SMA Solar Technology AG

Annual Report • Mar 30, 2017

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TAKEOFF INTO TOMORROW'S WORLD OF ENERGY

Annual Report 2016 SMA Solar Technology AG

NATURES STATES

SMA SOLAR TECHNOLOGY AG AT A GLANCE

		2016	20156	2014	2013	2012
Sales	€ million	946.7	981.8	805.4	932.5	1,463.4
Export ratio	%	87.9	87.5	78.3	71.0	56.3
Inverter output sold	MW	8,231	7,260	5,051	5,361	7,188
Capital expenditure	€ million	29.0	48.3	75.5	53.2	100.2
Depreciation	€ million	76.7	77.8	106.5	83.6	69.9
EBITDA	€ million	141.5	121.1	-58.4	-5.5	171.9
EBITDA-margin	%	14.9	12.3	-7.3	-0.6	11.7
Net income	€ million	29.6	14.3	- 179.3	-66.9	75.1
Earnings per share1	ਵ	0.85	0.41	-5.16	-1.92	2.16
Employees 2		3,345	3,330	5,060	5,141	5,992
in Germany		2,093	2,081	3,469	3,736	4,649
abroad		1,252	1,249	1,591	1,405	1,343

SMA Group				2016/12/31 2015/12/31 2014/12/31 2013/12/31			2012/12/31
Total assets		€ million	1,210.7	1,160.5	1,180.3	1,259.9	1,328.7
Equity		€ million	585.1	570.2	552.0	724.4	820.7
Equity ratio	1 6-200 300 000 300 300 100 T 375 PM 285-201201	ల్లిల్ల	48.3	49.1	46.8	57.5	810 = ========================================================================================================================================================================
Net working capital 3	11 11 11 1961 1982 1992 1991 1991 1991 1991 1991 1991 1991 1991 1991	€ million	225.4	223.0	251.0	247.6	268.0
Net working capital ratio 4 FITTORE BOO	OCL 281 041 040 001 300 1000	96	23.8	22.3	31.2	26.6	* 18.3
17.50 11.00 1 Net cash3 ([]] HOWA DIAL = PERSON	(19.94) 18.38.281 (81.30)	DOTA Callia a E million, __ _ _ _ _ A B S C L ( 1 ) 1 ( 1 ) 1 ) 1 ( 1 ) 1 ) 1 ( 1 ) 1 ) 1 ( ) 1 ) 1 ( ) 1 ) 1 ) 1 ) 1 ( ) 1 ) 1 ) 1 ) 1 ) 1 ) 1 ) 1 ) 1 ) 1 ) 1 ) 1 ) 1 ) 1 ) 1 ) 1 ) 1 ) 1 ) 1 ) 1 ( 1 ) 1 ) 1 )	362.0	285.6	225.4		329.7 ------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Converted to 34,700,000 shares

Reporting date; without temporary employees
Inventories and trade receivables minus trade payable

Relating to the last twelve months (LTM)

Total cash minus interest-bearing financial liabilitie

The figures for the previous year in the inc ile of the Railway Technology bu

11 11 22 2 2 11 11 11 11 11 11 11 11 11 11 11 11 11 11 11 11 11 11 11 11 11 11 11 11 11 11 11 11 11 11 11 11 11 11 11 11 11 11 11 11 11 11 11 11 11 11 11 11 11 11 11 11 11 11

Energy That Changes

As a leading global specialist for photovoltaic system technology, SMA is setting the standards today for the decentralized and renewable energy supply of tomorrow.

More than 3,000 SMA employees in 20 countries have devoted themselves to this task.

Our innovative solutions for all photovoltaic applications and our unsurpassed service offer our customers worldwide greater independence in meeting their energy needs.

In collaboration with our partners and customers, we are helping the people around the world transition to a self-sufficient, decentralized and renewable energy supply.

INVESTMENT HIGHLIGHTS

SMA WORLDWIDE

→ Direct exposure to the global solar market

· Headquarters · ● Foreign companies

• → Global leader for solar inverters for more than two decades
• → Proven technology and new solutions for the energy Internet
• → Flexible business model and best-cost sourcing strategy
• → Powerful global sales and service infrastructure
• → Bankable partner due to high equity ratio, net cash position and credit facility
• → Stable shareholder structure with Danfoss as strategic anchor investor
• → Experienced management team with proven track record

SMON A at a Globice ←

BUSINESS UNITS

17 GW of overall installed inverter output

27% increase in sales in comparison to the previous year

€397 million

in sales

RESIDENTIAL

The Residential business unit focuses on the attractive long-term market of small PV systems for private applications with the smart module technology of Tigo Energy, Inc., string inverters, energy management solutions, storage systems and communication products and accessories. In 2016, the Residential business unit's share of SMA Group's total sales was about 19%.

COMMERCIAL

With three-phase string inverters, complete energy management solutions, medium-voltage technology and other accessories, the Commercial business unit focuses on the growing market of medium-sized PV systems for commercial applications and large-scale PV power plants. In 2016, the Commercial business unit's share of SMA Group's total sales was about 28%.

UTILITY

The Utility business unit serves the growth market for large-scale PV power plants with central inverters and complete solutions comprising central inverters with their grid service and monitoring functions as well as all medium- and high-voltage technology and accessories. In 2016, the Utility business unit's share of SMA Group's total sales was about 42%.

100 MW

of newly installed battery inverter output installed in 2016

1.7 GW

operation and

maintenance contracts

OFF-GRID AND STORAGE

The Off-Grid and Storage business unit provides system technology for the integration of different battery technologies and power classes and collaborates with renowned battery manufacturers and companies in the automotive industry. The portfolio includes solutions for both grid-connected and off-grid as well as hybrid solutions.

SERVICE

The SMA Service range includes commissioning, warranty extensions, service and maintenance contracts, operational management, remote system monitoring and spare parts supply. With an installed capacity of approximately 55 GW worldwide, SMA leverages economies of scale to manage its service business profitably.

Des Shecholders,

SMA successfully continued on its path to more profit and higher cash flow in 2016. While sales remained at almost the same level as in the previous year at around €1 billion, the Company significantly increased earnings before interest and taxes (EBIT) to approximately €65 million. As a result of our attractive business model, we generated an adjusted free cash flow of around €121 million and increased our net cash to more than €360 million. For over two decades, SMA has been a global market leader in one of the most exciting industries of the 21st century. Our consistently high market share of around 20% is an outstanding achievement in view of the highly intense competition and rapidly changing markets. I would therefore like to thank all SMA employees as well as the temporary employees working at SMA for their excellent work and strong commitment. Thanks to the incredible dedication of our employees and the great trust of our customers in Germany and abroad, we increased the inverter output sold by 13% to 8.2 gigawatts - a record sales volume. The output sold by SMA in the past fiscal year is enough to provide a sustainable supply of clean electricity to the French capital Paris with its 2.2 million inhabitants and save around 6 million tons of CO2 a year.

INTERNATIONAL PV MARKETS ON THE RISF - SMA MOST POPULAR INVERTER BRAND AGAIN

With a 50% rise in new installations to 78 gigawatts (2015: 52 GW), the global photovoltaic markets posted much stronger growth in 2016 than we had forecasted at the beginning of the year. The main growth impetus came from China, which accounted for approximately 44% of the global market in 2016. In one year, China installed almost as much photovoltaic power as Germany has since the introduction of the Renewable Energy Sources Act (EEG) in 2000. However, there are signs that this pace of expansion will not be maintained. As a result of changes in the regulatory conditions, the Chinese market is expected to slump by around 30% in 2017. Many Chinese providers are therefore attempting to tap foreign photovoltaic markets with an aggressive pricing policy and to use low prices to compensate for the shortcomings in their sales and service infrastructure. With great concern, we observe that some Chinese competitors are not complying with legal standards. They are thereby harming not only consumers but also the entire photovoltaics sector.

The U.S. was the second-biggest market with installation of 14 gigawatts. The foundation for this success was the joint decision by the Democrats and the Republicans in the U.S. Congress in December 2015 to extend the investment tax credit for promoting the expansion of photovoltaics until 2020. With its systematic expansion of photovoltaics, the U.S. is establishing the conditions for introducing new business models in the energy sector and improving supply reliability.

The European markets unfortunately did not maintain the pace of expansion of the previous years. With newly installed photovoltaic power of 9.6 gigawatts, Europe now only accounts for 12% of the global market. So far, the EU states have not succeeded in forming an energy union and setting binding expansion targets for renewable energies. The energy mix is still a matter for national governments and parliaments. "More Europe" when it comes to energy industry matters could help reduce energy carrier imports from politically problematic regions such as Russia, the Middle East and North Africa. By pressing ahead with the expansion of renewable energy, Europe could also lay the foundations for an important future-oriented sector and local jobs.

Our strategy of investing in the internationalization of our business and offering our customers a complete range of products and comprehensive services is paying off. We are proud that, for the fifth year in succession, according to a study by IHS Markit, an independent information and analysis company, SMA is the world's most preferred inverter brand. We would like to extend our thanks to our customers: Your loyalty and trust continue to be an incentive.

ON TRACK FOR THE FUTURE WITH STRATEGY 2020

Following the successful completion of the Company's transformation, in 2016, we developed our strategy up until 2020. In addition to defending our global market leadership, another important strategic goal is to develop SMA into a provider of solutions. We have also defined flexibility concepts as part of the strategy to enable us to operate profitably even in sharply fluctuating sales markets. Strategy 2020 takes up disruptive approaches as well as elements for making SMA more attractive as a company. We are firmly convinced that with Strategy 2020 we are positioning SMA successfully for the changed market conditions. Further details can be found on page 29.

DIGITIZATION OF THE ENERGY INDUSTRY BRINGS NEW OPPORTUNITIES FOR SMA

As a result of enormous technological progress and the high level of new photovoltaic system installations worldwide, the cost of solar power has fallen by around 20% per year over the past three years. Solar power is already one of the most cost-effective energy sources, with generation costs of less than 3 U.S. cents per kilowatt hour in some cases. According to estimates by Bloomberg New Energy Finance, photovoltaics will therefore account for approximately 30% of the overall power generation capacity installed worldwide by 2040. Significant growth impetus for renewable energies is also created by the internationally agreed climate protection targets. Among other things, they are resulting in oil and gas heating being replaced by environmentally friendly technologies due to stricter regulatory requirements. In the future, private households and companies will be heated and air-conditioned in an environmentally sustainable way with photovoltaics. The strict guidance levels for vehicle CO2 emissions will also reinforce the trend toward renewable energies. Broad acceptance of hybrid and electric vehicles is not only increasing demand for electricity but also lowering the costs of storage systems. As a result of the anticipated price reduction, storage systems will become economically viable for more and more households and companies.

As the energy supply becomes more and more decentralized and renewable, the requirements for system technology are increasing significantly. To ensure that energy is used locally as far as possible and not fed into the utility grid in an undirected way, the different generators must be linked with storage systems and other

Chief Executive Officer SMA Solar Technology AG

components (e.g., heating, air conditioning, e-mobility, etc.). All sectors must be optimized completely automatically so as to avoid limitations with regard to convenience or processes in private households and companies. The complexity arising from digitization is enormous. No company can handle it alone. It is a matter of establishing the technical conditions for fully automatic optimization of total energy costs and for bringing together supply and demand. This gives rise to attractive business opportunities for specialists in environmental and communications technology.

SMA recognized this potential early on. Approximately 280,000 PV systems worldwide are already registered online in our Sunny Portal. In addition, we have selectively entered into strategic alliances and collaborated on standardizing technical interfaces (e. g., in the EEBus initiative) in recent years. Before the end of 2017, we will present a technical platform that allows for the monitoring of energy flows across different sectors, such as photovoltaics, heating and e-mobility. In the coming year, SMA will offer extensive energy management functions for optimizing total energy costs at a local level.

EXCELLENTLY POSITIONED FOR THE FUTURE AS A SPECIALIST IN PHOTOVOLTAIC SYSTEM TECHNOLOGY

The digitization of the energy transition is taking place at an astonishing speed. It requires a radical rethink by players in the energy sector. Nothing can simply be regarded as self-evident anymore: Electricity is no longer an expensive commodity but rather is freely available. Following the pioneering technological phase of generating sufficient volumes of renewable energy cost-effectively, the next phase is now to transform this into a consumer-focused service that creates added value for users.

Over the past few years, the SMA Managing Board has systematically developed the Company's expertise in the field of photovoltaic system technology. We successfully tapped the market for complex large-scale projects and expanded our activities in PV diesel hybrid systems and sophisticated services. We set technological standards in the photovoltaics sector and broke new ground with SMA's intelligent energy management. We implemented structural changes and increased SMA's flexibility. Today, SMA is excellently equipped for the future requirements of the energy industry. We have a clear view of our strengths and goals.

Our strengths and values clearly set us apart from others in the solar industry. We will build on this and design further solutions for decentralized energy supplies based on renewable energies. The 2017 fiscal year will certainly not be easy for SMA. We anticipate a continued sharp price decline that we will not be able to fully offset with new, cost-optimized products. We therefore expect sales to fall to between €830 million and €900 million. As a result of the consolidation of global production sites implemented in 2016, we have further reduced our break-even point. The SMA Managing Board therefore anticipates operating s before interests, taxes, depreciation and amortization (EBITDA) of between €70 million and high free cash flow. With an equity ratio of around 50%, we have a sound financial base for systematically implementing our strategy.

SMA will make optimal use of the opportunities arising on the market. We are therefore optimistic for the future. As early as 2018, we will present new, even more cost-optimized products and innovative solutions for all major market segments. Overall, the measures will lead to an increase in the gross margin and sustainably strengthen SMA's competitiveness.

Pierre-Pascal Urbon Chief Executive Officer SMA Solar Technology AG

CONTENTS

5 TO OUR SHAREHOLDERS

• 6 The Managing Board Team
• 8 Supervisory Board Report

13 CORPORATE GOVERNANCE

25 CONSOLIDATED MANAGEMENT REPORT

• Basic Information about the Group 26
• 38 Fiscal Year 2016
• 50 Supplementary Report
• 51 Risks and Opportunities Report
• 62 Forecast Report

67 CONSOLIDATED FINANCIAL STATEMENTS

• 76 Notes SMA Group
• 123 Responsibility Statement
• 124 Auditor's Report

125 OTHER INFORMATION

• 126 Glossary
• 130 Registered Trademarks
• 130 Disclaimer

THE MANAGING BOARD TEAM

ROLAND GREBE Board Member for Human Resources and IT

Roland Grebe (b. 1960) studied electrical engineering and has been working in various managerial positions primarily in the development area at SMA since 1984. He developed the first PV inverters that form the basis of SMA's Sunny Boy and Sunny Central inverters. Grebe also transformed the central inverter area from an individual project processor into a serial manufacturer for power plant technology and grew SMA's grid integration competencies to secure the future commercial viability of our products. Since June 2009, he has been a member of the Managing Board; and since March 2015, has been responsible for Human Resources and IT. In addition, he is responsible for Service Operations as well as the subsidiaries SMA Railway Technology GmbH and SMA Sunbelt Energy GmbH. Roland Grebe also serves as labor director of SMA.

PIERRE-PASCAL URBON CEO, Board Member for Finance/Legal and Sales

Pierre-Pascal Urbon (b. 1970) studied business administration and was active in mergers and acquisitions (M&A) consulting until 2005 - when he joined SMA. In 2006, he was appointed to the Managing Board and in 2011 as Chief Executive Officer. Urbon planned SMA's initial public offering and partnership with Danfoss A/S. He has also decisively advanced the Group's internationalization and the Company's transformation in 2015. As Chief Executive Officer, he has been responsible for Strategy, Finance/Legal and Sales since January 2016. Pierre-Pascal Urbon is a member of the Board of Directors of Tigo Energy, Los Gatos, USA.

DR .- ING. JÜRGEN REINERT Board Member for Operations and Technology

After he studied electrical engineering in South Africa, Dr.-Ing. Jürgen Reinert (b. 1968) received his doctorate at the Institute for Power Electronics and Electrical Drives (ISEA) in Aachen, Germany, and began his career as senior engineer there. From 1999 to 2011, he worked for the Emotron company, where in his last position, as General Manager, he was responsible for Technology and Operations. From 2011 to 2014, as Executive Vice President, Technology, he was responsible for the division Power Plant Solutions at SMA. Under his leadership, SMA was successful in expanding its worldwide project business and developing turnkey system solutions for large-scale PV power plants. Since April 2014, Dr.-Ing. Jürgen Reinert has been a member of the Managing Board; and since January 2016, has been responsible for Operations, Development and the business units. Dr.-Ing. Jürgen Reinert is in charge of the partnership with Danfoss and a member of the Danfoss A/S Supervisory Board.

Roland Grebe has resigned from the Managing Board as of December 31, 2016. For intormation on the composition of the Managing Board of SMA Solar Technology AG as of January 1, 2017 see page 26.

SUPERVISORY BOARD REPORT

Dear Shareholders,

In the same vein as 2014 and 2015, which were shaped largely by organizational restructuring, the 2016 fiscal year for SMA Solar Technology AG was also impacted by a variety of special influences. Under these circumstances, the fact that the Company achieved a sianificant improvement in EBT should be seen as a success. The restructuring program "Transformation 2015" played a considerable role in us achieving this result. For the Supervisory Board, 2016 continued to be shaped by measures designed to maintain SMA's competitiveness. The reasons for this were heavily fluctuating demand in all regions, high price pressure and the competition from Chinese competitors.

Cooperation within the Supervisory Board and between the Supervisory Board and the Managing Board in the reporting period was always characterized by openness, constructive dialogue and trust. The Supervisory Board assisted the Managing Board in an advisory capacity and continuously monitored the Managing Board with regard to the management of the Company in accordance with the law, the Articles of Incorporation and the Rules of Procedure. For its part, the Managing Board involved the Supervisory Board and its committees early on in all decisions of fundamental importance to SMA, keeping them regularly, promptly and comprehensively informed by means of written and oral reports. The subject matter of these reports included all strategy issues relevant to the Company, the market and competitive situation, and business developments. The Managing Board also reported to the Supervisory Board on the Company's and Group's position, sales and results of operations. Furthermore, the Managing Board presented detailed information on proposed business policies and other important questions concerning corporate planning, in particular financial, investment, production and personnel planning, as well as significant business transactions. Deviations in how events actually transpired in comparison to previously reported objectives were provided, including reasons for the variances. In addition, the Supervisory Board was informed about the Company's and the Group's profitability, in particular the return on equity, risk and opportunity management, risk status and compliance.

The Supervisory Board closely scrutinized and discussed business transactions requiring the approval of the Supervisory Board, as well as instances where business performance deviated from corporate planning. Between meetings, the Chairman of the Supervisory Board and his deputy were in regular and frequent contact with the Managing Board, especially the Chairman of the Managing Board, and discussed subjects concerning strategy, planning, business development, position of risk, risk management and compliance as well as significant business transactions and upcoming decisions. The

Supervisory Board members took general and specialized training necessary for their tasks on their own accord, and in doing so they received appropriate support from the Company. No Supervisory Board or Managing Board members reported any conflicts of interest to the Supervisory Board.

Focus of Supervisory Board Consultations

The Supervisory Board examined all material events and discussed them with the Managing Board at six regular meetings and one extraordinary meeting and adopted necessary resolutions in accordance with the law, Articles of Incorporation and Rules of Procedure. The Supervisory Board attended the vast majority of meetings in full. One member of the Presidial Committee attended less than half of the committee meetings.

In preparation for the meetings, the Supervisory Board received written reports from the Managing Board on a regular basis and on time. At each regular meeting, the subject matter of the deliberations was current business developments, the evolution of markets of particular importance to the SMA Group and corporate planning. Members of the Managing Board participated in all regular Supervisory Board and Audit Committee meetings, but were not present for discussions of agenda items relating to the Managing Board itself.

At its meeting on February 10, 2016, the Supervisory Board dealt with the Corporate Governance Report included in the 2015 Annual Report, as well as the Supervisory Board Report for 2015. In addition, the Supervisory Board addressed the current development of the Company and the budget for 2016, including the Company's future planning. The meeting and resolutions also dealt with the closure of subsidiary companies, possible Company partnerships and the allocation of responsibilities on the Managing Board.

At its meeting convened to adopt the accounts on March 16, 2016, the Supervisory Board acknowledged the 2015 Annual Financial Statements, approved the 2015 Consolidated Financial Statements after in-depth consultation and also passed the proposal to the Annual General Meeting on profit appropriation for 2015. In addition, it reviewed the proposal for selection of the Financial Statements and the Consolidated Financial Statements auditor for 2016, and discussed the Audit Committee's reservation of consent on the matter of potentially entrusting the Group auditor with other services, which was rendered necessary by the Audit Reform Act. The meeting also looked into the Company's possible investment in another company and difficulties with the delivery of components. The Supervisory Board also familiarized itself with the requirements incumbent on Supervisory Board members in connection with the FU Market Abuse Directive.

9

The extraordinary meeting of the Supervisory Board on April 1, 2016, reviewed and resolved the Company's acquisition of a stake in Tigo Energy, Inc.

At its meeting on May 30, 2016, the Supervisory Board focused intensively on deliberations to sell Group companies and informed itself of current issues affecting employees. The discussions also focused on topics relating to product quality and development of the cost of sales.

At the meeting on May 31, 2016, the Supervisory Board issued the audit assignment to the auditors for 2016.

Focus topic of the Supervisory Board meeting on September 8, 2016, was the medium-term strategy and partial realignment in terms of organization of some of the Company's business divisions. The discussions and resolutions also touched on the closure of production and service subsidiaries abroad. In addition, the Supervisory Board familiarized itself with the Company's product innovations and product roadmap and considered the results achieved in the partnership with Danfoss A/S.

At its meeting on December 8, 2016, the Supervisory Board approved the possible sale of SMA Railway Technology GmbH and held extensive discussions on the draft budget for 2017. In addition, the Rules of Procedure for the Supervisory Board were discussed and amended. The discussions and resolutions also covered changes within the Managing Board and Audit Committee, the remuneration system for the Managing Board and the extension of a mandate. The Managing Board and the Supervisory Board also adopted a new Declaration of Conformity pursuant to Section 161 (1) sentence 1 of the German Stock Corporation Act (AktG) to comply with the recommendations of the German Corporate Governance Code.

Focus of Committee Meetings

To improve the efficiency of the work carried out by the Supervisory Board, the Supervisory Board maintains four permanent committees: the Presidial Committee, Audit Committee, Nomination Committee and Mediation Committee. You will find the names of the persons appointed to these committees on our website at www.IR.SMA.de as well as in the Corporate Governance Report 2016.

The committees prepare the topics and resolutions to be reviewed by the entire Supervisory Board and, within the framework of the competencies transferred to them, they resolve those matters they have been assigned instead of the Supervisory Board. The content of the committee meetings is reported on by the committee chairman at the next plenary session of the Supervisory Board. All members of the Supervisory Board receive the content and resolutions of the committees in writing.

The Presidial Committee met four times in 2016. The committee's work focused in particular on dealing with matters relating to the Managing Board as well as preparing Supervisory Board resolutions on Managing Board composition, allocation of responsibilities, Managing Board remuneration and terminating Managing Board contracts.

The Audit Committee convened seven times in 2016, three times via telephone conferences. The meetings focused on discussing the Company's business performance and cost efficiency and the quarterly statements and half-yearly report. In addition, the committee familiarized itself with the main points and overall findings of the auditor for the 2015 Annual Financial Statements and upon review confirmed the auditor's independence. Another key area of the committee's work was reviewing the internal risk management systems (Internal Control System, Internal Auditing and Compliance), with the committee members gathering comprehensive information about these systems' methods and effectiveness. Furthermore, the committee dealt with the half-yearly report prepared by the Internal Auditing department and the Compliance Report neither of which showed any significant irregularities in SMA business processes. The Audit Committee also reviewed the recommendation for the entire board with regard to the profit appropriation, selecting the auditor for 2016 and granting the audit mandate.

The Nomination Committee held one meeting in the reporting period. The discussions focused on the search for a suitable candidate for a Supervisory Board member position.

The Mediation Committee did not convene in 2016.

Corporate Governance

In 2016, the Supervisory Board also dealt with the German Corporate Governance Code content. In 2016, the Supervisory Board and the Managing Board issued one Declaration of Compliance pursuant to Section 161 of the German Stock Corporation Act (AktG) in compliance with the recommendations of the German Corporate Governance Code. Three deviations for 2016 and two deviations for the period from 2017 were declared in the Declaration of Compliance dated December 2016. The joint report issued

by the Supervisory Board and the Managing Board on compliance with the rules of the German Corporate Governance Code pursuant to clause 3.10 of the German Corporate Governance Code (Corporate Governance Report) has been made permanently available on our website at www.IR.SMA.de and is also mentioned on pages 14 et seqq. of the Annual Report. This is also where you will find statements on conflicts of interest and how they are handled.

Annual Financial Statements and Consolidated Financial Statements

The Annual Financial Statements prepared by the Managing Board as of December 31, 2016, the Management Report for the 2016 fiscal year, the Consolidated Financial Statements as of December 31, 2016, and the Consolidated Management Report for the 2016 fiscal year were audited by the accounting firm Deloitte GmbH, Hanover. The Supervisory Board granted the audit assignment in accordance with the resolution adopted by the General Meeting on May 31, 2016. Prior to submitting the corresponding proposal to the General Meeting regarding appointment of the auditors, the Supervisory Board had obtained the auditor's certificate of independence pursuant to clause 7.2.1 of the German Corporate Governance Code. The Supervisory Board also monitored the independence of the auditor. In addition, it handled the assignment of orders to the auditor for non-audit-related services.

The Consolidated Financial Statements of the Company were prepared in line with Section 315a of the German Commercial Code (HGB) on the basis of the International Financial Reporting Standards (IFRS) as applicable in the EU. The auditor granted an unqualified audit opinion for the Annual Financial Statements and the Management Report as well as for the Consolidated Financial Statements and the Consolidated Management Report.

The reporting documents and the Managing Board's proposal on the appropriation of profits as well as the audit reports were made available to the Supervisory Board in good time. These were first discussed by the Audit Committee at its meetings on February 8, 2017, and March 21, 2017, with the auditors and then by the Supervisory Board at its meeting on March 22, 2017, on each occasion in the presence of the auditor's representatives. The auditor's representatives reported on the audit findings and provided detailed explanations of the net assets, financial position and results of operations of the Company and the Group. The questions posed by the Supervisory Board were answered and the reporting documents were reviewed in detail with the auditor's representatives and discussed and examined by the Supervisory Board. The Supervisory Board raised no objections after concluding its examination. Thereafter, the findings of the audit were approved. Accordingly, the Supervisory Board approved the Financial Statements prepared by the Managing Board and the related Management Reports for the 2016 fiscal year at its meeting convened to adopt the accounts on March 22, 2017. Hence, the Company's Annual Financial Statements have been approved as set out in Section 172 of the German Stock Corporation Act (AktG).

Finally, at its meeting held on March 22, 2017, the Supervisory Board approved the Managing Board's proposal on the appropriation of the balance sheet profit. In this respect, the Supervisory Board discussed the Company's liquidity position, the financing of planned investments and estimated business development. In doing so, the Supervisory Board came to the conclusion that the proposal was in the interests of the Company and the shareholders.

Changes to the Managing Board and Supervisory Board

As of December 31, 2016, Roland Grebe left the Managing Board. He worked at SMA for over 30 years and embodies the maxim of co-founder Dr. Cramer, to be realistic and attempt the impossible. With his engineering mind and personality, Roland Grebe, from the very beginning helped shape SMA in all phases of its development and made a key contribution to the Company's success. Dr. Winfried Hoffmann also resigned from the Supervisory Board after many years of service. He, too, played a major role in the success of renewable energies. Dr. Hoffmann made a huge contribution to the work of the SMA Supervisory Board with his scientific expertise and strong international management experience.

The Supervisory Board would like to thank Roland Grebe and Dr. Winfried Hoffmann for their dedicated and valuable work on behalf of the Company.

Alexa Hergenröther was made a Supervisory Board member by way of judicial appointment. Ulrich Hadding was appointed as a new member of the Managing Board as per January 1, 2017.

In the opinion of the Supervisory Board, the Managing Board successfully met the repeated challenges of 2016 with skill and determination. The Managing Board improved the Company's competitiveness in the long run by consolidating production facilities and consistently improving its cost structure. It also provided clarification on SMA's future business model with its Strategy 2020. The Supervisory Board believes that SMA is preparing itself extensively for the digitization of the energy industry.

The Supervisory Board would like to thank the Managing Board and all employees for their outstanding work and incredible dedication in 2016

Niestetal, March 22, 2017

The Supervisory Board

Dr. Erik Ehrentraut Chairman

Roland Bent Shareholder Representative

Oliver Dietzel Employee Representative

Peter Drews Shareholder Representative

Dr. Erik Ehrentraut Shareholder Representative (Chairman)

Kim Fausing Shareholder Representative (Deputy Chairman)

Johannes Häde Employee Representative

Heike Haigis Employee Representative

Alexa Hergenröther Shareholder Representative

Yvonne Siebert Employee Representative

Dr. Matthias Victor Employee Representative

Hans-Dieter Werner Employee Representative

Reiner Wettlaufer Shareholder Representative

CORPORATE GOVERNANCE

14	Corporate Governance Report
	Including Intormation on Corporate Governance Practices in Accordance to Section 289a of
	the German Commercial Code (HGB); Part of the Consolidated Management Report)
18	Intormation Concerning Takeovers Required by Sections 289 Paragraph 4 and 315 Paragraph 4 HGB
	(Part of the Consolidated Management Report),
20	Remuneration Report (Part of the Consolidated Management Report)

CORPORATE GOVERNANCE REPORT

In this declaration, SMA Solar Technology AG reports on its corporate governance principles in accordance with Section 289a of the German Commercial Code (HGB) and on corporate governance in the Company in accordance with Section 161 of the German Stock Corporation Act (AktG) and clause 3.10 of the German Corporate Governance Code (DCGK). The declaration includes the declaration of compliance, information on corporate governance practices, which comprises information on where they can be accessed by the public, the composition and description of the function of the Managing Board, Supervisory Board and respective committees and material corporate governance structures.

Complying with the principles of good corporate governance is extremely important to SMA. SMA is guided by the recommendations and suggestions in the German Corporate Governance Code (DCGK). The Managing Board and Supervisory Board dealt with meeting these requirements, in particular with the amendments to the DCGK in the version of May 5, 2015. Since the declaration of compliance of December 3, 2015, printed in the 2015 annual report, the Company has declared further emergent deviations from the German Corporate Governance Code in the declaration of compliance of December 8, 2016. The declaration of December 8, 2016, is reproduced below and published on our website at www.IR.SMA.de.

Declaration of Conformity to German Corporate Governance Code

In accordance with Section 161 of the German Stock Corporation Act, the Managing Board and Supervisory Board of SMA Solan Technology AG declare:

Since the last Declaration of Compliance dated December 3, 2015, SMA Solar Technology AG has complied with the recommendations of the Government Commission German Corporate Governance Code in the version dated May 5, 2015, published in the Bundesanzeiger (Federal Gazette) on June 12, 2015, with the exceptions mentioned below in numbers (1), (2) and (3) and will continue to comply with them with the exceptions mentioned below in numbers (1) and (3):

(1) Notwithstanding Article 5.4.1 (2) sentence 1 clause 4 of the German Corporate Governance Code in conjunction with the targets adopted by the Supervisory Board on December 5, 2012, for its composition, the Supervisory Board includes with Dr. Erik Ehrentraut one member who will have reached the age of 75 by the end of the election period.

The Supervisory Board believes it is vital that Dr. Ehrentraut's wealth of experience in managing a company with international operations and supporting the Company remains available to the Supervisory Board.

(2) Notwithstanding Article 5.2 (2) of the German Corporate Governance Code, the Chairman of the Supervisory Board, Dr. Erik Ehrentraut, is also Chairman of the Audit Committee.

The Supervisory Board believes it is justifiable to assign the role of Chairman of the Audit Committee to Dr. Ehrentraut as an independent member of the Supervisory Board in addition to his role as Supervisory Board Chairman, due to his expertise in accounting and internal control processes as well as his experience managing a company with international operations and his many years of service at the Company.

(3) Notwithstanding Article 5.4.1 of the German Corporate Governance Code, the Supervisory Board has decided not to define any maximum limits for terms of office on the Supervisory Board. The Supervisory Board believes that a limit on the term of office does not account for the specific work of the Supervisory Board members and their specific knowledge of the Company and the market environment.

Niestetal. December 8, 2016

The Managing Board

The Supervisory Board

Corporate Governance Practices

In 2016, the SMA Managing Board together with a selected team developed the SMA Strategy 2020. It comprises a forward-looking vision and mission, the values that all SMA employees align themselves with and clear strategic targets for the years to come. The Strategy 2020 was presented to all SMA employees worldwide and will provide the strategic framework for our activities, through which we will keep SMA on track for success even under changing market conditions. Further details can be found on page 29.

SMA adopted the code of conduct of the German Association of Materials Management, Purchasing and Logistics (BME) in 2009. These behavioral guidelines commit SMA to fair dealings with suppliers. The guidelines are based on, among other things, the Global Compact of the United Nations, the conventions of the International Labour Organization (ILO) and the United Nations' Universal Declaration of Human Rights. The objective is to enshrine general principles with regard to fairness, integrity and corporate responsibility in business relationships. For SMA, these behavioral guidelines complement its mission statement and corporate culture, in which fairness, integrity and corporate responsibility are deeply rooted. The BME's code of conduct is accessible on its website at www.bme.de.

In 2010, SMA also created its own guidelines for suppliers, which are guided by SMA's corporate principles and likewise by the United Nations Global Compact and the international labor standards of the ILO. The guidelines prescribe standards for sustainable activity and give expression to what SMA expects of suppliers and business partners with regard to social, ecological and ethical issues. The key points of the guidelines are the ban on child labor, forced labor, abuse and discrimination, the fight against corruption, fair working conditions, occupational health and safety, environmental protection, quality and product safety. The latest version of the guidelines (SMA Supplier Code) is reproduced on the SMA website www.SMA.de.

On January 13, 2011, the Company made a declaration to the General Secretary of the United Nations to adopt the 10 principles of the UN Global Compact as compulsory guidelines for its corporate governance. The principles of the UN Global Compact define standards for upholding human rights, the protection of workers' rights, environmental protection and the avoidance of corruption. They can be viewed on the website www.unglobalcompact.org.

In January 2012, the Managing Board also enacted the SMA business principles. The SMA business principles form the heart of the compliance management system and shape SMA's values into clear behavioral standards. They were drafted in a workgroup project led by Group Compliance. The members of the workgroup comprised the Chairwoman of the Works Council, representatives of corporate functions and executives. The SMA business principles are obligatory for all SMA employees worldwide.

In compliance with the provisions of Section 76 (4) Sentence 2 AktG, the Managing Board resolved on September 29, 2015 to set a target of 7% for the proportion of female employees in the two management levels below the Managing Board in the period up to June 30, 2017. The target is equal to the actual ratio of how the genders relate to each other as of the date of the resolution.

Transparency

Transparency is a key element of good corporate governance. Our aim is to provide all shareholders, financial analysts, media and interested members of the public at large with timely information about our business situation and significant corporate changes. All important information is also made available on our website at www.SMA.de. Reporting on the business situation and the operating results takes place in the Annual Report, in the press conference on financial statements and in the Quarterly Statements and Half-Yearly Financial Reports. Furthermore, the public is informed through press releases and, if stipulated by law, by means of ad hoc statements. In addition, once a year SMA invites investors, analysts and the press to its Capital Markets Day to inform them about the market and competition, SMA's strategic direction, unique selling propositions and financial developments. Moreover, social networks are used for communication. Transparency is particularly important whenever deliberations and Company

decisions might lead to conflicts of interest for members of the Supervisory Board or Managing Board. Any conflicts of interest that may have arisen are therefore disclosed by those members of the corporate bodies affected when discussion of the subject commenced. The member concerned does not participate in the adoption of any necessary resolutions by the Managing Board or the Supervisory Board.

According to a disclosure made by the members of the Managing Board and the Supervisory Board, they held, either directly or indirectly, 10.01% (2015: 10.01%) of all shares issued as of the end of the fiscal year. The Managing Board members held a total stake of 0.33% (2015: 0.33%) in the share capital and the Supervisory Board members held a stake of 9.68% (2015: 9.68%) in the share capital. The cdw foundation, in which Supervisory Board members Peter Drews and Reiner Wettlaufer act as Managing Board members, holds an additional 8.65%. In addition, Danfoss A/S, in which Supervisory Board member Kim Fausing acts as Vice President and COO, holds 20.00% (2015: 20.00%) of the share capital.

Remuneration Report

The Remuneration Report is a constituent part of the audited Consolidated Management Report and is shown on pages 20 et seqq. of the Annual Report.

The Company's Corporate Bodies and Their Functions

SMA Solar Technology AG is a stock corporation governed by German law. Accordingly, it possesses a dualistic management structure in which one corporate body is devoted to managing the Company (the Managing Board) and is supervised by another corporate body (the Supervisory Board). Both bodies are endowed with different powers and work closely with one another in an atmosphere of trust when managing and supervising the Company. At the Annual General Meeting, electing the auditor and shareholder representatives to the Supervisory Board takes place as does determining the appropriation of profits, along with making decisions that impact member rights of shareholders.

Managing Board

The Managing Board is responsible for independently and jointly managing the Company. It is obliged to sustainably ensure and increase Company value and is responsible for managing the business. It decides on fundamental issues of business policy and corporate strategy as well as on short- and medium-term financial planning. The Managing Board is responsible for preparing the Quarterly Statements, Half-Yearly Financial Reports and Annual Financial Statements of SMA Solar Technology AG and of the SMA Group, as well as for adherence to all legal and official provisions and internal policies. In compliance with the provisions in Section 111 (5) AktG, the Supervisory Board in its meeting on September 30, 2015, set a target of 0% for the proportion of women on the Managing Board in the period up to June 30, 2017. This target was set because the terms of the existing contracts with the Managing Board members at the time the resolutions were adopted ran beyond the period in question.

As a collective body, the Managing Board, in principle, strives to adopt resolutions unanimously. However, the Rules of Procedure for the Managing Board, adopted by the Supervisory Board (available on our website at www.IR.SMA.de) stipulate that individual members of the Managing Board are responsible for specific areas of responsibility. The Managing Board, with the consent of the Supervisory Board, lays out how responsibilities are assigned. The members of the Managing Board notify each other on an ongoing basis about all material events in their area of responsibility and about any matters covering several areas of responsibility. If the desired unanimity cannot be reached when adopting resolutions, then the Managing Board decides on the basis of a simple majority of the members present. However, no resolutions may generally be adopted on matters that have been assigned to the area of responsibility of a member absent from a meeting. Under legal provisions or the Rules of Procedure, in certain transactions, a unanimous resolution of the Managing Board is mandatory. For a predetermined number of transactions, the Supervisory Board has a reservation of consent. The Managing Board has not instituted any committees.

Roland Grebe left the Managing Board at the end of fiscal year 2016, and Ulrich Hadding was appointed as a member of the Managing Board on January 1, 2017. The Managing Board thus continues to comprise three members: Ulrich Hadding (Board Member for Finance, Human Resources and Legal), Dr.-Ing. Jürgen Reinert (Deputy Chief Executive Officer, Board Member for Operations and Technology) and Pierre-Pascal Urbon (Chief Executive Officer, Board Member for Strategy, Sales and Service).

Supervisory Board

The Supervisory Board advises the Managing Board in all matters and supervises its activity. The Managing Board involves and consults with the Supervisory Board on all matters of fundamental significance and whenever particularly important business decisions need to be made. Under the Rules of Procedure that apply to the Managing Board, which were adopted by the Supervisory Board, the Managing Board must obtain prior approval from the Supervisory Board for certain decisions. Such decisions include approval of the annual budget including the investment plan, incorporation, acquisition or sale of companies and acquisition or sale of real estate, whenever stipulated threshold values are exceeded. The Supervisory Board must also consent to the allocations of responsibility on the Managing Board.

The Supervisory Board is currently made up of 12 members and its composition complies with the provisions of the German Stock Corporation Act and the Co-Determination Act. Under these provisions, the employees of German Group companies and their shareholders (Annual General Meeting) each elect six representatives to the Supervisory Board. The current members of the Supervisory Board are: Oliver Dietzel, Johannes Häde, Heike Haigis, Yvonne Siebert, Dr. Mathias Victor and Hans-Dieter Werner as employee representatives, and Roland Bent, Peter Drews, Dr. Erik Ehrentraut (Chairman), Kim Fausing (Deputy Chairman), Alexa Hergenröther and Reiner Wettlaufer as shareholder representatives.

Dr. Erik Ehrentraut and Alexa Hergenröther, as independent members of the Supervisory Board, possess the necessary expertise in the fields of accounting or auditing as stipulated under Section 100 (5) of the AktG.

The Committees of the Supervisory Board are made up as Follows:

Presidial Committee	Dr. Erik Ehrentraut (Chairman), Yvonne Siebert (Deputy Chairwoman), Kim Fausing, Dr. Matthias Victor
Audit Committee	Alexa Hergenröther (Chairwoman), Dr. Erik Ehrentraut (Deputy Chairman), Oliver Dietzel, Johannes Häde
Nomination Committee	Peter Drews (Chairman), Reiner Wettlauter (Deputy Chairman), Dr. Erik Ehrentraut, Kim Fausing
Mediation Committee	Heike Haigis (Chairwoman), Kim Fausing (Deputy Chairman), Dr. Erik Ehrentraut, Hans-Dieter Werner

The committees prepare topics and resolutions for review by the Supervisory Board at its plenary session of the Supervisory Board. They regularly meet with stakeholders such as the Managing Board, the auditor or the Heads of Internal Auditing or Compliance for this purpose. The content of the committee meetings is reported on by the committee chairperson at the next plenary session of the Supervisory Board. Any member of the Supervisory Board may attend committee meetings, provided the relevant committee chairperson does not decide otherwise. The meeting minutes and resolutions adopted by committees are made available to all the members of the Supervisory Board.

The Supervisory Board reports annually on the focus of its activities and deliberations in the Supervisory Board Report. You may refer to the Supervisory Board Rules of Procedure on our website at www.IR.SMA.de. The Supervisory Board members take general and specialized training necessary for their tasks on their own accord, and in doing so they receive appropriate support from the Company.

As early as 2011, the Supervisory Board resolved objectives regarding its future composition. The objectives were edited at the meetings on December 5, 2012, and September 30, 2015, and now read as follows:

• 1. The minimum proportion of women on the Supervisory Board is determined by legal provisions.
• 1. Maintain the composition of Supervisory Board members with a background of international experience at least in the previous scope
• 1. Special consideration given to candidates with knowledge and experience in the application of financial reporting standards and internal control processes as well as in the field of auditing
• 1. Special consideration given to candidates with technical expertise, particularly in the field of renewable energies, preferably in the field of photovoltaics
• 1. Special consideration given to candidates with knowledge of the Company
• 1. At least half of the shareholder representatives are to be independent. At the same time, at least one member is to possess expertise in the field of accounting or auditing
• 1. Consideration of the age limit of 75 years at the end of the term of office when selecting new members

The objectives have been implemented as follows:

As regards 1 : The Supervisory Board now has three female members, Heike Haigis, Alexa Hergenröther and Yvonne Siebert. As of the date of the last election of Supervisory Board members in May 2015, the provisions of Section 96 (2) AktG on the appointment of women to the Supervisory Board were not yet applicable (Section 25 (2) of the Introductory Act of the Stock Corporation Act). However, the Supervisory Board is taking action to be able to fill future positions with qualified members of both genders in at least the legally prescribed minimum ratio.

As regards 2 to 5: In the opinion of the Supervisory Board, these objectives have been achieved.

As regards 6: To date, at least three shareholder representatives have been deemed as independent; three members, two of whom are independent, possess expertise in the fields of accounting and auditing.

As regards 7: To date, one member of the Supervisory Board will exceed the age limit of 75 years at the end of his term of office.

Cooperation Between the Managing Board and the Supervisory Board

The Managing Board and the Supervisory Board work closely with one another in an atmosphere of trust for the good of the Company, thus meeting both the requirements of effective enterprise control and the need to be able to make decisions quickly. Their common goal is to secure the continued existence of the Company

and steadily increase its value. To this end, the Managing Board keeps the Supervisory Board promptly and comprehensively informed, both in writing and verbally, and during regular meetings about the Company's position, current business developments and all relevant questions pertaining to strategic planning, risk management and important compliance matters. The Quarterly Financial Statements and the Half-Yearly Financial Report are discussed with the Managing Board on a regular basis during Audit Committee meetings prior to their publication.

Outside meetings, the Chairman of the Supervisory Board and his Deputy are also in contact with the Managing Board to discuss significant business transactions and upcoming decisions and are informed of key developments immediately.

Shareholders and Annual General Meeting

SMA Solar Technology AG shareholders discuss their co-determination and control rights at the Annual General Meeting, which takes place at least once a year. The Annual General Meeting adopts resolutions with binding effect and each share grants one vote. Every shareholder who registers on time is entitled to participate in the Annual General Meeting. In addition, shareholders may have their voting rights exercised by a credit institution, a shareholder association, the proxies deployed by SMA Solar Technology AG and bound by the shareholder's instructions or by another authorized representative. The invitation to the Annual General Meeting and all reports and information necessary for adopting resolutions, including the Annual Report, are published in accordance with the provisions of the Stock Corporation Act and are available in the run-up to the Annual General Meeting on our website at www.IR.SMA.de.

INFORMATION CONCERNING TAKEOVERS REQUIRED BY SECTIONS 289 (4) AND 315 (4) HGB

Number 1: The share capital of SMA Solar Technology AG amounts to €34.7 million. The capital is divided up into 34,700,000 no-par value bearer shares. The rights and obligations associated with the shareholdings fall under the regulations in the German Stock Corporation Act.

Number 2: Each share has the right to one vote. On October 1 , 2010, the four founders and main shareholders of SMA Solar Technology AG, Dr.-Ing.h.c. Günther Cramer, Peter Drews,

Prof. (em.) Dr .- Ing. Werner Kleinkauf and Reiner Wettlaufer, transferred equity stakes to the next generation within their families by way of a gift. The acquiring shareholders concluded a pooling agreement for a period of seven years. During the term of this agreement, the voting rights emanating from the shares transferred may only be exercised as a block vote. In addition, the shares may only be sold to third parties with the consent of the other members of the pool or if narrowly defined prerequisites are satisfied. At the end of the fiscal year, the shareholders who coordinate their voting rights in "Poolvertrag SMA Solar Technology AG" (pooling agreement) hold a total of 8,744,470 shares or 25.20% of the Company's voting rights. Beyond this, the Managing Board is not aware of any restrictions affecting voting rights or the transferability of shares.

Number 3: Danfoss A/S, Denmark, holds 20.00% of the Company's share capital.

Shareholders who coordinate their voting rights in "Poolvertrag SMA Solar Technology AG" (see Number 2) hold 25.20% of the Company's share capital. Lars Cramer as individual shareholder of the "Poolvertrag SMA Solar Technology AG" holds 1 1.05% of the Company's share capital.

Numbers 4 and 5: The shareholders do not have any special rights conferring them any particular powers of control.

Number 6: Appointment and dismissal of the Managing Board takes place pursuant to Sections 84 and 85 of the German Stock Corporation Act (AktG) together with Section 31 of the Co-Determination Act (MitBestG). Under Article 5 of the Articles of Incorporation, the Managing Board consists of at least two members and the exact number is laid down by the Supervisory Board. Under Section 179 of the AktG, the Articles of Incorporation may be amended by a resolution adopted by the Annual General Meeting with a majority of three-quarters of the share capital represented at the vote.

Number 7: The Articles of Incorporation include the provisions on the powers of the Managing Board regarding Authorized Capital II. The Managing Board, after obtaining the consent of the Supervisory Board, is entitled to increase the share capital on one or several occasions by up to a total of €10 million by issuing new bearer shares in return for cash contributions and/or contributions in kind in the period up to May 22, 2018. The Managing Board, with the consent of the Supervisory Board, is entitled to cancel the statutory subscription rights of shareholders: a) in the case of

capital increases in return for contributions in kind for the acquisition of or investment in companies, parts of companies or investments in companies, b) for the purpose of issuing shares to employees of the Company and companies affiliated with the Company, c) to exclude fractions and d) in the case of capital increases in return for cash contributions if the issue amount of the new shares does not fall significantly below the stock exchange price of shares of the same class and terms that are already listed at the time the Managing Board sets the final issue amount, and the total pro rata amount of the issued capital attributable to the new shares in respect of which the subscription right is excluded may not exceed 10% of the issued capital available at the time the new shares are issued.

Furthermore, following a resolution adopted by the Annual General Meeting on May 31, 2016, the Managing Board, in the period up to May 30, 2021, is entitled, on behalf of the Company, to acquire its own shares up to a value of 10% of the existing capital stock at the time the resolution was adopted by the Annual General Meeting, and to dispose of shares acquired in this way with the consent of the Supervisory Board by means other than through the stock exchange, or an offer made to all the shareholders, provided the shares are sold in return for cash at a price that does not fall significantly below the stock exchange price of shares in the Company issued under the same terms or the shares are sold in return for in-kind contributions, or they are offered in return for shares held by persons that either had or have an employment relationship with the Company, or with one of its affiliated companies, or members of bodies in companies that depend on the Company. Additionally, if the Managing Board sells the Company's own shares by offering them to all the shareholders with the consent of the Supervisory Board, the Managing Board is entitled to exclude the shareholders' right of subscription for fractions. In addition, the Managing Board is entitled to cancel any acquired own shares after obtaining the consent of the Supervisory Board.

Number 8: Credit lines agreed with banks with a volume of €100 million contain a change-of-control clause that includes the special termination right of the relevant bank.

Number 9: If the employment contract with a member of the Managing Board ends after being amicably cancelled within a period of nine months from a change of control, this member is entitled to severance pay amounting to his/her remuneration rights for the remaining term of the employment contract, however, no longer than a period of two years.

REMUNERATION REPORT

The Remuneration Report summarizes the principles that are decisive when it comes to determining remuneration for the Supervisory Board and Managing Board and also explains the remuneration structure and the emoluments payable.

Managing Board Remuneration and Emoluments

The remuneration system for the Managing Board (including the most important contractual elements) is decided at a Supervisory Board plenary session. The contracts concluded with Managing Board members currently in force have a term of three and five years. The Supervisory Board regularly examines the remuneration system for the Managing Board and defines targets for the variable components of the emoluments. The criteria for determining remuneration include evaluating the tasks of the individual Managing Board members, their personal performance, the overall financial situation and Company success, using compensation peer benchmarking and the Company's usual remuneration structure. In its assessment, the Supervisory Board also included Managing Board remuneration in relation to remuneration of the top-level executives and the workforce as a whole, taking into account changes over time, and thus laid out comparable peer groups from toplevel executives and the workforce. The remuneration is assessed in a way that ensures it is competitive with the market for highly qualified managerial staff. Apart from statutory requirements, the remuneration system also complies with the stipulations of the German Corporate Governance Code and with case law and was approved by the Annual General Meeting on May 27, 2014. The remuneration of the Managing Board consists of the following components in which the fixed component of the emoluments amounts to 40% to 50% and the variable component and long-term bonus in the case of good business performance of 50% to 60% of the total remuneration before additional benefits. At least one half of the variable component of the emoluments must correspond to the long-term bonus.

NON-PERFORMANCE-BASED FIXED REMUNERATION

The annual fixed emoluments are divided into 13 monthly salaries. The 1 3th salary is paid with the salary for November, on a pro rata basis for those taking up or leaving their posts during the year.

TARGET-BASED SHORT-TERM VARIABLE REMUNFRATION

The Managing Board members also receive a target-based variable salary component, which depends on earnings before taxes (EBT), sales achieved as recorded in the Consolidated Financial Statements for a fiscal year audited by the auditor, and achievement of personal objectives (personal performance). The personal objectives agreed upon with the Managing Board members for 2016 related to issues of cost reduction, process improvement, sales measures and strategic projects. For shortterm variable remuneration, if earnings are negative in any given fiscal year, they are set off against the EBT recorded for the next fiscal year. The targets (EBT/sales/personal performance) are adjusted annually by the Supervisory Board. If at least 100% of the target values are achieved, the full variable salary component agreed upon may be claimed. Values in-between are determined on a linear basis. If the total value of the individual target components is exceeded, this does not entitle payment of a higher variable component of the emoluments (cap). The performance-based variable component is paid out after the approval of the Consolidated Financial Statements, which usually takes place at the end of March of the following year. If the Managing Board members' duties do not extend beyond one full fiscal year, then they receive one-twelfth of the performance-based variable remuneration determined for the entire fiscal year for each month of the fiscal year in which they carry out their duties.

IONG-TERM BONUS

Managing Board members also receive a long-term bonus, which depends on the mean EBT margin as recorded in the Consolidated Financial Statements audited by the auditors over a period of three fiscal years. The target value (EBT margin) is determined annually by the Supervisory Board for the subsequent three fiscal years. If 100% of the target value is achieved, then the full agreed upon long-term bonus may be claimed. Values in-between are determined on a linear basis. If the target value is exceeded, this does

not entitle payment of a higher long-term bonus (cap). The bonus is payable, at the very earliest, upon expiration of the three-year period. Payment takes place after the third Consolidated Financial Statements have been approved, usually at the end of March, even if the employment contract ends before the end of the performance period. If the employment contract still has a term of at least two years to run when payment becomes due, then the Managing Board members are expected to invest the net amount payable, in part, in shares in SMA Solar Technology AG and to hold these shares until their Managing Board duties with the Company have ended.

ADDITIONAL BENFFITS

All Managing Board members are entitled to:

• → a company car,
• → reimbursement of travel costs and any expenses incurred on company business,
• -> employer's contribution up to the contribution assessment ceiling of the statutory social insurance scheme (pension, health, nursing care), even in the case of voluntary insurance and without furnishing any proof,
• -> appropriate professional indemnity insurance (D&O insurance).

Any taxes due must be borne by the Managing Board member.

OTHER CONTRACTUAL BENEFITS

In the event of death or permanent disability, the emoluments will continue to be paid for six months. In the event of early termination of Managing Board duties without good cause, the compensation payable is limited to the total remuneration for the remaining term of the contract and up to a maximum of two years' emoluments (severance pay cap). If the employment contract with a member of the Managing Board ends because it is amicably cancelled within a period of nine months from a change of control, this member is also entitled to a severance payment amounting to the remuneration claims. The same calculation basis applies as in the case of the severance pay cap. All members of the Managing Board are subject to a post-termination non-compete clause valid for a period of two years that provides a compensation payment amounting to 50% of the average annual emoluments. The calculation basis is the annual salary (fixed and variable components) paid out for

the last full calendar year. The Managing Board members must set off any monies earned while they are otherwise employed during the non-compete period. The maximum cash value of the compensation sums payable in a non-compete clause after conclusion of Managing Board duties amounts to €0.653 million (2015: €0.643 million) for Managing Board member Dr.-Ing. Jürgen Reinert and €0.860 million (2015: €0.809 million) for Pierre-Pascal Urbon.

In the 2016 fiscal year, the total emoluments payable to all members of the Managing Board in office in the fiscal year amounted to €3.484 million (2015: €6.106 million). This included variable emoluments of €0.599 million paid to the Managing Board in 2016 (2015: €1.355 million). The Managing Board members receive no separate remuneration for carrying out tasks at subsidiaries.

The table below provides information on the remuneration of the Managing Board in accordance with the rules of the German Corporate Governance Code of May 2015. The values in the "Inflow" table relate to the emoluments of individual Managing Board members for the 2016 fiscal year. The "Grants" table also shows the minimum and maximum remuneration achievable with regard to the variable remuneration components for the fiscal year.

In connection with his stepping down from the Managing Board, Roland Grebe received a single payment totaling €1.2 million to settle the existing non-compete clause, long-term variable remuneration and as severance pay.

No credits were granted nor were any advances paid to Managing Board members during the fiscal year. There are no pension commitments.

Inflow

	Roland Grebe Board Member for HR and IT Left 2016/12/31		Martin Kinne2 Board Member for Sales and Service Left 2015/12/31		Dr .- Ing. Jürgen Reinert Board Member for Operations and Technology Joined 2014/04/01		Lydia Sommer3 Board Member for Finance and HR/CFO Left 2015/02/28		Pierre-Pascal Urbon CEO, Board Member for Finance/Legal and Sales Joined 2006/07/01
In € '000	2015	2016	2015	2016	2015	2016	2015	2016	2015	2016
Fixed remuneration	415	480	480		415	480	54		500	650
Additional benefits/Others	22	23	34		22	23	4		23	29
Total	437	૨૦૩	514		437	૨૦૩	28		523	679
One-year variable remuneration	305	190	270		305	184	O		475	225
Multi-year variable remuneration
Long-term variable remuneration 2013 - 2015	O		O		O		O		O
Long-term variable remuneration 2014 - 2016		O				0				0
Total	305	190	270		305	184	0		475	225
Pension contribution	O	O	O		0	O	O		O	O
Total remuneration	742	୧୦3	784		742	687	58		998	904

' Roland Grebe left the Managing Board as of December 31, 2016.
² Martin Kinne left the Managing Board as of December 31, 2015.
3 Lydia Sommer left the Managing Boar

Grants

In €'000	Roland Grebe Board Member for HR and IT Left 2016/12/31				Martin Kinne2 Board Member for Sales and Service Left 2015/12/31
	2015	2016	2016 (min)	2016 (max)	2015	2016	2016 (min)	2016 (max)
Fixed remuneration	415	480	480	480	480
Additional benefits/Others	22	23	23	23	34
Total	437	503	503	503	514
One-year variable remuneration	305	240	72	240	270
Long-term variable remuneration 2015 - 2017	240				O
Long-term variable remuneration 2016 - 2018		O	0	O
Total	545	240	72	240	270
Pension contribution	0	O	0	0
Total remuneration	982	743	575	743	784

' Roland Grebe left the Managing Board as of December 31, 2016.
² Martin Kinne left the Managing Board as of December 31, 2015.

Grants

	Dr .- Ing. Jürgen Reinert Board Member for Operations and Technology Joined 2014/04/01			Lydia Sommer Board Member for Finance and HR/CFO Left 2015/02/28			Pierre-Pascal Urbon CEO, Board Member for Finance/Legal and Sales Joined 2006/07/01
In € 000	2015	2016	2016 (min)	2016 (max)	2015	2016	2016 (min)	2016 (max)	2015	2016	2016 (min)	2016 (max)
Fixed remuneration	415	480	480	480	ર્ટ વે				500	650	650	650
Additional benefits/Others	22	23	23	23	4				23	29	29	29
Total	437	203	૨૦૩	503	నికి				523	679	679	679
One-year variable remuneration	305	240	O	240	O				475	325	O	325
Long-term variable remuneration 2015 - 2017	240				29				325
Long-term variable remuneration 2016-2018		240	O	240						325	0	325
Total	ર્સ્વર	480	0	480	29				800	650	O	650
Pension contribution	O	O	0	0	O				O	O	O	O
Total remuneration	982	983	503	983	87				1,323	1,329	679	1,329

1 Lydia Sommer left the Managing Board as of February 28, 2015.

Supervisory Board Remuneration and Emoluments

In accordance with the regulations on Supervisory Board remuneration in effect since the 2013 fiscal year, Supervisory Board members receive fixed remuneration of €25,000 a year. The remuneration payable to the Chairman amounts to twice the amount mentioned above and the remuneration payable to the Chairman's deputy amounts to one and a half times the aforementioned amount.

Members of the Supervisory Board Audit Committee receive an annual remuneration of an additional €7,500. For members of the Supervisory Board Presidial Committee, the total annual remuneration is an additional €5,000. The chairpersons of these committees receive twice the aforementioned amounts. Members of other committees do not receive any special remuneration for their committee duties.

Supervisory Board members receive an additional €750 per meeting day for their meeting participation. If they take part in several meetings in one day, they receive a maximum payment of twice the aforementioned amount. The remuneration is payable at the end of the tiscal year. Supervisory Board members who have only sat on the Supervisory Board or a committee for part of the fiscal year receive remuneration pro rata temporis.

No other remuneration or benefits for personally rendered services, in particular consulting and mediation services, were granted to Supervisory Board members. Similarly, in the year under review, the Supervisory Board members were granted no credits or advances.

As of December 31, 2016, four of the members of the Supervisory Board held SMA shares.

The emoluments payable to the members of the Supervisory Board amounted to a total of €0.433 million in the 2016 fiscal year (previous year: €0.460 million).

Beyond the remuneration of the Supervisory Board, the employee representatives that are employees of the Company receive fee payments unrelated to their Supervisory Board duties.

Other

The Company has taken out professional indemnity insurance (D&O insurance) for the members of the corporate bodies of all SMA Group companies. It is effected or extended every year. The insurance covers the personal liability risk of the members resulting from a breach of duty when exercising their duties in the event that any claims for economic losses are asserted against them. The deductible in the policy for the 2016 fiscal year was 10% of the damage, however, no higher than one and a half times the fixed annual emoluments of the member of the corporate body.

Remuneration of the Supervisory Board

	Remuneration for Supervisory Board duties	Remuneration for committee duties		Total
In €'000	2015	2016	2015	2016	2015	2016
Roland Bent (as of January 28, 2015)	26.9	28.8	0.0	0.0	26.9	28.8
Dr .- Ing. E. h. Günther Cramer (Chairman until January 6, 2015)	0.8	0.0	0.2	0.0	1.0	0.0
Oliver Dietzel	32.5	30.3	12.8	12.8	45.3	43.1
Peter Drews	31.0	29.5	0.0	0.0	31.0	29.5
Dr. Erik Ehrentraut (Deputy Chairman until February 11, 2015, Chairman as of February 11, 2015)	56.1	55.3	33.4	32.0	89.5	87.3
Kim Fausing (Deputy Chairman)	0.01	0.0	0.0	0.0 '	0.0 '	0.0
Dr. Günther Häckl (until May 21, 2015)	14.3	0.0	4.2	0.0	18.5	0.0
Johannes Häde	31.8	30.3	12.8	12.8	44.6	43.1
Heike Haigis	31.8	28.8	0.0	0.0	31.8	28.8
Alexa Hergenröther (as of August 5, 2016)	0.0	11.6	0.0	0.9	0.0	12.5
Dr. Winfried Hoffmann (until June 30, 2016)	30.3	14.8	0.0	0.0	30.3	14.8
Joachim Schlosser (until May 21, 2015)	1 4.3	0.0	0.0	0.0	14.3	0.0
Yvonne Siebert (as of May 21, 2015)	18.3	29.5	4.6	7.3	22.9	36.8
Dr. Matthias Victor (as of May 21, 2015)	18.3	30.3	4.6	7.3	22.9	37.6
Hans-Dieter Werner (as of May 21, 2015)	18.3	29.5	0.0	0.0	18.3	29.5
Reiner Wettlaufer	31.0	29.5	12.8	11.5	43.8	41.0
Mirko Zeidler (until May 21, 2015)	14.3	0.0	4.2	0.0	18.5	0.0
Total	370.0	348.2	89.6	84.6	459.6	432.8

'

CONSOLIDATED MANAGEMENT REPORT

BASIC INFORMATION ABOUT THE GROUP
-----------------------------------	--

• 26 Business Activity and Organization
• 27 Products and Services
• 28 Important Sales Markets and Competitive Situation
• 29 Vision and Mission
• 29 Corporate Goals
• 30 Research and Development
• 32 Employees
• Corporate Social Responsibility (CSR) 34
• 36 Enterprise Management

38 FISCAL YEAR 2016

• 38 General Economic Conditions and Economic Conditions in the Sector
• 39 Results of Operations
• 44 Financial Position
• 45 Net Assets
• SMA Solar Technology AG (Notes Based on the German Commercial Code HGB) 46
• 48 Managing Board Statement on the Business Trends in 2016

50 SUPPLEMENTARY REPORT

• 50 Other Elements of the Consolidated Management Report
• 51 -RISKS AND OPPORTUNITIES REPORT
• રા Risk and Opportunity Management
• Internal Control System 52
• Individual Risks 54
• 62 FORECAST REPORT
• 62 The General Economic Situation
• Future General Economic Conditions in the Photovoltaics Sector 62
• 64 Overall Statement From the Managing Board on the Expected Development of the SMA Group

BASIC INFORMATION ABOUT THF GROUP

BUSINESS ACTIVITY AND ORGANIZATION

SMA Solar Technology AG (SMA) and its subsidiaries (SMA Group) develop, produce and distribute PV inverters, transformers, choke coils and monitoring and energy management systems for PV systems. Another area of business is operation and maintenance services for photovoltaic power plants (O&M business), in addition to other services. The power electronics components for railway technology are no longer part of SMA's core business and are to be sold

Organizational Structure

LEGAL STRUCTURE OF THE GROUP

As the parent company of the SMA Group, SMA, headquartered in Niestetal near Kassel, Germany, provides all of the functions required for its operative business. The parent company holds, either directly or indirectly, 100% of the shares of all the operating companies that belong to the SMA Group. The Annual Report includes information regarding the parent company and all 35 Group companies (2015: 35), including eight domestic companies and 27 companies based abroad. In 2016, SMA Solar Technology AG has increased the shareholding in Jiangsu Zeversolar New Energy Co., Ltd. and in SMA Immo Beteiligungs GmbH to 100% respectively. In addition, as part of a capital increase of USD 20 million, SMA Solar Technology AG acquired interests of 28.27% in Tigo Energy, Inc. Tigo Energy, Inc. is included in the Consolidated Financial Statements as an associate through the equity method.

ORGANIZATIONAL STRUCTURE

The SMA Group operates under a functional organization. In this organization, the Residential, Commercial, Utility and Service business units take on overall responsibility and manage development, operational service and sales as well as operations. In the organizational structure, Zeversolar, SMA Sunbelt Energy and the Off-Grid and Storage business unit have been combined under Other Business. This compact organization allows for fast decisions and a lean management structure. The Railway Technology business division is up for sale and is thus reported as a discontinued operation in accordance with IFRS 5.

MANAGEMENT AND CONTROL

As required by the German Stock Corporation Act (Aktiengesetz), the executive bodies consist of the Annual General Meeting, the Managing Board and the Supervisory Board. The Managing Board manages the Company; the Supervisory Board appoints, supervises and advises the Managing Board. The Annual General Meeting elects shareholder representatives to the Supervisory Board and grants or refuses discharge to the Managing Board and the Supervisory Board.

CHANGES TO THE MANAGING BOARD

In the year under review, the Managing Board of SMA Solar Technology AG comprised the following members: Roland Grebe (Board Member for Human Resources and IT), Dr .- Ing. Jürgen Reinert (Board Member for Operations and Technology) and Pierre-Pascal Urbon (Chief Executive Officer, Board Member for Finance/Legal and Sales). Roland Grebe stepped down from the Managing Board for personal reasons as of December 31, 2016. Ulrich Hadding was appointed to the Managing Board as of January 1, 2017. Since January 1, 2017, the SMA Managing Board has thus comprised Ulrich Hadding (Board Member for Finance, Human Resources and Legal), Dr .- Ing. Jürgen Reinert (Deputy Chief Executive Officer, Board Member for Operations and Technology) and Pierre-Pascal Urbon (Chief Executive Officer, Board Member for Strategy, Sales and Service).

COMPOSITION OF THE SUPERVISORY BOARD

The SMA Supervisory Board, which represents shareholders and employees in equal measure, consists of Roland Bent, Peter Drews, Dr. Erik Ehrentraut (Chairman), Kim Fausing (Deputy Chairman), Alexa Hergenröther (as of August 5, 2016) and Reiner Wettlaufer as shareholder representatives. The employees are represented on the Supervisory Board by Oliver Dietzel, Johannes Häde, Heike Haigis, Yvonne Siebert, Dr. Matthias Victor and Hans-Dieter Werner.

Dr. Winfried Hoffmann stepped down from office on the SMA Supervisory Board effective June 30, 2016. Alexa Hergenröther took his place as shareholder representative on the Supervisory Board. Ms. Hergenröther is a member of the management of K + S KALI GmbH.

PRODUCTS AND SERVICES

According to the independent analysis company IHS Markit, SMA is the clear global market leader for PV inverters in terms of sales. As a specialist in system technology, SMA develops and markets high-quality PV inverters and innovative technologies for intelligent management and efficient use of energy. SMA's product and solution portfolio contains a wide range of PV inverters and system technology for grid-connected PV systems, off-grid and hybrid systems as well as for storage integration. SMA offers technically and cost-optimized system solutions for all power classes and system types as well as different regional requirements. In addition, SMA provides comprehensive services that also encompass operational management of large-scale PV power plants.

The Residential business unit serves the attractive long-term market of small PV systems for private applications with the smart module technology from Tigo Energy, Inc.; single-phase string inverters with the brand name Sunny Boy; three-phase inverters in the lower output range up to 12 kW with the brand name Sunny Tripower; energy management solutions; storage systems; and communication products and accessories. With this portfolio of products and services, SMA offers a suitable technical solution for private PV systems in all major photovoltaic markets.

The Commercial business unit focuses on the growing market of medium-sized PV systems for commercial applications and on large-scale PV power plants using string inverters. Its portfolio includes solutions with the three-phase inverters from the Sunny Tripower brand with outputs of more than 12 kW, as well as complete energy management solutions for medium-sized PV systems, medium-voltage technology and other accessories.

The Utility business unit serves the growing market for largescale PV power plants with central inverters from the Sunny Central brand. The outputs of Sunny Central inverters range from 500 kW to the megawatts. In addition, its portfolio includes complete solutions comprising central inverters with their grid service and monitoring functions as well as all medium- and high-voltage technology and accessories.

In the reporting period, the Service business unit provided support to SMA customers worldwide, offering extensive services to optimize system performance and ensure high yield stability. The SMA Service range includes commissioning, warranty extensions, service and maintenance contracts, operational management, remote system monitoring and spare parts supply. SMA has its own service companies in all important photovoltaic markets. With an installed capacity of approximately 55 gigawatts (GW) worldwide, SMA leverages economies of scale to manage its service business profitably.

In the Other Business segment, the focus is on the integration of battery-storage systems for all system sizes. In addition to increasing PV self-consumption to reduce electricity costs in private households and companies, supplying electricity to remote areas reliably and cost-effectively is the priority here. SMA collaborates on storage integration with all leading battery manufacturers and with companies from the automotive industry so that it can always offer customers the latest technology with the greatest customer benefit and the best price-performance ratio.

The secondary brand Zeversolar, which is also a part of the Other Business segment, provides technologically simple products with an adjusted service range for the low-price segment in selected markets.

The Railway Technology business division, which is up for sale, manufactures converters for short- and long-distance railway traffic and complete energy supply systems for railway coaches and multiple-unit trains. The main product is the SMARTconverter 3, an on-board power system converter for subway and suburban railway trains, which is designed as a platform device and characterized by minimum weight, high efficiency and low life-cycle cost.

IMPORTANT SALES MARKETS AND COMPETITIVE SITUATION

The global photovoltaic market once again saw significant growth in 2016. SMA estimates that 78 GW of new PV power were installed in the reporting period. This equates to growth of approximately 50% compared with 2015 (2015: 52 GW). The strong growth came from China in particular, a market with a very low price level. Due to the further rise in price pressure in all market segments and regions, SMA estimates that the worldwide volume of investment for inverter technology in 2016 was €5.2 billion and thus only around 9% higher than in the previous year (2015: €4.8 billion).

GROWTH IN AMERICA AND CHINA, DECLINE IN EMEA

The share of the photovoltaic markets in Europe, the Middle East and Africa (EMEA) in global sales declined to approximately 20% in 2016 (2015: 23%). The decrease is particularly attributable to the decline in demand in Great Britain. In contrast, American photovoltaic markets developed very positively, making up 29% of global sales (2015: 24%). The Chinese market reported strong growth and accounted for approximately 44% of the global market with 34 GW. The newly installed power was double that of the previous year. Due to the low price level, however, the growth in China was much lower when measured in euros. The Chinese market therefore represented approximately 17% of global sales in 2016 (2015: 12%). The Asia-Pacific photovoltaic markets (excluding China) accounted for 34% of the global market, thereby losing market share again (2015: 41%).

SMA BENFFITS FROM STRONG POSITIONING IN GROWTH MARKETS

With its own companies in 20 countries, the SMA Group is in an excellent position to benefit from the growth of international markets. No other competitor has a comparable international sales and service structure with experienced photovoltaics specialists. The modern production sites with an overall annual capacity of over 10 GW in Niestetal and Kassel (Germany) and Yangzhong (China) are highly flexible and can be quickly adapted to changes in demand. The competence center for coils (electromagnetic components) is based in Zabierzów, near Krakow (Poland).

Thanks to its international position, SMA can react quickly to regional shifts in demand. SMA can benefit from global growth in demand with highly efficient PV inverters, integrated system solutions for PV systems of all power classes, intelligent energy management systems and battery storage solutions, complete solutions for PV diesel hybrid applications and extensive services up to and including operational management. This is also reflected in a global study by the analysis company IHS Markit, according to which SMA was by far the most popular inverter brand worldwide for the fifth time in a row in 2016.

In 2016, SMA sold inverters with an accumulated power of approximately 8.2 GW (2015: 7.3 GW) and generated €946.7 million in sales (2015: €981.8 million'). Measured in terms of sales, SMA accounted for approximately 20% of global demand for PV inverters, and thus defended its global market leadership.

SMA countered the increased price pressure in all segments and regions with additional measures to reduce costs. These included product innovations with low cost of sales and the consolidation of its global infrastructure. For example, the Company closed its production sites in Denver (U.S.) and Cape Town (South Africa) at the end of 2016 to make better use of its capacity at the production facilities in Germany and China.

The service business is becoming an increasingly important unique selling proposition in the solar industry. SMA has its own service companies in all important photovoltaic markets. With an installed capacity of approximately 55 GW worldwide, SMA leverages economies of scale to manage its service business profitably and expand it further.

In addition, SMA is advancing its strategic positioning in major future fields such as storage integration, digitization of the electricity supply and the combined use of renewable energies and fossil fuels in PV diesel hybrid systems. For example, the Company established SMA Energy Services in the year under review, an innovative service for the energy industry for better integration of solar energy into the supply system on the basis of high-resolution data on generation and consumption.

The figure for the previous year was adjusted retrospectively due to the planned sale of the Railway Technology business division

VISION AND MISSION

Energy supply structures are undergoing fundamental change all over the world. After the pioneer phase of renewable energies, now follows the digitization of the energy industry. In the foreseeable future, the energy supply will be decentralized, renewable, fully digital and interconnected. Photovoltaics will play an essential part as the most cost-effective source of energy. With a complete portfolio of products and solutions, extensive PV system expertise and a global presence, SMA is in an excellent position to take the opportunities offered. The SMA Managing Board together with a selected team developed the SMA Strategy 2020 keeping this in mind in the year under review. It comprises a forward-looking vision and mission as well as clear strategic targets for the years to come.

Our vision is to make people completely independent in their energy supply using decentralized renewable energy in a connected world. SMA will make a substantial contribution to the fast and full implementation of this vision. Our mission is to integrate and network photovoltaics, storage systems and mobility with intelligent energy management. With our superior solutions, we will shape the energy supply of the future.

CORPORATE GOALS

SMA's corporate goals are enshrined in the Strategy 2020. They were presented to all SMA employees around the world in the reporting period and are the basis for the Company's sustainable success.

GLOBAL MARKET LEADER IN ALL SEGMENTS

SMA's goal is to make consistent use of growth opportunities in all market sectors and regions and to be the global market leader in sales in every single one of our market segments - Residential, Commercial, Utility, Service and Off-Grid and Storage.

PROVIDER OF SYSTEMS AND SOLUTIONS

The ability to offer both individual components and entire systems and solutions including innovative services is becoming an important distinguishing feature in the photovoltaics industry. SMA has therefore set itself the target of increasing the proportion of sales it generates outside inverters from around 20% at present to over 40% by 2020.

SUSTAINABLE PROFITABILITY AND HIMITED CAPITAL TIF-JIP

To counter the high price pressure that is still expected, SMA is striving for continual process improvements and increases in efficiency. If necessary, profitability will be ensured through reductions in structural costs.

DEVFICOPMENT OF SMA BY MFANS OF DISRUPTIVE APPROACHES

The digitization of the energy supply is giving rise to business opportunities that demand novel approaches. To make use of the resulting opportunities, SMA will invest in start-ups that focus on disruptive technological approaches, data-based business models and end-to-end sales models.

SMA IS AN ATTRACTIVE COMPANY

Motivated employees with an international, entrepreneurial mindset and approach coupled with high credibility among all stakeholders are important factors for SMA's success in a dynamic market environment. We therefore practice our values and allow SMA employees the freedom for responsible, entrepreneurial action. We stand out, both internally and externally, due to fairness, internationality and sustainability.

RESEARCH AND DEVELOPMENT

As the global market leader in photovoltaics, SMA has set trends in the global photovoltaics industry for many years. We use our comprehensive systems expertise to develop complete solutions for different photovoltaic applications. To offer our customers in all market segments and regions the best complete solutions in terms of both technology and economic efficiency, we selectively collaborate with strong partners. With our continuous research and our market- and customer-focused development, we can further reduce the consumer cost of PV electricity and thus make a significant contribution to a successful global energy transition. Our innovations have won numerous awards, most recently in June 2016 at Intersolar Europe in Munich. Our technology is protected by many patents.

Forward-Looking Development Approach and High Capacity for Innovation

Our thorough understanding of different market requirements and our close proximity to our customers enable SMA to anticipate future system technology demands. Customers used to be concerned primarily with energy yield, service life and design flexibility. Now, however, consumer PV electricity costs, system integration as well as connectivity are the key factors in making a purchasing decision. With the increasing integration of PV systems into comprehensive systems, cyber security is also playing an ever more important role. In this context, the PV inverter is classified as a system-critical component, so customers place higher demands on the transparency of companies. 1

In product development, SMA is pursuing a platform strategy aimed at systematically cutting the cost of PV inverters and being able to react quickly to market changes. By standardizing the core inverter, we can increase the proportion of identical components across the entire portfolio. Customization in line with different markets and customer needs is implemented through the connection area and software. Thanks to our high capacity for innovation, we are able to launch new solutions and product enhancements within a very short space of time. In doing so, our international development teams work together closely and thus allow for optimal use of development capacity. In the year under review, SMA lowered its R&D expenses by 18.4% compared to the previous year to €78.3 million (including capitalized development projects) and simultaneously maintained its high capacity for innovation. By the end of the reporting year, SMA had been granted 869 patents and utility models worldwide. In addition, more than 600 other patent applications were still pending as of December 31, 2016. Furthermore, SMA holds the rights to 803 trademarks.

Research and Development Expenses of the SMA Group

in € million	2016	2015	2014	2013	2012
Research and development expenses	78.3	96.0	129.1	102.5	108.1
of which capitalized development projects	12.5	29.5	40.9	229	20.2
Depreciation on capitalized development projects (scheduled)	19.8	13.6	14.9	14.9	7.5
Research and development ratio in % in relation to sales	8.3	9.8	16.0	11.0	7.4

The figure for the previous year was adjusted retrospectively due to the planned sale of the Railway Technology business division.

Complete Solutions to Lower Energy Costs

PRIVATE SYSTEMS: FOCUS ON MORE SELF-CONSUMPTION AND OPTIMAL SERVICE

In the market segment for smaller residential PV systems, SMA promoted the integration of additional loads into energy management at the household level. Since September 2016, the Sunny Home Manager, the central control unit of the SMA Smart Home, has simply integrated commercially available household appliances from Bosch und Siemens Hausgeräte GmbH (BSH) into SMA's intelligent energy management via the EEBus communication standard. Self-generated solar energy is thus used even more efficiently. This increases the self-consumption of solar power and significantly reduces electricity costs.

In April 2016, SMA and Tigo Energy, Inc. based in Silicon Valley, announced their strategic partnership in the field of smart module technology. The technology patented by Tigo Energy, Inc. is a consistent evolution of the micro inverter technology and the module optimizers previously available on the market. SMA obtained the exclusive rights for global distribution of the TS4-Retrofit smart module technology developed by Tigo Energy, Inc. This chip-based solution has various options that allow an increase in energy yield, simplification of system planning and installation, as well as fire safety and cloud-based monitoring of system availability. Customers can thus adapt each PV module to their individual needs. With previous solutions, every PV module always had to be equipped with an optimizer regardless of whether this was necessary. The new solution from Tigo Energy, Inc. and SMA can therefore generate the same energy yield as fully optimized PV systems with lower capital expenditure. This

This paragraph is not a mandatory component of the management report as defined in Section 315 HGB in conjunction with GAS 20, and therefore not a subject of the financial audit.

strategic partnership gives SMA access to the fast-growing market of module-level power electronics (MLPE) with an estimated annual market volume of approximately €700 million. SMA will start selling the SMA Power+ Solution with Tigo Energy's smart module technology in the primary sales markets in January 2017. '

In the year under review, SMA also enhanced the globally successful Sunny Boy inverter family, and in the first quarter of 2017 the new Sunny Boy in the power classes 3.0/3.6/4.0/5.0 kW will be launched. The device is particularly easy to install and put into operation, has the latest communication standards and can be combined with the components of the SMA Power+ Solution into a full system solution. As a special customer benefit, SMA also automatically monitors the inverter for the first time and ensures further reduction in consumer cost of PV electricity with quick troubleshooting. In this respect, SMA can rely on its dense service network in all major photovoltaic markets - an advantage that competitors in Asia in particular cannot offer their customers because they often lack the required service infrastructure.

In the U.S., SMA introduced new inverters in the Sunny Boy product family with power of up to 8 kW back in August 2016. The devices have the latest safety and communication technology and enable faster installation and service. The U.S. products already meet the regulatory requirements of the UL 1741 SA standard, which will apply from fall 2017. The new U.S. inverters were also tested specifically for combination with the components of the SMA Power+ Solution and are available as a complete system solution.

COMMERCIAL APPICATIONS: COST REDUCTION THROUGH NEW INVERTER CONCEPT

In the medium-sized inverter segment (Commercial), SMA is expanding the globally successful Sunny Tripower string inverter family with a third generation. SMA introduced the new Sunny Tripower CORE 1 for the tirst time at Solar Power International in Las Vegas in September 2016. The 50 kW string inverter is suitable for global use in decentralized, commercial rooftop and ground-based PV systems and covered parking spaces. The new inverter will be commercially available in the second quarter of 2017. Its innovative mounting concept makes Sunny Tripower CORE 1 the first free-standing inverter for commercial solar projects. Faster installation and the innovative integration concept allow significant cost savings and a considerable increase in installation security for everyone involved in the project.

In addition, SMA launched the new Medium Voltage Station (MVS) for inverters in the current Sunny Tripower platforms in March 2016. The MVS enables decentralized PV systems with string inverters to be connected to medium-voltage grids quickly and easily. SMA is the first company to provide a fully integrated solution with preconfigured components. A robust standard container holds the medium-voltage transformer, medium-voltage switchgear and low-voltage connections for the inverters.

Also in March 2016, the decentralized Catalagan Solar Farm with 830 Sunny Tripower 60 inverters was commissioned in the Philippines. With 63 megawatts of power, it is one of the world's largest PV systems with string inverters and underscored SMA's eminent expertise in this field, which is becoming increasingly significant.

PV POWER PLANTS: HIGH-PERFORMANCE AND COST-EFFECTIVE COMPLETE SOLUTIONS

In the segment of large-scale PV power plants, SMA developed the Medium Voltage Power Station (MVPS) 5000SC-EV, a turnkey container solution for 1,500 V power plants, in the year under review. Equipped with two Sunny Central 2500-EV inverters and a mediumvoltage transformer and switchgear in a standard container, the new MVPS enables power of 5,000 kVA. SMA also provides a version with power of 4,400 kVA for 1,000 V power plants. Due to its unique power density and compactness, the Medium Voltage Power Station considerably lowers transport, installation and operating costs. The complete solution can be used worldwide in largescale PV power plants and can be erected outdoors in all ambient conditions. Delivery is scheduled to start in May 2017.

In August 2016, the Sunny Central 2500-EV-US was the first 1.500 V central inverter to receive UL 62109-1 certification for North America from Underwriter Laboratories. In September 2016, the independent company Bureau Veritas certified the Sunny Central 2200/2500-EV for global markets according to IEC standard 62109-1/2. This is official confirmation that SMA inverters comply with international standards. For SMA customers, the certification means that large-scale solar projects around the world can be implemented more safely, easily and cost-effectively with SMA central inverters.

This paragraph is not a mandatory component of the management report as defined in Section 315 HGB in conjunction with GAS 20, and therefore not a subject of the financial audit.

OTHER BUSINESS: FLEXIBLE STORAGE INTEGRATION FOR ALL SYSTEM SIZES '

The integration of battery-storage systems for all system sizes is of key importance in the Other Business segment. SMA launched Sunny Boy Storage on the German market in March 2016, making it the first manufacturer to offer an AC-coupled storage system for smaller residential PV systems for integrating high-voltage batteries such as the Powerwall from Tesla. Other major European storage markets and Australia followed during the year under review. With Sunny Boy Storage, it is possible to easily and cost-effectively integrate battery-storage systems into new and existing PV installations while also flexibly enhancing the storage system, as it is not necessary to touch the PV system. At the same time, SMA has used the solution to reduce system costs to the extent that electrical energy can now be stored at costs comparable to traditional household electricity rates in Germany. This was recognized by the expert judging panel at Intersolar Europe in June 2016, which distinguished Sunny Boy Storage with the ees AWARD for outstanding energy-storage products. In November 2016, SMA also entered into a partnership with the global market leader in the field of lithium-ion batteries for home storage systems, LG Chem. The flexible storage solution with Sunny Boy Storage and the high-voltage batteries RESU 10H and 7H from LG Chem has been available on the European and Australian markets since December 2016. With this storage system, PV system owners can reduce their electricity costs by more than 80%.

In the year under review, SMA also entered into a long-term sales partnership with Mercedes-Benz Energy GmbH, a wholly owned subsidiary of Daimler AG, relating to stationary battery-storage systems. The Mercedes-Benz energy storage system based on lithium-ion technology has been designed with a capacity of up to 20 kWh for use in private households. With the Sunny Island battery inverter, Sunny Home Manager and SMA Energy Meter as its core components, the SMA solution offers users of the Mercedes-Benz energy storage system maximum flexibility and high quality. Users benefit above all from the seasonal adjustment of battery use, which makes a crucial contribution to optimum use of the battery, as it considers the differing weather conditions during the summer and winter months.

In March 2016, SMA and its subsidiary SMA Sunbelt Energy GmbH commissioned a PV hybrid system on the Caribbean island of St. Eustatius, guaranteeing a sustainable energy supply for the island through the intelligent combination of PV farm, batterystorage system and diesel generators. The integration of 1.9 MWp of solar power and 1 MW of battery power with the SMA Fuel Save Controller 2.0 reduces the use of fossil fuels by up to 30%. In June, the system won the Intersolar Award for outstanding solar projects.

EMPLOYEES

Number of Employees Remains Constant After Completion of Staff Reduction

After SMA successfully completed the staff reduction in connection with the Company's transformation at the end of 2015, the number of employees remained virtually constant as of December 31, 2016, compared to the previous year. As of the reporting date, SMA had 3,345 employees worldwide (December 31, 2015: 3,330 employees; figures do not include temporary employees). SMA employed 2,093 people in Germany (December 31, 2015: 2,081 employees; figures do not include temporary employees) and 1,252 people abroad (December 31, 2015: 1,249 employees; figures do not include temporary employees).

SMA still uses temporary employees to absorb order fluctuations. Their hourly rate of pay is in line with that of SMA employees. In addition, temporary employees working at SMA also participate financially in the Company's success. As of the reporting date, the number of temporary employees declined by 141 to 530 globally (December 31, 2015: 671 temporary employees).

Employees

Reporting date	2016/ 12/31	2015/ 12/31 compa- rable '	2015/ 12/31	2014/ 12/31	2013/ 12/31	2012/ 12/31
Employees (excl. temporary employees)	3,345	3,330	3,510	5,060	5,141	5,992
of which domestic	2,093	2,081	2,253	3,469	3,736	4,649
of which abroad	1,252	1,249	1,257	1,591	1,405	1,343
Temporary employees	530	671	673	467	662	639
Total em- ployees (incl. temporary employees)	3,875	4,001	4,183	5,527	5,803	6,631

1 Not including employees of the Railway Technology business division, which is held for sale.

Full-Time Equivalents

Reporting date	2016/12/31 '	2015/12/31 comparable	2015/12/31	2014/12/31
Full-time equivalents (excl. trainees and temporary employees)	3,118	3,110	3,285	4,667
of which domestic	1,881	1,872	2,039	3,094
of which abroad	1,237	1,238	1,246	1,573

Not including employees of the Railway Technology business division, which is held for sale.

This section is not a mandatory component of the management report as defined in Section 315 HGB in conjunction with GAS 20, and therefore not a subject of the financial audit.

To achieve additional cost reductions required, the SMA Managing Board made the decision to close the production sites in Denver (U.S.) and Cape Town (South Africa) at the end of 2016. Against this backdrop, the number of employees will be reduced at the beginning of 2017. SMA's sales and service location in Rocklin, California, will remain and be expanded further. In the future, SMA will serve the American and South African markets from the production sites in Germany and China. These sites will therefore experience higher capacity utilization.

High Flexibility in Germany

Although SMA now generates almost 90% of its sales abroad, the Company remains committed to its site in Germany. The large share of production employees in Germany makes economic sense due to the product design. Generally, many assemblies and components are procured from countries with lower wage levels. By contrast, assembly and testing are performed by specialist employees in Germany, thus ensuring high quality. SMA can offset high order fluctuations by using temporary employees and modern working time models. The main location for development and production is Niestetal/Kassel. SMA is thus part of a future-oriented sector that is very important to the Federal Republic of Germany in terms of industrial policy: In 2015, about 300,000 people worked in the field of renewable energy in Germany, including some 30,000 in the solar industry. Not only is SMA the third-biggest employer in the North Hesse region, it also safeguards jobs at suppliers and service providers in Germany. '

Attractive Company for Motivated Employees

Highly motivated employees make a crucial contribution to the Company's success. For this reason, SMA cultivates a corporate culture characterized by tairness and respect. In joining the "Diversity Charter" in 2011, the Company undertook to create a work environment in which all employees have the same opportunities for development, regardless of gender, nationality, religion or ideology, disability, age or sexual orientation. In the year under review, SMA was named by the German magazine "Freundin" and the employer rating platform "kununu" as one of the 100 most family-friendly companies in Germany out of more than 208,000 companies.

The internal and external attractiveness of the Company was also defined as an important goal in the SMA Strategy 2020. At SMA, the corporate values of trust, performance and team spirit are actively put into practice. Employees are given freedom for responsible, entrepreneurial action. They are supported in developing an international perspective and working together on an interdisciplinary basis in a dynamic environment.

The fact that the Company was certified by the Top Employers Institute as a top employer for engineers in 2016 underscores its strong appeal to qualified specialist and management staff. The independent certification company identifies organizations around the world that are distinguished by excellent working conditions and thus contribute to the personal and professional development of their employees. Only companies that meet the objective assessment standards to a high level can qualify for certification as a top employer. This was the fourth time SMA had received the certification.

Targeted Development of Young Staff and Job Level Model

To identify, qualify and retain employees with particularly high potential, SMA established a talent management program in the year under review. In the interests of organized requirements and succession planning, the aim is to form a pool of employees who are considered for high-profile positions within the specialist, project manager and management career paths as a result of their excellent performance and outstanding potential. In the talent management program, the participating employees are developed in line with the "support and challenge" principle and optimally prepared to assume key positions.

Furthermore, in 2016, SMA introduced a job level model, initially at the SMA Solar locations in Niestetal and Kassel, to ensure greater transparency and comparability of compensation across all areas of the Company. The job level model is an organizational tool intended to help structure all existing positions at SMA and thus make them comparable internationally. The model is to be implemented gradually in all locations and companies of the SMA Group.

Excellent Quality Vocational Training

Young people have been receiving vocational training at SMA since 1985. Vocational training is a high priority at SMA as a key element in the technical qualification of new employees and a component for securing and fostering the next generation. More than 400 former trainees still work at the Company.

Currently, vocational training at SMA is offered in the following five professions: office management, industrial business management, device and system electronics, industrial electronics specializing in devices and systems, and mechatronics. Vocational training at SMA is characterized by an exceedingly strong focus on practical application and projects. The trainees quickly take on responsibility for the tasks and projects assigned to them, learn on a self-organized basis and solve complex tasks as part of a team. In addition, SMA offers in-house classes. Extensive preparation for examinations, internal and external training courses and seminars, introductory weeks, and IT and technology projects complement the training programs. We thereby promote not only the technical expertise

This paragraph is not a mandatory component of the management report as defined in Section 315 HGB in conjunction with GAS 20, and therefore not a subject of the financial audit.

but also the social skills needed by the successful specialists of the future. These objectives in relation to both professional training and the transfer of expertise will enable SMA to successfully develop young employees and prevent a shortage in skilled staff.

The high quality of vocational training at SMA is also reflected in the trainees' outstanding examination results. For example, in 2016, SMA trainee Lina Franke earned the best examination result out of all wholesale and foreign trade specialist trainees in Germany and was recognized for this achievement by the Association of German Chambers of Commerce and Industry. In addition, the best trainee in Hesse for the profession of device and system electronics also came from SMA in the year under review, as did the top performers at the Kassel-Marburg Chamber of Commerce and Industry in the professions of industrial electronics and office communications.

As of the reporting period, a total of 118 young people were in vocational training at SMA (December 31, 2015: 122 people). 38 trainees completed their vocational training during the reporting period. The best graduates were offered further employment at SMA. In the new cohort of trainees, 34 trainees commenced their vocational training at SMA.

CORPORATE SOCIAL RESPONSIBILITY (CSR)'

SMA understands sustainability as combining long-term economic success with protection of the environment and social responsibility. Our product solutions are manufactured in an environmentally friendly and resource-conserving way and allow for a sustainable, decentralized and renewable energy supply. In our actions, we maintain a balance between economic, ecological and social aspects. Our sense of identity also includes a fair and honest business policy, social commitment and satisfied, motivated employees.

Sustainability - An Important Element of the SMA Strategy 2020

Clearly defined values and principles have always been at the heart of our mind-set and actions at SMA. The SMA Strategy 2020 developed in the reporting year emphasizes the importance of sustainability to SMA. As part of the strategic objective "SMA is an attractive company," we are committed to organizing all activities in a responsible, fair and sustainable way along the entire value chain. Defined sustainability targets within the following four focus areas make it possible to measure this:

• → Products and processes
• → Energy and environment
• → Employees
• → Social responsibility

For all company activities, the Global Operations unit coordinates implementation of the sustainability strategy. Starting from the 2017 fiscal year, key sustainability activities will be assessed using the company-related and the product-related key figures. The decisive factor for the company-related key figure is creating more value with fewer resources. The product-related key figure is based on constantly increasing the sustainability performance of our products. To systematically achieve these sustainability targets, SMA intends to develop its own sustainability dashboard. In addition to the Global Reporting Initiative (GRI) standard, this will also be based on the United Nations Global Compact and also takes into account the UN's 21 sustainable development goals.

Living International Values and Principles

As early as 2011, SMA signed the UN Global Compact. In doing so, we publicly declared our commitment to responsible corporate governance. At the core of the UN initiative are 10 principles in the areas of human rights, labor standards, environmental protection and anticorruption.

Our social and environmental responsibility also extends to collaboration with our suppliers and business partners. As early as 2009, SMA signed the cross-sector Code of Conduct issued by the German Association of Materials Management, Purchasing and Logistics. In 2010, we supplemented this Code of Conduct with SMA's own guidelines for suppliers (Supplier Code). These cover topics such as corruption, antitrust law, ethical principles, labor standards and employee rights, environmental protection, quality and product safety.

In 2014, the Supplier Code was supplemented to include conflict minerals. Our suppliers must ensure that the tantalum, tin, tungsten and gold employed are not used to finance or support - either directly or indirectly - armed groups that are guilty of serious human rights violations in the Democratic Republic of the Congo or in neighboring countries. SMA expects suppliers to keep track of the origins of the minerals they use throughout the supply chain and to disclose their precautionary measures, upon request.

The section on Corporate Social Responsibility (CSR) is not a mandatory component of the management report as defined in Section 315 HGB in conjunction with GAS 20, and therefore not a subject of the financial audit.

Sparing Use of Resources

Another important starting point for sustainability in the manufacturing process is our corporate energy management policy. SMA's energy concept is based on three levels from which we work to improve energy-related performance: avoiding energy consumption, using energy more efficiently and increasing the share of renewable energies used. The goal is to supply SMA entirely with decentralized renewable energy from the local region by 2020. In this context, the SMA Climate Roadmap forms the basis for continuous development of projects contributing to the energy transition at SMA's headquarters.

SMA has already undertaken a number of flagship projects in the past with its CO2-neutral inverter production facility at Solar Factory 1, the Solar Academy, which functions independently from the utility grid, and the Data Processing Center, which was completed in 2013 and is one of the most resource-efficient centers of its kind. These projects are a testament to the high priority SMA places on its sustainable energy strategy. Meanwhile, we were able to increase the share of self-generated solar electricity in our total electricity consumption to 32%. In addition to other saving measures, we also converted the lighting in our parking block to energy-efficient LED technology in 2016. In 2017, Solar Factory 1 in Kassel is to be optimized further in terms of energy, thereby significantly reducing energy consumption.

Power Supply Sources

Self-produced PV power

Regional grid decentralized power supply

Transregional grid power supply

Development of Energy Consumption

Total energy consumption in MWh

Development of Energy Consumption per Produced kW Inverter Power

With our corporate environmental management system, we avoid environmental damage at every stage of the value chain. The environmental management system at the production sites in Niestetal/ Kassel is certified in accordance with DIN EN ISO 14001 and DIN EN ISO 50001. This internationally recognized certification attests to SMA's particularly efficient and sustainable use of energy in production and management. The gradual introduction of special energy management software also makes it possible to monitor all types of consumption on an ongoing basis. Assigning energy management to our international locations is a major goal for 2017.

Annual Report 2016 // SMA Solar Technology AG

Figures for our CO2 emissions have not been included in our sustainability reporting so far, although we already have an exemplary carbon balance at our site in Niestetal/Kassel. By gathering data in line with the GHG Protocol standard, SMA wants to transparently show its own carbon footprint. The long-term plan is to expand this to the entire value chain and also factor in the production of raw materials, all of our suppliers, the utilization phase and recycling of our products. As a first step, we recorded the emissions defined under Scope 1 and 2 in the Greenhouse Gas Protocol. Emissions defined under Scope 3 are to be added gradually by the end of 2017.

In addition to environmental responsibility, SMA also sees an economic advantage in treating waste products as secondary raw materials. In this context, we seek to avoid waste and reuse materials. One particular focus in this area in 2016 was packaging materials. As a result, 99% of the packaging for our new products now consists of environmentally friendly cardboard, while materials such as polystyrene and plastic are avoided. Our goal is to increase the share of recyclable waste at the global SMA production locations to almost 100% by 2020 and to no longer produce any residual waste. SMA is working equally intensively to reduce and avoid hazardous waste materials.

Life Cycle Assessments Along the Entire Value Chain

However, optimizing the energy supply and environmental management at the Company's own sites only covers one aspect of the environmental impact of manufacturing. In the future, it will therefore be crucial to examine the life cycle assessment along the entire value chain, including products' utilization phase. SMA applied this method to the Sunny Boy 1.5/2.5 inverter for the first time in 2015 and transferred it to the Sunny Central 2200 central inverter in 2016. The results showed that the high efficiency of our inverters as well as their high quality standard and the associated long service life have a positive influence, while in the future we will direct focus to our preliminary supply chain. Life cycle assessments will help us to continuously improve our newly defined product-related key figure for sustainability.

Award-Winning Sustainable Mobility Concept

SMA's commitment to sustainability also includes a corporate mobility management concept that has already won multiple awards. It is intended to raise employees' awareness of intelligent, environmentally friendly transport options - whether for getting to and from work or for traveling between SMA sites. One key element of our mobility concept is the fleet organization, which has been recognized by Deutsche Umwelthilfe (the German Environmental Aid Organization) as a good example of climate protection. This is aimed at limiting the CO2 emissions of company cars to 120 g/km, which we already achieved in 2016. In addition, we have largely expanded the charging infrastructure for electric vehicles on our premises, increasing the number of electric charging points to 45, where employees and visitors can charge their vehicles with carbon-neutral electricity. Another aspect of the corporate mobility management system relates to increasing the proportion of cyclists. In 2016, SMA introduced the option of leasing bikes to all employees, thereby convincing more employees to switch to cycling.

Social Commitment and Promoting Knowledge Throughout Networks

For SMA, taking its share of responsibility for social development is a matter of course. Over the past years, we have thus supported many different projects, organizations and initiatives - on a regional and national level as well as in newly industrialized and developing countries. SMA is involved in numerous networks, collaborative projects and initiatives that play an important role in further development of the North Hesse region in various ways including by providing expertise and human resources. We have been supporting deENet, the competence network for decentralized energy technologies, as an active member since 2003. The goal is to turn North Hesse into a renowned location for a decentralized energy supply through renewable energies using technological progress and sustainable regional development.

ENTERPRISE MANAGEMENT

Leading Indicators

To be able to react to market changes in a timely manner, it is exceedingly important for SMA to recognize opportunities and risks early on. To achieve this, we will have ongoing discussions about what are commonly referred to as operative leading indicators at both the Managing Board and business unit level with the business unit managers, vice presidents and the general managers of the subsidiaries. Indicators relevant to SMA include changes in PV system incentive programs and their effect on regional market potential, growth and competitiveness of SMA in regional markets, customer acceptance of new products as well as market-related information stemming from discussions with customers, suppliers and associations.

However, the myriad of influencing factors and the complex way they interact make it difficult to produce a detailed forecast that holds up long term. Therefore, based on operative leading indicators, we have drawn up scenarios for annual and medium-term planning. In the reporting period, the Managing Board and business unit management were informed on a monthly basis both about the financial development of the entire SMA Group and the individual business units and about changes in operative leading indicators.

Financial Management Parameters

In 2016, SMA used the following key financial management parameters for its operative business as explained below. There are no changes compared with the previous year in calculation of key figures or in the management system.

SALES

Sales include all of the sales generated over the reporting period. Because the market for inverters was shaped partly by plummeting prices, we also measure, in addition to sales, inverter output sold and the average selling price per watt. We calculate sales at both the Group and business unit level.

OPERATING PROFIT (EBIT)/OPERATIVE EARNINGS MARGIN

Operating profit also includes function costs and other expenses in addition to sales and cost of sales. SMA uses this key figure to measure the profitability of the individual business units and the Group. To determine the operative earnings margin, we calculate operating profit in relation to total sales. We measure operating profit and the operative earnings margin at both the Group and business unit level.

NET WORKING CAPITAL/NET WORKING CAPITAL RATIO

Net working capital management plays an important role. In addition to inventories, net working capital includes trade receivables and trade payables. We measure our customers' and suppliers' accounts receivables as well as product manufacturing inventories regularly in relation to sales over the past 12 months. We measure and manage net working capital at the corporate Group level.

CAPITAL EXPENDITURE

Capital expenditure is another key driver of liquidity planning. To manage capital expenditure, we formulate budgets as part of our annual planning, which the Managing Board approves over the course of the fiscal year. This particularly applies to large-scale capital expenditure projects, which are additionally evaluated with a profitability calculation. We manage capital expenditure at the corporate Group level.

Starting from the 2017 fiscal year, EBITDA will be used as an additional key financial management parameter for the operative business.

EBITDA/EARNINGS MARGIN BEFORE DEPRECIATION AND AMORTIZATION

EBITDA comprises sales, cost of sales, function costs and other expenses before depreciation and amortization of fixed and intangible assets. SMA uses this key figure to measure profitability at the Group level not including imputed depreciation of investments made. To determine the operative earnings margin before depreciation and amortization, we calculate EBITDA in relation to total sales.

Intragroup Reporting and Management

INTRAGROUP REPORTING

The monthly reporting includes, among other information, detailed status reports on orders placed and order volumes, the amount of inverter output sold, sales figures, results of operation, cash flow statements, research and development activities, investments and net working capital. The aim is to compare changes in decisive items on the income statement and balance sheet both with the budget and with the figures of the previous month and to take any corrective measures necessary. SMA checks annual planning and medium-term planning every six months and adjusts them if necessary. An electronic management information system (SAP Business Warehouse) serves as the "home" for the information used for reporting.

INTRAGROUP MANAGEMENT SYSTEM

In the reporting period, the basic elements of the intragroup management system were the weekly Managing Board meeting and monthly discussions on results with the business unit managers. Strategy implementation was also discussed during quarterly business reviews with the business units as was an assessment on the progress of objectives. In addition, the SMA intragroup management system encompasses the regular Risks and Opportunities Report and the report prepared by the Internal Auditing department.

FISCAI YFAR 2016

Relevant Changes to Reporting

Pursuant to IFRS 5, the figures for the previous year in the income statement and the statement of cash flows were adjusted retrospectively for the planned sale of the Railway Technology business division. However, there was no adjustment to the previous year's balance sheet as prescribed by the provisions of IFRS 5. The Railway Technology business division is reported as a discontinued operation.

GENERAL ECONOMIC CONDITIONS AND ECONOMIC CONDITIONS IN THE SECTOR

General Economic Conditions

The global economy had a turbulent year in 2016. According to the International Monetary Fund (IMF), the growth rate was the lowest since 2008/2009. The backdrop to this was a difficult first half of the year with unrest on the global financial markets. The economic discourse was dominated by growing political uncertainty as well as concerns over the effectiveness of monetary policy stimulus in important industrialized countries and the rate of monetary policy normalization in the United States. However, the situation stabilized in the second half of the year. In the end, the global economy in 2016 grew at a somewhat slower pace than in the previous year - the IMF puts the growth at 3.1% (2015: 3.2%). Gross domestic product (GDP) in developed national economies increased by 1.6% (2015: 2.1%). Growth in developing and newly industrialized countries remained on a par with the previous year at 4.1% in the reporting period.

The U.S. Federal Reserve (Fed), initiated the long-awaited interest rate reversal in December 2015 and raised the base rate for the second time since the financial crisis at the end of 2016. The target is now between 0.5% and 0.75%. In contrast, the monetary policy direction of other major industrialized countries remained unchanged.

In Europe, the United Kingdom's planned exit from the European Union was the prevailing issue for politicians and economic players. Before the referendum, the IMF warned of substantial economic and financial consequences. The economy in the euro zone slowed slightly year on year with growth of 1.7% (2015: 2.0%).

Alongside the European national economies, other key foreign markets for SMA developed in extremely varied ways in 2016. Growth was curbed in the U.S.; the economy grew by only 1.6% (2015: 2.6%). Japan's economy weakened and grew only slightly by 0.9% (2015: 1.2%). In China, GDP increased at a slightly lower rate of 6.7% compared with the previous year (2015: 6.9%). India's economy slowed but remained at a high level with a growth rate of 6.6% (2015: 7.6%).

Economic Conditions in the Sector

The global photovoltaic market grew more strongly in 2016 than originally expected. SMA expects growth of newly installed PV power of approximately 50% to around 78 GW (2015: approx. 52 GW). Price pressure remained particularly high in all segments and regions. Accordingly, SMA estimates that global sales of PV inverter technology increased by only around 9% to €5.2 billion (2015: €4.8 billion) compared to the newly installed PV power. The regional distribution of demand significantly changed in the reporting period. Accounting for roughly 20% of global sales, the significance of the PV markets in European countries, the Middle East and Africa (EMEA) declined (2015: 23%). At about €1.0 billion, sales slightly decreased in comparison to the previous year (2015: €1.1 billion). The decrease is particularly attributable to the decline in demand in Great Britain. In contrast, American photovoltaic markets developed very positively, making up around 29% of global sales at €1.5 billion (2015: €1.1 billion, 24%). The Chinese market registered new installations of 34 GW, more than double that of the previous year, due in particular to a cut in subsidies in the middle of the year and further subsidy cuts scheduled for 2017. Because of the high price pressure, growth in terms of euros was much lower. China therefore represented approximately 17% of sales with €0.9 billion in the reporting period (2015: €0.6 billion, 12%). The Asia-Pacific photovoltaic markets (excluding China) lost significant market shares. With sales of €1.8 billion, their share in the global market amounted to 34% in the reporting year (2015: €2.0 billion, 41%).

EMEA: GREAT BRITAIN BECOMES LESS IMPORTANT

Business in the EMEA region was characterized by significant adjustments to solar electricity tariffs in key European markets and delays in tendering procedures in Africa and the Middle East. Demand decreased significantly; newly installed PV power amounted to 9.6 GW (2015: 10.5 GW).

Great Britain was the most important photovoltaic market in Europe in the reporting period with 1.9 GW due to a strong first quarter, but declined in significance in the second quarter. This was due to the expiration of the subsidy for large-scale PV power plants with an output of over 1 MW as of April 1, 2016. At the beginning of 2016, there was also a radical reduction in the feed-in tariff, which is mainly used by operators of smaller systems. In addition, quarterly subsidy caps as well as the planned exit from the EU ensure that the British PV market will continue to play a less important role in the next few years.

In Germany, PV installation in 2016 was just 1.5 GW, as in the previous year, again falling well short of the German Federal Government's expansion target of 2.5 GW per year. This was mainly due to the burden on PV self-consumption in systems over 10 kWp resulting from the EEG apportionment, the expiration of subsidies for storage systems in the fall and the ongoing political discussion about the amendment to the Renewable Energy Sources Act (EEG).

NON-EUROPEAN MARKETS: U.S. MARKET NEARLY DOUBLES

The U.S. again boasted extremely positive development in the reporting year. According to SMA estimates, new PV installation nearly doubled year on year to 14.1 GW; sales with PV inverter technology amounted to around €1.2 billion. Demand for solar power systems in the U.S. is being supported in particular by tax incentive programs. The extension of the tax incentives to 2020 announced in December 2015 has created stable conditions in the U.S. market in the medium term. In addition, portfolio standards are supporting investing activities. These standards ensure that electric utility companies include a certain share of renewable energy in their energy generation portfolios. The growth in the U.S. market came primarily from the segment for large-scale PV power plants.

JAPAN AND CHINA DOMINATE THE MARKET IN ASIA

In Japan, the investment in inverter technologies in 2016 was approximately €1.1 billion. New PV installations came to 8.7 GW, so both figures were around 20% down on the previous year. Japan will remain one of the most important photovoltaic markets. There are a large number of medium-sized and large PV projects that have already been planned and approved.

At 34 GW, China's new PV installations in 2016 were more than twice that of the previous year. This development is mainly attributable to installations being brought forward, as the government reduced subsidy rates on June 30, 2016, and is planning further subsidy cuts in 2017. SMA expects a market slump of more than 30% in the coming year. The Chinese photovoltaic market continues to be dominated by tendering procedures that lack transparency. Significant market shares are only awarded to Chinese providers, some of which are state owned.

India now also plays an important role; the market is developing extremely positively. There are various incentive programs and a fundamental effort on the part of the government to supply the entire country with power. The Indian government has therefore set an ambitious target for PV expansion. 100 GW of PV power is to be installed in India by 2022. The country saw new PV installations of 4.0 GW in the reporting period, nearly double that of the previous year (2015: 2.2 GW). Most of the new installations were attributable to large-scale projects. Medium-sized commercial and small private systems are still not highly relevant in India at present. The price level in the Indian market is only slightly above that in China. The market structures, however, allow for fair competition.

RESULTS OF OPERATIONS

Sales and Earnings

SMA SIGNIFICANTLY INCREASES OPERATING PROFIT (EBIT)

The SMA Group generated sales of €946.7 million in the 2016 fiscal year (2015: €981.8 million). This equates to a slight decline in sales of 3.6% compared with the previous year. By contrast, sold PV inverter output rose by 13.4% in the same period to 8,231 MW (2015: 7,260 MW). The decline in sales accompanied by a rise in PV inverter output sold is attributable to the high price pressure in all segments and regions along with the greater share of higherperformance inverters in the product mix.

SMA again benefited from its excellent international position in light of the regional changes in the photovoltaic market. The international share of sales remained high at 87.9% (2015: 87.5%). In 2016, the SMA Group's most important foreign markets were North America, Japan, India and Great Britain. Systematically implementing its internationalization strategy over the past few years has allowed SMA to reduce its dependency on individual photovoltaic markets. In 2016, in relation to gross sales, the North and South American (Americas) region accounted for 46.1% of

sales, with the European countries, the Middle East and Africa (EMEA) contributing 29.8% and the Asia-Pacific (APAC) region 24.1%. The distribution of sales between the Utility, Commercial, Residential and Service segments illustrates how important it is for SMA to serve all segments and applications. SMA generated 4 1.9% of its sales in the Utility segment; the Residential and Commercial segments accounted for 18.5% and 27.8% respectively; and the service business 4.7%.

As of December 31, 2016, the order backlog decreased to €537.1 million (December 31, 2015: €699.8 million). The decline is due mainly to the fact that demand in the U.S. was particularly strong at the end of 2015 because of the expected expiration of the Investment Tax Credit (ITC) in 2016. The project pipeline was substantially reduced after the ITC was extended to 2020 in the reporting period. At €392.7 million (December 31, 2015: €370.9 million), the majority of the order backlog (73.1%) is attributable to service business. This part of the order backlog will largely be realized over the next few years. Amounting to €144.3 million (December 31, 2015: €328.9 million), product business made up 26.9% of the order backlog. At €61.9 million (December 31, 2015: €198.6 million), the Utility segment accounts for 43% of the product-related order backlog. The Commercial and Residential segments account for €34.7 million (24%, December 31, December 2015: €36.6 million) and €21.1 million (15%, December 31, 2015: €30.4 million) of the product-related order backlog. The remaining order backlog of €26.7 million relates to Other Business (December 31, 2015: €63.4 million).

Despite the slight decline in sales, SMA increased EBITDA to €141.5 million in 2016 (EBITDA margin: 14.9%, 2015: €121.1 million, 12.3%) through reduction of fixed costs and introduction of new products. EBIT increased to €64.8 million (2015: €43.3 million). This equates to an EBIT margin of 6.8% (2015: 4.4%). Net income amounted to €29.6 million (2015: €14.3 million). Earnings per share amounted to €0.85 (2015: €0.41).

MANAGING BOARD RECOMMENDS DIVIDEND PAYMENT OF €0.20 PER SHARE

In fiscal year 2016, SMA Solar Technology AG as the parent company of the SMA Group registered an annual net income of €31.4 million (2015: €30.8 million) in its separate commercial statements. The Managing Board will recommend that the Supervisory Board will propose a dividend of €0.20 per qualifying bearer share at the Annual General Meeting on May 23, 2017. The amount paid out in dividends will thus amount to €6.9 million (2015: €4.9 million). In relation to the consolidated net income of €29.6 million, the payout ratio is 23.4% and falls within the margin of 20% to 40% announced by the Managing Board. This makes SMA the only listed solar company in Germany to allow its shareholders to participate in its business success by way of a dividend. Since its IPO in 2008, SMA has paid out a total of €7.34 dividends per share.

Sales and EBIT

in € million

Sale

EBIT

← EBIT margin in % of sales

Sales and Earnings per Segment

RESIDENTIAL BUSINESS UNIT SUFFERS SALES DECLINE

The Residential business unit serves the attractive long-term market of small PV systems for private applications with the smart module technology from Tigo Energy, Inc.; single-phase string inverters with the brand name Sunny Boy; three-phase inverters in the lower output range up to 12 kW with the brand name Sunny Tripower; energy management solutions; storage systems; and communication products and accessories. With this portfolio of products and services, SMA offers a suitable technical solution for private PV systems in all major photovoltaic markets.

External sales in the Residential business unit decreased by 30.7% year on year to €175.0 million (2015: €252.7 million). This is primarily attributable to the loss of market share in the U.S., where a strong shift toward module-level power electronics technology took place that SMA was not yet able to address in the reporting period. Its share of the SMA Group's sales was 18.5% (2015: 25.7%). In addition to North America, the most important foreign markets continued to be Benelux, Italy and Japan. In the reporting period, the major sales drivers were the Sunny Boy 3000 to 6000TL inverters.

The Residential business unit's EBIT deteriorated significantly year on year despite reduced fixed costs, productivity increases and the launch of new products, amounting to € - 15.4 million (2015: € 1.8 million). The profitability of the Residential business unit was adversely affected primarily by lower sales and one-time items. In relation to internal and external sales, the EBIT margin was -8.8% (2015: 0.7%).

COMMERCIAL BUSINESS UNIT CONSIDERABLY INCREASES SALES AND EARNINGS

The Commercial business unit focuses on the growing market of medium-sized PV systems for commercial applications and on large-scale PV power plants using string inverters. Its portfolio includes solutions with the three-phase inverters from the Sunny Tripower brand with outputs of more than 12 kW, as well as complete energy management solutions for medium-sized PV systems, medium-voltage technology and other accessories.

In 2016, external sales in the Commercial business unit improved again to €263.0 million year on year (2015: €207.4 million). Its share of the SMA Group's sales was 27.8% (2015: 21.1%). The renewed decline in sales in Germany was more than offset by sales increases in the most important foreign markets of North America and Japan. In the reporting period, the major sales drivers were products based on the Sunny Tripower platform.

EBIT improved to €17.8 million (2015: €-25.6 million). Apart from an increase in external sales, this is primarily attributable to new product launches and a reduction in fixed costs. In relation to internal and external sales, the EBIT margin was 6.7% (2015: - 12.3%).

UTILITY BUSINESS UNIT REMAINS KEY EARNINGS DRIVER

The Utility business unit serves the growing market for large-scale PV power plants with central inverters from the Sunny Central brand. The outputs of Sunny Central inverters range from 500 kW to the megawatts. In addition, its portfolio includes complete solutions comprising central inverters with their grid service and monitoring functions as well as all medium- and high-voltage technology and accessories.

In 2016, external sales in the Utility business unit decreased slightly by 4.6% year on year to €396.7 million (2015: €416.0 million). This is primarily attributable to the sharp price decline in all regions. The Utility business unit's share of the SMA Group's total sales was 41.9% (2015: 42.5%). It thus remains the strongest-selling business unit in the Group. The most important foreign markets were North America, India, Brazil and Great Britain. The most successful products included the new Sunny Central 2200/2500 inverters.

In the year under review, EBIT increased to €66.8 million (2015: €56.5 million). The main reasons for the increase were the reduction in fixed costs, productivity increases and the introduction of the new Sunny Central 2200/2500 in combination with the Medium Voltage Power Station. In relation to internal and external sales, the EBIT margin was 16.8% (2015: 13.6%).

SERVICE BUSINESS UNIT DECUNES SLIGHTLY

SMA has its own service companies in all important photovoltaic markets. With an installed capacity of around 55 GW worldwide, SMA leverages economies of scale to manage its service business profitably. Services offered include commissioning, warranty extensions, service and maintenance contracts, operational management, remote system monitoring and spare parts supply.

In 2016, external service sales decreased by 9.7% to €44.7 million (2015: €49.5 million). Its share of the SMA Group's sales was 4.7% (2015: 5.0%). Notable sales drivers were operational management (O&M business), maintenance and service contracts subject to charge, and chargeable commissioning. In the reporting period, EBIT was €14.1 million (2015: €14.4 million). In relation to internal and external sales, the EBIT margin was 12.5% (2015: 12.4%).

OTHER BUSINESS IMPROVES SALES AND EARNINGS

The Other Business segment comprises Zeversolar, SMA Sunbelt Energy and the Off-Grid and Storage business unit. Railway Technology is no longer included in Other Business as the Group intends to sell this division.

In the reporting period, external sales totaled €67.3 million (2015: €56.2 million). Its share of the SMA Group's total sales was 7.1% (2015: 5.7%). EBIT was €-4.2 million (2015: €-7.8 million). In relation to internal and external sales, the EBIT margin amounted to -6.2% (2015: -13.9%).

Sales by Segments'

' Gross sales before sales deductions (previous year's figures in parenthesis)

Sales by Regions

Gross sales before sales deductions (previous year's figures in parenthesis)

Development of Significant Income Statement Items

FIX COSTS AGAIN SIGNIFICANTIY REDUCED

The cost of sales fell by 8.3% year on year to €704.0 million (2015: €767.9 million) and thus at a considerably higher rate than sales. The cost of sales was positively affected by material cost reductions, introduction of new products with lower specific costs of sales and reduced fixed costs. The gross margin increased to 25.6% (2015: 21.8%).

Personnel expenses included in cost of sales fell by a considerable 5.1% year on year to €117.8 million (2015: €124.1 million), reflecting the full effect of the savings from personnel adjustments. Depreciation and amortization were on a par with the previous year at €67.3 million in 2016 (2015: €67.4 million). This includes scheduled depreciation on capitalized development costs of €19.8 million (2015: €13.6 million). In addition, one-time items from the closure of production sites impaired cost of sales amounting to €9.4 million. The other costs in the cost of sales amounted to €61.9 million.

Selling expenses fell by 12.0% year on year to €47.8 million (2015: €54.3 million), due to savings from personnel adjustments in 2016. In the reporting period, the cost of sales ratio was 5.0% (2015: 5.5%).

In the past fiscal year, research and development expenses not including capitalized development projects amounted to €65.8 million (2015: €66.5 million). Total research and development expenses including capitalized development projects amounted to €78.3 million in 2016, down significantly on the previous year's level (2015: €96.0 million). In 2016, the research and development cost ratio (gross) amounted to 8.3% (2015: 9.8%). Development projects were capitalized in the amount of €12.5 million in the reporting period (2015: €29.5 million).

Administrative expenses in 2016 totaled €50.6 million (2015: €58.3 million). The decrease in administrative expenses of 13.2% is mainly attributable to savings from personnel adjustments. In the reporting period, the ratio of administrative expenses was 5.3% (2015: 5.9%).

In 2016, the balance of other operating income and expenses amounted to €-13.7 million and thus deteriorated considerably compared to the previous year's income (2015: €8.5 million). This includes, in particular, one-time items from the closure of production sites amounting to €10.3 million as well as value adjustments made on receivables and exchange rate effects.

Cost of Sales

← Ratio in % of sales

in € million

Research and Development Expenses

Research and development expenses

Of which capitalized development projects

Ratio in % of sales

← Ratio in % of sales

Administrative Expenses

← Ratio in % of sales

FINANCIAL RESULT

In 2016, the financial result slightly decreased by €0.9 million to €-5.9 million (2015: €-5.0 million). This was significantly influenced by the negative pro rata earnings from the investment in Tigo Energy, Inc., which were included in the consolidated profit and loss account for the first time. Financial expenses in 2016 totaled €5.1 million (2015: €6.9 million).

Selling Expenses

Earnings before interest, taxes, depreciation and amortization (EBITDA) of €141.5 million resulted in an EBITDA margin of 14.9% (2015: €121.1 million, 12.3%). The return on equity after taxes (net income in relation to average total assets in the reporting period) came to 5.1% in the reporting year (2015: 2.5%); the return on assets after taxes was 2.5% (2015: 1.2%).

Multi-Period Overview of Results of Operation

in %	2016	2015	2014	2013	2012
EBIT margin	6.8	4.4	-20.5	-9.6	7.0
EBITDA margin	14.9	12.3	-7.3	-0.6	11.7
EBT margin (return on sales)	6.2	3.9	-20.8	-9.5	7.2
Return on equity after taxes	5.1	2.5	-28.1	-8.7	9.3
Return on assets (after taxes)	2.5	1.2	- 14.7	-5.2	5.6

FINANCIAL POSITION

Principles and Objectives of Financial Management

Inflows of funds from operative business activities constitute the key source of financing. Cash holdings are managed and invested centrally by Corporate Treasury. The decision is based not only on returns but also the credit rating of the bank partner. In the case of supplier credits granted, counterparty risk is monitored continuously. The decision is primarily based on the customer's payment practices and financial circumstances. To cover potential payment defaults, SMA has also taken out commercial credit insurance.

We systematically recognize market risks - above all currency risks - that might jeopardize the operating results and preclude such risks through hedging operations, provided this is economically expedient.

Financing Analysis

The loans assumed as part of the Zeversolar acquisition were again restructured and completely paid off by the end of 2016. Bank loans expiring in 2017 will be paid off at the respective due date. Restructuring its financing will enable SMA to dramatically reduce its annual interest charges.

In the 2016 fiscal year, SMA agreed upon a long-term financing of €100 million with three domestic banks. At the end of the year, a small portion of the credit line was utilized in the form of guarantee credits.

In total, financial liabilities fell by €6.5 million from €46.9 million as of the end of 2015 to €40.4 million as of the end of 2016.

Most of the provisions set aside by the SMA Group are for warranty obligations from our various product families. The equity ratio of 48.3% as of the end of 2016 (December 31, 2015: 49.1%) underscores the still solid balance sheet structure.

Liquidity Analysis

SMA INCREASES NET CASH TO €362 MILLION

Gross cash flow improved significantly, climbing by €63.8 million to €131.8 million (2015: €68.0 million).

Inventories increased by 15.8% to €169.2 million (2015: €146.1 million). The €5.8 million increase in trade payables, substantial decrease in trade receivables and change in inventories resulted in a small increase in net working capital of €2.4 million to €225.4 million (2015: €223.0 million). The net working capital ratio in relation to sales over the past 12 months increased to 23.8% (December 31, 2015: 22.3%) and was thus slightly above the range of 20% to 23% targeted by the management.

In the 2016 fiscal year, net cash flow from operating activities of continuing operations was €147.5 million (2015: €102.7 million).

Net cash flow from investing activities of continuing operations amounted to €-107.9 million in the 2016 fiscal year compared to the previous year's figure of €-64.0 million. It primarily includes the outflow of funds of €17.6 million for the acquisition of shares in Tigo Energy, Inc. The outflow of funds for investments in fixed assets and intangible assets amounted to €29.0 million and was thus considerably lower than the comparative figure for continuing operations in the 2015 fiscal year of €48.3 million. The decline illustrates the SMA Group's adjusted investment activity. A major portion of the investments, namely €12.5 million, went to capitalized development projects for the launch of new product families. The balance of proceeds and payments for the investment amounted to €-61.8 million (2015: €-15.0 million). The outflow of funds from the asset deal with Danfoss relevant to the statement of cash flows amounted to €1.5 million in the fiscal year, as in the previous year.

As of December 31, 2016, cash and cash equivalents amounting to €216.1 million (December 31, 2015: €200.2 million) included cash on hand, bank balances and short-term deposits with an original term to maturity of less than three months. With time deposits that have a term to maturity of more than three months, fixed-interest-bearing securities, liquid assets pledged as collateral and after

deducting interest-bearing financial liabilities, this resulted in net cash of €362.0 million (December 31, 2015: €285.6 million). SMA substantially increased its high liquidity reserve in the reporting period despite the acquisition of shares in Tigo Energy, Inc., and the dividend paid to our shareholders in May 2016.

in € million	2016	2015	2014	2013	2012
Shareholders' equity	585.1	570.2	552.0	724.4	820.7
Equity ratio in %	48.3	49.1	46.8	57.5	61.8
Non-current liabilities	292 9	281.2	284.0	287.0	263.6
Current liabilities	332.7	309.1	344.3	248.5	244.4
Share of non-current pro- visions in total assets in %	7.4	7.5	7.4	8.1	8.5
Financial liabilities	40.4	46.9	69.3	73.4	35.6
Net cash	362.0	285.6	225.4	329.7	446.3
Net working capital	225.4	223.0	251.0	247.6	268.0
Net cash flow from operating activities	147.5	102.7	-27.6	-2.4	116.1
Net cash flow from investing activities	-107.9	-64.0	24.7	34.4	-260.1
Net cash flow from financing activities	-24.6	-23.2	-10.0	-16.4	-43.2

1 From continuing operations

Investment Analysis

In the 2016 fiscal year, investments in fixed assets and intangible assets amounted to €29.0 million and were thus clearly below the previous year's figure of €48.3 million. This equates to an investment ratio in relation to sales of 3.1% compared with 4.9% in the 2015 fiscal year.

€14.9 million was invested in fixed assets (2015: €17.4 million), primarily for machinery and equipment. The investment ratio for fixed assets was 1.6% in the fiscal year (2015: 1.8%). Scheduled depreciation of fixed assets slightly increased to €49.1 million (2015: €47.3 million). This includes impairments as a result of the closure of the production site in the U.S. amounting to €9.1 million.

Investments in intangible assets amounted to €14.1 million (2015: €30.9 million). They largely related to capitalized development projects. Amortization of intangible assets amounted to €27.6 million and was thus clearly below the previous year's figure of €31 7 million

Investments Compared to Depreciations and Net Cash Flow From Operating Activities

in € million	2016	2015	2014	2013	2012
Net cash flow from operating activities	147.5	102.7	-27.6	-2.4	116.1
Capital expenditure	29.0	50.6	75.5	53.2	100.2
Depreciation and amortization	76.7	79.0	106.5	83.6	69 0

1 See Notes, sections 15 and 16, page 101 et seqq.

NET ASSETS

SMA Has a Solid Equity Ratio of 48.3%

As of December 31, 2016, the total assets increased by 4.3% to €1,210.7 million (December 31, 2015: €1,160.5 million). At €426.2 million, non-current assets were below the level observed at the end of 2015 (December 31, 2015: €470.7 million).

Net working capital amounted to €225.4 million (December 31, 2015: €223.0 million). The net working capital ratio in relation to sales over the past 12 months was 23.8%. Trade receivables decreased by 8.3% compared to December 31, 2015, to € 165. 1 million as of the end of the fiscal year (December 3 1, 2015: €180.0 million). Days sales outstanding increased to 66.5 (December 31, 2015: 62.0 days). Inventories increased by 15.8% to €169.2 million (December 31, 2015: €146.1 million). Trade payables rose by €5.8 million to €108.9 million (December 31, 2015: €103.1 million). The share of trade credit in total assets was on a par with the previous year at 9.0% (December 31, 2015: 8.9%).

In 2016, the Group's equity capital base increased by €14.9 million to €585.1 million (December 31, 2015: €570.2 million). The first-time presentation of cash flow hedging transactions in the balance sheet impaired equity by €10.3 million (including deferred taxes). This relates exclusively to anticipatory hedges for future transactions in USD. With an equity ratio of 48.3%, SMA has a comfortable equity capital base and therefore an extremely solid balance sheet structure.

Importance of Off-Balance Sheet Financing Instruments

The SMA Group uses lease agreements for plant and office equipment. Future obligations under tenancy and lease agreements are shown in the Notes in section 31, Obligations Under Leases and Other Financial Obligations.

SMA is not involved in any other off-balance sheet transactions that might have a significant impact on its financial position, results of operations, investment expenditure, net assets or capital expenditure - neither currently nor in the future.

Multi-Period Overview of Net Assets

in € million	2016	2015	2014	2013	2012
Goodwill, intangible assets and fixed assets	300.7	385.9	413.1	441.1	443.8
Financial assets and long-term securities (incl. deposits with a total term to maturity of more than three months)	159.4	97.7	82.5	185.1	295.5
Cash and cash equiva- lents (incl. deposits with a total term to maturity ot less than three months)	216.1	200.2	184.0	192.4	185.3

All figures for 2016 from continuing operations

SMA SOLAR TECHNOLOGY AG (NOTES BASED ON THE GERMAN COMMERCIAL CODE HGB)

In addition to reporting on the SMA Group, business development of SMA Solar Technology AG (SMA AG) is outlined below.

SMA AG is the parent company of the SMA Group and has its headquarters in Niestetal, Germany. Its primary business operations include the development, production and sale of PV inverters as well as monitoring and energy management systems for PV systems. Another area of business is providing operation and maintenance service (O&M business), and other services. In addition to its own operative business, SMA AG also functions as a holding company for the SMA Group. All key management mechanisms of SMA AG are oriented toward the SMA Group.

The SMA AG Annual Financial Statement is prepared according to the German Commercial Law (HGB). The Consolidated Financial Statements follow International Financial Reporting Standards (IFRS). This leads to differences between accounting and valuation methods. These mainly relate to intangible assets, inventory measurement, provisions, financial instruments, accrual items and deferred taxes. An amendment made to the HGB by the Accounting Directive Implementation Act (BilRUG) results in further differences in the presentation of sales and other operating income between IFRS and HGB for 2016. The sales of the previous year were adjusted accordingly to improve comparability. The effect, by which sales are increased and other operating income decreased compared to the HGB accounting before BilRUG, amounts to €47.3 million and results primarily from license income.

Results of Operations

SMA Solar Technology AG Income Statements in Accordance With HGB for the Period From January 1 to December 31, 2016

in €'000	2016	2015
Sales	744,984	713,267
Increase or decrease in finished goods and work in progress	-2,860	-12,443
	742,124	700,824
Other own work capitalized	2,188	3,240
Other operating income	72,563	93,557
Material expenses	412,120	395,708
Personnel expenses	124,606	140,555
Depreciation and amortization of intangible and fixed assets	37,365	43,273
Other operating expenses	203,098	204,553
Financial result	4,486	22,605
Taxes on income	12,524	5,024
Income after taxes	31,648	31,113
Other taxes	238	278
Annual net income	31,410	30,835
Accumulated income/losses brought forward	321,231	295,254
Profit available for distribution	352,641	326,089

SMA AG generated sales of €745.0 million in the 2016 fiscal year (2015: €713.3 million). This equates to an increase in sales of 4.4% compared with the previous year. The sold PV inverter output rose by 51.1% in the same period to 7.1 GW (2015: 4.7 GW). Of this, 3.2 GW (2015: 1.4 GW) were attributable to associated companies. The much lower sales growth in comparison to inverter output sold is attributable to the high price pressure in all segments and regions along with the greater share of higher-performance inverters in the product mix.

Other operating income amounted to €72.6 million (2015: €93.6 million). Other operating income included €41.1 million (2015: €63.5 million) from the reversal and utilization of provisions. In addition, claims for compensation from insurers and suppliers of €5.7 million were reported here (2015: €1.6 million). Income from foreign currency gains totaled €16.3 million in the fiscal year (2015: €18.5 million).

Material expenses increased by €16.4 million year on year to €412.1 million (2015: €395.7 million). The 4.1% rise in material expenses is less than the rise in sales with PV inverters and services (9.6%). This is mainly due to the changed product mix compared with the previous year and successful measures to save material costs.

Personnel expenses declined by 11.4% to €124.6 million (2015: €140.6 million). This is due to the reduction in the average number of employees (not including temporary employees, trainees or interns) by 444 to 1,918 employees, reflecting the effect of the savings from the personnel adjustments.

Depreciation and amortization of intangible and fixed assets declined by €5.9 million to €37.4 million (2015: €43.3 million). The reduction in depreciation and amortization was primarily a result of lower investing activities.

At €203.1 million, other operating expenses were on a par with the previous year (2015: €204.6 million). This included €30.1 million for services (2015: €27.0 million), €8.4 million for building rent (2015: €10.2 million), €35.0 million for selling expenses (2015: €34.4 million) and €55.1 million from the recognition of provisions (2015: €42.4 million). Expenses related to foreign currency valuation were €11.8 million for the fiscal year (2015: €6.6 million).

The financial result amounted to €4.5 million (2015: €22.6 million). The decline is attributable to lower income from investments. In the previous year, income from investments was affected by a write-up on the investment in Jiangsu Zeversolar New Energy Co., Ltd., in the amount of €24.9 million.

SMA AG's net operating income improved to €44.2 million (2015: €36.2 million) due to the substantial sales growth and lower total expenditure.

Taxes on income increased by €7.5 million. This includes tax expenditure for previous years in the amount of €4.4 million (2015: €3.7 million).

After tax, the annual net income amounted to €31.4 million in 2016 compared with annual net income of €30.8 million in the past fiscal year.

Net Assets and Financial Position

SMA Solar Technology AG Balance Sheet in Accordance With HGB as of December 31, 2016

in €'000	2016/12/31	2015/12/31
ASSETS
A. Non-current assets
Intangible assets	14,365	17,586
Fixed assets	208,696	230,085
III. Financial assets	161,802	127,845
	384,863	375,516
B. Current assets
Inventories 1	84,167	88,095
II. Receivables and other assets	166,286	167,732
III. Securities	96,406	47,636
IV. Cash and cash equivalents	206,802	193,136
	553,661	496,599
C. Prepaid expenses and deferred charges	1,323	1,243
	939,847	873,358
LIABILITIES
A. Shareholders' equity
Share capital	34,700	34,700
II. Capital reserves	124,200	124,200
III. Retained earnings
1. Statutory reserve	400	400
2. Other retained earnings	3,136	3,136
IV. Profit available for distribution	352,641	326,089
	515,077	488,525
B. Special account with reserve characteristics	101	141

101	141
162,457	151,696
113,112	108.231
149.100	124,765
939,847	873,358

As of December 31, 2016, total assets of SMA AG increased by €66.4 million to €939.8 million (2015: €873.4 million).

Non-current assets increased by €9.4 million to €384.9 million (2015: €375.5 million). This increase is primarily attributable to the acquisition of shares in Tigo Energy, Inc.

As of December 31, 2016, total inventories of €84.2 million were below the previous year's level (2015: €88.1 million). The decrease of 4.4% year on year is the result of reduced inventories of raw materials, consumables and supplies (€-4.5 million to €39.5 million) and of unfinished goods (€-3.6 million to € 1 1.3 million). In contrast, the inventory of finished goods grew (+ €4.2 million to €33.4 million).

Trade receivables decreased by €14.2 million and totaled €61.8 million on the reporting date.

Cash and cash equivalents and securities increased by 25.9% to €303.2 million (2015: €240.8 million).

Equity increased considerably, as a result of earnings, by €26.6 million to €515.1 million compared with December 31, 2015. The equity ratio is 54.8% (2015: 55.9%).

The provisions of SMA AG largely comprise provisions for warranty obligations for our various product families and personnel provisions. The €10.8 million increase in provisions to €162.5 million (2015: €151.7 million) resulted primarily from the €14.0 million increase in the provision for anticipated losses from financial derivatives to €17.2 million. In contrast, personnel provisions decreased by €4.7 million to €14.6 million (2015: €19.3 million).

Trade payables went up by €12.8 million year on year to €79.4 million (2015: €66.6 million). This increase is attributable to the higher purchasing volume as a result of sales growth.

Accrued liabilities of €149.1 million (2015: €124.8 million) were reported for deferred sales for extended warranties, and service and maintenance contracts sold for subsequent years.

SMA AG's financial position essentially corresponds to that of the SMA Group.

RISKS AND OPPORTUNITIES

The business performance of SMA AG is essentially exposed to the same risks and opportunities as the SMA Group. SMA AG also partakes in the risks affecting its investments and subsidiary companies proportionate to its respective holding. The risks are presented in the Risks and Opportunities Report. The relationships with our investments can also result in negative effects from statutory or contractual provisions for liabilities (particularly financing).

OUTLOOK

As a result of SMA AG's interdependence with its Group companies and its importance within the Group, please refer to our statements in the Forecast Report for the SMA Group, which also outline the expectations for the parent company specifically.

MANAGING BOARD STATEMENT ON THE BUSINESS TRENDS IN 2016

In 2016, the SMA Group achieved a sales record by selling inverter output of 8,231 MW (2015: 7,260 MW) and successfully continued on the path to more profit and higher cash flow. At €946.7 million, sales were at the upper end of the Managing Board's forecast of €900 million to €950 million that was adjusted on October 24, 2016. Sales were largely driven by the segment of large- scale PV power plants (Utility). At the same time, the segment for commercial PV systems (Commercial) and the Other Business segment with the Off-Grid and Storage business unit posted positive sales growth. In the Residential business unit, however, sales were significantly lower than in the previous year. Despite an unexpectedly high decline in average selling prices of around 20%, SMA considerably increased EBIT year on year to €64.8 million (EBIT margin: 6.8%). This also put SMA's EBIT within the Managing Board's forecast of October 2016 (forecast: €60 million to €70 million). SMA did not achieve the original sales and earnings forecast of January 29, 2016, due particularly to the price pressure in all market segments that could be felt worldwide from the middle of 2016 and the one-time items from the consolidation of production locations in particular. The forecast predicted sales of € 950 million to € 1,050 million and operating earnings (EBIT) of €80 million to €120 million.

As a result of our attractive business model, we generated an adjusted free cash flow (net of term deposit investments) of around €121 million in 2016. Net cash increased to €362.0 million (2015: €285.6 million); the equity ratio was 48.3% at the end of the reporting year (2015: 49.1%). In addition, SMA has a longterm credit line from domestic banks of €100 million.

Portfolio Expanded Further and Fixed Costs Lowered

SMA augmented the product portfolio in the reporting year and continued to advance its strategic positioning in major future fields. The investment in Tigo Energy, Inc., announced in April 2016 gives SMA access to the fast-growing market of module-level power electronics (MLPE) for the first time. SMA will also use this new solution to expand its data-based business models. In addition, we have not only cooperated with our partner Bosch Siemens Hausgeräte to enable integration of further appliances into intelligent energy management with SMA Smart Home via the EEBus communication standard, but also established SMA Energy Services, an innovative service for the energy industry for better integration of solar energy into the supply system on the basis of high-resolution data on generation and consumption.

SMA countered the increased price pressure in all segments and regions with additional measures to reduce costs. These included product innovations with lower cost of sales and the consolidation of its global infrastructure. A significant measure here was the closure of the production sites in Denver (U.S.) and Cape Town (South Africa) at the end of 2016 to make better use of the capacity at the production facilities in Germany and China.

Course Set for the Future With Strategy 2020

Another significant milestone in the reporting period was the development of the SMA Strategy 2020. The guidelines and targets formulated therein will provide the strategic framework for our activities in the years to come, through which we will keep SMA on track for success even under the changed market conditions.

Target-Actual Comparison for 2016

in € million	Forecast on 2016/01/29	Forecast on 2016/10/24	2016 results
Sales	950 to 1,050	900 to 950	946.7
Operating Profit (EBIT)	80 to 120	60 to 70	64.8

Net Income

Earnings per Share

SUPPLEMENTARY REPORT

Significant Events Since the Beginning of the 2017 Fiscal Year

On February 10, 2017, SMA Solar Technology AG signed a contract regarding the sale of SMA Railway Technology GmbH. The buyer and the seller have agreed not to disclose the purchase price. The identity of the contractual partner will be published after the transaction has been concluded.

OTHER ELEMENTS OF THE CONSOLIDATED MANAGEMENT REPORT

The following sections are elements of the Consolidated Management Report:

• → The Corporate Governance Statement in accordance with Section 289a HGB starting on page 15
• → Information Concerning Takeovers starting on page 18
• → The Remuneration Report starting on page 20

RISKS AND OPPORTUNITIES REPORT

RISK AND OPPORTUNITY MANAGEMENT

Risk Management System

In the context of its global business activity, the SMA Group is exposed to a range of risks, which can impair target attainment in the implementation of strategies in the business units. However, suitable countermeasures can be used to actively control and influence those risks. In addition, with regard to opportunity management, a balanced ratio between risks and opportunities is used. The Risk Management System we employ helps identify risks at an early stage and control them in an understandable manner. The system is oriented toward the COSO Enterprise Risk Management (ERM) - Integrated Framework (COSO ERM), which is an internationally accepted standard for establishing and systematically developing a Company-wide Risk Management System. In addition to strategic risks, this also includes all downstream risks on the operative and procedural level. In addition, COSO ERM serves as an aid in formulating a risk strategy to identify risks at an early stage and proactively manage them. A uniform software application is used throughout the Group to make recognition of opportunities and risks as well as reporting easier and to meet documentation requirements.

Integration Into the Existing Structure and Process-Oriented Organization

The SMA Managing Board bears overall responsibility for effective risk and opportunity management to ensure that all risks and opportunities are considered comprehensively and uniformly. The Supervisory Board is responsible for monitoring the effectiveness of the Group-wide Risk Management System. In order for this task to be performed, the Supervisory Board's Audit Committee processes the information for the Supervisory Board. The task of implementing and developing the system further was transferred to the Group risk management position, which is directly subordinate to the Chief Executive Officer.

Risk Identification

A risk is defined by SMA as an event that ensues from a decision made by Management (strategic), an action (operative) or external circumstances and - if the risk transpires - results in a negative deviation from the planned earnings. The goal of risk management is to identify risks above a defined threshold as early as possible to limit the potential impact by employing suitable measures. In addition, SMA must accept risks to a certain extent to utilize opportunities.

The Managing Board bindingly laid out the objectives of risk management in terms of risk strategy and principles of organization, analysis and communication in a risk handbook. It contains regulations for dealing with risks, requirements and value limits as well as regular and immediate uniform reporting processes. Responsibility for identifying risks lies primarily with the defined risk officers. These are executives in the first two levels below the Managing Board and selected central Group functions. Involving this group of people ensures active identification, analysis and measurement of risks, and creates the necessary transparency in a potential risk situation.

Risk Assessment

In the quarterly risk identification process, risk officers determine the risk situation in a standardized bottom-up process. In doing so, the relevant risk officer assesses the probability of a risk occurring and the amount of damage that might be caused by any individual risks identified. The probability of occurrence is classified according to two evaluation categories "possible" and "likely." This allows an optimum link with the balance sheet accounting of risks for which provisions could or must be recognized. The effects of risks on net income are bracketed together in three damage categories "slight," "medium" and "high." The qualitative and quantitative assessments are used consistently throughout the Group.

Gross and net risk values have to be determined for every individual risk within an observation period of two years. Gross risk represents the largest possible negative financial effect before the Company takes measures to influence the risk. Net risk considers risk-reduction activities

Risk Management

While taking into account the corporate strategy, the objective of risk management is to actively influence identified and assessed individual risks. The risk potentials must be influenced with targeted countermeasures. Risks are identified by an early-warning system so that they can be controlled (e.g., through damage prevention or steps to limit damage), sufficient security reserves can be formed or specific risks can be transferred to third parties (e. g., through insurance companies). With regard to risk management, these measures and their implementation are subject to regular review and adjustment.

Continuous Risk Monitoring and Reporting

The development of all risks is monitored using suitable earlywarning tools and key figures. Our Risk Management System is designed to ensure that the appropriate employees can identify risks and changes to them early on and report them to the decision-makers in the Company. These reports are first made to the central Group Risk Manager and to the Managing Board if the individual risks are classified at least as "medium." Apart from quarterly risk notifications, immediate reporting duties have been outlined for all risk officers, who must report to the Managing Board if the risk situation changes significantly. Adjustments to the risk management process and all significant risks and countermeasures are presented to the Risk & Opportunity Board in regular meetings. In the regular process, the business unit heads ensure that all significant risks and opportunities for their respective business field are fully documented and correctly evaluated in the Risk Management System. This relates in particular to risks regarding the pricing, earnings, sales and market share of the business field as well as the product, development and application portfolio. In addition, the Supervisory Board's Audit Committee is informed of significant risks with a considerable impact and newly identified issues that exceed defined value limits every six months. To ensure integration with the (Group) accounting process, the risk management process follows a coordinated timetable and thus provides all SMA functions involved in (Group) accounting and financial reporting with the relevant information in full.

Opportunity Management

All companies must use available opportunities to be successful. This can pertain to both internal and external potential. As part of our integrated risk and opportunity management approach, we regularly identify and assess opportunities. Identifying them early on and regularly and acting accordingly is a core management task. We assess opportunities to the best of our knowledge, basing our assessment on assumptions relating to market development, market potential of technologies and system solutions as well as forecasted changes in demand and prices. The cornerstones of this are the Group-wide planning process as well as strategy meetings held by the Managing Board with executives from the two top levels of management. To identify our opportunities, we continuously employ market and competitive analysis and systematic knowledge management, and place great importance on an open information policy within the Group. In doing so, we strive to create a balanced relationship between opportunities and risks.

INTERNAL CONTROL SYSTEM

SMA's Internal Control System includes all the principles, procedures and measures available to ensure business activities maintain the proper course. It is made up of systematically created organizational and technical measures and controls within the Company aimed at guaranteeing adherence to laws and regulations, as well as guidelines for preventing damage that might be caused by its employees or third parties. The Managing Board is responsible for implementation and adequacy of the Internal Control System; effectiveness is monitored by the Supervisory Board or its Audit Committee

Key Features of the Internal Control and Risk Management System in Relation to the (Group) Accounting Process

The Internal Control System pertaining to the accounting process is part of the Overall Internal Control System, which is embedded in the Company-wide Risk Management System. Processintegrated and process-independent monitoring steps constitute the basis of the internal monitoring system. Automated IT process controls are an important constituent part of the process-integrated measures. Additional controls are the organizational monitoring methods, such as the four-eyes principle, separation of administration, execution, settlement and approval functions and written work instructions. Furthermore, wherever possible we protect the IT systems deployed against unauthorized access by using appropriate authorization systems and access restrictions. The Supervisory Board's Audit Committee and the Internal Auditing department are intimately incorporated into the internal monitoring system with process-independent audit activities.

On the basis of a risk-orientated audit plan, the Internal Auditing department regularly examines the effectiveness of the Internal Control System by means of sampling and thus also checks material parts of the Internal Control System as it pertains to the (Group's) accounting process. Alongside the Internal Auditing department, the auditor of the Annual Financial Statements also carries out an evaluation. Under the terms of his/her audit of the Financial Statements, the auditor is obliged to report any risks found related to accounting and any fundamental weaknesses in the Internal Control and Risk Management System to the Supervisory Board's Audit Committee. Audits of the Annual Financial Statements and Consolidated Financial Statements, by the auditor, and of the local financial statements submitted by the Group companies included in the scope of consolidation, safeguard the basic process-independent monitoring mechanism in the accounting system.

Risks With Regard to the (Group) Accounting Process

Important risks in the (Group) accounting process include the possibility that the consolidated local financial statements of the Group companies fail to properly reflect the true net assets, financial position and results of operations due to unintentional or deliberate wrongdoing, or that publication of the Quarterly Statements or of the Annual Financial Statements is late. These risks may permanently impair the confidence of shareholders or the reputation of SMA. As an integral part of SMA, the Risk Management System as it pertains to (Group) accounting is concerned with detecting the risk of misstatements in the Group's bookkeeping as well as in external financial reporting. To ensure systematic early identification of risks Group-wide, SMA has installed a monitoring system to identify risks, early on, that threaten the existence of the Company in accordance with Section 91 (2) AktG, permitting - beyond the limits of statutory regulations - prompt identification, control and monitoring of all existence-threatening and other risks. The auditor assesses proper functioning of the early risk identification system in accordance with Section 317 (4) HGB.

Regulations and Controls Designed to Ensure Propriety of (Group) Accounting

The internal control measures are aimed at securing proper and reliable (Group) accounting and ensure business transactions are fully and promptly recorded in accordance with legal provisions and the Articles of Association. They also guarantee that inventory-taking is properly implemented and that assets and liabilities are properly recognized, measured and carried in the Annual Financial Statements and Consolidated Financial Statements. Furthermore, the regulations ensure that accounting records provide reliable and comprehensible information. The main tasks of the departments involved in the (Group) accounting process are clearly separated and their areas of responsibility are clearly assigned. The relevant departments are staffed with qualified personnel in sufficient numbers.

SMA constantly evaluates laws, financial reporting standards and other agreements and considers their relevance and effect on the (Group) accounting process. We promptly communicate applicable requirements to all Group companies. The uniform IT platform and Group account plan and standardized processes ensure proper and timely recording of all important business transactions. There are binding rules for the recording of manual business transactions. An accounting manual specifies Group-wide accounting provisions in accordance with the International Financial Reporting Standards (IFRS). In addition to general accounting principles and methods, the regulations above all include requirements concerning the balance sheet, income statement, statement of comprehensive income, Notes, Management Report, statement of cash flows, statement of changes in equity and segment reporting in compliance with EU legislation. By defining clear requirements, the risk of inconsistent practices when recognizing, measuring and carrying assets and liabilities should be reduced. In addition, a check is carried out centrally on the financial statements submitted by the companies included in the scope of consolidation while referring to the audit reports drafted by the local auditors. Each month upon submission of the reporting packages, those responsible at the subsidiaries also confirm the propriety and completeness of each financial statement by way of an internal declaration of completeness.

Use of IT Systems

Business transactions at SMA and at all the larger subsidiaries are primarily recorded using ERP systems from SAP AG, Walldorf (Germany). These are protected from misuse by appropriate authorization systems and access restrictions. The authorizations granted are reviewed and amended regularly. The centralized control and monitoring of nearly all IT systems, centralized change management and regular system backups minimize not only the risk of data loss, but also the risk of IT system failures related to (Group) accounting. Smaller companies either operate local ERP systems or commission external service providers with their own IT systems.

Use of a uniform, Group-wide consolidation program ensures that all data is recorded properly, promptly and completely and that Group-internal business transactions are eliminated. This is from where the various components of the Consolidated Financial Statements, including important data for the Notes to the Consolidated Financial Statements, are derived.

Disclaimer

The Internal Control and Risk Management System enables control of risks that might otherwise prevent the Annual Financial Statements and Consolidated Financial Statements from being properly drawn up and is therefore continuously being improved. However, Company-wide application of the regulatory and control measures cannot guarantee absolute reliability with regard to the accurate, complete and timely recording of facts in (Group) accounting and in the detection of irregularities.

INDIVIDUAL RISKS

The following section describes significant risks with considerable disadvantageous effects on business and the associated net assets, financial position and results of operation of the Group and the Company's reputation. The possibility of occurrence as well as accompanying effects after countermeasures have been taken are assessed (net risk). The order of the risks presented in the four categories reflects their current assessment for SMA.

The probability of occurrence and the possible effect of a risk as well as its year-on-year development are assessed by the following criteria:

Features of the Risk Assessment

Probability of Potential effects occurrence		Future risk development as of the reporting date (trend)
Possible (> 0 to < 50%)	Slight	Limited negative ettects on expected earnings, no loss of reputation, no threat to customer relationships	7 Higher than previous year
Likely (>= 50 to < 100%)		Medium Some negative ettects on expected earnings, moderate loss of reputation, potential threat to customer relation- ships, identifiable disruption to business operations (primarily internal effect)	→ Same as previous year
	High	Substantial negative effects on expected earnings, high loss of reputation, major threat to customer relationships, signiticant disruption to business operations (with external effect), up to disruption of busi- ness operations that threatens existence	> Lower than previous year

Presentation of the Individual Risks

Individual risks	Probability of occurrence	Potential financial impact	Risk devel- opment 2015/ 12/31	Risk devel- opment 2016/ 12/31
Strategic risks
Regulatory risks	Likely	High
Competition risks	Likely	High
Market risks	Likely	High
Investment risks	Possible	Medium
Risks from research and development activities	Likely	High
Operating risks
Procurement and inventory risks	Likely	High
Product risks	Likely	High
Personnel-related risks	Likely	Medium
IT risks	Likely	High		7
Financial risks
Financing and liquidity risks	Possible	Slight	7
Risks from exchange rate fluctuations	Possible	Medium	7
Risks from customer bad debt	Possible	Medium	1
Compliance risks
Export risks	Possible	Medium
Antitrust risks	Possible	High
Risks from violating data protection law	Possible	Medium
Risks from environmental damage	Likely	Slight

Strategic Risks

REGULATORY RISKS

The photovoltaics sector's high dependence on government subsidies continues to diminish as a result of the increasingly competitive cost structure of solar power. However, markets remain highly volatile due to differing subsidies and changes to them in terms of content and regionally. There are considerable regional and cyclical volume fluctuations that complicate planning significantly. The risk situation is largely unchanged due to the still very high international share.

While demand for PV inverter technology declined in the EMEA region, the North and South American and Asia-Pacific regions boasted growth in terms of new installations measured in gigawatts. On a cumulative basis, approximately 35% of PV inverter output already installed in the Americas region is attributable to SMA. The Company confirmed its status as the leading provider of PV inverter solutions with its large number of installations in the Americas region in 2016. General conditions improved slightly as tax incentives for PV systems were extended to 2020. Nonetheless, there is a high level of uncertainty due to current political changes. Potential import duties on goods from Europe, for example, would have considerable negative effects on SMA's profitability. In the APAC region (not including China), SMA is well positioned and can therefore benefit from the positive development in these markets. Tariff trade barriers in this region would also have an adverse effect on SMA's profitability.

SMA regularly performs market research to be able to respond promptly to emerging changes in subsidies in target and existing markets. Short-term fluctuations in demand are discussed with local sales managers and operations in the rolling forecast process. Thanks to its high level of flexibility in production, SMA can usually react quickly to changes. The establishment of local production facilities is possible but would put pressure on SMA's cost structure.

For more information on development in individual markets, please see the remarks in the Forecast Report, "Future General Economic Conditions in the Photovoltaics Sector" section.

RISK OF AGGRESSIVE COMPFTITION

Some markets continue to offer PV system incentive programs. The concomitant demand leads to intense competition. Existing and new competitors will attempt to secure market shares through aggressive policies regarding pricing and terms and conditions. Moreover, transparent bidding processes in saturated markets lead to more intense price competition. Although SMA continues to press ahead with internationalization, changes to subsidies could cause additional price pressure, potentially with substantial negative effects on further business development in these markets and SMA's earnings.

Other possible scenarios include competitors improving the quality, functionality or performance of their products, or local competitors reacting more flexibly and adapting better to the prevailing market requirements in certain markets. Markets breaking away in connection with freed-up capacity, especially in China through the reduction of expansion targets, would also result in an increase in fierce competition. Such competition may in the future lead to further declines in prices for products and services produced by SMA and likewise to a loss in market shares. Should our competitors succeed in being able to quote well below SMA's prices on a sustained basis, this would impair earnings growth or have a negative effect on SMA's break-even point.

The SMA Managing Board continues to forecast a sharp price decline. This price decline is expected to be offset by growth in volume. In addition, SMA is meeting this price competition with market-appropriate and cost-optimized products and solutions. With expenditure for research and development of €78.3 million in the 2016 fiscal year (including capitalized development projects), SMA remains well positioned to set important trends with new products, systems and solutions. The numerous awards SMA has received for its high capacity for innovation underscore the market orientation of development achievements.

Furthermore, there are opportunities for development of additional international markets. SMA's international sales share is already nearly 90%, and we will continue to expand our international presence to benefit from the growth emerging in foreign markets. To this end, the Managing Board employs a structured process for systematic analysis of potential markets to identify and use this business potential at an early stage.

Opening up new business areas to increase sales is one of the central elements of SMA's corporate strategy. In this context, the Managing Board sees services (e.g., O&M business), system technology for storage applications and intelligent energy management solutions as areas of business with opportunities to increase sales.

The cost-out measures and projects to increase efficiency are already showing results and will be pursued consistently. Continuous review and optimization of global locations and cost structures will be the key to SMA's long-term success. Use of flexible tools for inventory management as well as in procurement and production is intended to sustainably increase flexibility in the face of demand fluctuations (see also procurement and inventory risks).

For more information on development in individual markets, please see the remarks in the Forecast Report, "Overall Statement From the Managing Board on the Expected Development of the SMA Group" section.

MARKET RISKS

In the past, the high demand for PV systems resulted partially from the sharp increase in conventional energy carrier prices. Because of increased prices for oil and gas, rising energy prices are still anticipated in the medium term. The higher the price of energy from these sources, the more attractive generating electricity from sunlight becomes. Photovoltaics have proven to be increasingly competitive in recent years. In a growing number of regions around the world, solar power is now more cost-efficient than conventional energy.

The risk of declining market shares in conjunction with the risk of aggressive competition or changes in market development is monitored globally by the heads of the business units based on the forecast process with sales. These risks are countered with a market-appropriate adjustment of the product and solution portfolio. In addition, SMA is consistently positioning the SMA and Zeversolar brands to serve the largest possible market. While the products and solutions sold under the SMA brand are brought to market in all of SMA's sales regions, Zeversolar products are mainly deployed in the low-price segments in Australia, Benelux and India. Zeversolan also serves demand in the Chinese market.

In the past fiscal year, SMA was again voted the world's most popular inverter brand by the "PV Inverter Customer Insight Survey -2016," conducted by the IHS Markit institute for market research and business consulting. The study surveyed inverter buyers in over 45 countries. It shows that SMA, as the winner five years running, is the preferred inverter brand among all customer groups around the world and in many of the large photovoltaic markets, despite fierce global competition between inverter manufacturers.

Nonetheless, the dependence on individual regions or markets (e. g., U.S. business) is considerable. If, for example, this market was to break away because of regulatory or political changes, this would have substantial, potentially existence-threatening effects on SMA.

SMA can reduce its dependence on individual photovoltaic markets with its global positioning. SMA's range includes highefficiency PV inverters, complete system solutions for PV systems of all power classes, electric batteries and intelligent energy management systems. The range is rounded off by complete solutions for PV diesel hybrid applications and extensive services up to and including operational management.

There are high barriers of entry into individual markets. The entry barriers can be divided into size-dependent and experiencedependent barriers. For example, the size-dependent barriers include the scope of the product and service portfolio, global infrastructure and economies of scale. The entry barriers that depend on experience include the ability to design complete and coordinated solutions for PV applications (e.g., storage solutions) or to meet certification requirements in the respective sales regions. If SMA cannot or can only partially overcome these barriers to entry, this would have significant effects on future development. SMA has therefore entered into targeted strategic alliances to generate economies of scale or an expansion of its portfolio. In addition, SMA works to contact the certification authorities and electric utility companies abroad to be able to make any necessary adjustments to its product and service portfolio early on.

Formation of buying syndicates can increase the dependency of SMA on a few wholesalers or specialist wholesalers and other customers generating large sales. This dependency harbors a risk as a result of these large customers gaining more negotiating power coupled with increased price pressure. SMA avoids dependency on individual customers by deploying a targeted sales strategy. The share in total sales of the ten largest customers worldwide therefore fell to approximately 27% in the 2016 fiscal year.

For more information on development in individual markets, please see the remarks in the Forecast Report, "Future General Economic Conditions in the Photovoltaics Sector" section.

INVESTMENT RISKS

Improper assessment of market changes in the future could lead to failure in fully utilizing our production capacities and to unscheduled depreciation of production equipment and product developments. The non-utilized infrastructure would have a negative effect on our earnings. Because of the sustainably lowered fixed costs, SMA can generate profits even with lower sales. Thanks to our high degree of production flexibility, we can largely absorb negative demand fluctuations.

For more information, please see the remarks in the Forecast Report, "Overall Statement From the Managing Board on the Expected Development of the SMA Group" section.

RESEARCH AND DEVFLOPMENT RISKS

In addition to optimization of existing products and the development of future product generations, the SMA Managing Board's goal is to develop complete system solutions. However, this inherently gives rise to the risk that vital technological trends are identified too late or that market launch is delayed due to development stages that are too long. As this could lead to sales losses and smaller market shares, SMA will continue to invest up to 10% of sales in research and development activities to develop new processes, technologies, products, system solutions and services. Products and solutions can be developed more quickly and efficiently by simplifying and standardizing the product development process at all SMA development sites around the world. SMA is consciously seeking collaboration with research facilities to advance strategic development projects with the aim of further reducing development time of innovative products. However, we cannot rule out that individual development projects will fail to deliver expected exploitable economic results or do so in the expected time frame.

The SMA Managing Board sees storage applications and integration of storage solutions as providing particular opportunities to strengthen core business. SMA is the only inverter manufacturer to collaborate with nearly all world-leading manufacturers of stationary battery-storage systems. However, the market success of these solutions depends largely on storage system prices. The sharp declines in prices for electric battery-storage systems in recent years have improved sales prospects.

With our patents and through constant monitoring of technologies and competitors relevant to SMA, we work to maintain and expand our technological edge. Because competitors and research institutes also file a large number of patent applications, we cannot rule out that, in spite of regular, extensive and international research, we will not infringe on third-party patent rights or other industrial property rights or that, vice versa, our rights will be violated by third parties. If the former occurs, SMA may incur considerable costs related to claims for compensation, in its defense against such claims or in relation to royalty payments to third parties. It is therefore important that a product be checked for third-party rights in a timely manner before approval and market launch. Corresponding milestones have been included in the guidelines and process descriptions on product development and market launch. The Intellectual Property Management department actively protects proprietary technologies and monitors patent applications. By employing patent attorneys, SMA also strives to reduce the risk of lawsuits and any litigation costs. We make provisions for disputes related to intellectual property, when necessary, if we consider it likely that such claims might be asserted against us.

Like political conditions, the risk from new technical directives on requirements can only be influenced to a limited extent. The risk of not meeting such requirements remains unchanged. Only an accelerated development process and specific market knowledge will enable SMA to limit this risk in the future. Therefore, our employees actively contribute to new technical guidelines through standards associations and other organizations. In addition, the assumptions and associated risks with regard to strategic projects are regularly reviewed. Based on future continued focus of our development capacities, key developments should be identified and advanced more quickly. These procedures allow us to recognize and implement changes in what is required of our products early on.

For additional details, please refer to the information on research and development in the Consolidated Management Report.

Operating Risks

PROCUREMENT AND INVENTORY RISKS

SMA is increasingly dependent on certain suppliers. We work to minimize these risks through market analyses, careful evaluation of suppliers, flexible supplier agreements, clearly defined quality standards and reducing dependence on individual suppliers. SMA will therefore make greater use of standard components in future innovations and qualify alternative suppliers to increase flexibility.

Regular inventory analyses are carried out in connection with increasingly shorter innovation cycles and resulting potential inventory write-down requirements. Inventories are continuously monitored and adjusted with controlling tools and early-warning systems. By monitoring changes in important raw material prices, development trends should be identified in a timely manner and compensatory mechanisms developed with suppliers before they affect purchase prices and negatively influence SMA's earnings. Despite these measures, supply problems with important suppliers could threaten the delivery capacity for existing and new products and SMA's competitive advantage.

The internationalization of our purchasing structures with decentralized purchasing teams in Poland and China is leading to lower purchase prices and logistics costs and diminished dependence on local suppliers. As part of the global purchasing and commodity strategy, these activities are being pursued and expanded in a sustainable manner. Danfoss and SMA have been working together successfully in a cross-company purchasing partnership for some years. The objective of the partnership is to further reduce costs through joint purchasing activities. Other advantages of the partnership are, for example, sharing of information and process knowledge, methods and tools as well as best practice insights so as to further improve specific negotiations and our competitiveness in the long term.

For more information on development in individual markets, please see the remarks in the Forecast Report, "Overall Statement From the Managing Board on the Expected Development of the SMA Group" section.

PRODUCT RISKS

We are always striving to develop new products, solutions and systems and to improve existing ones. For this reason, we use new materials and new technologies in development to make innovations possible. This can result in SMA products being defective. Large delivery lots bear the risk of errors or defects affecting a product series or several product batches. Production shortcomings may on the one hand derive from SMA errors or from defects in primary products provided by SMA suppliers. Unidentified incompatibilities can also emerge after products are launched, which requires improvement to the customer system on-site after installation to prevent the product from posing a danger to the customer, in the worst-case scenario. A lapse of reliability could result in a long-term loss of trust and reputation. In addition, any necessary product recall would have a negative impact on earnings.

If responsibility for the error lies with the supplier, then the supplier must bear the direct costs. If SMA is responsible for the error, then product liability insurance will cover the losses incurred. However, this does not cover the cost of materials. Newly developed products may be subject to more failures than established products. We are able to minimize this risk through comprehensive testing during the development phases, accompanying quality inspections during production, field testing prior to scheduled serial production and product liability insurance. We make provisions for disputes related to product risks if we consider it likely that such claims can be asserted against us.

To continuously increase the quality of our products, in addition to general process improvements covering the entire value chain, new developments are backed by specific stress and qualification tests; tests are carried out on the entire series and advance quality planning is integrated into the development process. Depending on the nature and scope of the technical fault, Service assesses the necessity for repair or replacement of the device and carries out appropriate countermeasures. To meet customer needs even better in the future, the SMA Managing Board will continue to establish and expand service capacities.

PERSONNEL-RELATED RISKS

Qualified and motivated employees are key to the evolution of our enterprise, increased internationalization of sales, purchasing and service activities and SMA's business success. To ensure SMA's future viability it is important to retain engineers and other skilled staff at the Company for the long term as well as fill management positions adequately. The SMA Managing Board continuously monitors personnel structures and, if necessary, adapts them to the sales level expected in the future.

There is still a risk that talented individuals could leave the Company and not be replaceable (by someone with the necessary qualifications) at short notice. We offer performance-based remuneration systems and participation in the Company's success, flexible working hours and options for further education and training as well as for balancing family and career. By integrating university research and education into our work at the Kassel site, and building other partnerships with universities and institutes, SMA also works to be perceived as an attractive employer and thereby successfully able to recruit and retain highly qualified young staff to the Company long term.

For additional details, please refer to the information in the section "Employees" in the Consolidated Management Report.

IT-RELATED RISKS

As a global market, technology and innovation leader and publicly traded stock corporation, SMA is in the public eye and therefore heavily under threat of industrial espionage and cybercrime. Increasing connectivity and the need for permanent availability place ever higher demands on our IT systems and products. We reduce the risks of IT breakdowns by continually reviewing and improving IT security and employing advanced hardware and software solutions. Protective programs are put in place to defend against malware. Distributed data centers and mirrored databases also reduce the risk of data losses. Alongside securing network and server availability, it is most important to minimize potential information loss via employees, service providers and external attacks. In addition, the safety of the products and the digital services offered is also part of Group-wide risk management. The information security officer coordinates and supervises these activities. Together with the Group's data protection officer, our employees ensure that personal data is processed in accordance with the regulations of the Federal Data Protection Act. Furthermore, additional measures initiated protect confidential business information and the private sphere of our employees and business partners.

Financial Risks

FINANCING, CURRENCY AND LIQUIDITY RISKS

As a global business, SMA is inevitably exposed to financial risks. These include risks from changes to general interest rates, exchange rate fluctuations and financing and liquidity risks.

Corporate Treasury controls Group financing and limitation of financial risks at SMA. The principle underlying our hedging policy is to protect SMA against sharp changes in prices, exchange rates and interest rates by means of contracts and hedging transactions to an economically feasible extent. Corporate Treasury has also secured borrowing by negotiating a long-term credit line of €100 million.

The permissible hedging instruments have been laid out by the Managing Board in Group-wide guidelines that also regulate the entire process-oriented organization including hedging strategies, responsibilities and control mechanisms. For example, extensive currency hedges were concluded.

For additional details, please refer to the information under Financial Position - Principles and Objectives of Financial Management in the Consolidated Management Report.

For detailed information regarding the financial market risks and risk management, please also refer to the Notes to the Consolidated Financial Statements on pages 110 et seqq. under 39. Objectives and Methods Concerning Financial Risk Management.

RISK OF DEFAULT OR CUSTOMER INSOLVENCY

The unstable and sometimes unfavorable conditions on the financial markets are conducive to potential non-payment risks for some customers. In addition, the competitive situation and internationalization require extension of payment periods, coupled with the reduction of collateral (e.g., in the form of bank guarantees). If customers can no longer keep up with their payment obligations, there is a higher default risk for receivables with negative effects on SMA's results of operation, financial position and net assets. The level of receivables could increase because of the planned growth in project business (utility). This potential development is, however, backed by appropriate securities in the project business.

As part of our accounts receivable management, we minimize the risk of individual customers' non-payment in accordance with the Company's credit guidelines by obtaining references and credit reports for the purposes of a credit check, allocating appropriate credit limits and continuously monitoring general payment practices. Depending on the volume and the credit rating of the customer and the country, we request collateral for customer deliveries. If it is expected that a credit limit is not sufficient for our future business relationship, then we examine whether we should ask the customer to furnish collaterals or whether we can accept the residual risk. To cover potential payment defaults, SMA has also taken out commercial credit insurance. Payment periods were largely stable in the past fiscal year; SMA did not sustain any material defaults thanks to effective accounts receivable and customer credit management. The SMA Managing Board sees the greatest potential for reducing the risk of defaults through consistent implementation of accounts receivable management. Central commercial project management at the locations in the U.S. and Germany represents another effective measure to avoid or minimize risk to project business, which is an important aspect of SMA's portfolio. All project contracts entailing risks are systematically subjected to a legal and commercial risk assessment. Based on this, risky agreements are mitigated for SMA through additional financial securities or contractual adjustments made together with sales and the customer. Remaining project risks are assessed and approved separately from the heads of the business units and the Managing Board, provided these risks are proportionate. Due to the expansion of business activity in Service (e.g., O&M business), it was decided to also transfer this project risk management to Service.

Compliance Risks

Our influential position on the market as a technology and innovation leader, which is also being strengthened by market consolidation, as well as our steadily increasing international business, give rise to diverse tax, brand, patent, competition, antitrust and environmental risks

There is a risk that SMA could be involved in unlawful business conduct or that individual employees could violate SMA's business principles and directives. In particular, this includes the risk of corruption and fraud, of which could be significant the effects on SMA's development.

Group Compliance issued business principles and directives globally to counter these risks. Basic work sequences and processes were derived from these and implemented globally. Therefore, in the context of their work for SMA, all employees are obligated to act ethically and in accordance with the laws and regulations of the legal system of their country. These regulations and obligations are consolidated globally by mandatory training sessions on business principles.

For additional details, please refer to the information on corporate social responsibility in the Consolidated Management Report.

EXPORT RISKS

As a result of increasing internationalization and an international share of sales of around 90%, there will be more risks for SMA in importing and exporting materials, and providing services and finished products. SMA must meet the legal requirements for imports from and exports to many countries to stay competitive and meet the needs of its increasingly international customers. An additional customs risk has arisen for SMA in connection with the delivery of components from Germany to production sites abroad.

Violations of trade restrictions and customs laws are subject to significant penalties and could damage SMA's reputation. SMA is diligent in its efforts to comply with customs and export control regulations and particularly with trade restrictions. In addition, SMA purposefully monitors its obligations under commercial and customs law using an IT system, which reduces the risk of potential non-compliance.

Due to the global business operations and another slight increase in the international share of sales year on year, SMA is subject to diverse tax laws and regulations abroad. Changes in tax laws in Germany and abroad could affect the SMA Group's tax accounting items. In addition to changes in legal regulations, assessment and interpretation of complex tax regulations, such as those regarding transfer prices, may also affect our net assets, financial position and results of operation. We therefore collaborate closely with tax consultants in individual countries to identify risks and carry out audits at regular intervals.

ANTITRUST LAW

Our primary goal is to minimize antitrust risks from the outset. Group Compliance has therefore issued an Antitrust Directive. The directive stipulates clear do's and don'ts for all major business situations. In addition, all employees of the areas affected must receive antitrust law training within a stipulated period.

RISKS OF VIOLATING DATA PROTECTION LAW

There is a risk that the necessary care is not always taken in the processing of PV system operators' personal data and, for example, data is used for cross-promotional purposes without consent. There are also risks in the increasingly widespread storage and processing of personal data using cloud solutions, where permissibility regarding data protection law is disputed. Against the backdrop of the changing business environment and the necessary development of new sales channels, this risk is becoming increasingly significant.

SMA counters data protection risks by having the Company's data protection officer educate those employees who process personal data and monitor all projects where PV system operators' personal data is processed. If agreements with third parties are to be reached (for contract data processing), the necessary data protection clauses must be applied, taking into account EU standards.

ENVIRONMENTAL RISKS

SMA employs a small amount of hazardous substances during production that, in principle, pose a risk to the environment. The comprehensive measures we take in production and in quality management ensure that SMA products are manufactured in a way that is environmentally friendly and guarantees compliance with all environmental regulations. Furthermore, SMA has safeguarded itself against certain environmental risks, including with insurance.

For additional details, please refer to the information on corporate social responsibility in the Consolidated Management Report.

OVERALL STATEMENT ON THE GROUP'S RISK SITUATION

On the basis of our Risk Management System, we continue to assess the overall situation regarding risks to SMA's future development to be manageable. However, on the basis of the present assessment, individual risks still have been identified that, particularly if they all transpired at once, could significantly impair business development should the strategic targets be missed and the planned measures be unfulfilled. The risk profile has slightly improved year on year. New products allowed variable costs to be effectively reduced. The ongoing internationalization of sales activities is also expected to make a significant contribution to securing the current sales level. The result of this bundle of measures is that operational and financial flexibility will positively influence the earnings situation as long as sales remain the same.

Furthermore, SMA will take additional measures to counter the described risks and keep the potential negative effects as small as possible. It is therefore our objective to continue optimizing the Risk and Opportunity Management System to identify potential risks even faster, to counteract them and take advantage of any opportunities that arise.

FORFCAST REPORT

THE GENERAL ECONOMIC SITUATION: GLOBAL ECONOMY GAINS MOMENTUM

The International Monetary Fund (IMF) expects the global economy to gain momentum in 2017. For some months already, experts have been seeing signs that the economic situation is brightening in many countries. However, there are also numerous risks, writes the IMF in its latest update of the World Economic Outlook (WEO) of January 16, 2017. It is referring in particular to the uncertainty associated with Donald Trump's new government in the U.S. and its global impact.

The IMF forecasts global growth of 3.4% for the current year (2016: 3.1%), confirming its October forecast. In comparison with the October forecast, the experts anticipate a slightly better situation in industrialized countries with growth of 1.9% and a marginal slowdown in developing countries with a 4.5% increase in economic power.

In the medium term, however, the IMF sees some risks in store for the global economy, such as if political shifts cause nations to lean toward more protectionism, as is currently becoming apparent with the new U.S. President Trump. Restrictions in world trade could inhibit productivity and tarnish market sentiment, says the IMF. In addition, increasing geopolitical tensions and terrorism could compromise the global economic situation. In contrast, IMF experts see the potential increase in government spending in the U.S. and China as a positive.

The gulf between the interest policies of the European Central Bank (ECB) and the U.S. Federal Reserve (Fed) is likely to grow wider this year. According to the interest rate forecasts presented by the Fed in December 2016, three further moves could be made this year. The ECB, on the other hand, is still fighting against sluggishness in many important national economies of the eurozone. The ECB and the Fed will therefore march in opposite directions in 2017. The U.S. dollar will thus remain strong against the euro.

Developments in the U.S. make it much harder for the IMF to make forecasts. Experts now anticipate a 2.3% rise in growth in 2017. They likewise have a more positive view of the economic situation in Germany, Japan, Spain and Great Britain than they did in October. Growth prospects for China have also brightened; the IMF expects growth of 6.5% in 2017. In contrast, the experts lowered their expectations for India by 0.4 percentage points to 7.2%.

FUTURE GENERAL ECONOMIC CONDITIONS IN THE PHOTOVOLTAICS SECTOR

Renewable Energy Will Grow Faster Than Conventional Energy Carriers

In its World Energy Outlook 2016, the International Energy Agency (IEA) forecasts that renewable energy will see much faster global growth than conventional energy carriers in the years to come. In addition to industrialized countries, the IEA expects fast-growing, newly industrialized countries particularly in South America, Africa and Asia to play an important role.

The experts from Bloomberg New Energy Finance (BNEF) also confirm the growing significance of renewable energy. In their New Energy Outlook 2016, they forecast that, in 2040, renewable energy will account for more than 50% of the world's installed power generation capacity. According to the BNEF experts, photovoltaics will be the most cost-efficient energy source in most countries of the world by as early as 2030 and it will account for approximately 45% of the new power generation capacity installed worldwide in that year.

Increased use of renewable energies is driven by various trends, which include regionalization of the electricity supply. More and more households, cities and companies want to become less dependent on energy imports and rising energy costs. In this context, the IEA describes a decentralized energy supply with photovoltaics as a "driver for the transformation of traditional roles in the energy market." This will lead to a rise in demand for energy storage solutions in the residential, commercial and industrial sectors. In addition, energy will be increasingly distributed via smart grids to manage electricity demand, avoid consumption peaks and take the strain off utility grids. E-mobility is expected to become an important pillar of these new energy supply structures a few years from now. Integration of electric vehicles may also help increase self-consumption of renewable energies and offset fluctuations in the utility grid.

Decline in China, Growth in Other Regions

Photovoltaics have proven to be increasingly competitive in recent years. In a growing number of regions around the world, solar power is now more cost-efficient than conventionally generated energy. For example, large-scale solar projects in the Middle East are already generating solar power at costs of less than \$0.03. This points the way to an environment in which the industry will grow in the medium and long term even without subsidization. In the wake of the transformation of global energy supply structures, current and future objectives include intelligently linking different technologies, providing intermediate storage solutions for generated energy, thereby ensuring a reliable and cost-effective electricity supply based on renewable energies.

For 2017, the SMA Managing Board anticipates 71 GW of newly installed PV power around the world. This equates to a decrease of around 9%. The decrease will mainly occur in China. In contrast, the SMA Managing Board estimates that markets outside China will grow by approximately 7% to a total of 47 GW. Global investments in PV system technology will decline due to the plummeting demand in China and the overall high price pressure in the industry. The fast-growing segment of storage applications will only partially offset the expected decline in investment in traditional photovoltaic applications. Overall, the SMA Managing Board therefore expects investment in PV system technology of €4.9 billion in 2017 (2016: €5.2 billion).

Storage Technology Boosts Investment in EMEA

According to estimates by the SMA Managing Board, the European photovoltaic markets will further decline in 2017. However, according to these estimates, market growth in the Middle East and in African countries will more than compensate for the anticipated decline in demand in Europe. Overall, the SMA Managing Board therefore anticipates an approximately 6% increase in newly installed PV power to around 10 GW in the European, Middle Eastern and African (EMEA) region. According to SMA estimates, the volume of investment in inverter technology will be around 25% higher than in the previous year at an expected €1.3 billion. The disproportionately high increase in euros is attributable in particular to the business with PV system technology for storage applications.

Price Pressure Hurts Investment in North and South America

For the American markets, the SMA Managing Board expects a slight decline after the strong growth of last year. There are good medium-term prospects thanks to the existing tax incentive programs in the U.S. and the continued growth of the South American photovoltaic markets. The SMA Managing Board estimates that newly installed power in the overall Americas region will decline by around 7% to 16 GW in 2017. The volume invested in inverter technology will fall at a greater rate to €1.3 billion due to high price pressure (2016: €1.5 billion).

Slight Decline in Investment in Asia-Pacific Excluding China

The most important markets in the Asia-Pacific (APAC) region include China, Japan and India. The SMA Managing Board estimates that new PV installations in China will decrease sharply to 24 GW in 2017 due to previous subsidy cuts and further scheduled subsidy cuts (2016: 34 GW). Investments in inverter technology in China are expected to fall to €0.6 billion (2016: €0.9 billion). For the Asia-Pacific region excluding China, however, the SMA Managing Board predicts an encouraging increase in newly installed PV power to 21 GW in 2017 (2016: 17 GW). The growth will be driven in particular by the Indian market. However, the high price pressure in the region excluding China will erode the volume growth. The SMA Managing Board therefore expects investment of approximately €1.7 billion in inverter technology (2016: €1.8 billion).

Energy Management and Smart Module Technology Growth Markets

In the opinion of SMA's Managing Board, innovative system technologies that temporarily store solar power and provide energy management to private households and commercial enterprises offer attractive business opportunities. Rising prices for conventional domestic power and many private households and companies wanting to drive forward the energy transition by making their contribution to a sustainable and decentralized energy supply are the basis for new business models. Demand for solutions that increase self-consumption of solar power is likely to rise particularly in the European markets, the U.S. and Japan. In these markets, renewable energies are already taking on a greater share in the electricity supply. In 2017, the SMA Managing Board expects the volume of the still fairly new market to amount to between €0.6 billion and €1.1 billion (this does not include the figures for batteries). Estimated demand is already included in the specified development projections for the entire inverter technology market. Positive growth stimuli are also emanating from e-mobility. Interconnection with photovoltaic systems is giving rise to new business models and greater customer benefits.

The SMA Managing Board also sees good growth prospects in the field of smart module technology to increase the functionality and performance of PV modules (module level power electronics MLPE). These technologies include micro inverters and DC optimizers. The SMA Managing Board estimates that DC optimizers in particular will gain in importance over the currently dominant string inverter technology without optimizers in the years to come. This trend is emanating from North America because regulatory requirements in the markets there encourage the use of DC optimizers.

PV Diesel Hybrid Systems Offer Attractive Business Opportunities

There are worthwhile business opportunities for PV diesel hybrid systems in many countries in Central and South America as well as in the Middle East, Asia-Pacific and Africa. In these regions, energy needs are growing considerably in line with increasing prosperity. Scalable electricity supply solutions are in demand, especially in areas without a grid connection. Intelligent system technology allows photovoltaics to be integrated well into already existing diesel-powered grids. However, business with PV diesel hybrid systems is developing more slowly than in subsidized photovoltaic markets because of technical complexity and limited financing options. In addition, the low price of oil is affecting demand negatively. The medium-term prospects remain good.

OVERALL STATEMENT FROM THE MANAGING BOARD ON THE EXPECTED DEVELOPMENT OF THE SMA GROUP

The following statements on the future development of the SMA Group are based on estimates drawn up by the SMA Managing Board and the expectations concerning the progression of global photovoltaic markets set out above. The SMA Group operates under a functional organization. The Residential, Commercial, Utility and Service business units take on overall responsibility and manage development, operational service and sales as well as operations. SMA Sunbelt Energy and the Off-Grid and Storage business unit have been combined under Other Business. From the beginning of the 2017 fiscal year, Zeversolar will be fully allocated to the Residential business unit due to changes in its business activities. This will result in a shift from the Other Business segment to the Residential segment. The Railway Technology business division is reported as a discontinued operation. The Forecast Report is based on the described reporting structure.

SMA's sales and earnings depend on global market growth, market share and price dynamics. Factoring in the pronounced demand fluctuations in the solar industry, last year, the SMA Managing Board consolidated the global production locations and thus increased SMA's financial and operational flexibility. In addition, more cost-effective products were developed for important sales markets to counter the high price pressure in the industry. By agreeing to a syndicated loan of €100 million, domestic commercial banks have underscored the SMA Group's high credit rating.

Managing Board Anticipates Difficult Fiscal Year

On January 26, 2017, the SMA Managing Board published its sales and earnings forecast for the current fiscal year for the first time. It predicts a sales decline to between €830 million and €900 million (2016: €946.7 million). The decrease is mainly attributable to high price pressure in the solar industry. Against this backdrop, the SMA Managing Board expects declining earnings before interest, taxes, depreciation and amortization (EBITDA) of between €70 million and €90 million (2016: €141.5 million). The depreciation and amortization are expected to amount to between €60 million and €70 million. On this basis, the Managing Board expects EBIT to decline tangibly. The earnings forecast includes positive earnings effects in the single-digit millions from the sale of SMA Railway Technology GmbH, the closing of which is expected by mid-2017.

SMA's business model is not capital-intensive. The investments (including capitalized development projects) will increase to up to €50 million (2016: €29.0 million). The increase is mainly attributable to test equipment for new product generations, higher capitalization of development costs and measures to modernize the IT infrastructure. The SMA Group's working capital is expected to amount to between 22% and 25% of the sales of the last 12 months (2016: 23.8%). The consolidation of global production sites will increase transport times and thus inventory. This effect on working capital can be partially offset by longer payment periods with suppliers and optimized debtor management. Overall, the SMA Managing Board anticipates a positive free cash flow. Net cash is expected to grow to over €400 million (2016: €362.0 million).

Price Dynamics and Digitization Determine Business Performance

For 2017, the SMA Managing Board expects to see high price pressure continue in all market segments and regions. This is mainly being caused by the aggressive pricing policy of Chinese competitors, who are attempting to quickly tap foreign markets and to compensate for their shortcomings in sales and service infrastructures. Unfortunately, many Chinese competitors do not comply with legal standards in the design of products and thus intentionally distort the competition.

SMA will not extricate itself from general developments in market pricing, but it will maintain its own high demands on product quality. Systematic investments in development in recent years resulted in SMA having a multi-award-winning product portfolio for all output ranges. During 2016, customers at the leading trade fairs in the U.S. and Europe were presented with innovations that will lead to considerable savings in the total costs of a PV system. In addition, we will launch further cost-optimized products globally in the future to increase SMA's competitiveness in the medium term. To further optimize the SMA Group's break-even point and increase flexibility, the SMA Managing Board closed production sites in Denver, U.S., and Cape Town, South Africa, at the end of 2016. The effects generated by product innovations and cost reduction measures are expected to be recognized in earnings from 2017 onwards.

Overall, SMA is in a good position to benefit in all market segments and regions from the trend of decentralized energy supply structures. No other competitor has a similar international presence. In addition, SMA will use its financial strength to benefit from the digitization of the energy industry. For example, SMA has developed a technical platform that allows for energy flow monitoring across different sectors, such as photovoltaics, heating, cooling, ventilation as well as stationary and mobile storage systems. With an intelligent energy management solution, we will optimize total energy costs at the local level in the future. These new solutions distinguish us further from competitors and allow us to establish new business models. As a specialist in complete solutions in the energy sector, SMA will specifically establish and expand strategic alliances to more quickly tap into the potential offered by digitization.

Well Prepared for Market Changes With Full Product Range

SMA's broad product portfolio in all market segments is a major distinguishing feature. The Company can therefore react quickly to changing markets and benefit from the global development of photovoltaic markets.

The Residential business unit serves global markets for small PV systems with and without connection to a smart home solution. According to Managing Board estimates, in 2017, the Residential business unit will generate sales of €190 million to €210 million, accounting for approximately 20% of SMA Group sales (2016: €175.0 million; 18.5%). The portfolio of the Residential business unit with the SMA and Zeversolar brands comprises module optimizers, single- and three-phase string inverters in the lower output range up to 12 kW, energy management solutions, storage systems, communication products and accessories. The main sales drivers include the Sunny Boy inverters with outputs up to 5 kW. Europe, North America, Australia and Japan remain the most important sales markets. Over the course of the year, the Residential business unit will launch cost-optimized products under the SMA and Zeversolar brands in the core markets and, for the first time, sell a Sunny Boy inverter configured for the solar module optimizers from Tigo Energy, Inc. In addition, the Residential business unit aims to access new customers and distribution channels to increase sales. Product innovations and outlined sales measures are only expected to affect earnings in the medium term. The SMA Managing Board therefore expects the Residential business unit to generate negative EBIT in the lower double-digit millions in 2017. In the medium term, planned product innovations and cost optimization of the existing portfolio will increase the business unit's gross margin.

The Commercial business unit concentrates on global markets for medium-sized to large PV systems with and without an energy management solution. For the Commercial business unit, the SMA Managing Board forecasts sales of €250 million to €270 million (2016: €263.0 million). The business unit is therefore expected to account for around 30% of Group sales (2016: 27.8%). The main sales drivers are the Sunny Tripower inverters in the power class 25 kW and above. In 2017, the portfolio will be expanded by a completely new product generation with an output of 50 kW for rooftop applications and an enhanced-performance three-phase Sunny Tripower inverter for ground-based PV systems. In addition, the Commercial business unit will launch a new energy management solution to monitor the energy flows from different sectors and also optimize them at a later date. The SMA Managing Board thus anticipates positive operating earnings (EBIT) in the upper one-digit millions in 2017.

The Utility business unit serves the markets for large-scale PV projects. With expected sales of between €270 million and €290 million (2016: €396.7 million), the Utility business unit is expected to account for around 30% of Group sales (2016: 41.9%). In addition to central inverters with grid service and monitoring functions, the Utility business unit portfolio also comprises complete solutions including medium- and high-voltage technology as well as accessories. In 2017, the portfolio will be complemented by a compact, complete solution including medium-voltage and switching technology with an output of 5 MW. The integrated solution within a 40-foot container will be sold under the brand name Medium

Voltage Power Station 5000. The main sales driver is expected to be the new Sunny Central inverter with an output of 2.5 MW. The SMA Managing Board anticipates positive operating earnings (EBIT) in the upper one-digit millions in 2017.

Our service business will continue to benefit from the number of commissioned projects in the Utility and Commercial business units in 2017. In addition, the SMA Managing Board expects the conclusion of new, long-term service and maintenance contracts for large-scale PV projects and extended warranties for Sunny Boy and Sunny Tripower inverters. With sales of €55 million to €60 million (2016: €44.7 million), the SMA Managing Board anticipates positive operating earnings (EBIT) in the single-digit millions.

For the business areas combined under Other Business – SMA Sunbelt Energy and the Off-Grid and Storage business unit - the SMA Managing Board anticipates total sales of €65 million to €70 million (2016: €67.3 million). These business areas are expected to generate positive operating earnings (EBIT) in the one-digit millions.

SMA Is a Global Market Leader and Has Set the Course for the Future

With its strategy so far, SMA has successfully defended its global market leadership in a market environment dominated by drastic change. According to its own estimates, SMA accounts for around 20% of global demand. Following the rapidly implemented company transformation, the SMA Managing Board adjusted its strategy to the market developments expected in the future. As the future energy supply becomes increasingly decentralized and renewable, system technology requirements are increasing significantly. Establishing the technical conditions for fully automatic optimization of total energy costs and merging supply and demand are giving rise to attractive business opportunities for SMA. Therefore, SMA's continued evolution into a solutions provider is one of the most important strategic objectives for the years to come. In our strategy work, we have also defined flexibility concepts enabling us to operate profitably even in sharply fluctuating sales markets.

Thanks to our extensive experience in PV system technology, ability to quickly implement changes and enter into numerous strategic partnerships, SMA is well prepared for the digitization of the energy industry. We will build on our unique strengths and design additional system solutions for decentralized energy supplies based on renewable energy. Furthermore, we will systematically take advantage of opportunities that arise from new business models as part of the digitization of the energy industry. SMA is characterized by an extraordinary corporate culture and motivated employees who make a decisive contribution to the Company's long-term success.

Niestetal, March 2, 2017

SMA Solar Technology AG The Managing Board

CONSOLIDATED FINANCIAL STATEMENTS

• INCOME STATEMENT SMA GROUP ୧୫
• မွ STATEMENT OF COMPREHENSIVE INCOME SMA GROUP
• BALANCE SHEET SMA GROUP 70
• STATEMENT OF CASH FLOWS SMA GROUP 73
• 74 STATEMENT OF CHANGES IN EQUITY SMA GROUP

NOTES SMA GROUP

GENERAL INFORMATION 108 Equity 76 24. 76 109 1. Basics 25. Provisions 77 110 2 Consolidation 26 Financial Liabilities 81 111 クア ನ Accounting Principles and Amendments to Trade Payables 111 28. Other Financial Liabilities Accounting Standards 91 4. Segment Reporting 111 29. Other Liabilities 112 30. Additional Disclosures Relating to Financial Instrument NOTES TO THE INCOME STATEMENT 115 ૭૬ 31. Obligations Under Leases and SMA GROUP Other Financial Obligations ૭5 5. Cost of Sales 116 32. Contingencies 95 6. Selling Expenses 96 7 Research and Development Expenses NOTES TO THE STATEMENT ୨୧ 8. General Administrative Expenses 116 97 OF CASH FLOWS SMA GROUP 0 Other Operating Income 97 116 10. Other Operating Expenses 33. Net Cash Flow From Operating Activities 97 11. Employee and Temporary Employee 117 Net Cash Flow From Investing Activities 34. Benefits 117 Net Cash Flow From Financing Activities 35. 98 12. Financial Result 117 36. Cash and Cash Equivalents 98 13. Income Taxes 100 14. Earnings per Share 117 OTHER DISCLOSURES 117 37. Events After the Balance Sheet Date 101 NOTES TO THE BALANCE SHEET SMA GROUP 117 38. Related Party Disclosures 101 119 15. Intangible Assets 39. Objectives and Methods Concerning 102 16. Fixed Assets Financial Risk Management 103 17 Investments in Associates 122 40. Auditor's Fees 104 18. Investment Property 122 41. Declaration on the German Corporate 105 19. Inventories Governance Code in Accordance With 105 20. Trade Receivables and Other Receivables Section 161 AktG 106 21. Other Financial Assets 122 42. Consolidated Financial Statements 107 22. Cash and Cash Equivalents 23. Assets Classified as Held for Sale 107

INCOME STATEMENT SMA GROUP

in €'000	Note	2016	2015 ,
Sales	4	946,713	981,816
Cost of sales	5	704,025	767,900
Gross profit		242,688	213,916
Selling expenses	ර	47,775	54,298
Research and development expenses	7	65,801	66,531
General administrative expenses	8	50,640	58,317
Other operating income	9	34,406	46,401
Other operating expenses	10	48,112	37,870
Operating profit (EBIT)		64,766	43,301
Result from at equity-accounted investments		-2,722	0
Financial income		1,954	1,944
Financial expenses		5,134	6,926
Financial result	12	-5,902	-4,982
Profit before income taxes		58,864	38,319
Income taxes	13	29,975	15,284
Profit from continuing operations		28,889	23,035
Profit from discontinued operation		710	-8,785
Net income		29,599	14,250
of which attributable to non-controlling interests		0	-53
of which attributable to shareholders of SMA AG		29,599	14,303
Earnings per share, basic/diluted	4	0.85	0.41
thereof from continuing operations (in €)		0.83	0.66
thereof from discontinued operation (in €)		0.02	-0.25
Number of ordinary shares (in thousands)		34,700	34,700

l Previous year's figures adjusted pursuant IFRS 5.34

STATEMENT OF COMPREHENSIVE INCOME SMA GROUP

in € 000	Note	2016	2015
Net income		29,599	14,250
Unrealized gains (+)/losses (-) from currency translation of foreign subsidiaries		1,993	4,100
Changes recognized outside profit or loss (currency translation differences)		1,993	4,100
Cash flow hedges before taxes		- 14,910	O
Deferred taxes related to cash-flow-hedges		4,562	0
Cash flow hedges after income taxes		-10,348	0
Overall comprehensive result1		21,244	18,350
of which attributable to non-controlling interests		0	-53
of which attributable to shareholders of SMA AG		21,244	18,403

] All items of other comprehensive income may be reclassified to profit or loss

BALANCE SHEET SMA GROUP

in €'000	Note	2016/12/31	2015/12/31
ASSETS
Intangible assets	ા ર	73,231	91,299
Fixed assets	। ୧	234,327	294,584
Investment property	18	15,414	0
Other investments		5	5
Investments in associates	17	14,875	0
Deferred taxes	13	88,323	84,830
Non-current assets		426,175	470,718
Inventories	19	169,219	146,131
Trade receivables	20	165,098	180,043
Other financial assets (total)	21	177,935	127,157
Cash equivalents with a duration of more than 3 months and asset management		159,419	97,655
Rent deposits and cash on hand pledged as collaterals		9,242	27,048
Remaining other financial assets		9,274	2,454
Receivables from tax authorities (total)		21,407	24,689
Claims for income tax refunds	13	5,900	3,879
Claims for VAT refunds	20	15,507	20,810
Other receivables	20	9,729	11,545
Cash and cash equivalents	22	216,124	200, 180
		759,512	689,745
Assets classified as held for sale	23	25,077	0
Current assets		784,589	689,745
Total assets		1,210,764	1,160,463

2016/12/31

Note

2015/12/31

LIABILITIES AND SHAREHOLDERS' EQUITY Share capital		34,700	34,700
Capital reserves		119,200	119,200
Retained earnings		431,212	416,334
SMA Solar Technology AG shareholders' equity		585,112	570,234
Equity attributable to non-controlling interests		0	-26
Shareholders' equity	24	585,112	570,208
Provisions	25	89,926	86,939
Financial liabilities2	26	20,658	27,135
Other liabilities (total)		161,269	142,587
Accrual item for extended warranties	29	154,872	134,763
Other financial liabilities	28	1,015	1,412
Remaining other liabilities	29	5,382	6,412
Deferred taxes	13	21,022	24,402
Non-current liabilities		292,875	281,063
Provisions	25	87,117	83,097
Financial liabilities2	26	19,691	19,788
Trade payables		108,902	103,134
Income tax liabilities	13	14,986	9,942
Other liabilities (total)		97,920	93,231
Human Resources department	29	17,687	23,314
Prepayments received	29	22,239	22,961
Other financial liabilities	28	13,763	18,192
Remaining other liabilities	29	44,231	28,764
		328,616	309,192
Liabilities directly associated with assets classified as held for sale	23	4,161	O
Current liabilities		332,777	309,192
Total equity and liabilities		1,210,764	1,160,463
Total Cash (in € million)		385	325
Cash and cash equivalents + cash equivalents with a duration of more than 3 months and asset management + rent deposits and cash on hand pledged as collaterals
Net Cash (in € million)		362	286
Total cash - current and non-current loan liabilities (excluding derivatives)

'

in €′000

. As millions as anny
2 Includes notinterest-bearing current derivatives amounting to €17.6 million (2015: €7.6 million)

72 Consolidated Financial Statements – Statement of Cash Flows

STATEMENT OF CASH FLOWS SMA GROUP

in € 000	Note	2016	2015
Profit trom continuing operations		28,889	23,035
Income taxes		29,975	15,284
Financial result		5,902	4,982
Depreciation and amortization		76,725	77,768
Change in provisions		7,007	-45,682
Result trom the disposal of assets		2,157	464
Change in non-cash expenses/revenue		14,963	19,295
Interest received		1,664	1,774
Interest paid		- 1,657	-6,639
Income tax paid		-33,824	-22,297
Gross cash flow		131,801	67,984
Change in inventories		-36,155	47,151
Change in trade receivables		9,861	- 18,686
Change in trade payables		5,768	- 10, 138
Change in other net assets/other non-cash transaction		36,273	16,393
Net cash flow from operating activities - continuing operations	33	147,548	102,704
Net cash flow from operating activities - discontinued operations		-2,942	1,414
Net cash flow from operating activities		144,606	104,118
Payments for investments in tixed assets		- 14,903	-17,370
Proceeds trom the disposal of tixed assets		1,982	731
Payments for investments in intangible assets		- 14, 124	-30,901
Payments for the acquisitions of interests in associated companies		-17,596	0
Payments for the acquisition of companies net of cash		- 1,500	- 1,500
Proceeds from the disposal of securities and other tinancial assets		182,569	102,035
Payments for the acquisition of securities and other financial assets		-244,332	-117,036
Net cash flow from investing activities - continuing operations	34	-107,904	-64,041
Net cash flow from investing activities - discontinued operations		-47	-2,307
Net cash flow from investing activities		-108,375	-66,348
Change in non-controlling interests		26	-13
Proceeds of financial liabilities		0	833
Redemption of tinancial liabilities		-16,012	-24,065
Dividends paid by SMA Solar Technology AG		-4,858	0
Cash outflows for the acquisition of non-controlling interests in subsidiaries		-3,734	0
Net cash flow from financing activities - continuing operations	રૂ રે	-24,578	-23,245
Net cash flow from financing activities - discontinued operations		0	0
Net cash flow from financing activities		-24,578	-23,245
Net increase/decrease in cash and cash equivalents		15,066	14,525
Changes due to exchange rate effects		3,056	1,667
Cash and cash equivalents as of January 1		200, 180	183,988
Less cash and cash equivalents of discontinued operations		-2,178	-3,192
Cash and cash equivalents as of December 31	36	216,124	196,988

¹ Previous year's figures adjusted pursuant to IFRS 5.34

STATEMENT OF CHANGES IN EQUITY SMA GROUP

in €'000	Note	Share capital	Capital reserves
Shareholders' equity as of January 1, 2015		34,700	119,200
Consolidated net result
Other comprehensive income after tax	24
Overall result
Proceeds from owners (capital increase Zeversolar)
Changes in the scope of consolidation
Shareholders' equity as of December 31, 2015		34,700	119,200
Shareholders' equity as of January 1, 2016		34,700	119,200
Consolidated net result
Other comprehensive income after tax	24
Overall result
Change due to the Aquisition of non-controlling interests
Dividend payments of SMA Solar Technology AG
Shareholders' equity as of December 31, 2016		34,700	119,200

Difference from currency translation	Cash flow hedges	Other retained earnings	Total	Equity attributable to non-controlling interests	Consolidated shareholders' equity
2,658	O	395,417	551,975	-13	551,962
		14,303	14,303	-53	14,250
4,099		O	4,099	1	4,100
					18,350
		-58	-58	39	-19
		-85	-85		-85
6,757	O	409,577	570,234	-26	570,208
6,757	O	409,577	570,234	-26	570,208
		29,599	29,599	0	29,599
1,993	- 10,348	O	-8,355	0	-8,355
					21,244
		- 1,508	- 1,508	26	- 1,482
		-4,858	-4,858		-4,858
8,750	-10,348	432,810	585,112	O	585,112

Equity attributable to the shareholders of the parent company

NOTES SMA GROUP

GENERAL INFORMATION

1. Basics

The Consolidated Financial Statements of SMA Solar Technology AG for the year ending December 31, 2016, were prepared in compliance with the International Financial Reporting Standards (IFRS) as adopted by the EU, as well as in compliance with the regulations of Section 315a of the German Commercial Code (HGB). The requirements of the standards applied were met completely and provide a fair view of the net assets, financial position and results of SMA Solar Technology AG and the subsidiary companies included in the scope of consolidation (hereinafter: SMA Group or the Group).

The registered office of the Company is Sonnenallee 1, 34266 Niestetal, Germany is registered at the commercial court of Kassel under the trade register number HRB 3972. Shares of SMA Solar Technology AG are traded publicly. They are listed in the Prime Standard of the Frankfurt Stock Exchange. Since September 22, 2008, they have been listed in the technology index TecDAX.

The Consolidated Financial Statements are prepared on the basis of the amortized acquisition cost principle. Exceptions to this are provisions, deferred taxes, derivative financial instruments and available-for-sale securities.

The income statement is classified according to the cost of sales method. The Consolidated Financial Statements were prepared in euros. Unless indicated otherwise, all amounts stated are in euros rounded to whole thousands (€ 000) or millions (€ million). Compared to last year, the balance sheet has been adjusted to increase the transparency of reporting. The item "receivables from tax authorities" has been inserted on the asset side. Other receivables decreased accordingly in the same amount. On the liability side, items "other financial liabilties (non-current)" and "other liabilities" were adjusted. The previous year's figures were also adjusted.

The Managing Board of SMA Solar Technology AG authorized the Consolidated Financial Statements on March 2, 2017, for submission to the Supervisory Board. The Supervisory Board has the duty reviewing the Consolidated Financial Statements and declaring whether it approves the Consolidated Financial Statements.

SMA Solar Technology AG (SMA) and its subsidiaries (SMA Group) develop, produce and distribute PV inverters, transformers, choke coils and monitoring and energy management systems for PV systems. Another area of business is operation and maintenance services for photovoltaic power plants (O&M business), in addition to other services. The power electronics components for railway technology are no longer part of SMA's core business and are to be sold.

More detailed information on the segments is provided in section 4.

Consolidation つ

2.1. CONSOLIDATION PRINCIPIES

All domestic and foreign subsidiaries in which SMA Solar Technology AG, directly, has the option of controlling the financial and operating policies are included in the Consolidated Financial Statements of the SMA Group.

Intercompany transactions, balances, sales, expenses and income, profits and losses, as well as receivables and payables among the consolidated companies are eliminated. In the event of consolidation measures affecting income, the income-tax-related effects are measured and deferred taxes recorded.

The Financial Statements of SMA Solar Technology AG and the subsidiaries are prepared on identical reporting dates using uniform accounting and valuation methods.

In the event of an acquisition, subsidiaries are fully consolidated from the date of acquisition (i.e., as of the date on which the Group obtains control). Consolidation takes place according to the purchase method of accounting. In line with the purchase method of accounting, the cost of acquisition of the business combination is offset against the fair value of the assets acquired and liabilities assumed from the date of acquisition. The cost of acquisition of the business combination consists of the fair value of the purchase price paid and the carrying amount of any non-controlling interests. The non-controlling interests may either be recognized at the proportionate value of the assets acquired and liabilities assumed (applied at SMA) or at their fair value. Transaction costs that are directly attributable to the acquisition are recognized in the net income, provided they do not refer to the issue of shares in the SMA Group.

Profit and loss and every component of other comprehensive income are attributable to SMA's shareholders and non-controlling interests. This applies even when it results in a negative balance for non-controlling interests.

A positive difference resulting from the offsetting is capitalized as goodwill. It may, if applicable, also include the goodwill corresponding to non-controlling interests. Negative differences resulting from the consolidation at the date of acquisition are recognized directly in the income statement.

In the case of a business combination as a result of the successive acquisition of shares, the existing shares are revalued at their fair value, and any effects are recognized in the net income.

Conditional considerations of the acquisition price are valued at their fair value on the date of acquisition. Adjustments of the fair value within the measurement period are made retroactively and accordingly booked against goodwill. Adjustments are based on additional facts available in the acquisition period. Changes in the fair value of contingent consideration that are not adjustments during the measurement period are made according to the nature of the contingent consideration. For equity, there is no subsequent measurement; it is recognized in equity on settlement. If the contingent consideration is an asset or liability, the subsequent measurement is based on IAS 39 or IAS 37 and recognized in the income statement.

Changes in holdings in subsidiaries that do not result in a loss of control are recognized as equity transactions. The book values of shares held by the Group and non-controlling interests are adjusted to reflect the changes to the holdings in subsidiaries. Any difference between the amount by which the non-controlling interests are adjusted and the fair value of the consideration paid or received is recognized directly in equity and allocated to the shareholders of the parent company.

If the Company loses control over a subsidiary, the gain or loss on deconsolidation is recognized through profit or loss. This comprises the difference between:

• → the total fair value of the consideration received and the fair value of retained shares,
• → the book value of the assets (including goodwill), the liabilities of the subsidiary and all non-controlling interests.

All amounts related to this subsidiary presented in other comprehensive income are recognized in the same manner as a sale of assets (i.e., reclassifications to the income statement or direct transfer to retained earnings). Retained shares in the subsidiary are recognized at the fair value determined on the date of loss of control

22 SCOPE OF CONSOLIDATION

Investment holdings within the scope of consolidation as of December 31, 2016 changed in comparison to December 31, 2015 as a result of the acquisition of interests in Tigo Energy, Inc. and the increase in the shareholding in Jiangsu Zeversolar New Energy Co., Ltd. to 100%. The share in Immo Betelligungs GmbH was increased to 100% through the acquisition of 6% of the shares from SMA Technologie-Holding GmbH. SMA Railway Technology (Guangzhou) Co., Ltd is currently in liquidation.

With the exception of Tigo Energy Inc., all companies within the scope of consolidation are fully consolidated. Tigo Energy, Inc. is recognized as an associate in the Consolidated Financial Statements according to the equity method. Those companies entitled to investments in the list of shareholdings are not consolidated aue to their subordinate importance.

The scope of consolidation of the SMA Group is presented in the complete list of shareholdings shown below pursuant to Section 313 of the German Commercial Code:

Name of parent company	Registered office	Share in capital	Consolidation
SMA Solar Technology AG	Niestetal, Germany		F
Shares in affiliated companies
dtw Sp. zo.o."	Zabierzów, Poland	100%	F
Jiangsu Zeversolar New Energy Co., Ltd.	Suzhou, China	100%	F
Australia Zeversolar New Energy Pty. Ltd.	Sydney, Australia	100%3	F
Jiangsu ZOF New Energy CO., Ltd.	Yangzhong, China	100%	F
Zeversolar GmbH	Munich, Germany	100%	F
SMA America Holdings LLC	Denver, USA	100%	F
SMA America Production LLC	Denver, USA	100%3	F
SMA Solar Technology America LLC	Rocklin, USA	100%	F
SMA Australia Pty. Ltd.	North Ryde, Australia	100%	F
SMA Benelux BVBA	Mechelen, Belgium	100%	F
SMA France S.A.S.	Saint Priest, France	100%	F
SMA Ibérica Technología Solar, S.L.	Sant Cugat del Vallès (Barcelona), Spain	100%	F
SMA Immo Beteiligungs GmbH	Niestetal, Germany	100%	F
SMA Immo GmbH & Co. KG	Niestetal, Germany	100%	F
SMA Italia S.r.l.	Milan, Italy	100%	F
SMA Japan Kabushiki Kaisha	Tokyo, Japan	100%	F
SMA Middle East Limited	Abu Dhabi, United Arab Emirates	100%	F
SMA New Energy Technology (Shanghai) Co., Ltd.	Shanghai, China	100%	F
SMA Railway Technology GmbH	Kassel, Germany	100%	F
SMA Railway Technology (Guangzhou) Co., Ltd	Guangzhou, China	100%	F
SMA Solar Beteiligungs GmbH	Niestetal, Germany	100%	F
SMA Solar India Private Limited	Mumbai, India	100%	F
SMA Solar Technology Beteiligungs GmbH	Niestetal, Germany	100%	F
SMA Solar Technology Canada Inc.	Vancouver, Canada	100%	F
SMA Solar Technology Portugal, Unipessoal Lda.	Lisbon, Portugal	100%	F
SMA Solar Technology South Atrica (Pty.) Ltd.	Cape Town, South Africa	100%	F
SMA Solar (Thailand) Co., Ltd.	Bangkok, Thailand	100%2	F
SMA Solar UK Ltd.	Banbury, Great Britain	100%	F
SMA South America SpA	Santiago, Chile	100%	F
SMA Brasil Tecnologia Ferroviaria E Solar Ltda.	ltupeva, Brazil	100%3	F
SMA Sub-Sahara Production Pty. Ltd.	Cape Town, South Atrica	100%	F
SMA Sunbelt Energy GmbH	Niestetal, Germany	100%	F
SMA Technology Hellas AE	Athens, Greece	100%	F
SMA Technology Korea Co., Ltd.	Seoul, South Korea	100%	F
Zeversolar New Energy GmbH	Niestetal, Germany	100%	F
Investments
IdE Institut dezentrale Energietechnologien gemeinnützige GmbH	Kassel, Germany	10%	Z
Uni Kassel International Management School KIMS GmbH	Kassel, Germany	9.6%	N
Tigo Energy, Inc.	Los Gatos, USA	28.27%	R

List of Shareholdings Pursuant to Section 313 of the German Commercial Code

F = fully consolidated; N = not consolidated; R = recognized at equity
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0,1% are held by SMA Solar Technology Beteiligungs GmbH.

0 1 15 are held by SMA Solar Tochnology Beteligungs GmbH and 0.001% are held by SMA Solar UK Ltd.
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SMA Solar Technology AG, SMA America Production LLC, dtw Sp.zo.o., Jiangsu Zeversolar New Energy Co., Ltd., Jiangsu ZOF New Energy CO., SMA Railway Technology GmbH and SMA Sub-Sahara Production Pty. Ltd. are manufacturing companies. The others are sales and service companies.

All SMA Group companies prepare their annual financial statements as of December 31 , with the exception of our Indian subsidiary SMA Solar India Private Limited, which prepares its financial statements as of March 31 due to statutory regulations. There are no subsidiaries with minorities existing from the SMA Group's perspective.

The companies SMA Immo GmbH & Co. KG (Section 264b German Commercial Code - HGB) and SMA Solar UK Ltd. (Section 479A Companies Act 2006) exercised exemption clauses regarding the preparation and publication of Financial Statements.

2.3. TRANSLATION OF FINANCIAL STATEMENTS INTO FOREIGN CURRENCIES

The Consolidated Financial Statements are prepared in euros, which is the reporting currency of the Group. Each company within the Group defines its own functional currency, which is normally the local currency. The items contained in the Financial Statements of each company are valued using this functional currency.

Transactions denominated in foreign currencies are translated initially into the functional currency by applying the spot rate valid at the time of the transaction. On each subsequent due date, monetary assets and liabilities denominated in foreign currencies are translated into the functional currency by applying the spot rate valid on that day. All translation differences are recognized through profit or loss.

Assets and liabilities of subsidiaries preparing their balance sheets in a currency other than the euro are translated using the current exchange rate on the balance sheet date. Items on the income statement are translated periodically using the average rate of the relevant month. The equity components of subsidiaries are translated at the corresponding historical exchange rate applicable upon accrual. Any resulting translation differences are recorded under other income within equity as adjustment items for foreign currency translation or in shares of other shareholders. The accumulated amount recorded in equity is recognized through profit or loss upon the disposal of the foreign subsidiary concerned.

The relevant exchange rates for trancial Statements prepared in foreign currencies in relation to the euro have evolved as follows:

	Average rate	Closing rate
in €	2016		2015 2016/12/31 2015/12/31
1 Chinese renminbi (CNY)	0.13687	0.14473	0.13585	0.14099
1 U.S. dollar (USD)	0.94891	0.90100	0.94697	0.91802

3. Accounting Principles and Amendments to Accounting Standards

3.1. NEW IASB ACCOUNTING STANDARDS

STANDARDS AND INTERPRETATIONS TO BE APPLIED FOR THE FIRST TIME IN THE FISCAL YEAR

IFRS Annual Improvement Process 2012 - 2014

As part of its annual process of making minor improvements to standards and interpretations (Annual Improvements to IFRSs 2012 - 2014 Cycle), the IASB has issued amendments. The amendments affect four standards (IFRS 5, IFRS 7, IAS 19 and IAS 34). Retroactive application of the amendments is mandatory for reporting periods of a fiscal year beginning on or after January 1, 2016, and have only minor or no relevance to the Group.

Amendments to IAS 1 Disclosure Initiative

The amendments aim to remove obstacles for preparers with regard to exercising judgment in the presentation of financial statements. They were applied for the first time in the current reporting year. This resulted in minor changes to the presentation of the financial statements. For example, presentation of the new standards became shorter because standards that were clearly not relevant were not included.

Amendments to IAS 16 and IAS 38 Clarification of Acceptable Methods of Depreciation and Amortization

The amendments adopted on May 12, 2014 concern the application of methods of depreciation and amortization. They describe which methods may be used for the depreciation and amortization of fixed assets and intangible assets. According to IAS 16, the revenue-based method is not a permissible method of depreciation or amortization. They were applied for the first time in the current reporting year. The amendments had no effects on the Group's assets, financial position or results of operations.

STANDARDS AND INTERPRETATIONS THAT HAVE REEN PUBLISHED BUT ARE NOT YET MANDATORY

In its 2016 Consolidated Financial Statements, SMA did not apply the following accounting standards, which had already been adopted by the IASB but were not yet mandatory for this fiscal year.

Of the applicable standards and interpretations that have been published but are not yet mandatory, the following are expected to have an impact on the Financial Statements of the SMA Group. They will be implemented in the year of compulsory first-time application at the very latest, if they are implemented and applied in the EU.

IFRS 9 Financial Instruments

IFRS 9 replaces the current standard for accounting of financial instruments, IAS 39 Financial Instruments: Recognition and Measurement. In the future, the measurement of financial assets at "amortized cost" or "at fair value" will depend on the underlying business model and the characteristics of the contractually agreed cash flows. The new requirements for recognizing impairment are based on expected losses and not incurred losses as before. The recognition of hedging relationships is now more closely guided by the entity's risk management strategy.

The precise effects of IFRS 9 on SMA AG's consolidated financial statements are currently being examined. Changes to the classification of financial instruments may result in slight alterations to balance sheet presentation. Eftects could also arise in particular from the new impairment provisions. Trade receivables are the key balance sheet item for which expected impairment losses must be recognized in the future. No material effects are expected for hedge accounting due to the high effectiveness of the hedging recognized at SMA AG. In addition, IFRS 9 results in new qualitative disclosure requirements. Application of the new standard is mandatory for fiscal years beginning on or after January 1, 2018. Early application is permitted, but not planned at SMA AG.

IFRS 15 Revenue From Contracts With Customers

IFRS 15 is a new standard published on May 28, 2014 that applies to reporting periods beginning on or after January 1, 2018. IFRS 15 specifies how and when an IFRS reporter will recognize revenue as well as requiring such entities to provide users of financial statements with more informative, relevant disclosures. The standard provides a single, principle-based five-step model based on transferring control to the customer for revenue recognition and to be applied to all contracts with customers. The first-time application of the standard is not expected to have any significant impact on earnings. This is because the allocation of the transaction price to the different services in the contract does not result in any material differences from previous accounting methods. There will be no material effects with regard to the time of revenue recognition - apart from where this concerns contractual ancillary services. Application of the standard will result in more extensive disclosures.

Clarification on IFRS 15 Revenue from Contracts with Customers

The IASB issued amendments to IFRS 15 on April 12, 2016. These amendments clarify certain aspects of the standard and allow for additional practical simplifications for first-time application. The amendments are effective for annual periods beginning on or atter January 1, 2018, it it comes to the implementation in the EU. Earlier application is permitted.

IFRS 16 Leases

IFRS 16 replaces the existing IAS 17 and accompanying interpretations. It was published on January 13, 2016, and, if implemented by the EU, applies to reporting periods beginning on or after January 1, 2019. For lessees, the new standard provides an accounting model that does not differentiate between finance and operating leases. In the future, most leases will have to be recognized on the balance sheet. For lessors, the regulations of IAS 17 "Leases" are largely unchanged, so the distinction between finance and operating leases has to be retained, resulting in different consequences for accounting. The regulation will have a moderate impact on the Group. The Group will be affected as a lesser the contracts currently recognized as operating leases are of no material volume.

IFRIC 22 Foreign Currency Transactions and Advance Consideration

The IASB published IFRIC 22 "Foreign Currency Transactions and Advance Consideration" on December 8, 2016. IFRIC 22 addresses an application issue regarding IAS 21 "The Effects of Changes in Foreign Exchange Rates." It clarifies at what point the exchange rate needs to be determined for translating foreign currency transactions that include payments received or advance payments. According to this, the decisive factor for determining the exchange rate for the underlying asset, income or expense is the time at which the asset or liability resulting from the advance payment is first recorded. The interpretation has to be applied from January 1, 2018, if implemented by the EU. No material effects are expected on the Group's assets, financial position or results of operations.

Amendments to IAS 7 Disclosure Initiative

The amendments aim to provide clarification on IAS 7 and improve the information that is provided to users of financial statements on a company's financial activities. Application in the EU is mandatory for fiscal years beginning on or after January 1, 2017.

Amendment to IAS 12 Income Taxes

The amendments comprise clarifying paragraphs and an additional illustrating example of how to account for deferred tax assets relating to assets measured at fair value. The amendments take effect in the EU for reporting periods that begin on or after January 1, 2017. No material effects are expected.

Amendment to IAS 40 Investment Property

The amendment to IAS 40 adopted by the IASB on December 8, 2016, aims to clarify the circumstances in which the classification of a property as an "investment property" begins or ends if the property is still under construction or development. The amendment has to be applied from January 1, 2018. Earlier application is permitted. This does not affect the Group's financial reporting.

Amendments to IFRS 10 Consolidated Financial Statements and IAS 28 Investments in Associates

These amendments clarify that in transactions involving associates or joint ventures, the extent of gain or loss recognition depends on whether the assets sold or contributed constitute a business. Mandatory application of these amendments has been postponed indefinitely in the EU.

IFRS Annual Improvement Process 2014 - 2016

As part of its annual process of making minor improvements to standards and interpretations (Annual Improvements to IFRSs 2014 - 2016 Cycle), the IASB has issued amendments affect four standards (IFRS 1, IFRS 12 and IAS 28). The amendments to IFRS 12 have to be applied for reporting periods from January 1, 2017, and the amendments to IFRS 1 and IAS 28 have to be applied from January 1, 2018. The improvements have only minor or no relevance to the Group.

The Group did not adopt any new standards, interpretations or amendments to existing standards prematurely in 2016.

3.2. DISCLOSURES TO THE ACCOUNTING AND VALUATION POLICIES

Intangible assets acquired with a finite useful life are valued at acquisition costs. They decline via straightline amortization over their useful lives and accumulated impairments.

The costs for internally generated intangible assets are recognized in which they accrue, with the exception of development costs that can be capitalized.

Research and development expenses include all expenses that can be attributed directly to research or development activities. Expenditure on research is recognized as expenditure in the is incurred. The development costs of a project are capitalized as an intangible asset only after the SMA Group can demonstrate both the technical feasibility of completing the intangible asset so that it will be available for internal use or sale and the intention to complete the intangible asset and either use or sell it. In addition, the SMA Group must demonstrate how the intangible asset will generate future economic benefits, the availability of resources to complete the intangible asset and the ability to reliably measure the expenditure attributable to the intangible asset during its development costs are recognized at cost pursuant to IAS 38.66, less accumulated amortization and accumulated impairment losses. Amortization commences at the end of the development phase and from the asset can be used. Amortization is effected over the period during which future benefit will be expected. Incomplete development projects are tested annually for impairment. When the reasons that have resulted in impairment cease to exist, a corresponding addition is made.

With the purchase of dtw Sp.zo.o. in the 2011 fiscal year, the Group formed goodwill for the first time. Additional goodwill arose from the acquisition of Jiangsu Zeversolar New Energy Co., Ltd. in 2013, which was written off in 2014. Danfoss' inverter segment and Phoenix's O&M business were acquired in 2014. Both transactions resulted in low goodwill. There were no other intangible assets with an indefinite useful life in the periods under review.

Intangible assets with a finite useful life are written down over three to five years using straight-line amortization. In the case of intangible assets with a finite useful life, the period of amortization method are reviewed at least at the end of each fiscal year. Any changes in the amortization period that become necessary because of changes in the expected useful life are accounted for as changes to estimates. Amortization is recorded under the expense category that corresponds to the intangible asset in the enterprise.

Any gains or losses from derecognition of intangible assets are determined as the difference between the net disposal proceeds and the book value of the asset. They are recognized in profit or loss in thich the asset is derecognized.

Fixed assets are valued at acquisition or production costs less straight-line depreciation and accumulated impairment losses. Borrowing costs are added to acquisition and production costs in the event of qualifying assets. The cost of replacement of a part of a fixed asset is included in the book value of this asset when incurred if the criteria for recognition are fulfilled. When major inspections are carried out, the costs are capitalized according to the book value of the relevant assets if the criteria for recognition are met. All other maintenance and repair costs are expensed immediately.

The depreciation period is based on the expected useful life. Depreciation is recognized under the expense category that corresponds to the function of assets in the enterprise. Scheduled straight-line depreciation is based on the following useful life of assets:

	Useful life
Leasehold improvements	10 years
Buildings	25 to 35 years
Technical equipment and machinery	6 to 8 years
Business and office equipment	5 to 10 years

A fixed asset is derecognized either upon its disposal or when no further economic benefit is expected from the further use or sale of the asset. Gains or losses from derecognition of the asset are determined as the difference between the net disposal proceeds and the book value of the asset and recognized through profit or loss in the income statement as other operating income or other operating expenses in which the asset is derecognized.

The residual values, useful lives and depreciation methods are reviewed at the end of each fiscal year and adjusted if necessary.

Fixed assets that are held to generate rental income are recognized as "Investment property" in accordance with IAS 40. Investment property must be measured at cost on acquisition. Subsequently, investment property can be measured using either the cost model or the fair value model.

In the 2016 fiscal year, SMA Solar Technology AG rented two buildings for the first time. These buildings are located on a plot of land that is available for SMA to use for another 82 years as stipulated in the building lease. Investment property are accounted for using the cost model, whereby the properties are measured according to IAS 16 (i.e., at historical cost less depreciation and impairment and reversals of impairment). The buildings are depreciated on a straight-line basis over their economic useful life. The of the two buildings is 33 years.

A survey was compiled to determine the current market value. The properties were valued on the basis of the income approach. The input parameters equate to level three measurement in accordance with IFRS 13. The market value was thus determined to be €16.5 million. Refer to section 18 for more details.

Fixed assets that constitute non-current assets held for sale and discontinued operations are classified as held for sale according to IFRS 5 if the associated book value is realized largely through disposal and not through continued use. On the date of classification, the non-current assets are measured at the lower book value and fair value less costs to sell, and no longer depreciated or amortized.

The item was transferred to "Assets classified as held for sale" according to IFRS 5.12 on September 30, 2016.

Impairment of intangible assets and fixed assets: On each balance sheet date, the Group reviews whether there are any indicators that the value of an asset might be impaired. If such indicators exist or if an annual impairment test of an asset is required, the Group makes an estimate of the recoverable amount of the relevant asset. The recoverable amount of an asset is its fair value less costs to sell or its value in use, whichever is higher. As a rule, the recoverable amount will be determined for each individual asset. If it proves impossible to determine the recoverable amount for individual assets because the cash flows depend on those of other assets, the cash flows are determined for the next higher group of assets (cash-generating unit), for which such a cash flow can be determined.

If the book value of an asset or a cash-generating unit exceeds the recoverable amount, the asset or the cash-generating unit is impaired and written down to the recoverable amount. In assessing the value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments regarding the interest effect and the risks specific to the asset. To determine the fair value less costs to sell, an adequate valuation model is used on valuation multipliers, stock prices of quoted shares of entities or other available indicators for the fair value. Impairment costs are recognized under the expense category that corresponds to the impaired asset in the enterprise. In fiscal year 2016, as in the previous year, impairment was taken into account on development projects. See also section 15, Intangible Assets.

For assets, a test is carried out on each balance sheet date to determine whether there are any indicators that a previously recognized impairment loss has ceased to exist or has diminished. Additions are made if the recoverable amount has increased in subsequent periods. An impairment loss recognized is only reversed if there is a change in the assumptions used to determine the asset's recoverable amount since the last impairment loss was recognized. If this is the case, the book value of the asset is increased to its recoverable amount. An addition is limited to the amount that would have resulted based on scheduled depreciation without recognizing an impairment. The addition is immediately recognized in the income statement. This was not the case in the year under revious year. A once impaired goodwill will not be reversed.

Inventories are measured at the lower value of acquisition costs and net realizable value. The costs of acquisition or production include all costs incurred during acquisition as well as other costs incurred in bringing the inventories to their present location. Borrowing costs are not taken into account here. In general, when determining the acquisition costs of raw materials, consumables and supplies, moving average prices are used. The cost of production of work in progress and finished goods is determined using detailed cost accounting. The net realizable value consists of the estimated sales proceeds that can be achieved through the ordinary course of business, less the estimated costs incurred up to completion and the estimated necessary selling expenses. If the reasons that have resulted in an impairment of inventories no longer exist, a corresponding addition is made.

A financial instrument is a contract that gives rise to both a financial asset held by one entity and a financial liability or an equity instrument held by another entity. If the trading date and the settlement date of financial assets are different, then the settlement date is decisive for initial recognition. The date of contract conclusion is only decisive in the case of financial derivatives.

As a rule, financial instruments are reported as soon as an entity of the SMA Group becomes a contracting party to the provisions of the financial instrument. In the event of purchases or sales usual in the market (purchases or sales in the contract, the conditions of which provide for the delivery of the asset within a certain period, which is usually defined by the regulations of the relevant market), the settlement date (i. e., the date on which the asset is delivered to or by an SMA Group company) is decisive for its initial recognition in the balance sheet and for its removal from the balance sheet. Financial assets and financial liabilities are measured at fair value upon their initial recognition. In case of financial assets and financial liabilities for which there is no measurement at fair value through profit or loss, the transaction costs that are directly attributable to the purchase of the financial asset or the financial liability are also included. Financial assets and financial liabilities are generally and only netted if there is a right of offsetting these amounts on the relevant date and if the intention is to perform the settlement on a net basis.

For subsequent measurements, financial assets as defined in IAS 39 are classified as financial assets at fair value through profit or loss, as loans and receivables, as held-to-maturity investments or as available-for-sale financial assets. Financial liabilities as defined in IAS 39 are classified as financial liabilities at fair value through profit or loss or as other financial liabilities. Financial assets are designated to measurement categories upon their initial recognition. If permitted and necessary, redesignations are made at the fiscal year.

For the SMA Group, the measurement categories loans and receivables, financial assets and liabilities measured at fair value and other financial liabilities are particularly relevant.

Any loans and receivables granted by the enterprise and other financial liabilities are measured at amortized cost of acquisition using the effective interest method. These are primarily trade receivables and payables, other financial receivables, and assets and long-term loans.

Held-for-trading assets are measured at their fair value. These primarily include derivative financial instruments that are not part of an effective hedging relationship as defined in IAS 39 and which must therefore be designated mandatorily as held for trading. Derivative financial instruments are reported as assets if their fair value is positive and as liabilities if their fair value is negative. Gains and losses in the fair value of derivative financial instruments are recognized directly through profit or loss no hedging relationship was created for them. Gains or losses resulting from subsequent measurement are recognized through profit or loss in the income statement.

On each balance sheet date, the book values of financial assets that are not measured af fair value through profit and loss are tested to determine whether objective substantial indicators for an impairment exist (such as considerable financial difficulties of the debtor, high probability of bankruptcy proceedings being initiated against the debtor, elimination of an active market for the financial asset, significant changes in the technological, economic, legal or market environment of the issuer or a permanent fall in the fair value of the financial assets below the amortized cost of acquisition). A possible impairment loss which is due to the fair value being lower than the book value is recognized through profit and loss. If impairments of the fair values of financial assets available for sale have previously been recognized directly in equity, these are eliminated from equity up to the amount of the identified impairment and transferred to the income statement. If subsequent measurements show that the fair value has increased objectively due to events occurring after the impairment loss was originally recognized, the impairment loss is reversed by applying the relevant amount through profit and loss. Impairments relating to unquoted available-for-sale equity instruments that are reported at acquisition costs may not be reversed.

A financial asset is removed from the books if the enterprise has relinquished control of the contractual rights related to the financial asset. A financial liability is removed from the books if the obligation underlying the liability is discharged, cancelled or has expired.

The Group is hedging the foreign currency risk from future sales in 2017 in a different currency to the Group's functional currency (USD). In the second half of 2016, the Group started to present this hedging relationship on the balance sheet under hedge accounting. Highly probable future sales in USD are hedged with currency futures and recognized in the balance sheet as a cash flow hedge. Exercising the option permitted under IAS 39, hedges against currency risks associated with fixed obligations are accounted for as cash flow hedges.

The effective portion of the change in fair value of derivatives that are suitable for use as cash flow hedges and have been designated as such is recognized under other comprehensive income, taking into account deferred taxes. Gains or losses relating to the ineffective portion are recognized directly through profit or loss and presented in the Consolidated Income Statement under items "Other Operating Income/Other Operating Expenses".

Amounts presented under other comprehensive income are reclassified to the consolidated income statement during the period in which the underlying transaction is also recognized through profit or loss. These amounts are presented in the consolidated income statement under the underlying transaction.

Presentation of the hedging relationship in the balance sheet ends either when the Group dissolves the hedging relationship or the hedging instrument, or when the hedging instrument expires, is sold, ended, exercised, or is otherwise no longer suitable for hedging purposes. The entire gain or loss recognized under other comprehensive income and accumulated under equity at this time remains under equity and is only recognized in profit or loss once the expected transaction is also presented in the consolidated income statement. If the expected transaction is no longer expected to materialize, the entire gain or loss recognized under equity is reclassified directly to the consolidated income statement.

Cash and cash equivalents reported in the balance sheet include cash on hand as well as bank balances, checks, payment instruments in transit and short-term deposits with a total term to maturity of less than three months. The cash and cash equivalents in the Consolidated Statements of Cash Flows are accrued in line with the aforementioned definition and include any bank overdrafts that have been granted.

Government grants are not recognized until there is reasonable assurance that SMA will meet all of the conditions for receiving the grants. Government grants have to be recognized in the income statement in line with planning during the periods in which the corresponding expenses to be offset by the grants are recognized. Government grants that are paid to compensate for expenses or losses already incurred or to provide immediate financial support without associated expense in the future are recognized in the income statement in the period in which the corresponding claim arises.

Provisions account for all recognizable present (legal and constructive) obligations of the Group to third parties as a result of past events, which are expected to an oufflow of resources with an economic benefit to settle the obligation and the amount of which can be determined reliably. The provisions are recognized in line with IAS 37 at the estimated amount required to settle them. Insofar as the Group expects to receive a repayment, at least in part, for a reported provision (such as for an insurance contract), the repayment is recorded as a separate asset if the inflow of the payment is highly probable. The expense for the formation of the provision is recognized in the income statement. Non-current provisions are carried in the balance sheet at their settlement amount discounted to the balance sheet date using corresponding termdependent market interest rates. If the amount is discounted, the increase of provisions caused by expiration is recorded under finance costs. Additions to the provisions for guarantees outlined under 25. Provisions are recognized in cost of sales. They are not deferred from sales.

The determination as to whether an agreement contains a lease is made based on the economic content of the agreement on the date of its conclusion and requires an assessment of whether fulfillment of the agreement depends on the use of a specific assets and whether the agreement grants a right to use the asset.

An operating lease exists if the substantial rewards and risks regarding the leased object are retained by the lessor. Lease payments on operating leases are recorded over the lease as an expense in the income statement.

Borrowing costs directly attributable to the acquisition or production of qualifying assets are added to the cost of those assets until the assets are substantially ready for their intended use or sale. Qualifying assets refer to those assets that require a longer period of time before they are available for their intended use or sale. All other borrowing costs are recognized as profit or loss in the period in which they are incurred. As in the previous year, no borrowing costs were capitalized in the current period under review.

Employee benefits are, as a rule, reported as a liability if an employee has provided work in exchange for benefits payable in the future and are recognized as an expense if the entity has received the economic benefit resulting from the work provided by an employee in exchange for future benefits.

Long-service and death benefits are granted on the basis of a company agreement of obligations to pay benefits is carried out by applying the projected unit credit method takes into account both the claims for payment of long-service rewards and the acquired pension rights known as of the balance sheet date, and payments of long-service rewards and death benefits expected in the future.

In 2009, SMA Solar Technology AG introduced value-based lifelong working-time accounts. Under certain conditions, employees may have time credits or special benefits reposted to these value accounts and may later take paid leave of absence using the credit balances extrapolated based on income. The employees' value claims are protected against insolvency and are reinsured.

Revenue is recognized if it is probable that the economic benefit will flow to the Group and the amount of the revenue can be measured reliably. Revenue is measured at the consideration received. Discounts, rebates and other deductions are not taken into account. Revenue from the sale of goods and products is recognized if the material rewards and risks associated with the goods and products sold have passed to the buyer. This is the case upon delivery of goods and products or handover from the carier. Revenue from services is recognized as soon as the services are rendered. In the case of multi-year service contracts, the recognition of revenue is spread over the contract term. Interest income is recognized when interest has accrued using the effective internal rate used to discount estimated future cash inflows over the expected term of the financial instrument to the net book value of the financial asset). Dividends are recognized when the right to receive payment is established.

Current tax receivables and tax liabilities for the ongoing and for previous periods are measured at the amount which is expected to be reimbursed by the tax authority or to be paid to the tax authority. Tax rates and tax laws applicable on the balance sheet date are used to calculate this amount. Current taxes that relate to items stated directly in equity are not recognized in the income statement but rather in equity.

Deferred taxes are calculated according to IAS 12 on the basis of the standard international balance-sheetrelated liability method. This requires deferred tax items to be recognized for all temporary differences between the tax base of an asset or liability and its carrying amount in the consolidated balance sheet as well as for tax loss carryforwards. However, deferred tax assets are only recognized if realization is sufficiently likely.

Deferred taxes are measured using the tax rates that, under current legislation, would apply in the future on the probable date of reversal of the temporary differences. The effects of amendments to tax legislation on deferred tax assets and liabilities are recognized in profit or loss in the material conditions for such amendments to come into force arise. Deferred tax assets and liabilities are not discounted according to the regulations of IAS 12. Deferred tax assets and liabilities are offset within individual companies on the basis of maturity.

3.3. SIGNIFICANT JUDGEMENTS, ESTIMATES AND ASSUMPTIONS

Preparation of the Consolidated Financial Statements requires the Company management to make judgements, estimates and assumptions that affect the amounts of revenues and expenses, assets and liabilities reported on the reporting date as well as the disclosure of contingent liabilities. Uncertainty related to these assumptions and estimates may lead to results that require material adjustments to the book values of the relevant assets or liabilities in the future.

When applying the accounting and valuation policies, the Company management made the following judgments, which had a significant effect on the amounts recognized in the Consolidated Financial Statements.

The key assumptions concerning the future and other key sources of estimation uncertainty on the reporting date associated with a significant risk of causing a material adjustment to the book values of assets and liabilities during the next fiscal year are explained below:

Development costs are capitalized in line with the accounting policies presented when all required conditions are given. Initial capitalization of costs is based on an estimate by the Company management that a project's technical and economic feasibility has been proven. This is normally the case when a development project has reached a specific milestone or a specific quality gate in the development process. When determining the amounts to be capitalized, the Company management makes further valuation assumptions regarding the amount of expected future cash flows from the assets, the discounting rates to be applied and the period of inflow of expected future cash flows generated by the assets. With this in mind, €12,5 million (2015: €29,5 million) were capitalized during the fiscal year. The research and development costs recognized as expenses are presented in section 7, "Research and Development Expenses".

In addition to individual circumstances, provisions for overall warranty risks are also taken into account when setting aside provisions for warranty obligations. In the case of warranty risks, an obligation of five or ten years is generally adopted as a base. The expected warranty expenditure is based on historical values. The expected warranty expenditure is calculated by referring to a weighted percentage determined by comparing actual warranty expenditure in the last five to ten years leading up to the previous year's sales and applying these percentages to the sales covered by warranty obligations. Only warranty expenditure relating to past years that has not been assigned to individual circumstances is taken into account. As a result of improved processes in the quality management in the current fiscal year individual facts can be identified and evaluated at an earlier stage than in the past. These issues are consequently no longer part of the overall warranty risks, but valued individually. This results because a lower percentage in fiscal year 2016 to a 9.5 million euro lower overall warranty provision. The warranty provisions are used up equally over the five-to ten-year warranty period. The value of the provision for individual cases and overall warranty risks amounted to €153.9 million as of December 31, 2016 (December 31, 2015: €139.8 million). More information is provided in section 25, Provisions. Accrued payments received for non-gratuitous warranties are collected over the warranty period as sales revenues on a straight-line basis because, in this case, a linear progression of warranty costs is also adopted as the best possible estimation method.

On each balance sheet date, the Group examines whether there are indicators for an impairment of nonfinancial assets. Estimating the value in use requires the Company management to make an estimate of the expected future cash flows from the asset or the cash-generating unit and to choose a suitable discount rate to calculate the present value of these cash flows. As in the previous year, impairment was recognized on development projects in fiscal year 2016. See also section 15, Intangible Assets.

Deferred tax assets are formed for all unused tax loss carryforwards to the extent that it is probable that there will be sufficient taxable profit to enable the loss carryforwards to actually be used. Determining the amount of deferred tax assets requires the Company management to use significant discretion regarding the expected time of accrual and the amount of taxable income in the future as well as regarding future tax planning strategies. Deferred tax assets for loss carryforwards amounted to €10.0 million (2015: €21.9 million).

র্যা Segment Reporting

The SMA Group operates under a functional organization, the Residential, Commercial, Utility and Service business units take on overall responsibility and manage development, operational service and sales as well as operations. Segment Other Business comprises Zeversolar, SMA Sunbelt Energy and the Off-Grid and Storage business unit. This compact organization allows for fast decisions and a lean management structure. The Railway Technology business division is up for sale and is thus reported as a discontinued operation in accordance with IFRS 5. It was previously assigned to the Segment Other Business segment. The Zeversolar business division does not need to be shown separately in 2016 on the basis of size criteria under IFRS 8.13. It has once again been classified under Segment Other Business.

Sales in the Residential, Commercial und Utility business units are subject to fluctuations because of discontinuous incentive programs.

Segment	Activities
Residential	Ihe Residential business unit serves the attractive long-term market of small PV systems for private applications with the smart module technology from Tigo Energy; single-phase string inverters with the brand name Sunny Boy; three-phase inverters in the lower output range up to 12 kW with the brand name Sunny Tripower; energy man- agement solutions; storage systems; and communication products and accessories. With this portfolio of products and services, SMA offers a suitable technical solution for private PV systems in all major photovoltaic markets.
Commercial	The Commercial business unit focuses on the growing market of medium-sized PV systems for commercial applications and on large-scale PV power plants using string inverters. Its portfolio includes solutions with the three-phase inverters trom the Sunny Tripower brand with outputs of more than 12 kW as well as complete energy management solutions for medium-sized PV systems, medium-voltage technology and other accessories.
Utility	The Utility business unit serves the growing market for large-scale PV power plants with central inverters from the Sunny Central brand. The outputs of Sunny Central inverters range from 500 kW to the megawatts. In addition, its portfolio includes complete solutions comprising central inverters with their grid service and monitoring functions as well as all medium- and high-voltage technology and accessories.
Service	In the reporting period, the Service business unit provided support to SMA customers worldwide, offering ex- tensive services to optimize system performance and ensure high yield stability. The SMA Service range includes commissioning, warranty extensions, service and maintenance contracts, operational management, remote system monitoring and spare parts supply. SMA has its own service companies in all important photovoltaic markets. With an installed capacity of around 55 GW worldwide, SMA leverages economies of scale to manage its service business profitably.
Other Business	In the Other Business segment, the focus is on the integration of batterystorage systems for all system sizes. In addition to increasing PV sell-consumption to reduce electricity costs in private households and companies, supplying electricity to remote areas reliably and cost-eftectively is the priority here. SMA collaborates on storage integration with all leading battery manufacturers and with companies industry so that it can always offer customers the latest technology with the greatest customer benefit and best price-performance ratio. The secondary brand Zeversolar, which is also a part of the Other Business segment, provides technologically simple products with an adjusted service range for the low-price segment in selected markets.

The operating result of the segments is monitored separately by the Managing Board to make decisions on the allocation of resources and to determine the profitability of the segments. Group financing, currency and interest rate hedging and the income tax burden are controlled at the Group level and are therefore not allocated to the individual operating segments.

Regarding information on geographical segments, sales are assigned to countries using the destination principle. The Company refrains from presenting non-current assets based on this classification. SMA Solar Technology AG develops and manufactures its products mainly in Germany. There are no material noncurrent assets tied to the production sites outside Germany in China, North America and Poland. Accordingly, an apportionment of assets by regions is likewise not a part of internal management reporting.

The Group measures the performance of its segments through a measurement profit or loss, which is referred to as EBIT in the internal management and reporting system. This measurement comprises gross profit, selling and general administrative expenses, research and non-capitalized development costs as well as other operating income (balance of other operating income and expenses).

Segment assets comprise the intangible assets attributed to each segment and its fixed assets, inventories and trade receivables. Segment liabilities include trade payables that are directly attributable to the relevant segments. Internal management reporting is in line with the accounting policies of external reporting.

The transfer prices between the business segments are determined using management prices based on usual arm's length market conditions. Income from external third parties is reported using the same valuation parameters as shown in the income statement.

No asymmetrical allocations are made to individual segments.

Sales are not broken down into goods deliveries and services because the amount of services is insignificant compared to goods deliveries. Services are provided in the Service segment, they represent less than 5% of the Group's revenue.

Financial Ratios by Segments and Regions

in € million	External sales		Internal sales		Total sales		Operating profit (EBIT)
	2016	2015	2016	2015	2016	2015	2016	2015
Segments
Residential	175.0	252.7	0.2	0.0	175.2	252.7	-15.4	1.8
Commercial	263.0	207.4	1.2	0.0	264.2	207.4	17.8	-25.6
Utility	396.7	416.0	0.0	0.7	396.7	416.7	66.8	56.5
Service	44.7	49.5	67.8	66.4	112.5	115.9	14.1	14.4
Other Business	67.3	56.2	0.7	0.1	68.0	56.3	-4.2	-7.8
Total segments	946.7	981.8	69.9	67.2	1,016.6	1,049.0	79.1	39.3
Reconciliation	0.0	0.0	-69.9	-67.2	-69.9	-67.2	-14.3	4.0
Continuing operations	946.7	981.8	0.0	0.0	946.7	981.8	64.8	43.3

in € million	Segment assets		Segment liabilities		Capital expenditure		Depreciation and amortization
	2016	2015	2016	2015	2016	2015	2016	2015
Segments
Residential	19.9	65.4	0.3	0.9	2.7	9.9	13.1	13.0
Commercial	48.6	39.1	2.5	0.8	8.0	5.7	2.1	9.8
Utility	159.7	154.1	3.2	7.5	1.4	14.7	10.2	4.6
Service	43.0	39.5	0.5	2.2	0.4	0.5	1.4	। .5
Other Business	34.7	52.1	11.9	11.0	3.3	4.0	2.8	4.0
Total segments	305.9	350.2	18.4	22.4	15.8	34.8	29.6	32.9
Reconciliation	879.8	810.3	603.0	567.9	13.2	15.8	47.1	46.1
Continuing operations	1,185.7	1,160.5	621.4	590.3	29.0	50.6	76.7	79.0

I The Railway Technology company is no longer part of the Other Business segment. The previous year's figures were adjusted.

Sales by regions

in € million	2016	2015
EMEA	286.3	359.6
Americas	442.5	421.3
APAC	231.0	218.8
Sales deductions	-13.1	-17.9
External sales	946.7	981.8
thereof Germany	116.4	124.8

Financial Statements is as follows:
in € million	2016	2015
Total segment earnings (EBIT)	79.1	39.3
Eliminations	-14.3	4.0
Consolidated EBIT	64.8	43.3

Reconciliation of segment figures for the continuing operations to the correlating figures stated in the

Financial result	-5.9	-5.0
Earnings before income taxes	58.9	38.3
Total segment assets	305.9	350.2
Other central items and eliminations	182.4	170.0
Centrally administered land and buildings	169.0	191.8
Cash and long-term time deposits	375.5	297.9
Financial instruments not designated and other assets	43.8	61.9
Deferred tax assets and income tax receivables	94.2	88.7
Investments in associates	14.9	0.0
Group assets	1,185.7	1,160.5
Total segment liabilities	18.4	22.4
Other central items and eliminations	90.5	80.7
Financial instruments not designated, liabilities and provisions	476.5	452.9
Income tax liabilities and deferred tax liabilities	36.0	34.3
Group liabilities	621.4	590.3

Circumstances are shown in the reconciliation which by definition are not particular, this includes unallocated parts of the Group head office, including the centrally administered cash and cash equivalents, financial instruments, financial liabilities and buildings, the expenses of which are apportioned to the segments. In the previous year, the reconciliation included the restructuring provision. Business relations between the segments are eliminated in the reconciliation.

In 2016, as in the previous year, no customer accounted for a share of more than 10% of Group sales.

NOTES TO THE INCOME STATEMENT SMA GROUP

5. Cost of Sales

in €′000	2016	2015
Material expenses	456,983	538,803
Personnel expenses	117,766	124,092
Depreciation and amortization	67,322	67,365
Other	61,954	37,640
	704,025	767,900

Cost of sales include, as direct costs, product-related material expenses as well as all other expenses for the areas of Production, Purchasing, Service, and Facility Management and IT.

The cost of sales fell by 8.3% year on year to €704.0 million (2015: €767.9 million) and thus at a considerably higher rate than sales. The cost of sales was positively affected by specific material cost reductions, introduction of new products with lower specific costs of sales and reduced fixed costs. The gross margin increased to 25.6% (2015: 21.8%).

Personnel expenses included in cost of sales fell by a considerable 5.1% year on year to €1 17.8 million (2015: €124.1 million), reflecting the full effect of the savings from personnel adjustments made.

Depreciation and amortization were on a par with the previous year at €67.3 million in 2016 (2015: €67.4 million). This included scheduled depreciation on capitalized development costs of €19.8 million (2015: €13.6 million).

The rise in other expenses within cost of sales to €61.9 million can be explained primarily by higher external IT project costs, higher transport costs owing to deliveries of new Sunny Central products in the U.S. and the addition of provisions for warranty obligations.

6. Selling Expenses

in € 000	2016	2015
Material expenses	131	976
Personnel expenses	27,317	33,674
Depreciation and amortization	368	470
Other	19,959	19,178
	47,775	54,298

Selling expenses include expenditure for global sales activities, internal sales and marketing. With its international sales organization, SMA is benefiting from the global development of photovoltaic markets.

Selling expenses fell by 12.0% year on year to €47.8 million (2015: €54.3 million), due to savings from personnel adjustments in 2016. In the reporting period, the cost of sales ratio was 5.0% (2015: 5.5%).

7. Research and Development Expenses

2016	2015
4,538	5,088
43,941	52,731
7,639	8,290
22,158	29,873
78,276	95,982
-12,475	-29,451
65,801	66,531

Research and development expenses include all costs that can be attributed to the areas of product development, development-related testing and product management.

In the past fiscal year, research and development expenses not including capitalized development projects amounted to €65.8 million (2015: €66.5 million). Total research and development expenses including capitalized development projects amounted to €78.3 million in 2016, down significantly on the previous year's level (2015: €96.0 million). In 2016, the research and development cost ratio (gross) amounted to 8.3% (2015: 9.8%).

Development projects were capitalized in the amount of €12.5 million in the reporting period (2015: €29.5 million).

8. General Administrative Expenses

in €′000	2016	2015
Material expenses	61	50
Personnel expenses	26,871	30,288
Depreciation and amortization	926	1,603
Other	22,782	26,376
	50,640	58,317

Administrative expenses include expenses for Finance, Human Resources, Legal and Compliance and Corporate Communication.

Administrative expenses in 2016 totaled €50.6 million (2015: €58.3 million). The substantial decrease in administrative expenses of 13.2% is mainly attributable to savings from personnel adjustments. In the reporting period, the ratio of administrative expenses was 5.3% (2015: 5.9%).

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9. Other Operating Income

in €′000	2016	2015
Revenues from foreign currency translation	22,837	24,847
Government grants	2,160	2,420
Other miscellaneous income	9,409	19,134
	34,406	46,401

Other operating income specifically includes income from foreign currency valuation as well as non-operative income, such as from assets measured at fair value through profit or loss. In the previous year, other miscellaneous income included income from the reversal of the restructuring provision amounting to €9.1 million.

10. Other Operating Expenses

in €′000	2016	2015
Expense from foreign currency translation	21,279	20,097
Other miscellaneous expenses	26,833	17,773
	48,112	37,870

Other operating expenses increased by 27.0% to €48.1 million.

Other operating expenses include effects from consolidation locations. Expenses for additions to impairment losses on receivables amounted to €5.7 million in the reporting period (2015: €2.2 million).

11. Employee and Temporary Employee Benefits

in € '000	2016	2015
Wages and salaries	175,484	192,434
Expenses for temporary employees	18,604	17,575
Social security contribution and welfare payments	25,862	29,569
	219,950	239,578

Voluntary contributions to private pensions amounted to €1.3 million in 2016 (2015: €1.6 million).

The average number of employees in the Group amounted to:

599	791
1,849	2,191
735	713
3,183	3,695
148	170
627	રેરિક
3,958	4,421

12. Financial Result

in €'000	2016	2015
Loss from at equity-accounted investments	2,722	O
Interest income	1,664	1,787
Other financial income	161	5
Income from interest derivatives	129	152
Financial income	1,954	1,944
Interest expenses	3,554	5,263
Other financial expenses	1,401	1,431
Expenses from interest derivatives	147	180
Interest portion from valuation of provisions	32	52
Financial expenses	5,134	6,926
Financial result	-5,902	-4,982

In 2016, the financial result decreased by €0.9 million to €-5.9 million (2015: €-5.0 million). This was significantly influenced by the negative earnings from the investment in Tigo Energy, Inc., which were included in the Consolidated Income Statement for the first time. On the other hand, at €3.6 million, interest expenses were considerably lower than the previous year's figure of €5.3 million. This was partly due to repayment of external loans for Jiangsu Zeversolar New Energy.

13. Income taxes

Actual income taxes (paid or payable) and deferred taxes are recognized as income taxes. They break down as follows:

in €′000	2016	2015
Actual income taxes
for current fiscal year	28,971	20,383
for previous years	4,394	3,777
Deferred taxes
from temporary differences	-15,222	- 12,660
from tax loss carryforwards	11,832	3,784
Income taxes	29,975	15,284

Income taxes comprise trade tax, corporation tax and the solidarity surcharge in Germany, and comparable income taxes abroad. The expected income tax expense that would result from applying the tax rate of the parent company SMA Solar Technology AG to the IFRS net income before taxes can be reconciled to income taxes shown in the Income Statement as follows:

in €′000	2016	2015
Net income before income taxes	58,864	38,319
Tax rate of the parent company	30.6%	30.6%
Expected income tax expenses	18,012	11,726
Differences related to differing tax rates domestic and abroad	267	-3,210
Effects due to changes in tax rates	266	- 5
Tax-free income	-397	82
Non-deductible expenses	1,041	288
Unusable loss carryforwards and amortization of loss carryforwards	4,997	2,327
Taxes relating to previous years	4,394	3,777
Other tax effects	1,395	309
Actual income taxes (according to Income Statement)	29,975	15,284
Effective Group tax rate	50.9%	39.9%

The corporation tax rate of 1 5% and the solidarity surcharge rate of 5.5% are to be applied for corporations based in Germany. In addition, domestic companies and partnerships are subject to trade tax, which is influenced by assessment rates specific to the particular municipality. The average trade tax rate to be applied at the level of the parent company was 14.8% (2015: 14.8%). The overall tax rate of the Group's parent company was thus 30.6% (2015: 30.6%).

The effects of deviations between the relevant tax rates at the level of the domestic and foreign Group companies and the overall tax rate at the level of the Group's parent company are shown in the reconciliation statement under tax-rate-related deviations in Germany and abroad.

No deferred taxes were formed for the undistributed profits of foreign subsidiaries, including accrued currency translation differences because this income and these translation differences are either not subject to corresponding taxation or are not be distributed in the foreseable future. No deferred taxable temporary differences arising from subsidiaries held for sale due to lack of materiality.

As of December 31, 2016, there were current income tax receivables amounting to €5.9 million (2015: €3.9 million) and current income tax liabilities of €15.0 million (2015: €9.9 million). Tax liabilities are the result of global business activity and a share of foreign sales of 87.9 percent. As a result, SMA is subject to various tax laws and regulations in other countries. Tax changes in the domestic and foreign group could affect the tax positions of SMA. In addition to changes of legal regulations also the assessment and interpretation of complex tax regulations, as for example the transfer prices, can influence our earnings, financial and asset position. We work closely with tax consulting companies in the individual countries, to identify risks, and perform regular audits and take appropriate precautions. For risks arising from previous years expenses incurred in the amount of €4.5 million at the date.

Deferred tax assets and deferred tax liabilities were recorded directly in item "Other comprehensive income" at €4.6 million (2015: €0.0 million). Deferred tax assets and liabilities were distributed across the following items:

		2016/12/31	2015/12/31
in €'000	Deferred tax assets	Deferred tax liabilities	Deferred tax assels	Deferred tax liabilities
Intangible assets	238	- 18,502	282	-22,598
Fixed assets	13,004	-402	7,082	-648
Financial assets	1,890	-932	8,016	-24
nventories	8,582	-15	7,003	-517
Other assets	409	-35	574	- 149
Other provisions	2,584	- 25	6,580	- 1
Other liabilities	51,592	-981	33,436	-465
Loss carryforwards	10,024	0	21,857	O
	88,323	-21,022	84,830	-24,402

Deferred tax assets are regarded as realizable if a sufficient amount of taxable income is expected in the future. Deferred tax assets on loss carryforwards were mainly generated at SMA Solar Technology AG. A planning period of three years was taken as a basis.

As of December 31, 2016, domestic SMA companies had corporation tax loss carryforwards of €191.3 million (2015: €231.3 million) and trade tax loss carryforwards of €220.6 million (2015: €261.0 million). Corporate tax loss carryforwards amounting to €158.5 million (2015: €169.9 million) and trade tax loss carryforwards amounting to €187.8 million (2015: €199.6 million) were not used for the formation of deferred tax assets from loss carryforwards.

14. Earnings per Share

Earnings per share are calculated by dividing the net income attributable to the weighted average of ordinary shares in circulation during the period. The number of shares in the 2016 fiscal year amounted to 34.7 million, as in the previous year.

The net income attributable to the shareholders is the net income after tax. As there were no shares held by the Company on the reporting date or any other special cases, the number of ordinary shares issued equated to the number of shares in circulation.

The calculation of earnings in relation to the weighted average number of shares in accordance with IAS 33 resulted in earnings of €0.85 per share for the period from January 1, 2016 to December 31, 2016, with an average weighted number of shares of 34.7 million and earnings of €0.41 per share for the period from January 1, 2015 to December 31, 2015, with an average weighted number of 34.7 million.

There were no options or conversion options as of the reporting date. Therefore, there were no diluting effects and the diluted and basic earnings per share were the same.

Pursuant to the German Stock Corporation Act, the distributable dividend is based on the net profit, which is recorded in the Annual Financial Statements of SMA Solar Technology AG prepared according to the provisions of the German Commercial Code and the Stock Corporation Act.

The Managing Board will recommend that the Supervisory Board propose a dividend of €0.20 per qualifying bearer share at the Annual General Meeting on May 23, 2017. The amount paid out in dividends will thus amount to €6.9 million (2015: €4.9 million).

NOTES TO THE BALANCE SHEET SMA GROUP

15. Intangible Assets

Intangible assets evolved in the fiscal years under review as follows:

in €'000	Goodwill	Develop- ment projects	Patents/ licenses/ other rights	Software	Intangible assets in progress	Total
Acquisition costs
2016/01/01	13,660	135,492	21,308	47,254	29,837	247,551
Changes in currency	0	-289	-604	-21	l	-913
Additions	0	4,286	814	ર્સ્ટ	8,969	14,124
Disposals (-)	0	0	0	192	0	192
Transfers	0	18,280	225	୧୦୫	-19,072	41
Classified as held for sale	0	4,487	42	317	800	5,652
2016/12/31	13,660	153,282	21,701	47,387	18,929	254,959
Depreciation and amortization
2016/01/01	12,862	86,188	15,867	37,739	3,596	156,252
Changes in currency	0	-265	-547	- 10	0	-822
Additions	0	22,562	620	4,451	0	27,633
Disposals (-)	0	O	0	21	0	21
Classified as held for sale	O	-970	-35	-308	0	-1,313
2016/12/31	12,862	107,515	15,905	41,851	3,596	181,729
Net value 2015/12/31	798	49,304	5,441	9,515	26,241	91,299
Net value 2016/12/31	798	45,767	5,797	5,536	15,333	73,231
Acquisition costs
2015/01/01	13,660	86,853	20,196	45,208	47,605	213,522
Changes in currency	0	33	980	22	1	1,036
Additions	0	12,550	108	179	20,152	32,989
Disposals (-)	0	O	0	3	0	3
Transfers	0	36,056	24	1,848	-37,921	7
2015/12/31	13,660	135,492	21,308	47,254	29,837	247,551
Depreciation and amortization
2015/01/01	12,862	61,961	14,153	32,479	2,253	123,708
Changes in currency	0	-8	864	10	0	866
Additions	0	24,235	850	5,253	1,343	31,681
Disposals (-)	0	O	0	3	0	3
2015/12/31	12,862	86,188	15,867	37,739	3,596	156,252
Net value 2014/12/31	798	24,892	6,043	12,729	45,352	89,814
Net value 2015/12/31	798	49,304	5,441	9,515	26,241	91,299

€8.2 million (2015: €18.9 million) of the additions of intangible assets in progress included development projects.

In relation to development projects, amortization of intangible assets is posted in the Income Statement under cost of sales. Amortization of development projects and intangible assets in progress included an impairment loss of €2.7 million (2015: €6.0 million) due to changes in sales forecasts and partial discontinuation of a

development project. The impairment exclusively relates to products of the Residential business unit. The amortization was made to the value in use. An after-tax interest rate of 9.8% (2015: 10.2%) was applied. Amortization of software is allocated to the functional areas dependent on use.

The goodwill is assigned to cash-generating units on the basis of the organizational structure. The goodwill from the asset deal with Danfoss is assigned to the Commercial segment (€0.3 million), from the asset deal with Phoenix to the Service segment (€0.2 million) and that of dtw Sp.zo.o. (€0.3 million) to the Residential segment.

The existing goodwill was confirmed in the impairment reviews at the fiscal year. The progression of cash flow was extrapolated for the period after the third year on the basis of a constant annual growth rate of 1.0% (2015: 1.0%). This was derived from the average long-term growth rate on the photovoltaic market. The after-tax interest rates applied ranged between 9.6% and 11.9% (pre-tax interest rates: 13.4% to 14.7%), The Managing Board believes that no reasonably conceivable change in basic assumptions on the basis of which the recoverable amount is determined would result in the cumulative book value of the cash-generating unit exceeding its cumulative recoverable amount.

16. Fixed Assets

Fixed assets evolved as follows in the 2016 fiscal year:

in €'000	Land and buildings incl. buildings on third-party property	Technical equipment/ machinery	Other equip- ment, plant and office equipment	Prepayments and assets under construction	Total
Acquisition costs
2016/01/01	283,138	78,178	196,348	1,284	558,948
Changes in currency	449	-97	374	7	733
Additions	940	- 106	1,885	12,184	14,903
Disposals (-)	3,350	3,501	6,179	1,712	14,742
Transfers	166	ર 25	5,930	-6,662	-41
Reclassified to "investment property"	- 19,221	0	0	0	- 19,221
Classified as held for sale	3,016	462	2,907	16	6,401
2016/12/31	259,106	74,537	195,451	5,085	534,179
Depreciation and amortization
2016/01/01	75,804	37,570	150,990	0	264,364
Changes in currency	337	-71	375	0	641
Additions	23,576	5,615	19,900	0	49,091
Disposals (-)	216	2,472	5,116	0	7,804
Transfers	O	0	0	0	0
Reclassified to "investment property"	-3,807	0	0	0	-3,807
Classified as held for sale	-541	-22	-2,070	0	-2,633
2016/12/31	95,153	40,620	164,079	0	299,852
Net value 2015/12/31	207,334	40,608	45,358	1,284	294,584
Net value 2016/12/31	163,953	33,917	31,372	5,085	234,327

The additions to land and buildings mainly related to the extension of buildings.

As of December 31, 2016, prepayments and assets under construction are included in particular prepayments for tools and machinery. The amount of depreciation include an impairment loss of € 9,1 million as a result of the closure of the production facility in the United States and an impairment loss in the amount of € 0.2 million of subsidiaries in South Africa, as well as Zeversolar.

The book losses from asset disposals related mainly to Corporate Functions, as in the previous year.

Fixed assets of €20.5 million (2015: €22.6 million) were negatively affected by mortgage liens used to secure financial liabilities.

Fixed assets evolved as follows in the 2015 fiscal year:

	Land and buildings incl. buildings on third-party	Technical equipment/	Other equip- ment, plant and office	Prepayments and assets under
in €'000	property	machinery	equipment	construction	Tota
Acquisition costs
2015/01/01	278,386	76,265	193,825	4,877	553,353
Changes in currency	2,186	714	1,547	124	4,571
Additions	3,639	108	1,574	12,271	17,592
Disposals (-)	2,134	2,199	12,228	0	16,561
Transfers	1,061	3,290	11,630	-15,988	-7
2015/12/31	283,138	78,178	196,348	1,284	558,948
Depreciation and amortization
2015/01/01	60,323	32,866	136,832	0	230,021
Changes in currency	905	275	1,162	0	2,342
Additions	16,598	6,313	24,403	0	47,314
Disposals (-)	2,022	1,884	11,407	0	15,313
2015/12/31	75,804	37,570	150,990	0	264,364
Net value 2014/12/31	218,063	43,399	56,993	4,877	323,332
Net value 2015/12/31	207,334	40,608	45,358	1,284	294,584

17. Investments in Associates

SMA AG has a 28.27% stake in Tigo Energy, Inc. The associate is included in the Consolidated Financial Statements according to the equity method.

Its financial information is as follows:

in €′000	2016	2015
Current assets	15,442	O
Non-current assets	857	O
Current liabilities	-2,159	O
Non-current liabilities	-4,406	O
Sales	5,232	O
Annual earnings	-9,027	O
Other comprehensive income	-581	O
Overall result	-9,608	O
Dividends received from Tigo	0	O

The book value of the associate was €14.9 million on the reporting date. The reconciliation of the financial information shown with the book value is as follows:

in €′000	2016/12/31	2015/12/31
Net assets Tigo	9,734	O
Holdings (%)	28.27	O
Group share in the net assets	2,752
Goodwill	13,351	O
Other adjustments	-1,228	O
Book value of the Group investment	14,875	0

18. Investment Property

in €′000	2016/12/31	2015/12/31
Level at the beginning of the year	0	O
Transfers from fixed assets (net book value)	15,414	O
Level at the end of the reporting period	15,414	O
Income and expenses included in the profit and loss account	2016	2015
Rental income	82	O
Attributable expenses	117	O

In the 2016 fiscal year, SMA began to rent two buildings that it had previously been using itself. The investment properties are accounted for using the cost model, whereby the properties are measured according to IAS 16, i. e. at historical cost less depreciation and impairment. The buildings are depreciated on a straight-line basis over their economic useful life. The underlying useful life of the two buildings is 33 years. Attributable expenses have to be assigned in full to the investment properties responsible for generating the rental income.

The tenancy agreements for the buildings do not contain any conditional rental payments, but they each offer an option to extend, which can be exercised by the tenant. The non-cancelable rental periods are five years and six years. The distribution of rental income is shown in the table below.

in € million	< 1 year	> 1 to 5 years	> 5 years	Total
Rental income	1.7	6.9	0.7	9.3

19. Inventories

Inventories of the SMA Group are made up as follows:

in €′000	2016/12/31	2015/12/31
Raw materials, consumables and supplies	58,385	74,858
Unfinished goods, work in progress	13,112	21,401
Finished goods and goods for resale	97,666	49,329
Prepayments	રેણ	543
	169,219	146,131

Inventories are measured at the lower value of acquisition or production costs and net realizable value. Inventory increased chiefly because of positive business performance and extensive action taken to increase throughput speeds and eliminate interim storage. The balance of impairment accounts amounted to €38.0 million (2015: €57.9 million), of which €31.0 million concerned central corporate functions, €2.8 million Service and €4.2 million Segment Other Business. The total acquisition and production costs recognized as expenses include impairments on net realizable value of €8.8 million. The book value of the inventories written down to the net realizable value amounted to €2.0 million as of December 31, 2016 (December 31, 2015: €0.8 million). Capital gains were € 2.3 million due to the sale of depreciated inventory.

20. Trade Receivables and Other Receivables

Trade receivables are non-interest-bearing and, with the exception of the Chinese market, usually due between 30 and 90 days. No significant extensions to payment terms were granted in the reporting period. It is possible that different payment terms are granted for projects.

The other receivables mainly comprise prepaid expenses and other receivables due from tax authorities, which were not overdue on the reporting date.

		Overdue, but not impaired
in €'000	Book value	Neither overdue nor impaired	< 30 days	30 to 60 days	60 to 90 days	> 90 days
2016	165,098	144,853	7,421	3,603	2,618	6,603
2015	180,043	127,429	23,476	13,753	6,449	8,936

The age structure of trade receivables was as follows on the reporting dates:

As of December 31, 2016, value adjustments with a nominal value of €23.5 million (2015: €21.7 million) were carried out on trade receivables. No value adjustments were made regarding overdue receivables as of December 31, 2016, this amounted to €20.2 million (December 31, 2015: €52.6 million) as there were no significant changes in the credit rating of the customers. Settlement of the receivables is expected.

The value adjustment account of trade receivables evolved as follows:

in €′000	Individual value correction	Value correction on portfolio basis	Total
As of 2015/01/01	21,161	524	21,685
Additions with effect on the expenses (net)	2,181	29	2,210
Usage	-452	O	-452
Release	- 1,817	-287	2,104
Exchange rate difference	349	3	352
As of 2015/12/31	21,422	269	21,691
Additions with effect on the expenses (net)	5,654	71	5,725
Usage	-507	0	-507
Release	-862	-147	- 1,009
Exchange rate difference	-189	- 1	-190
Classified as "held for sale"	-2,216	-41	-2,257
As of 2016/12/31	23,302	151	23,453

Furthermore, no adjustments had to be made for the other receivables and financial assets. The receivables are adjusted individually based on individual assessments. The maximum default risk equates to the carrying amount shown in the balance sheet.

21. Other Financial Assets

As of December 31, 2016, other current financial assets included in particular financial assets and time deposits with a term to maturity of over three months and accrued interest totaling €1.59.4 million (2015: €97.7 million). Other non-current financial assets were reclassified as current other financial assets due to their subordinate importance for the net assets, financial position and results of operation. They primarily included a rent deposit for buildings in the U.S. amounting to USD 2.5 million (December 31, 2015: USD 2.5 million). The previous year's figures were adjusted accordingly.

22. Cash and Cash Equivalents

Cash and cash equivalents include cash in hand as well as bank balances, checks, payments in transit and deposits with an original term to maturity of less than three months. Bank balances bear interest at variable interest rates applicable to deposits subject to call.

As of December 31, 2016, the Group had unused credit lines amounting to €52.5 million (2015: €41.7 million) for which all conditions for use had been met. The credit lines have been provided on an "until further notice" basis.

23. Assets Classified as Held for Sale

SMA intends to dispose of a plot of land it no longer uses. A purchase agreement has already been concluded for nine parts. Negotiations for the other parts are currently ongoing. It is assumed that the fair value of the respective areas of land less costs to sell will be higher than the book value, so no impairment is recognized.

In the reporting year, machinery was also classified as held for the first time. This machinery is intended to be sold as part of a site closure. It is assumed that the fair value of the respective machinery less costs to sell will be higher than the book value.

In addition to these sales, SMA intends to dispose of the "Railway Technology" business division includes SMA Railway Technology GmbH and its subsidiary SMA Railway Technology (Guangzhou) Co., Ltd. The business division develops, produces and distributes power electronics components for railway technology. Railway technology has experienced a strong trend toward consolidation in recent years. To be a successful supplier in the railway in the long term, SMA Railway Technology needs to further internationalize its business and expand its product range. To secure the future of SMA Railway Technology, SMA therefore decided to look for a strategic partner for this business to allow it to achieve the critical size required for its long-term success.

in € 000	2016/12/31	2015/12/31
Land classified as held for sale	1,828	O
Machinery classified as held for sale	1,174	0
Assets attributable to the Railway Technology business division	22,075	O
	25,077
Liabilities attributable to the Railway Technology business division	4,161	0

As stated, SMA intends to sell the business division. Sales negotiations were successfully completed with the signing of a sales contract in February 2017. On the reporting date it is also assumed that the fair value less costs to sell of the division will be higher than the total book value of its associated assets and liabilities. As such, no impairment was recognized at the time of reclassification nor thereafter. Pursuant to IFRS 5, the division is reported as a discontinued operation as of December 31, 2016. As a result, the expenses and income associated with this operation are reported under "Profit from discontinued operation." The assets and liabilities attributable to the SMA Railway division are reclassified under the items "Assets classified as held for sale" and "Liabilities directly associated with assets classified as held for sale." The previous year's disclosure in the income statement has been adjusted accordingly. However, there was no adjustment to the previous year's balance sheet as prescribed by the provisions of IFRS 5.

In 2016, the expenses of the SMA Railway business division amounted to €23.2 million (2015: €26.8 million). In 2016, external sales totaled €23.9 million (2015: €17.8 million). The pre-tax profit/loss (-) for 2016 was €0.7 million (2015: €-9.0 million). Income taxes amounted to €0.1 million (2015: €0.2 million).

The main groups of assets and liabilities attributable to the business divisions classified as held for sale at the balance sheet date include:

in € 000	2016/12/31
Intangible assets	3,840
Fixed assets	2,257
Deferred tax assets	2,066
Inventories	6,268
Trade receivables and other receivables	5,466
Cash on hand and bank balances	2,178
Assets attributable to the Railway Technology business division, which is classified as held for sale	22,075
Provisions	- 1,426
Trade payables	-665
Deferred tax liabilities	-1,239
Other liabilities	-831
Liabilities attributable to the Railway Technology business division, which are directly associated with assets classified as held for sale	-4,161
	17,914

24. Equity

The change in equity, including effects not shown in the income statement, is presented in the statement of changes in equity. Significant impact was caused by the net income and effects from foreign exchange gains/losses.

The capital reserve contains agio amounts from the issuance of SMA Solar Technology AG shares.

The other retained earnings contain mainly the retained profit and the statutory reserve. In addition, retained earnings include other equity components such as the difference between foreign currency translation and the market values from cash flow hedging not recognized in profit or loss.

Shares in SMA AG are no-par value bearer shares.

The Articles of Incorporation include the provisions on the Managing Board regarding Authorized Capital II. The Managing Board, after obtaining the consent of the Supervisory Board, is entitled to increase the share capital on one or several occasions by up to a total of € 10 million by issuing new bearer shares in return for cash contributions and/or contributions in kind in the period up to May 22, 2018. The Managing Board, with the consent of the Supervisory Board, is entitled to cancel the statutory subscription rights of shareholders: a) in the case of capital increases in return for contributions in kind for the acquisition of or investment in companies or investments in companies, b) for the purpose of issuing shares to employees of the Company and companies affiliated with the Company, c) to exclude fractions and d) in the case of capital increases in return for cash contributions if the issue amount of the new shares does not fall significantly below the stock exchange price of shares of the same class and terms that are already listed at the time the Managing Board sets the final issue amount, and the total pro rata amount of the issued capital attributable to the new shares in respect of which the subscription right is excluded may not exceed 1 0% of the issued capital available at the time the new shares are issued.

Furthermore, following a resolution adopted by the Annual General Meeting on May 31, 2016, the Managing Board, in the period up to May 30, 2021, is entitled, on behalf of the Company, to acquire its own shares up to a value of 10% of the existing capital stock at the time the resolution was adopted by the Annual General Meeting, and to dispose of shares acquired in this way with the consent of the Supervisory Board by means other than through the stock exchange, or an offer made to all the shareholders, provided the shares are sold in return for cash at a price that does not fall significantly below the stock exchange price of shares in the Company issued under the same terms or the shares are sold in return for in-kind contributions, or they are offered in return for shares held by persons that either had or have an employment relationship with the Company, or with one of its affiliated companies, or members of bodies in companies that depend on the Company. Additionally, if the Managing Board sells the Company's own shares by offering them to all the shareholders with the consent of the Supervisory Board is entitled to exclude the shareholders' right of subscription for fractions. In addition, the Managing Board is entitled to cancel any acquired own shares after obtaining the consent of the Supervisory Board.

The Annual General Meeting of SMA Solar Technology AG held on May 31, 2016, followed the Managing and Supervisory Boards' proposal to distribute a dividend of €0.14 per dividend-bearing share for the 2015 fiscal year (2014: €0.00 per dividend-bearing share).

The objective of capital management is to maintain SMA's financial substance and ensure necessary flexibility.

The equity ratio is used to measure the financial security of SMA. This is the ratio of equity shown in the consolidated balance sheet to total assets. Accordingly, the financing structure is characterized by a conservative capital structure dominated by internal financing. As of the reporting date, the equity ratio was 48.3% (2015: 49.1%). External financing occurs almost exclusively through liabilities arising from operative business.

25. Provisions

Provisions account for all discernible risks from pending transactions and all contingent liabilities on the balance sheet date and break down as follows:

in €'000	Warranties	Personnel	Other	Total
As of 2016/01/01	139,790	7,904	22,342	170,036
Additions	53,919	2,234	11,654	67,807
Usage	38,428	2,973	9,532	50,933
Release	2,017	1,001	7,297	10,315
Compounding	0	30	2	32
Changes in currency	1,897	0	-56	- 1,841
Classified as "available for sale"	1,172	137	116	1,425
As of 2016/12/31	153,989	6,057	16,997	177,043
Current in 2016	67,590	3,477	16,050	87,117
Non-current in 2016	86,399	2,580	947	89,926
	153,989	6,057	16,997	177,043
Current in 2015	62,176	5,653	15,268	83,097
Non-current in 2015	77,614	2,251	7,074	86,939
	139,790	7,904	22,342	170,036

in €′000	2016/12/31	2015/12/31
Residential	50,695	45,955
Commercial	58,595	51,579
Utility	39,694	34,803
Service	190	O
Other Business	4,815	7,453
	153,989	139,790

The provisions for statutory warranties are attributable to the segments as follows:

Warranty provisions consist of general warranty obligations (periods of between five and ten years) for the various product areas within the Group. In addition, provisions are set aside for individual cases that are expected to be used in the following year.

Personnel provisions mainly include obligations for long-service anniversaries, death benefits and partial relitement benefits. Personnel provisions affect cash in relation to contractual commitments made.

Other provisions include restoration obligations for tax risks, purchase commitments and provisions for consolidation of production locations in an amount of €5.4 million.

From the 2016 fiscal year, long-term service contracts that were previously recognized in other provisions will be presented under other liabilities as a deferred sales item. Existing balances and additions throughout the year were reclassified to other liabilities outside profit or loss.

26. Financial Liabilities

in €'000	2016/12/31	2015/12/31
Liabilities due to credit institutions	22,779	39,306
Derivative financial liabilities	17,570	7,617
of which liabilities from derivatives inside hedge accounting	14,910	O
of which liabilities from derivatives outside of hedge accounting	2,660	7,617
	40,349	46,923

In the 2016 fiscal year, liabilities to credit institutions mainly include liabilities for the financing of SMA Immo properties and an SMA AG PV system. They have an average time to maturity of 10 years.

The significant reduction in the level of loan liabilities resulted from the repayment of external loans by Zeversolar. In addition, repayments were made by SMA AG and SMA Immo.

Derivative financial liabilities predominantly include negative market values for currency futures presented in hedge accounting. Liabilities aside from the recognized hedging relationships consist of interest derivatives, currency futures and options.

All liabilities from derivatives have a residual maturity of less than 12 months.

27. Trade Payables

Trade payables are non-interest-bearing and are normally due within 30 to 90 days.

28. Other Financial Liabilities

in € 000	2016/12/31	2015/12/31
Sales department liabilities	3,792	6,619
Other	10,986	12,985
	14,778	19,604
Current	13,763	18,192
Non-current	1,015	1,412
	14,778	19,604

The liabilities of the Sales department primarily contain liabilities to customers from advance payments received.

Liabilities from bonus agreements with customers have been reported in remaining other liabilities since the 2016 fiscal year; the previous year's figures were adjusted accordingly. In the previous year, these were still assigned to sales department liabilities.

29. Other Liabilities

in €'000	2016/12/31	2015/12/31
Accrual item for extended warranties	167,643	146,130
Liabilities from prepayments received	46,406	31,613
Liabilities in the Human Resources department	19,531	25,191
Liabilities due to tax authorities	3,861	6,735
Liabilities from subsidies received	3,433	3,653
Liabilities from bonus agreements	826	427
Other	2,710	2,464
	244,410	216,213
Current	84,157	75,037
Non-current	160,253	141,176
	244,410	216,213

The accrual item for extended warranties includes liabilities from chargeable extended warranties granted for products from the Residential and Commercial business units. Liabilities in the Human Resources department contain obligations to employees regarding performance-based bonuses and positive vacation and flextime balances as well as variable salary components and contributions to the workers' compensation association and to social insurance systems. The main items included in the liabilities are tax liabilities from payroll accounting. The liabilities from subsidies received relate to taxable government grants from funds of the common-task program "Improvement of the Regional Economic Structure" (EU GA), granted as investment subsidies. The total amount of retransfer of government grants is stated under other operating income.

Liabilities from bonus agreements with customers have been reported in remaining other liabilities since the 2016 fiscal year; the previous year's figures were adjusted accordingly. In the previous year, these were still assigned to sales department liabilities.

30. Additional Disclosures Relating to Financial Instruments

	Assessment		2016/12/31	2015/12/31
in €'000	category according to IAS 39	Market value	Book value	Market value	Book value
Assets
Cash and cash equivalents	LaR	216,124	216,124	200, 180	200, 180
Trade receivables	LaR	165,098	165,098	180,043	180,043
Other financial investments	AfS	5	5	5	5
Other financial assets		177,935	177,935	127,157	127,157
of which institutional mutual funds	FAHIT	96,406	96,406	47,636	47,636
of which other (time deposits)	LaR	78,489	78,489	79,521	79,521
of which derivatives that do not qualify for hedge accounting	FAHft	3,040	3,040	0	0
Liabilities
Trade payables	FLAC	108,902	108,902	103,134	103,134
Financial liabilities		40,349	40,349	46,923	46,923
of which liabilities due to credit institutions	FLAC	22,779	22,779	39,306	39,306
of which derivatives that do not qualify for hedge accounting	FLHFT	2,660	2,660	7,617	7,617
of which derivatives that qualify for hedge accounting (cash flow hedge)	n/a	14,910	14,910	O	0
Other financial liabilities	FLAC	14,778	14,778	23,258	23,258
Of which grouped by categories according to IAS 39:
Loans and receivables	LaR	459,711	459,711	459,744	459,744
Financial liabilities measured at amortized cost	FLAC	146,459	146,459	165,698	165,698
Financial assets held for trading	FAHfT	99,446	99,446	47,636	47,636
Financial liabilities held for trading	FLHFT	2,660	2,660	7,617	7,617
Cash flow hedges	n/a	14,910	14,910	0	0
Available for sale financial assets	AfS	5	5	5	5

Cash and cash equivalents, trade receivables and time deposits mainly have short terms to maturity. Accordingly, their book values on the reporting date were almost identical to their fair value.

The fair values of other non-current receivables correspond to the payments related to the assets while taking into account current interest parameters, which reflect market- and partner-related changes in conditions and expectations.

Other financial investments relate to investments not included in the scope of consolidation. However, because no active market exists for these investment of their fair value was not possible, measurement on the relevant reporting dates was effected at amortized cost of acquisition.

Trade payables and other current financial liabilities normally have short terms to maturity. The recognized values are almost identical to the fair values.

Fair values of other non-current financial liabilities are determined by referring to the present values of the payments associated with the debts. For discounting, term-related commercially available interest rates were used (level 2).

Derivative financial instruments are used to hedge against currency risks arising from operative business. These include currency futures and options inside of hedge accounting. In principle, these instruments are only used for hedging purposes. As is the case with all financial instruments, they are recognized at fair value upon initial recognition. The fair values are also relevant measurements. The fair value of traded derivative financial instruments is identical to the market value may be positive or negative. The measurement of forward transactions is based on forward contract rates. Options are measured in line with the Black-Scholes and Heath-Jarrow-Morton option pricing models. The parameters that were used in the valuation models are in line with market data.

Derivative financial liabilities that qualify for hedge accounting include cash flow hedging for certain planned material transactions in a foreign currency.

In the current fiscal year, no market values recognized in equity were reclassified to the income statement. Hedged planned transactions in a foreign currency are recognized fully in profit or loss in the subsequent fiscal year.

The put option in the amount of the present value of the redemption amount of the shares granted in connection with the acquisition of Zeversolar shares was posted under derivative financial liabilities without a hedge relationship. As of the reporting date, the put option no longer existed (December 31, 2015: €3.9 million). This is due to the increase in the share in Zeversolar

The following table shows the allocation of our financial assets and liabilities measured at fair values in the balance sheet using the three levels of the fair value hierarchy:

in €'000
2016	Level 1	Level 2	Level 3	Total
Financial assets, measured at fair value
Institutional mutual funds	96,406			96,406
Derivative financial instruments		3,040		3,040
Financial liabilities, measured at fair value
Derivative financial instruments		17,570		17,570
outside of hedge accounting		2,660	0	2,660
inside hedge accounting		14,910	O	14,910
2015	Level 1	Level 2	Level 3	Total
Financial assets, measured at fair value
Institutional mutual funds	47,636			47,636
Derivative financial instruments		0		O
Financial liabilities, measured at fair value
Derivative financial instruments outside of hedge accounting		3,731	3,886	7,617

The levels of the fair value hierarchy and their application to our assets and liabilities are described below:

Level 1: Quoted prices for identical assets or liabilities in active markets.

Level 2: Inputs other than quoted prices that are observable directly (e. g., prices) or indirectly (e.g., derived from prices).

Level 3: Inputs that are not based on observable market data for assets and liabilities.

The 2016 net results for financial instruments are as follows:

	From interest		From subsequent measurement	From disposal	Net result
in € 000		Currency translation	Value correction
Loans and Receivables (LaR)	556	6,110	-4,716	-174	1,776
Financial Liabilities Measured at Amortized Cost (FLAC)	- 1,619	O	O	O	- 1,619
Financial Assets Held for Trading (FAHFT)	1,108	0	-2,791	-3,173	-4,856
Financial Liabilities Held for Trading (FLHFT)	-164	O	129	O	-35
Tota	-119	6,110	-7,378	-3,347	-4,734

The 2015 net results for financial instruments are as follows:

	From interest		From subsequent measurement	From disposal	Net result
in €'000		Currency translation	Value correction
Loans and Receivables (LaR)	400	12,050	-4,314	-3,046	5,090
Financial Liabilities Measured at Amortized Cost (FLAC)	-3,394	O	O	O	-3,394
Financial Assets Held for Trading (FAHFT)	1,387	O	- 1,094	-6,558	-6,265
Financial Liabilities Held for Trading (FLHfT)	-180	O	- 1,529	O	- 1,709
Tota	-1,787	12,050	-6,937	-9,604	-6,278

Interests from financial instruments are shown in the financial result. The SMA Group recognizes other components of the net result in other operating expenses and other operating income.

In detail, the nominal payment obligations of financial liabilities are as follows:

in €'000	Book value	Total Cash flows	< 1 year	1 to 3 years	4 to 5 years	> 5 years
2016
Trade payables	108,902	108,902	108,902	0	0	0
Financial liabilities	40,349	43,927	20,661	6,975	7,360	8,931
of which from liabilities due to credit institutions	22,779	26,352	3,324	6,791	7,306	8,931
of which from derivatives outside of hedge accounting	2,660	2,665	2,427	184	ਦੇ ਕ	0
of which from derivatives inside hedge accounting	14,910	14,910	14,910	0	0	0
Other financial liabilities	14,778	14,778	13,763	1,015	0	0
2015
Trade payables	103,134	103,134	103,134	0	0	0
Financial liabilities	46,923	51,573	21,003	10,606	7,621	12,343
of which from liabilities due to credit institutions	39,306	43,931	17,610	6,483	7,505	12,333
of which from derivatives outside of hedge accounting	7,617	7,642	3,393	4,123	116	10
Other financial liabilities	23,258	23,258	21,846	1,412	0	0

Contains the net cash flow from forward exchange transactions amounting to €14,162k, providing a gross fulfillment.

Payment obligations amount to €316,934k, payment claims amount to €302,772k.

The closing rate was used for the conversion of the foreign currency transaction.

31. Obligations Under Leases and Other Financial Obligations

The obligations of the SMA Group under operating leases relate mainly to buildings and, to a minor extent, to plant and office equipment. Expenses recognized through profit and loss amounted to €18.7 million (2015: €24.3 million) in the year under review.

Other financial obligations arose primarily from tenancy agreements and operating leases for buildings, office trailers, plant and office equipment concluded by the Group as the lessee. The terms to maturity of future payments to the end of the minimum term of the agreements are as follows:

in €′000	2016/12/31	2015/12/31
Maturity of less than 1 year	10,898	10,479
Maturity of 1 to 5 years	21,282	28,816
Maturity of more than 5 years	3,403	5,307
	35,583	44,602

On the reporting date, there were no obligations from finance leasing in the SMA Group.

In addition, there were financial obligations to third parties under the purchase order commitment for investment orders placed amounting to €1.8 million (2015: €1.4 million). There were financial obligations for intangible assets amounting to €4.4 million). The other financial obligations were within the framework customary for the business.

32. Contingencies

As of December 31, 2016, there were no changes compared to the previous year (€0.05 million).

NOTES TO THE STATEMENT OF CASH FLOWS SMA GROUP

The intention to sell the Railway Technology business division meant that the previous year's figures were adjusted pursuant to IAS 5.34. The notes to the statement of cash flows relate to continuing operations.

The liquid funds shown in the Statement of Cash Flows correspond to the balance sheet item "Cash and Cash Equivalents".

33. Net Cash Flow From Operating Activities

Gross cash flow improved significantly during the fiscal year to €131.8 million (2015: €68.0 million). It reflects the operating income prior to commitment of funds.

Net cash flow from operating activities in fiscal year 2016 amounted to €147.5 million (2015: €102.7 million).

The net cash flow increased due to the increase of inventories mainly due to customers' project delays by 15.8% to €169.2 million (2015: €146.1 million increase in trade payables, the substantial decrease in trade receivables and the change in inventories resulted in a small 1.1% increase in net working capital to €225.4 million (2015: €223.0 million). At 23.8%, the net working capital ratio in relation to sales over the past 12 months was higher than the figure on December 31, 2015 (22.3%), and was thus above the range of 20% to 23% targeted by management.

34. Net Cash Flow From Investing Activities

In the 2016 fiscal year, net cash flow from investing activities amounted to €- 107.9 million, after €-64.0 million in the previous year, and primarily included the outflow of €17.6 million for the acquisition of shares in Tigo Energy, Inc. The outflow of funds for investments in fixed assets amounted to €29.0 million and was thus considerably lower than the comparative figure in the 2015 fiscal year of €48.3 million. The decline illustrates the SMA Group's adjusted investment activity. A major portion of the investments, namely €12.5 million, went on capitalized development projects for the launch of new product families. The balance of proceeds and payments for the investment amounted to €-62.0 million (2015: €- 15.0 million). The outflow of funds from the asset deal with Danfoss relevant to the statement of cash flows amounted to €1.5 million in the fiscal year, as in the previous year.

Pursuant to IAS 7.16, monetary investments with a term to maturity of more than three months are allocated to the net cash flow from investing activities.

35. Net Cash Flow From Financing Activities

In the 2016 fiscal year, besides loan repayments for Jiangsu Zeversolar New Energy Co., Ltd., net cash flow from financing activities also consisted of loan repayments for Immo, the dividend payment of SMA Solar Technology AG amounting to €4.9 million and a cash outflow of €3.7 million for the remaining shares in Jiangsu Zeversolar New Energy Co., Ltd. This item totaled €-24.6 million in the 2016 fiscal year compared with €-23.2 million in the previous year.

36. Cash and Cash Equivalents

Cash and cash equivalents amounting to €216.1 million (2015: €200.2 million) include cash in hand, bank balances and short-term deposits with an original term to maturity of less than three months.

OTHER DISCLOSURES

37. Events After the Balance Sheet Date

In the year under review, the Managing Board of SMA Solar Technology AG has comprised the following members: Roland Grebe (Board Member for HR and IT), Dr.-Ing. Jürgen Reinert (Board Member for Operations and Technology), Pierre-Pascal Urbon (Chief Executive Officer, Board Member for Finance/Legal and Sales). Roland Grebe resigned from the Managing Board for private reasons effective December 31, 2016. Ulrich Hadding was newly appointed to the Managing Board effective January 1, 2017. Since January 1, 2017, the Managing Board of SMA thus comprise Ulrich Hadding (Board Member for Finance, HR and Legal), Dr .- Ing. Jürgen Reinert (Deputy Chief Executive Officer, Board Memmber for Operations and Technology) and Pierre-Pascal Urbon (Chief Executive Officer Board Member for Strategy, Sales, and Service

On February 10, 2017, SMA Solar Technology AG signed a contract regarding the sale of SMA Railway Technology GmbH. The buyer and the seller have agreed not to disclose the purchase price. The identity of the contractual partner will be published after the transaction has been concluded.

38. Related Party Disclosures

According to the definition contained in IAS 24, related persons responsible for planning, controlling and monitoring the Company's activities. Related persons include the members of the Managing Board and the Supervisory Board of SMA Solar Technology AG as well as their close relatives. In 2015, the group of related parties was expanded by Danfoss' acquisition of a 20% stake in SMA. In the current fiscal year, the group of related parties was increased due to the 28.27% stake in Tigo Energy, Inc.

Related persons:

In the year under review, the following were members of the Managing Board of SMA Solar Technology AG: Roland Grebe, Board Member for HR IT (until December 31, 2016) Dr. - Ing. Jürgen Reinert, Board Member for Operations and Technology Pierre-Pascal Urbon, Chief Executive Officer, Board Member for Finance/Legal and Sales

Dr. - Ing. Jürgen Reinert sits on the supervisory boards of Danfoss A/S, Denmark, and KraftPowercon, Sweden.

Pierre-Pascal Urbon is a member of the Board of Directors of Tigo Energy, Inc., U.S.

In the year under review, the following persons were members of the Supervisory Board of SMA Solar Technology AG:

Shareholder Representative: Dr. Erik Ehrentraut, Consultant, Chairman Kim Fausing, General Manager and COO Danfoss, Deputy Chairman Roland Bent, General Manager Peter Drews, Chairman of the Foundation Managing Board Alexa Hergenröther; General Manager (since August 5, 2016) Dr. Winfried Hoffmann, Consultant (until June 30, 2016) Reiner Wettlaufer, Chairman of the Foundation Managing Board

Employee Representative: Johannes Häde Yvonne Siebert Dr. Matthias Victor Hans-Dieter Werner Oliver Dietzel, Trade Union Secretary Heike Haigis, Trade Union Secretary

Remuneration of key management members of the Group, which must be disclosed under IAS 24, includes remuneration of the Managing Board and the Supervisory Board.

In the reporting year, the total emoluments payable to the Managing Board amounted to €3.5 million (2015: €6.1 million). The non-performance-based component amounted to €2.9 (2015: €4.7 million), the performance-based components to €0.6 million). The compensation relates exclusively to short-term benefits. No compensation for tasks in subsidiaries was granted. In connection with his stepping down from the Managing Board, Roland Grebe received a single payment totaling €1.2 million to settle the existing non-compete clause and as severance pay.

The total compensation of the members of the Supervisory Board in the year under review amounted to €0.4 million (2015: €0.5 million (2015: €0.4 million) of this was non-performance-based fixed compensation, and €0.1 million (2015: €0.1 million) was compensation for committee work. As in the previous year, this did not include salary components. Kim Fausing has waived his entitlements from the Company. The remuneration paid to the members of the Managing and Supervisory Boards is shown in detail in a separate remuneration report in line with the criteria of the German Corporate Governance Code. The complete Remuneration Report is included in the Consolidated Management Report.

Members of the Supervisory Board hold the following positions in statutory supervisory boards and similar controlling bodies of commercial enterprises:

Roland Bent, member on the boards of four international Phoenix Contact companies: Phoenix Contact (China) Holding Co. Ltd., Phoenix Contact (Nanjing) R&D and Engineering Center Co. Ltd., Phoenix Contact Holding Inc. U.S. and Phoenix Contact Development & Manufacturing Inc., U.S.

Kim Fausing, Deputy Chairman of the Board at Velux A/S, Hørsholm, Denmark, and Member of the Board at Hilti AG, Liechtenstein.

Related entities:

On May 28, 2014, SMA concluded an agreement regarding a close strategic partnership with Danfoss A/S. As part of this partnership, Danfoss acquired a 20% stake in SMA and therefore now also belongs to the group of related entities. SMA entered into a strategic partnership with Danfoss in the areas of purchasing, sales and research and development. SMA also performs services on behalf of Danfoss. All agreements were concluded under fair market conditions. The business relationships between SMA and Danfoss in the fiscal year are presented in the table below. There is no material collateralization nor are there guarantees.

in € million	2016	2015
Goods acquired from Danfoss	25.5	18.2
Services acquired from Danfoss	6.1	8.9
Services sold to Danfoss	2.5	3.2
Outstanding receivables at the end of the year	0.7	1.0
Outstanding liabilities at the end of the year	6.4	2.9

In addition, SMA has a 28.27% stake in Tigo Energy, Inc. SMA entered into a strategic partnership with Tigo Energy, Inc. in the areas of development, sales and service. Furthermore, for a duration of 30 months, SMA has exclusive rights to the worldwide sale of the new TS4-Retrofit product platform for module optimization developed by Tigo Energy, Inc. SMA has also obtained a seat on Tigo Energy's Board of Directors. In the 2016 fiscal year, no significant transactions were carried out with Tigo Energy, Inc. Goods amounting to a total value of €0.3 million were acquired, which meant that liabilities to Tigo Energy, Inc. totaled €0.2 million as of December 31, 2016.

The company movendum GmbH, whose Managing Director is Dr. Ute Urbon, was commissioned by the Supervisory Board to look for a Supervisory Board member. Following the successful outcome of this consultation, the company received a standard market fee of €48,000 in the year under review.

Other related entities are the Günther Cramer Foundation, Peter Drews Foundation and Reiner Wettlaufer Foundation, which together established caw Stiftungsverbund gGmbH (formerly SMA Stiftungsverbund gGmbH). No transactions requiring disclosure under IAS 24 were made with these entities in the reporting period.

39. Objectives and Methods Concerning Financial Risk Management

Financial risk management is integrated into the Group-wide hedging policy. Deliberate treatment of potential risks and sound control as well as successful management of such risks when they occur are supported by an accompanying information and communication policy as well as by further education and training of employees. The principle underlying the Group's hedging policy in the financial field is to protect against significant price, currency and interest risks by means of contracts and hedging transactions to an economically reasonable extent.

The financial instruments of the Group relate primarily to trade receivables and cash resulting directly from operating activities. In addition, there is a particular amount of trade payables that also arise from operating activities. The Group also uses derivative financial instruments as part of exchange and interest rate hedging. The Group's main risks in relation to financial instruments are interest-based cash flow risks as well as liquidity, currency and credit risks. The strategies and procedures for controlling individual types of risks delined in the context of the Group's overall hedging policy are presented below.

INTEREST RATE RISK

Interest rate risks within the SMA Group mainly arise in the case of financial liabilities and non-current portions of certain provisions. Interest on the aforementioned liabilities is not paid by the contracting party and is therefore discounted at the interest rate usual in the market, which means that there is no separate control of the interest rate risk. The variable interest-bearing portion of existing financial liabilities is secured through an interest rate swap. This ensures that interest rates are hedged in the long term and allows financing costs to be reliably calculated over the contract's term. The following sensitivities can be calculated for the financial instruments held on the balance sheet date:

If the market interest rate had increased by 1.0 percentage point, the impact on the financial result would have been €0.2 million (2015: €0.2 million). The effect on equity in relation to the market valuation of financial instruments of the available-for-sale category would have been neutral (December 31, 2015: neutral). When calculating sensitivities with regard to a decline in interest rates of 1.0 percentage point, the effect on earnings before taxes would have been €-0.1 million (2015: €-0.1 million), and the effect on equity would have been neutral (December 31, 2015: neutral).

FORFIGN CURRENCY RISK

As a globally active company, the SMA Group is exposed to both transaction-related and translation-related foreign currency risks.

SMA assesses risks from an economical point of view. Using this point of view, foreign currency risks arise in the form of direct transaction risks that derive from any (current or planned) receivable or payable denominated in a foreign currency and the resulting payment flow. The SMA Group's extensive business activity in North America means that foreign currency risks at present mainly arise in USD. In light of that a large portion of the added value attributable to the North American companies is generated locally and sales in the local currency are balanced by expenditure in the local currency, the operative foreign currency risk in the SMA Group is limited.

Currency risks also arise in particular from the sales activity of our Japanese subsidiary.

An intra-Group guideline ensures that SMA companies report their foreign currency risks to Corporate Treasury, provided there are no country-specific restrictions in this regard. The remaining Group-wide risk is hedged by Corporate Treasury through the use of currency derivatives concluded externally with banks. Forward exchange transactions are the most commonly used method in this case. The use of options as part of the hedging strategy is also possible.

Translation risks mainly occur when the assets and liabilities denominated in a foreign currency are converted to the parent company's domestic currency when preparing the Consolidated Financial Statements. Translation risks are not included within the scope of the active control of foreign currency risks.

ltems denominated in foreign currencies, and the development of those currencies, are monitored continuously and the risks are hedged, provided this is economically reasonable. The risks from hedging transactions in themselves are limited to the possibility that opportunities arising from a better price performance cannot be realized.

To present market risks, IFRS 7 requires sensitivity analyses which show the effects of hypothetical changes in relevant risk variables on earnings and equity. Currency risks are caused by financial instruments that are denominated in a currency other the functional currency and which are of a monetary nature; exchangerate-related differences from the translation of financial statements into the Group currency are not taken into account. The U.S. dollar is deemed to be a relevant risk variable. The currency sensitivity analysis is based on original financial instruments in the form of receivables. Through the use of hedging transactions (derivatives), which are designed to hedge the underlying transaction, the opposing effects that accompany changes in the exchange rate of the USD are evened out. Notwithstanding, measurement of the hedging transactions

concluded for the 2017 fiscal year results, on the one hand, in a positive contribution to earnings of €0.7 million from fair value measurement (2015: € - 3.2 million) and, on the other hand, in equity costs of € 14.9 million before deferred taxes from the first-time application of hedge accounting.

An increase of 5% in the euro with respect to the USD and/or JPY on December 31, 2016, would have led to a positive change in the currency derivatives of €3.6 million (2015: €4.8 million). A decrease of 5% in the euro with respect to the USD on December 31, 2015 would have led to a reduction in the value of the currency derivatives of €5.6 million (2014: €-5.3 million). As of December 31, 2016, the currency hedges related to EUR/USD and EUR/JPY.

With regard to the hedging transactions presented under hedge accounting, a 5% increase in the euro against the USD as of December 31, 2015, would have resulted in a €9.0 million increase in equity. A 5% weaker euro would have resulted in additional equity costs of €13.8 million.

Pursuant to IFRS, currency risks affect monetary financial instruments that are denominated in a foreign currency (i.e., in a currency other than the functional currency). This means that the foreign currency is the relevant risk variable. Translation-related risks are not taken into account. Because the individual Group companies mainly conduct their operative business in their own functional currency, we rate the risk from exchange rate fluctuations resulting from our ongoing business activity as insignificant.

CREDIT RISK

For all deliveries to customers, collateral is requested depending on the respective transaction and the specific customer and country risk. Data from the customer's previous business relationship, including payment practices and additional credit reports, are also used to avoid non-payment. In addition, the Group performs a customer credit check, which is based on certain financial key ratios. By setting a timely manner or suspending orders, the Group avoids being exposed to a significant risk of non-payment. If possible, the default risk is also limited by commercial credit insurance. The maximum non-payment risk is limited to the book value disclosed in section 20. There are no major concentrations of non-payment risks within the Group

With respect to all of the Group's other financial assets such as cash equivalents, available-for-sale financial investments and derivative financial instruments, the maximum credit risk, should the counterparty fail to pay, corresponds to the book value of these instruments. This counterparty default risk is analyzed on a continuous basis and managed by means of corresponding business allocation - also taking into account potential opportunities - with regard to cluster risks and credit risks.

LIQUIDITY RISK

The Company uses financial planning tools for early detection of future liquidity requirements. According to current planning, it can be assumed that the financial requirements will be covered in a reliable time frame. Insurance contracts are concluded to hedge against the financial consequences of possible liability risks and damage claims, insofar as this is reasonable and possible. The cover provided by such contracts is reviewed and adapted regularly.

CAPITAI MANAGEMENT

The strategic objective of capital management within the SMA Group is to ensure financial flexibility and independence to make rapid use of the opportunities in a photovoltaic market characterized by strong growth. Profitable employment of the capital is measured through regular monitoring capital. Within the SMA Group, net working capital is defined as the sum of inventories and trade receivables less trade payables. To be able to usefully measure relative capital consumption even in the event of strong corporate growth, net working capital is expressed in relation to sales. Through debtor management, which ensures that receivables are collected in good time, and linking inventories to sales as well as a constant dividend policy, the Company positions itself to achieve its objectives of financial flexibility and independence. In accordance

with our intra-Group guidelines, the net working capital ratio determined in this way has to be below 21%. In the year under review, the equity ratio of the SMA Group was 48.3% (2015: 49.1%) and the net working capital ratio was 23.8% (2015: 22.3%).

40. Auditor's Fees

The fees paid to the auditor and recorded as an expense in the year under review break down as follows:

in €′000	2016	2015
Financial statement auditing	372	486
Other audit-related services	O	13
Other services	137	52
	509	551

The cost of financial statement avditing comprises the fees for the Consolidated Financial Statements as well as for the audit of the Financial Statements of SMA Solar Technology AG and its domestic subsidiaries, provided they are obligated to perform an audit pursuant to Section 316 of the German Commercial Code. The fees for audit-related services and other audit work include expenses for the Interim Consolidated Financial Statements. The fees for other services for other agreed upon single auditing and consulting activities, which were performed during the reporting year.

41. Declaration on the German Corporate Governance Code in Accordance With Section 161 AktG

The declaration required under Section 161 AktG on the recommendations issued by the Government Commis sion German Corporate Governance Code was given by the Managing Board and the Supervisory Board on December 8, 2016, and made permanently available to shareholders on the SMA website at www.SMA.de.

42. Consolidated Financial Statements

As the ultimate parent company, SMA Solar Technology AG prepared the Consolidated Financial Statements for the largest scope of consolidation as of December 31, 2016, which are filed with the operator of the Electronic Federal Gazette and subsequently published in the Electronic Federal Gazette.

Niestetal, March 2, 2017

SMA Solar Technology AG The Managing Board

Ulrich Hadding

Dr .- Ing. Jürgen Reinert

Pierre-Pascal Urbon

RESPONSIBILITY STATEMENT

We assure to the best of our knowledge that, in accordance with the applicable accounting standards, the Consolidated Financial Statements give a fair view of the net assets, financial position and results of operations of the Group and that the Consolidated Management Report gives a fair view of the course of business including the results of operations and the Group's position and describes the fundamental opportunities and risks of the probable development of the Group.

Niestetal, March 2, 2017

SMA Solar Technology AG The Managing Board

Ulrich Hadding

Dr.-Ing. Jürgen Reinert

Pierre-Pascal Urbon

AUDITOR'S REPORT

(Translation - the German text is authoritative)

We have audited the Consolidated Financial Statements prepared by SMA Solar Technology AG, Niestetal comprising the income statement of comprehensive income, balance sheet, statement of cash flows, statement of changes in equity and the Notes to the Consolidated Financial Statements - and the Consolidated Management Report combined with the Management Report for the fiscal year from January 1 to December 31, 2016. Preparation of the Consolidated Financial Statements and the Consolidated Management Report in accordance with International Financial Reporting Standards (IFRS), as adopted by the European Union (EU), and the additional requirements of German commercial law pursuant to Section 315a (1) of the German Commercial Code (HGB) is the responsibility of the Company's Managing Board. Our responsibility is to express an opinion on the Consolidated Financial Statements and the Consolidated Management Report based on our audit.

We conducted our audit of the Consolidated Financial Statements in accordance with Section 317 HGB and generally accepted German standards for the audit of financial statements promulgated by the Institut der Wirtschaftsprüfer (Institute of Public Auditors). Those standards require that we plan and perform the audit such that misstatements materially affecting the presentation of the net assets, financial position and results of operations in the Consolidated Financial Statements in accordance with the applicable accounting standards and in the Consolidated Management Report are detected with reasonable assurance. Knowledge of the business activities and the economic and legal environment of the Group and expectations as to possible errors are taken into account in the determination of audit procedures. The effectiveness of the accountingrelated Internal Control System and the evidence supporting the Consolidated Financial Statements and the Consolidated Management Report are examined primarily on a test basis within the framework of the audit. The audit includes the assessment of the Annual Financial Statements of the entities included in the Consolidated Financial Statements, the determination of entities to be included in consolidation, the accounting and consolidation principles used and significant estimates made by the Managing Board, as well as evaluation of the overall presentation of the Consolidated Financial Statements and the Consolidated Management Report. We believe that our audit provides a reasonable basis for our opinion.

Our audit has not led to any reservations.

In our opinion, based on the findings of our audit, the Consolidated Financial Statements of SMA Solar Technology AG, Niestetal, comply with IFRS, as adopted by the EU, and the additional requirements of German commercial law pursuant to Section 315a (1) HGB, and give a true and fair view of the net assets, financial position and results of operations of the Group in accordance with these requirements. The Consolidated Management Report is consistent with the Consolidated Financial Statements, complies with statutory provisions, provides an accurate view of the Group's position overall and suitably presents the opportunities and risks of future development.

Hanover, March 2, 2017

Deloitte GmbH Wirtschaftsprüfungsgesellschaft

Reker Meier Wirtschaftsprüfer Wirtschaftsprüfer (German Public Auditor) (German Public Auditor)

SMA Solar Technology AG // Annual Report 2016

OTHER INFORMATION

126	GLOSSARY
126	Technical Glossary
128	Financial Glossary

130 -REGISTERED TRADEMARKS 130 DISCLAIMER

GIOSSARY

TECHNICAL GLOSSARY

A

AC (Alternating Current) Grid-compliant current

C

Central Inverter

Inverters for large-scale PV power plants that are used with centralized design concepts

Change-of-Control Clause

Provision in the board member and management employment contracts that provides a special termination right in case of a change of ownership or a change in majority shareholders, usually against payment of a firmly agreed compensation, continued payment of remuneration, often also a corresponding pension provision

Compliance

Legally compliant conduct

Corporate Governance

Procedures for managing and controlling companies in a manner that is responsible and aimed at long-term value creation

D

DC (Direct Current)

Direct current must be converted to grid-compliant alternating current (AC) for the grid supply or household use.

Diesel-Powered Grid

An isolated, decentralized power grid with diesel generators as the primary power source. Diesel-powered grids are used mainly where an energy supply is not possible via a central utility grid. With PV systems integrated into diesel-powered grids, the use of diesel generators is not a must. PV-diesel hybrid systems make a considerable contribution to the reduction of fuel costs and CO2 emissions.

E

EEbus

International companies from the energy, telecommunications, electronics and automotive sectors have come together in the EEBus Initiative. Together, they develop communication standards to network devices and energy-efficiency applications, regardless of the manufacturer.

G

Grid Management

For decentralized generation plants, participation in grid management means that they have to adapt their feed-in to meet current grid distribution capacities. It affects all PV systems feeding in at medium voltage level.

Inverter

ﺍ

An electrical device that converts direct into alternating voltage or direct into alternating current

M

Medium Voltage

Voltage range from 1,000 V to 60,000 V

S

Smart Module Technology/Module-Level Power Electronics (MLPE) With module-level power electronics, individual PV system modules that are affected by shading, for example, can be flexibly equipped with additional functions. This module technology can be used in individual modules when trees or chimneys cause partial shading, when modules are placed at different angles or for detailed monitoring at the module level.

String Inverter

With string technology, the PV generator is divided into individual module areas, and each of these individual "strings" is assigned its own string inverter.

U

UL 1741 SA

The UL 1741 SA (Supplement A) standard identifies inverter functions required for optimal grid stability.

W

W, kW, MW, GW

Units for power: 1 kilowatt (kW) = 1,000 watts (W) 1 megawatt (MW) = 1,000 kilowatts 1 gigawatt (GW) = 1,000 megawatts

Wp

Abbreviation for watt peak. Unit used for the standardized rated power of a photovoltaic cell or a photovoltaic module under standard conditions.

FINANCIAL GLOSSARY

E

EBIT Earnings before interest and taxes

EBITDA

Earnings before interest, taxes, depreciation and amortization

EBIT Margin

Operating profit x 100 Sales

(the higher the percentage, the higher the earning power)

EBT Earnings before taxes

Equity Ratio Shows the share of equity in total assets.

F

Free Cash Flow

Operating cash flow minus investments plus negative investments in fixed and intangible assets. Free cash flow is important because it allows a company to pay dividends or to buy back shares. Therefore, free cash flow is a measure of how much cash can be paid to the shareholders of a company.

Free Cash Flow (Adjusted)

Operating cash flow minus investments plus negative investments in fixed and intangible assets before cash inflows or outflows from time deposits or investments in securities. Adjusted free cash flow is an indicator of ability to repay debt financing.

G

Gross Cash Flow

Shows the operating income prior to any commitment of funds. It is calculated by considering earnings before income tax and the financial result - plus interest received, depreciation and amortization, changes in other provisions, profit/loss from the disposal of fixed assets and other non-cash expenses/revenues less interest paid and income tax paid.

Gross Profit

Sales minus cost of sales

1

IAS

International Accounting Standards; newer standards refer to the initials IFRS

IASB

International Accounting Standards Board

IFRIC

Interpretations of the International Financial Reporting Interpretations Committee on IAS/IFRS

IFRS

International Financial Reporting Standards defined by the IASB

N

Net Cash

Liquid funds and securities contained within working capital and cash on hand pledged as collatoral less interest-bearing financial liabilities

Net Cash Flow From Financing Activities Outflow/inflow of liquid funds from equity financing and debt financing

Net Cash Flow From Investing Activities Outflow/inflow of liquid funds from investments and disinvestments

Net Cash Flow From Operating Activities

Outflow/inflow of liquid funds, unaffected by investments, disinvestments and financing activities

Net Working Capital

The total amount of short-term, interest-free working capital (inventories plus trade receivables less trade payables)

Net Working Capital Ratio

Net working capital in relation to net sales

O

Operating Profit (EBIT) Earnings before interest and taxes

Order Backlog

This includes current sales and sales expected in the future. In this context, the requirements for all orders pending delivery and deliveries that have already been made but not yet posted as goods issue are taken into account based on their volume and value.

R

Return on Assets (After Taxes)

The return on assets (after taxes) is the consolidated net profit divided by the average total assets of the reporting period (average of total assets at the beginning and end of the reporting period).

Return on Equity (After Taxes)

The return on equity (after taxes) is the consolidated net profit divided by the averaged total equity for the reporting period (average of total equity at the beginning and end of the reporting period).

Return on Sales

Ratio of EBT to sales

REGISTERED TRADEMARKS

Company logos, Energy that changes, SMA, SMA Solar Technology, SMA Railway Technology, Sunny, Sunny Boy, Sunny Central, Sunny Home Manager, Sunny Portal, Sunny Tripower, Sunny Tripower Core, Zeversolar are registered trademarks of SMA Solar Technology AG in many countries.

DISCLAIMER

The Annual Report, in particular the Forecast Report included in the Management Report, includes various forecasts and expectations as well as statements relating to the future development of the SMA Group and SMA Solar Technology AG. These statements are based on assumptions and estimates and may entail known and unknown risks and uncertainties. Actual development and results as well as the financial and asset situation may therefore differ substantially from the expectations and assumptions made. This may be due to market fluctuations, the development of world market prices for commodities, of financial markets and exchange rates, amendments to national and international legislation and provisions or fundamental changes in the economic and political environment. SMA does not intend to and does not undertake an obligation to update or revise any forward-looking statements to adapt them to events or developments after the publication of this Annual Report.

FINANCIAL CALENDAR

2017/05/11	Publication of Quarterly Statement: January to March 2017 Analyst Conference Call: 09:00 a.m. (CET)
2017/05/23	Annual General Meeting 2017
2017/08/10	Publication of Half-Yearly Financial Report: January to June 2017 Analyst Conference Call: 09:00 a.m. (CET)
2017/11/09	Publication of Quarterly Statement: January to September 2017 Analyst Conference Call: 09:00 a.m. (CET)

PUBLICATION INFORMATION

Published by SMA Solar Technology AG

Text SMA Solar Technology AG

Consulting, Concept & Design Silvester Group www.silvestergroup.com

Photos

Andreas Berthel Stefan Daub Carsten Herwig Getty Images

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CONTACT

SMA Solar Technology AG Sonnenallee 1 34266 Niestetal Germany Phone: +49 561 9522-0 Fax: +49 561 9522-100 info@SMA.de www.SMA.de/en

Investor Relations www.IR.SMA.de/contact

SMA Solar Technology AG Sonnenalle 1 34266 Niestetal Germany

Phone: +49 561 9522-0 Fax: +49 561 9522-100 info@SMA.de www.SMA.de/en