UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form
(Mark One)
OR
For the fiscal year ended December 31 , 2021
OR
For the transition period from ______ to ______
OR
Date of event requiring this shell company report.
Commission File Number
(Exact Name of Registrant as specified in its charter)
(Jurisdiction of incorporation or organization)
(Address of principal executive offices)
Chief Executive Officer
Caesarstone Ltd.
Telephone: +
Facsimile: +972 (4) 636-4400
(Name, telephone, email and/or facsimile number and address of company contact person)
Securities registered or to be registered pursuant to Section 12(b) of the Securities Act of 1933:
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Title of each class |
Trading Symbol |
Name of each exchange on which registered |
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The |
Securities registered or to be registered pursuant to Section 12(g) of the Act: None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of December 31, 2021:
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act:
Yes ☐
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934:
Yes ☐
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days:
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files):
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See definition of “accelerated filer,” “large accelerated filer” and “emerging growth company” in Rule 12b-2 of the Exchange Act (Check one):
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Large accelerated filer ☐ |
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Non-accelerated filer ☐ |
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Emerging growth company |
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act. ☐
† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.
Indicate by check mark whether the registrant has filed a report on the attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
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International Financial Reporting Standards as issued by the International Accounting Standards Board ☐ |
Other ☐ |
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow:
Item 17 ☐ Item 18 ☐
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):
Yes ☐ No
PRELIMINARY NOTES
Introduction
As used herein, and unless the context
suggests otherwise, the terms “Caesarstone,” “Company,” “we,” “us” or “ours”
refer to Caesarstone Ltd. and its consolidated subsidiaries. In this document, references to “NIS” or “shekels”
are to New Israeli Shekels, and references to “dollars,” “USD” or “$” refer to U.S. dollars.
Our reporting currency is the United States
(“U.S.”) dollar. The functional currency of each of our non-U.S. subsidiaries is the
local currency in which it operates. These subsidiaries’ financial statements are translated into the U.S. dollar, the parent company’s
functional currency, using the current rate method.
Other financial data appearing in this
annual report that is not included in our consolidated financial statements and that relate to transactions that occurred prior to December
31, 2021 are reflected using the exchange rate on the relevant transaction date. With respect to all future transactions, U.S. dollar
translations of NIS amounts presented in this annual report are translated at the rate of $1.00 = NIS 3.11, the representative exchange
rate published by the Bank of Israel as of December 31, 2021.
Market and Industry
Data and Forecasts
This annual report includes data, forecasts
and information obtained from industry publications and surveys and other information available to us. Some data is also based on our
good faith estimates, which are derived from management’s knowledge of the industry and independent sources. Forecasts and other
metrics included in this annual report to describe the countertop industry are inherently uncertain and speculative in nature and actual
results for any period may materially differ. We have not independently verified any of the data from third-party sources, nor have we
ascertained the underlying assumptions relied upon therein. While we are not aware of any misstatements regarding the industry data presented
herein, estimates and forecasts involve uncertainties and risks and are subject to change based on various factors, including those discussed
under the headings “—Forward-Looking Statements” and “ITEM 3: Key Information—Risk Factors” in this
annual report.
Unless otherwise noted in this annual
report, Freedonia Custom Research, a division of MarketResearch.com, Inc. (“Freedonia”)
is the source for third-party industry data and forecasts. The Freedonia report, dated March 12, 2021 (“Freedonia
Report”), represents data, research opinion or viewpoints developed independently by Freedonia and does not constitute a
specific guide to action. In preparing the report, Freedonia used various sources, including publicly available third-party financial
statements; government statistical reports; press releases; industry magazines; and interviews with manufacturers of related products
(including us), manufacturers of competitive products, distributors of related products, and government and trade associations. Growth
rates in the Freedonia Report are based on many variables, such as currency exchange rates, raw material costs and pricing of competitive
products, and such variables are subject to wide fluctuations over time. The Freedonia Report speaks as of its final publication date
(and not as of the date of this filing), and the opinions and forecasts expressed in the Freedonia Report are subject to change by Freedonia
without notice. Management believes this third-party report to be reputable, but has not independently verified the underlying data sources,
methodologies, or assumptions. The report and other publications referenced are generally available to the public and were not commissioned
by the Company.
Special Note Regarding
Forward-Looking Statements and Risk Factor Summary
This annual report contains forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as amended (“Securities
Act”), Section 21E of the Securities Exchange Act of 1934, as amended (“Exchange Act”),
and the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995, that are based on our management’s
beliefs and assumptions and on information currently available to our management. Forward-looking statements include information concerning
our possible or assumed future results of operations, business strategies, financing plans, competitive position, industry environment,
potential growth opportunities, potential market opportunities and the effects of competition. Forward-looking statements include all
statements that are not historical facts and can be identified by terms such as “anticipates,” “believes,” “could,”
“seeks,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,”
“predicts,” “projects,” “should,” “will,” “would” or similar expressions that
convey uncertainty of future events or outcomes and the negatives of those terms. These statements may be found in several sections of
this annual report, including, but not limited to “ITEM 3: Key Information—Risk Factors,” “ITEM 4: Information
on the Company,” “ITEM 5: Operating and Financial Review and Prospects,” “ITEM 10: Additional Information—Taxation—United
States Federal Income Taxation—Passive foreign investment company considerations.” Forward-looking statements reflect our
current views with respect to future events and are based on assumptions and are subject to risks and uncertainties, including those described
in “ITEM 3.D. Key Information—Risk Factors.” Important factors that could affect our actual results and cause them to
differ materially from those expressed in forward-looking statements include, but are not limited to, the items in the following list,
which also summarizes some of our principal risks:
| • |
the impact of the coronavirus (COVID-19) pandemic on end-consumers, the global
economy and our business and results of operations; |
| • |
adverse global conditions, including macroeconomic and geopolitical uncertainty,
may negatively impact our financial results |
| • |
Constraints in the global supply of, prices for, and availability of transportation
of the raw materials, finished goods and other products essential to our operations; |
| • |
changes in the availability or prices to the prices of our raw materials or to
the suppliers of our raw materials; |
| • |
downturns in the home renovation, remodeling and residential construction sectors
or the economy generally; |
| • |
disruptions to our information technology systems globally, including by deliberate
cyber-attacks; |
| • |
future foreign exchange rates and fluctuations in such rates, particularly the
NIS, Australian dollar, Canadian dollar, British pound, Indian Rupee and the Euro; |
| • |
Our ability to raise funds to finance our current and future capital needs;
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| • |
Our ability to pass rising costs to our customers; |
| • |
competitive pressures from other manufacturers of quartz and other surface materials
as well as increased competition from lower-priced alternatives; |
| • |
risks associated with changes in global trade policies or the imposition of tariffs; |
| • |
our ability to successfully consummate business combinations or acquisitions and
our success in integrating our most recently acquired Lioli Ceramica Private Limited (“Lioli”)
and Omicron Granite and Tile (“Omicron”) businesses into our operations; |
| • |
our ability to manage required changes in our production and supply chain, and
manufacture our products efficiently; |
| • |
disturbances to our operations, the operations of our equipment and raw material
suppliers, distributors, customers, consumers or other third parties; |
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our ability to effectively manage changes to our production and supply chain and
effectively collaborate with Original Equipment Manufacturer (“OEM”) suppliers;
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our ability to execute our strategy to expand sales in certain markets;
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impacts on revenue from sales disruptions in our geographic concentrations or
key markets; |
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our reliance on third-party distributors, re-sellers, and a limited number of
large retailers; |
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our ability to effectively manage our inventory and successfully pursue a wider
product offering; |
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quarterly fluctuations in our results of operations as a result of seasonal factors
and building construction cycles; |
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the outcome of litigations including those regarding silicosis, other bodily injury
claims or other legal proceedings in which we are involved, and our ability to use our insurance policy to cover damages; |
| • |
regulatory requirements and any changes thereto relating to crystalline silica
dust and related hazards; |
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the extent of our liability for environmental, health and safety, product liability
and other matters; |
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the protection of our brand, technology and intellectual property; |
| • |
our tax position, including meeting certain conditions required to receive certain
tax benefits, our exposure to U.S. tax liabilities and related consequences under the U.S. Internal Revenue Code, and the continued availability
of certain tax benefits granted by the Israeli government ; |
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compliance with and impacts of laws and changes in laws where we operate (Primarily
Israel, the U.S., Canada and Australia); |
| • |
our ability to retain our senior management team and other skilled and experienced
personnel; |
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the effect of the share ownership by the Kibbutz and Tene; |
| • |
our ability to manage or resolve conflicts of interest arising from employee affiliations
with Kibbutz Sdot-Yam (the “Kibbutz”) and with Tene Investment in Projects 2016 Limited
Partnership (“Tene”); |
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the effects of enforcements against us, our officers and directors in the United
States; |
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our ability to maintain our lease agreements with the Kibbutz, the Israeli Lands
Administration (the “ILA”) and Caesarea Development Corporation; |
| • |
coverage by equity research analysts, publicly announced financial guidance, investor
perceptions and our ability to meet other expectations (such as Environmental Social and Governance); |
| • |
the impacts of conditions in Israel, such as negative economic conditions or labor
unrest; |
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differences in the governance of shareholders’ rights under Israeli law;
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the amount and timing of our dividend payments; |
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price volatility of, and effects of future sales on, our ordinary shares;
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our status as a foreign private issuer and related exemptions with respect thereto;
and |
| • |
our expectations regarding regulatory matters applicable to us. |
The preceding list is not intended to
be an exhaustive list of all our forward-looking statements. Forward-looking statements reflect our current views with respect to future
events and are based on assumptions and are subject to risks and uncertainties, including those described in “ITEM 3.D. Key Information—Risk
Factors.”
You should not put undue reliance on any
forward-looking statements. Actual results could differ materially from those anticipated in these forward-looking statements as a result
of various factors described in this annual report, including factors beyond our ability to control or predict. Although we believe that
the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that future results, levels of activity,
performance and events and circumstances reflected in the forward-looking statements will be achieved or will occur. Any forward-looking
statement made in this annual report speaks only as of the date hereof. Except as required by law, we undertake no obligation to update
publicly any forward-looking statements for any reason after the date of this annual report, to conform these statements to actual results
or to changes in our expectations.
TABLE OF CONTENTS
| PART I | 1 |
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(
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| PART II |
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(
ii )
PART
I
ITEM
1: Identity of Directors, Senior Management and Advisers
Not applicable.
ITEM
2: Offer Statistics and Expected Timetable
Not applicable.
ITEM
3: Key Information
| A. |
[Reserved] |
| B. |
Capitalization
and Indebtedness |
Not applicable.
| C. |
Reasons
for the Offer and Use of Proceeds |
Not applicable.
| D. |
Risk Factors |
Our business faces significant risks and
uncertainties. You should carefully consider all the information set forth in this annual report and in our other filings with the United
States Securities and Exchange Commission (the “SEC”). Our business, financial condition
and results of operations could be materially and adversely affected by any of these risks. In that event, the trading price of our ordinary
shares would likely decline, and you might lose all or part of your investment. This report also contains forward-looking statements that
involve risks and uncertainties. Our results could materially differ from those anticipated in these forward-looking statements, as a
result of certain factors including the risks described below and elsewhere in this report and our other SEC filings. See also “Special
Note Regarding Forward-Looking Statements and Risk Factor Summary” on page iv of this annual report.
Risks Related to our
Business
Economic
and External Risks
The
COVID-19 pandemic could further impact end-consumers and the global economy in general, lower demand for our products, disrupt our operations
and materially and adversely affect our business and financial results.
The impact of the COVID-19 pandemic has
resulted in a widespread public health crisis and governmental authorities have implemented numerous measures attempting to contain and
mitigate the effects of the virus. The COVID-19 pandemic has increased market uncertainty and volatility, led to travel and other restrictions,
including individual quarantines, and significantly affected consumer and businesses behaviors. The volatility in stock markets around
the world has and may continue to materially and adversely impact stock prices and trading volumes for us and other companies. The
culmination of these dramatic large-scale events could result in a global economic recession, depression, excessive inflation or other
sustained adverse market events and significantly decrease home renovation and remodeling activity and new residential construction, and
in turn reduce the demand for our products, thus materially and adversely affecting our business and results of operations.
The COVID-19 pandemic may also adversely
affect our ability to conduct our business effectively due to disruptions to our production and supply chain, availability and cost of
shipping services, availability and productivity of personnel. We attempted to comply with rapidly changing restrictions, such as travel
restrictions, curfews and others. Additionally, the impact of the COVID-19 pandemic on international shipping, including fewer available
shipping providers and routes, has significantly increased costs, and has increased, and may continue to increase, our cost of goods sold
in the future. Such increase has and may in the future materially adversely affect our business, financial condition and results of operations.
Any future shipping delays and cost increases as a result of the COVID-19 pandemic, or any future pandemic or resurgence, could have a
material adverse effect on our business and results of operations.
1
Governmental actions in response to the
Covid-19 pandemic, in locations where we operate could further limit our operations, which may have a material adverse effect on our operations
and financial results, for example gathering restrictions, isolation for COVID-19 positive and for people who were in contact with a COVID-19
positive person, and reduced workforce in the education system and more generally in the public sector. The widespread COVID-19 pandemic
may further disrupt our ability to manufacture products and impact the operations of our customers and modes of shipping, any of which
could lead to reduction in customer orders and sales to certain regions and end-markets. In addition, the COVID-19 pandemic increased
risks for insolvency due to cash-flow management and credit availability, and as some customers may be impacted more severely, we could
face collection difficulties, which would have an adverse effect on our financial results.
The COVID-19 pandemic further contributed to costs entailed with producing at our facilities, such as,
but not limited to: compliance with heightened environmental health and safety standards, including any governmental mandates to mitigate
the spread of the COVID-19 pandemic; labor; energy; raw material costs; and taxes. If the production costs of our products continue to
increase, it could negatively and materially impact our results.
In addition, we are facing challenges
in recruiting employees. A significant reduction in our workforce brought about as a result of the COVID-19 pandemic, and current difficulties
to recruit required personnel and/or our compliance with instructions imposed by governmental authorities may harm our ability to continue
operating our business and materially and adversely affect our operations and financial condition. Further, we cannot assure you that
we will be designated an “essential business”, as defined under the government instructions, and moreover, we cannot foresee
whether the Israeli authorities will impose further restrictive instructions in the future, which if implemented may lead to significant
changes and potentially a shutdown of our operations.
Authorities around the world have and
may continue implementing similar restrictions on business and individuals in their jurisdictions. We cannot assure you that we will be
able to continue to manage our international operations and business effectively, which would have material adverse effect on our results
of operations. See “—Our operating results may suffer due to our failure to manage our international operations effectively
or due to regulatory changes in foreign jurisdictions where we operate”.
Future outbreaks of the COVID-19 pandemic
leading to additional restrictions and regulations related to the COVID-19 pandemic containment efforts may further challenge our ability
to conduct our operations and, as a result, may materially and adversely affect our financial results. For example, in Morbi, India, where
our subsidiary Lioli is located, the prevalence of the COVID-19 disease and death rates were relatively high during 2021 and caused some
disruptions to our operations. Additionally, Lioli relies on production materials and equipment from diverse locations, and as a
result, any restrictions related to the COVID-19 pandemic that impact the delivery of such could materially and adversely impact the ability
of our Lioli facility to continue production. Although operations at Lioli are currently not disrupted by the COVID-19 pandemic restrictions
imposed by local or federal authorities or deliveries of production materials, we cannot assure you that operations at Lioli will continue
to run or that Morbi or Indian authorities will not institute restrictions and regulations that affect our operations. Currently
the trajectory of the COVID-19 outbreak remains highly uncertain and we cannot predict the duration, severity or effect of the pandemic
or any future containment effort.
Adverse
global conditions, including macroeconomic and geopolitical uncertainty, may negatively impact our financial results.
Global conditions, dislocations in the
financial markets, or inflation could adversely impact our business. In addition, the global macroeconomic environment has been and may
continue to be negatively affected by, among other things, instability in global economic markets, increased trade tariffs and trade disputes,
instability in the global credit markets, supply chain weaknesses, instability in the geopolitical environment as a result of the Russian
Ukraine conflict, the withdrawal of the United Kingdom from the European Union, and other political tensions, and foreign governmental
debt concerns. Such challenges have caused, and may continue to cause, uncertainty and instability in local economies and in global financial
markets, which may adversely affect our business.
2
Additionally, economic downturns and geopolitical challenges in regions of the world that are critical
to our operations have in the past and could in the future cause supply chain and other disruptions that impact our business. For example,
Russia’s and Ukraine’s conflict, and the possibility of retaliatory measures taken by the U.S. and NATO have created global
security concerns that could have a lasting adverse impact on regional and global economies. Although we do not have operations in Ukraine
or Russia, we have in the past sold product to local distributers, an activity that may be halted for various some of our suppliers, including
an important raw material used in our ceramic production is based in Ukraine and has ceased its operations. Procuring alternatives and
amending production may be costly and may not be possible in a timely fashion, which could disrupt our production and have an adverse
impact on our business’s results of operations, financial condition and profitability.
Downturns
in the home renovation and remodeling and new residential construction sectors or the economy generally and a lack of availability of
consumer credit could materially and adversely impact end-consumers and lower demand for our products, which could cause our revenues
and net income to decrease.
Our products are primarily used as countertops in residential kitchens. As a result, our sales depend significantly
on home renovation and remodeling spending, as well as new residential construction spending, primarily in the United States, Australia
(unless stated otherwise, reference to Australia in this report includes Australia and New Zealand), Canada and Israel. We estimate (supported
by the Freedonia Report), that approximately 60%-70% of our revenue in our main markets (U.S., Australia, Canada) is related to residential
renovations and remodeling activities, while 30%-40% is related to new residential construction.
During periods of industry downturn, housing
markets are likely to experience an oversupply of both new and resale home inventory, an increase in foreclosures, and reduced levels
of consumer demand for new homes as a result of fluctuations in interest rates, consumer confidence, government programs and unemployment.
During such periods, customers may choose to reduce their discretionary spending and, as a result, delay or cancel their home renovation
or remodeling projects.
In addition, many of our customers are
homebuyers or homeowners who finance their home purchases, construction and renovation projects through loans or lenders that provide
mortgage financing. Downturns in the housing market and/or the economy generally could limit the availability of consumer credit. A tightening
of lending standards by financial institutions could reduce the ability of consumers to obtain suitable financing for their renovation
and remodeling expenditures or home purchases, which could in term materially and adversely affect our ability to grow or sustain our
business, our revenues and net income. See also “—The COVID-19 pandemic could further impact end-consumers and the global
economy in general, lower demand for our products, disrupt our operations and materially and adversely affect our business and results
of operations” and “—Disturbances to our operations or the operations of our suppliers, distributors, customers, consumers
or other third parties could materially adversely affect our business.”
We
may need to raise funds to finance our current and future capital needs, which may dilute the value of our outstanding ordinary shares,
increase our financial expenses or limit our business activities.
We may need to raise additional funds to
finance our existing and future capital needs, including to fund ongoing working capital requirements. If we raise additional funds through
the sale of equity securities, these transactions may dilute the value of our outstanding ordinary shares. Any debt financing would increase
our level of indebtedness and could negatively affect our liquidity and restrict our operations. We may be unable to raise additional
funds on terms favorable to us or at all. If financing is not available or is not available on acceptable terms, we may be unable to fund
our future needs. This may prevent us from increasing our market share, capitalizing on new business opportunities or remaining competitive
in our industry, which could materially and adversely affect our business, prospects, financial condition and results of operations.
3
Our
results of operations may be materially and adversely affected by fluctuations in currency exchange rates, and we may not have adequately
hedged against them.
We conduct business in multiple countries,
which exposes us to risks associated with fluctuations in currency exchange rates between the U.S. dollar (our functional currency) and
other currencies in which we conduct business. In 2021, 50.0% of our revenues were denominated in U.S. dollars, 6.0% in NIS, 6.0% in Euros,
13.1% in Canadian dollars, 18.4% in Australian dollars and a smaller portion in other currencies. In 2021, the majority of our expenses
were denominated in U.S. dollars, NIS and Euros, and a smaller proportion in Canadian and Australian dollars and other currencies. As
a result, weakening of the Australian and Canadian dollars and strengthening of the NIS and, to a lesser extent, strengthening of the
Euro against the U.S. dollar presents a significant risk to us and may impact our business significantly. For example, the NIS appreciated
7.5% and 6.4% against the U.S. dollar during 2020 and 2021, respectively, and resulted in finance expenses of approximately $6.8 million
and $7.5 million in such years See “ITEM 11: Quantitative and Qualitative Disclosures About Market Risk.” for the impact of
currencies fluctuation on our operating income. We translate sales and other results denominated in foreign currency into U.S. dollars
for our financial statements; therefore, during periods of a strengthening dollar, our reported international sales and earnings could
be reduced because foreign currencies may translate into fewer U.S. dollars.
In addition, we currently engage in derivatives
transactions, such as forward and option contracts, to hedge against the risks associated with our foreign currency exposure. Our strategy
to hedge our cash flow exposures involves consistent hedging of exchange rate risk in variable ratios up to 100% of the exposure over
rolling 12 months. As of December 31, 2021, our average hedging ratio was approximately 24% out of our expected currencies exposure for
2022. Moreover, our currency derivatives, except for our U.S. dollar/NIS forward contracts, are currently not designated as hedging accounting
instruments under Accounting Standards Codification (“ASC”) 815, Derivatives and Hedging.
Hedging results are charged to finance expenses, net, and therefore, do not offset the impact of currency fluctuations on our operating
income. Our U.S. dollar/NIS forward contracts are charged to operating expenses as designated hedge instruments, partially offsetting
the impact of the U.S. dollar/NIS currency fluctuations on our operating income. While we may decide to enter into additional hedging
transactions in the future, the availability and effectiveness of these transactions may be limited and we may not be able to successfully
hedge our exposure, which could adversely affect our financial condition and results of operations. See “ITEM 11: Quantitative and
Qualitative Disclosures About Market Risk.”
If
we are unable to pass rising costs to our customers, it could have a material adverse effect on our business.
The prices of our raw materials, and energy
related costs vary significantly in recent months with market conditions, and in addition, because we acquire our raw materials from third-party
suppliers that are located outside of the regions where we manufacture our products, our baseline shipping and import costs are often
higher than those of our competitors and are also dependent on shipping availability and cost. While we are attempting to pass on such
increases costs to our customers, our ability to do so depends on many factors including competition in our markets. If we are unable
to mitigate the increase in these costs, particularly raw material and shipping, our financial condition and results of operations could
be materially and adversely affected.
4
If
we are unable to compete with lower-priced products and pass increase costs to our customers, our market share may decrease, and our financial
results may be adversely and materially impacted.
We have invested considerable resources
to position our quartz surface products as premium branded products. Due to our products’ high quality and positioning, we generally
set our prices—especially for our differentiated products—at a higher level than alternate surfaces and quartz surfaces provided
by other manufacturers. Manufacturers located in the Asia-Pacific region (predominantly China) and certain parts of Europe can produce
quartz surface products at a lower cost, including quartz surface products which imitate our products and designs. Many of these manufacturers
are able to reduce their production costs by purchasing their raw materials in the same or nearby regions where they produce their goods.
Further penetration of these products into our market may reduce our market share, limit our ability to increase prices and have a material
adverse effect on our financial condition and results of operations.
Global
trade is affected by governmental involvement including through antidumping and countervailing duties and these may cause unforeseeable
market changes that could adversely impact our financial results.
Antidumping and countervailing duty orders
are designed to provide relief from imports sold at unfairly low or subsidized prices by imposing special duties on such imports. Such
orders normally benefit domestic suppliers in the country in which the duty orders are in place and foreign suppliers not covered by the
orders. During 2018 and 2019, antidumping and countervailing duty (“AD/CVD”) petitions
were filed with the U.S. Department of Commerce (“DOC”) and the International Trade
Commission (“ITC”). The petitions, which were filed by a U.S. quartz manufacturer,
alleged that Chinese, and subsequently Indian and Turkish manufacturers injured the U.S. domestic quartz industry and therefore duties
were required to offset such unfair trade practices. Ultimately, the DOC and ITC imposed AD/CVD duties ranging approximately between 265%
and 340% for Chinese, and between 3.81% and 80.79% for Indian and Turkish manufacturers.
The imposition of AD/CVD orders have driven
some of the affected manufacturers to direct their products into other markets in which we operate (including markets in which we hold
a higher market share than in the U.S., such as Australia) thereby adversely impacting our operations and financial results. Finally,
any duties and tariffs imposed by the U.S. or other regulators may not succeed in remediation of any impact caused by the relevant imports.
Chinese, Indian and Turkish exporters may shift their focus to other, competing materials, to circumvent the duties. As a result, our
non-U.S. markets have faced increased competitive pressures. Changes in the AD/CVD tariffs may increase uncertainty and our financial
results may be adversely and materially impacted.
On October 29, 2021 the European Ceramic
Tile Manufacturers' Federation, filed a complaint to the European Commission (“Commission”)
in which it requested that the Commission initiate an anti-dumping investigation concerning imports to the EU of ceramic tiles originating
in India and Turkey between July 2020 and June 2021 (“Complaint”). The Complaint provides
a very board definition of characteristics of what will be considered “ceramic tiles”. Such characteristics include large
size ceramic slabs (120 x 120 CM or larger) which are similar to the type of ceramic slabs which are also manufactured by our subsidiary,
Lioli, an India-based producer of porcelain slabs.
The Complaint is focused on small size
ceramic slabs which are considered low-end products (used primarily for floors and wall cladding), compared to the large size ceramic
slab considered premium products sold at higher margins. Therefore, Lioli has filed a petition to exclude from the Compliant such large
size ceramic slabs.
If the Commission does not agree to exclude
Lioli’s large size ceramic slab and it is further found by the Commission that anti-dumping has indeed occurred during such period,
then the Commission may impose duties on ceramic slab imported to the EU which will be applied to Lioli’s products as well.
The current antidumping and countervailing
duty orders may not remain in effect and continue to be enforced from year to year, the products and countries currently covered by orders
may no longer be covered, and duties may not continue to be assessed at the same rates. For example, in the United States, rates
of duty can change as a result of “administrative reviews” of antidumping and countervailing duty orders. These orders can
also be revoked as a result of periodic “sunset reviews,” which determine whether the orders will continue to apply to imports
from particular countries. Antidumping and countervailing duties in the European Union and Canada are also subject to periodic reviews.
In the European Union and in Canada, such reviews can include interim reviews, expiry reviews and other types of proceedings that may
result in changes in rates of duty or termination of the duties.
5
Operational
Risks
Constraints
in the global supply of, prices for and availability of transportation of the raw materials, finished goods and other products essential
to our operations could cause our results of operations and prospects to suffer.
We currently manufacture our products at our two facilities in Israel, one facility in the United States
and one facility in India. In addition, we source a portion of our supply chain from OEMs which are also subject to similar risks. We
actively manage our global supply chain and production facilities in Israel, U.S. and India, during 2021, we experienced disruption and
volatility in our supply chain that we expect to continue through 2022. Supply chain issues have occurred on a global scale fueled by
COVID-19 pandemic and have caused delays in the arrival of or otherwise constrained our supply of raw materials, particularly quartz and
porcelain, which are essential and non-fungible components in the manufacture of our countertops and surface products. Other supply chain
risks include, but are not limited to: disruptions in shipping logistics, as ports and other channels of entry from where we import, export
and deliver our products have been closed or continue to operate at reduced capacity; shutdowns or reduced operations at our suppliers’
facilities; changes in the market prices for quartz and the countertop materials upon which we rely; and shortages of raw materials as
a result of high levels of demand or reduced capacity of our suppliers. Difficulties or interruptions obtaining the raw materials required
for our manufacturing operations, including any difficulties in the short term or long term to obtain Ukraine clay, bentonite due to the
current situation in Ukraine, has and could continue to delay our output or supply of products and harm our relationships with our customers,
damage our brand and reputation and have a material adverse effect on our results of operations. There can be no assurance that we will
continue to effectively manage our global supply chain and manufacturing operations in the future and that the impacts of the challenges
in supply chain and material procurement, brought about by COVID-19 geopolitical events and market conditions will not materially adversely
affect our business, financial condition, results of operations and growth prospects. If these conditions continue to worsen, we cannot
assure you that we will be able to successfully secure raw materials to our various manufacturing facilities in a timely or profitable
manner. In addition, price increases imposed by our OEMs and other suppliers for raw materials and transportation providers used in our
business, if we are unable to pass these costs increases to our customers, in whole or in part, it could have a material adverse effect
on our business and consolidated results of operations.
Changes
in the prices of our raw materials have increased our costs and decreased our margins and net income in the past and may increase our
costs and decrease our margins in the future.
The principal raw materials used for our products are polyester and quartz. In 2021, raw materials used
in manufacturing processes accounted for approximately 29% of our cost of goods sold. The cost of raw materials consists of the purchase
prices of such materials and costs related to the logistics of delivering the materials to our manufacturing facilities. The raw materials
we use for our products are subject to price volatility caused by weather, supply conditions, government regulations, economic and political
climate, labor costs, and other unpredictable factors. Our raw materials costs are also impacted by changes in foreign currency exchange
rates, mainly the Euro as it relates to polyester and other raw materials purchased from Europe. Any increase in raw material prices increases
our cost of sales and can decrease our margins and net income. Furthermore, we may face market conditions that will make it impossible
to pass all or some of the increased costs to our customers. If we are unable to recover these costs it may have a material adverse effect
on our financial results. For cost of our raw materials in 2021 and prior years, see “ITEM 5.A: Operating Results and Financial
Review and Prospects—Operating Results—Cost of revenues and gross profit margin.”
Quartz, which includes quartz, quartzite
and other dry minerals and engineered materials containing high amounts of silica (together referred to in this annual report as “quartz”
unless otherwise specifically stated), is the main raw material component used in our engineered quartz products. Quartz accounted for
approximately 33.8% of our raw materials cost in 2021. Our cost of sales and overall results of operations may be impacted significantly
by fluctuations in quartz prices. For example, if the cost of quartz at our plants had risen by 10% in 2021, we would have experienced
a decrease of approximately 0.9% in our gross profit margin in such year. In 2021, our average cost of quartz increased by 12.0%, following
an increase of 3.2% during 2020. Any future increases in quartz prices could also materially and adversely impact our margins and net
income.
6
Polyester, which acts as a binding agent
in our products, accounted for approximately 35.3% of our raw materials costs in 2021. Accordingly, our cost of sales and overall results
of operations may be impacted significantly by fluctuations in polyester prices. For example, if the cost of polyester had risen by 10%
in 2021, we would have experienced a decrease of approximately 1% in our gross profit margin in such year. The cost of polyester we incur
is a function of, among other things, manufacturing capacity, demand and the price of crude oil and more specifically benzene. Our cost
of polyester fluctuated significantly over the years. In 2021, our average polyester cost increased by approximately 54%. We acquire polyester
on an annual framework basis, or a purchase order basis based on our projected needs for the subsequent one to three months. Going forward,
we may experience pressure from our polyester suppliers to increase prices even during a period covered by purchase orders.
Since 2020, we have been using a dynamic
hedging strategy to reduce our exposure to changes in the polyester prices. This strategy involves hedging certain components of our polyester
formula in variable ratios of the exposure over rolling 12 months. Therefore, future fluctuations in polyester prices which we have not
adequately hedged could materially and adversely affect our profitability. Moreover, our polyester contract derivatives are currently
not designated as hedging accounting instruments under Accounting Standards Codification (“ASC”)
815, Derivatives and Hedging. Hedging results are charged to finance expenses, net, and therefore, do not offset the impact of polyester
prices on our operating income.
Pigments are also used to manufacture our products. Although pigments account for a significantly lower
percentage of our raw material costs than polyester, we encountered in the past and may experience in the future fluctuations in pigment
prices. For example, the cost of titanium dioxide, our principal white pigmentation agent, decreased by approximately 0.2% and increased
by approximately 16.4% in 2020 and 2021, respectively. Such prices fluctuations may also have a materially adverse impact on our margins
and net income.
As a result of recent global economic conditions (as discussed in the risk factor entitled “Adverse
global conditions, including macroeconomic and geopolitical uncertainty, may negatively impact our financial results”), the
prices of raw materials used for our products has been particularly volatile in fiscal 2021 and the first quarter of fiscal 2022, and
hedging mechanisms and strategies used to mitigate this price volatility have been limited, for example the current situation in Ukraine
may also make it more difficult in the short-term and long-term to obtain Ukraine clay, bentonite used in our ceramic production.
If we are unable to increase the price of our products to cover increased costs, to offset operating cost increases or are not successful
in our commodity hedging program, then commodity and raw material price volatility or increases could materially and adversely affect
our profitability, financial condition and results of operations. Moreover, future decisions not to engage in hedging transactions or
ineffective hedging transactions might result in increased cost volatility, potentially adversely impacting our profitability, financial
condition and results of operations. If we are unable to source raw materials, that could limit our ability to utilize our manufacturing
facilities, in addition, increases in the prices of these raw materials recover these both may have a material adverse effect on our financial
results.
For cost of our raw materials in 2021
and prior years, see “ITEM 5.A: Operating Results and Financial Review and Prospects—Operating Results—Cost of revenues
and gross profit margin.”
We
face intense competitive pressures from manufacturers of other surface materials, which could materially and adversely affect our results
of operations and financial condition.
Our surface products compete with several
surface materials such as granite, laminate, marble, manufactured solid surface, concrete, stainless steel, wood, and other porcelain
and quartz surfaces. We compete with manufacturers of these surface materials with respect to a range of factors. These factors include,
among other things, brand awareness and brand position, product quality, product differentiation, design and breadth of product offerings,
slab dimensions, new product development and time to market, availability and supply time, technological innovation, popular home interior
design trends, pricing, availability of inventory on demand, distribution coverage, customer service and versatility in products portfolio.
7
Since we seek to position our products
as a premium alternative to other surface materials, the perception among end-consumers and other stakeholders of our products is a key
competitive differentiator. If we are unable to anticipate or react quickly to changes in consumer preference in these areas, we may lose
market share and our results of operations may suffer. If consumer preference shifts away from materials we are offering to other materials,
or away from branded surfaces, our market share may be reduced, and our financial results may be materially and adversely impacted.
Competition increases with increased global
production capacity by new and existing competitors. Should our competitors be able to produce products more efficiently at lower prices,
adapt more quickly to changes in consumer preferences and demands, have a diversified product offering, or acquire complementary businesses,
we may lose market share and our financial results may suffer.
Our
ability to fully integrate acquisitions, joint ventures and/or investments, including our previously announced acquisitions of Lioli and
Omicron, could be more difficult, costly and time-consuming than we expect and therefore disrupt our business and adversely affect the
value of our shares.
Our success will depend, in part, on our
ability to expand our product offerings and grow our business in response to customer demands, competitive pressures and industry trends
in the home renovation and construction sectors. We pursue our growth strategy by acquiring complementary businesses across the globe,
including our previously announced acquisitions of Lioli, an India-based porcelain countertop slab producer, in October 2020 (the “Lioli
Acquisition”), and Omicron, a stone supplier based in Pompano Beach, Florida, in December 2020 (the “Omicron
Acquisition”).
The combination of independent businesses
is a complex, costly and time-consuming process. While our management continues to make progress in integrating Lioli’s and Omicron’s
businesses with ours, such efforts are still underway and are expected to continue through 2022. During this time, we and our management
have encountered, and are likely to continue to encounter, ongoing challenges with respect to achieving anticipated synergies. For example,
we have experienced a high turnover rate of key employees at Lioli, which we attribute to challenges assimilating Lioli employees into
our workplace culture and maintaining consistent operational standards and processes. We seek to manage these transitions carefully, such
as by establishing employee training and development programs. However, any continued retention issues at our acquired companies will
result in a loss of institutional knowledge about those businesses. Failure to address these risks, such as by successfully retaining
current employees or recruiting new professionals with relevant industry knowledge, will likely result in operational delays and negatively
impact our financial results.
In addition, we may be exposed to unforeseen
or undisclosed claims and liabilities arising from the operations of Lioli and Omicron from periods prior to the dates we acquired them.
For example, although we believe that we have a good and marketable title to the Lioli manufacturing facility in Morbi, Gujarat, India,
there are certain historic discrepancies between records of different local and regional authorities in Gujarat, India, including records
of titles to physically non-existing plots, that might result in our ownership to the facility or its parts being challenged, including
by title holders of existing and non-existing adjacent plots. Our ability to seek indemnification from the former owners for these and
any other claims or liabilities could be significant and limited by various factors, including the specific limitations contained in the
respective acquisition agreements and the financial ability of the former owners. If we are unable to enforce any indemnification rights
we may have, or if we do not have any right to indemnification, we could be held liable for the costs or obligations associated with such
claims or liabilities, which could adversely affect our operating performance.
In addition, as a result of the Lioli
Acquisition and the Omicron Acquisition we carry a significant amount of intangible assets (including goodwill) on our balance sheet.
As of December 31, 2021, our goodwill and other intangible assets (including Lioli and Omicron acquisitions), amounted to $45.8 million
and $9.6 million, respectively. The future occurrence of potential indicators of impairment could include, for example, a significant
adverse change in business climate, an adverse action or assessment by a regulator, unanticipated competition, a material negative change
in relationships with significant customers, strategic decisions made in response to economic or competitive conditions, continued loss
of key personnel, or an expectation that a reporting unit or a significant portion of a reporting unit will be sold or disposed of, and
could result in goodwill impairment charges. Although we have not recorded goodwill impairment charges in the past, we cannot guarantee
that we will not experience goodwill impairments in the future.
8
If
we fail to effectively manage required changes in our production and supply chain, we may be unable to serve the market or suffer additional
inefficiencies.
Our production and supply chain processes are complex and rely on our estimates and forecasts in terms
of volume as well as product mix. These processes are characterized by an interdependent network of suppliers and material needs, owned
and leased manufacturing locations, external manufacturing partners, distribution networks, shared service delivery centers and information
systems, each of which supports our ability to provide our products to our customers consistently. The Lioli Acquisition and Omicron Acquisition
further expanded our production and supply chain, as well as product offerings, into new global markets. While we continue integrating
Lioli and the Omicron into our existing business, we must also effectively manage the increased complexity resulting from manufacturing
and sourcing products and materials on a vaster global scale. A failure to accurately forecast or manage our needed inventories, as well
as any disruptions in our production and supply chain processes, may hinder the availability of our products in the market, result in
loss of sales, increase shipping costs and harm our relationships with our customers, damage our brand and reputation and have a materially
adverse effect on our results of operations. In addition, if we are unsuccessful in adjusting our manufacturing operations to such changes,
or to changes in the demand for our products, we may be unable to grow our business and revenue, maintain our competitive position or
improve our profitability.
The
ability of suppliers to deliver parts, components and manufacturing equipment to our facilities, and our ability to manufacture without
disruption, could affect the timely delivery of our products and fulfillment of our contracts with distributors and customers.
We have purchased the majority of our
manufacturing production lines from Breton S.p.A. (“Breton”), a manufacturer of lines
to produce engineered stone slabs. We depend on Breton for certain spare parts for our production line equipment and for their support
and know-how required to resolve specific technical problems in their manufacturing equipment and anticipate we will continue to do so
in the future. If Breton were to cease business, or otherwise experienced an inability or delay in providing specialty machine components
and spare parts, know-how or technical support to us, we would be unable to obtain such components or expertise for an indeterminate amount
of time. As a result, the output of our products to our distributor sand customers could be prevented or delayed.
In addition, our operations are subject
to disruption for a variety of reasons, including COVID-19-related supply chain difficulties or slowdowns, work stoppages, labor relations,
damage to our manufacturing facilities or products caused by hazards, human error, negligence or other failures or circumstances beyond
our control. There can be no assurance that we will continue to effectively manage our global supply chain and manufacturing operations
in the future and that the impacts of COVID-19 and other global developments on our supply chain and manufacturing will not materially
adversely affect our business, financial condition, results of operations and growth prospects. See “—The COVID-19 pandemic
could further impact end-consumers and the global economy in general, lower demand for our products, disrupt our operations and materially
and adversely affect our business and results of operations” and “—Disturbances to our operations or the operations
of our suppliers, distributors, customers, consumers or other third parties could materially adversely affect our business.”
Our insurance policies have limited coverage in case of certain disruptions or significant damage to our
manufacturing facilities and may not fully compensate us for the cost of replacement and any loss from business interruptions. Any damage
to our facilities or interruption in manufacturing, whether due to limitations in manufacturing capacity or arising from factors outside
of our control, could result in delays or failure in meeting contractual obligations and could have a materially adverse effect on our
relationships with our distributors and customers, and on our financial results.
9
Problems
inherent in the use of OEM suppliers, such as a failure to effectively collaborate or diversify our relationships with various OEMs, could
materially adversely affect our competitive position or profitability.
In order to optimize our production capabilities,
meet market demands and adjust to changes in market dynamics, during 2021 we accelerated our strategy to acquire certain basic product
models from third-party engineered stone and ceramic OEMs, primarily from China, Spain and Italy. We anticipate further increasing this
activity during 2022.
The successful expansion of our supplier
network through OEM relationships will depend on several factors, including, for example:
| • |
our ability to manage our relationships with OEMs; |
| • |
the extent to which we experience delays in delivery of products from OEMs or
the quality of products produced by these OEMs does not meet our standards; |
| • |
damage or disruption to the ability of our OEMs to develop, manufacture and transport
our products as a result of factors within or outside their control; |
| • |
failure by such OEMs to comply with applicable laws and regulations or accepted
industry standards; and |
| • |
our ability to agree on the commercial terms with such vendors, or effectively
enforce the terms of any verbal or written agreements, which could cause OEMs to cease manufacturing in the amounts required to meet the
demand for our products, or at all. |
If any of the above factors should materialize,
we could experience adverse impacts to our business, financial condition and results of operations. Moreover, our failure to effectively
manage our OEM supplier-partnerships could require us to locate alternative manufacturers or produce the products using our facilities,
which could cause substantial delays in manufacturing, increase our costs, negatively impact our brand, reputation, and the quality of
our products in case we rely on new vendors, and require us to adjust our products and our manufacturing processes. Even if we do effectively
manage such relationships, they may not help us to successfully optimize our operations and reduce costs. In addition, cooperation with
OEMs may require us to expose certain intellectual property relating to our products and designs, the confidentiality of which we may
not be able to further control or enforce. Finally, if we experience demand for our products that exceeds our manufacturing capacity and
we fail to acquire slab models from OEMs, we may not have sufficient inventory to meet our customers’ demands, which would negatively
impact our revenues, reputation and potentially cause us to lose market share.
A
key element of our strategy is to expand our sales in certain markets, such as the United States. Failure to expand such sales would have
a materially adverse effect on our future growth and prospects.
A key element of our strategy is to expand
sales of our products in certain of our key existing markets, as well as additional new markets that we believe have high growth potential.
In line with our growth acceleration plan, we are continuing to make strategic investments to increase our distribution network in the
United States, including through the expansion of our brand into the South, Southeast and Ohio Valley markets via the Omicron Acquisition,
and most recently, by increasing the headcount of our U.S. sales force in 2021. We estimate we can continue to expand our brand and the
sales of our engineered quartz and porcelain products in the United States where, according to Freedonia, engineered quartz surfaces represented
20% of the total countertops by volume installed in 2020.
We face several challenges in generating
demand for our products in the United States or other markets, including increasing consumers’ awareness of our brand for their
kitchen countertops and other interior settings. If the market for our products in these regions does not develop as we expect, our future
growth, business, prospects, financial condition and operating results will be adversely affected. In addition, changes to trade environments,
including imposition of import tariffs or withdrawal from or revisions to international trade policies or agreements, may affect our growth
potential globally, and further impact other markets in which we operate. See “—Competition from manufacturers of lower priced
products may reduce our market share, alter consumer preferences and materially and adversely affect our results of operations and financial
condition”.
10
Even if we are able to increase our brand
awareness and the demand for our products in these and other regions we consider to be viable markets, we may face certain challenges
in supplying materials to large retailers in these regions. For more information, see “—A sizable proportion of our sales
in North America is attributable to a limited number of large retailers; any deterioration of our relationships with such retailers or
deterioration in their business performance (in fields relevant to the sale of our products) could adversely impact our results of operations.”
Additionally, our reliance on third-party suppliers to provide installation and fabrication services to large retailers could impair our
relationship with our customers, which could also materially harm our business and results of operations. Our success will depend, in
large part, upon consumer acceptance and adoption of our products and brand in these markets, on the level of our execution, our go-to
market strategy and its implementation and the timely availability of our products across regions, and if we do not effectively expand
into these markets, there could be an adverse impact on our sales and financial condition.
A
sizable proportion of our sales in North America is attributable to a limited number of large retailers; any deterioration of our relationships
with such retailers or deterioration in their business performance (in fields relevant to the sale of our products) could adversely impact
our results of operations.
We supply our products to retailers in
a manner that includes fabrication and installation of countertops, primarily from our quartz surfaces, performed by third party contractors.
While we expect that these retailers will continue to purchase our products, there is no assurance that such current agreements will be
renewed at all or on similar terms. In case these collaborations are terminated or not renewed, our revenue could significantly decrease.
Our sales to retailers, may be affected,
among other things, by their focus, sales and promotional events, the timing, scope and other terms that are determined exclusively by
such retailers and can impact our sales volume. Accordingly, these sales have been, and may continue to be, volatile, and we may not be
able to maintain or increase such sales or to maintain its current profitability level. In particular, as a result of the COVID-19 pandemic,
governmental mandates resulted in the capacity limitations at businesses and the temporary shutdown of non-essential businesses, including
for example IKEA. These restrictions, which negatively affected our sales volumes in 2021, could continue to negatively affect our sales
volumes in the future and have a material adverse impact on our business depending on the duration of the COVID-19 pandemic and its effects.
See also “—The COVID-19 pandemic could further impact end-consumers and the global economy in general, lower demand for our
products, disrupt our operations and materially and adversely affect our business and results of operations” and “—Disturbances
to our operations or the operations of our suppliers, distributors, customers, consumers or other third parties could materially adversely
affect our business”.
In addition, we have entered into arrangements
with third parties for the supply of fabrication and installation services to and we may enter into such agreements with other third parties.
The success of these third-party relationships may impact our supply of countertops, inventory levels, quality and service level standards
and ability to manage the installation and fabrication of countertops to meet the end consumers’ demands at reasonable prices. If
we are unable to successfully manage the installation and fabrication services performed for us by these third-party fabricators and installers,
we may experience relatively high waste of our products used by fabricators for such works, and complaints from end-consumers with respect
to supply time, quality and service level of the fabrication and installation, including defects and damages. Such risks could expose
us to warranty-related damages, which, if not covered back-to-back by the fabricators engaged by us, could have a materially adverse effect
on our financial results, reputation and brand position and lead to the termination of our agreements with retailers.
We
rely on select suppliers in specific regions for the raw materials used in the production of our products, and we may encounter significant
manufacturing delays if we experience disruptions in these supply arrangements and/or are required to change suppliers.
Our principal raw materials for engineered
quartz products are quartz, polyester and pigments. We acquire quartz from quartz manufacturers from Turkey, India, Israel and several
European countries. We typically transact business with our quartz suppliers on an annual framework basis, under which we execute purchase
orders from time to time. In 2021, approximately 62% of our quartz was imported from several suppliers in Turkey. We acquire polyester
from several suppliers, mainly from Europe, on an annual framework basis, or on a purchase order basis based on our projected needs for
the subsequent one to three months. We acquire other raw materials used in our engineered quartz products from a limited number of suppliers
on a purchase order basis, and our ability to preset prices in advance is limited. Additionally, the principal raw materials used in our
porcelain products are clay minerals, natural minerals (such as feldspar) and chemical additives. We typically transact business with
our suppliers of these raw materials on an annual framework basis, under which we execute purchase orders from time to time. Because nearly
all of our supply arrangements are based on our projected or anticipated needs, we cannot be certain that any of our current suppliers
will continue to provide us with the quantities of raw materials that we require or will be able to satisfy our anticipated specifications
and quality requirements. We may also experience a shortage of such materials if, for example, demand for our products increases.
11
In addition, we may lose our supply contracts
or arrangements, or the ability to effectively enforce our rights thereunder, if our supplier relationships are disrupted as a result
of factors beyond our control, including, for example, political tensions in the regions where our supplies are located. For instance,
in recent years, rising tensions between Turkey and the State of Israel have increased the risk that our commercial arrangements with
Turkish suppliers for quartz may be adversely and materially impacted. If political tensions between Turkey and Israel worsen, and our
Turkish quartz suppliers fail to perform in accordance with our arrangements, we may not be able to successfully enforce them.
If we are unable to agree upon prices
with suppliers of our raw materials, our suppliers could cease supplying us with the raw materials required for our products. If our supply
of raw materials is adversely impacted to a material extent or if, for any other reason, any of our suppliers do not perform in accordance
with our agreements with them or cease supplying us with the relevant material for any reason, we would need to locate alternate suppliers.
Securing replacement suppliers could result in substantial delays in manufacturing, increase our costs, negatively impact the quality
of our products, or require us to adjust our products and our manufacturing processes. Any such delays in or disruptions to the manufacturing
process could materially and adversely impact our reputation, revenues and results of operations as well as other business aspects, such
as our ability to serve our customers and meet their order requests.
For more information with regards to suppliers
of raw materials used in our products, see “ITEM 4.B: Information on the Company—Business Overview—Raw materials and
Service Provider Relationships.”
In
addition to our traditional engineered quartz offering, we have commenced manufacturing of porcelain products and sales of porcelain,
natural stone and other materials, and may pursue a further expansion of our product offering, including introducing new products and
materials, which may be unsuccessful, and may divert management’s attention and negatively affect our margins and results of operations.
Our competitive advantage is due, in part,
to our ability to develop and introduce innovative new and improved products and to strengthen our brand. To maintain such advantage,
we may develop our own new products or acquire manufacturers of products that are competing with, or complimentary to, ours. Such new
products may include new surface materials and complementary products. Introducing new products involves uncertainties, such as predicting
changing consumer preferences, developing, manufacturing, marketing and selling new technologies, products and materials, and entering
new market segments.
For example, as a result of the Lioli Acquisition, we have commenced manufacturing and sales of porcelain
slabs for different applications, including flooring and cladding, and we intend to extend our produced porcelain countertops offering.
Lioli may face adverse tariffs for sale into the EEU See also “—Global trade is affected by governmental involvement including
through antidumping and countervailing duties and these may cause unforeseeable market changes that could adversely impact our financial
results.” In addition, our recently acquired Omicron locations in the U.S. also sell natural stone and ancillary products for kitchen
installation and fabrication. Although we believe that the expansion into new products, materials and, in some cases, applications represent
an opportunity to leverage our existing business, no guarantee can be given as to customer demand for the new products. Moreover, in the
future we may decide to introduce additional new products and enter new markets, whether through cooperation with third-party manufacturers
or manufacturing at our own facilities.
12
Despite our intention to expand our manufacturing
and sales of porcelain or other additional products, we may not be successful in capturing the market share dominated by competitors in
this area, offer innovative alternatives ahead of the competition or maintain the strength of our brand. Such new initiatives may require
increased time and resources from our management, result in higher than expected expenses and have a material adverse effect on our margins
and results of operation.
Our
revenues are subject to significant geographic concentration and any disruption to sales within one of our key existing markets, or to
sales to a major customer therein, could materially and adversely impact our results of operations and prospects.
Our sales are subject to significant geographic
concentration, with four largest markets accounting for 85.1% of revenues. In 2021, sales in the United States, Australia (including New
Zealand), Canada and Israel accounted for 47.4%, 18.4%, 13.1% and 6.1% of our revenues, respectively. Our results of operations could
be materially and adversely impacted by a range of factors, including spending on home renovation and remodeling and new residential construction
in the region (as discussed above), local competitive changes, changes in consumers’ quartz surface or countertop preferences and
regulatory changes that specifically impact these markets (such as imposition of antidumping and countervailing duties in the United States
as discussed above), as well as by our performance in each of these markets. Sales in our main markets could be materially and adversely
impacted by other general economic conditions, including in a global or local recession, depression, excessive inflation or other sustained
adverse market events and increases in imports of cheaper quartz surfaces from low cost countries manufacturers into such markets, especially
the United States, Australia and Canada. Stronger local currencies could make lower-priced imported goods more competitive than our products.
Although we face different challenges and risks in each of the markets in which we operate, due to the existence of a high level of geographic
concentration, should an adverse event occur in any of these jurisdictions, our results of operations and prospects could be impacted
disproportionately.
In addition, we derived a mid-single digit percentage of our total revenues in 2021 from one customer.
Revenues from this significant customer increased during 2021. The loss of or a further decrease in business from such customer could
have a material adverse effect on our revenues, results of operations and our financial condition.
Our
business is subject to disruptions and quarterly fluctuations in revenues and net income as a result of seasonal factors, weather-related
conditions, natural disasters, building construction cycles and actions by third parties over which we have no control, which are hard
to predict with certainty.
Our results of operations are impacted
by seasonal factors, weather-related conditions, and construction and renovation cycles. The levels of manufacturing, fabrication, distribution,
and installation of our products generally follow activity in the construction and renovation industries. Severe weather conditions, such
as unusually prolonged cold conditions, hurricanes, severe storms, earthquakes, floods, fires, droughts, other natural disasters or similar
events could reduce, delay or halt the construction and renovation industries in the markets in which we operate, and our businesses may
be adversely affected. Markets in which we operate that are impacted by winter weather, such as snowstorms and extended periods of rain,
may experience a slowdown in construction activity during the beginning and the end of each calendar year, and this winter slowdown contributes
to lower sales in our first and fourth quarters. Natural disasters including tornados, hurricanes, floods and earthquakes may damage our
facilities, the launch facilities we use or those of our suppliers, which could have a material adverse effect on our business, financial
condition and results of operations. Traditionally, the second and third quarters of the year exhibit higher sales volumes than first
and fourth quarters, however during 2021 that was not the case as the revenues generated in the fourth quarter of 2021 were similar to
the second and third quarter revenues in 2021. For more information, see “ITEM 5.A: Operating and Financial Review and Prospects—Operating
Results—Factors impacting our results of operations” and “ITEM 5.A: Operating and Financial Review and Prospects—Operating
Results—Quarterly results of operations and seasonality.” Adverse weather in a particular quarter or a prolonged winter period
can also impact our quarterly results. Our future results of operations may experience substantial fluctuations from period to period
as a consequence of such adverse weather. Increased or unexpected quarterly fluctuations in our results of operations may increase the
volatility of our share price and cause declines in our share price even if they do not reflect a change in the overall performance of
our business.
13
Furthermore, our ability, and that of
our suppliers, OEM suppliers, distributors, customers and other third parties, to develop, manufacture, transport, distribute, sell, install
and use our products is critical to our success. Damage or disruption to our or their operations could occur due to various factors, some
of which cannot be foreseen, including, among others, telecommunications failures; power, fuel or water shortages; strikes, labor disputes
or lack of availability of qualified personnel; or other reasons beyond our control or the control of such third parties. Failure to take
adequate steps to mitigate the likelihood or potential impact of such events, or to effectively manage such events if they occur, could
continue to result in adverse effects on our business, financial condition or results of operations.
Our
distributors’ actions may have a materially adverse effect on our business and results of operations. Our results of operations
may be further impacted by the actions of our re-sellers.
Sales to third-party distributors accounted
for approximately 10% of our revenues in 2021. In our indirect markets, we depend on the success of the selling and marketing efforts
of our third-party distributors, and any disruption in our distribution network could materially impair our ability to sell our products
or market our brand, which could materially and adversely affect our business and results of operations. As we have limited control over
these distributors, their actions could also materially harm our brand and company reputation in the marketplace.
In the majority of our distribution arrangements,
we operate based on an initial agreement or general terms of sale or, in certain cases, without any agreement, in writing or at all. The
lack of a written agreement with many of our distributors may lead to ambiguities, costs and challenges in enforcing terms of such arrangements,
including where we wish to terminate early due to the distributor’s failure to meet annual sales targets. We have experienced difficulties,
including litigation, in connection with the termination of certain of our distributors due to disputes regarding their terms of engagement.
See “ITEM 8.A: Financial Information—Consolidated Financial Statements and Other Financial Information—Legal proceedings.”
Additionally, we may be unable to distribute our products through another distributor within the territory during the period in which
we must give prior termination notice, or to identify and retain new distributors upon termination, which may materially and adversely
impact our market share, results of operations, relationships with our customers and end-consumers and brand reputation. Because some
of our distributors operate on nonexclusive terms, distributors may also distribute competitors’ countertop surfaces or other surface
materials, which may cause us to lose market share. If we opt to distribute our products directly upon termination of existing arrangements
with our distributors, ramping up our logistics and shipping capabilities could require significant time and financial commitments, which
could materially and adversely impact our market share and results of operations. We cannot assure you that we will be able to successfully
transition to direct distribution in a timely or profitable manner.
In the United States, we supply our products
in part to sellers who in turn re-sell them to fabricators, contractors, developers and builders. Certain actions by such third parties
may also materially harm our brand and reputation.
The termination of arrangements with distributors
and re-sellers may lead to litigation, resulting in significant legal fees for us and detracting our management’s effort, time and
resources. In addition, our distributors and re-sellers generally disclose to us sales volumes and other information on a monthly or quarterly
basis. Inaccurate sales forecasts, on which we have already relied on in our production planning or our failure to understand correctly
the information in a sales report could cause significant, unexpected volatility in our sales and may impact our ability to make plans
regarding our supply chain. Any of these events could materially and adversely affect or cause unexpected fluctuations in our results
of operations.
14
Legal,
Regulatory, Safety and Security Risks
Results
of Silicosis and other bodily injury claims may have a material adverse effect on our business, operating results, and financial condition.
Silicosis is a potentially fatal progressive
occupational lung disease and is characterized by scarring of the lungs and damage to the breathing function. Inhalation of dust containing
fine silica particles (respirable crystalline silica, or RCS) may occur while performing certain tasks, including among others, processing
materials that contain crystalline silica (with quartz having a relatively high crystalline silica content) if safety measures are not
implemented, which in turn can cause silicosis and other health issues.
Since 2008, we have been named, either directly or as a third party defendant, in numerous lawsuits alleging
damages caused by exposure to RCS related to our products filed by individuals (including fabricators and their employees, and our former
employees), their successors, employers and the State of Israel, and in subrogation claims by the Israeli National Insurance Institute
(the “NII”), WorkerCover in several states in Australia, and others. As of December
31, 2021, we were subject to pending lawsuits with respect to 154 injured persons globally (of which 114 were in Israel, 38 in Australia
and two in the United States) and had received pre-litigation demand letters with respect to additional 18 persons, in each case relating
to silicosis claims. One of the injured persons filed against us a lawsuit in the Central District Court in Israel with a motion for its
recognition as a class action; and subsequently we reached a settlement agreement with the lead-plaintiff with respect to this claim,
pursuant to which we will make a payment on a one-time basis, without any admission of liability, of an aggregate amount of approximately
NIS 9.0 million (approximately $2.9 million) to fund certain safety related expenses at fabrication facilities in Israel, as well as the
plaintiff’s compensation and legal expenses. This settlement has been approved by the competent courts in 2021 and the parties are
in the process of performing the settlement agreement, a process that will continue throughout 2022. Most of the claims asserted against
us do not specify a total amount of damages sought and the plaintiffs’ future damages, if any, is intended to be determined at trial
or settlement discussions.
Although we intend to vigorously contest
some of the pending claims, we cannot provide any assurance that we will be successful. As of December 31, 2021, we estimated based on
the current legal conditions that our total exposure with respect to all then-pending lawsuits in Israel and Australia was approximately
$42.9 million (which we made a provision for on our balance sheet), however, the actual outcome of such lawsuits may vary from our estimate.
We believe that we have $6.7 million of coverage under our product liability insurance and, accordingly, our net exposure with respect
to such pending claims is estimated to be $36.2 million. At this early stage of litigation, we are unable to estimate the probability
of the actual exposure in the claims filed against us in the U.S.
Any pending or future litigation is subject
to significant uncertainty. Our estimated total net exposure with respect to pending claims is subject to change for a variety of reasons,
including an unpredictable adverse development in the pending cases. We cannot estimate the number of potential claimants that may file
claims against us, the jurisdictions in which such claims may be filed, who the claimants are or the nature of the claims. Consistent
with the experience of other companies involved in silica-related litigation, there may be an increase in the number of asserted claims
against us. In addition, punitive damages may be awarded in certain jurisdictions, even though they are rare in Israel. We may be also
subject to putative class action lawsuits in the future in Israel and abroad and we cannot be certain whether such claims will succeed
in being certified or on their merits. An actual outcome which is higher than our estimate could have a material adverse effect on our
financial results and cash flow.
Any uninsured damages to which we are
subject in existing or future potential litigation, the cost of defending any uninsured claims, compliance costs, and the loss of business
from fabricators who no longer find it practical to fabricate our products, may have a material adverse impact on our revenues and profits.
Moreover, even if we are found only partially liable to a plaintiff’s damages, in some jurisdictions the plaintiff may seek to collect
all his damages from us, requiring us to collect separately from our co-defendants their allocated portion of the damages and there can
be no assurance that we will succeed in such collection.
As of December 31, 2021, 22 of our employees,
out of which 11 were employed in our plants in Israel as of such date, were banned by occupational physicians from working in a workplace
with dust due to diagnose or suspected diagnose of silicosis or other lung diseases, and any expenses not covered by the National Insurance
Institute of Israel which we may incur in this respect are not covered by our employer liability insurance. However, so far, we managed
to receive contribution in settlements also from insurers of fabricators, although insurers (such as ours) alleged that there is no insurance
coverage for silicosis in employer liability insurance. In addition, as of December 31, 2021 there were two outstanding lawsuits that
had been filed against us by former employees.
15
We currently have limited product liability
insurance policies, which apply to us and our subsidiaries and cover claims related to bodily injuries though in most cases these policies
exclude damages caused by exposure to hazardous dust. In recent years, we have been able to obtain such insurance only on less favorable
terms than previously. If we are unable to renew our product liability insurances at all or in part, if we cannot obtain insurance on
as favorable terms as previously, or if our insurance is terminated early, decreased, provides inadequate coverage or if we are subject
to silicosis-related claims excluded by our product liability insurance policy or by our employer liability insurance policy, we may incur
significant legal expenses and become liable for damages, in each case, that are not covered by insurance. For example, as of September
2020 our Australian product liability insurance ceased coverage of newly diagnosed silicosis related claims. Such events might have a
material adverse effect on our business and results of operations. As of December 31, 2021, our insurance receivables for silicosis-related
claims totaled $6.7 million. Although we believe that it is probable that such receivables will be paid to us when such payments are due,
if our insurers become insolvent in the future or for other reason do not pay such amounts in full or on a timely basis, such failure
could have a material adverse effect on our financial results and cash flow.
In addition, media coverage regarding
the hazards associated with exposure to RCS in the engineered quartz surfaces, which intensified significantly primarily in Australia,
may adversely affect consumer preferences toward our products, damage our brand and reputation and lead to loss of sales and a material
adverse effect to our revenues and financial results. Increased awareness of this issue, and media focus may also trigger greater governmental
and regulatory scrutiny and action, which may increase our costs of compliance therewith, lead to greater propensity for litigation against
us or ultimately even result in a ban of quartz-based products.
Any of the risks described above relating
to claims regarding silicosis and other bodily injury claims may have a material adverse effect on our business, operating results and
financial condition. For more information, see “ITEM 8.A: Financial Information—Legal Proceedings—Claims related to
alleged silicosis and other injuries.” See also Note 11 to the financial statements included elsewhere in this report.
Regulatory
requirements and any changes thereto relating to hazards associated with exposure to RCS in stone and engineered quartz surfaces may adversely
and materially affect our business.
During recent years, after identifying
exposure to silica in the engineered quartz and stone countertop industry as a health hazard to workers involved in manufacturing, cutting,
fabricating, finishing and installing quartz and stone countertops, several local regulatory bodies have issued safety alerts and promoted
new regulations. For example, in 2015, the Israeli Ministry of Economy and Industry (“IMEI”)
proposed a new law aimed at improving the health, protection and safety of persons engaged in fabrication of engineered quartz surfaces
by imposing, among other things, obligations to obtain permits for operating a fabrication business. While, that law did not pass, there
is still a possibility of regulatory involvement or renewed attempts for legislation that could adversely affect our market and so results
of our operations. In July 2019, the Australian federal government established a national dust disease taskforce in light of the re-emergence
of silicosis. In October 2019, Queensland State in Australia approved a new code of practice on managing RCS exposure in the stone benchtop
industry, that included, among others, prohibiting uncontrolled dry cutting and periodic air monitoring requirements. In early 2020, Victoria
State in Australia announced its intention to execute a licensing initiative in its territory, after prohibiting uncontrolled dry cutting
of engineered stone, and such licensing scheme is to enter into effect by the end of 2022. Western Australia State recently changed its
exposure standard for RCS, in addition to launching a new health surveillance requirement for silica, according to which employers will
be required to provide a low-dose high-resolution CT scan instead of the previously required chest X-ray. In February 2020, the U.S. Occupational
Safety and Health Administration published a National Emphasis Program addressing the hazards of silica in various industries. Contemplated
and current regulatory initiatives in the U.S., Australia and Israel are necessary to improve health and safety, however, these changes
may also disrupt the market or impose burdens on fabricators and distributors potentially causing them to shift towards using other materials,
which could materially and adversely impact our business. Further regulatory changes regarding the ability to use, process or sell stone
countertops, particularly engineered quartz, and the safety measures required in such activities may materially adversely affect our business.
16
In New-South Wales, Australia, a Legislative
Council Committee was formed to review the State’s response to silicosis in the manufactured stone industry. The Legislative Council
Committee issued its final report in March 2020 after receiving submission and holding hearings with interested parties, and recommended,
among other things: providing all manufactured stone workers a low-dose high-resolution CT scan (instead of X-ray); obliging all manufacturers
and suppliers to provide safety data sheets and to affix standardized warning labels on all manufactured stone products; further reducing
the workplace exposure standard for RCS; and establishing a silicosis register.
We may be required to incur additional
expenses associated with exposure to RCS in the engineered quartz surfaces industry to enhance our compliance with current and future
laws, regulations or standards. Failure to comply with existing regulatory requirements or any changes thereto may expose us to regulatory
actions (as detailed below in “—The extent of our liability for environmental, health and safety, product liability and other
matters may be difficult or impossible to estimate and could negatively impact our financial condition and results of operations”)
as well as to lawsuits by our employees. Greater regulatory scrutiny and action may also lead to greater propensity for litigation against
us or ultimately result in a government ban of our products.
Environmental,
health and safety regulations, product liability regulations, industry standards and other similar matters may be costly, difficult or
impossible to comply with under our existing operations and could negatively impact our financial condition and results of operations.
Our manufacturing facilities are subject
to numerous Israeli, U.S. federal and state (Georgia) and Indian federal and Gujarati laws and regulations which may cause us to incur
significant costs and liabilities. We are also subject to industry standards and policies imposed by our customers (such as large retailers),
relating to environmental, health and safety, use of our products and other matters such as dust, acetone and styrene control, as detailed
in “ITEM 4.B: Information on the Company—Business Overview—Environmental and Other Regulatory Matters.” Other
aspects of our activities are subject to local laws wherever we operate, including Canada, Australia, Singapore and the United Kingdom.
These laws, ordinances and regulations can be subject to change and such change could result in increased compliance costs, the need for
additional capital expenditures, or otherwise adversely affect us. In February 2022, Israel adopted a long term goal for the reduction
of environmental styrene emissions. Although such goal is not expected to impact our current operations, the adoption of new regulations
could create an additional burden for any future investment in our Israeli facilities. Our recently purchased plant in India is
relatively new, thus is still in the stages of adjustments to comply with local regulations and permits, including issues of groundwater
abstraction and water consumption, gas use, diesel generator capacity use and emission standards. Violations of environmental, health
and safety laws and regulations may lead to civil and criminal sanctions against us, our directors, officers or employees. Liability under
these laws and regulations and compliance with various industry standards and policies involves inherent uncertainties and in some cases
may compel the installation of additional equipment and subject us to substantial penalties, injunctive orders and facility shutdowns,
as well as damages to our reputation and brand and may therefore lead to loss in revenue. If our operations are enjoined because of failure
to comply with such regulations, or if we are required to install expensive equipment in order to meet regulatory requirements, it could
materially adversely affect our results of operations. Any contemplated expansion of our facilities will also need to meet standards imposed
by laws, regulations and other industry standards. Violations of environmental laws could also result in obligations to investigate or
remediate potential contamination, third-party property damage or personal injury claims resulting from potential migration of contaminants
off-site. Violations of such laws and regulations may also constitute a breach of current or future commercial contracts we have with
third parties and impact our cooperation with customers and suppliers. We have identified in the past and may identify in the future compliance
risks related to environmental and health and safety regulation standards. Preparation and implementation of mitigation plans for such
risks may take time during which we may not be in full compliance with applicable laws and standards.
17
In addition, the operation of our manufacturing
facilities in Israel, the United States (Georgia) and India (Gujarat) is subject to applicable permits, standards, licenses and approvals.
Any expansions or improvements to our facilities will be subject to obtaining appropriate permits, and we cannot be certain that such
permits will be obtained in a timely matter, or at all. For detailed information, see “ITEM 4.B: Information on the Company—Business
Overview—Environmental and Other Regulatory Matters”. We expect our business licenses to be extended by the relevant authorities
for a specified term and we intend to seek subsequent extensions on an ongoing basis. Generally, failure to obtain a permit or license
required for the operation of our facilities, or failure to comply with the requirements thereunder, may result in civil and criminal
penalties, fines, court injunctions, imprisonment, and operations stoppages. If we are unable to obtain, extend or maintain the business
license for any of our plants, we would be required to cease operations at such location, which would materially adversely affect our
results of operations. Our ability to obtain necessary permits and approvals for our manufacturing facilities may be subject to additional
costs and possible delays beyond our initial projections. In addition, to demonstrate compliance with underlying permits licenses or approvals,
we are required to perform a considerable amount of monitoring, record-keeping and reporting. We may not have been, or may not be, at
all times, in complete compliance with such requirements and we may incur material costs or liabilities in connection with such violations,
or in connection with remediation at our sites or certain third-party manufacturing sites if we are found liable in relation thereto.
From time to time, we face compliance
issues related to our manufacturing facilities. See “ITEM 4.B: Information on the Company—Business Overview—Environmental
and Other Regulatory Matters” for additional information on compliance with environmental, health and safety and other relevant
regulations relating to our facilities, including with respect to our compliance with styrene ambient air standards and dust emission
occupational health standards.
New environmental laws and regulations,
new interpretations of existing laws and regulations, increased governmental enforcement or other developments in Israel, the United States
(Georgia) and India (Gujarat) could require us to make additional unforeseen expenditures. These expenditures and other costs for environmental
compliance could have a material adverse effect on our business’s results of operations, financial condition and profitability.
The range of reasonably possible losses from our exposure to environmental liabilities in excess of amounts accrued to date cannot be
reasonably estimated at this time. For example, recently the Israeli Ministry of Environmental Protection added to the requirements involved
in extending a plant's toxin permit additional conditions regarding cyber risk management, which apply immediately.
In addition, our manufacturing, distribution
and other facilities are subject to health and safety regulations, including workplace safety and transportation. Although we introduced
safety rules and procedures at all our facilities and provide safety trainings to our employees and contractors on a regular basis, breaches
of such safety measures have occurred in the past and may occur in the future. If our employees or contractors do not follow and we do
not successfully enforce the safety procedures established in our facilities or otherwise do not meet the relevant laws and standards,
our employees or contractors may be subject to work-related injuries. As a result, we and our officers and directors could be subject
to claims, fines, orders and injunctions due to workplace accidents involving our employees or contractors. For example, in recent years,
serious accidents related to our operations occurred in Canada. Although we believe that such accidents resulted from safety breaches
by our contractors, for one of these accidents, proceedings were filed against us by the local authorities. Although we maintain workers’
compensation and liability insurance, it may not provide adequate coverage against potential liabilities and can expose us, our directors
and officers to administrative and criminal proceedings.
Other than as described above, we cannot
predict whether we may become liable under environmental, product liability and health and safety statutes, rules, regulations and case
law of the countries in which we operate. The amount of any such liability in the future or its impact on our business operation otherwise
could be significant and may adversely impact our financial condition and results of operations.
The
steps that we have taken to protect our brand, technology and other intellectual property may not be adequate, and we may not succeed
in preventing others from appropriating our intellectual property.
We believe that our trademarks (registered
and unregistered) are important to our brand, success and competitive position. We anticipate that, as the countertop market becomes increasingly
competitive, maintaining and enhancing our brand, proprietary technology and other intellectual property may become more important, difficult
and expensive. In the past, some of our trademark applications for certain classes of applications of our products have been rejected
or opposed in certain markets. We have in the past, are currently, and may in the future be, subject to opposition proceedings with respect
to applications for registration of our intellectual property, such as our trademarks. As with all intellectual property rights, such
application may be rejected entirely or awarded subject to certain limitations such as territories, any current or future markets or applications.
These limitations to registering our brand names and trademarks in various countries and applications may restrict our ability to promote
and maintain a cohesive brand throughout our key markets, which could materially harm our competitive position and materially and adversely
impact our results of operations. Additionally, if we are unsuccessful in challenging a third party’s products based on trademark
infringement, continued sales of such products could materially and adversely affect our sales and our brand and result in the shift of
consumer preference away from our products.
18
There can be no assurance that new or
pending patent applications for our technologies and products will be approved in a timely manner or at all, or that, if granted, such
patents will effectively protect our intellectual property. There can be no assurance that we will develop patentable intellectual property
in the future, and we have chosen and may further choose not to pursue patents for innovations that are material to our business.
While we continue to make significant
investments in innovating the design of our products and register design patents on selected models, it may not be adequate to prevent
our competitors from imitating our designs and copying our innovative ideas.
Despite our efforts to execute confidentiality
agreements with our consultants, suppliers, customers, employees and managers, our know-how and trade secrets could be disclosed to third
parties, which could cause us to lose any competitive advantage resulting from such know-how or trade secrets, as well as related intellectual
property protections in certain cases.
The actions we take to establish and protect
our intellectual property may not be adequate to prevent unlawful copy and use of our technology by third parties or imitation of our
products and the offering of them under our trademarks by others. These actions may also not be adequate to prevent others, including
our competitors, from obtaining intellectual property rights overcoming ours, and limiting or blocking the production and sales of our
existing or future products and applying certain technologies. Our competitors may seek to limit our marketing and offering of products
relying on their alleged intellectual property rights.
We may face significant expenses and liability
in connection with the protection of our intellectual property rights in and outside the United States. The laws of certain foreign countries
may not protect intellectual property rights to the same extent as the laws of the United States.
Third parties have claimed, and may from
time to time claim, that our current or future products infringe their patent or other intellectual property rights. Under such circumstances,
we may be required to expend significant resources in order to contest such claims and, in the event that we do not prevail, we may be
required to seek a license for certain technologies, develop non-infringing technologies or discontinue some of our products. In addition,
any future intellectual property litigation, regardless of its outcome, may be expensive, divert the efforts of our personnel and disrupt
or damage relationships with our customers.
For more information, see “ITEM
4.B: Information on the Company—Business Overview—Intellectual Property.”
Disruptions
to or our failure to upgrade and adjust our information technology systems globally, may materially impair our operations, hinder our
growth and materially and adversely affect our business and results of operations.
We believe that an appropriate information
technology (“IT”) infrastructure is important in order to support our daily operations
and the growth of our business. To this end, we are implementing a digital transformation within the Company to better streamline processes
and support our business strategy. Our technological and digital investments are geared towards operational enhancements in supply chain
management and production, along with improvement of our go-to-market tools.
19
If we experience difficulties in implementing
new or upgraded information systems or experience significant system failures, or if we are unable to successfully modify our management
information systems or respond to changes in our business needs, we may not be able to effectively manage and grow our business, and we
may fail to meet our reporting obligations. Additionally, if our current back-up storage arrangements and our disaster recovery plan are
not operated as planned, we may not be able to effectively recover our information system in the event of a crisis, which may materially
and adversely affect our business and results of operations.
In the current environment, there are
numerous and evolving risks to cybersecurity and privacy, including criminal hackers, hacktivists, state-sponsored intrusions, industrial
espionage, employee malfeasance and human or technological error. High-profile security breaches at other companies and in government
agencies have increased in frequency and sophistication in recent years. Although we take steps designed to secure our IT infrastructure
and sensitive data and enhance our business continuity and disaster recovery capabilities, we can provide no assurance that our current
IT system or any updates or upgrades thereto, the current or future IT systems of our distributors or re-sellers or the IT systems of
online paying agents that we use or may use in the future, are fully protected against third-party intrusions, viruses, hacker attacks,
information or data theft or other similar risks. We carry data protection liability insurance against cyber-attacks, however the potential
magnitude of cyber events and the exceptions to these policies means that we may not be able to recover our damages from such an event.
We have experienced and expect to continue
to experience actual and attempted cyber-attacks of our IT networks, such as through phishing scams and ransomware. Although none of these
actual or attempted cyber-attacks has had a material adverse impact on our operations or financial condition, we cannot guarantee that
any such incidents will not have such an impact in the future. Furthermore, a cyber-attack that bypasses our IT security systems or those
of our distributors, re-sellers, online paying agents or other third party contractors, causing an IT security breach, could lead to a
material disruption of our information systems, the loss of business information and loss of service to our customers, which could,
among other things, disrupt our business, force us to incur costs or cause reputational damage. There is no assurance that we will be
insulated from claims relating to cyber-attacks or withstand legal challenges in relation to our agreements with third parties. Additionally,
we have access to sensitive information relating to our employees as well as business partners and customers in the ordinary course of
business. Any failure or perceived failure by us, or our third-party contractors on our behalf, to comply with local and foreign laws
regarding privacy and data security, as well as contractual commitments in this respect, may result in governmental enforcement actions,
fines, or litigation, which could have an adverse effect on our reputation and business. If a significant data breach occurred, our reputation
could be materially and adversely affected, confidence among our customers may be diminished, or we may be subject to legal claims, any
of which may contribute to the loss of customers and have a material adverse effect on us. To the extent that such disruptions or uncertainties
result in delays or cancellations of customer orders or the manufacture or shipment of our products, or in theft, destruction, loss, misappropriation
or release of our confidential data or our intellectual property, our business and results of operations could be materially and adversely
affected.
These risks will increase as we increase
our cooperation with and reliance on third party contractors that provide cloud solutions and store increasingly large amounts of data,
as part of our digital focus and enhancement of go to market tools.
Legislative or regulatory action in these
areas is also evolving, and we may be unable to adapt our IT systems or to manage the IT systems of third parties to accommodate these
changes. Increasing regulatory focus on information security and data privacy issues and expanding laws in these areas may result in increased
compliance costs and expose us to increased liability. Globally, new and emerging laws, such as the General Data Protection Regulation
(“GDPR”) in Europe and state laws in the U.S. on privacy, data and related technologies,
such as the California Consumer Privacy Act (“CCPA”), create new compliance obligations,
create new private rights of action and expand the scope of potential liability, either jointly or severally with our customers and suppliers.
The GDPR, which became effective on May 25, 2018, imposed new compliance obligations for the collection, use, retention, security, processing,
transfer and deletion of personally identifiable information of individuals and created enhanced rights for individuals. The CCPA, which
grants expanded rights to access and delete personal information, and the right to opt out of the sale of personal information, among
other things, became effective on January 1, 2020. These and any other new and emerging laws and regulations, may force us to bear the
burden of more onerous obligations in our contracts or otherwise increase our potential liability to customers, regulators, or other third
parties.
20
Cybersecurity and complying with personal
data rights pose economic, operational and reputational risks. If we are unable to implement the technological and digital projects required
to support our future growth and profitability in compliance with applicable rules and regulations, our business and results of operations
will be materially adversely affected. In addition, the devotion of additional resources to the security of our information technology
systems in the future could significantly increase the cost of doing business or otherwise adversely impact our financial results.
As a result of the COVID-19 pandemic, a greater number of our employees are working remotely and accessing
our IT systems and networks remotely, which may further increase our vulnerability to cybercrimes and cyberattacks and increase the stress
on our technology infrastructure and systems. Although we maintain data protection liability insurance, exclusions from coverage are added
into these policies and coverage may not be sufficient to cover all of our losses from any future breaches or failures of our IT systems,
networks and services.
From
time to time, we are subject to litigation, disputes or other proceedings, which could result in unexpected expenses and time and resources
that could have a materially adverse impact on our results of operation, profit margins, financial condition and liquidity.
We are currently involved in several legal
disputes, including against certain fabricators (our customers) and their employees in Israel and Australia, as well as against our former
workers, as further detailed in “ITEM 8.A: Financial Information—Consolidated Financial Statements and Other Financial Information—Legal
Proceedings.” In addition, from time to time, we are involved in other legal proceedings and claims in the ordinary course of business
related to a range of matters, including contract law, intellectual property rights, employment, product liability and warranty claims,
and claims related to modification and adjustment or replacement of product surfaces sold.
The outcome of litigation and other legal
matters is always uncertain, and the actual outcome of any such proceedings may materially differ from estimates. An adverse ruling in
these proceedings could have a materially adverse effect on us. If we are unsuccessful in defending such claims or elect to settle any
of these claims, we could incur material costs and could be required to pay varying amounts of monetary damages, some of which may be
significant, and/or incur other penalties or sanctions, some or all of which may not be covered by insurance. For example, our ongoing
dispute with our former South African distributer is still unresolved (see “—Financial Information—Consolidated Financial
Statements and Other Financial Information—Legal Proceedings—Claim by former South African distributor”), during 2020
we settled a product liability lawsuit that was filed against and have paid approximately $0.5 million. Although we maintain product liability
insurance, we cannot be certain that our coverage, if applicable, will be adequate for liabilities actually incurred or that insurance
will continue to be available to us on economically reasonable terms, or at all. These material costs could have a materially adverse
effect on our business, results of operations and financial condition.
Our
operating results may suffer due to our failure to manage our international operations effectively or due to regulatory changes in foreign
jurisdictions where we operate.
Our products are sold in over 50 countries
throughout the world, our raw materials, equipment and machinery are acquired in different countries, our products are manufactured in
Israel, the United States and India, and our global management operates from Israel. We are therefore subject to risks associated with
having international operations and expanding globally, including risks related to complying with the law and regulations of various foreign
governments and regulatory authorities. These laws and regulations may apply to us, our subsidiaries, individual directors, officers,
employees and agents, and may restrict our operations, trade practices, investment or acquisition decisions or partnership opportunities.
Accordingly, our sales, purchases and operations are subject to risks and uncertainties, including, but not limited to:
| • |
fluctuations in exchange rates; |
21
| • |
fluctuations in land and sea transportation costs, as well as delays or other
changes in transportation and other time-to-market delays, including as a result of strikes; |
| • |
unpredictability of foreign currency exchange controls; |
| • |
compliance with unexpected changes in regulatory requirements; |
| • |
compliance with a variety of regulations and laws in each relevant jurisdiction;
|
| • |
difficulties in collecting accounts receivable and longer collection periods;
|
| • |
changes in tax laws and interpretation of those laws; |
| • |
taxes, tariffs, quotas, custom duties, trade barriers and other similar restrictions
on our sales, purchases and exports which could be imposed by certain jurisdictions; |
| • |
negative or unforeseen consequences resulting from the introduction, termination,
modification, or renegotiation of international trade agreements or treaties or the imposition of countervailing measures or antidumping
duties or similar tariffs; |
| • |
difficulties enforcing intellectual property and contractual rights in certain
jurisdictions; and |
| • |
economic changes, geopolitical regional conflicts, such as the invasion of Ukraine
by Russia, terrorist activity, political unrest, civil strife, acts of war, strikes and other economic or political uncertainties.
|
Significant political developments could
also have a materially adverse effect on us.
In the United States, due to our substantial
sales, distribution, import and manufacturing operations, potential or actual changes in fiscal, tax and labor policies could have uncertain
and unexpected consequences that materially impact our business, results of operations and financial condition.
Tariffs, taxes or other trade barriers could require us to change manufacturing sources, reduce prices,
increase spending on marketing or product development, withdraw from or not enter certain markets or otherwise take actions that could
be adverse to us. The U.S. federal government may propose additional changes to international trade agreements, tariffs, taxes, and other
government rules and regulations. These regulatory changes could significantly impact our business and financial performance. For example,
the expansive sanctions being imposed by the U.S., EU and other countries against Russia, and any proposed changes to the prior imposition
of tariffs on imports from China, Mexico and Canada. In particular, given the unpredictable nature of the U.S.-China relationship and
its sizable impact on global economic stability, our business and operating success may be materially adversely affected if recent normalization
attempts by these two countries do not endure and additional tariffs or other restrictions on free trade are imposed by either country.
Any such changes may impact the level of free trade or tariff prices on goods imported into the United States. Moreover, changes in U.S.
political, regulatory and economic conditions or in its policies governing international trade and foreign manufacturing and investment
in the U.S. could adversely affect our sales in the U.S. In Europe, the U.K. formally exited the European Union (“E.U.”)
on January 31, 2020 (“Brexit”). Following a transition period during which existing
trade rules continued to apply through December 31, 2020, the U.K. and the E.U. entered into an EU-UK trade and cooperation agreement
that details the future economic relationship between the U.K. and the E.U. The EU-UK trade and cooperation agreement went into effect
on January 1, 2021, however, there is still uncertainty on the application and interpretation of many of the provisions, including with
respect to the relationship between the Republic of Ireland. Although the E.U. is not a key market of ours, Brexit has and for the foreseeable
future will continue to adversely affect economic and market conditions in the U.K., the E.U. and its member states and elsewhere, and
contribute to uncertainty and instability in global financial markets, which may adversely affect our business and financial condition
to the extent the global economy or home renovation, remodeling and construction sectors are negatively impacted or harm our ability to
further expand into the European and U.K. markets.
22
The regulatory framework for privacy and
data security issues worldwide is currently in flux and is likely to remain so for the foreseeable future. A failure by us or a third-party
contractor providing services to us to comply with applicable privacy and data security laws and regulations may result in sanctions,
statutory or contractual damages or litigation.
All these risks could also result in increased
costs or decreased revenues, either of which could have a materially adverse effect on our profitability. As we continue to expand our
business globally, we may have difficulty anticipating and effectively managing these and other risks that our global operations may face,
which may materially and adversely affect our business outside of Israel and our financial condition and results of operations.
We
may have exposure to greater-than-anticipated tax liabilities.
The determination of our worldwide provision
for income taxes and other tax liabilities requires significant judgment, and there are many transactions and calculations where the ultimate
tax determination is uncertain. We have applied the guidance in ASC 740, “Income Taxes” in determining our accrued liability
for unrecognized tax benefits, which totaled approximately $3.8 million as of December 31, 2021. See also note 12 to our financial statements
included elsewhere in this report. Although we believe our estimates are reasonable, the ultimate outcome may differ from the amounts
recorded in our financial statements and may materially affect our financial results in the period or periods for which such determination
is made.
We have entered transfer pricing arrangements
that establish transfer prices for our inter-company operations. However, our transfer pricing procedures are not binding on the applicable
taxing authorities. The amount of income tax that we pay could be materially and adversely affected by earnings being lower than anticipated
in jurisdictions where we have lower statutory rates and higher than anticipated in jurisdictions where we have higher statutory rates.
From 2015 onward, our U.S. manufacturing operations also carry inter-company transactions at transfer prices and arrangements set by us.
We cannot be certain that tax authorities will not disfavor our inter-company arrangements and transfer prices in the relevant jurisdictions.
Taxing authorities outside of Israel could challenge our allocation of income between us and our subsidiaries and contend that a larger
portion of our income is subject to tax in their jurisdictions, which may have higher tax rates than the rates applicable to such income
in Israel. Any adjustment in one country while not followed by counter-adjustment in the other country, may lead naturally to double taxation
for the group. Any change to the allocation of our income as a result of review by such taxing authorities could have a negative effect
on our operating results and financial condition.
Our facilities in Israel receive different
tax benefits as “Preferred Enterprises” under the Israeli Law for the Encouragement of Capital Investments, 1959 (“Investment
Law”), with our production lines qualifying to receive different grants and/or reduced company tax rates. Therefore, some
of our production lines also receive tax benefits based on our revenues and the allocation of those revenues between the two facilities
in Israel. As a result, the Israeli taxing authorities could challenge our allocation of income between these two facilities and contend
that a larger portion of our income is subject to higher tax rates. In Israel, there are no tax benefits to production outside of the
country. As such, our portion of taxable income in Israel that relates to the U.S. manufacturing facility might not have tax benefits,
based on certain interpretations. The Israel Tax Authority (“ITA”) could challenge
the allocation of income related to production in Israel and income related to production outside of Israel, which may result in significantly
higher taxes. There are currently no legal regulations governing this allocation and certain of the ITA’s internal guidelines have
ambiguities. Moreover, we may lose all our tax benefits in Israel in the event that our manufacturing operations outside of Israel exceed
certain production levels (currently set at 50% of the overall production and subject to future changes by the ITA).
In the United States, H.R. 1, originally
known as the 2017 Tax Cuts and Jobs Act (the “TCJA”) made significant changes to the
U.S. Internal Revenue Code, including a reduction in the federal income corporate tax rate from a top marginal rate of 35% to a flat rate
of 21% and limitations on certain corporate deductions and credits. In addition, the TCJA requires complex computations to be performed
that were not previously required in U.S. tax law, significant judgments to be made in interpretation of the provisions of the TCJA and
significant estimates in calculations, and the preparation and analysis of information not previously relevant or regularly produced.
The U.S. Treasury Department, the IRS, and other standard-setting bodies could interpret or issue guidance on how provisions of the TCJA
will be applied or otherwise administered that is different from our interpretation. Finally, foreign governments may enact tax laws in
response to the TCJA that could result in further changes to global taxation and materially affect our financial position and results
of operations. While we have provided the effect of the TCJA in our Consolidated Financial Statements as included in Note 12 to our financial
statements included elsewhere in this report, the application of accounting guidance for various items and the ultimate impact of the
TCJA on our business are currently uncertain.
23
We are entitled to a property tax abatement
(starting in the 2014 tax year) with respect to our U.S manufacturing facility and the capital investment made in such facility for ten
years at 100% and an additional five years at 50% subject to our satisfaction of certain qualifying terms with respect to headcount, average
salaries paid to our employees and total capital investment amount in our U.S manufacturing facility. The tax abatement is granted pursuant
to bond purchase loan agreements we entered with the Development Authority of Bryan County. If we do not meet the qualifying terms of
the bond, we will bear the applicable property tax, which will be recognized in our operating costs and which would materially and adversely
impact our projected margins and results of operations. See “ITEM 4.D: Information on the Company—Property, Plants and Equipment.”
Certain
U.S. holders of our ordinary shares may suffer adverse tax consequences if we or any of our non-U.S. subsidiaries are characterized as
a “controlled foreign corporation”, or a CFC, under Section 957(a) of the Internal Revenue Code of 1986, as amended.
A non-U.S. corporation is considered a
CFC if more than 50% of (1) the total combined voting power of all classes of stock of such corporation entitled to vote, or (2) the total
value of the stock of such corporation, is owned, or is considered as owned by applying certain constructive ownership rules, by United
States shareholders who each own stock representing 10% or more of the vote or 10% or more of the value on any day during the taxable
year of such non-U.S. corporation (“10% U.S. Shareholder”). Because our group includes
one or more U.S. subsidiaries, certain of our non-U.S. subsidiaries could be treated as CFCs (regardless of whether we are treated as
a CFC). Generally, 10% U.S. Shareholders of a CFC are required to report annually and include currently in its U.S. taxable income such
10% U.S. Shareholder’s pro rata share of the CFC’s “Subpart F income”, “global intangible low-taxed income”,
and investments in U.S. property by CFCs, regardless of whether we make an actual distribution to such shareholders. “Subpart F
income” includes, among other things, certain passive income (such as income from dividends, interests, royalties, rents and annuities
or gain from the sale of property that produces such types of income) and certain sales and services income arising in connection with
transactions between the CFC and a person related to the CFC. An individual that is a 10% U.S. Shareholder with respect to a CFC generally
would not be allowed certain tax deductions or foreign tax credits that would be allowed to a 10% U.S. Shareholder that is a U.S. corporation.
Failure to comply with these reporting obligations may subject a 10% U.S. Shareholder to significant monetary penalties and may prevent
the statute of limitations with respect to such shareholder’s U.S. federal income tax return for the year for which reporting was
due from starting. We cannot provide any assurances that we will assist investors in determining whether any of our non-U.S. subsidiaries
is treated as a CFC or whether any investor is treated as a 10% U.S. Shareholder with respect to any such CFC or furnish to any 10% U.S.
Shareholders information that may be necessary to comply with the aforementioned reporting and tax payment obligations. A United States
investor should consult its tax advisors regarding the potential application of these rules to an investment in our ordinary shares.
Risks
Related to our Relationship with Kibbutz Sdot-Yam
Our
directors and employees who are members of Kibbutz Sdot-Yam and Tene may have conflicts of interest with respect to matters involving
the Company.
As of March 11, 2022, the Kibbutz, together
Tene, being parties to a voting agreement, beneficially owned 14,029,494 constituting approximately 40.7% of our shares. Both the Kibbutz
and Tene are deemed our controlling shareholders under the Israeli Companies Law. The Kibbutz and Tene also agreed to use their best efforts
to prevent any dilutive transactions that would reduce the Kibbutz’s holdings in us below 26% on a fully diluted basis and to cause
that at least four directors on behalf of the parties are elected to our board of directors. For more information, see “ITEM 7.A.
Major Shareholders and Related Party Transactions—Major Shareholders.” Two members of our board of directors and a number
of our key employees are members of the Kibbutz. Certain of these individuals also serve in different positions in the Kibbutz, including
business manager of the Kibbutz. Such individuals have fiduciary duties to both us and Kibbutz Sdot-Yam. As a result, our directors and
executive officers who are members of the Kibbutz may have real or apparent conflicts of interest on matters affecting both us and the
Kibbutz and, in some circumstances, such individuals may have interests adverse to us. For example, in the annual general meeting of our
shareholders held in December 2015, the Kibbutz opposed the independent nominees our board of directors proposed to nominate to the board
and suggested two alternative nominees identified by the Kibbutz as independent. In addition, two members of our board of directors, including
the chairman of the board of directors, also serve as partners in Tene. Since these individuals have fiduciary duties to both us and Tene,
there may be real or apparent conflicts of interest in this respect as well. See “ITEM 6.A: Directors, Senior Management and Employees—Directors
and Senior Management.”
24
Our
headquarters and one of our two manufacturing facilities in Israel are located on lands leased by Kibbutz Sdot-Yam from the Israel Lands
Administration and the Edmond Benjamin de Rothschild Caesarea Development Corporation Ltd. If we are unable to continue to lease such
lands from Kibbutz Sdot-Yam, our business and future business prospects may suffer.
One of our manufacturing facilities, our
headquarters and our research and development facilities are located on lands leased by the Kibbutz pursuant to two lease agreements between
the Kibbutz and the ILA, and an additional lease agreement between the Kibbutz and the Edmond Benjamin de Rothschild Caesarea Development
Corporation Ltd. (“Caesarea Development Corporation”).
The first lease agreement between the
Kibbutz and the ILA has been extended through 2060. The second agreement between the Kibbutz and the ILA expired in late 2009, and in
February 2017, the District Court approved a settlement pursuant to which the Kibbutz and the ILA will enter into a new lease agreement
for a period of 49 years, with an option to renew for additional 49 years. Based on information we received from the Kibbutz, the parties
are still in the process of finalizing the terms of the lease agreement. Previous agreements between the Kibbutz and the ILA with respect
to this property contained restrictions with respect to the use of the property by the Kibbutz. We cannot assure you that our current
use of the property and the rights granted to us by the Kibbutz pursuant to the land use agreement will not provide the ILA with the right
to terminate the rights of the Kibbutz to the property.
The lease agreement between the Kibbutz
and the Caesarea Development Corporation permits the Kibbutz to use the property for the community needs of the Kibbutz and is in effect
until year 2037. Caesarea Development Corporation charges the Kibbutz based on the use of the relevant portion of the property for industrial
purposes, and thus, has provided recognition to the Kibbutz’s use of such portion of the property for industrial purposes.
Each of the ILA and the Caesarea Development
Corporation may terminate their respective lease in certain circumstances, including if the Kibbutz breaches its agreements therewith,
commences proceedings to disband or liquidate, or in the event that the Kibbutz ceases to be organized as a “kibbutz” as defined
in the lease (meaning, a registered cooperative society classified as a kibbutz). If any of the leases and the rights of Kibbutz Sdot-Yam
to use the properties described above terminate, we may be unable to maintain our operations on these lands, which would have a materially
adverse effect on our operations.
For more information on these agreements,
see “ITEM 7.B: Major Shareholders and Related Party Transactions—Related Party Transactions.”
Pursuant
to certain agreements between us and Kibbutz Sdot-Yam, we depend on Kibbutz Sdot-Yam with respect to leasing the buildings and areas of
our manufacturing facilities in Israel, acquiring new land as well as building additional facilities should we need them.
Our Bar-Lev facility is leased from the
Kibbutz pursuant to a land purchase and leaseback agreement effective as of September 1, 2012. The land purchase and leaseback agreement
was simultaneously executed with a land use agreement pursuant to which the Kibbutz permits us to use the site for a period of ten years
with an automatic renewal for an additional ten years unless we provide the Kibbutz two years’ advance notice that we do not wish
to renew the lease. In 2021, the agreement was automatically extended for an additional ten year period.
25
Our Sdot-Yam facility, located in the
Kibbutz, is also leased from the Kibbutz, pursuant to a land use agreement effective as of March 2012 for a period of 20 years. We may
not terminate the operation of either of the two production lines at our Sdot-Yam facility as long as we continue to operate production
lines elsewhere in Israel. Additionally, our headquarters must remain at the Kibbutz. As a result of these restrictions, our ability to
reorganize our manufacturing operations and headquarters in Israel is limited.
In addition, pursuant to the agreements
we entered into with the Kibbutz with respect to our Bar-Lev and Sdot-Yam facilities, in the event of a material change in the payments
made by the Kibbutz to the ILA or the Caesarea Development Corporation or changes in the market conditions, every three years the Kibbutz
may appoint an independent appraiser to reassess the fees we agreed to pay to the Kibbutz in light of such changes. If an independent
appraiser concludes that the fees payable by us to the Kibbutz for the Bar-Lev and Sdot-Yam facilities are below market, the Kibbutz can,
in its sole discretion, adjust such fees to the market value with a binding effect on us. Such appraisal took place during 2021, and resulted
in an increase of the lease fees. See “—Other factors impacting our results of operations— Agreements with Kibbutz Sdot-Yam
.”
Pursuant to the land use agreements between
us and the Kibbutz, subject to certain exceptions, if we need additional facilities on the land that we are permitted to use under such
land use agreements, then, subject to obtaining the permits required by law, the Kibbutz will build such facilities for us by using the
proceeds of a loan that we will make to the Kibbutz, which loan shall be repaid to us by off-setting the additional monthly payment that
we would pay for such new facilities and, if not fully repaid during the lease term, upon termination thereof. As a result, we depend
on the Kibbutz to build such facilities in a timely manner. While the Kibbutz is responsible under the agreement for obtaining various
licenses, permits, approvals and authorizations necessary for our use of the property, with respect to our use of property in Sdot-Yam,
we have waived any monetary recourse against the Kibbutz for failure to receive such licenses, permits, approvals and authorizations.
If we are unable to renew our existing
lease agreements with the Kibbutz in the future, we may be required to move our Israeli facilities and headquarters to an alternate location.
In addition, the Kibbutz may not be able, in a timely manner, to purchase additional land or build additional facilities that we may require
due to increased demand for our products or obtain the necessary licenses or permits for existing or current property. This could result
in increased costs, substantial delays and disruptions to the manufacturing process, which could materially and adversely impact our reputation,
revenues and results of operations as well as other business aspects, such as our ability to serve our customers and meet the existing
or increased demand for our products. We may also suffer losses to the extent we have waived monetary recourse against the Kibbutz for
failure to obtain licenses and permits for some of our currently leased property. For more information with respect to our agreements
with the Kibbutz, see “ITEM 7.B: Major Shareholders and Related Party Transactions—Related Party Transactions.”
Regulators
and other third parties may question whether our agreements with Kibbutz Sdot-Yam are no less favorable to us than if they had been negotiated
with unaffiliated third parties.
Our headquarters, research and development
facilities and our two manufacturing facilities in Israel are located on lands leased by the Kibbutz. We have entered into certain agreements
with the Kibbutz pursuant to which the Kibbutz provides us with, among other things, a portion of our labor force, electricity, maintenance,
security and other services. We believe that such services are rendered to us in the normal course of business and they represent terms
no less favorable than those that would have been obtained from an unaffiliated third party. Nevertheless, a determination with respect
to such matters requires subjective judgments regarding valuations, and regulators and other third parties may question whether our agreements
with the Kibbutz are in the ordinary course of our business and are no less favorable to us than if they had been negotiated with unaffiliated
third parties. As a result, the tax treatment for these transactions may also be called into question, which could have a materially adverse
impact on our operating results and financial condition. See “ITEM 7.B: Major Shareholders and Related Party Transactions—Related
Party Transactions.”
26
Under
Israeli law, our board, audit committee and shareholders may be required to reapprove certain of our agreements with Kibbutz Sdot-Yam
every three years, and their failure to do so may expose us to liability and cause significant disruption to our business.
The Companies Law requires that the authorized
corporate organs of a public company approve every three years any extraordinary transaction in which a controlling shareholder has a
personal interest and that has a term of more than three years, unless a company’s audit committee determines, solely with respect
to agreements that do not involve compensation to a controlling shareholder or his or her relatives, in connection with services rendered
by any of them to the company or their employment with the company, that a longer term is reasonable under the circumstances. Our implementation
of this requirement with respect to the agreements entered between us and the Kibbutz may be challenged by regulators and other third
parties.
Our audit committee has determined that
the terms of all the agreements entered into between us and the Kibbutz are reasonable under the relevant circumstances, except for the
services agreement entered into between the Kibbutz and us on July 20, 2011 (as amended). See “ITEM 7.B: Major Shareholders and
Related Party Transactions—Related Party Transactions.” The extension of our services agreement with the Kibbutz have been
approved in 2021 under the Companies Law requirements and is subject to re-approval in 2024.
If the relevant corporate organs do not
re-approve the services agreement in accordance with the Companies Law, or if it is determined that re-approval of our other agreements
with the Kibbutz is required every three years and the re-approval is not obtained, we will be required to terminate such agreements,
which may be considered a breach under the terms of such agreements, and could expose us to damage claims and legal fees, and cause significant
disruption to our business. In addition, we would be required to find suitable replacements for the services provided to us by the Kibbutz
under the services agreement, which may take time, and we can provide no assurance that we can obtain the same or better terms with a
third party than those we have agreed to with the Kibbutz.
Risks
Related to our Ordinary Shares
We
cannot provide any assurance regarding the amount or timing of dividend payments.
In February 2020, we revised our dividend
policy to provide for a quarterly cash dividend of up to 50% of reported net income attributable to controlling interest on a year-to-date
basis, less any amount already paid as dividend for the respective period (the “Calculated Dividend”),
subject in each case to approval by the Company’s board of directors. If the Calculated Dividend is less than $0.10 per share, no
dividend shall be paid. In the fourth quarter of 2019, we distributed a cash dividend in the amount of $0.15 per share, in the fourth
quarter of 2020, we distributed a cash dividend in the amount of $0.14 per share, in the second quarter of 2021, we distributed a cash
dividend in the amount of $0.21 per share and in the fourth quarter of 2021, we distributed a cash dividend in the amount of $0.10 per
share, in each case subject to withholding tax of 20%. We cannot provide assurances regarding the amount or timing of any dividend payments
and may decide not to pay dividends in the future.
The
price of our ordinary shares may be volatile.
The market price of our ordinary shares
could be highly volatile and may fluctuate substantially as a result of many factors, including but not limited to (i) actual or anticipated
fluctuations in our results of operations; (ii) variance in our financial performance from the expectations of market analysts; (iii)
announcements by us or our competitors of significant business developments, changes in distributor relationships, acquisitions or expansion
plans; (iv) changes in the prices of our raw materials or the products we sell; (v) our involvement in litigation, specifically for example,
any adverse precedent set in Australia in connection with silica related claims; (vi) our sale of ordinary shares or other securities
in the future; (vii) market conditions in our industry; (viii) changes in key personnel; (ix) the trading volume of our ordinary shares;
(x) changes in the estimation of the future size and growth rate of our markets; (xi) changes in our board of directors, including director
resignations; (xii) actions of investors and shareholders, including short seller reports and proxy contests; and (xiii) general economic
and market conditions unrelated to our business or performance, such as increased shipping and handling markets. See also “—The
COVID-19 pandemic could further impact end-consumers and the global economy in general, lower demand for our products, disrupt our operations
and materially and adversely affect our business and results of operations”.
27
In the past, following periods of volatility
in the market price of a company’s securities, securities class action litigation has often been instituted against that company
relating to the price of shares. We have been in the past subject to a putative securities class action which was settled and covered
by our insurance carriers. We cannot assure you that in the future we may not be subject to further litigation or that it will be fully
covered by our insurance carriers.
Our
share price is impacted by reports from research analysts, publicly announced financial guidance, investor perceptions and our ability
to meet other expectations about our business.
The trading market for our ordinary shares
relies in part on the research and reports that equity research analysts publish about us and our business. Recently, two analysts discontinued
research coverage of our business. If additional analysts do not establish research coverage, or if the current research analyst ceases
coverage of our company or fails to publish reports on our Company regularly, we could lose visibility in the market and demand for our
shares may decline, which might cause our share price and trading volume to decline.
The price of our ordinary shares could
also decline if one or more securities analysts downgrade our ordinary shares or if one or more of those analysts issue other unfavorable
commentary. The market price for our ordinary shares has been in the past, and may be in the future, materially and adversely affected
by statements made in reports issued by short sellers regarding our business model, our management and our financial accounting. In the
past, we have also faced difficulty accurately projecting our earnings and have missed certain of our publicly announced guidance. If
our financial results for a period do not meet our guidance or if we reduce our guidance for future periods, the market price of our ordinary
shares may decline. We have experienced in the past, and may experience in the future, a decline in the value of our shares as a result
of the foregoing factors.
Environmental, social and governance (“ESG”) and sustainability
reporting is becoming more broadly expected by investors, shareholders and other third parties. We may face reputational damage in the
event our corporate responsibility initiatives or objectives do not meet the standards set by our investors, shareholders, lawmakers,
listing exchanges or other constituencies, or if we are unable to achieve an acceptable ESG or sustainability rating. A low ESG or sustainability
rating by a third-party rating service could also result in the exclusion of our ordinary shares from consideration by certain investors.
Ongoing focus on corporate responsibility matters by investors and other parties as described above may impose additional costs or expose
us to new risks.
The
substantial share ownership position of Kibbutz Sdot-Yam and Tene will limit your ability to influence corporate matters.
As of March 11, 2022, the Kibbutz and
Tene beneficially owned 14,029,494 ordinary shares constituting 40.7% of our outstanding ordinary shares. As a result of this concentration
of share ownership and their voting agreement described above, the Kibbutz and Tene are considered controlling shareholders under the
Israeli Companies Law, and, acting on their own or together, will continue to have significant voting power on all matters submitted to
our shareholders for approval. These matters include:
| • |
the composition of our board of directors (other than external directors);
|
| • |
approving or rejecting a merger, consolidation or other business combination;
and |
| • |
amending our articles of association, which govern the rights attached to our
ordinary shares. |
This concentration of ownership of our
ordinary shares could delay or prevent proxy contests initiated by other shareholders, mergers, tender offers, open-market purchase programs
or other purchases of our ordinary shares that might otherwise give you the opportunity to realize a premium over then-prevailing market
price of our ordinary shares. The interests of the Kibbutz or Tene may not always coincide with the interests of our other shareholders.
This concentration of ownership may also lead to proxy contests. For example, prior to the voting arrangement between Tene and the Kibbutz,
in connection with our annual general meeting of shareholders held in December 2015, the Kibbutz issued a proxy to our shareholders, in
which it opposed the independent nominees our board of directors proposed to nominate to the board and suggested two alternative nominees.
Such initiatives, which may not coincide with the interests of our other shareholders, result in us incurring unexpected costs and could
divert our management’s time and attention. This concentration of ownership may also materially and adversely affect our share price.
28
In recent years, Israeli issuers listed
on securities exchanges in the United States have also been faced with governance-related demands from activist shareholders, unsolicited
tender offers and proxy contests. Responding to these types of actions by activist shareholders could be costly and time-consuming for
management and our employees and could disrupt our operations or business model in a way that would interfere with our ability to execute
our strategic plan.
As
a foreign private issuer whose shares are listed on the Nasdaq Global Select Market, we may follow certain home country corporate governance
practices instead of certain Nasdaq requirements.
As a foreign private issuer whose shares
are listed on the Nasdaq Global Select Market, we are permitted to follow certain home country corporate governance practices instead
of certain requirements of the rules of Nasdaq. As permitted under the Israeli Companies Law, our articles of association provide that
the quorum for any ordinary meeting of shareholders shall be the presence of at least two shareholders present in person, by proxy or
by a voting instrument, who hold at least 25% of the voting power of our shares instead of 33 1/3% of the issued share capital required
under Nasdaq requirements. At an adjourned meeting, any number of shareholders constitutes a quorum.
In the future, we may also choose to follow
Israeli corporate governance practices instead of Nasdaq requirements with regard to, among other things, the composition of our board
of directors, compensation of officers and director nomination procedures. In addition, we may choose to follow Israeli corporate governance
practice instead of Nasdaq requirements with respect to shareholder approval for certain dilutive events (such as for issuances that will
result in a change of control of the company, certain transactions other than a public offering involving issuances of a 20% or more interest
in the company and certain acquisitions of the stock or assets of another company) and for the adoption of, and material changes to, equity
incentive plans. Accordingly, our shareholders may not be afforded the same protection as provided under Nasdaq corporate governance rules.
Following our home country governance practices, as opposed to the requirements that would otherwise apply to a U.S. company listed on
the Nasdaq Global Select Market, may provide less protection than is accorded to investors of domestic issuers. See “ITEM 16G: Corporate
Governance.”
As
a foreign private issuer, we are not subject to the provisions of Regulation FD or U.S. proxy rules and are exempt from filing certain
Exchange Act reports.
As a foreign private issuer, we are exempt
from the rules and regulations under the Exchange Act related to the furnishing and content of proxy statements, and our officers, directors
and principal shareholders are exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the Exchange
Act. In addition, we are not required under the Exchange Act to file annual and current reports and financial statements with the SEC
as frequently or as promptly as U.S. domestic companies whose securities are registered under the Exchange Act, we are permitted to disclose
limited compensation information for our executive officers on an individual basis and we are generally exempt from filing quarterly reports
with the SEC under the Exchange Act. Moreover, we are not required to comply with Regulation FD, which restricts the selective disclosure
of material nonpublic information to, among others, broker-dealers and holders of a company’s securities under circumstances in
which it is reasonably foreseeable that the holder will trade in the company’s securities on the basis of the information. These
exemptions and leniencies reduce the frequency and scope of information and protections to which you may otherwise have been eligible
in relation to a U.S. domestic issuer.
We would lose our foreign private issuer
status if (a) a majority of our outstanding voting securities were either directly or indirectly owned of record by residents of the United
States and (b)(i) a majority of our executive officers or directors were United States citizens or residents, (ii) more than 50% of our
assets were located in the United States or (iii) our business were administered principally in the United States. Our loss of foreign
private issuer status would make U.S. regulatory provisions mandatory. The regulatory and compliance costs to us under U.S. securities
laws as a U.S. domestic issuer may be significantly higher. If we are not a foreign private issuer, we will be required to file periodic
reports and registration statements on U.S. domestic issuer forms with the SEC, which are more detailed and extensive than the forms available
to a foreign private issuer. We would also be required to follow U.S. proxy disclosure requirements, including the requirement to disclose,
under U.S. law, more detailed information about the compensation of our senior executive officers on an individual basis. We may also
be required to modify certain of our policies to comply with accepted governance practices associated with U.S. domestic issuers. Such
conversion and modifications will involve additional costs. In addition, we would lose our ability to rely upon Nasdaq exemptions from
certain corporate governance requirements that are available to foreign private issuers.
29
The
market price of our ordinary shares could be negatively affected by future sales of our ordinary shares.
As of March 11, 2022, we had 34,475,995
shares outstanding. This included approximately 14,029,494 ordinary shares, or 40.7% of our outstanding ordinary shares, beneficially
owned by the Kibbutz and Tene, which can be resold into the public markets in accordance with the restrictions of Rule 144, including
volume limitations, applicable to resales by affiliates or holders of restricted securities.
Sales by us or by the Kibbutz, Tene or
other large shareholders of a substantial number of our ordinary shares in the public market, or the perception that these sales might
occur, could cause the market price of our ordinary shares to decline or could materially impair our ability to raise capital through
a future sale of, or pay for acquisitions using, our equity securities.
As of March 11, 2022, 2,216,720 ordinary
shares were reserved for issuance under our 2011 option plan and our 2020 Share Incentive Plan of which options to purchase 1,649,575
ordinary shares were outstanding, with a weighted average exercise price of $16.7 per share, and 90,578 restricted stock units (“RSUs”)
were outstanding. To the extent they are covered by our registration statements on Form S-8, these shares may be freely sold in the public
market upon issuance, except for shares held by affiliates who have certain restrictions on their ability to sell.
Risks
Relating to our Incorporation and Location in Israel
If
we fail to comply with Israeli law restrictions concerning employment of Jewish employees on Saturdays and Jewish holidays, we and our
office holders may be exposed to administrative and criminal liabilities and our operational and financial results may be materially and
adversely impacted.
We are subject to the Israeli Hours of Work and Rest Law, 1951 (“Rest
Law”), which imposes certain restriction on the employment terms and conditions of our employees. Among others, the Rest
Law prohibits the employment of Jewish employees on Saturdays and Jewish holidays, unless a permit is obtained from the IMEI. Employment
of Jewish employees on such days without a permit constitutes a violation of the Rest Law. We received a permit from the IMEI to employ
Jewish employees on Saturdays and Jewish holidays in connection with most of the production machinery in our Sdot-Yam facility, effective
until December 31, 2022. There is no assurance that we will be able to maintain such permit while we do not actually employ Jewish employees
on Saturdays, or, if cancelled by the IMEI, that we will be able to obtain such permit in the future. If we fail to obtain such permit
in the future or if we are deemed to be in any violation of the Rest Law, we may be required to halt operations of our manufacturing facilities
on Saturdays and Jewish holidays, we and our officers may be exposed to administrative and criminal liabilities, including fines, and
our ability to utilize our Sdot-Yam facility and therefore our operational and financial results could be materially and adversely impacted.
Conditions
in Israel could materially and adversely affect our business.
We are incorporated under Israeli law
and our principal offices and two of our manufacturing facilities (Sdot-Yam and Bar-Lev) are located in Israel. Accordingly, political,
economic and military conditions in Israel directly affect our business. Since the establishment of the State of Israel in 1948, a number
of armed conflicts have occurred between Israel and its neighboring countries. These conflicts involved missile strikes against civilian
targets in various parts of Israel including most recently, central Israel, and negatively affected business conditions in Israel as well
as home starts and the building industry in Israel.
30
Our facilities are in range of rockets
that may be fired from Lebanon, Syria or the Gaza Strip into Israel. In the event that our facilities are damaged as a result of hostile
action or hostilities otherwise disrupt the ongoing operation of our facilities, our ability to deliver products to customers could be
materially and adversely affected. Our commercial insurance in Israel covers losses that may occur as a result of acts of war or terrorist
attacks on our facilities and disruption to the ongoing operations for damages of up to $40 million, if such damages are not covered by
the Israeli government, which in certain cases covers direct damages caused by terrorist attacks or acts of war. Even if insurance is
maintained and adequate, we cannot assure you that it will reduce or prevent any losses that may occur as a result of such actions or
will be exercised in a timely manner to meet our contractual obligations with customers and vendors.
In addition, popular uprisings in various
countries in the Middle East and North Africa have affected the political stability of those countries. Such instability may lead to deterioration
in the political and trade relationships that exist between the State of Israel and these countries, such as Turkey, from which we import
a significant amount of our raw materials. Moreover, some countries around the world restrict doing business with Israel and Israeli companies,
and additional countries may impose restrictions on doing business with Israel and Israeli companies if hostilities in Israel or political
instability in the region continues or increases. These restrictions may limit materially our ability to obtain raw materials from these
countries or sell our products to companies and customers in these countries. In addition, there have been increased efforts by activists
to cause companies and consumers to boycott Israeli goods. Such efforts, particularly if they become more widespread, may materially and
adversely impact our ability to sell our products out of Israel.
Our employees in Israel, generally males,
including executive officers, may be called upon to perform military service on an annual basis until they reach the age of 40 (and in
some cases, up to 45 or 49). In emergency circumstances, they could be called to immediate and prolonged active duty. Our operations could
be disrupted by the absence of a significant number of our employees related to military service or the absence for extended periods of
one or more of our key employees for military service. Such disruption could materially and adversely affect our business and results
of operations. Additionally, the absence of a significant number of the employees of our Israeli suppliers and contract manufacturers
related to military service may disrupt their operations, in which event our ability to deliver products to customers may be materially
and adversely affected.
Any hostilities involving Israel or the
interruption or curtailment of trade between Israel and its present trading partners, or a significant downturn in the economic or financial
condition of Israel, could materially and adversely affect our operations and product development, cause our revenues to decrease and
materially harm the share price of publicly traded companies with operations in Israel, such as us.
Our
operations may be affected by negative economic conditions or labor unrest in Israel.
General strikes or work stoppages, including at Israeli seaports, have occurred periodically or have been
threatened in the past by Israeli trade unions due to labor disputes. These general strikes or work stoppages may have a materially adverse
effect on the Israeli economy and on our business, including our ability to deliver products to our customers and to receive raw materials
from our suppliers in a timely manner. These general strikes or work stoppages, in Israel or in other countries where we, our subsidiaries,
suppliers and distributors operate, may prevent us from shipping raw materials and equipment required for our production and shipping
our products by sea or otherwise to our customers, which could have a materially adverse effect on our results of operations. Specifically,
our Israeli operations are highly dependent on the free exchanges of goods (whether raw material into Israel or finished product export),
a trade that is made possible through a limited number of seaports in Israel. Current pressures experienced by Israeli ports, planned
governmental reforms and dock workers unions responses could lead to strikes or other disruptions in the ports operations could affect
our ability to operate out Israeli facilities or our export our product, which could have a materially adverse effect on our results of
operations.
Since none of our employees work under
any collective bargaining agreements, extension orders issued by the IMEI apply to us and affect matters such as cost of living adjustments
to salaries, length of working hours and work week, recuperation pay, travel expenses, and pension rights. Any labor disputes over such
matters could result in a work stoppage or strikes by employees that could delay or interrupt our output of products. Any strike, work
stoppages or interruption in manufacturing could result in a failure to meet contractual obligations or in delays, including in our ability
to manufacture and deliver products to our customers in a timely manner, and could have a materially adverse effect on our relationships
with our distributors and on our financial results.
31
If a union of our employees is formed
in the future, we may enter into a collective bargaining agreement with our employees, which may increase our costs and limit our managerial
freedom, and if we are unable to reach a collective bargaining agreement, we may become subject to strikes and work stoppages, all of
which may materially and adversely affect our business.
The
tax benefits that are available to us require us to continue to meet various conditions and may be terminated or reduced in the future,
which could increase our costs and taxes.
Our Israeli facilities have been granted
“Preferred Enterprise” status by the Israeli Authority for Investment and Development of the Industry and Economy (“Investment
Center”), which provides us with investment grants (in respect of certain Approved Enterprise programs) and makes us eligible
for tax benefits under the Investment Law.
In order to remain eligible for the tax
benefits of a “Preferred Enterprise” we must continue to meet certain conditions stipulated in the Investment Law and its
regulations, as amended, and in certificates of approval issued by the Investment Center (in respect of Approved Enterprise programs),
which may include, among other things, selling more than 25% of our products to markets of over 14 million residents in 2012 (such export
criteria will further be increased in the future by 1.4% per annum) in a specific tax year, making specified investments in fixed assets
and equipment, financing a percentage of those investments with our capital contributions, filing certain reports with the Investment
Center, complying with provisions regarding intellectual property and the criteria set forth in the specific certificate of approval issued
by the Investment Center or the ITA. If we do not meet these requirements, the tax benefits could be canceled and we could be required
to refund any tax benefits and investment grants that we received in the past adjusted to the Israeli consumer price index and interest,
or other monetary penalties. Further, in the future, these tax benefits may be reduced or discontinued. If these tax benefits are cancelled,
our Israeli taxable income would be subject to regular Israeli corporate tax rates. The standard corporate tax rate for Israeli companies
has been 23% since 2018.
Effective as of January 1, 2011, the Investment Law was amended (“Amendment
No. 68” or the “2011 Amendment”). Under Amendment No. 68, the criteria
for receiving tax benefits were revised. In the future, we may not be eligible to receive additional tax benefits under this law. The
termination or reduction of these tax benefits would increase our tax liability, which would reduce our profits. Additionally, if we increase
our activities outside of Israel through acquisitions, for example, our expanded activities might not be eligible to be included in future
Israeli tax benefit programs. We may lose all our tax benefits in Israel in the event that our manufacturing operations outside of Israel
exceed certain production levels (currently set at 50% of the overall production and subject to future changes by the ITA). We do not
foresee such circumstances as probable in the coming years. From 2017 onward, our current Preferred, the tax rate for the portion of our
income related to the Bar-Lev manufacturing facility was reduced to 7.5% and Sdot-Yam tax rate 16%..
Historically, some portions of income
were tax exempt, but that is no longer the case. In the event of a distribution of a dividend from the tax-exempt income described above,
we will be subject to tax at the corporate tax rate applicable to our Approved Enterprise’s and Beneficiary Enterprise’s income
on the amount distributed (grossed-up to reflect the pre-tax income that it would have had to earn in order to distribute the dividend)
in accordance with the effective corporate tax rate that would have been applied had we not relied on the exemption. In addition to the
reduced tax rate, a distribution of income attributed to an “Approved Enterprise” and a “Beneficiary Enterprise”
will be subject to 15% withholding tax (or a reduced rate under an applicable double tax treaty, subject to the receipt in advance of
a valid certificate from the ITA allowing for a reduced tax rate). As for a “Preferred Enterprise,” dividends are generally
subject to 20% withholding tax from 2014 (or a reduced rate under an applicable double tax treaty, subject to the receipt in advance of
a valid certificate from the ITA allowing for a reduced tax rate). However, because we announced our election to apply the provisions
of Amendment No. 68 prior to June 30, 2015, we will be entitled to distribute exempt income generated by any Approved/Beneficiary Enterprise
to our Israeli corporate shareholders tax free (See “ITEM 10.E: Additional Information—Taxation—Israeli tax considerations
and government programs—Law for the Encouragement of Capital Investments, 1959”).
32
The amendment to the Investment Law stipulated
that investments in subsidiaries, including in the form of acquisitions of subsidiaries from an unrelated party, may also be considered
as a deemed dividend distribution event, increasing the risk of triggering a deemed dividend distribution event and potential tax exposure.
The ITA’s interpretation is that this provision applies retroactively to investments and acquisitions made prior to the amendment.
It
may be difficult to enforce a U.S. judgment against us, our officers and directors in Israel or the United States, or to assert U.S. securities
laws claims in Israel or serve process on our officers and directors.
We are incorporated in Israel. Other than
one director, none of our directors, or our independent registered public accounting firm, is a resident of the United States. None of
our executive officers is resident in the United States. The majority of our assets and the assets of these persons are located outside
the United States. Therefore, it may be difficult for an investor, or any other person or entity, to enforce a U.S. court judgment based
upon the civil liability provisions of the U.S. federal securities laws against us or any of these persons in a U.S. or Israeli court,
or to effect service of process upon these persons in the United States. Additionally, it may be difficult for an investor, or any other
person or entity, to assert U.S. securities law claims in original actions instituted in Israel. Israeli courts may refuse to hear a claim
based on a violation of U.S. securities laws on the grounds that Israel is not the most appropriate forum in which to bring such a claim.
Even if an Israeli court agrees to hear a claim, it may determine that Israeli law and not U.S. law is applicable to the claim. If U.S.
law is found to be applicable, the content of applicable U.S. law must be proved as a fact, which can be a time-consuming and costly process.
Certain matters of procedure will also be governed by Israeli law. There is little binding case law in Israel addressing the matters described
above.
Your
rights and responsibilities as our shareholder will be governed by Israeli law which may differ in some respects from the rights and responsibilities
of shareholders of United States corporations.
Since we are incorporated under Israeli
law, the rights and responsibilities of our shareholders are governed by our articles of association and Israeli law. These rights and
responsibilities differ in some respects from the rights and responsibilities of shareholders in U.S.-based corporations. In particular,
a shareholder of an Israeli company has a duty to act in good faith and in a customary manner in exercising its rights and performing
its obligations towards the company and other shareholders and to refrain from abusing its power in the company, including, among other
things, in voting at the general meeting of shareholders on certain matters, such as an amendment to the company’s articles of association,
an increase of the company’s authorized share capital, a merger of the company and approval of related party transactions that require
shareholder approval. A shareholder also has a general duty to refrain from discriminating against other shareholders. In addition, a
controlling shareholder or a shareholder who knows that it possesses the power to determine the outcome of a shareholders’ vote
or to appoint or prevent the appointment of an office holder in the company or has another power with respect to the company, has a duty
to act in fairness towards the company. However, Israeli law does not define the substance of this duty of fairness. See “ITEM 6.C:
Directors, Senior Management and Employees—Board Practices—Board Practices—Fiduciary duties and approval of specified
related party transactions under Israeli law—Duties of shareholders.” Additionally, the parameters and implications of the
provisions that govern shareholder behavior have not been clearly determined by the Israeli courts. These provisions may be interpreted
to impose additional obligations and liabilities on our shareholders that are not typically imposed on shareholders of United States corporations.
Provisions
of Israeli law may delay, prevent or make undesirable a merger transaction, or an acquisition of all or a significant portion of our shares.
Israeli corporate law regulates mergers
by mandating certain procedures and voting requirements and requires that a tender offer be affected when more than a specified percentage
of shares in a company are purchased. Further, Israeli tax considerations may make potential transactions undesirable to us or to some
of our shareholders whose country of residence does not have a tax treaty with Israel granting tax relief to such shareholders from Israeli
tax. With respect to mergers, Israeli tax law allows for tax deferral in certain circumstances but makes the deferral contingent on the
fulfillment of numerous conditions, including a holding period of two years from the date of the transaction during which certain sales
and dispositions of shares of the participating companies are restricted. Moreover, with respect to certain share swap transactions, the
tax deferral is limited in time, and when such time expires, the tax becomes payable even if no actual disposition of the shares has occurred.
See “ITEM 10.B: Additional Information—Memorandum and Articles of Association—Acquisitions under Israeli law.”
33
Under Israeli law, our two external directors
have terms of office of three years. Our current external directors have been elected by our shareholders to serve for a three-year term
commencing December 1, 2020.
These provisions of Israeli law could
have the effect of delaying or preventing a change in control and may make it more difficult for a third party to acquire us or our shareholders
to elect different individuals to our board of directors, even if doing so would be beneficial to our shareholders, and may limit the
price that investors may be willing to pay in the future for our ordinary shares.
If
we are considered a “monopoly” under Israeli law, we could be subject to certain restrictions that may limit our ability to
freely conduct our business to which our competitors may not be subject.
Under the Israeli Economic Competition
law (formerly, the Restrictive Trade Practices Law, 1988) (the “Israeli Competition Law”),
a company that either supplies more than 50% of any asset or service in Israel or, in some cases, in a specific geographical area in Israel,
or holds market power in a relevant market, is deemed to be a monopoly. The determination of monopoly status depends on an analysis of
the relevant product or service market, but it does not require a positive declaration, and the status is achieved by virtue of such market
share threshold being crossed or the existence of market power.
Depending on the analysis and the definition
of the relevant product market in which we operate, we may be deemed to be a “monopoly” under Israeli law. Under the Israeli
Competition Law, a monopoly is prohibited from participating in certain business practices, including unreasonably refusing to provide
the relevant product or service, or abuse of market power by means of discriminating between similar transactions or charging what are
considered to be unfair prices, and from engaging in certain other practices. The Israeli Competition Commissioner may determine that
a company that is a monopoly has abused its position in the market and may subsequently order such company to change its conduct in matters
that may materially and adversely affect the public, including imposing business restrictions on a company determined to be a monopoly
and giving instructions with respect to the prices charged by the monopoly. If we are indeed deemed to be a monopoly and the Commissioner
finds that we have abused our position in the market by taking anticompetitive actions and using anti-competitive practices, such as those
described above, it would serve as prima facie evidence in private actions and class actions against
us alleging that we have engaged in anti-competitive behavior. Furthermore, the Commissioner may order us to take or refrain from taking
certain actions, which could limit our ability to freely conduct our business. Violations of the Israeli Competition Law can constitute
a criminal offence, may lead to civil claims, administrative penalties and may expose a company to class actions.
Sales in Israel accounted for approximately
6.1% of our revenues in 2021. We have a significant market position in certain jurisdictions outside of Israel and cannot assure you that
we are not, or will not become, subject to the laws relating to the use of dominant product positions in particular countries, which laws
could limit our business practices and our ability to consummate acquisitions.
General
Risk Factors
If
we do not manage our inventory effectively, our results of operations could be materially adversely affected.
We must manage our inventory effectively
in order to meet the demand for our products. If our forecasts for any Specific Stock Keeping Unit (“SKU”)
exceed actual demand, we could experience excess inventory, resulting in increased logistic costs. If we ultimately determine that we
have excess inventory, we may have to reduce our prices and write-down inventory which could have an adverse effect on our business, financial
condition and results of operations. If we have insufficient inventory levels, we may not be able to respond to the market demand for
our products, resulting in reduced sales and market share.
34
Our
limited resources and significant competition for business combination or acquisition opportunities may make it difficult for us to complete
a combination or acquisition, and any combination or acquisition that we complete may disrupt our business and fail to achieve our intended
objectives.
We have in the past and intend to continue
growing our business through a combination of organic growth and acquisitions. For more information, see “ITEM 4: Information on
the Company—History and Development of the Company—Our History.” While we believe there are a number of target businesses
we might consider acquiring, including, in certain instances, our distributors, manufacturers of quartz surfaces and other surfaces like
ceramic, we may be unable to persuade those targets of the benefits of a combination or acquisition. Our ability to compete with respect
to a combination with or acquisition of certain larger target businesses will be determined by, among other factors, our available financial
resources. This inherent competitive limitation may give others an advantage in pursuing such combinations or acquisitions.
Any combination or acquisition that we
effect will be accompanied by several risks, including, but not limited to:
| • |
the difficulty of integrating the operations and personnel of the acquired business;
|
| • |
the potential disruption of our ongoing business; |
| • |
the potential distraction of management; |
| • |
expenses related to the acquisition; |
| • |
potential unknown liabilities associated with acquired businesses; |
| • |
challenges integrating completed combinations or acquisitions in an efficient
and timely manner; and |
| • |
failure to realize the expected synergies or benefits in connection with a future
combination or acquisition. |
If we are not successful in completing
combinations or acquisitions that we pursue in the future, we may incur substantial expenses and devote significant management time and
resources without a successful result. Acquisitions which may include the expansion of our business into new products, like ceramic, and
new applications, could distract the attention of management, impose high expenses and investments and expose our business to additional
risks. Such acquisitions carry further risks associated with the entry into new business lines in which we do not have prior experience,
and there can be no assurance that any such business expansion would be successful. In addition, future combinations or acquisitions could
require the use of substantial portions of our available cash, incur significant debt that could impact the way that we run our business,
or result in dilutive issuances of securities. For more information, see “—Fully integrating Lioli’s and Omicron’s
businesses may be more difficult, costly and time-consuming than expected, which may adversely affect our results of operations and the
value of our common shares” and “—In addition to our traditional engineered quartz offering, we have commenced manufacturing
of porcelain products and sales of porcelain, natural stone and other materials, and may pursue a further expansion of our product offering,
including introducing new products and materials, which may be unsuccessful, and may divert management’s attention and negatively
affect our margins and results of operations.” These factors could each adversely impact our share price and, additionally, our
share price may be adversely impacted if the market assesses that we overpaid for a particular acquisition.
We
depend on our senior management team and other skilled and experienced personnel to operate our business effectively, and the loss of
any of these individuals could materially and adversely affect our business and our future financial condition or results of operations.
We are dependent on the skills and experience
of our senior management team and other skilled and experienced personnel. These individuals possess strategic, managerial, sales, marketing,
operational, manufacturing, logistical, financial and administrative skills that are important to the operation of our business. During
2021 we have experienced a significant increase in turnover across our operations and challenges in recruiting and retaining employees
as labor markets change around the world post-COVID-19.
35
Retention of institutional knowledge and
the ability to attract, motivate and retain personnel, as well as the ability to successfully onboard our senior management as a team
comprised of several new members, are crucial for implementing our business strategy, without which our business and our future financial
condition or results of operations could suffer materially and adversely. We do not carry key man insurance with respect to any of our
executive officers or other employees. We cannot assure you that we will be able to retain all our existing senior management personnel
and key personnel or to attract additional qualified personnel when needed.
The market for qualified personnel is
competitive in the geographies in which we operate. Moreover, the COVID-19 pandemic has also caused a shift to virtual or hybrid recruiting
and employment, which has increased the difficulty in timely attracting new employees, integrating and introducing them into our corporate
culture and retaining them for the longer term. Companies with whom we compete have expended and will likely continue to expend more resources
than we do on employee recruitment and are often better able to offer more favorable compensation and incentive packages than we can.
We seek to retain and motivate existing personnel through our compensation practices, company culture, and career development opportunities.
If we are unable to attract and retain qualified personnel when and where they are needed, our ability to operate and grow our business
could be impaired. Moreover, if we are not able to properly balance investment in personnel with sales, our profitability may be adversely
affected.
In addition, factors beyond our control
may damage or disrupt the ability of our senior management or key employees to perform their critical roles in the Company. In particular,
the ongoing COVID-19 pandemic may affect the health and livelihood of our management and employees. The pandemic has led governments in
the jurisdictions in which we operate, including the location of our headquarters and manufacturing facilities, to implement reductions
in onsite workforce, travel restrictions and individual quarantines. Such limitations may lead to significant changes in the operations
of our business, such as reduction in number of shifts at our plants, reduced sales activity and lack of back office support, and materially
adversely affect our business and financial condition. See also “—The COVID-19 pandemic could further impact end-consumers
and the global economy in general, lower demand for our products, disrupt our operations and materially and adversely affect our business
and financial results” and “—Disturbances to our operations or the operations of our suppliers, distributors, customers,
consumers or other third parties could materially adversely affect our business.”
Labor shortages and
increased turnover or increases in employee and employee-related costs could have adverse effects on our profitability.
We have recently experienced increased
difficulties in recruitment at some of our production facilities and other locations. While we have historically experienced some level
of ordinary course turnover of employees, the COVID-19 pandemic and resulting actions and impacts have exacerbated labor shortages and
increased turnover. A number of factors have had and may continue to have adverse effects on the labor force available to us, including
reduced employment pools, unemployment subsidies, including unemployment benefits offered in response to the COVID-19 pandemic, and other
government regulations, which include laws and regulations related to workers’ health and safety, and wage and hour practices. Labor
shortages and increased turnover rates within our team members have led to and could in the future lead to increased costs, such as increased
overtime to meet demand and increased wage rates to attract and retain employees and could negatively affect our ability to efficiently
operate our production facilities or otherwise operate at full capacity. An overall or prolonged labor shortage, lack of skilled labor,
increased turnover or labor inflation could have a material adverse impact on our operations, results of operations, liquidity or cash
flows.
36
ITEM
4: Information on the Company
| A. |
History
and Development of the Company |
Our History
Caesarstone Ltd. was founded in 1987 and
incorporated in 1989 in the State of Israel. We began as a leading manufacturer of high-end engineered surfaces used primarily as countertops
in residential and commercial buildings, and are now a multi material designer, producer and reseller of countertops. We design, develop
produce and source engineered quartz, natural stone and porcelain products that offer aesthetic appeal and functionality through a distinct
variety of colors, styles, textures, and finishes used primarily as countertops, vanities, and other interior and exterior spaces.
Our products are currently sold in over
50 countries through a combination of direct sales in certain markets performed by our subsidiaries and indirectly through a network of
independent distributors in other markets. We acquired the businesses of our former Australian, Canadian, U.S. and Singaporean distributors,
and established such businesses within our own subsidiaries in such countries. In March 2012, we listed our shares on the Nasdaq Global
Select Market. In 2017, we started selling our products in the U.K. directly through our U.K. subsidiary, Caesarstone (UK) Ltd. In December
2020, we acquired Omicron, a premier stone supplier which operated several locations across Florida, Ohio, Michigan and Louisiana. We
now generate a substantial portion of our revenues in the United States, Australia and Canada from direct distribution of our products.
In addition, in October 2020, we acquired a majority stake in Lioli, an India-based producer of porcelain slabs, which also sells its
porcelain products in India and other markets.
We are a company limited by shares organized
under the laws of the State of Israel. We are registered with the Israeli Registrar of Companies in Jerusalem. Our registration number
is 51-143950-7. Our principal executive offices are located at Kibbutz Sdot-Yam, MP Menashe, 3780400, Israel, and our telephone number
is +972 (4) 610-9368. We have irrevocably appointed Caesarstone USA as our agent for service of process in any action against us in any
United States federal or state court. The address of Caesarstone USA is 1401 W. Morehead Street, Suite 100, Charlotte, NC, 28208. The
SEC maintains an internet site at http:/www.sec.gov that contains reports and other information regarding issues that file electronically
with the SEC. Our securities filings, including this annual report and the exhibits thereto, are available on the SEC’s website.
For more information about us, our website is www.caesarstone.com. The information contained
in, or connected with, our SEC filings on the SEC internet site and our website shall not be deemed to be incorporated by reference in
this annual report.
Principal Capital Expenditures
Our capital expenditures for fiscal years
2021, 2020 and 2019 amounted to $31.5 million, $19.8 million and $23.6 million, respectively. The majority of our investment activities
have historically been related to the purchase of manufacturing equipment and components for our production lines. For additional information
on our capital expenditures, see “ITEM 5.B: Liquidity and Capital Resources–Capital expenditures.”
37
| B. |
Business Overview
|
We are a multi material designer, producer and reseller of countertops used in residential and commercial
buildings globally. The global countertop industry generated approximately $117 billion in sales to end consumers in 2020 based on average
installed price, which includes fabrication, installation and other service related costs, as per the following charts:
The majority of our sales are at the wholesale
level to fabricators and distributors and exclude fabrication, installation and other service related costs.
The engineered quartz countertop is a
growing category in the countertop market and continues to take market share from other materials, such as granite, manufactured solid
surfaces and laminate. Between 1999 and 2020, global engineered quartz sales to end-consumers grew at a compound annual growth rate of
16.6% compared to a 5.0% compound annual growth rate in total global countertop sales to end-consumers during the same period. Following
the Lioli Acquisition, we intend to commence marketing and sales of porcelain countertops under our Caesarstone brand. Porcelain represents
one of the fastest growing categories in the global countertop market. and between 2014 and 2020, the porcelain sales to end-consumers
grew at a compound annual growth rate of 14.9%.
In recent years, quartz penetration rate, by volume, other
than in Israel, increased in our key markets, as detailed in the following chart:
Quartz penetration in
our key markets
|
For the year ended December
31, |
||||||||||||||||||||
|
2020 |
2016 |
2014 |
2012 |
2010 |
||||||||||||||||
|
Region |
||||||||||||||||||||
|
United States |
20 |
% |
14 |
% |
8 |
% |
6 |
% |
5 |
% | ||||||||||
|
Australia (not including New Zealand) |
47 |
% |
45 |
% |
39 |
% |
35 |
% |
32 |
% | ||||||||||
|
Canada |
28 |
% |
24 |
% |
18 |
% |
12 |
% |
9 |
% | ||||||||||
|
Israel (*) |
67 |
% |
87 |
% |
86 |
% |
85 |
% |
82 |
% | ||||||||||
(*) In Israel, quartz lost market share mainly to porcelain,
which increased its market share from a de-minimis rate in 2016 to over 20% in 2020, a trend we estimate continued thorugh 2022.
Our products consist primarily of engineered
quartz, natural stone and porcelain slabs that are currently sold in over 50 countries through a combination of direct sales in certain
markets and indirectly through a network of independent distributors in other markets. Our products are primarily used as indoor
outdoor kitchen countertops in the renovation and remodeling and residential construction end markets. Other applications for our products
include vanity tops, back splashes, furniture, and other interior and exterior surfaces that are used in a variety of residential and
non-residential applications. High quality engineered quartz offers durability, non-porous characteristics, superior scratch, stains and
heat resistance levels, making it durable and ideal for kitchen and other applications relative to competing products such as granite,
manufactured solid surfaces and laminate. Porcelain is characterized by its hardness and its stain resistance, as well as extreme heat
and UV resistance. Through our design and manufacturing processes we can offer a wide variety of colors, styles, designs and textures.
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From 2010 to 2021, our revenue grew at
a compound annual growth rate of 11.3%. From 2020 to 2021, our revenue increased at an annual rate of 32.4%. In 2021, we generated revenue
of $643.9 million, net income attributable to controlling interest of $19.0 million, adjusted EBITDA of $68.2 million and adjusted net
income attributable to controlling interest of $28.6 million. Adjusted EBITDA and adjusted net income attributable to controlling interest
are non-GAAP financial measures. See “ITEM 8.B: Business Overview—Non-GAAP Financial Measures” below for a description
of how we define adjusted EBITDA and adjusted net income attributable to controlling interest and reconciliations of net income to adjusted
EBITDA and net income attributable to controlling interest to adjusted net income attributable to controlling interest.
Our Products
Our products are generally marketed under the Caesarstone brand. Currently, our porcelain products manufactured
in India are marketed either under the Caesarstone brand, mainly for counter-top applications in selected markets, and under the existing
Lioli brand mainly for flooring and cladding applications. Most of our stone and ceramic products are installed as countertops in residential
kitchens. Other applications of our products include vanity tops, back splashes, and exterior surfaces. In addition, we sell natural stone,
sinks and various ancillary fabrication tools and materials. Our standard size engineered quartz slabs, constituting the majority of our
products measure 120 inches long by 56 1/2 inches wide, and 131 1/2 inches long by 64 1/2 inches wide for the jumbo slabs, with a thickness
of 1/2 of an inch, 3/4 of an inch or 1 1/4 inches, and 3/4 of an inch or 1 1/4 inches for the jumbo slabs. On average engineered quartz
surfaces are comprised on average of 85% quartz blended with polyester, and pigments. Our engineered quartz products’ composition
gives them superior strength and resistance levels to heat impact, scratches, cracks, and chips. Polyester, which acts as a binding agent
in our engineered quartz products, make such products non-porous and highly resistant to stains. Pigments act as a dyeing agent to vary
our products’ colors and patterns. Our standard size porcelain countertop slabs measure 126 inches long by 63 inches wide, 94 inches
long by 47 inches wide and 47 inches by 47 inches mm, with a thickness of 1/2 inches, 1/3 inches and 1/4 inches, in matt and polished
finishes. Porcelain surfaces are typically comprised of clay minerals, natural minerals, and chemical additives, and offer non-porous
characteristics as well as scratch and heat resistance.
We design our products with a wide range
of colors, finishes, textures, thicknesses, and physical properties, which help us meet the different functional and aesthetic demands
of end-consumers. Our designs range from fine-grained patterns to coarse-grained color blends with a variegated visual texture. Through
offering new designs, we capitalize on Caesarstone’s brand name and foster our position as a leading innovator in the counter-top
space.
Our product offerings consist of four
collections, each of which is designed to have a distinct aesthetic appeal. We use a multi-tiered pricing model across our products and
within each product collection ranging from lower price points to higher price points. Each product collection is designed, branded, and
marketed with the goal of reinforcing our products’ premium quality.
We introduced our original product collection,
Classico, in 1987, and today, this collection still generates more revenue than our other collections. Launched in 2012, our Supernatural
collection, which is marketed as specialty high-end, offers designs inspired by natural stone and which are manufactured using proprietary
technology. In 2018, we launched our new Metropolitan collection, inspired by the rough and unpolished textures found in industrial architecture.
In 2020, we introduced our Outdoor collection, an innovative product category, which comprises stain resistant, easy-to-clean surfaces,
made of a highly durable material, proven to withstand UV-rays and the most extreme environmental conditions over a long term, intended
for use in outdoor cooking spaces.
We regularly introduce new colors and
designs to our product collections based on consumer trends. We offer over 70 different colors of quartz products, with five textures
and three thicknesses generally available for each collection. Each year we typically introduce between four to eight new colors and models.
39
In 2018, we began to offer porcelain slabs
sourced through OEMs and following the Lioli Acquisition, from Lioli as well.
In addition, following the Omicron Acquisition,
we now offer to our customers in the United States resale of natural stone, as well as various ancillaries and fabrication and installation
accessories.
A key focus of our product development
is a commitment to substantiating our claim of our products’ superior quality, strength, and durability. Our products undergo regular
tests for durability and strength internally by our laboratory operations group and by external accreditation organizations. Products
in our portfolio are accredited by organizations overseeing safety and environment performance, such as the NSF International and GREENGUARD
Indoor Air Quality. Generally, our products support green building projects and allow contractors to receive Leadership in Energy and
Design (“LEED”) points for projects incorporating our products.
Distribution
Our four largest markets based on sales
are currently the United States, Australia (including New Zealand), Canada and Israel. In 2021, sales of our products in these markets
accounted for 47.4%, 18.4%, 13.1% and 6.1% of our revenues, respectively. Total sales in these markets accounted for 85.1% of our revenues
in 2021. For a breakdown of revenues by geographic market for the last three fiscal years, see “ITEM 5.A: Operating Results and
Financial Review and Prospects—Operating Results.”
Direct
Markets
We currently have direct sales channels
in the United States, Australia, Canada, Israel, the United Kingdom (“U.K.”) and Singapore.
Our direct sales channels allow us to maintain greater control over the entire sales channel within a market. As a result, we gain greater
insight into market trends, receive feedback more readily from end-consumers, fabricators, architects and designers regarding new developments
in tastes and preferences, and have greater control over inventory management. Our subsidiaries’ warehouses in each of these countries
maintain inventories of our products and are connected to each subsidiary’s sales department. We supply our products primarily to
fabricators, who in turn resell them to contractors, developers, builders and consumers, who are generally advised by architects and designers.
In certain market channels in the U.S., Canada and Australis, we also provide, together with our products, fabrication and installation
services, which we source from third party fabricators. We believe that our supply of a fabricated and installed Caesarstone countertop
is a competitive advantage in such channels, which enables us to better control our products’ prices as well as to promote a full
solution to our customers, while in some of these cases our products are sold under different brands.
In Israel, where our headquarters are
located, we distribute our products directly to several local distributors who in turn sell them to fabricators. This arrangement reduces
our financial exposure and simplifies our logistics in the Israeli market. Although we sell our products to distributors in this market,
we consider this a direct market due to the warranty we provide to end-consumers, as well as our fabricator technical and health and safety
instruction programs and our local sales and marketing activities. In the United States, Australia, Canada, the United Kingdom, and Singapore
we have established direct distribution channels with distribution locations in major urban centers complemented by arrangements with
various third parties, sub-distributors or stone suppliers in certain areas of the United States.
Indirect
Markets
We distribute our products in other territories
in which we do not have a direct sales channel through third-party distributors, who generally distribute our products to fabricators
on an exclusive or non-exclusive basis in a specific country or region. Fabricators sell our products to contractors, developers, builders
and consumers. In some cases, our distributors operate their own fabrication facilities. Additionally, our distributors may sell to sub-distributors
located within the territory who in turn sell to fabricators.
In most cases, we engage one or more distributors
to serve a country or territory. Today, we sell our products in over 45 countries through third-party distributors, and over 50 countries
in total. Sales to third-party distributors accounted for approximately 10% of our revenues in 2021. This strategy often allows us to
accelerate our penetration into multiple new markets. Our distributors typically have prior stone surface experience and close relationships
with fabricators, builders and contractors within their respective territory.
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We work closely with our distributors
to assist them in preparing and executing a marketing strategy and comprehensive business plan. Ultimately, however, our distributors
are responsible for the sales and marketing of our products and providing technical support to their customers within their respective
territories. To assist some of our distributors in the promotion of our brand in these markets, we provide marketing materials and in
certain cases, monetary participation in marketing activities. Our distributors devote significant effort and resources to generating
and maintaining demand for our products along all levels of the product supply chain in their territory. To this end, distributors use
our marketing products and strategies to develop relationships with local builders, contractors, developers, architects and designers.
Certain distributors, as well as sub-distributors, do not engage in brand promotion activities and their activities are limited to sales
promotion, warehousing and distributing to fabricators or other customers.
We do not control the pricing terms of
our distributors’ or sub-distributors’ sales to customers. As a result, prices for our products may vary.
Sales and Marketing
Sales
We manufacture or source our products
based upon our rolling projections of the demand for our products.
Since 2019, we have operated under a regional
structure which consists of North America, APAC, EMEA and Israel. Under this structure, each region manages the direct distribution channels
and focuses on penetrating new markets within its territory, as well as further develops its key growth indirect sales markets.
We believe our products still have significant
growth opportunities in the United States, Canada and Europe. For information on sales trends in the markets in which we operate, see
“ITEM 5: Operating and Financial Review and Prospects—Components of statement of income”. In 2016, we established a
direct sales channel in the United Kingdom and starting in January 2017 we have been selling and distributing our products in the U.K.
directly through our U.K. subsidiary. In December 2020, we acquired Omicron, a premier stone supplier servicing the Florida, Ohio, Michigan
and Louisiana markets in the U.S. We intend to continue to invest resources to further strengthen and increase our penetration in our
existing markets. We are also exploring alternative sales channels and methodologies to further enhance our presence in each market.
Marketing
We position our engineered quartz, porcelain
and natural stone surfaces as premium branded products in terms of their designs, quality and pricing. Through our marketing, we seek
to convey our products’ ability to elevate the overall quality of an entire kitchen or other setting. Our marketing strategy is
to deliver this message every time our end-consumers, customers, fabricators, architects and designers meet our brand. We also aim to
communicate our position as a design-oriented global leader in engineered surfaces innovation and technology.
The goal of our marketing activities is
to drive marketing and sales efforts across the regions, while creating demand for our products from end-consumers, fabricators, contractors,
architects and designers, which we refer to as a “push-and-pull demand strategy.” We combine both pushing our products through
all levels of the product supply chain while generating demand from end-consumers as a complementary strategy.
We implement a multi-channel marketing
strategy in each of our territories and market not only to our direct customers, but to the entire product supply chain, including fabricators,
developers, contractors, kitchen retailers, builders, architects and designers. We use multiple marketing channels, including advertisements
in home interior magazines and websites, the placement of our display stands and sample books in kitchen retails stores and our company’s
website and social media presence. We share knowledge with fabricators about our products and their capabilities, installation methods
and safety requirements through manuals, seminars and webinars. In addition, our “Master of Stone” program operates as an
online training platform, with content aimed at educating fabricators on the topics of Health Safety, professional know-how and
added value content for fabrication plant managers and making safety and professional working guidelines accessible to our fabricators
worldwide.
41
Our marketing materials are developed
by our global marketing department in Israel and are used globally. In 2021, we spent $15.3 million on direct advertising and promotional
activities.
Our websites are a key part of our marketing
strategy enabling us to create data-driven personal relationship, on and off site, in order to increase engagement and conversion to sale.
Our websites enable our business partners, customers and end-consumers to view currently available designs, photo galleries of installations
of our products in a wide range of settings, instructions with respect to the correct usage of our products and offer an innovative cutting-edge
experience with rich content and interactive tools to empower and guide consumers at any stage of their renovation journey. We also conduct
marketing activity in the social media arena mainly to increase our brand awareness among end-consumers, architects and designers.
During 2020, we opened a new Israeli showroom
named “Caesarstone Concept House” where we introduced innovative technology-driven consumer experience.
We also seek to increase awareness of
our brand and products through a range of other methods, such as trade shows, home design shows, design competitions, media campaigns
and through our products’ use in high profile projects and iconic buildings. In recent years, we have collaborated with renowned
designers, who created exhibitions and particles from our products. Our design initiatives attracted press coverage around the world.
Research and Development
Our research and development (“RD”) department
is primarily located in Israel. As of December 31, 2021, our corporate RD department was comprised of 16 employees, all of whom have
extensive experience in engineered quartz surface manufacturing, polymer science, engineering, product design and engineered quartz surface
applications. In addition, our RD for porcelain manufacturing is conducted by eight dedicated employee located in India. In 2021,
RD costs accounted for approximately 0.7% of our revenues.
The strategic mission of our RD team
is to develop and maintain innovative and leading technologies and top-quality designs, develop new and innovative products according
to our marketing department’s roadmap, increase the cost-effectiveness of our manufacturing processes and raw materials, and generate
and protect company intellectual property in order to enhance our position in the engineered quartz surface industry. We also study and
evaluate consumer trends by attending industry exhibitions and hosting international design workshops with market and design specialists
from various regions.
Customer Service
We believe that our ability to provide
outstanding customer service is a strong competitive differentiator. Our relationships with our customers are established and maintained
through the coordinated efforts of our sales, marketing, production and customer service personnel. In our direct markets, the warranty
period varies. We provide end-consumers with various warranties depending on the relevant markets ranging from a ten-year limited warranty
to limited lifetime warranties in selected markets such as the United States, Canada and Israel. In our indirect markets, end-consumers,
warranty issues on our products are addressed by our local distributor. We provide all our distributors a limited direct manufacturing
defect warranty and our distributors are responsible for providing warranty coverage to end-customers. The warranties provided by our
distributors vary in term. In our direct markets, following an end-consumer call, our technicians are sent to the product site within
a short time. We provide readily accessible resources and tools regarding the fabrication, installation, care and maintenance of our products.
We believe our comprehensive global customer service capabilities and the sharing of our service-related know-how differentiate our company
from our competitors.
Raw Materials and Service
Provider Relationships
Quartz, polyester and pigment are the
primary raw materials used in the production of our engineered quarts products. We acquire raw materials from third-party suppliers. Suppliers
ship raw materials for our engineered quartz products to our manufacturing facilities in Israel and the U.S. primarily by sea. Our raw
materials are generally inspected at the suppliers’ facilities and upon arrival at our manufacturing facilities in Israel and the
U.S. The cost of our raw materials consists of the purchase prices of such materials and costs related to the logistics of delivering
the materials to our manufacturing facilities. Our raw materials costs are also impacted by changes in foreign currency exchange rates.
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Quartz is the main raw material component
used in our engineered quartz products. Raw quartz must be processed into finer grades of sand and powder before we use it in our manufacturing
process. We purchase quartz from our quartz suppliers after it was already processed by them. We acquire quartz from suppliers primarily
in Turkey, Belgium, India, Portugal, the U.S. and Israel. In 2021, approximately 62% of our quartz, including mainly quartzite, which
is used across all of our engineered quartz products, was imported from several suppliers in Turkey. Approximately 40% of the imported
quartz from Turkey (or 25% of our total quartz) was acquired from Mikroman Madencilik San ve TIC.LTD.STI (“Mikroman”)
and approximately 33% of the imported quartz from Turkey (or 20% of our total quartz) was acquired from Polat Maden Sanayi ve Ticaret
A.S (“Polat”). Our current supply arrangements with Polat and Mikroman are set forth
in letter agreements.
Similar to our arrangements with Mikroman
and Polat described above, we typically transact business with our quartz suppliers on an annual framework basis, under which we execute
purchase orders from time to time. Quartz imported from Turkey, Europe and Israel for our U.S. manufacturing facility entails higher transportation
costs.
In most cases, we acquire polyester from several suppliers, on an annual framework basis or purchase order
basis based on our projected needs for the subsequent one to three months. Typically, suppliers are unwilling to agree to preset prices
for periods longer than a quarter and suppliers’ prices may vary during a quarter as well.
Pigments for our engineered quartz production
in Israel are purchased from Israel and suppliers abroad. Pigments for our U.S. engineered quartz production are primarily purchased from
U.S. vendors.
The principal raw materials for our porcelain
products are clay minerals (such as Ukraine clay, bentonite), natural minerals (such as feldspar) and chemical additives. While we acquire
feldspar locally from Indian suppliers, Ukraine clay and bentonite are imported from the relevant regions. We typically transact business
with our suppliers of raw materials for porcelain products on an annual framework basis, under which we execute purchase orders from time
to time.
Our strategy is to maintain, whenever
practicable, multiple sources for the purchase of our raw materials to achieve competitive pricing, provide flexibility and protect against
supply disruption.
See “ITEM 3.D. Key Information—Risk
Factors—We may encounter significant delays in manufacturing if we are required to change the suppliers for the raw materials used
in the production of our products.” For our cost of raw materials in 2021 and prior years, see “ITEM 5.A: Operating Results
and Financial Review and Prospects—Operating Results—Cost of revenues and gross profit margin.”
Manufacturing and Facilities
Our products are manufactured at our four
manufacturing facilities located in Kibbutz Sdot-Yam in central Israel, Bar-Lev Industrial Park in northern Israel, Richmond Hill, Georgia
in the U.S. and, following the Lioli Acquisition, in Morbi, Gujarat in India. Our Sdot-Yam facility includes our first two production
lines. We completed our Bar-Lev manufacturing facility in 2005, which included our third production line, and we established our fourth
production line at this facility in 2007 and our fifth production line at this facility in 2013. We completed our U.S. manufacturing facility
in 2015, where we began to operate our sixth production line in the second quarter of 2015 and our seventh line in the fourth quarter
of 2015. In addition to a $135 million as an initial investment, we have the option to further invest and expand in Richmond Hill to accommodate
additional manufacturing capacity in the future as needed to satisfy potential demand. During 2020, in response to the pandemic impact
on our business we reduced the utilization of our production facilities in Israel and the U.S and currently we are still only partially
utilizing our U.S. production facility. As part of the Lioli Acquisition, in 2020 we acquired a porcelain slab manufacturing facility,
which is comprised of one production line currently in operation.
43
Finished slabs are shipped from our facilities
in Israel and the U.S. to our distribution centers worldwide, directly to customers and to third-party distributors worldwide. Finished
porcelain slabs manufactured at our Morbi facility are distributed via third-party distributors and are shipped from India worldwide.
For further discussion of our facilities, see “ITEM 4.D: Information on the Company—Property, plants, and equipment.”
The manufacturing process for our engineered quartz products typically involves the blending of quartz
(85% on average) with polyester and pigments. Using machinery acquired primarily from Breton, the leading supplier of engineered stone
manufacturing equipment, together with our proprietary manufacturing enhancements, this mixture is compacted into slabs by a vacuum and
vibration process. The slabs are then moved to a curing kiln where the cross-linking of the polyester is completed. Lastly, the slabs
are gauged, calibrated and polished to enhance shine.
The manufacturing process for our porcelain
products typically involves blending of clay, natural minerals (such as feldspar) and chemical additives required for the shaping process.
The multi-ingredient mixture is fed to a ball mill, together with water, to achieve fine grinding. The excess water is then removed, and
the resulting powder is shaped into slabs. Slabs are first moved to dryers and then passed through a glaze line, where they are decorated
with different applicators. Decorated slabs are passed through digital printing machines and then go into a curing kiln for final firing
process. Lastly, the slabs are gauged, calibrated and polished to enhance shine.
We maintain strict quality control and
safety standards for our products and manufacturing process. Our manufacturing facilities have several safety certifications from third-party
organizations, including an OHSAS 18001 safety certification from the International Quality Network for superior manufacturing safety
operations.
In addition, since 2018 we have increased
our outsourcing capabilities and currently purchase a certain portion of our engineered quartz slabs from third-party quartz manufacturers
that meet our specifications. We conduct quality control and quality assurance processes with respect to such outsourcing of our products.
In 2021, OEMs products accounted for less than 10% of revenues, and we are aiming to increase purchases from OEMs in 2022. For more information,
see ITEM 3.D: Key Information - Operational Risks.
Seasonality
For a discussion of seasonality, please
refer to “ITEM 5.A: Operating and Financial Review and Prospects—Operating Results—Factors impacting our results of
operations” and “ITEM 5.A: Operating and Financial Review and Prospects—Operating Results—Quarterly results of
operations and seasonality.”
Competition
We believe that we compete principally
based upon product quality, breadth of colors and designs offering and innovation, brand awareness and position, pricing and customer
service. We believe that we differentiate ourselves from competitors on the basis of our premium brand, our signature product designs,
our products and designs innovation, our ability to directly offer our products in major markets globally, our focus on the quality of
our product offerings, our customer service-oriented culture, our high involvement in the product supply chain and our leading distribution
partners.
The dominant surface materials used by
end-consumers in each market vary. Our products compete with a number of other surface materials as well as similar materials offered
by other producers and re-sellers. The manufacturers of these products consist of a number of regional as well as global competitors.
Some of our competitors may have greater resources than we have, and may adapt to changes in consumer preferences and demand more quickly,
expand their materials offering, devote greater resources to design innovation and establishing brand recognition, manufacture more versatile
slab sizes and implement processes to lower costs.
The engineered quartz and porcelain surface
market is highly fragmented and is also served by a number of regional and global competitors. We also face growing competition from low-cost
manufacturers from Asia and Europe. Large multinational companies have also invested in their engineered quartz and porcelain surface
production capabilities. For more information, see “ITEM 3.D. Key Information—Risk Factors—We face intense competitive
pressures from manufacturers of other surface materials, which could materially and adversely affect our results of operations and financial
condition” and “ITEM 3.D. Key Information—Risk Factors—Competition from manufacturers of lower priced products
may reduce our market share, alter consumer preferences and materially and adversely affect our results of operations and financial condition”.
44
Information Technology
Systems
We believe that an appropriate information
technology infrastructure is important in order to support our daily operations and the growth of our business.
We implemented various IT systems to support
our business and operations. Our Enterprise Resource Planning (“ERP”) software provides
us with accessible quality data that support our forecasting, planning and reporting. Accurate planning is important in order to support
sales and optimize working capital and cost as our products can be built in a number of combinations of sizes, colors, textures and finishes.
Given our global expansion, we implemented a global ERP based on an Oracle platform. Our MES systems manage work processes on the production
floor in our facilities and Salesforce enhances our Customer Relationship Management (“CRM”)
infrastructure.
We are implementing a digital transformation
within our organization to better streamline processes and support our business strategy. We continued investing in our digital transformation
projects for better consumer engagement and customer experience. Our technological and digital investments will be geared towards operational
enhancements in inventory management and production, along with transforming our go-to-market tools. We seek to update our IT infrastructure
to enhance our ability to prevent and respond to cyber threats and conduct training for our employees in this respect. For further details,
see “ITEM 3.D. Key Information—Risk Factors—Disruptions to or our failure to upgrade and adjust our information technology
systems globally, may materially impair our operations, hinder our growth and materially and adversely affect our business and results
of operations.”
Intellectual Property
Our Caesarstone brand is central to our
business strategy, and we believe that maintaining and enhancing the Caesarstone brand is critical to expanding our business.
We have obtained trademark registrations
in certain jurisdictions that we consider material to the marketing of our products, including CAESARSTONE® and our Caesarstone logo.
We have obtained trademark registrations for additional marks that we use to identify certain product collections, as well as other marks
used for certain of our products. While we expect our current and future applications to mature into registrations, we cannot be certain
that we will obtain such registrations. In many of our markets we also have trademarks, including registered and unregistered marks, on
the colors and models of our products. We believe that our trademarks are important to our brand, success and competitive position. In
order to mitigate the risk of infringement, we conduct an ongoing review process before applying for registration. However, we cannot
be certain that third parties will not oppose our application or that the application will not be rejected in whole or in part. In the
past, some of our trademark applications for certain classes of our products’ applications have been rejected or opposed in certain
markets and may be rejected for certain classes in the future, in all or parts of our markets, including without limitation, for flooring
and wall cladding. We are currently subject to opposition proceedings with respect to applications for registration of our trademark Caesarstone
in certain jurisdictions.
To protect our know-how and trade secrets,
we customarily require our employees and managers to execute confidentiality agreements or otherwise agree to keep our proprietary information
confidential. Typically, our employment contracts also include clauses requiring these employees to assign to us all inventions and intellectual
property rights they develop in the course of their employment and agree not to disclose our confidential information. We limit access
to our trade secrets and implement certain protections to allow our know-how and trade secret to remain confidential.
In addition to confidentiality agreements,
we seek patent protection for some of our latest technologies. We have obtained patents for certain of our technologies and have pending
patent applications that were filed in various jurisdictions, including the United States, Europe, Australia, Canada, China and Israel,
which relate to our manufacturing technology and certain products. No patent application of ours is material to the overall conduct of
our business. There can be no assurance that pending applications will be approved in a timely manner or at all, or that such patents
will effectively protect our intellectual property. There can be no assurance that we will develop patentable intellectual property in
the future, and we have chosen and may further choose not to pursue patents for innovations that are material to our business.
45
Environmental and Other
Regulatory Matters
Environmental
and Health and Safety Regulations
Our manufacturing facilities and operations
in Israel, our manufacturing facility in Georgia, United States and our manufacturing facility in Gujarat, India are subject to numerous
Israeli, U.S. and Indian environmental and workers’ health and safety laws and regulations, respectively, and our supply chain operations
are subject to applicable local laws and regulations. For instance, applicable U.S. laws and regulations include federal, state and local
laws and regulations, including Georgia state laws. Laws and regulations in the U.S. and other countries govern, among other things, exposure
to pollutants, protection of the environment; setting standards for emissions; generation, treatment, import, purchase, use, storage,
handling, disposal and transport of hazardous wastes, chemicals and materials, including sludge; discharges or releases of hazardous materials
into the environment, soil or water; permissible exposure levels to hazardous materials; product specifications; nuisance prevention;;
soil, water or other contamination from hazardous materials and remediation requirements arising therefrom; and protection of workers’
health and safety.
In addition to being subject to regulatory
and legal requirements, our manufacturing facilities in Israel, the United States and India operate under applicable permits, licenses
and approvals with terms and conditions containing a significant number of prescriptive limits and performance standards. Business licenses
for our facilities in Israel contain conditions related to a number of requirements, including with respect to dust emissions, air quality,
the disposal of effluents and process sludge, and the handling of waste, chemicals and hazardous materials. Subject to certain terms,
the business license for our Sdot-Yam plant is in effect until December 31, 2025. The business license for our Bar-Lev plant is in effect
until June 30, 2022, and the Company is in the process of seeking an extension. The business license for our U.S. facility is renewed
every year subject to a fee paid to the city and county. Our site in India has a Factory License which is a basic license issued by the
Inspectorate of Factories, which is in effect until December 31, 2023. The site in India has also obtained a Consent to Operate (the “CTO”)
from the State Pollution Control Board, which is a permit issued to any factory in India with all the compliance requirements related
to environmental aspects, such as air emission, water and wastewater management, waste management. The CTO is valid until September 28,
2023. We operate in Israel under poison permits that regulate our use of poisons and hazardous materials. Our current poison permits are
valid until January 2023 for both our Israeli facilities. In addition, we dispose of wastewater from our Israeli manufacturing facilities
to a treatment plant pursuant to permits obtained from the Israeli Ministry of Environmental Protection (“IMEP”),
which are effective until March 31, 2022 and the Company is in process of its extension. Our facility in the United States is required
to obtain and follow a General Permit for Storm Water Discharges Associated with Industrial Activity of the Georgia Environmental Protection
Division (“GEPD”), an air quality permit from GEPD and other requirements and regulations
including among others specific limitations on emission levels of hazardous substances, such as styrene, specific limitations on RCS levels
inside our plant, allowable wastewater discharge limits, oil spill prevention rule, hazardous waste handling requirements and fire protection
measures requirements. Our site in India is required to comply with all applicable conditions, including with respect to water consumption,
wastewater discharge, air emission monitoring and pollution control devices, hazardous wastes storage and disposal, specified in the CTO.
We are currently in the process of renewing the plant’s Fire NOC (No Objection Certification), which expired in July 2021 due to
a requirement to install a Fire Hydrant system in the entire plant area. In all our manufacturing facilities, we are implementing measures
on an ongoing basis in order to achieve and maintain compliance with dust and styrene environmental and occupational emissions standards
and to reduce such emissions to minimum thresholds.
46
Each of these permits, licenses and standards
require a significant amount of monitoring, record-keeping and reporting in order for us to demonstrate compliance therewith.
Official representatives of the health
and safety and environment authorities in Israel, the States of Georgia and Gujarat visit our facilities from time to time, to inspect
issues such as workplace safety, industrial hygiene, monitoring lockout tag out programs, exposure and emissions, water treatment, noise
and others. Such inspections may result in citations, penalties, revocation of our business license or limitation or shut down of our
facilities’ operations. It may also require us to make further investments in our facilities.
From time to time, we face environmental
and health and safety compliance issues related to our manufacturing facilities
| • |
Emissions - Israel. In December 2019, the IMEP issued the additional terms to the business
license for our Bar-Lev facility, which require among others, performing a constant monitoring of styrene emission. Accordingly, we implemented
the required terms, including an online styrene emission monitoring system that was installed at our Bar-Lev facility during September
2020. The IMEP closely monitors our Bar-Lev facility’s implementation of the additional terms and emissions, specifically of styrene.
During July 2021, the Company received a warning letter from the IMEP in which our Bar-Lev plant was notified of violations of the Clean
Air Act and the plant’s business license terms, following an unannounced styrene emission sampling that revealed several cases of
deviations from the styrene emission standard under the Clean Air Act in Israel. The IMEP has ordered the Company to take corrective and
preventive actions, including reducing the expected timeframe for installation of additional Regenerative Thermal Oxidizer (“RTO”)
system and to implement a continuous (online) monitoring device on the Bar-Lev plant’s fence. We are cooperating with the IMEP and
are currently in the process of implementing all its requirements and remaining additional terms. Similarly, in October 2020 we received
from the IMEP the final version of the additional terms to the business license for our Sdot-Yam facility, which required, among others,
implementation of a continuous monitoring of the facility’s styrene emission. Accordingly, we implemented the required terms, including
an online styrene emission monitoring system that was installed at Sdot-Yam plant in May 2021. The IMEP closely monitors our Sdot-Yam
facility emissions, specifically for its styrene emissions. During January 2021 we were informed of several cases of deviations from the
styrene emission standard under the Clean Air Act in Israel at our Sdot-Yam plant, which were identified in an unannounced continuous
monitoring inspection that was conducted on the Sdot-Yam plant’s fence by the municipal supervisory authority. Recently the municipal
supervisory authority advised (but did not order) that a continuous monitoring system on the Sdot-Yam plant’s fence should be installed,
and that advice is being reviewed. In February 2022, Israel adopted a long term goal for the reduction of environmental styrene emissions.
Although such goal is not expected to impact our current operations, the adoption of new regulations could create an additional burden
for any future investment in our Israeli facilities. We are constantly in the process of taking the required corrective actions in order
to comply with the business license terms, the styrene emission standard and the IMEP instructions |
| • |
Workers’ safety and health. The Israeli Ministry of Economics, Labor Division (“IMOE”)
in Israel the U.S. Occupational Safety and Health Administration (“OSHA”) in the U.S.
and the Indian Ministry of Labor and Employment, conduct audits of our plants, in which, among other things, it examines if there were
any deviations from permitted ambient levels of RCS, styrene and acetone in the plants. We seek, on an ongoing basis, to continue reducing
the level of exposure of our employees to RCS, styrene and acetone, while enforcing our employees’ use of personal protection equipment.
|
Other
Regulations
We are subject to the Israeli Rest Law,
which, among other things, prohibits the employment of Jewish employees on Saturdays and Jewish holidays, unless a permit is obtained
from the IMEI. We received a permit from the IMEI to employ Jewish employees on Saturdays and Jewish holidays in connection with most
of the production machinery in our Sdot-Yam facility, effective until December 31, 2022.
47
If we are deemed to be in violation of
the Rest Law, we may be required to halt operations of our manufacturing facilities on Saturdays and Jewish holidays, we and our officers
may be exposed to administrative and criminal liabilities, including fines, and our operational and financial results could be materially
and adversely impacted. For more information, see “Item 3.D. Key Information—Risk Factors—Risks relating to our incorporation
and location in Israel—If we fail to comply with Israeli law restrictions concerning employment of Jewish employees on Saturdays
and Jewish holidays, we and our office holders may be exposed to administrative and criminal liabilities and our operational and financial
results may be materially and adversely impacted.”
For information on other regulations applicable,
or potentially applicable, to us, see the following risks factors in “ITEM 3.D. Key Information—Risk Factors”:
| • |
“Risks related to our business and industry—We may have exposure to
greater-than-anticipated tax liabilities.” |
| • |
“Risks related to our incorporation and location in Israel— Conditions
in Israel could materially and adversely affect our business.” |
| • |
“Risks related to our incorporation and location in Israel—The tax
benefits that are available to us require us to continue to meet various conditions and may be terminated or reduced in the future, which
could increase our costs and taxes.” |
| • |
“Risks related to our incorporation and location in Israel—If we are
considered a ‘monopoly’ under Israeli law, we could be subject to certain restrictions that may limit our ability to freely
conduct our business to which our competitors may not be subject. |
Legal Proceedings
See “ITEM 8.A: Financial Information—Consolidated
Financial Statements and Other Financial Information—Legal Proceedings.”
Non-GAAP Financial
Measures
We use certain non-GAAP financial measures
to evaluate our performance in conjunction with other performance metrics. The following are examples of how we use such non-GAAP measures:
| • |
Our annual budget is based in part on these non-GAAP measures. |
| • |
Our management and board of directors use these non-GAAP measures to evaluate
our operational performance and to compare it against our work plan and budget. |
Our non-GAAP financial measures, adjusted
gross profit, adjusted EBITDA and adjusted net income attributable to controlling interest, have no standardized meaning and accordingly
have limitations in their usefulness to investors. We provide such non-GAAP data because management believes that such data provide useful
information to investors. However, investors are cautioned that, unlike financial measures prepared in accordance with U.S. GAAP, non-GAAP
measures may not be comparable with similar measures used by other companies. These non-GAAP financial measures are presented solely to
permit investors to more fully understand how management and our board assesses our performance. The limitations of these non-GAAP financial
measures as performance measures are that they provide a view of our results of operations without reflecting all events during a period
and may not provide a comparable view of our performance to other companies in our industry.
Investors should consider non-GAAP financial
measures in addition to, and not as replacements for, or superior to, measures of financial performance prepared in accordance with GAAP.
48
In arriving at our presentation of non-GAAP
financial measures, we exclude items that either have a non-recurring impact on our income statement or which, in the judgment of our
management, are items that, either as a result of their nature or size, could, were they not singled out, potentially cause investors
to extrapolate future performance from an improper base. In addition, we also exclude share-based compensation expenses to facilitate
a better understanding of our operating performance, since these expenses are non-cash and accordingly, we believe do not affect our business
operations. While not all inclusive, examples of these items include:
| • |
amortization of purchased intangible assets; |
| • |
legal settlements (both gain or loss) and loss contingencies, due to the difficulty
in predicting future events, their timing and size; |
| • |
material items related to business combination activities important to understanding
our ongoing performance; |
| • |
excess cost of acquired inventory; |
| • |
expenses related to our share-based compensation; |
| • |
significant one-time offering costs; |
| • |
significant one-time non-recurring items (both gain or loss); |
| • |
material extraordinary tax and other awards or settlements, both amounts paid
and received; and |
| • |
tax effects of the foregoing items. |
|
2021 |
2020 |
2019 |
2018 |
2017 |
||||||||||||||||
|
Reconciliation of Gross profit to Adjusted
Gross profit: |
||||||||||||||||||||
|
Gross profit |
$ |
171,498 |
$ |
133,942 |
$ |
148,639 |
$ |
163,414 |
$ |
197,223 |
||||||||||
|
Share-based compensation expense (a)
|
321 |
416 |
285 |
163 |
285 |
|||||||||||||||
|
Non-recurring import related expenses (income)
|
— |
— |
(1,501 |
) |
2,104 |
— |
||||||||||||||
|
Amortization of assets related to acquisitions
|
852 |
529 |
— |
— |
— |
|||||||||||||||
|
Other non-recurring items (b) |
— |
— |
1,661 |
— |
— |
|||||||||||||||
|
Adjusted Gross profit |
$ |
172,671 |
$ |
134,887 |
$ |
149,084 |
$ |
165,681 |
$ |
197,508 |
||||||||||
| (a) |
Share-based compensation includes expenses related to stock options and restricted stock
units granted to employees and directors of the Company. |
| (b) |
In 2019, reflects mainly to one-time amortization of machinery equipment with no future
alternative use, and one-time inventory write down due to discontinuation of certain product group manufacturing. |
|
2021 |
2020 |
2019 |
2018 |
2017 |
||||||||||||||||
|
Reconciliation of Net Income to Adjusted
EBITDA: |
||||||||||||||||||||
|
Net income |
$ |
17,889 |
$ |
7,622 |
$ |
12,862 |
$ |
24,568 |
$ |
27,558 |
||||||||||
|
Finance expenses, net |
7,590 |
10,199 |
5,578 |
3,639 |
5,583 |
|||||||||||||||
|
Taxes on income |
1,950 |
4,700 |
6,243 |
4,560 |
7,402 |
|||||||||||||||
|
Depreciation and amortization |
35,407 |
29,460 |
28,587 |
28,591 |
29,926 |
|||||||||||||||
|
Legal settlements and loss contingencies,
net (a) |
3,283 |
6,319 |
12,359 |
8,903 |
24,797 |
|||||||||||||||
|
Contingent consideration adjustment related
to acquisition |
284 |
— |
— |
— |
— |
|||||||||||||||
|
Share-based compensation expense (b)
|
1,845 |
2,858 |
3,632 |
1,684 |
5,277 |
|||||||||||||||
|
Provision for employee fringe benefits (c)
|
— |
— |
— |
— |
(114 |
) | ||||||||||||||
|
Non-recurring import related expense (income)
|
— |
— |
(1,501 |
) |
2,104 |
— |
||||||||||||||
|
Acquisition-related expenses |
— |
921 |
— |
— |
— |
|||||||||||||||
|
Other non-recurring items (d) |
— |
— |
1,286 |
1,157 |
— |
|||||||||||||||
|
Adjusted EBITDA |
$ |
68,248 |
$ |
62,079 |
$ |
69,046 |
$ |
75,206 |
$ |
100,429 |
||||||||||
| (a) |
Consists of legal settlements expenses and loss contingencies, net related to product liability
claims and other adjustments to ongoing legal claims, including related legal fees. In 2017, this also includes Kfar Giladi arbitration
results. |
| (b) |
Share-based compensation includes expenses related to stock options and restricted stock
units granted to employees and directors of the Company. |
| (c) |
In 2017, relates to
an adjustment of provision for taxable employee fringe benefits as a result of a settlement with the Israel Tax Authority and with the
NII. |
| (d) |
In 2019, relates to non-recurring expenses related to North American region establishment,
one-time charge related to reduction in headcount and certain activities including discontinuation of certain product group manufacturing,
and in 2018 also relocation expenses of Caesarstone USA headquarters (Company’s subsidiary). |
49
|
2021 |
2020 |
2019 |
2018 |
2017 |
||||||||||||||||
|
Reconciliation of Net Income Attributable to Controlling Interest to Adjusted
Net Income Attributable to Controlling Interest: |
||||||||||||||||||||
|
Net income attributable to controlling interest |
$ |
18,966 |
$ |
7,218 |
$ |
12,862 |
$ |
24,405 |
$ |
26,202 |
||||||||||
|
Legal settlements and loss contingencies, net (a) |
3,283 |
6,319 |
12,359 |
8,903 |
24,797 |
|||||||||||||||
|
Contingent consideration adjustment related to acquisition |
284 |
— |
— |
— |
— |
|||||||||||||||
|
Amortization of assets related to acquisitions, net of tax |
2,391 |
446 |
— |
— |
— |
|||||||||||||||
|
Share-based compensation expense (b) |
1,845 |
2,858 |
3,632 |
1,684 |
5,277 |
|||||||||||||||
|
Provision for employee fringe benefits (c) |
— |
— |
— |
— |
(114 |
) | ||||||||||||||
|
Non-cash revaluation of lease liabilities (d) |
2,918 |
3,189 |
3,615 |
— |
— |
|||||||||||||||
|
Non-recurring import related expense (income) |
— |
— |
(1,501 |
) |
2,104 |
|||||||||||||||
|
Acquisition-related expenses |
— |
921 |
— |
— |
— |
|||||||||||||||
|
Other non-recurring items (e) |
— |
— |
2,486 |
1,157 |
— |
|||||||||||||||
|
Total adjustments before tax |
10,721 |
13,733 |
20,591 |
13,848 |
29,960 |
|||||||||||||||
|
Less tax on above adjustments (f) |
1,054 |
4,488 |
6,729 |
2,168 |
6,343 |
|||||||||||||||
|
Total adjustments after tax |
$ |
9,667 |
$ |
9,245 |
$ |
13,862 |
$ |
11,680 |
23,617 |
|||||||||||
|
Adjusted net income attributable to controlling interest |
$ |
28,633 |
$ |
16,463 |
$ |
26,724 |
$ |
36,085 |
$ |
49,819 |
||||||||||
| (a) |
Consists of legal settlements expenses and loss contingencies, net related to product liability
claims and other adjustments to ongoing legal claims, including related legal fees. In 2017, this also includes Kfar Giladi arbitration
results. |
| (b) |
Share-based compensation includes expenses related to stock options and restricted stock
units granted to employees and directors of the Company. |
| (c) |
Relates to an adjustment of provision for taxable employee fringe benefits as a result of
a settlement with the Israel Tax Authority and with the NII made during 2017. |
| (d) |
Exchange rate differences deriving from revaluation of lease contracts in accordance with
FASB ASC 842. |
| (e) |
In 2019, relates to non-recurring expenses related to North American region establishment,
one time charge related to reduction in headcount and certain activities including discontinuation of certain product group manufacturing,
one time amortization of machinery equipment with no future alternative use, and in 2018 also relocation expenses of Caesarstone USA headquarters
(Company’s subsidiary). |
| (f) |
Based on the effective tax rates of the relevant periods. |
| C. |
Organizational
Structure |
The legal name of our company is Caesarstone
Ltd. On June 9, 2016, the Israeli Register of Companies approved to change our name from Caesarstone Sdot-Yam Ltd. to Caesarstone Ltd.
Caesarstone was organized under the laws
of the State of Israel. We have five direct wholly-owned subsidiaries: Caesarstone Australia PTY Limited, which is incorporated in Australia,
Caesarstone South East Asia PTE LTD, which is incorporated in Singapore, Caesarstone (UK) Ltd., which is incorporated in the United Kingdom,
Caesarstone Canada Inc., which is incorporated in Canada, and Caesarstone USA, Inc., which, together with its two wholly-owned subsidiaries,
Caesarstone Technologies USA, Inc. and Omicron, are incorporated in the United States. In addition, following the Lioli Acquisition, Caesarstone
Ltd. holds a majority interest of Lioli, incorporated in India, and therefore is consolidating the results of its operations in our Consolidated
Financial Statements.
50
In 2019, we transitioned into a new regional
structure which consists of North America, APAC, EMEA and Israel.
| D. |
Property,
Plants and Equipment |
Our manufacturing facilities are located in Israel, the United States and India. The following table sets
forth our most significant facilities as of December 31, 2021:
|
Properties |
Issuer’s Rights
|
Location |
Purpose |
Size |
|
Kibbutz Sdot-Yam(1) |
Land Use Agreement |
Caesarea, Central Israel |
Headquarters, manufacturing facility, research and development
center |
Approximately 30,000 square meters of facility and approximately
48,000 square meters of un-covered yard* |
|
Bar-Lev Industrial Park manufacturing facility(2) |
Land Use Agreement Ownership |
Carmiel, Northern Israel |
Manufacturing facility |
Approximately 23,000 square meters of facility and approximately
50,000 square meters of un-covered yard** |
|
Belfast Industrial Center(3)(4) |
Ownership |
Richmond Hill, Georgia, United States |
Manufacturing facility |
Approximately 26,000 square meters of facility and approximately
401,000 square meters of un-covered yard (excluding 56,089 square meters of wetland) |
|
Bharat Nagar(5) |
Ownership |
Morbi, Gujarat, India |
Manufacturing facility |
Approximately 60,000 square meters of facility and approximately
55,000 square meters of open land, gas yard, effluent treatment plant, labor colony and roads |
* Square-meter figures with respect to
properties in Israel are based on data measured by the relevant municipalities used for local tax purposes.
** Square-meter figures based on data
used by Israeli municipalities for local tax purpose is adjusted to reflect the property leased from Kibbutz Sdot-Yam as agreed between
us and the Kibbutz during 2014. This does not include additional 5,000 square meters adjacent to the manufacturing facility, which we
acquired in December 2019.
51
| (1) |
Leased pursuant to a land use agreement with Kibbutz Sdot-Yam entered in March
2012 with a term of 20 years, which replaced the former land use agreement. Starting from September 2014 we use an additional 9,000 square
meters pursuant to Kibbutz Sdot-Yam’s consent under terms materially similar to the land use agreement. However, we have the right
to return such additional office space and premises to Kibbutz Sdot-Yam at any time upon 90 days’ prior written notice. In September
2016, we exercised our right to return to the Kibbutz an additional office space of approximately 400 square meters which we used since
January 2014 under terms materially similar to the land use agreement. The lands on which these facilities are located are held by the
ILA and leased or subleased by Kibbutz Sdot-Yam pursuant to agreements described in “ITEM 7.B: Major Shareholders and Related Party
Transactions—Related Party Transactions—Relationship and agreements with Kibbutz Sdot-Yam—Land use agreement.”
|
| (2) |
We own 2,673 square meters of facility and 2,550 square meters of uncovered yard,
and the remainder is leased pursuant to a land use agreement with Kibbutz Sdot-Yam entered into in March 2011, with a term of 10 years
commencing in September 2012, which will be automatically renewed, unless we give two years’ prior notice, for an additional 10-year
term. In 2021, the agreement was extended for an additional ten year period. This agreement was executed simultaneously with the land
purchase and leaseback agreement we entered into with Kibbutz Sdot-Yam, according to which Kibbutz Sdot-Yam acquired from us our rights
in the lands and facilities of the Bar-Lev industrial center, under a long term lease agreement we entered into with the ILA on June 6,
2007 to use the premises for an initial period of 49 years as of February 6, 2005, with an option to renew for an additional term of 49
years as of the end of the initial period. For more information, see “ITEM 7.B: Major Shareholders and Related Party Transactions—Related
Party Transactions—Relationship and agreements with Kibbutz Sdot-Yam—Land purchase agreement and leaseback.” |
| (3) |
On September 17, 2013, we entered into a purchase agreement for the purchase of
approximately 45 acres of land in Richmond Hill, Georgia, United States, comprising approximately 36.6 acres of upland and approximately
9 acres of wetland for our new U.S. manufacturing facility, the construction of which was completed in 2015. On June 22, 2015, we exercised
a purchase option in the agreement and acquired approximately 19.4 acres of land, comprising approximately 18.0 acres of upland. On November
25, 2015, we entered into a new purchase agreement for the purchase of approximately 54.9 acres of additional land situated adjacent to
the previously purchased land, comprising approximately 51.1 acres of upland. |
| (4) |
In December 2014, we entered into a bond purchase loan agreement, were issued
a taxable revenue bond on December 1, 2014, and executed a corresponding lease agreement. Pursuant to these agreements, the Development
Authority of Bryan County, an instrumentality of the State of Georgia and a public corporation (“DABC”),
has acquired legal title of our facility in Richmond Hill, in the State of Georgia, U.S., and in consideration leased such facilities
back to us. In addition, the facility was pledged by DABC in favor of us and DABC has committed to re-convey title to the facility to
us upon the maturity of the bond or at any time at our request, upon our payment of $100 to DABC. Therefore, we consider such facilities
to be owned by us. This arrangement was structured to grant us property tax abatement for ten years at 100% and additional five years
at 50%, subject to our satisfying certain qualifying conditions with respect to headcount, average salaries paid to our employees and
the total capital investment amount in our U.S. plant. In December 2015, we entered into an additional bond purchase loan agreement with
the Development Authority of Bryan County, and were issued a second taxable revenue bond on December 22, 2015, to cover additional funds
and assets which were utilized in the framework of constructing, acquiring and equipping our U.S. facility. If we were to expand our current
U.S. facility, we would have been entitled to an additional taxable revenue bond and a corresponding property tax abatement. In 2017,
we notified DABC that we will not be utilizing such additional bond at this time and, accordingly, it has expired. |
| (5) |
In October 2020, we acquired a majority stake, in Lioli, which owns the Bharat
Nagar facility in Morbi, Gujarat, India. For more information on our title to the property in Morbi, Gujarat, India, see “ITEM 3.D.
Key Information—Risk Factors—Operational Risks—Fully integrating Lioli’s and Omicron’s businesses may be
more difficult, costly and time-consuming than expected, which may adversely affect our results of operations and the value of our common
shares.” |
For further discussion and details of
the productive capacity of our facilities, see “ITEM 4.B: Information on the Company—Business Overview—Manufacturing
and Facilities.” Various environmental issues may affect our utilization of the above-mentioned facilities. For a further discussion,
see “Item 4.B. Information on the Company—Business Overview—Environmental and Other Regulatory Matters—Environmental
and Health and Safety Regulations” above.
52
ITEM
4A: Unresolved Staff Comments
Not applicable.
ITEM
5: Operating and Financial Review and Prospects
| A. |
Operating Results
|
The following discussion and analysis of our financial condition and results
of operations should be read in conjunction with our financial information presented in “ITEM 3: Key Information,” our audited
consolidated balance sheets as of December 31, 2021 and 2020, the related consolidated income statements and cash flow statements
for each of the three years ended December 31, 2021, 2020 and 2019, and related notes and the information contained elsewhere in this
annual report. Our financial statements have been prepared in accordance with U.S. GAAP. See “ITEM 3.D: Key Information—Risk
Factors” and “Special Note Regarding Forward-Looking Statements.”
Company overview
We are a leading manufacturer and reseller
of high-end engineered surfaces used primarily as countertops in residential and commercial buildings. We design, develop and produce
engineered quartz and porcelain products that offer aesthetic appeal and functionality through a distinct variety of colors, styles, textures,
and finishes used in countertops, vanities, and other interior and exterior surfaces. Our high-quality engineered quartz surfaces are
marketed and sold under our premium Caesarstone brand. We have grown to become one of the largest global providers of engineered quartz
surfaces. Our products accounted for approximately 5% of global engineered quartz by volume in 2020. Our sales in the United States, Australia
(including New Zealand), Canada and Israel, our four largest markets, accounted for 47.4%, 18.4%, 13.1% and 6.1% of our revenues in 2021.
We believe that our revenues will continue to be highly concentrated among a relatively small number of geographic regions for the foreseeable
future. For further information with respect to our geographic concentration, see “ITEM 3.D: Key Information—Risk Factors—Our
revenues are subject to significant geographic concentration and any disruption to sales within one of our key existing markets could
materially and adversely impact our results of operations and prospects.”
Between 2010 to 2021, our revenue grew
at a compound annual growth rate of 11.3% driven mainly by the continued quartz penetration and the Lioli and Omicron acquisitions, increased
remodeling spending in all our top three markets and growth in the residential segment in the United States, our largest market. In addition,
the portion of innovative designs within our offering increased over time. Revenue increased by 32.4% between 2020 and 2021. See “—Comparison
of period-to-period results of operations—Year ended December 31, 2021 compared to year ended December 31, 2020—Revenues”
for additional information. From 2020 to 2021, our adjusted gross profit margin decreased from 27.5% to 26.6%, adjusted EBITDA margin
decreased from 12.8% to 10.6%, and adjusted net income margin attributable to controlling interest increased from 3.4% to 4.4% over the
same period. We define each of such margins by dividing adjusted gross profit, adjusted EBITDA and adjusted net income attributable to
controlling interest, respectively, by revenues. Adjusted EBITDA and adjusted net income attributable to controlling interest are non-GAAP
financial measures, see “ITEM 8.B: Business Overview—Non-GAAP Financial Measures” for a description of how we define
adjusted EBITDA and adjusted net income attributable to controlling interest and reconciliations of net income to adjusted EBITDA and
net income attributable to controlling interest to adjusted net income attributable to controlling interest. We attribute the decrease
in the adjusted EBITDA margin mainly due to higher raw material prices, particularly polyester, and shipping price increases which were
partially offset by favorable product mix, selling price increases, and more favorable exchange rates.
53
Our mission is to be the first brand of
choice for countertops all around the world. We believe that a significant portion of our future growth will come from our U.S. market
where we see the greatest growth opportunity. We believe that transitioning to direct sales will contribute to our future growth in the
long term. We believe that in order to remain competitive in the long term, we will need to grow our business both organically and through
acquisitions.
As part of the Company’s business growth strategy, strategic acquisitions are considered opportunities
to enhance our value proposition through differentiation and competitiveness. In recent years and as further described below, we have
successfully executed on this strategy, including our 2020 acquisitions of Lioli, an India-based developer and producer of porcelain countertop
slabs with manufacturing facilities in Asia, and Omicron, a premier stone supplier operating in several locations across the United States
in Florida, Ohio, Michigan and Louisiana, which now operate as part of our United States operations. Under the terms of the transaction
agreement, Caesarstone acquired Omicron for an approximately $19 million. For more information, see “2020 Acquisitions” below
Factors impacting our
results of operations
We consider the following factors to be
important in analyzing our results of operations:
| • |
Our sales are impacted by home renovation and remodeling and new residential construction,
and to a lesser extent, commercial construction. We estimate (supported by the Freedonia Report), that approximately 60%-70% of our revenue
in our main markets (U.S., Australia, Canada) is related to residential renovations and remodeling activities, while 30%-40% is related
to new residential construction. |
| • |
Our revenues and results of operations exhibit some quarterly fluctuations as
a result of seasonal influences which impact construction and renovation cycles. Due to the fact that certain of our operating costs are
fixed, the impact of such fluctuations on our profitability is material. We believe that the second and third quarters tend to exhibit
higher sales volumes than the other quarters because demand for our surfaces and other products is generally higher during the summer
months in the northern hemisphere with the effort to complete new construction and renovation projects before the new school year. Conversely,
the first quarter is typically impacted by the winter slowdown in the northern hemisphere in the construction industry and might impact
sales in Israel depending on the timing of the spring holiday a particular year. Similarly, sales in Australia during the first quarter
are negatively impacted by fewer construction and renovation projects. The fourth quarter is susceptible to being impacted by the onset
of winter in the northern hemisphere although the fourth quarter of 2021 demonstrated higher revenues not in line with this trend given
the increased demand to our products. |
| • |
We conduct business in multiple countries in North America, South America, Europe,
Asia-Pacific, Australia and the Middle East and as a result, we are exposed to risks associated with fluctuations in currency exchange
rates between the U.S. dollar and certain other currencies in which we conduct business. A significant portion of our revenues is generated
in U.S dollar, and to a lesser extent the Australian dollar, Canadian dollar, Euro and NIS. In 2021, 50% of our revenues were denominated
in U.S. dollars, 18.4% in Australian dollars, 13.1% in Canadian dollars, 6.0% in Euros and 6.0% in NIS. As a result, devaluations of the
Australian dollars, and to a lesser extent, the Canadian dollar relative to the U.S. dollar may unfavorably impact our profitability.
Our expenses are largely denominated in U.S. dollars, NIS and Euro, with a smaller portion in Australian dollars and Canadian dollars.
As a result, appreciation of the NIS, and to a lesser extent, the Euro relative to the U.S. dollar may unfavorably affect our profitability.
We attempt to limit our exposure to foreign currency fluctuations through forward contracts, which, except for U.S. dollar/NIS forward
contracts, are not designated as hedging accounting instruments under ASC 815, Derivatives and Hedging. As of December 31, 2021, we had
total outstanding forward contracts with a notional amount of $75.8 million. These transactions were for a period of up to 12 months.
The fair value of these foreign currency derivative contracts was positive $1.4 million, which is included in current assets and current
liabilities, as of December 31, 2021. For further discussion of our foreign currency derivative contracts, see “ITEM 11: Quantitative
and Qualitative Disclosures About Market Risk.” In addition, we entered derivative instruments not designated as hedging accounting
to partially manage our exposure to fluctuations of styrene prices. As of December 31, 2021, we had one outstanding forward contract,
related to styrene prices, with a notional amount of $0.3 million. This transaction was for a period of 1 month. The fair value of this
styrene forward derivative contract was positive $0.2 million, which is included in current assets, as of December 31, 2021.
|
54
Components of statements
of income
Revenues
We derive our revenues from sales of quartz
and, to a lesser extent, other surfaces and materials, mostly to fabricators and resellers in our direct markets and to third-party distributors
in our indirect markets. In the United States, Australia, Canada and Singapore the initial purchasers of our products are primarily fabricators.
In Israel, the purchasers are a small number of local distributors who, in turn, sell to fabricators. In the United States, we also sell
our products to a small number of sub-distributors, stone resellers as well as to large retailers. The purchasers of our products in our
other markets are our third-party distributors who, in turn, sell to sub-distributors and fabricators. Our direct sales accounted for
90%, for the years ended December 31, 2021.
Revenue is recognized when a customer
obtains control of promised goods or services in an amount that reflects the consideration the entity expects to receive in exchange for
those goods or services.
The warranties that we provide vary by
market. In our indirect markets, we provide all our distributors with a limited direct manufacturing defect warranty. In all our indirect
markets, distributors are responsible for providing warranty coverage to end-customers. In Australia, Canada, the United States, the United
Kingdom and Singapore we provide end-consumers with a limited warranty on our products for interior countertop applications. In Israel,
we typically provide end-consumers with a direct limited manufacturing defect warranty on our products. Based on historical experience,
warranty issues are generally identified within one and a half years after the shipment of the product and a significant portion of defects
are identified before installation. We record a reserve on account of possible warranty claims, included in our cost of revenues. Historically,
warranty claims expenses have been low, accounting for approximately 0.3% of our total cost of goods sold in 2021.
The following table sets forth the geographic
breakdown of our revenues during the periods indicated:
|
Year ended December 31, |
||||||||||||||||||||||||
|
2021 |
2020 |
2019 | ||||||||||||||||||||||
|
Geographical Region |
% of total revenues |
Revenues in thousands of USD |
% of total revenues |
Revenues in thousands of USD |
% of total revenues |
Revenues in thousands of USD |
||||||||||||||||||
|
United States |
47.4 |
% |
$ |
305,353 |
42.7 |
% |
$ |
207,496 |
45.9 |
% |
$ |
250,471 |
||||||||||||
|
Canada |
13.1 |
84,467 |
14.9 |
72,492 |
15.7 |
85,979 |
||||||||||||||||||
|
Latin America |
0.7 |
4,702 |
0.4 |
2,149 |
0.8 |
4,115 |
||||||||||||||||||
|
Australia (incl. New Zealand) |
18.4 |
118,714 |
21.3 |
103,587 |
19.8 |
108,150 |
||||||||||||||||||
|
Asia |
4.7 |
30,390 |
3.0 |
14,566 |
2.8 |
15,514 |
||||||||||||||||||
|
EMEA |
9.4 |
60,836 |
9.3 |
45,201 |
7.9 |
43,054 |
||||||||||||||||||
|
Israel |
6.1 |
39,430 |
8.4 |
40,921 |
7.1 |
38,692 |
||||||||||||||||||
|
Total |
100 |
% |
$ |
643,892 |
100.0 |
% |
$ |
486,412 |
100.0 |
% |
$ |
545,974 |
||||||||||||
Revenue in 2021 was $643.9 million compared
to $486.4 million in the prior year. On a constant currency basis, 2021 revenue was higher by 28.1% year-over-year, mainly due to the
Omicron and Lioli acquisitions and an increase in demand for our products. The decrease in 2020 revenues compared to 2019 on a constant
currency basis was 11.0% and was mainly due to 2020 COVID-19 impacts.
55
Revenues in the U.S. increased by 47.2% in 2021 compared to a decline of 17.2% in 2020. The increase in
2021 also included the impact of the initial consolidation of Omicron results commencing January 1, 2021.
Revenues in Canada increased by 16.5%
in 2021 compared to a decline of 15.7% in 2020, representing a 9.0% increase and 15.1% decrease on a constant-currency basis, respectively.
Revenues in Latin America increased by
118.9% in 2021 compared to a decrease of 47.8% in 2020.
Revenues in Australia increased by 14.6%
in 2021 compared to a decrease of 4.2% in 2020. On a constant currency basis, revenues in Australia increased by 5.2% in 2021 and declined
by 3.7% in 2020.
Revenues in Asia increased by 108.6% in
2021 compared to a decrease of 6.1% in 2020. On a constant currency basis, revenues in Asia increased by 107% in 2021 and declined by
5.4% in 2020. The increase in 2021 compared to 2020 is also attributed to the consolidation of Lioli commencing October, 2020.
Revenues in EMEA increased by 34.6% in
2021 and by 5.0% in 2020. On a constant-currency basis, revenue increased in EMEA by 28.2% in 2021 and 4.1% in 2020.
Revenues in Israel decreased by 3.6% in
2021 compared to an increase of 5.8% in 2020. On a constant currency basis, revenues decreased by 9.3% in 2021 and increased by
2% in 2020.
For additional information, see “—Comparison
of period-to-period results of operations—Year ended December 31, 2021 compared to year ended December 31, 2020—Revenues.”
Cost
of revenues and gross profit margin
Our cost of revenues includes the cost
of manufactured products sold as well as the cost of purchased products from third parties such as quartz, ceramic, natural stone and
other ancillary products. We experienced increased costs that are connected with the global supply chain environment and the increase
in cost of our two main components of the manufactured items, the quartz and polyester. Approximately 29% of our cost of revenues is raw
material costs. The cost of our raw materials consists of the purchase prices of such materials and costs related to the logistics of
delivering the materials to our manufacturing facilities, but does not include raw materials included in products not manufactured by
us. Our raw materials costs are also impacted by changes in foreign exchange rates. Our principal raw materials, quartz and polyester
jointly accounted for approximately 69% of our total raw material cost in 2021. The balance of our cost of revenues consists primarily
of manufacturing costs, related overhead and the cost of other products not manufactured by us. Cost of revenues in our direct distribution
channels also includes the cost of delivery from our manufacturing facilities to our warehouses, warehouse operational costs, as well
as additional delivery costs associated with the shipment of our products to customer sites in certain markets. In the U.S. and Canada,
we also incur fabrication and installation costs related to retail sales and other commercial building projects. In the case of our indirect
distribution channels, we bear the cost of delivery to the seaport closest to our production plants and our distributors bear the cost
of delivery from the seaport to their warehouses.
Quartz is one of our principal raw materials.
In 2021, approximately 62% of our total quartz was from several suppliers in Turkey, with the major part acquired from Mikroman and Polat.
Quartz accounted for approximately 33.8%
of our raw materials cost in 2021. Accordingly, our cost of sales and overall results of operations are impacted significantly by fluctuations
in quartz prices. In 2021 and 2020, the average cost of quartz increased by 12% and 3.2%, respectively. The increase in 2021
was primarily due to an increase in shipping costs, while the increase in 2020 was mainly due to a more expensive sand mix, caused by
a more expensive product mix, and to a lesser extent by an increase in shipping costs. Any future increases in quartz costs may adversely
impact our margins and net income.
Given the significance of polyester costs
relative to our total raw material expenditures, our cost of sales and overall results of operations are impacted significantly by fluctuations
in polyester prices, which generally correlate with benzine prices. In 2021, our average polyester costs increased by approximately 54.1%
as a result of market conditions (a sharp increase in cost of raw materials composing resin due to higher energy prices affected by the
COVID-19 pandemic). In 2020, our average polyester costs decreased by approximately 18%, due to market conditions (led by lower
energy prices affected by the COVID-19 pandemic) and adding alternative suppliers. Any future increases in polyester costs may adversely
impact our margins and net income.
56
We are exposed to fluctuations in the prices of pigments, although to a lesser extent than with polyester.
For example, the cost of titanium dioxide, our principal white pigmentation agent, increased in 2021 by approximately 16.4% due to its
manufacturing process which consumes a lot of energy and increased in price. Any future increases in pigments costs may adversely impact
our margins and net income.
The gross profit margins on sales in our
direct markets are generally higher than in our indirect markets in which we use third-party distributors, due to the elimination of the
third-party distributor’s margin. In many markets, our expansion strategy is to work with third-party distributors who we believe
will be able to increase sales more rapidly in their market and more cost effective than if we distributed our products directly. However,
in several markets we distribute directly, including the United States, Australia, Canada and in the United Kingdom Singapore and India.
In the future, we intend to evaluate other potential markets to distribute directly.
Research
and development, net
Our research and development expenses
consist primarily of salaries and related personnel costs, as well as costs for subcontractor services and costs of materials consumed
in connection with the design and development of our products. We expense all our research and development costs as incurred.
Marketing
and selling
Marketing and selling expenses consist
primarily of compensation and associated costs for personnel engaged in sales, marketing, distribution and advertising and promotional
expenses. In 2021 our advertising and promotional expenses as well as marketing assistance expenses increased mainly to support growth
in demand and revenues. In 2020 our expenses decreased due to the cost-cutting efforts we implemented due to COVID-19. In each of 2020
and 2019, our expenses decreased as part of our cost-savings initiatives mainly attributed to the U.S. and the decrease was also partially
attributable to the formation of the North America region at the beginning of 2020 that yielded cost savings due to synergies. This was
partially offset by increased costs in the United Kingdom to support growth in the newly established direct distribution operations.
General
and administrative
General and administrative expenses consist
primarily of compensation and associated costs for personnel engaged in finance, human resources, information technology, legal and other
administrative activities, as well as fees for legal and accounting services. See “—Other factors impacting our results of
operations—Agreements with Kibbutz Sdot-Yam” and “ITEM 7: Major Shareholders and Related Party Transactions—Related
Party Transactions.”
Legal
settlements and loss contingencies, net
Legal settlements and loss contingencies, net consists of expenses related to settlements expenses and
estimated exposure not covered by our insurance applicable to individual silicosis claims and other ongoing claims. We recorded $3.3 million
of such expenses in 2021, $6.3 million in 2020 and $12.4 million in 2019. The decrease from 2020 to 2021 is mainly attributed to a refund
we received in 2021 from our insurance company in connection with the class action litigation in Israel. See “—Financial Information—Consolidated
Financial Statements and Other Financial Information—Legal Proceedings—Claim by former South African distributor”.
Finance
expenses, net
Finance expenses, net, consist primarily
of bank and credit card fees, borrowing costs and exchange rate differences arising from changes in the value of monetary assets and monetary
liabilities stated in currencies other than the functional currency of each entity. These expenses are partially offset by interest income
on our cash balances and gains on derivative instruments. The decrease in finance expenses during 2021 related mainly to realized and
unrealized gains on derivatives not designated as hedge instruments.
57
Corporate
taxes
As we operate in a number of countries,
our income is subject to taxation in different jurisdictions with a range of tax rates. Our effective tax rate was 9.8% in 2021, 38.1%
in 2020 and 32.7% in 2019. In 2020, a higher portion of our pre-tax income was attributable to our subsidiaries which are subject to higher
tax rates compared to our income derived in Israel. In 2021 the lower effective tax rate is attributable mainly to taxable losses in certain
entities and to deferred tax assets recorded to capture carry-forward NOLs.
The standard corporate tax rate for Israeli
companies was 23% in each of 2021, 2020 and 2019. Our non-Israeli subsidiaries are taxed according to the tax laws in their respective
countries of origination.
Effective January 1, 2011, with the enactment
of Amendment No. 68 to the Israeli Tax Law, both of our Israeli facilities operate under a consolidated “Preferred Enterprise”
status. The “Preferred Enterprise” status provides the portion related to the Bar-Lev manufacturing facility with the potential
to be eligible for grants of up to 20% of the investment value in approved assets and a reduced flat corporate tax rate, which applies
to the industrial enterprise’s entire preferred income, 7.5% in 2017 onward. For the portion related to the Sdot-Yam facility, this
status provides us with a reduced flat corporate tax rate, which applies to the industrial enterprise’s entire preferred income,
which was 16% during the same period.
In December 2017, the U.S. enacted significant
tax reform commencing with the year ended December 31, 2017, including, but not limited to (1) reducing the U.S. federal corporate income
tax rate to 21% effective 2018; and (2) imposing a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries of
U.S. companies that had not been previously taxed in the U.S.
The TCJA also established new tax provisions
affecting 2018, including, but not limited to (1) creating a new provision designed to tax global intangible low-tax income; (2) generally
eliminating U.S. federal taxes on dividends from foreign subsidiaries; (3) eliminating the corporate alternative minimum tax; (4) creating
the base erosion anti-abuse tax; (5) establishing a deduction for foreign derived intangible income; (6) repealing the domestic production
activity deduction; and (7) establishing new limitations on deductible interest expense and certain executive compensation.
The reduction of the U.S. federal corporate
income tax rate required us to remeasure our deferred tax assets and liabilities as of the date of enactment. For the year ended December
31, 2017, we decreased the net deferred tax liability as a result of such remeasurement, resulting in tax income benefit for the year
ended December 31, 2017.
As of December 31, 2019, certain provisions
of the TCJA remains subject to Internal Revenue Service as well as state tax authorities’ guidance and interpretation which could
have a material adverse effect on our cash tax liabilities, results of operations, and financial condition. In addition, the TCJA could
be subject to potential amendments and technical corrections, any of which could materially lessen or increase certain adverse impacts
of the legislation on us and our business. We will continue to evaluate the effects of the TCJA on us as federal and state tax authorities
issue additional regulations and guidance.
On March 27, 2020, the CARES Act was enacted
in response to the COVID-19 pandemic. The CARES Act has a number of beneficial tax provisions. Among the provision of the CARES Act, the
business interest deduction limit under Code Sec. 163(j) is increased to 50 percent of our adjusted taxable income in the U.S. for tax
year 2020. In addition, Net operating losses (NOLs) arising in tax years beginning in 2019, 2020, and 2021 now have a five-year carryback
period and an unlimited carryforward period. Under the CARES Act we carryback our U.S. NOL for the year ended December 31, 2021 to prior
taxable years.
For more information about the tax benefits
available to us as an Approved Enterprise or as a Beneficiary Enterprise or as Preferred Enterprise, see “ITEM 10.E: Additional
Information—Taxation—Israeli tax considerations and government programs.”
58
Net
income attributable to non-controlling interest
In October 2020, we acquired a majority
stake in Lioli and for the year ended on December 31, 2021, 45% of Lioli’s net income was attributed to its minority shareholders.
In 2021, Lioli had a net loss of approximately $2.4 million.
Other factors impacting
our results of operations
Share-based
compensation
We recorded share-based compensation expenses
of $1.8 million, $2.9 million and $3.6 million in 2021, 2020 and 2019, respectively, and expect to record $2.7 million over a weighted
average period of 3.1 years from December 31, 2021. For more information, see also Note 13 to our financial statements included elsewhere
in this report.
Agreements
with Kibbutz Sdot-Yam
We are party to a series of agreements
with our largest shareholder, the Kibbutz, which govern different aspects of our relationship. Pursuant to these agreements, in consideration
for using facilities leased to us or for services provided by the Kibbutz, we paid to the Kibbutz an aggregate of $11.0 million in 2021,
$9.4 million in 2020 and $9.5 million in 2019 (excluding VAT). During 2021 and following the assessment of an appointed appraiser, the
fees under the lease agreements were increased and adjusted for 2021 onwards for total annual amount of approximately NIS 26.7 million
(approximately $8.6 million), linked to the Israeli consumer price index.
For more information on these agreements,
see “ITEM 7.B: Major Shareholders and Related Party Transactions—Related Party Transactions.”
Management
Services Agreement with Tene
In November 2021, we entered into a management
services agreement with Tene Growth Capital 3 Funds Management Company Ltd., the management company of the general partner of Tene Investment
in Projects 2016, L.P., pursuant to which Tene Investment in Projects 2016, L.P. provides us with the services of an Executive Chairman
of the Board (by Dr. Ariel Halperin), the services of an additional director (by Mr. Dori Brown) and regular business development advice
for an aggregate annual management fee of NIS 870,000 plus VAT and expenses. The payment due pursuant to the Management Services Agreement
replaced all other arrangements for payment to Dr. Ariel Halperin and Mr. Dori Brown as Chairman of the board of directors or director
during the term of the Management Services Agreement.
For more information on these agreements,
see “ITEM 7.B: Major Shareholders and Related Party Transactions—Related Party Transactions.”
2020 Acquisitions
Lioli Acquisition. On August 31, 2020, the Company entered into
a definitive agreement with Lioli to acquire a majority stake in Lioli, an India-based developer and producer of porcelain countertop
slabs with manufacturing facilities in Asia. The terms of the agreement provided that at the first closing the Company would pay a cash
investment of approximately $12 million, representing an enterprise value of approximately $34 million, including the assumption of debt
of approximately $17.9 million and additional consideration of up to approximately $10 million to be paid in case certain conditions are
to be met. As part of the Lioli Acquisition, the Company granted Lioli’s minority shareholders a put option under which they have
the right to require us to purchase their remaining shares in Lioli, and likewise, the Company has a call option under which we have the
right to require the minority shareholders to sell us their minority shares in Lioli. The consideration to be paid for the shares transferred
pursuant to these options is based on an EBITDA multiplier. These options become exercisable as of April 1, 2024 and until the 20th anniversary
of the Lioli Acquisition. During March 2022, we invested an additional $2.5 million in Lioli by subscribing for new securities,
thereby increasing our ownership percentage to 66.4% of Lioli’s outstanding shares, constituting 60.4% of Lioli’s shares on
a fully diluted basis.
Omicron
Acquisition. On December 31, 2020, the Company simultaneously signed and closed on its transaction to acquire the entire membership
interests Omicron, a premier stone supplier operating in several locations across the United States in Florida, Ohio, Michigan and Louisiana,
which now operate as part of our United States operations. Under the terms of the transaction agreement, Caesarstone acquired Omicron
for an approximately $19 million.
59
Comparison of period-to-period
results of operations
The following table sets forth our results
of operations as a percentage of revenues for the periods indicated:
|
|
Year ended December 31, |
|||||||||||||||||||||||
|
|
2021 |
2020 |
2019 |
|||||||||||||||||||||
|
|
Amount |
% of Revenue |
Amount |
% of Revenue |
Amount |
% of Revenue |
||||||||||||||||||
|
|
(in thousands of U.S. dollars) |
|||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Consolidated Income Statement Data:
|
||||||||||||||||||||||||
|
Revenues: |
$ |
643,892 |
100 |
% |
$ |
486,412 |
100 |
% |
$ |
545,974 |
100.0 |
% | ||||||||||||
|
Cost of revenues |
472,394 |
73.4 |
352,470 |
72.5 |
397,335 |
72.8 |
||||||||||||||||||
|
Gross profit |
171,498 |
26.6 |
133,942 |
27.5 |
148,639 |
27.2 |
||||||||||||||||||
|
Operating expenses: |
||||||||||||||||||||||||
|
Research and development, net |
4,216 |
0.7 |
3,974 |
0.8 |
4,146 |
0.8 |
||||||||||||||||||
|
Marketing and selling |
85,725 |
13.3 |
62,047 |
12.8 |
66,770 |
12.2 |
||||||||||||||||||
|
General and administrative |
50,845 |
7.9 |
39,081 |
8.0 |
40,681 |
7.5 |
||||||||||||||||||
|
Legal settlements and loss contingencies, net |
3,283 |
0.5 |
6,319 |
1.3 |
12,359 |
2.3 |
||||||||||||||||||
|
Total operating expenses |
144,069 |
22.4 |
111,421 |
22.9 |
123,956 |
22.7 |
||||||||||||||||||
|
Operating income |
27,429 |
4.3 |
4.6 |
24,683 |
4.5 |
|||||||||||||||||||
|
Finance expenses, net |
7,590 |
1.2 |
22,521 |
2.1 |
5,578 |
1.1 |
||||||||||||||||||
|
Income before taxes on income |
19,839 |
3.1 |
10,199 |
2.5 |
19,105 |
3.5 |
||||||||||||||||||
|
Taxes on income |
1,950 |
0.3 |
4,700 |
0.9 |
6,243 |
1.1 |
||||||||||||||||||
|
Net income |
$ |
17,889 |
2.8 |
% |
$ |
7,622 |
1.6 |
% |
$ |
12,862 |
2.4 |
% | ||||||||||||
|
Net income (loss) attributable to non-controlling
interest |
(1,077 |
) |
(0.2 |
) |
404 |
0.1 |
— |
— |
||||||||||||||||
|
Net income attributable to controlling interest
|
$ |
18,966 |
2.9 |
% |
$ |
7,218 |
1.5 |
% |
$ |
12,862 |
2.4 |
% | ||||||||||||
Year
ended December 31, 2021 compared to year ended December 31, 2020
Revenues
Revenues increased by $157.5 million,
or 32.4%, to $ 643.9 million in 2021 from $ 486.4 million in 2020 mainly due to the Omicron and Lioli acquisitions, and an increase
in demand for our products across most regions.
Cost of revenues and
gross profit margins
Cost of revenues in 2021 amounted to $472.4
million compared to $352.5 million in 2020 as a result of the higher revenues generated during 2021. Gross profit increased from $133.9
million in 2020 to $171.5 million in 2021, with a decrease in gross margin of 90 basis points, from 27.5% in 2020 to 26.6% in 2021. The
decrease in gross margin mainly reflects higher raw material prices, particularly polyester, and shipping price increases which were partially
offset by favorable product mix, selling price increases, and more favorable exchange rates.
Operating expenses
Research
and development. Research and development expenses remained relatively unchanged and amounted to $4.2 million in 2021 and $4.0
million in 2020.
Marketing
and selling. Marketing and selling expenses increased by $23.7 million, or 38.2%, to $ 85.7 million in 2021 from $62.0
million in 2020. Marketing expenses as percent of revenue increased from 12.8% in 2020 to 13.3% in 2021. This was mainly to support growth
in demand and revenues and also as a result of the consolidation of the recently acquired businesses of Omicron and Lioli. In 2020, our
expenses decreased due to the cost-cutting efforts caused by COVID-19 and to a lesser extent government pandemic grants.
60
General
and administrative. General and administrative expenses increased by $ 11.8 million, or 30.1%, to $50.8 million in 2021 from $39.0
million in 2020. This increase is mainly due to COVID-19 cost cutting in 2020 and Omicron and Lioli acquisition consolidated during the
entire 2021.
Legal
settlements and loss contingencies, net. Legal settlements and loss contingencies, net, decreased by $3.0 million, or 48%,
from $6.3 million in 2020 to $3.3 million in 2021. This decrease is mainly attributed to a refund received in 2021 from our insurance
carrier in connection with the bodily injury class action in Israel.
Finance expenses, net
Finance expenses decreased to $7.6 million
in 2021 from $10.2 million in 2020. The difference was primarily a result of higher income from the Company’s derivatives instruments
mainly attributed to the styrene hedge contracts.
Taxes on income
Taxes on income declined by $2.7 million
to $2.0 million in 2021 from $4.7 million in 2020. Our effective tax rate was 9.8% in 2021 compared with 38% in 2020. This was mostly
due to taxable loss in Israel, lease liability update and lower taxable income allocated to the U.S.
Net income attributable
to non-controlling interest
In 2021, net loss attributable to non-controlling
interest amounted to $1.1 million. In 2020 net income attributable to non-controlling interest amounted to $0.4 million, and was
fully attributable to the majority stake in Lioli acquired in the fourth quarter of 2020.
Year
ended December 31, 2020 compared to year ended December 31, 2019
For a comparison of the years ended December 31, 2020 and 2019, see “ITEM 5.A. Operating and Financial
Review and Prospects—Operating Results—Year ended December 31, 2020 compared to year ended December 31, 2019” included
in our annual report on Form 20-F for the year ended December 31, 2020, filed with the SEC on March 22, 2021, which comparative information
is herein incorporated by reference.
Quarterly results of
operations and seasonality
The following table presents our unaudited
condensed consolidated quarterly results of operations for the eight quarters in the period from January 1, 2020 to December 31, 2021.
We also present reconciliations of gross margins to adjusted gross margins, net income to adjusted EBITDA and net income attributable
to controlling interest to adjusted net income attributable to controlling interest for the same periods. This information should be read
in conjunction with our consolidated financial statements and related notes included elsewhere in this annual report. For more information
on our use of non-GAAP financial measures, see “ITEM 8.B: Business Overview—Non-GAAP Financial Measures.” We have prepared
the unaudited condensed consolidated quarterly financial information for the quarters presented below on the same basis as our audited
consolidated financial statements. The historical quarterly results presented below are not necessarily indicative of the results that
may be expected for any future quarters or periods.
61
|
Three months ended |
||||||||||||||||||||||||||||||||
|
Dec. 31, 2021 |
Sept. 30, 2021 |
June 30, 2021 |
Mar. 31, 2021 |
Dec. 31, 2020 |
Sept. 30, 2020 |
June 30, 2020 |
Mar. 31, 2020 |
|||||||||||||||||||||||||
|
(as a % of revenue) |
||||||||||||||||||||||||||||||||
|
Consolidated Income Statement Data:
|
||||||||||||||||||||||||||||||||
|
Revenues: |
100.0 |
% |
100.0 |
% |
100.0 |
% |
100.0 |
% |
100.0 |
% |
100.0 |
% |
100.0 |
% |
100.0 |
% | ||||||||||||||||
|
Gross profit |
23.2 |
26.2 |
28.0 |
29.7 |
28.1 |
31.4 |
20.4 |
28.8 |
||||||||||||||||||||||||
|
Operating income (loss) |
2.0 |
5.4 |
3.2 |
6.9 |
5.9 |
12.1 |
(2.9 |
) |
1.8 |
|||||||||||||||||||||||
|
Net income (loss) |
(1.9 |
) |
3.6 |
0.9 |
9.5 |
(1.4 |
) |
10.3 |
(5.9 |
) |
2.1 |
|||||||||||||||||||||
|
Three months ended |
||||||||||||||||||||||||||||||||
|
Dec. 31, 2021 |
Sept. 30, 2021 |
June 30, 2021 |
Mar. 31, 2021 |
Dec. 31, 2020 |
Sept. 30, 2020 |
June 30, 2020 |
Mar. 31, 2020 |
|||||||||||||||||||||||||
|
(in thousands of U.S. dollars) |
||||||||||||||||||||||||||||||||
|
Consolidated Income Statement Data:
|
||||||||||||||||||||||||||||||||
|
Revenues: |
$ |
171,057 |
$ |
163,341 |
$ |
163,462 |
$ |
146,032 |
$ |
136,896 |
$ |
123,922 |
$ |
99,037 |
$ |
126,557 |
||||||||||||||||
|
Revenues as a percentage of annual revenue
|
26.6 |
% |
25.3 |
% |
25.4 |
% |
22.7 |
% |
28.1 |
% |
25.5 |
% |
20.4 |
% |
26.0 |
% | ||||||||||||||||
|
Gross profit |
$ |
39,678 |
$ |
42,734 |
$ |
45,784 |
$ |
43,302 |
$ |
38,515 |
$ |
38,854 |
$ |
20,172 |
$ |
36,401 |
||||||||||||||||
|
Operating income (loss) |
3,342 |
8,876 |
5,173 |
10,038 |
8,091 |
15,047 |
(2,904 |
) |
2,287 |
|||||||||||||||||||||||
|
Net income (loss) |
(3,303 |
) |
5,870 |
1,480 |
13,842 |
(1,981 |
) |
12,807 |
(5,882 |
) |
2,678 |
|||||||||||||||||||||
|
Other financial data: |
||||||||||||||||||||||||||||||||
|
Adjusted Gross profit |
39,864 |
42,885 |
45,981 |
43,941 |
39,107 |
38,954 |
20,294 |
36,532 |
||||||||||||||||||||||||
|
Adjusted Gross profit as a percentage of
annual adjusted Gross profit |
23.1 |
% |
24.8 |
% |
26.6 |
% |
25.5 |
% |
29.0 |
% |
28.9 |
% |
15.0 |
% |
27.1 |
% | ||||||||||||||||
|
Adjusted EBITDA |
$ |
11,535 |
$ |
17,684 |
$ |
18,776 |
$ |
20,253 |
$ |
18,750 |
$ |
23,662 |
$ |
6,521 |
$ |
13,146 |
||||||||||||||||
|
Adjusted EBITDA as a percentage of annual
adjusted EBITDA |
16.9 |
% |
25.9 |
% |
27.5 |
% |
29.7 |
% |
30.2 |
% |
38.1 |
% |
10.5 |
% |
21.2 |
% | ||||||||||||||||
|
Adjusted net income attributable to controlling
interest |
$ |
163 |
$ |
6,830 |
$ |
7,207 |
$ |
14,434 |
$ |
1,642 |
$ |
14,110 |
$ |
(3,498 |
) |
$ |
4,607 |
|||||||||||||||
|
Adjusted net income attributable to controlling
interest as a percentage of annual adjusted net income |
0.6 |
% |
23.8 |
% |
25.2 |
% |
50.4 |
% |
9.7 |
% |
83.7 |
% |
(20.7 |
)% |
27.3 |
% | ||||||||||||||||
|
Three months ended |
||||||||||||||||||||||||||||||||
|
Dec. 31, 2021 |
Sept. 30, 2021 |
June 30, 2021 |
Mar. 31, 2021 |
Dec. 31, 2020 |
Sept. 30, 2020 |
June 30, 2020 |
Mar. 31, 2020 |
|||||||||||||||||||||||||
|
(in thousands of U.S. dollars) |
||||||||||||||||||||||||||||||||
|
Reconciliation of Gross profit to Adjusted Gross profit: |
||||||||||||||||||||||||||||||||
|
Gross profit |
$ |
39,678 |
$ |
42,734 |
$ |
45,784 |
$ |
43,302 |
$ |
38,515 |
$ |
38,854 |
$ |
20,172 |
$ |
36,401 |
||||||||||||||||
|
Share-based compensation expense (a) |
107 |
72 |
37 |
105 |
63 |
100 |
122 |
131 |
||||||||||||||||||||||||
|
Non-recurring import related expenses (income) |
— |
— |
— |
— |
||||||||||||||||||||||||||||
|
Amortization of assets related to acquisitions |
79 |
79 |
160 |
534 |
529 |
— |
— |
— |
||||||||||||||||||||||||
|
Adjusted Gross profit |
$ |
39,864 |
$ |
42,885 |
$ |
45,981 |
$ |
43,941 |
$ |
39,107 |
$ |
38,954 |
$ |
20,294 |
$ |
36,532 |
||||||||||||||||
| (a) |
Share-based compensation includes expenses related to stock
options and RSU’s granted to our employees and directors. |
62
|
Three months ended |
||||||||||||||||||||||||||||||||
|
Dec. 31, 2021 |
Sept. 30, 2021 |
June 30, 2021 |
Mar. 31, 2021 |
Dec. 31, 2020 |
Sept. 30, 2020 |
June 30, 2020 |
Mar. 31, 2020 |
|||||||||||||||||||||||||
|
(in thousands of U.S. dollars) |
||||||||||||||||||||||||||||||||
|
Reconciliation of Net Income (loss) to Adjusted EBITDA: |
||||||||||||||||||||||||||||||||
|
Net income (loss) |
$ |
(3,303 |
) |
$ |
5,870 |
$ |
1,480 |
$ |
13,842 |
$ |
(1,981 |
) |
$ |
12,807 |
$ |
(5,882 |
) |
$ |
2,678 |
|||||||||||||
|
Finance (income) expenses, net |
7,425 |
2,403 |
3,095 |
(5,333 |
) |
8,613 |
(52 |
) |
2,507 |
(869 |
) | |||||||||||||||||||||
|
Taxes on income |
(780 |
) |
603 |
598 |
1529 |
1,459 |
2,292 |
471 |
478 |
|||||||||||||||||||||||
|
Depreciation and amortization related to acquisitions |
8,916 |
8,802 |
8,781 |
8,908 |
8,300 |
7,058 |
6,987 |
7,115 |
||||||||||||||||||||||||
|
Legal settlements and loss contingencies, net (a) |
(1,181 |
) |
(385 |
) |
4,109 |
740 |
1,392 |
452 |
1,637 |
2,838 |
||||||||||||||||||||||
|
Contingent consideration adjustment related to acquisition |
— |
— |
284 |
— |
— |
— |
— |
— |
||||||||||||||||||||||||
|
Share-based compensation expense (b) |
458 |
391 |
429 |
567 |
523 |
628 |
801 |
906 |
||||||||||||||||||||||||
|
Acquisition-related expenses |
— |
— |
— |
— |
444 |
477 |
— |
— |
||||||||||||||||||||||||
|
Adjusted EBITDA |
$ |
11,535 |
$ |
17,684 |
$ |
18,776 |
$ |
20,253 |
$ |
18,750 |
$ |
23,662 |
$ |
6,521 |
$ |
13,146 |
||||||||||||||||
| (a) |
Consists of legal settlements expenses and loss contingencies, net, related primarily to
product liability claims and other adjustments to ongoing legal claims. |
| (b) |
Share-based compensation includes expenses related to stock
options and rRSU’s granted to our employees and directors. In addition, includes expenses for phantom awards granted and the related
payroll expenses as a result of exercises. |
|
Three months ended |
||||||||||||||||||||||||||||||||
|
Dec. 31, 2021 |
Sept. 30, 2021 |
June 30, 2021 |
Mar. 31, 2021 |
Dec. 31, 2020 |
Sept. 30, 2020 |
June 30, 2020 |
Mar. 31, 2020 |
|||||||||||||||||||||||||
|
(in thousands of U.S. dollars) |
||||||||||||||||||||||||||||||||
|
Reconciliation of Net Income (loss) Attributable to Controlling Interest to Adjusted
Net Income Attributable to Controlling Interest: |
||||||||||||||||||||||||||||||||
|
Net income (loss) attributable to controlling interest |
$ |
(2,877 |
) |
$ |
5,948 |
$ |
1,705 |
$ |
14,190 |
$ |
(2,385 |
) |
$ |
12,807 |
$ |
(5,882 |
) |
$ |
2,678 |
|||||||||||||
|
Legal settlements and loss contingencies, net (a) |
(1,181 |
) |
(385 |
) |
4,109 |
740 |
1,392 |
452 |
1,637 |
2,838 |
||||||||||||||||||||||
|
Contingent consideration adjustment related to acquisition |
— |
— |
284 |
— |
— |
— |
— |
— |
||||||||||||||||||||||||
|
Amortization of assets related to acquisitions, net of tax |
502 |
502 |
561 |
826 |
446 |
— |
— |
— |
||||||||||||||||||||||||
|
Share-based compensation expense (b) |
458 |
391 |
429 |
567 |
523 |
628 |
801 |
906 |
||||||||||||||||||||||||
|
Non-cash revaluation of lease liabilities (c) |
3,461 |
430 |
889 |
(1,862 |
) |
3,177 |
227 |
1,256 |
(1,471 |
) | ||||||||||||||||||||||
|
Acquisition-related expenses |
— |
— |
— |
— |
444 |
477 |
— |
— |
||||||||||||||||||||||||
|
Total adjustments before tax |
3,240 |
938 |
6,272 |
271 |
5,982 |
1,784 |
3,694 |
2,273 |
||||||||||||||||||||||||
|
Less tax on above adjustments |
200 |
56 |
770 |
28 |
1,955 |
481 |
1,310 |
344 |
||||||||||||||||||||||||
|
Total adjustments after tax |
3,040 |
882 |
5,502 |
243 |
4,027 |
1,303 |
2,384 |
1,929 |
||||||||||||||||||||||||
|
Adjusted net income attributable to controlling interest |
163 |
6,830 |
7,207 |
14,434 |
1,642 |
14,110 |
(3,498 |
) |
4,607 |
|||||||||||||||||||||||
|
Adjusted diluted EPS |
$ |
0.01 |
$ |
0.20 |
$ |
0.21 |
$ |
0.42 |
$ |
0.05 |
$ |
0.41 |
$ |
(0.10 |
) |
$ |
0.13 |
|||||||||||||||
| (a) |
Consists of legal settlements expenses and loss contingencies, net, related primarily to
product liability claims and other adjustments to ongoing legal claims. |
| (b) |
Share-based compensation includes expenses related to stock
options and RSU’s granted to our employees and directors. |
| (c) |
Exchange rate differences deriving from revaluation of lease contracts in accordance with
FASB ASC 842. |
63
Our results of operations are impacted
by seasonal factors, including construction and renovation cycles. We believe that the second and third quarters of the year exhibits
higher sales volumes than other quarters because demand for quartz surface products is generally higher during the summer months in the
northern hemisphere, when the weather is more favorable for new construction and renovation projects, as well as the impact of efforts
to complete such projects before the beginning of the new school year. Conversely, the first quarter is impacted by a slowdown in new
construction and renovation projects during the winter months as a result of adverse weather conditions in the northern hemisphere and,
depending on the date of the spring and winter holiday in Israel in a particular year, sales in Israel might be impacted due to such holiday.
Similarly, sales in Australia during the first quarter are negatively impacted due to fewer construction and renovation projects.
We expect that seasonal factors will have
a greater impact on our revenue, adjusted EBITDA and adjusted net income attributable to controlling interest in the future as we continue
to increase direct distribution as a percentage of our total revenues in the future. This is because we generate higher average selling
prices in the markets in which we have direct distribution channels and, therefore, our revenues are more significantly impacted by changes
in demand in these markets. At the same time, our fixed costs have also increased as a result of our larger portion of direct distribution
and, therefore, the impact of seasonal fluctuations on our revenues, profit margins, adjusted EBITDA and adjusted net income attributable
to controlling interest will likely be magnified in future periods.
| B. |
Liquidity
and Capital Resources |
Our primary capital requirements have
been to fund production capacity expansions, as well as investments in and acquisitions of third-party distributors, such as the purchase
of Caesarstone Canada Inc., our acquisition of the business of our former Australian distributor and establishing our U.K. operations
, our investment in and acquisition of Caesarstone USA, formerly known as U.S. Quartz Products, Inc. and the construction of our new manufacturing
facility in the United States, as well as the recent Lioli Acquisition and Omicron Acquisition. Our other capital requirements have been
to fund our working capital needs, operating costs, meet required debt payments, finance a repurchase of our shares and to pay dividends
on our share capital.
Capital resources have primarily consisted
of cash flows from operations, cash generated from the March 2012 Initial Public Offering (the “IPO”),
proceeds from the land purchase agreement and leaseback in connection with our Bar-Lev facility and borrowings under our credit facilities.
Our working capital requirements are affected by several factors, including demand for our products, raw material costs and shipping costs.
Our inventory strategy is to maintain
sufficient inventory levels to meet anticipated customer demand for our products. Our inventory is significantly impacted by sales in
the United States, Australia and Canada, our largest markets, due to the 40-120 days required to ship our products to these locations
from Israel. We continue to focus on meeting market demand for our products while improving our inventory efficiency over the long term
by implementing procedures to improve our production planning process.
64
We minimize working capital requirements
through our distribution network that allows sales and marketing activities to be provided by third-party distributors. We believe that,
based on our current business plan, our cash, cash equivalents and short-term bank deposits on hand, cash from operations and borrowings
available to us under our revolving credit line and short-term facilities, we will be able to meet our capital expenditure and working
capital requirements, and liquidity needs for at least the next twelve months. We may require additional capital to meet our liquidity
needs and future growth requirements. Continued instability in the global market may increase our capital needs, and conditions in the
capital markets could adversely affect our ability to obtain additional capital to grow or sustain our business and would affect the cost
and terms of such capital.
The Company’s material cash requirements
include the following contractual and other obligations:
Leases
The Company has lease arrangements for
certain equipment and facilities, including for manufacturing, logistics and offices. As of December 31, 2021 the Company had lease payment
obligations of $182.2 million, with $26.0 million payable within 12 months.
Purchase Obligations
As of December 31, 2021, the Company had
manufacturing equipment and raw material purchase obligations of $36.2 million all payable within 12 months. The Company’s purchase
obligations are primarily noncancelable.
Debt
As of December 31, 2021, the Company had
outstanding bank credits and debts of an aggregate principal amount of $12.5 million all payable within 12 months. Future interest
payments associated with the these amounts total $1.4 million, all payable within 12 months.
Cash flows
The following table presents the major
components of net cash flows used in and provided by operating, investing and financing activities for the periods presented:
|
Year ended December 31, |
||||||||||||
|
2021 |
2020 |
2019 |
||||||||||
|
(in thousands of U.S. dollars) |
||||||||||||
|
Net cash provided by operating activities |
$ |
20,684 |
$ |
47,618 |
$ |
83,049 |
||||||
|
Net cash used in investing activities |
(34,885 |
) |
(68,305 |
) |
(23,587 |
) | ||||||
|
Net cash used in financing activities |
(25,254 |
) |
(6,084 |
) |
(14,127 |
) | ||||||
Cash
provided by operating activities
Operating activities consist primarily
of net income adjusted for certain non-cash items. Adjustments to net income for non-cash items include depreciation and amortization,
share-based compensation and deferred taxes. In addition, operating cash flows are impacted by changes in operating assets and liabilities,
principally inventories, accounts receivable, prepaid expenses and other assets, accounts payable and accrued expenses.
Cash provided by operating activities
in 2021 decreased by $26.9 million from $47.6 million in 2020 to $20.7 million in 2021, mainly due to an increase in inventories by $54.2
million during 2021 compared to a decrease by $0.4 million during 2020, an increase in trade payables by $28.3 million during 2021 compared
to a decrease by $17.9 million during 2020, and an increase in accounts receivables by $9.0 million during 2021 compared to a decrease
by $11.6 million during 2020.
65
Cash provided by operating activities
in 2020 decreased by $35.4 million from $83.0 million in 2019 to $47.6 million in 2020, mainly due to a decrease in inventories by $0.3
million during 2020 compared to a decrease by $35.3 million during 2019, increase in accrued expenses and other liabilities by $0.4 million
during 2020 compared to an increase by $5.8 million during 2019, a decrease in trade payables by $17.9 million during 2020 compared to
a decrease by $6.7 million during 2019, and a decrease in other accounts receivable and prepaid expenses by $9.3 million during 2020 compared
to an increase by $6.3 million during 2019.
Cash
used in investing activities
Net cash used in investing activities
for the years ended December 31, 2021, 2020 and 2019 were $34.9 million, $68.3 million and $23.6 million, respectively. In 2021, investing
activities included $31.5 million of capital expenditures, and $1.3 million of investment in marketable securities. In 2020,
investing activities included $19.8 million of capital expenditures, $19.2 million of investment in marketable securities and
$29.0 million of cash consideration paid for the Lioli Acquisition and Omicron Acquisition. In 2019, cash used in investing activities
consisted principally of capital expenditures that amounted to $23.6 million.
Cash
used in financing activities
Net cash used in financing activities
for 2021 was $25.3 million, which included $11.8 million of bank credit repayment and $10.7 million of dividend paid, and $1.3 million
of repayment of a financial leaseback arrangement related to our Bar-Lev facility. Net cash used in financing activities for 2020 was
$6.1 million, which included $4.8 million of dividend paid and $1.2 million of repayment of a financing liability of land from a related
party arrangement related to our Bar-Lev facility. Net cash used in financing activities for 2019 was $14.1 million, which included $7.8
million of bank credit repayment, $5.2 million of dividend paid and $1.2 million of repayment of a financing liability of land from a
related party arrangement related to our Bar-Lev facility.
Credit
facilities
As of December 31, 2021, we had a long-term
bank debt from commercial banks in India, as a result of the Lioli Acquisition, in the amount of $9.5 million, presented in short-term
liabilities, together with a credit line of $3.0 million bearing interest at the rate per annum equal to the India Libor rate plus 4.5%.
As of December 31, 2020, we had long-term bank debt in the amount of $9.5 million and current maturities of long-term bank loans of $2
million and $2.8 million as short term credit. The bank debt is to be repaid on a monthly basis through 2025. While the loan is outstanding,
Lioli is subject to certain covenants including, among others, limiting its ability to divest assets, pay dividends, borrow additional
funds and place other encumbrances on its assets.
In addition, Lioli was provided a shareholder’s loan by all its shareholders (including its minority
shareholders). Such loan is denominated in INR and amounts to $4.0 million, including the approximately $3.5 million that the Company
extended during 2021 in part in accordance with the terms of the Lioli Acquisition, and which was used to repay certain selling shareholders.
The loan bears an interest rate per annum equal to Libor rate plus 4.5% and is to be repaid during the third quarter of 2025.
In addition, we have long-term and short-term
debt related to the Bar-Lev sale and lease-back transaction with the Kibbutz.
We also received a loan on January 17,
2011, in the amount of CAD 4.0 million ($4.1 million) to Caesarstone Canada Inc. by its shareholders, Ciot and us, on a pro rata basis.
The loan bears an interest rate until repayment at a per annum rate equal to the Bank of Canada’s prime business rate plus 0.25%,
with the interest accrued on the loan paid on a quarterly basis. The loan balance as of December 31, 2021 was $0.5 million (reflects the
portion of the loan received from Ciot), which was included in related party and other loan line item.
As of December 31, 2021, we had short-term
credit lines with total availability of $18.9 million, consisting of $13.0 million from banks in India (as a result of the Lioli Acquisition),
$0.9 million from an American bank (as a result of the Omicron Acquisition), $3.4 million from Israeli banks, and $1.6 million from Australian
banks, of which $18.1 million were utilized as of December 31, 2021. Our credit lines from Israeli banks are subject to annual renewal.
66
Our credit facilities and services provided
by banks in India are secured with a “Negative floating pledge,” whereby we committed not to pledge or charge and not to undertake
to pledge or charge our general floating assets.
Capital
expenditures
Our capital expenditures mainly included
the expansion, improvement and maintenance of our manufacturing capacity and capabilities, expansion on our north America distribution
network and investment and improvements in our information technology systems. In 2021, 2020 and 2019 our capital expenditures were $31.5
million, $19.8 million, and $23.6 million, respectively. Following 2021, which was characterized by higher capital expenditures we plan
to back to pre-Covid-19 levels in connection with our manufacturing facilities in the coming years. For more information, see “Item
4.A. Information on the Company –Principal Capital Expenditures”.
Land
purchase agreement and leaseback
Pursuant to a land purchase agreement
entered on March 31, 2011, which became effective upon our IPO, Kibbutz Sdot-Yam acquired from us our rights in the lands and facilities
of the Bar-Lev Industrial Park in consideration for NIS 43.7 million (approximately $10.9 million). The carrying value of the Bar-Lev
land at the time of closing this transaction was NIS 39.0 million (approximately $10.4 million). The land purchase agreement was executed
simultaneously with the execution of a land use agreement.
Pursuant to the land use agreement, Kibbutz
Sdot-Yam permits us to use the Bar-Lev land for a period of ten years commencing on September 2012, that will be automatically renewed,
unless we give two years’ prior notice, for a ten-year term in consideration for an annual fee of NIS 4.1 million (approximately
$1.1 million) to be linked to increases in the Israeli consumer price index. The fee is subject to adjustment following January 1, 2021,
and every three years thereafter at the option of Kibbutz Sdot-Yam if Kibbutz Sdot-Yam chooses to obtain an appraisal that supports such
an increase. During 2021, the Kibbutz utilized its option under the agreement and the annual fees for Bar-Lev land were updated to NIS
8.1 million (approximately $2.6 million).
The transaction was not qualified as “sale
lease-back” accounting under both ASC 840 and ASC 842 and the Company recorded the entire amount received as consideration as a
liability.
Off-balance
sheet financing arrangements
We do not currently engage in off-balance
sheet financing arrangements. In addition, we do not have any interest in entities referred to as variable interest entities, which includes
special purpose entities and other structured finance entities.
| C. |
Research
and Development, Patents and Licenses |
Our RD department is located in Israel. As of December 31, 2021, our corporate RD department
was comprised of 16 employees, all of whom have extensive experience in engineered quartz surface manufacturing, polymer science, engineering,
product design and engineered quartz surface applications. In addition, our RD for porcelain manufacturing is conducted by eight
dedicated employee located in India, whose activities are supported by the RD department in Israel. In 2021, research and development
costs accounted for approximately 0.7% of our revenues, and in 2020 and 2019, research and development costs accounted for approximately
0.8% of our revenues, respectively.
We pursue a strategy of identifying certain
innovative proprietary technologies and seeking patent protection when applicable. We have obtained patents for certain of our technologies
and have pending patent applications which relate to our manufacturing technology and certain products. We act to protect other innovative
proprietary technologies developed by us by implementing confidentiality protection measures without pursuing patent registration. No
patent application is material to the overall conduct of our business.
Research and development expenses were
$4.2 million, $4.0 million and $4.1 million in 2021, 2020 and 2019, respectively.
For a description of our research and development policies, see “ITEM 4.B: Information on the Company—Business
Overview—Research and development.”
67
| D. |
Trend Information
|
Impacts from COVID-19
The COVID-19 pandemic has increased market
uncertainty and volatility and led to travel and other restrictions including individual quarantines imposed globally, significantly affecting
consumer and businesses behaviors. The volatility in stock markets around the world has already and may continue to materially and adversely
impact stock prices and trading volumes for us and other corporations. The culmination of these dramatic large-scale events could result
in a global economic recession and significantly decrease home renovation and remodeling activity and new residential construction, and
in turn reduce the demand for our products, thus materially and adversely affecting our business and results of operations.
We have attempted and continue to attempt to comply with rapidly
changing restrictions, such as travel restrictions, curfews and others. Following recommendations from the Israeli Ministry of Health
and the Ministry of Finance, in April 2020, September 2020 and January 2021, the Israeli government imposed full nationwide lockdowns,
shuttering schools and nonessential businesses, restricting gatherings and people’s movement. In addition, starting in March 2020,
in periods other than the full lockdowns, the government has systematically limited operations of the private sector, including reductions
of onsite workforce, imposed travel and gathering restrictions and reduced workforce in the public sector. Currently travel to and from
work is still permitted, however the authorities may place additional, more restrictive measures on businesses and individuals.
The widespread outbreak of certain diseases,
such as the recent COVID-19 pandemic, may adversely affect our business, disrupt our ability to manufacture products and impact the operations
of our customers and modes of shipping, any of which could lead to reduction in customer orders and sales to certain regions and end-markets.
See also “—The COVID-19 pandemic could further impact end-consumers and the global economy in general, lower demand for our
products, disrupt our operations and materially and adversely affect our business and results of operations” and “—Disturbances
to our operations or the operations of our suppliers, distributors, customers, consumers or other third parties could materially adversely
affect our business”.
Employee health and safety is our priority.
Deemed part of essential infrastructure industry, we continue to produce our products, while coordinating with and implementing guidance
from the relevant governmental health guidelines. In an effort to keep our employees safe and healthy, we have implemented several measures
including, but not limited to: increasing physical distancing of our employees; separating between shifts and roles; changing our travel
and shuttles; separating spaced during meal times; adding temperature and symptom screening stations for employees prior to entering our
facilities; increasing personal hygiene practices and providing our employees additional personal protective equipment and sanitation
stations; and increasing sanitation of our facilities. In addition, we implemented global travel restrictions and work-from-home policies
for employees who have the ability to work remotely.
We have received governmental support
for our operations mainly in Canada, the United Kingdom and Singapore an aggregate amount of $1.8 million.
In addition, after halting recruitment,
and furloughing employees, primarily due to reduction of our production capacity, we are facing challenges to recruit plant workers, particularly
at our Sdot-Yam facility. Such challenges were partially due to the Israel social security scheme, which provides unemployment payments
to workers laid off due to COVID-19 until mid-2021.
Currently, the trajectory of the COVID-19
outbreak remains highly uncertain. The extent to which COVID-19 will continue to impact our business and results of operations will depend
on evolving factors, such as the duration and severity of the outbreak, containment measures, the availability and efficiency of providing
vaccines to the worldwide population; and governmental, business and individual actions in response to the pandemic. However, we will
continue to assess our operations for any impacts, trends and uncertainties involving the pandemic’s effects on economic activity
and the particular effects on our industry and business, including the construction and renovation markets, our sales, availability and
price of our raw materials, and the extent to which our business may be materially and adversely affected. For a discussion of certain
risks associated with the COVID-19 pandemic, see “ITEM 1.A. Risk Factor—The COVID-19 pandemic could further impact end-consumers
and the global economy in general, lower demand for our products, disrupt our operations and materially and adversely affect our business
and financial results.”
68
| E. |
Critical
Accounting Estimates |
Our accounting policies affecting our
financial condition and results of operations are more fully described in our consolidated financial statements for the years ended December
31, 2021, 2020 and 2019, included in this annual report. The preparation of our financial statements requires management to make judgments,
estimates and assumptions that affect the amounts reflected in the consolidated financial statements and accompanying notes, and related
disclosure of contingent assets and liabilities. We base our estimates upon various factors, including past experience, where applicable,
external sources and on other assumptions that we believe are reasonable under the circumstances, the results of which form the basis
for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results
may differ from these estimates under different assumptions or conditions and could have a materially adverse effect on our reported results.
In many cases, the accounting treatment
of a particular transaction, event or activity is specifically dictated by accounting principles and does not require management’s
judgment in its application, while in other cases, management’s judgment is required in the selection of the most appropriate alternative
among the available accounting principles, that allow different accounting treatment for similar transactions.
We believe that the accounting policies
discussed below are critical to our financial results and to the understanding of our past and future performance as these policies relate
to the more significant areas involving management’s estimates and assumptions. We consider an accounting estimate to be critical
if: (1) it requires us to make assumptions because information was not available at the time or it included matters that were highly uncertain
at the time we were making our estimate; and (2) changes in the estimate or different estimates that we could have selected may have had
a material impact on our financial condition or results of operations.
Revenue recognition
We derive our revenues from sales of quartz
surfaces mostly through a combination of direct sales in certain markets and indirectly through a network of distributors in other markets.
Starting January 1, 2018, we adopted Accounting
Standards Codification 606, Revenue from Contracts with Customers (ASC 606).
Under ASC 606, revenue is recognized when
a customer obtains control of promised goods or services in an amount that reflects the consideration the entity expects to receive in
exchange for those goods or services. In addition, ASC 606 requires disclosure of the nature, amount, timing, and uncertainty of revenue
and cash flows arising from contracts with customers.
We apply the following five steps in accordance
with ASC 606:
(1) identify
the contract with a customer: A contract is an agreement between two or more parties that creates enforceable rights and obligations.
In evaluating the contract, we analyze the customer’s intent and ability to pay the amount of promised consideration (credit risk)
and considers the probability of collecting substantially all the consideration. We determine whether collectability is reasonably assured
on a customer-by-customer basis pursuant to various criteria including our historical experience, credit insurance results and other inputs.
(2) identify
the performance obligations in the contract: At a contract’s inception, we assess the goods or services promised in a contract with
a customer and identify the performance obligations. The main performance obligation is a delivery of our products.
69
(3) determine
the transaction price: Our products that are sold through agreements with distributors are non-exchangeable, non-refundable, non-returnable
and without any rights of price protection or stock rotation. Accordingly, we consider all the distributors to be end-consumers. For certain
revenue transactions with specific customers, we are responsible also for the fabrication and installation of our products. We recognize
such revenues upon receipt of acceptance evidence from the end consumer which occurs upon completion of the installation. Although, in
general, we do not grant rights of return, there are certain instances where such rights are granted. We maintain a provision for returns
in accordance with ASC 606, which is estimated, based primarily on historical experience as well as management judgment, and is recorded
through a reduction of revenue.
(4) allocate
the transaction price to the performance obligations in the contract: The majority of our revenues are sales of goods, therefore there
is one main performance obligation that absorbs the transaction price.
(5) recognize
revenue when a performance obligation is satisfied: Revenue is recognized when or as performance obligations are satisfied by transferring
control of a promised good or service to a customer. Control transfers at a point in time, which affects when revenue is recorded. The
majority of our revenues deriving from sales of products which are recognized when control is transferred based on the agreed International
Commercial terms, or “INCOTERMS”.
We adopted ASC 606 in the first quarter
of 2018 using the modified retrospective method, no cumulative effect adjustment as of the date of the adoption was required.
Prior years information has not been restated
and continues to be reported under the old accounting standard 605, “Revenue Recognition” (ASC 605).
Lease accounting
On January 1, 2019, we adopted Accounting
Standards Update (“ASU”) No. 2016-02, Leases (“Topic
842”), as amended, which supersedes the lease accounting guidance under Topic 840, and generally requires lessees to recognize
operating and financing lease liabilities and corresponding Right-Of-Use (“ROU”) assets
on the balance sheet and to provide enhanced disclosures surrounding the amount, timing and uncertainty of cash flows arising from leasing
arrangements. We adopted the new guidance using the modified retrospective transition approach by applying the new standard to all leases
existing on the date of initial application and not restating comparative periods. The most significant impact was the recognition of
ROU assets and lease liabilities for operating leases. See Note 2 and Note 10 to our Consolidated Financial Statements for the year ended
December 31, 2021 for further information regarding leases.
Allowance
for credit loss
Our trade receivables are derived from
sales to customers located mainly in the United States, Australia, Canada, Israel and Europe. We perform ongoing credit evaluations of
our customers and to date have not experienced any substantial losses. In certain circumstances, we may require letters of credit or prepayments.
We maintain an allowance for credit loss for estimated losses from the inability of our customers to make required payments that we have
determined to be doubtful of collection. We determine the adequacy of this allowance by regularly reviewing our accounts receivable and
evaluating individual customers’ receivables, considering customers’ financial condition, credit history and other current
economic conditions. If a customer’s financial condition were to deteriorate which might impact its ability to make payment, then
additional allowances may be required. Provisions for credit loss are recorded in general and administrative expenses. Our allowance for
credit loss was $9.0 million, $6.8 million and $2.5 million as of December 31, 2021, 2020 and 2019, respectively.
Inventory
valuation
The majority of our inventory consists
of finished goods and of raw materials. Inventories are valued at the lower of cost or net realizable value, with cost of finished goods
determined on the basis of direct manufacturing costs plus allocable indirect costs representing allocable operating overhead expenses
and manufacturing costs and cost of raw materials determined using the “standard cost” method which approximates actual cost
on a weighted average basis. We assess the valuation of our inventory on a quarterly basis and periodically write down the value for different
finished goods and raw material categories based on their quality classes and aging. If we consider specific inventory to be obsolete,
we write such inventory down to zero. Inventory provisions are provided to cover risks arising from slow-moving items, discontinued products,
excess inventories and net realizable value lower than cost. The process for evaluating these write-offs often requires us to make subjective
judgments and estimates concerning prices at which such inventory will be able to be sold in the normal course of business. Accelerating
the disposal process or incorrect estimates of future sales potential may cause actual results to differ from the estimates at the time
such inventory is disposed of or sold. Inventory provision was $16.8 million, $16.6 million and $18.2 million as of December 31, 2021,
2020 and 2019, respectively.
70
Goodwill
and other long-lived assets
The purchase price of an acquired business
is allocated between intangible assets and the net tangible assets of the acquired business with the residual of the purchase price recorded
as goodwill. The determination of the value of the intangible assets acquired involves certain judgments and estimates. These judgments
can include, but are not limited to, the cash flows that an asset is expected to generate in the future and the appropriate weighted average
cost of capital.
As of December 31, 2021, our goodwill
and identifiable intangible assets totaled $45.8 million and $9.6 million, respectively. The decrease in goodwill was mainly attributable
to the exchange rates fluctuations and the decrease in intangible assets was mainly attributable to the amortization of intangibles assets
related to the Lioli and Omicron acquisitions. We assess the impairment of goodwill of our reporting unit annually during the fourth quarter
of each fiscal year, or more often if events or changes in circumstances indicate that the carrying value may not be recoverable. Goodwill
is tested for impairment at the reporting unit level by first performing a qualitative assessment to determine whether it is more likely
than not that, the fair value of the reporting unit is less than is carrying value. If the reporting unit does not pass the qualitative
assessment, then the reporting unit’s carrying value is compared to its fair value. We have only one reporting unit because all
our components have similar economic characteristic, and we determine its fair value based on fair value methodologies include estimates
of future cash flows, future short-term and long-term growth rates and weighted average cost of capital, see also Note 2l and 7 in our
financial statements.
As of December 31, 2021, 2020 and 2019,
no impairment losses had been identified.
We also evaluate the carrying value of
all long-lived assets, such as property, plant and equipment and right of use assets, for impairment whenever events or changes in circumstances
indicate that the carrying value of an asset may not be recoverable. We will record an impairment loss when the carrying value of the
underlying asset group exceeds its estimated fair value. In determining whether long-lived assets are recoverable, our estimate of undiscounted
future cash flows over the estimated life of an asset is based upon our experience, historical operations of the asset, an estimate of
future asset profitability and economic conditions. The future estimates of asset profitability and economic conditions require estimating
such factors as sales growth, inflation and the overall economics of the countertop industry. Our estimates are subject to variability
as future results can be difficult to predict. If a long-lived asset is found to be non-recoverable, we record an impairment charge equal
to the difference between the asset’s carrying value and fair value.
Fair
value measurements
The performance of fair value measurements
is an integral part of the preparation of financial statements in accordance with generally accepted accounting principles. Fair value
is defined as the price that would be received to sell the asset or paid to transfer the liability in an orderly transaction between market
participants to sell or transfer such an asset or liability. Selection of the appropriate valuation techniques, as well as determination
of assumptions, risks and estimates used by market participants in pricing the asset or liability requires significant judgment. Although
we believe that the inputs used in our evaluation techniques are reasonable, a change in one or more of the inputs could result in an
increase or decrease in the fair value for example, of certain assets and certain liabilities and could have an impact on both our consolidated
balance sheets and consolidated statements of income.
71
Business
Combination
We allocate the fair value of purchase
consideration to the tangible assets acquired, liabilities assumed, and intangible assets acquired based on their estimated fair value.
The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is recorded as
goodwill. Such valuations require our management to make significant estimates and assumptions, especially with respect to intangible
assets. Significant estimates in valuing certain intangible assets include, but are not limited to, future expected cash flows from acquired
operations and other intangible assets, their useful lives and discount rates. Our management’s estimates of fair value are based
upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may
differ from estimates. During the measurement period, which is not to exceed one year from the acquisition date, we may record adjustments
to the assets acquired and liabilities assumed, with the corresponding offset to goodwill. Upon the conclusion of the measurement period,
any subsequent adjustments are recorded to earnings.
Marketable
Securities
We account for investments in debt securities
in accordance with ASC 320, "Investments - Debt and Equity Securities." Management determines the appropriate classification of its investments
in debt securities at the time of purchase and re-evaluates such determinations at each balance sheet date.
Marketable securities classified as "available-for-sale"
(“AFS”) are carried at fair value, based on quoted market prices. Unrealized gains and losses are reported in a separate component
of shareholders' equity in accumulated other comprehensive income (loss). Gains and losses are recognized when realized, on a specific
identification basis, in our consolidated statements of income.
We asses AFS debt securities with an amortized
cost basis in excess of estimated fair value to determine what amount of that difference, if any, is caused by expected credit losses
in accordance with ASC 326. Factors considered in making such a determination include the duration and severity of the impairment,
the reason for the decline in value, the potential recovery period and our intent to sell, including whether it is more likely than not
that we will be required to sell the investment before recovery of cost basis. For securities with an unrealized loss that we intend to
sell, or it is more likely than not that we will be required to sell before recovery of their amortized cost basis, the entire difference
between amortized cost and fair value is recognized in earnings. For securities that do not meet these criteria, the amount of impairment
recognized in earnings is limited to the amount related to credit losses, while declines in fair value related to other factors are recognized
in accumulated other comprehensive income (loss). We did not record credit loss allowance on our marketable securities during the year
ended December 31, 2021.
Accounting
for contingencies
We are involved in various product liability,
commercial, environmental claims and other legal proceedings that arise from time to time in the course of business. We record accruals
for these types of contingencies to the extent that we conclude their occurrence is probable and that the related liabilities are estimable.
When accruing these costs, we will recognize an accrual in the amount within a range of loss that is the best estimate within the range.
When no amount within the range is a better estimate than any other amount, we accrue for the minimum amount within the range. We record
anticipated recoveries under the applicable insurance policies, in the amounts that are covered, and we believe their collectability is
probable. Legal costs are expensed as incurred.
For unasserted claims or assessments,
we followed the accounting guidance in ASC 450-20-50-6, 450-20-25-2 and 450-20-55-2 in which we must first determine that the probability
that an assertion will be made is likely, then, a determination as to the likelihood of an unfavorable outcome and the ability to reasonably
estimate the potential loss is made.
We review the adequacy of the accruals
on a periodic basis and may determine to alter our reserves at any time in the future if we believe it would be appropriate to do so.
As such, accruals are based on management’s judgment as to the probability of losses and, where applicable, accruals may materially
differ from settlements or other agreements made with regards to such contingencies.
72
See Note 11 to our financial statements
included elsewhere in this annual report and “ITEM 8.A: Financial Information—Consolidated Financial Statements and Other
Financial Information—Legal Proceedings” for further information regarding legal matters.
Income
taxes
We account for income taxes in accordance
with ASC 740, “Income Taxes”, which requires that deferred tax assets and liabilities be recognized using enacted tax rates
for the effect of temporary differences between the financial reporting and tax basis of recorded assets and liabilities. ASC 740 also
requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that some portion or all the deferred
tax asset will not be realized. We have recorded a valuation allowance to reduce our subsidiaries’ deferred tax assets to the amount
that we believe is more likely than not to be realized. Our assumptions regarding future realization may change due to future operating
performance and other factors.
ASC 740 requires that companies recognize
in their consolidated financial statements the impact of a tax position if that position is not more likely than not of being sustained
on audit based on the technical merits of the position. ASC 740 also provides guidance on de-recognition, classification, interest and
penalties, accounting in interim periods and disclosure. We accrue interest and penalties related to unrecognized tax benefits in our
tax expenses.
We establish reserves for tax-related
uncertainties based on estimates of whether, and the extent to which, additional taxes will be due. These reserves are established when
we believe that certain positions might be challenged despite our belief that our tax return positions are in accordance with applicable
tax laws. As part of the determination of our tax liability, management exercises considerable judgment in evaluating tax positions taken
by us in determining the income tax provision and establishes reserves for tax contingencies in accordance with ASC 740 guidelines. We
adjust these reserves in light of changing facts and circumstances, such as the closing of a tax audit, new tax legislation, or the change
of an estimate based on new information. To the extent that the final tax outcome of these matters is different from the amounts recorded,
such differences will affect the provision for income taxes in the period in which such determination is made. The provision for income
taxes includes the effect of reserve provisions and changes to reserves that are considered appropriate, as well as the related net interest
and penalties.
We file income tax returns in Australia,
Canada, Israel, Singapore, England, India and the United States. The Israeli tax authorities audited our income tax returns for the fiscal
years leading up to and including 2018 and we were examined by the IRS in the United States for our income tax return for the fiscal years
leading up to and including 2016. We may be further subject to examination in the other countries in which we file tax returns and for
any subsequent years. Management’s judgment is required in determining our provision for income taxes in each of the jurisdictions
in which we operate. The provision for income tax is calculated based on our assumptions as to our entitlement to various benefits under
the applicable tax laws in the jurisdictions in which we operate. The entitlement to such benefits depends upon our compliance with the
terms and conditions set out in these laws. Although we believe that our estimates are reasonable and that we have considered future taxable
income and ongoing prudent and feasible tax strategies in estimating our tax outcome, there is no assurance that the final tax outcome
will not be different than those which are reflected in our historical income tax provisions and accruals. Such differences could have
a material effect on our income tax provision, net income and cash balances in the period in which such determination is made.
Share-based
compensation
We measure and recognize stock-based compensation expense based on the fair value measurement for all share-based
payment awards made to our employees, including employee stock options and RSUs, over the service period for awards expected to vest.
Stock-based compensation expense associated with employee stock options in 2021, 2020 and 2019 was $1.8 million, $2.9 million and $3.6,
respectively.
73
Under ASC 718, we estimate the value of
employee stock options as of date of grant using a Black Scholes-based option valuation model. The determination of fair value of
stock option awards on the date of grant is affected by several factors including our stock price, our stock price volatility, the risk-free
interest rate, expected dividends and employee stock option exercise behaviors. If such factors change and we employ different assumptions
for future grants, our compensation expense may differ significantly from the amounts that we have recorded in the past. In addition,
our compensation expense is affected by our estimate of the number of awards that will ultimately vest. The RSUs are measured at the grant
date based on the market value of our ordinary shares. See Note 2w to the financial statements included elsewhere in this report.
ITEM
6: Directors, Senior Management and Employees
| A. |
Directors
and Senior Management |
Our directors and executive officers,
their dates of birth and positions as of March 15, 2022, are as follows:
|
Name |
Date of Birth |
Position | ||
|
Officers |
||||
|
Yuval Dagim |
December 13, 1962 |
Chief Executive Officer | ||
|
Nahum Trost |
September 24, 1978 |
Chief Financial Officer | ||
|
David Cullen |
April 10, 1959 |
Managing Director, APAC | ||
|
Ken Williams |
April 4, 1961 |
Managing Director, North America | ||
|
Amir Reske |
October 13, 1973 |
Managing Director, EMEA | ||
|
Idit Maayan Zohar |
November 11, 1972 |
Chief Marketing Officer | ||
|
Efrat Rimmer |
March 31, 1977 |
Vice President, Global Supply Chain and Commercial | ||
|
Amihai Seider |
November 29, 1967 |
Vice President, Global Production | ||
|
Erez Margalit |
July 14, 1967 |
Vice President, Global Research and Development | ||
|
Ron Mosberg |
December 15, 1979 |
General Counsel and Corporate Secretary | ||
|
Efrat Yitzhaki |
November 23, 1972 |
Vice President, Global Human Resources | ||
|
Eyal Levy |
May 26, 1970 |
Chief Information Officer | ||
|
Directors |
||||
|
Dr. Ariel Halperin(4) |
March 18,1955 |
Chairman | ||
|
Nurit Benjamini (1)(2)(3)(5)(6) |
October 27, 1966 |
Director | ||
|
Lily Ayalon(1)(2)(3)(5)(6) |
June 17, 1965 |
Director | ||
|
Roger Abravanel (4)(5) |
July 27, 1946 |
Director | ||
|
Dori Brown(4) |
September 2,1971 |
Director | ||
|
Ronald Kaplan(3) (5) |
August 15, 1951 |
Director | ||
|
Ofer Tsimchi(1)(2)(5) |
September 15, 1959 |
Director | ||
|
Shai Bober |
July 17,1975 |
Director | ||
|
Tom Pardo Izhaki |
June 3, 1983 |
Director |
____________
| (1) |
Member of our audit committee. |
| (2) |
Member of our compensation committee. |
| (3) |
Member of our nominating committee. |
| (4) |
Member of our strategy committee. |
| (5) |
Independent under the Nasdaq rules. |
| (6) |
External director under the Israeli Companies Law. |
Executive
Officers
Yuval
Dagim has served as our Chief Executive Officer since August 2018. Prior to joining us, during 2017, Mr. Dagim served as the CEO
of Shikun Binui Ltd. (TASE: SKBN.TA), a global construction and infrastructure company. Prior to that, from 2011 to 2016, Mr. Dagim
held several managerial positions at Kimberly Clark (NYSE: KMB), a multinational personal care corporation. including as VP and Managing
Director at Kimberly Clark Australia New Zealand, and as Managing Director and Chief Executive Officer at Kimberly Clark Israel
(Hogla Kimberly). From 2008 to 2011, he served as Managing Director of Quarry Products at Hanson UK, a leading supplier of heavy building
materials to the construction industry and from 2002 to 2008 as Regional Director Deputy Managing Director at Hanson Israel. Mr.
Dagim holds a B.Sc. degree in Mechanical Engineering from the Israeli Technological Institute, the Technion, and an executive M.B.A. from
Bar Ilan University, Israel.
74
Nahum Trost has served as our Chief Financial
Officer since September 2021, Mr. Trost served as our Director of Finance, leading the corporate finance since 2014. Mr. Trost possesses
over 18 years of experience in various financial roles, including extensive experience in financing, capital and accounting, primarily
at companies with an international focus. Prior to joining us in April 2014, Mr. Trost served in various positions at Lumenis Ltd. and
his last role was Vice President of Corporate finance. Mr. Trost also served as a CPA with Ernst Young. He holds a bachelor’s
degree in economics and accounting from the Haifa University, Israel, and a master’s degree in business economics from the Israeli
Technological Institute Technion.
David
Cullen has served as our Managing Director, APAC, since May 2019. Previously, from April 2010 to May 2019, Mr. Cullen served as
Chief Executive Officer for Caesarstone Australia. Prior to joining us, from January 2009 to March 2010, Mr. Cullen served as General
Manager in Australia of Komatsu Ltd., a Japanese manufacturer of industrial and mining equipment. From January 2006 to November 2008,
he served as Chief Executive Officer of Global Food Equipment Pty Ltd., an Australian importer and distributor of commercial food equipment.
From 2004 to 2006, he served as Chief Executive Officer of White International Pty Ltd., an Australian supplier of industrial and residential
pump products. From 2003 to 2004, Mr. Cullen served as Chief Executive Officer of Daisytek Australia Pty Ltd, a subsidiary of Daisytek
International Corporation. From 1996 to 2002, he served as Chief Executive Officer of Tech Pacific Australia Pty Ltd., the largest distributor
of IT equipment in the Asia-Pacific region. Mr. Cullen has held various other management positions in other companies since 1985.
Mr. Cullen holds a Bachelor of Commerce degree from the University of New South Wales.
Ken
Williams has served as our President of North America since January 2019. Previously, from March 2016 to January 2019, he has served
as our President of Caesarstone Canada. Prior to joining us, from February 1999 to March 2016, Mr. Williams held various senior executive
level leadership positions, including Executive Vice President of Sales and Marketing, in a number of Masco Corporation divisions, a global
company involved in the design, manufacture and distribution of branded home improvement and building products. Previously, Mr. Williams
held general management positions and leadership roles at Fortune Brands, the Redhill Company Ltd. and Thorne Stevenson Kellogg Management
Consultants. Mr. Williams holds a Bachelor of Business Administration Degree from Trent University in Ontario, Canada.
Amir
Reske has served as our Managing Director, EMEA since May 2019. Previously, from 2016 to May 2019, he has served as Managing Director,
Caesarstone (UK). Prior to joining us, from 2013 to 2016, Mr. Reske served as the CEO of Tadiran Energy Ltd. in Israel, a corporation
focusing on the development, manufacturing, import, distribution, service and marketing of air conditioning systems for residential
commercial applications. Previously, from 2012 to 2013, Mr. Reske served as the Director of Subsidiaries at Meuhedet National Health Services,
a major health service organization in Israel and, from 2005 to 2012, as the Chief Investment Director / Director of Business Development,
at CP Holdings Ltd, a trading firm in the United Kingdom. He is a member of the Israeli bar and holds a post graduate diploma in legal
practice from the University of Oxford and a business law degree from Coventry University.
Idit Maayan-Zohar has served as our Global Chief
Marketing Officer since February 2022. Prior to that, from 2012, Ms. Maayan-Zohar held various managerial positions in our Global Marketing
Department, serving most recently as the Director of Global Marketing Customer Experience. Previously, from 2006 to 2012, Ms. Maayan-Zohar
served as Advertising Manager at Bank Hapoalim, one of the leading banks in Israel and prior to that as an Advertising Manager at Bezeq,
The Israeli telecommunications company. Ms. Maayan-Zohar holds a B.A. in Business Administration from the College of Management
Academic Studies and an M.B.A in Communication and Political Science from Bar-Ilan University.
Efrat Rimmer has served as our Vice President,
Global Supply Chain and Commercial since February 2021. Prior to joining us, from July 2019 until January 2021. Ms. Rimer served as CEO
and Co-founder of TreatMee Ltd., a company developing technological solutions and visual communication systems. Prior to that, from July
2001 to January 2019, Ms. Rimer served in various managerial positions at HP Ltd., including as VP Operations, from 2016 to 2019; Supply
Chain strategy manager, from 2012 to 2016; Europe Strategic account manager, from 2009 to 2012; Global procurement manager, from 2005
to 2009; and as Production logistics manager Lean manager, from 2001 to 2005. Ms. Rimer holds
a B.Sc. in Industrial Engineering form Ben Gurion University, and an MBA from Ben Gurion University.
75
Amihai Seider has served as our Vice President,
Global Production since March 2019. Prior to joining us, from August 2003, Mr. Seider held various managerial positions at Haifa Chemicals,
Israel-based specialty fertilizer manufacturer including VP Operations from May 2012 and Plant Manager from September 2006 to May 2012.
Previously, from 1994 to 2003, Mr. Seider held managerial roles at Electrochemical Industries (1952) Ltd., a manufacturer and distributer
of chemical products including as Plant Manager from 2000 to 2003. Mr. Seider holds a B.Sc. in Chemical Engineering from Technion University,
and an M.B.A. from Haifa University, Israel.
Erez Margalit has served as our Vice President
Research and Development since August 2013 and joined us in December 2010 as our RD Engineering Manager. Prior to joining us, from
2008 to October 2010, Mr. Margalit served as Director of Equipment, Reliability and Services of Fab1 and Fab2 of Tower Semiconductor Ltd.,
a manufacturer of microelectronic devices. From 2001 to 2008, Mr. Margalit served as Technical Manager for several departments in Tower
Semiconductor Ltd. Mr. Margalit has specialized in designing, developing and implementing unique industry machinery for unique applications.
Mr. Margalit holds a degree in Electronics (Practical Engineer) from Yezreel Valley College.
Ron
Mosberg has served as our General Counsel Corporate Secretary since September 2018. Prior to joining us, from 2015, Mr. Mosberg
served as the General Counsel and Corporate Secretary at Enzymotec Ltd., an Israeli based global nutraceutical company. Previously, from
2007 to 2015, Mr. Mosberg worked as a lawyer at leading Israeli law firms. Mr. Mosberg holds an LL.B. in Law and Psychology from Tel Aviv
University, Israel.
Efrat
Yitzhaki has served as our Vice President, Human Resources since November 2019. Prior to joining us, from 2018 to 2019, Ms. Yitzhaki
held the role of VP Human Resources at Shikun and Binui, a global construction and infrastructure company. Previously, from 2013 to 2018,
she served as HR Director at Kimberly Clark Israel, a multinational personal care corporation. From 2008 to 2013, Ms. Yitzhaki served
as Group Training OD MD Manager at Osem Group/Nestle Israel and HR Manager at Nestle Ice Cream. She holds a double B.A. in psychology
and business, and an M.A. in psychology and business from the Hebrew University, Israel.
Eyal
Levy has served as our Chief Information Officer since June 2021. Mr. Levy joined us in 2013 and has served as the manager of global
business applications and as the global manager of digital, analytics innovation. Prior to joining us, he held various managerial
roles in leading consulting companies in the IT industry. He holds a BA in marketing from Baruch College and MBA in business management
from the New York Institute of Technology and a CIO diploma from the Technion - Israel Institute of Technology.
Directors
Dr. Ariel Halperin has served as our Chairman
of the board of directors since December 2016. Dr. Halperin previously served as our director from December 2006 to May 2013. He has served
as the senior managing partner of Tene Investment Funds, an Israeli private equity fund focusing on established growth companies with
leading global market positions, since 2004 and as a founding partner in Tenram Investments Ltd. a private investment company engaged
in domestic and foreign real estate investments since 2000. From 1992 to 2000, Dr. Halperin led negotiations related to the Kibbutzim
Creditors Agreement serving as trustee for the Israeli government, Israeli banks and the Kibbutzim. Dr. Halperin currently serves as a
director of several Tene Investment Funds’ portfolio companies, including Haifa Group., Qnergy Ltd., Gadot Chemical Terminals (1985)
Ltd., Gadot Agro Ltd. and othe Gadot group members companies, Sharon Laboratories Ltd., Questar Ltd. and Ahern Agribusiness Inc. Dr. Halperin
also holds several private investment companies. Dr. Halperin holds a B.A. in Mathematics and Economics and Ph.D. in Economics from The
Hebrew University of Jerusalem in Israel and a Post-Doctorate in Economics from the Massachusetts Institute of Technology in Cambridge,
Massachusetts.
Nurit
Benjamini has served as our external director under the Companies Law since December 2020. Since December 2013, Ms. Benjamini currently
serves as the Chief Financial Officer of Crazy Labs Ltd., a world-wide leader in casual and hyper-casual game development, distribution
and innovation. From 2011 to 2013, Ms. Benjamini served as the Chief Financial Officer ofWix.com (NASDAQ: WIX); from 2007 to 2011, she
served as the Chief Financial Officer of CopperGate Communications Ltd., now Sigma Designs Israel Ltd., a subsidiary of Sigma Designs
Inc. (NASDAQ: SIGM) and from 2000 to 2007, she served as the Chief Financial Officer of Compugen Ltd. (NASDAQ:CGEN). Ms. Benjamini currently
serves as an external director and the chairperson of the audit committee of Gamida Cell Ltd. (NASDAQ: GMDA), as an external director
and the chairperson of the audit and compensation committees of BiolineRx Ltd. (NASDAQ: BLRX), and as an external director and the chairperson
of the audit committee of Allot Communications Ltd. (NASDAQ: ALLT). Ms. Benjamini earned both a B.A. degree in economics and business
and an M.B.A. in finance from Bar Ilan University, Israel.
76
Lily
Ayalon has served as our external director under the Companies Law since December
2020. Ms. Ayalon currently is a business consultant and serves on the board of directors for numerous public companies. Since 2015. From
2010 to 2015, Ms. Ayalon served as the Senior Deputy Director General of the Government Companies Authority; from 2006 to 2009, she served
as the Deputy Chief Executive Officer and Executive Directory of a subsidiary of the New Hamashbir Group Ltd. and from 2004 to 2006, she
served as the Chief Financial Officer of Amot Investments. Ms. Ayalon is a certified public accountant and earned both a B.A. degree in
accounting and economics and an M.B.A in finance from the Hebrew University of Jerusalem, Israel.
Roger
Abravanel has served as our director since December 2016. During 2006, Mr. Abravanel retired from McKinsey Company, a global
management consulting firm, which he joined in 1972 and where he had become a principal in 1979 and a director in 1984. Mr. Abravanel
has provided consulting services to Israeli and Italian private and venture capital funds throughout his career. Mr. Abravanel served
as a director of Teva Pharmaceutical Industries Ltd. (TASE: TEVA), a multinational pharmaceutical company, from 2007 to 2017, as a director
of COFIDE—Gruppo De Benedetti SpA., an Italian holding company active in the healthcare and automotive industries, from 2008 until
2013, as a director of Luxottica Group SpA., an Italian premium, luxury and sports eyewear conglomerate, from 2006 to 2014, and as a director
of Admiral Group plc, a car insurance provider in the U.K., from 2012 until 2015. Mr. Abravanel currently serves as a director of Banca
Nazionale del Lavoro (a subsidiary of BNP Paribas), of The Phoenix Holdings Ltd. and of Genenta Science. Mr. Abravanel received a B.Sc.
degree in chemical engineering from the Polytechnic University in Milan in 1968 and an M.B.A. from INSEAD (with distinction) in 1972.
Dori Brown has served as our director since
December 2016. Mr. Brown previously served as our director from December 2006 to March 2012. Mr. Brown joined Tenram Investment Ltd. as
an associate in 2001 and became a partner in 2003. Mr. Brown is one of the founding partners of Tene Investment Funds and has acted as
managing partner since 2004. Mr. Brown currently serves as a director of several Tene Investment Funds’ entities and portfolio companies,
including Optimax investments Ltd., Telefire Ltd., Scodix Ltd., Ha’bonim Industrial Valves Ltd. and Hamadia Doors. Mr. Brown also
holds several private investment companies. Mr. Brown holds an LL.B. degree from Bar Ilan University, Israel.
Ronald
Kaplan has served as our director since December 2015. Mr. Kaplan has served as chairman of the board of directors of Trex Company,
Inc. (NYSE: TREX), a major manufacturer of wood-alternative decking, railings and other outdoor items made from recycled materials, since
August 2015. From May 2010 to August 2015, Mr. Kaplan served as Chairman, President and Chief Executive Officer of Trex Company, Inc.
From January 2008 to May 2010, Mr. Kaplan served as a director and President and Chief Executive Officer of Trex Company, Inc. From February
2006 through December 2007, Mr. Kaplan served as Chief Executive Officer of Continental Global Group, Inc., a manufacturer of bulk material
handling systems. For 26 years prior to this, Mr. Kaplan was employed by Harsco Corporation (NYSE: HSC), an international industrial services
and products company, at which he served in a number of capacities, including as senior vice president, operations, and, from 1994 through
2005, as President of Harsco Corporation’s Gas Technologies Group, which manufactures containment and control equipment for the
global gas industry. Mr. Kaplan received a B.A. in economics from Alfred University and a M.B.A. from the Wharton School of Business,
University of Pennsylvania.
Ofer Tsimchi has served as our director since
December 2014. He is a managing partner of Danbar Group Ltd., a management services firm, which he co-founded in 2006. Mr. Tsimchi served
as the Executive Chairman of the Board of Polysack Plastic Industries Ltd., which develops and manufactures film products for high-shrink
labels, candy wrappers and agro-textiles, from 2008 to 2011. Mr. Tsimchi has been a director of Redhill Biopharma (NASDAQ: RDHL), a specialty
biopharmaceutical company focused on gastrointestinal diseases, since 2011, Maabarot Products Ltd., Israel’s leading developer,
manufacturer, and marketer of a wide range of advanced nutrition and health products for people and pets, since 2014, and Kidron Industrial
Materials Ltd., a manufacturer of chemical preparations, since 2003. From 2003 until 2005, he served as director and Chief Executive Officer
of Kidron Industrial Holdings Ltd. Group, a manufacturer of precision molded plastic products and components. From 2002 until 2003, Mr.
Tsimchi was a Business Development Manager of ProSeed Capital Fund, a venture capital firm. From 2000 until 2001, Mr. Tsimchi acted as
the Chief Executive Officer of Insider Financial Services Ltd. From 1997 until 2000, Mr. Tsimchi served as the Chief Executive Officer
of Inbar Moulded Fiberglass and from 1993 until 1997 as its Vice President of Marketing and Sales. He was the Community Director and Secretary
of Kibbutz Hamadia from 1990 until 1993. Mr. Tsimchi holds a B.Sc. in Economics and Agriculture from the Hebrew University, Israel.
77
Shai
Bober has served as the business manager of Kibbutz Sdot-Yam since June 2019. From 2014 to 2019, Mr. Bober served as Caesarstone’s
maintenance manager. From 2008 to 2003, Mr. Bober served as an electrical and control system engineer in our plants in Israel and in the
U.S. Mr. Bober serves as a director on the financial committee of Kibbutz Sdot-Yam and as Chief Executive Officer of Kibbutz Sdot-Yam
Energy Company Ltd. Mr. Bober holds a Bachelor of Technology degree, in Electrical and Electronics Engineering, from the Afeka Academic
College of Engineering, Israel.
Tom
Pardo Izhaki has served as the Chief Financial Officer of Kibbutz Sdot-Yam since 2017. From 2013 to 2017, Ms. Pardo Izhaki served
as the Chief Financial Officer of the A.T. Group. From 2008 to 2013, she served as a supervisor of the department of assurance services
at PWC Israel and, from 2002 to 2008, in a senior bookkeeping role at Sdot-Yam Marble Tiles Ltd. Ms. Pardo Izhaki holds a B.A. in
Economics and Accounting from Haifa University, and an M.A. in Accounting from Bar-Ilan University, Israel. Ms. Pardo Izhaki is qualified
as a Certified Public Accountant in Israel.
| B. |
Compensation
of Officers and Directors |
The aggregate compensation paid by us
and our subsidiaries to our current executive officers, including stock-based compensation, for the year ended December 31, 2021, was
$8.5 million. This amount includes $0.9 million set aside or accrued to provide pension, severance, retirement or similar benefits or
expenses.
CEO Compensation
Pursuant to a services agreement we entered
into with our Chief Executive Officer, Yuval Dagim, in consideration for services provided by Mr. Dagim, we pay Mr. Dagim monthly compensation
of NIS 205,000 (approximately $66,000), as well as provide benefits that are customary for senior executives in Israel, such as reimbursement
for the costs of a cellular phone and car fuel used in the course of performing his obligations.
Mr. Dagim is also entitled to an annual
cash bonus of up to $840,000 based on quantitative performance goals of which up to $210,000 can be paid as a discretionary bonus subject
to the Board’s evaluation of Mr. Dagim’s performance; provided, however, that such discretionary bonus will not be granted
to the CEO in the event the Company does not have a positive EBITDA for the given fiscal year.
In addition, in August 2019, Mr. Dagim
received a signing bonus in the amount of NIS 400,000 upon the completion of his first year with us (12 months).
In November 2018, Mr. Dagim was granted options to purchase 300,000 ordinary shares of the Company (the
“Options”) and 40,000 RSU’s each representing a right to receive one ordinary
share of the Company(the “CEO’s RSUs”).
The exercise price of the Options is $15.65, which was the closing price of our ordinary shares as traded on Nasdaq at the date of approval
of the grant by our board of directors. The Options and the CEO’s RSU’s were granted in accordance with, and subject to, all
terms and conditions of the Company’s 2011 Incentive Compensation Plan and our customary option agreement, including, among other
things, provisions for the adjustment of the exercise price of the options in case of distribution of dividends. The Options and the CEO’s
RSUs are subject to a vesting schedule over a period of four years, as follows: 25% of the Options and the CEO’s RSUs will vest
upon the lapse of each 12 months following the date Mr. Dagim joined Caesarstone, provided, however, that upon the lapse of the notice
period, the amount of Options and the CEO’s RSUs which is equal to 75,000 and 10,000, respectively, multiplied by a fraction, the
numerator of which will be the period elapsed as of the last date a portion of the Options and the CEO’s RSUs has vested and the
denominator of which will be a 12 months period, will be accelerated and automatically be vested. The Options and the CEO’s RSUs
will fully accelerate and vest in the event of a Change of Control (as such term is defined in the Company’s 2011 Incentive Compensation
Plan).
78
In November 2021, Mr. Dagim was granted
options to purchase 50,000 ordinary shares of the Company (the “New Options”). The
exercise price of the Options is $13.23, which was the closing price of our ordinary shares as traded on Nasdaq at the date of approval
of the grant by our board of directors. The Options were granted in accordance with, and subject to, all terms and conditions of the Company’s
2020 Incentive Compensation Plan and our customary option agreement, including, among other things, provisions for the adjustment of the
exercise price of the options in case of distribution of dividends. The New Options are subject to a vesting schedule over a period of
four years, as follows: 25% of the New Options will vest upon the lapse of each 12 months following the grant date, provided, however,
that upon the lapse of the notice period, the amount of New Options which is equal to 12,500 multiplied by a fraction, the numerator
of which will be the period elapsed as of the last date a portion of the New Options has vested and the denominator of which will be a
12 months period, will be accelerated and automatically be vested. The New Options will fully accelerate and vest in the event of a Change
of Control (as such term is defined in the Company’s 2020 Incentive Compensation Plan). Mr. Dagim may be entitled to exercise the
vested Options, subject to his option agreement and applicable law, until the earlier of (i) 120 days following his adjustment period
(as described below), or (ii) the expiration of the New Options.
Mr. Dagim may be entitled to exercise
his vested Options, subject to his option agreement and applicable law, until the earlier of (i) 120 days following his adjustment period
(as described below), or (ii) the expiration of the Options.
In addition, in the event that within
12 months following the date on which through an event or a transaction or a series of events or transactions, a person, other than the
Kibbutz, beneficially owns more ordinary shares of the Company than the ordinary shares then beneficially owned by Tene, but in no event
not less than 25% of our outstanding ordinary shares, we terminate Mr. Dagim’s engagement with us other than for cause or material
non-performance, all outstanding options and other equity awards then held by Mr. Dagim shall become fully vested and exercisable.
We and Mr. Dagim may each terminate the
agreement (other than for cause) with three (3) months prior written notice. Upon termination by us (not for cause), Mr. Dagim shall be
entitled, in addition to the prior notice period, to an adjustment period of six (6) months. Upon termination by Mr. Dagim, subject to
him completing a twelve (12) month engagement period with us, he shall be entitled in addition to the prior notice period, to an adjustment
period of three (3) months.
Director Compensation
Each of our directors (other than the
Chairman of the board of directors, Mr. Dori Brown, Mr. Roger Abravanel and Mr. Ronald Kaplan) is entitled to the payment of annual fee
of NIS 120,000 (approximately $39,000) and payment of NIS 3,350 (approximately $1,100) per meeting for participating in meetings of the
board and committees of the board. The annual fee shall not exceed the maximum annual fee of an expert external director set forth in
the Companies Regulations (Rules regarding Compensation and Expenses of External Directors) 5760-2000 as adjusted by the Companies Regulations
(Relief for Public Companies with Shares Listed for Trading on a Stock Market Outside of Israel), 5760-2000. The compensation awarded
for participating in resolutions adopted without an actual convening (meaning, unanimous written resolutions) and for participating through
media communication will be reduced as follows: (1) for resolutions that will be adopted without an actual convening, the participation
compensation will be reduced to 50%; and (2) for participation through media communication, the participation compensation will be reduced
to 60%.
Mr. Roger Abravanel is entitled to an
annual fee of $100,000 and a per-meeting fee $2,500 for participation in meetings of the board and committees of the board. Our shareholders
further approved that Mr. Ronald Kaplan is entitled to an annual fee of $75,000 and a per-meeting fee of $2,500 for participation in meetings
of the board and committees of the board. The participating fees of Mr. Abravanel and Mr. Kaplan for meetings held through media communication
shall be reduced by 50% and for meetings by written consent shall be reduced by 75%.
79
Until November 2021, Dr. Ariel Halperin,
our chairman of the board of directors, was entitled to an annual fee in the amount of NIS 750,000 (approximately $233,000), payable in
equal quarterly installments, and Mr. Dori Brown was entitled to the same fees of the other directors (other than the Chairman of the
board of directors, Mr. Roger Abravanel and Mr. Ronald Kaplan). In November 2021, we entered into a management services agreement with
Tene Growth Capital 3 Funds Management Company Ltd., the management company of the general partner of Tene Investment in Projects 2016,
L.P., pursuant to which Tene Investment in Projects 2016, L.P. provides us with the services of an Executive Chairman of the Board (by
Dr. Ariel Halperin), the services of an additional director (by Mr. Dori Brown) and regular business development advice for an aggregate
annual management fee of NIS 870,000 plus VAT. The payment due pursuant to the Management Services Agreement replaced all other arrangements
for payment to Dr. Ariel Halperin and Mr. Dori Brown as Chairman of the board of directors or director during the term of the Management
Services Agreement. For more information on these agreements, see “ITEM 7.B: Major Shareholders and Related Party Transactions—Related
Party Transactions.”
The participation compensation and the
annual fee is inclusive of all expenses incurred by our directors in connection with their participation in a meeting held at our offices
or at the director’s residence area, or with regard to resolutions resolved by written consent or teleconference, provided that
with respect to independent directors residing outside of Israel (other than chairman of the board and external directors), their travel
and lodging expenses related to their participation and physical attendance at any board or board committee meeting will be borne by us.
In addition, our directors are entitled to reimbursement for travelling expenses when traveling abroad on our behalf and other expenses
incurred in the performance of their duties and services to us.
Individual
Covered Executive Compensation
The table below reflects the compensation
granted to our five most highly compensated office holders (as defined in the Companies Law) during or with respect to the year ended
December 31, 2021. We refer to the five individuals for whom disclosure is provided herein as our “Covered Executives.” For
purposes of the table below, “compensation” includes amounts accrued or paid in connection with salary cost, consultancy fees,
bonuses, equity-based compensation, retirement or termination payments, benefits and perquisites such as car, phone and social benefits
and any undertaking to provide such compensation. All amounts reported in the table are in terms of cost to the Company, as recognized
in our financial statements for the year ended December 31, 2021. Each of the Covered Executives was covered by our DO liability
insurance policy and was entitled to indemnification and exculpation in accordance with applicable law and our articles of association.
|
Name and Principal Position
(1) |
Salary (2) |
Bonus (3) |
Equity-Based
Compensation (4) |
All other
compensation (5) |
Total |
|||||||||||||||
|
(in U.S. dollars) |
||||||||||||||||||||
|
Yuval Dagim |
762,492 |
459,853 |
407,195 |
- |
1,629,540 |
|||||||||||||||
|
Ken Williams |
445,524 |
168,353 |
49,043 |
2,394 |
665,314 |
|||||||||||||||
|
Erez Margalit |
399,052 |
93,295 |
48,263 |
14,773 |
555,383 |
|||||||||||||||
|
David Cullen |
387,543 |
95,702 |
54,750 |
6,543 |
544,538 |
|||||||||||||||
|
Efrat Rimer |
319,277 |
85,116 |
113,399 |
16,310 |
534,102 |
|||||||||||||||
| (1) |
All Covered Executives are employed by us on a full time (100%) basis. |
| (2) |
Salary includes the Covered Executive’s gross salary plus payment of social benefits
made by us on behalf of such Covered Executive. Such benefits may include, to the extent applicable to the Covered Executive, payments,
contributions and/or allocations for savings funds (such as managers’ life insurance policy), education funds (referred to in Hebrew
as “keren hishtalmut”), pension, severance, risk insurances (such as life, or work disability insurance), payments for social
security and tax gross-up payments, vacation, medical insurance and benefits, convalescence or recreation pay and other benefits and perquisites
consistent with our policies. |
| (3) |
Represents annual bonuses granted to the Covered Executive based on formulas set forth in
the bonus plans and approvals set forth in the respective resolutions of our compensation committee and the board of directors.
|
| (4) |
Represents the equity-based compensation expenses recorded in our consolidated financial
statements for the year ended December 31, 2021, based on the option’s and RSU’s award’s fair value, calculated in accordance
with accounting guidance for equity-based compensation. For a discussion of the assumptions used in reaching this valuation, see Note
2w to our consolidated financial statements. |
| (5) |
Includes mainly leased car and mobile phone expenses. |
80
Employment and consulting
agreements with executive officers
We have entered into written employment
or service agreements with each of our executive officers.
Employment
agreements
We have entered into written employment
or services agreements with each of our office holders who is not a director. These agreements each contain customary provisions regarding
non-competition, confidentiality of information and assignment of inventions. The non-competition provision generally applies for a period
of six months following termination of employment. The enforceability of covenants not to compete in Israel and the United States is subject
to limitations. In addition, we are required to provide notice of between two and six months prior to terminating the employment of certain
of our senior executive officers other than in the case of a termination for cause. The terms of engagement of our chief executive officer
are described above.
Indemnification
agreements
Our articles of association permit us
to exculpate, indemnify and ensure our directors and office holders to the fullest extent permitted by law, subject to limited exceptions.
We have entered into agreements with each of our current directors and office holders exculpating them from a breach of their duty of
care to us to the fullest extent permitted by law, subject to limited exceptions, and undertaking to indemnify them to the fullest extent
permitted by law. See “ITEM 6.C: Directors, Senior Management and Employees—Board Practices—Exculpation, insurance and
indemnification of office holders.”
Directors’
service contracts
There are no arrangements or understandings
between us and any of our subsidiaries, on the one hand, and any of our directors, on the other hand, providing for benefits upon termination
of their employment or service as directors of our Company or any of our subsidiaries.
Equity incentive plan
In November 2020, we adopted the 2020
Caesarstone Share Incentive Plan (the “2020 Plan”) that replaced our 2011 Incentive
Compensation Plan (the “2011 Plan”). Awards previously issued under the 2011 Plan will
continue to be governed by the terms of the 2011 Plan.
The maximum aggregate number of our shares
available for issuance as awards under the 2020 Plan is (i) 2,500,000 authorized but unissued shares, plus (ii) up to 1,000,000
shares carried over from the 2011 Plan, and shares underlying outstanding awards granted pursuant to the 2011 Plan if expired, cancelled,
terminated, forfeited or settled in cash in lieu of issuance of shares, which will be available for grant of awards pursuant to the 2020
Plan. However, except subject to certain adjustments, in no event will more than 3,500,000 shares be available for issuance pursuant to
the exercise of incentive stock options. As of March 11, 2022, the number of ordinary shares allocated under the 2020 Plan was 431,165
ordinary shares. Considering the number of options and RSUs already granted, as of March 11, 2022, 2,216,720 ordinary shares remained
available for future option or RSU grants under the 2020 Plan. As of March 11, 2022, the number of ordinary shares underlying outstanding
equity awards allocated under the 2011 and 2020 equity incentive plans was 1,740,153 ordinary shares.
Under the 2020 Plan, we provide stock-based
compensation to our directors, executive officers, employees and consultants, and those of our affiliates. The 2020 Plan is intended to
further our success by increasing the ownership interest of certain of our and our subsidiaries employees, directors and consultants and
to enhance our and our subsidiaries ability to attract and retain employees, directors and consultants. See also Note 13 to our financial
statements included elsewhere in this report for additional information about grants of options and RSUs in recent years.
The 2020 Plan provides for granting awards
under various tax regimes, including, without limitation, in compliance with Section 102 of the Israeli Income Tax Ordinance (New Version),
5721-1961 (the “Ordinance”), and Section 3(i) of the Ordinance and for awards granted to our United States employees or service
providers, including those who are deemed to be residents of the United States for tax purposes, Section 422 of the Code and Section 409A
of the Code.
81
Section 102 of the Ordinance allows employees,
directors and officers who are not controlling shareholders and are considered Israeli residents to receive favorable tax treatment for
compensation in the form of shares or options. Our non-employee service providers and controlling shareholders may only be granted options
under section 3(i) of the Ordinance, which does not provide for similar tax benefits.
The 2020 Plan provides for the grant of
stock options (including incentive stock options and nonqualified stock options), ordinary shares, restricted shares, restricted share
units and other share-based awards.
Options granted under the 2020 Plan to
our employees who are U.S. residents may qualify as “incentive stock options” within the meaning of Section 422 of the Code
or may be non-qualified stock options.
In the event of termination of a grantee’s
employment or service with the company or any of its affiliates, all vested and exercisable awards held by such grantee as of the date
of termination may be exercised within one hundred and twenty (120) days after such date of termination, unless otherwise determined by
the administrator, but in any event no later than the date of expiration of the award’s term. After such one hundred and twenty
(120) day period, all unexercised awards will terminate, and the shares covered by such awards shall again be available for issuance under
the 2020 Plan.
In the event of termination of a grantee’s
employment or service with the company or any of its affiliates due to such grantee’s death, permanent disability or retirement,
all vested and exercisable awards held by such grantee as of the date of termination may be exercised by the grantee or the grantee's
legal guardian, estate, or by a person who acquired the right to exercise the award by bequest or inheritance, as applicable, within twelve
months after such date of termination, unless otherwise provided by the administrator, but in any event no later than the date of expiration
of the award’s term. Any awards which are unvested as of the date of such termination or which are vested but not then exercised
within the twelve month period following such date, will terminate and the shares covered by such awards shall again be available for
issuance under the 2020 Plan.
In the event of termination of a grantee’s
employment or service on due to such grantee’s retirement, all exercisable awards held by such grantee as of the date of retirement
may be exercised at any time within the three (3) month period after the date of such retirement, unless otherwise determined by the administrator.
Notwithstanding any of the foregoing,
if a grantee’s employment or services with the company or any of its affiliates is terminated for “cause” (as defined
in the 2020 Plan), all outstanding awards held by such grantee (whether vested or unvested) will terminate on the date of such termination
and the shares covered by such awards shall again be available for issuance under the 2020 Plan, unless otherwise determined by the administrator.
Grant
of stock options to Chief Executive Officer
See “ITEM 6.B: Directors, Senior
Management and Employees—Compensation—CEO Compensation.”
| C. |
Board Practices
|
Corporate governance
practices
As a foreign private issuer, we are permitted
to follow Israeli corporate governance practices instead of Nasdaq corporate governance rules, provided that we disclose which requirements
we are not following and the equivalent Israeli requirement. We rely on this “foreign private issuer exemption” as follows:
As permitted under the Companies Law, pursuant to our articles of association, the quorum required for any meeting of shareholders consists
of at least two shareholders present in person, by proxy or by other voting instrument in accordance with the Companies Law, who hold
at least 25% of the voting power of our shares, instead of 33.33% of the issued share capital required under the Nasdaq requirements.
At an adjourned meeting, any number of shareholders constitutes a quorum for the business for which the original meeting was called.
82
Otherwise, we comply with Nasdaq corporate
governance rules generally applicable to U.S. domestic companies listed on Nasdaq. We may in the future decide to use the foreign private
issuer exemption with respect to some or all the other Nasdaq Global Select Market corporate governance rules. We also comply with Israeli
corporate governance requirements under the Companies Law applicable to public companies.
Board of directors
and officers
As of the date of this report, our board
of directors consists of ten directors, six of whom are independent under the Nasdaq rules, including Ms. Nurit Benjamini and Ms. Lily
Ayalon, who serve as our external directors and whose appointment fulfills the requirements of the Companies Law for the company to have
two external directors (see “—External directors”). Specifically, our board of directors has determined that each of
Ofer Tsimchi, Nurit Benjamini, Lily Ayalon, Ronald Kaplan and Roger Abravanel meets the independence standards under the rules of Nasdaq.
In reaching this conclusion, the board of directors determined, following the recommendation of our nominating committee, that none of
these directors has a relationship that would preclude a finding of independence and any relationships that these directors have with
us do not impair their independence.
Under our articles of association, the
number of directors on our board of directors must be no less than seven and no more than 11 and must include at least two external directors.
The minimum and maximum number of directors may be changed, at any time and from time to time, by a simple majority vote of our shareholders
at a shareholders’ meeting.
Each director holds office until the annual
general meeting of our shareholders in the subsequent year unless the tenure of such director expires earlier pursuant to the Companies
Law or unless he or she is removed from office as described below, except our external directors, who have a term of office of three years
under Israeli law (see “—External directors—Election and dismissal of external directors”).
The directors who are serving in office
shall be entitled to act even if a vacancy occurs on the board of directors. However, should the number of directors, at the time in question,
become less than the minimum set forth in our articles of association, the remaining director(s) would be entitled to act for the purpose
of filling the vacancies or to convene a general meeting, but not for any other purpose.
Any director who retires from his or her
office would be qualified to be re-elected subject to any limitation affecting such director’s appointment as a director under the
Companies Law. See “—External directors” for a description of the provisions relating to the reelection of external
directors.
A general meeting of our shareholders
may remove a director from office prior to the expiry of his or her term in office (“Removed Director”)
by a simple majority vote (except for external directors, who may be dismissed only as set forth under the Companies Law), provided that
the Removed Director is given a reasonable opportunity to state his or her case before the general meeting. If a director is removed from
office as set forth above, the general meeting shall be entitled, in the same session, to elect another director in his or her stead in
accordance with the maximum number of directors permitted by our articles of association as stated above. Should it fail to do so, the
board of directors shall be entitled to do so. Any director who is appointed in this manner shall serve in office for the period remaining
of the term in office of the director who was removed and shall be qualified to be re-elected.
Any amendment of our articles of association
regarding the election of directors, as described above, require a simple majority vote. See “—External directors” for
a description of the procedure for the election of external directors.
In addition, under the Companies Law,
our board of directors must determine the minimum number of directors who are required to have financial and accounting expertise. Under
applicable regulations, a “director with financial and accounting expertise” is a director who, by reason of his or her education,
professional experience and skill, has a high level of proficiency in and understanding of business accounting matters and financial statements
so that he or she is able to fully understand our financial statements and initiate debate regarding the manner in which the financial
information is presented. The determination of whether a director possesses financial and accounting expertise is made by the board of
directors. In determining the number of directors required to have such expertise, the board of directors must consider, among other things,
the type and size of the company and the scope and complexity of its operations. Our board of directors has determined that we require
at least one director with the requisite financial and accounting expertise and that each of Ms. Nurit Benjamini and Ms. Lily Ayalon has
such expertise.
There are no family relationships among any of our office holders (including directors).
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Alternate directors
Our articles of association provide, subject
to the limitations under the Companies Law, that any director may, by written notice to us, appoint another person who is qualified to
serve as a director to serve as an alternate director. The appointment of an alternate director shall be subject to the consent of the
board of directors. The alternate director will be regarded as a director. Under the Companies Law, a person who is not qualified to be
appointed as a director, a person who is already serving as a director or a person who is already serving as an alternate director for
another director, may not be appointed as an alternate director. Nevertheless, a director who is already serving as a director may be
appointed as an alternate director for a member of a committee of the board of directors so long as he or she is not already serving as
a member of such committee, and if the alternate director is to replace an external director, he or she is required to be an external
director and to have either “financial and accounting expertise” or “professional expertise,” depending on the
qualifications of the external director he or she is replacing. A person who does not have the requisite “financial and accounting
experience” or the “professional expertise,” depending on the qualifications of the external director he or she is replacing,
may not be appointed as an alternate director for an external director. A person who is not qualified to be appointed as an independent
director, pursuant to the Companies Law, may not be appointed as an alternate director of an independent director.
External directors
Qualifications
of external directors
Under the Companies Law, companies incorporated
under the laws of the State of Israel that are “public companies,” including companies with shares listed on the Nasdaq Global
Select Market, are required to appoint at least two external directors who meet the qualification requirements under the Companies Law.
Such external directors are not required to be Israeli residents in case the company is listed on a foreign stock exchange (such as us).
Appointment of external directors is made by a special majority resolution of the general meeting of our shareholders. At a shareholders’
meeting held on November 10, 2020, each of Ms. Nurit Benjamini and Ms. Lily Ayalon were elected to serve as external directors of the
Company for a three-year term commencing on December 1, 2020 and expiring on November 30, 2023.
A person may not be appointed as an external
director if the person is a relative of a controlling shareholder or if on the date of the person’s appointment or within the preceding
two years the person or his or her relatives, partners, employers or anyone to whom that person is subordinate, whether directly or indirectly,
or entities under the person’s control have or had any affiliation with any of (each an “Affiliated
Party”): (1) us; (2) any person or entity controlling us on the date of such appointment; (3) any relative of a controlling
shareholder; or (4) any entity controlled, on the date of such appointment or within the preceding two years, by us or by our controlling
shareholder. If there is no controlling shareholder or any shareholder holding 25% or more of voting rights in the company, a person may
not serve as an external director if the person has any affiliation to the chairperson of the board of directors, the general manager
(chief executive officer), any shareholder holding 5% or more of the company’s shares or voting rights or the senior financial officer
as of the date of the person’s appointment.
The term “controlling shareholder”
means a shareholder with the ability to direct the activities of the company, other than by virtue of being an office holder. A shareholder
is presumed to have “control” of the company and thus to be a controlling shareholder of the company if the shareholder holds
50% or more of the “means of control” of the company. “Means of control” is defined as (1) the right to vote at
a general meeting of a company or a corresponding body of another corporation; or (2) the right to appoint directors of the corporation
or its general manager.
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The term “affiliation” includes:
| • |
an employment relationship; |
| • |
a business or professional relationship maintained on a regular basis; |
| • |
control; and |
| • |
service as an office holder, excluding service as a director in a private company
prior to the first offering of its shares to the public if such director was appointed as a director of the private company in order to
serve as an external director following the initial public offering. |
The term “relative” is defined
as a spouse, sibling, parent, grandparent, descendant, spouse’s descendant, sibling and parent and the spouse of each of the foregoing.
The term “office holder” is
defined as a general manager, chief business manager, deputy general manager, vice general manager, or any other person assuming the responsibilities
of any of the foregoing positions, without regard to such person’s title, and a director or manager directly subordinate to the
general manager.
A person may not serve as an external
director if that person or that person’s relative, partner, employer, a person to whom such person is subordinate (directly or indirectly)
or any entity under such person’s control has a business or professional relationship with any entity that has an affiliation with
any Affiliated Party, even if such relationship is intermittent (excluding insignificant relationships). Additionally, any person who
has received compensation intermittently (excluding insignificant relationships) other than compensation permitted under the Companies
Law may not continue to serve as an external director.
No person can serve as an external director
if the person’s position or other affairs create, or may create, a conflict of interest with the person’s responsibilities
as a director or may otherwise interfere with the person’s ability to serve as a director or if such a person is an employee of
the Israel Securities Authority or of an Israeli stock exchange. If at the time an external director is appointed all current members
of the board of directors, who are not controlling shareholders or relatives of controlling shareholders, are of the same gender, then
the external director to be appointed must be of the other gender. In addition, a person who is a director of a company may not be elected
as an external director of another company if, at that time, a director of the other company is acting as an external director of the
first company.
The Companies Law provides that an external
director must either meet certain professional qualifications or have financial and accounting expertise, and that at least one external
director must have financial and accounting expertise. However, if at least one of our other directors (1) meets the independence requirements
of the Exchange Act, (2) meets the Nasdaq requirements for membership on the audit committee and (3) has financial and accounting expertise
as defined in the Companies Law and applicable regulations, then neither of our external directors is required to possess financial and
accounting expertise as long as both possess other requisite professional qualifications as required under the Companies Law and regulations
promulgated thereunder.
The regulations promulgated under the
Companies Law define an external director with requisite professional qualifications as a director who satisfies one of the following
requirements: (1) the director holds an academic degree in either economics, business administration, accounting, law or public administration,
(2) the director either holds an academic degree in any other field or has completed another form of higher education in the company’s
primary field of business or in an area which is relevant to his or her office as an external director in the company, or (3) the director
has at least five years of experience serving in any one of the following, or at least five years of cumulative experience serving in
two or more of the following capacities: (a) a senior business management position in a company with a substantial scope of business,
(b) a senior position in the company’s primary field of business or (c) a senior position in public administration.
Our board of directors has determined
that each of our external directors, Ms. Nurit Benjamini and Ms. Lily Ayalon, qualifies as an “audit committee financial expert,”
as defined by the rules of the SEC, and has the requisite financial experience required by the Nasdaq rules and the Companies Law.
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Under the Companies Law, until the lapse
of a two-year period from the date that an external director has ceased to act as an external director (and until the lapse of a one-year
period, with respect to such external director spouse or children) certain prohibitions apply to the ability of the company and its controlling
shareholders, including any corporations controlled by a controlling shareholder to grant such former external director or his or her
spouse or children any benefits (directly or indirectly).
Election
and dismissal of external directors
Under Israeli law, external directors
are elected by a majority vote at a shareholders’ meeting, provided that either:
| • |
the majority of the shares that are voted at the meeting in favor of the election
of the external director, excluding abstentions, include at least a majority of the votes of shareholders who are not controlling shareholders
or have a personal interest in the appointment (excluding a personal interest that did not result from the shareholder’s relationship
with the controlling shareholder); or |
| • |
the total number of shares held by the shareholders mentioned in the paragraph
above that are voted against the election of the external director does not exceed two percent of the aggregate voting rights in the company.
|
Under Israeli law, the term of office
for external directors for Israeli companies traded on certain foreign stock exchanges, including the Nasdaq Global Select Market, such
as the Company, may be extended, indefinitely, in increments of additional three-year terms, in each case provided that: (i) both the
audit committee and the board of directors confirm that, in light of the expertise and contribution of the external director, the extension
of such external director’s term would be in the interest of the company; (ii) the appointment to the additional term is subject
to the reelection provision described above; and (iii) the term during which the nominee served as an external director and the board
of directors’ and audit committee’s reasoning for the extension of such term were presented before the general meeting of
shareholders prior to the approval of the extension.
An external director may be removed by
the same special majority of the shareholders required for his or her election, if he or she ceases to meet the statutory qualifications
for appointment or if he or she violates his or her fiduciary duty to the company. An external director may also be removed by order of
an Israeli court if the court finds that the external director is permanently unable to exercise his or her office, has ceased to meet
the statutory qualifications for his or her appointment, has violated his or her fiduciary duty to the company, or has been convicted
by a court outside Israel of certain offenses detailed in the Companies Law.
If the vacancy of an external directorship
causes a company to have fewer than two external directors, the company’s board of directors is required under the Companies Law
to call a special general meeting of the company’s shareholders as soon as possible to appoint such number of new external directors
so that the company thereafter has two external directors.
Under the regulations pursuant to the
Companies Law, a public company with securities listed on certain foreign exchanges, including the Nasdaq Global Select Market, that satisfies
the applicable domestic country laws and regulations that apply to companies organized in that country relating to the appointment of
independent directors and composition of audit and compensation committees and have no controlling shareholder may adopt an exemption
from the requirement to appoint external directors or comply with the audit committee and compensation committee composition requirements
under the Companies Law. We may adopt this exemption in the future if we will no longer have a controlling shareholder.
Additional
provisions
Under the Companies Law, each committee
authorized to exercise any of the powers of the board of directors must include only directors and is required to include at least one
external director and each of the audit and compensation committees are required to include all of the external directors.
An external director is entitled to compensation
and reimbursement of expenses in accordance with regulations promulgated under the Companies Law and is prohibited from receiving any
other compensation, directly or indirectly, in connection with serving as an external director except for certain exculpation, indemnification
and insurance provided by the company, as specifically allowed by the Companies Law.
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Audit committee
Our audit committee consists of Ms. Nurit
Benjamini, Ms. Lily Ayalon and Mr. Ofer Tsimchi. Ms. Nurit Benjamini serves as the chairperson of the audit committee.
Companies
Law requirements
Under the Companies Law, the board of
directors of any public company must appoint an audit committee comprised of at least three directors, including all the external directors.
The audit committee may not include:
| • |
the chairperson of the board of directors; |
| • |
a controlling shareholder or a relative of a controlling shareholder; and
|
| • |
any director employed by, or providing services on an ongoing basis to, the company,
a controlling shareholder of the company or an entity controlled by a controlling shareholder of the company or any director who derives
most of his or her income from the controlling shareholder. |
According to the Companies Law, the majority
of the members of the audit committee, as well as the majority of members present at audit committee meetings, are required to be “independent”
(as defined below) and the chairperson of the audit committee is required to be an external director. Any persons disqualified from serving
as a member of the audit committee may not be present at the audit committee meetings, unless the chairperson of the audit committee has
determined that such person is required to be present at the meeting or if such person qualifies under one of the exemptions of the Companies
Law. Without derogating from the aforementioned, under the Companies Law, a company’s general counsel and a company’s secretary,
which are not a controlling shareholder or relative thereof, may be present at an audit committee meeting if the committee has requested
their presence.
The term “independent director”
is defined under the Companies Law as an external director or a director who meets the following conditions and who is appointed or classified
as such according to the Companies Law: (1) the conditions for his or her appointment as an external director (as described above) are
satisfied and the audit committee approves the director having met such conditions and (2) he or she has not served as a director of the
company for over nine consecutive years with any interruption of up to two years of his or her service not being deemed a disruption to
the continuity of his or her service.
Under the regulations promulgated under
the Companies Law, an audit committee of companies such as ours may deem a director which qualifies as an independent director, among
others, under the Nasdaq listing rules, to be an independent director within the meaning of the Companies Law, provided that such director
complies with the Companies Law requirements for external directors with respect to a lack of affiliation with a controlling shareholder,
its relatives and entities under its control or his or her relative’s control, excluding the company itself or any of its subsidiaries.
In addition, companies such as ours may extend the term of office of an independent director who has served for more than nine years for
additional periods of three years each if such director continues to comply with the Companies Law requirements for external director’s
lack of affiliation as described above.
Nasdaq
requirements
Under the Nasdaq rules, we are required
to maintain an audit committee consisting of at least three independent directors, all of whom are financially literate and one of whom
has accounting or related financial management expertise.
All members of our audit committee meet
the requirements for financial literacy under the applicable rules of the SEC and the Nasdaq rules. Our board of directors has determined
that each of Ms. Nurit Benjamini and Ms. Lily Ayalon qualifies as an “audit committee financial expert,” as defined by applicable
rules of the SEC and has the requisite financial experience as defined by Nasdaq rules.
Each of the members of the audit committee is “independent” under the relevant Nasdaq rules
and as defined in Rule 10A-3(b)(1) under the Exchange Act, which is different from the general test for independence of members of the
board.
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Approval
of transactions with related parties
The approval of the audit committee is
required to effect specified actions and transactions with office holders and controlling shareholders and their relatives, or in which
they have a personal interest. See “—Fiduciary duties and approval of specified related party transactions under Israeli law.”
For the purpose of approving transactions with controlling shareholders, the term “controlling shareholder” also includes
any shareholder that holds 25% or more of the voting rights of the company if the company has no shareholder that owns more than 50% of
its voting rights. For purposes of determining the holding percentage stated above, two or more shareholders who have a personal interest
in a transaction that is brought for the company’s approval are deemed as joint holders. The audit committee may not approve an
action or a transaction with a controlling shareholder or with an office holder unless at the time of approval the audit committee meets
the composition requirements under the Companies Law and provided such transaction is in the interest of the Company.
Audit
committee role
Our board of directors has adopted an
audit committee charter setting forth the responsibilities of the audit committee consistent with the rules of the SEC and Nasdaq rules,
which include, among other responsibilities:
| • |
retaining and terminating our independent auditors, subject to board of directors
and shareholder ratification; |
| • |
pre-approval of audit and non-audit services to be provided by the independent
auditors; |
| • |
reviewing with management and our independent directors our quarterly and annual
financial reports prior to their submission to the SEC; and |
| • |
approval of certain transactions with office holders and controlling shareholders
and other related-party transactions. |
Additionally, under the Companies Law,
the role of the audit committee includes the identification of irregularities in our business management, among other things, by consulting
with the internal auditor or our independent auditors and suggesting an appropriate course of action to the board of directors. In addition,
the audit committee or the board of directors, as set forth in the articles of association of the company, is required to approve the
yearly or periodic work plan proposed by the internal auditor. The audit committee is required to assess the company’s internal
audit system and the performance of its internal auditor. The Companies Law also requires that the audit committee assess the scope
of the work and compensation of the company’s external auditor. In addition, the audit committee is required to determine whether
certain related party actions and transactions are “material” or “extraordinary” for the purpose of the requisite
approval procedures under the Companies Law, whether certain transactions with a controlling shareholder will be subject to a competitive
procedure (regardless of whether or not such transactions are deemed extraordinary transactions) and to set forth the approval process
for transactions that are “non-negligible” (meaning, transactions with a controlling shareholder that are classified by the
audit committee as non-negligible, even though they are not deemed extraordinary transactions), as well as determining which types of
transactions would require the approval of the audit committee, optionally based on criteria which may be determined annually in advance
by the audit committee. The audit committee charter states that in fulfilling its role the committee is entitled to demand from us
any document, file, report or any other information that is required for the fulfillment of its roles and duties and to interview any
of our employees or any employees of our subsidiaries in order to receive more details about his or her line of work or other issues that
are connected to the roles and duties of the audit committee.
88
Nominating Committee
We have a nominating committee comprised
of three of our directors, Ms. Nurit Benjamini, Ms. Lily Ayalon and Mr. Ronald Kaplan, each of whom has been determined by our board of
directors to be independent under the applicable Nasdaq rules. Our board of directors has adopted a nominating committee charter setting
forth the responsibilities of the committee which include, among other responsibilities:
| • |
conduct of the appropriate and necessary inquiries into the backgrounds and qualifications
of possible candidates to serve as directors; |
| • |
review and recommend to the board any nominees for election as directors, including
nominees recommended by shareholders, and consideration of the performance of incumbent directors whose terms are expiring in determining
whether to nominate them to stand for re-election; |
| • |
review and recommend to the board regarding board member qualifications, board
composition and structure, and recommend if necessary, measures to be taken so that the board reflects the appropriate balance of knowledge,
experience, skills, expertise and diversity required for the board; and |
| • |
perform such other activities and functions as are required by applicable law,
stock exchange rules or provisions in our articles of association, or as are otherwise necessary and advisable, in its or the board’s
discretion, for the efficient discharge of its duties. |
Compensation Committee
We have a compensation committee consisting
of three of our directors, Ms. Nurit Benjamini, Ms. Lily Ayalon and Mr. Ofer Tsimchi, each of whom has been determined by our board of
directors to be independent under the applicable Nasdaq rules. Ms. Lily Ayalon serves as the Chairperson of the compensation committee.
Our board has adopted a compensation committee charter setting forth the responsibilities of the committee which include, among other
responsibilities:
| • |
reviewing and recommending overall compensation policies with respect to our Chief
Executive Officer and other office holders; |
| • |
reviewing and approving corporate goals and objectives relevant to the compensation
of our Chief Executive Officer and other office holders including evaluating their performance in light of such goals and objectives and
determining their compensation based on such evaluation; |
| • |
reviewing and approving the granting of options and other incentive awards; and
|
| • |
reviewing, evaluating and making recommendations regarding the compensation and
benefits for our non-employee directors. |
The compensation committee is also authorized
to retain and terminate compensation consultants, legal counsel or other advisors to the committee and to approve the engagement of any
such consultant, counsel or advisor, to the extent it deems necessary or appropriate.
Pursuant to the Companies Law, Israeli
public companies are required to appoint a compensation committee comprised of at least three directors, including all the external directors,
who must also constitute a majority of its members. All other members of the compensation committee, who are not external directors, must
be directors who receive compensation that is in compliance with regulations promulgated under the Companies Law. In addition, the chairperson
of the compensation committee must be an external director. The Companies Law further stipulates that directors who are not qualified
to serve on the audit committee, as described above, may not serve on the compensation committee either and that, similar to the audit
committee, generally, any person who is not entitled to be a member of the compensation committee may not attend the compensation committee’s
meetings.
89
The responsibilities of the compensation
committee under the Companies Law include: (i) making recommendations to the board of directors with respect to the approval of the compensation
policy and any extensions thereto; (ii) periodically reviewing the implementation of the compensation policy and providing the board of
directors with recommendations with respect to any amendments or updates thereto; (iii) reviewing and resolving whether or not to approve
arrangements with respect to the terms of office and employment of office holders; and (iv) resolving whether or not to exempt a transaction
with a candidate for chief executive officer from shareholder approval.
Compensation Policy
under the Companies Law
In accordance with the Companies Law,
we have adopted a compensation policy for our executive officers and directors. The purpose of the policy is to describe our overall compensation
strategy for our executive officers and directors and to provide guidelines for setting their compensation, as prescribed by the Companies
Law.
The compensation policy must be determined
and later reevaluated according to certain factors, including: the advancement of the company’s objectives, business plan and long-term
strategy; the creation of appropriate incentives for office holders, while considering, among other things, the company’s risk management
policy; the size and the nature of the company’s operations; and with respect to variable compensation, the contribution of the
office holder towards the achievement of the company’s long-term goals and the maximization of its profits, all with a long-term
objective and according to the position of the office holder.
According to the Israeli Companies Law,
the policy must be reviewed and readopted at least once every three years. The adoption of the compensation policy requires the approval
of the compensation committee, the board of directors and our shareholders, in that order. The shareholders’ approval must include
the majority of shares voted at the meeting. In addition to the majority vote, the shareholder approval must satisfy either of two additional
tests:
| • |
the majority includes at least a majority of the shares voted by shareholders
other than our controlling shareholders or shareholders who have a personal interest in the adoption of the compensation policies; or
|
| • |
the total number of shares held by non-controlling shareholders and disinterested
shareholders that voted against the adoption of the compensation policies, does not exceed 2% of the aggregate voting rights of our company.
|
In accordance with the Companies Law,
our policy was last readopted in November 2020 by the compensation committee, the board of directors and our shareholders, and is filed
as an exhibit to this Annual Report.
Strategy Committee
In February 2017, we established a strategy
committee comprised of three of our directors, Mr. Roger Abravanel, Dr. Ariel Halperin and Mr. Dori Brown. Mr. Roger Abravanel serves
as the chairperson of the strategy committee. The strategy committee maintains an ongoing, cooperative, interactive strategic planning
process with our management, including the identification, setting and maintenance of strategic goals and expectations as well as the
review of potential acquisitions, joint ventures, and strategic alliances. References to our strategy and strategic planning are intended
to focus on our medium- and long-term initiatives versus day to day operations.
90
Compensation
of Directors and Executive Officers
Directors.
Under the Companies Law, the compensation of our directors requires the approval of our compensation committee, the subsequent approval
of the board of directors and, unless exempted under the regulations promulgated under the Companies Law, the approval of the shareholders
at a general meeting. If the compensation of our directors is inconsistent with our Compensation Policy, then shareholder approval will
also be required, as follows:
| • |
at least a majority of the shares held by all shareholders who are not controlling
shareholders and do not have a personal interest in such matter, present and voting at such meeting, are voted in favor of the compensation
package, excluding abstentions; or |
| • |
the total number of shares of non-controlling shareholders and shareholders who
do not have a personal interest in such matter voting against the compensation package does not exceed 2% of the aggregate voting rights
in the company. |
Executive
Officers other than the Chief Executive Officer. The Companies Law requires the compensation of a public company’s executive
officers (other than the chief executive officer) to be approved by, first, the compensation committee; second by the company’s
board of directors and third, if such compensation arrangement is inconsistent with the company’s stated compensation policy, the
company’s shareholders (by a special majority vote as discussed above with respect to the approval of director compensation). However,
if the shareholders of the company do not approve a compensation arrangement with an executive officer (other than the chief executive
officer) that is inconsistent with the company’s stated compensation policy, the compensation committee and board of directors may
override the shareholders’ decision if each of the compensation committee and the board of directors provide detailed reasons for
their decision after reconsidering the compensation arrangement, while taking into consideration that the shareholders of the company
did not approve the compensation arrangement.
Chief
Executive Officer. The compensation of a public company’s chief executive officer requires the approval of first, the company’s
compensation committee; second, the company’s board of directors; and third, the company’s shareholders (by a special majority
vote as discussed above with respect to the approval of director compensation). However, if the shareholders of the company do not approve
the compensation arrangement with the chief executive officer, the compensation committee and board of directors may override the shareholders’
decision if each of the compensation committee and the board of directors provide a detailed report for their decision after reconsidering
the compensation arrangement, while taking into consideration that the shareholders of the company did not approve the compensation arrangement.
The compensation committee and board of
directors approval should be in accordance with the company’s stated compensation policy; however, in special circumstances, they
may approve compensation terms of a chief executive officer that are inconsistent with such policy provided that they have considered
those provisions that must be included in the compensation policy according to the Companies Law and that shareholder approval was obtained
(by a special majority vote as discussed above with respect to the approval of director compensation). The compensation committee may
waive the shareholder approval requirement with regards to the approval of the engagement terms of a candidate for the chief executive
officer position, if they determine that the compensation arrangement is consistent with the company’s stated compensation policy,
the chief executive officer did not have a business relationship with the company or a controlling shareholder of the company and that
having the engagement transaction subject to a shareholder vote would impede the company’s ability to employ the chief executive
officer candidate.
Notwithstanding the above, the amendment
of existing compensation terms of executive officers (including the chief executive officer and excluding officers who are also directors),
requires only the approval of the compensation committee, provided that the committee determines that the amendment is not material in
relation to the existing terms.
Internal auditor
Under the Companies Law, the board of
directors of a public company must appoint an internal auditor based on the recommendation of the audit committee. The role of the internal
auditor is, among other things, to examine whether a company’s actions comply with applicable law and orderly business procedure.
Under the Companies Law, the internal auditor may not be an interested party or an office holder or a relative of an interested party
or of an office holder, nor may the internal auditor be the company’s independent auditor or the representative of the same.
An “interested party” is defined in the Companies Law as (i) a holder of 5% or more of the
issued share capital or voting power in a company, (ii) any person or entity who has the right to designate one or more directors or to
designate the chief executive officer of the company, or (iii) any person who serves as a director or as a chief executive officer of
the company. Our internal auditor is Mr. Ofer Orlitzky of Leon, Orlitzky and Co.
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Fiduciary duties and
approval of specified related party transactions under Israeli law
Fiduciary
duties of office holders
The Companies Law imposes a duty of care
and a duty of loyalty on all office holders of a company.
The duty of care requires an office holder
to act with the degree of proficiency with which a reasonable office holder in the same position would have acted under the same circumstances.
The duty of care includes, among other things, a duty to use reasonable means, in light of the circumstances, to obtain:
| • |
information on the business advisability of a given action brought for his or
her approval or performed by virtue of his or her position; and |
| • |
all other important information pertaining to such action. |
The duty of loyalty incumbent on an office
holder requires him or her to act in good faith and for the benefit of the company, and includes, among other things, the duty to:
| • |
refrain from any act involving a conflict of interest between the performance
of his or her duties in the company and his or her other duties or personal affairs; |
| • |
refrain from any activity that is competitive with the business of the company;
|
| • |
refrain from exploiting any business opportunity of the company for the purpose
of gaining a personal advantage for himself or herself or others; and |
| • |
disclose to the company any information or documents relating to the company’s
affairs which the office holder received as a result of his or her position as an office holder. |
We may approve an act specified above
which would otherwise constitute a breach of the office holder’s duty of loyalty, provided that the office holder acted in good
faith, the act or its approval does not harm the company, and the office holder discloses his or her personal interest, including any
related material information or document, a sufficient time before the approval of such act. Any such approval is subject to the terms
of the Companies Law, setting forth, among other things, the organs of the company entitled to provide such approval, and the methods
of obtaining such approval.
Disclosure
of personal interest of an office holder and approval of related party transactions
The Companies Law requires that an office
holder promptly disclose to the company any personal interest that he or she may have and all related material information or documents
relating to any existing or proposed transaction by the company. An interested office holder’s disclosure must be made promptly
and, in any event, no later than the first meeting of the board of directors at which the transaction is considered. An office holder
is not obliged to disclose such information if the personal interest of the office holder derives solely from the personal interest of
his or her relative in a transaction that is not considered as an extraordinary transaction.
Under the Companies Law, once an office
holder has complied with the above disclosure requirement, a company may approve a transaction between the company and the office holder
or a third party in which the office holder has a personal interest, pursuant to the certain procedures as set forth in the Companies
Law. However, a company may not approve a transaction or action that is not to the company’s benefit.
92
Under the Companies Law, unless the articles
of association of a company provide otherwise, a transaction with an office holder or with a third party in which the office holder has
a personal interest, which is not an extraordinary transaction, requires the approval by the board of directors. Our articles of association
provide that such a transaction, which is not an extraordinary transaction, shall be approved by the board of directors or a committee
of the board of directors or any other entity (which has no personal interest in the transaction) authorized by the board of directors.
If the transaction considered is an extraordinary transaction with an office holder or a third party in which the office holder has a
personal interest, then audit committee approval is required prior to approval by the board of directors. For the approval of compensation
arrangements with directors and executive officers, see “— Compensation of Directors and Executive Officers.”
Any person who has a personal interest
in the approval of a transaction that is brought before a meeting of the board of directors or the audit committee may not be present
at the meeting or vote on the matter. However, if the chairman of the board of directors or the chairman of the audit committee, as applicable,
has determined that the presence of an office holder with a personal interest is required, such office holder may be present at the meeting
for the purpose of presenting the matter. Notwithstanding the foregoing, a director who has a personal interest may be present at the
meeting of the audit committee or the board of directors and vote on the matter if a majority of the directors or members of the audit
committee, as applicable, have a personal interest in the approval of such transaction. If a majority of the directors at a board of directors
meeting have a personal interest in the transaction, such transaction also requires approval of the shareholders of the company.
A “personal interest” is defined
under the Companies Law as the personal interest of a person in an action or in a transaction of the company, including the personal interest
of such person’s relative or the interest of any other corporate body in which the person and/or such person’s relative is
a director or general manager, a holder of 5% or more of the issued and outstanding share capital of the company or its voting rights,
or has the right to appoint at least one director or the general manager, but excluding a personal interest stemming solely from the fact
of holding shares in the company. A personal interest also includes (1) a personal interest of a person who votes according to a proxy
of another person, including in the event that the other person has no personal interest, and (2) a personal interest of a person who
gave a proxy to another person to vote on his or her behalf regardless of whether the discretion of how to vote lies with the person voting
or not.
An “extraordinary transaction”
is defined under the Companies Law as any of the following:
| • |
a transaction other than in the ordinary course of business; |
| • |
a transaction that is not on market terms; or |
| • |
a transaction that may have a material impact on the company’s profitability,
assets or liabilities. |
93
Disclosure
of personal interests of a controlling shareholder and approval of transactions
The Companies Law also requires that a
controlling shareholder promptly disclose to the company any personal interest that he or she may have and all related material information
or documents relating to any existing or proposed transaction by the company. A controlling shareholder’s disclosure must be made
promptly and, in any event, no later than the first meeting of the board of directors at which the transaction is considered. See “—Audit
committee—Approval of transactions with related parties” for the definition of a controlling shareholder. Extraordinary transactions
with a controlling shareholder or in which a controlling shareholder has a personal interest, including a private placement in which a
controlling shareholder has a personal interest, and the terms of engagement of the company, directly or indirectly, with a controlling
shareholder or a controlling shareholder’s relative (including through a corporation controlled by a controlling shareholder), regarding
the company’s receipt of services from the controlling shareholder, and if such controlling shareholder is also an office holder
or an employee of the company, regarding his or her terms of service or employment, require the approval of each of (i) the audit committee
or the compensation committee with respect to the terms of the engagement of the company, (ii) the board of directors and (iii) the shareholders,
in that order. In addition, the shareholder approval must fulfill one of the following requirements:
| • |
a majority of the shares held by shareholders who have no personal interest in
the transaction and are voting at the meeting must be voted in favor of approving the transaction, excluding abstentions; or |
| • |
the shares voted by shareholders who have no personal interest in the transaction
who vote against the transaction represent no more than 2% of the voting rights in the company. |
In addition, any extraordinary transaction
with a controlling shareholder or in which a controlling shareholder has a personal interest with a term of more than three years requires
the approval described above, every three years; however, transactions not involving the receipt of services or compensation can be approved
for a longer term, provided that the audit committee determines that such longer term is reasonable under the circumstances.
The Companies Law requires that every
shareholder that participates, in person, by proxy or by voting instrument in a vote regarding a transaction with a controlling shareholder,
must indicate in advance or in the ballot whether or not that shareholder has a personal interest in the vote in question. Failure to
so indicate will result in the invalidation of that shareholder’s vote.
Duties
of shareholders
Under the Companies Law, a shareholder
has a duty to refrain from abusing its power in the company and to act in good faith and in an acceptable manner in exercising its rights
and performing its obligations to the company and to other shareholders, including, among other things, when voting at meetings of shareholders
on the following matters:
| • |
an amendment to the articles of association; |
| • |
an increase in the company’s authorized share capital; |
| • |
a merger; and |
| • |
the approval of related party transactions and acts of office holders that require
shareholder approval. |
A shareholder also has a general duty
to refrain from discriminating against other shareholders.
The remedies generally available upon
a breach of contract will also apply to a breach of the shareholder duties mentioned above, and in the event of discrimination against
other shareholders, additional remedies are available to the injured shareholder.
In addition, any controlling shareholder,
any shareholder that knows that its vote can determine the outcome of a shareholder vote and any shareholder that, under a company’s
articles of association, has the power to appoint or prevent the appointment of an office holder, or any other power with respect to a
company, is under a duty to act with fairness towards the company. The Companies Law does not describe the substance of this duty except
to state that the remedies generally available upon a breach of contract will also apply in the event of a breach of the duty to act with
fairness, taking the shareholder’s position in the company into account.
Approval
of private placements
Under the Companies Law and the regulations
promulgated thereunder, a private placement of securities does not require approval at a general meeting of the shareholders of a company;
provided however, that in special circumstances, such as a private placement completed in lieu of a special tender offer (see “ITEM
10.B: Additional Information—Memorandum and Articles of Association—Acquisitions under Israeli law”) or a private placement
which qualifies as a related party transaction (see “—Fiduciary duties and approval of specified related party transactions
under Israeli law”), approval at a general meeting of the shareholders of a company is required.
94
Code
of Conduct and Business Ethics
Our board of directors adopted a written
Code of Business Conduct and Ethics setting forth our expectations regarding personal and corporate conduct for all of our directors,
officers, employees and representatives. For more information, see “Item 16B. Code of Ethics.”
Exculpation, insurance
and indemnification of office holders
Under the Companies Law, a company may
not exculpate an office holder from liability for a breach of the duty of loyalty. An Israeli company may exculpate an office holder in
advance from liability to the company, in whole or in part, for damages caused to the company as a result of a breach of duty of care
but only if a provision authorizing such exculpation is included in its articles of association. Our articles of association include such
a provision. The company may not exculpate in advance a director from liability arising out of a prohibited dividend or distribution to
shareholders.
Under the Companies Law and the Securities
Law, 5728—1968 (“Securities Law”), a company may indemnify an office holder in
respect of the following liabilities, payments and expenses incurred for acts performed by him as an office holder, either in advance
of an event or following an event, provided its articles of association include a provision authorizing such indemnification:
| • |
a monetary liability incurred by or imposed on him or her in favor of another
person pursuant to a judgment, including a settlement or arbitrator’s award approved by a court. However, if an undertaking to indemnify
an office holder with respect to such liability is provided in advance, then such undertaking must be limited to certain events, which,
in the opinion of the board of directors, can be foreseen based on the company’s activities when the undertaking to indemnify is
given, and to an amount or according to criteria determined by the board of directors as reasonable under the circumstances, and such
undertaking shall detail the foreseen events described above and amount or criteria; |
| • |
reasonable litigation expenses, including reasonable attorneys’ fees, incurred
by the office holder as a result of an investigation or proceeding instituted against him or her by an authority authorized to conduct
such investigation or proceeding, provided that (i) no indictment was filed against such office holder as a result of such investigation
or proceeding; and (ii) no financial liability, was imposed upon him or her as a substitute for the criminal proceeding as a result of
such investigation or proceeding or, if such financial liability was imposed, it was imposed with respect to an offense that does not
require proof of criminal intent or in connection with a monetary sanction; |
| • |
a monetary liability imposed on him or her in favor of an injured party at an
Administrative Procedure (as defined below) pursuant to Section 52(54)(a)(1)(a) of the Securities Law; |
| • |
expenses incurred by an office holder or certain compensation payments made to
an injured party that were instituted against an office holder in connection with an Administrative Procedure under the Securities Law,
including reasonable litigation expenses and reasonable attorneys’ fees; and |
| • |
reasonable litigation expenses, including attorneys’ fees, incurred by the
office holder or imposed by a court in proceedings instituted against him or her by the company, on its behalf, or by a third party, or
in connection with criminal proceedings in which the office holder was acquitted, or as a result of a conviction for an offense that does
not require proof of criminal intent. |
An “Administrative Procedure”
is defined as a procedure pursuant to chapters H3 (Monetary Sanction by the Israeli Securities Authority), H4 (Administrative Enforcement
Procedures of the Administrative Enforcement Committee) or I1 (Arrangement to prevent Procedures or Interruption of procedures subject
to conditions) to the Securities Law.
Under the Companies Law and the Securities
Law, a company may insure an office holder against the following liabilities incurred for acts performed by him or her as an office holder
if and to the extent provided in the company’s articles of association:
| • |
a breach of duty of loyalty to the company, provided that the office holder acted
in good faith and had a reasonable basis to believe that the act would not harm the company; |
95
| • |
a breach of duty of care to the company or to a third party, to the extent such
a breach arises out of the negligent conduct of the office holder; |
| • |
a monetary liability imposed on the office holder in favor of a third party;
|
| • |
a monetary liability imposed on the office holder in favor of an injured party
at an Administrative Procedure pursuant to Section 52(54)(a)(1)(a) of the Securities Law; and |
| • |
expenses incurred by an office holder in connection with an Administrative Procedure
instituted against him or her, including reasonable litigation expenses and reasonable attorneys’ fees. |
Under the Companies Law, a company may
not indemnify, exculpate or insure an office holder against any of the following:
| • |
a breach of a duty of loyalty, except for indemnification and insurance for a
breach of the duty of loyalty to the company to the extent that the office holder acted in good faith and had a reasonable basis to believe
that the act would not prejudice the company; |
| • |
a breach of duty of care committed intentionally or recklessly, excluding a breach
arising out of the negligent conduct of the office holder; |
| • |
an act or omission committed with intent to derive illegal personal benefit; or
|
| • |
a fine, monetary sanction or forfeit levied against the office holder. |
Under the Companies Law, exculpation,
indemnification and insurance of office holders must be approved by the compensation committee and the board of directors and, with respect
to directors or controlling shareholders, their relatives and third parties in which such controlling shareholders have a personal interest,
also by the shareholders.
Our articles of association permit us
to exculpate, indemnify and ensure our office holders to the fullest extent permitted or to be permitted by law. Our office holders are
currently covered by a directors and officers’ liability insurance policy. We have agreements with each of our current office holders
exculpating them from a breach of their duty of care to us to the fullest extent permitted by law, subject to limited exceptions, and
undertaking to indemnify them to the fullest extent permitted by law, subject to limited exceptions. This indemnification is limited to
events determined as foreseeable by the board of directors based on our activities, and to an amount or according to criteria determined
by the board of directors as reasonable under the circumstances. The maximum aggregate amount of indemnification that we may pay to our
office holders based on such indemnification agreement is an amount equal to 25% of our shareholders’ equity on a consolidated basis,
less a provision that was made for indemnification as stated, based on our most recent financial statements made publicly available before
the date on which the indemnification payment was made. Such indemnification amounts are in addition to any insurance amounts. Each office
holder who previously received an indemnification letter from us and agreed to receive this new letter of indemnification, gave his approval
to the termination of all previous letters of indemnification that we have provided to him or her in the past, if any; however, in the
opinion of the SEC, indemnification of office holders for liabilities arising under the Securities Act is against public policy and therefore
unenforceable.
We previously entered into letters of
indemnification with some former office holders that currently remain in effect, and pursuant to which we undertook to indemnify them
with respect to certain liabilities and expenses then permitted under the Companies Law, which are similar to those described above. These
letters of indemnification are limited to foreseeable events that were determined by the board of directors and indemnity payments are
limited to a maximum amount of $2.0 million for one series of related events for each office holder.
96
D. Employees
As of December 31, 2021, we had 2,272
employees, of whom 697 were based in Israel, including 28 individuals who provide services to us through our manpower agreement (“Manpower
Agreement”) with Kibbutz Sdot-Yam, discussed below, and with whom we do not have employment relationships, 724 employees
in the United States (including 193 employees in our Richmond Hill facility), 126 employees in Australia, 134 in Canada, 513 in India,
54 in the United Kingdom and 24 in Asia. The following table shows the breakdown of our global workforce by category of activity as of
December 31 for the past three fiscal years:
|
As of December 31, |
||||||||||||
|
Department |
2021 |
2020 |
2019 |
|||||||||
|
Manufacturing and operations |
1,397 |
1,222 |
911 |
|||||||||
|
Research and development |
24 |
26 |
15 |
|||||||||
|
Sales, marketing, service and support |
651 |
580 |
424 |
|||||||||
|
Management and administration |
200 |
171 |
151 |
|||||||||
|
Total |
2,272 |
1,999 |
1,501 |
|||||||||
_________
The size of our global workforce increased
by 273 employees in 2021. Such increase is primarily attributed to the ramping up of the Lioli facility and the additional support necessary
to meet the increased demand primarily in the U.S.
Israeli labor laws (applicable to our
Israeli employees) govern the length of the workday, minimum wages for employees, procedures for hiring and dismissing employees, determination
of severance pay, annual leave, sick days, advance notice of termination of employment, equal opportunity and anti-discrimination laws
and other conditions of employment. Subject to certain exceptions, Israeli law generally requires severance pay upon the retirement, death
or dismissal of an employee, and requires us and our employees to make payments to the NII, which is similar to the U.S. Social Security
Administration. Our employees have pension plans in accordance with the applicable Israeli legal requirements.
None of our employees work under any collective
bargaining agreements. Extension orders issued by the IMEI apply to us and affect matters such as cost of living adjustments to salaries,
length of working hours and week, recuperation pay, travel expenses, and pension rights. We have never experienced labor-related work
stoppages or strikes and, while there can be no assurance that we will not experience any, we believe that our relations with our employees
are satisfactory.
97
E. Share Ownership
Beneficial Ownership
of Executive Officers and Directors
The following table sets forth certain
information regarding the beneficial ownership of our ordinary shares as of March 11, 2022, of each of our directors and executive officers.
|
Name of Beneficial Owner |
Number of Shares Beneficially Held(1) |
Percent of Class |
||||||
|
Executive Officers |
||||||||
|
Yuval Dagim |
* |
* |
||||||
|
Nahum Trost |
* |
* |
||||||
|
David Cullen |
* |
* |
||||||
|
Ken Williams |
* |
* |
||||||
|
Amir Reske |
* |
* |
||||||
|
Idit Maayan Zohar |
* |
* |
||||||
|
Efrat Rimer |
* |
* |
||||||
|
Amihai Seider |
* |
* |
||||||
|
Erez Margalit |
* |
* |
||||||
|
Ron Mosberg |
* |
* |
||||||
|
Efrat Yitzhaki |
* |
* |
||||||
|
Eyal Levy |
* |
* |
||||||
|
Directors |
||||||||
|
Dr. Ariel Halperin(2) |
* |
* |
||||||
|
Nurit Benjamini |
* |
* |
||||||
|
Lily Ayalon |
* |
* |
||||||
|
Roger Abravanel |
* |
* |
||||||
|
Dori Brown |
* |
* |
||||||
|
Ronald Kaplan |
* |
* |
||||||
|
Ofer Tsimchi |
* |
* |
||||||
|
Shai Bober |
* |
* |
||||||
|
Tom Pardo Izhaki |
* |
* |
||||||
|
All current directors and executive officers
as a group (21 persons)(2) |
||||||||
_________
| * |
Less than one percent of the outstanding ordinary shares. |
| (1) |
As used in this table, “beneficial ownership” means the sole or shared power
to vote or direct the voting or to dispose or direct the disposition of any security. For purposes of this table, a person is deemed to
be the beneficial owner of securities that can be acquired within 60 days from March 11, 2022, through the exercise of any option or warrant.
Ordinary shares subject to options that are currently exercisable or exercisable within 60 days, or other awards that are convertible
into our ordinary shares within 60 days, are deemed outstanding for computing the ownership percentage of the person holding such options
or other agreements, but are not deemed outstanding for computing the ownership percentage of any other person. The amounts and percentages
are based upon 34,475,995 ordinary shares outstanding as March 11, 2022. |
All our shareholders, including the shareholders
listed above, have the same voting rights attached to their ordinary shares. See “ITEM 10.B: Additional Information—Memorandum
and Articles of Association—Voting.”
Our directors and executive
officers hold, in the aggregate, (i) 632,109 options immediately exercisable or exercisable within 60 days from March 11, 2022 with. a
weighted average exercise price of $18.2 per share and have expiration dates generally seven years after the grant date, and (ii) 50,192
RSUs that vest within 60 days from March 11, 2022.
| (2) |
Includes 14,029,494 ordinary shares beneficially owned by Tene Investment in Projects 2016,
L.P. (“Tene”). As further described in footnote (2) under “ITEM 7.A: Major Shareholders
and Related Party Transactions—Major Shareholders,” Each of Dr. Halperin, Tene Growth Capital III (G.P.) Company Ltd. (“Tene
III”), and Tene Growth Capital 3 (Fund 3 G.P.) Projects, L.P (“Tene III Projects”)
may be deemed to share voting power over the 14,029,494 ordinary shares and dispositive power over the 5,589,494 ordinary shares, in each
case, beneficially owned by Tene. See “ITEM 7.A: Major Shareholders and Related Party Transactions—Major Shareholders.”
|
ITEM
7: Major Shareholders and Related Party Transactions
| A. |
Major Shareholders |
The following table sets forth certain
information regarding the beneficial ownership of our outstanding ordinary shares as of the date indicated below, by each person who we
know beneficially owns 5.0% or more of the outstanding ordinary shares. For information on the beneficial ownership of each of our directors
and executive officers individually and as a group, see “ITEM 6.E: Directors, Senior Management and Employees—Share Ownership.”
Beneficial ownership of ordinary shares
is determined in accordance with the rules of the SEC and generally includes any ordinary shares over which a person exercises sole or
shared voting or investment power, or the right to receive the economic benefit of ownership. For purposes of the table below, we deem
shares subject to options or other agreements that are currently exercisable or exercisable within 60 days of March 11, 2022, to be outstanding
and to be beneficially owned by the person holding the options for the purposes of computing the percentage ownership of that person but
we do not treat them as outstanding for the purpose of computing the percentage ownership of any other person. The amounts and percentages
are based upon 34,475,995 ordinary shares outstanding as of March 11, 2022.
All our shareholders, including the shareholders
listed below, have the same voting rights attached to their ordinary shares. See “ITEM 10.B: Additional Information—Memorandum
and Articles of Association—Voting.”
A description of any material relationship
that our principal shareholders have had with us or any of our predecessors or affiliates within the past three years is included below
under “—Related Party Transactions.”
98
|
Name of Beneficial
Owner |
Number of Shares Beneficially Owned
|
Percentage of Shares Beneficially Held
|
||||||
|
Mifalei Sdot-Yam Agricultural Cooperative
Society Ltd. (1)(3) |
14,029,494 |
40.7 |
% | |||||
|
Tene Investment in Projects 2016, L.P.(2)(3)
|
14,029,494 |
40.7 |
% | |||||
|
The Phoenix Holdings Ltd. (4) |
2,287,901 |
6.6 |
% | |||||
|
Global Alpha Capital Management Ltd. (5)
|
2,209,741 |
6.4 |
% | |||||
|
BlackRock, Inc. (6) |
1,906,485 |
5.5 |
% | |||||
(1) Based on a Schedule 13D/A filed on
October 28, 2019 by Mifalei Sdot-Yam Agricultural Cooperative Society Ltd. (“Mifalei Sdot-Yam”).
Mifalei Sdot-Yam is controlled by Sdot-Yam Business, Holding and Management – Agricultural Cooperative Society Ltd., which is in
turn controlled by Kibbutz Sdot-Yam. Mifalei Sdot-Yam holds shared voting power, over 14,029,494 ordinary shares and sole dispositive
power over 10,440,000 ordinary shares. No individual member of Mifalei Sdot-Yam has dispositive power or casting vote over the ordinary
shares. The Economic Council elected by the members of Kibbutz Sdot-Yam manages the economic activities and strategy of Kibbutz Sdot-Yam.
The Economic Council takes its decisions by majority vote and currently has eleven members, including Shai Bober and Tom Pardo, which
are directors on our board. The address of Kibbutz Sdot-Yam is MP Menashe 3780400, Israel. Our
board of directors operates independently from the Economic Council.
Kibbutz Sdot-Yam is a communal society,
referred to in Hebrew as a “kibbutz” (plural “kibbutzim”) with approximately
460 members and an additional 350 residents located in Israel on the Mediterranean coast between Tel Aviv and Haifa. Established in 1940,
Kibbutz Sdot-Yam is a largely self-governed community of members who share certain social ideals and professional interests on a communal
basis. Initially, the social idea behind the formation of the kibbutzim in Israel was to create a communal society in which all members
share equally in all the society’s resources and which provides for the needs of the community. Over the years, the structure of
the kibbutzim has evolved, and today there are a number of different economic and social arrangements adopted by various kibbutzim.
Today, each member of Kibbutz Sdot-Yam
continues to own an equal part of the assets of the Kibbutz. The members of Kibbutz Sdot-Yam are engaged in a number of economic activities,
including agriculture, industrial operations and outdoor venue operations. A number of Kibbutz members are engaged in professions outside
the Kibbutz. The Kibbutz is the owner and operator of several private companies. The Kibbutz community holds in common all land, buildings
and production assets of these companies.
Some of the members of Kibbutz Sdot-Yam
work in one of the production activities of Kibbutz Sdot-Yam, according to the requirements of Kibbutz Sdot-Yam and the career objectives
of the individual concerned. Other members work outside of Kibbutz Sdot-Yam in businesses owned by other entities. Each member receives
income based on the position the member holds and his or her economic contribution to the community, as well as on the size and composition
of his or her family. Each member’s income depends on the income of Kibbutz Sdot-Yam from its economic activities. Each member has
a personal pension fund that is funded by Kibbutz Sdot-Yam, and all accommodation, educational, health and old age care services, as well
as social and municipal services, are provided either by or through Kibbutz Sdot-Yam and are subsidized by Kibbutz Sdot-Yam.
The elected Economic Council is the key
economic decision-making body of Kibbutz Sdot-Yam. Kibbutz Sdot-Yam also has a General Secretary (chairman) and other senior officers,
all of whom are elected by the members of Kibbutz Sdot-Yam at its General Meeting for terms of seven years. A meeting of the members of
the Kibbutz may remove a member of the Economic Council by simple majority vote.
As of December 31, 2021, 28 of our employees,
or 1.2% of our total workforce, were also members of Kibbutz Sdot-Yam.
(2) Based on a Schedule 13D/A filed on
October 28, 2020 and on information provided to the Company by the beneficial owner, Tene Investment in Projects 2016, L.P. (“Tene”)
has shared voting power over 14,029,494 ordinary shares and shared dispositive power over 5,589,494, consisting of (i) 3,589,494 ordinary
shares, which it directly owns, and (ii) 2,000,000 ordinary shares underlying an immediately exercisable call option (“Call
Option”) from Mifalei Sdot-Yam, which it directly owns pursuant to the Shareholders’
Agreement (as defined below) with Mifalei Sdot-Yam. Pursuant to the Shareholders’ Agreement, Tene also shares voting power over
10,440,000 Ordinary Shares beneficially owned by Mifalei Sdot-Yam. Dr. Ariel Halperin is the sole director of Tene Growth Capital III
(G.P.) Company Ltd. (“Tene III”), which is the general partner of Tene Growth Capital
3 (Fund 3 G.P.) Projects, L.P (“Tene III Projects”), which is the general partner of
Tene. Dr. Halperin is also a member of our board of directors. Each of Dr. Halperin, Tene III and Tene III Projects may thus be deemed
to share voting power over the 14,029,494 ordinary shares and dispositive power over the 5,589,494 ordinary shares, in each case, beneficially
owned by Tene.
99
(3) On October 13, 2016, based on approval
from the Israeli Antitrust Commission, Mifalei Sdot-Yam and Tene entered into the shareholders’ agreement (“Shareholders’
Agreement”), memorialized in a term sheet signed by Mifalei Sdot-Yam and Tene on September 5, 2016 and further amended on
February 20, 2018. Pursuant to the Shareholders’ Agreement:
| • |
The parties agreed to vote at general meetings of our shareholders in the same
manner, following discussions intended to reach an agreement on any matters proposed to be voted upon, with Tene determining the manner
in which both parties will vote if no agreement is reached, except with respect to certain carved-out matters, with respect to which Mifalei
Sdot-Yam will determine the manner in which both parties will vote if no agreement is reached. |
| • |
The parties agreed to use their best efforts to prevent any dilutive transactions
that would reduce Mifalei Sdot-Yam’s holdings in us below 26% on a fully diluted basis, provided that such agreement will not apply
as of the date on which the percentage of Mifalei Sdot-Yam’s holdings decreases below 26% of our outstanding shares on a fully diluted
basis, for any reason whatsoever, or if Mifalei Sdot-Yam receives a satisfactory written certification from the Israel Land Authority
permitting Mifalei Sdot-Yam’s holdings in us to decrease below 26%. Subject to certain exceptions, Mifalei Sdot-Yam will also continue
to hold at least 6,850,000 of our ordinary shares for the seven-year term of the Shareholders’ Agreement, and in no case fewer than
the number of ordinary shares that would permit Tene to exercise the Call Option in full. |
| • |
The parties agreed to use their best efforts to cause that at least four directors
be elected to our board (one identified by Mifalei Sdot-Yam, two identified by Tene and another identified by Mifalei Sdot-Yam with Tene’s
consent), provided that the parties will not propose a resolution at a general meeting of our shareholders that will contradict a recommendation
of our board on elections. |
| • |
The parties granted each other certain tag-along rights with respect to their
dispositions of ordinary shares. |
(4) Based on Schedule 13G/A filed with
the SEC on February 7, 2022 by The Phoenix Holdings Ltd., as of December 31, 2021, The Phoenix Holdings Ltd. held shared voting and dispositive
power over 2,287,901 ordinary shares. These ordinary shares are beneficially owned by various direct or indirect, majority or wholly owned
subsidiaries of The Phoenix Holding Ltd. (the “Subsidiaries”). The Subsidiaries manage
their own funds and/or the funds of others, including for holders of exchange-traded notes or various insurance policies, members of pension
or provident funds, unit holders of mutual funds, and portfolio management clients. Each of the Subsidiaries operates under independent
management and makes its own independent voting and investment decisions. The address of The Phoenix Holding Ltd. is Derech Hashalom 53,
Givataim, 53454, Israel.
(5) Based on Schedule 13G/A filed with
the SEC on February 7, 2022 by Global Alpha Capital Management Ltd., as of December 31, 2021, Global Alpha Capital Management Ltd held
sole voting power over 2,066,599 ordinary shares, and sole dispositive power over 2,209,741 ordinary shares. The address of the Global
Alpha Capital Management Ltd. is 1800 McGill College, Suite 1300, Montreal, Quebec, H3A 3J6, Canada.
(6) Based on Schedule 13G/A filed with
the SEC on February 3, 2022 by BlackRock Inc., as of December 31, 2021, BlackRock Inc. held sole voting power over 1,873,072 ordinary
shares, and sole dispositive power over 1,906,485 ordinary shares. The address of the BlackRock Inc. is 55 East 52nd Street, New York,
NY 10055.
100
Changes in Ownership
Prior to our IPO in March 2012, Kibbutz
Sdot-Yam owned 18,715,000, or 70.1% of our ordinary shares. Immediately after the IPO, due to our issuance of ordinary shares, the Kibbutz’s
ownership in our ordinary shares decreased to 56.1%. As a result of two subsequent public offerings of ordinary shares completed in 2013
and 2014, the Kibbutz sold 6,325,000 of the 17,765,000 ordinary shares it owned, decreasing its ownership percentage to 32.8% immediately
after those offerings. Pursuant to the Shareholders’ Agreement, effective October 13, 2016, the Kibbutz sold to Tene 1,000,000 of
its 11,440,000 ordinary shares and granted to Tene the Call Option to purchase 2,000,000 ordinary shares. During 2018, Tene purchased
additional 2,589,494 ordinary shares in the open market. The parties also agreed to vote at general meetings of our shareholders together,
such that they share voting power over 14,029,424 ordinary shares. As a result, as of March 11, 2022, the Kibbutz and Tene each beneficially
owned 40.7% of our ordinary shares.
Beneficial ownership by holders of more
than 5% of our ordinary shares is shown in the table above.
Registered Holders
Based on a review of the information provided
to us by our transfer agent, as of March 11, 2022, there were three registered holders of our ordinary shares, one of which (Cede
Co., the nominee of the Depositary Trust Company) is a United States registered holder, holding approximately 59.3% of our outstanding
ordinary shares.
| B. |
Related
Party Transactions |
Related Party Transactions
Policy
Our audit committee adopted and annually
reapproves a policy, which lays out the procedures for approving transactions with our controlling shareholders, currently Kibbutz Sdot-Yam
and Tene, and certain of our office holders and other related persons. Pursuant to this policy, as required by the Companies Law, for
each transaction with our controlling shareholder or transactions in which our controlling shareholder has a personal interest as well
as transactions with our office holders or transactions in which our office holders have a personal interest, our audit committee is required
to determine whether such transaction is an extraordinary transaction and, with respect to controlling shareholder transactions only,
whether it is a negligible transaction. Subject to our audit committee’s determination, negligible transactions and non-extraordinary
transactions are subject to a competitive procedure comprised of obtaining two third-party quotes for such transaction and additional
requirements as required by the Companies Law. An extraordinary transaction, which is not negligible, is subject, generally, to a tender
in addition to the approvals required by the Companies Law. In addition, this policy determines certain transactions with our controlling
shareholder as negligible and non-extraordinary transactions which are ongoing transactions but are required to be approved on an annual
basis. Pursuant to this policy, we have, and may in the future, engage in transactions with our controlling shareholder and officeholders
including with respect to services consumed by us for our operational needs as well as contribute donations to associations in which our
controlling shareholder or shareholders has or have a personal interest.
Relationship and agreements
with Kibbutz Sdot-Yam
We have entered into certain agreements
with Kibbutz Sdot-Yam pursuant to which Kibbutz Sdot-Yam provides us with, among other things, a portion of our labor force, electricity,
maintenance, and other services.
Pursuant to certain of these agreements,
in consideration for using facilities licensed to us or for services provided by Kibbutz Sdot-Yam, we paid the Kibbutz an aggregate of
$11.0 million in 2021, $9.4 million in 2020 and $9.5 million in 2019 (excluding VAT), as set forth in more detail below. We believe that
these services are rendered to us in the ordinary course of our business and that they represent terms no less favorable than those that
would have been obtained from an unaffiliated third party. Nevertheless, a determination with respect to such matters requires subjective
judgments regarding valuations, and regulators and other third parties may question whether our agreements with Kibbutz Sdot-Yam are no
less favorable to us than if they had been negotiated with unaffiliated third parties.
101
Under the Companies Law, we are required
to approve every three years any extraordinary transaction in which a controlling shareholder has a personal interest and that has a term
of more than three years, unless the company’s audit committee, constituted in accordance with the Companies Law, determines, solely
with respect to agreements that do not involve compensation to a controlling shareholder or his or her relatives, in connection with services
rendered by any of them to the company or their employment with the company, that a longer term is reasonable under the circumstances,
or another exemption applies under Israeli law. Our audit committee has determined that the term of all the agreements entered into between
us and Kibbutz Sdot-Yam are reasonable under the relevant circumstances, including our Manpower Agreement entered into between Kibbutz
Sdot-Yam and us on January 1, 2011, as amended on July 30, 2015 and November 27, 2018 (except, as it relates to office holders which portion
terminated in November 2021), and the Services Agreement entered into between Kibbutz Sdot-Yam and us on July 20, 2011, as amended on
February 13, 2012, July 30, 2015, November 27, 2018 and October 14, 2021.
Land
use agreement
Land leased to Kibbutz
Sdot-Yam by the ILA and the Caesarea Development Corporation
Our headquarters and research and development
facilities, as well as one of our two manufacturing facilities, are located on the grounds at Kibbutz Sdot-Yam and include 30,744 square
meter of facility and 60,870 square meters of un-covered yard. The headquarters and facilities are located on lands title to which is
held by the ILA, and which are leased or subleased to Kibbutz Sdot-Yam pursuant to the following agreements: (i) a 49-year lease from
the ILA signed in July 1978 that commenced in 1962 and expired in 2011 and has been extended pursuant to an option in the agreement for
an additional 49 years, and (ii) a new agreement entered into in April 2014 between Kibbutz Sdot-Yam and the Caesarea Development Corporation
pursuant to which Kibbutz Sdot-Yam leases the relevant premises (including such premises which are leased by the Kibbutz to us) from the
Caesarea Development Corporation until year 2037. Additionally, Kibbutz Sdot-Yam has been negotiating the renewal of a long-term lease
agreement with the ILA which expired in 2009. After a series of discussions with the ILA to renew this expired agreement, on February
21, 2017, the District Court approved a settlement between the parties, pursuant to which the Kibbutz is entitled to a new lease agreement
for a period of 49 years, with an option to renew for additional 49 years. As of the date of this report, a definitive lease agreement
between the parties has not been signed yet. To date, the expiration of this lease agreement has not had any impact on our ability to
use the facilities located on the property subject to the leases. The ILA may terminate its leases with Kibbutz Sdot-Yam in certain circumstances,
including if Kibbutz Sdot-Yam breaches its agreements therewith, commences proceedings to disband or liquidate or in the event that Kibbutz
Sdot-Yam ceases to be a “kibbutz” as defined in the lease (meaning, a registered cooperative society classified as a kibbutz).
The ILA may, from time to time, change its regulations governing the lease agreements, and these changes could affect the terms of the
land use agreement, as amended, including the provisions governing its termination.
Kibbutz Sdot-Yam currently permits us
to use the land and facilities pursuant to a land use agreement which became effective in March 2012 and expires 20 years thereafter.
Under the land use agreement, Kibbutz Sdot-Yam agreed to permit us to use approximately 100,000 square meters of land leased to the Kibbutz,
consisting both of facilities and unbuilt areas, in consideration for an annual fee of NIS12.9 million ($4.0 million in 2013 and thereafter,
plus VAT, and beginning in 2013, adjusted every six months based on any increase of the Israeli consumer price index compared to the index
as of January 2011. The annual fee may be adjusted after January 1, 2021 or after January 1, 2018 if the Kibbutz is required to pay significantly
higher lease fees to the ILA or Caesarea Development Corporation, and every three years thereafter if Kibbutz Sdot-Yam chooses to obtain
an appraisal. The appraiser will be mutually agreed upon or, in the absence of agreement, will be chosen by Kibbutz Sdot-Yam out of the
list of appraisers recommended at that time by Bank Leumi Le-Israel B.M. (“Bank Leumi”).
Every addition or deletion of space is accounted for based on the original rates mentioned above.
In addition, in the land use agreement,
we have waived any claims for payment of NIS 18.0 million ($4.6 million) from Kibbutz Sdot-Yam with respect to prior investments in infrastructure
on Kibbutz Sdot-Yam’s lands used by us under the prior land use agreement.
102
During 2021, following a request by the Kibbutz, in accordance with its rights under the land lease agreements
for Sdot-Yam and Bar-Lev facilities the terms of the land lease agreement, a market assessment of an appointed independent appraiser was
obtained and following such appraisal process, we are required to pay an amount of NIS 18.6 million (US$ 6.0 million) and NIS 8.1 million
(US$ 2.6 million) annually for each of the Sdot-Yam and the Bar-Lev facilities, respectively.
Under the land use agreement, we may not
terminate the operation of either of our two production lines at our plant in Kibbutz Sdot-Yam as long as we continue to operate production
lines elsewhere in Israel, and our headquarters must remain at Kibbutz Sdot-Yam. Furthermore, we may not decrease or return to Kibbutz
Sdot-Yam any part of the land underlying the land use agreement, except upon one year’s advance written notice with regards to a
certain unbuilt area, subject to certain conditions. In addition, subject to limitations, we may be able to sublease lands. Kibbutz Sdot-Yam
will have three months to accept or reject a request for sublease, in its sole discretion, provided that if it does not respond within
such three-month period, then we will be entitled to sublease such lands to a person approved in advance by Kibbutz Sdot-Yam. In such
event, we will continue to be liable to Kibbutz Sdot-Yam with respect to such lands. Pursuant to the land use agreement, subject to certain
exceptions, if we need additional facilities on the land that we are permitted to use in Kibbutz Sdot-Yam, subject to obtaining the permits
required by law, Kibbutz Sdot-Yam may build such facilities for us by using the proceeds of a loan that we will make to Kibbutz Sdot-Yam,
which loan shall be repaid to us by off-setting the monthly additional payment that we would pay for such new facilities and, if not fully
repaid during the lease term, upon termination thereof.
We have committed to fund the cost of
the construction, up to a maximum of NIS 3.3 million ($1.1 million) plus VAT, required to change the access road leading to Kibbutz Sdot-Yam
and our facilities, such that the entrance to our facilities will be separated from the entrance into Kibbutz Sdot-Yam. In addition, we
committed to pay NIS 200,000 (approximately $64,000) plus VAT to cover the cost of paving an area of land leased from Kibbutz Sdot-Yam
with such payment deducted in monthly installments over a four-year period beginning the year the construction completed from the lease
payments to be made to Kibbutz Sdot-Yam under the land use agreement related to our Sdot-Yam facility.
In connection with this agreement, we reached non-monetary agreements with Kibbutz Sdot-Yam allowing them
access to certain infrastructures located in the leased premises such as electrical, water and sewage.
While Kibbutz Sdot-Yam is responsible
under the agreement for obtaining various licenses, permits, approvals and authorizations necessary for use of the property, we have waived
any monetary recourse against Kibbutz Sdot-Yam for failure to receive such licenses, permits, approvals and authorizations.
Pursuant to these land use agreements,
we paid to Kibbutz Sdot-Yam an aggregate of $5.3 million in 2021, $4.7 million in 2020 and $4.5 million in 2019.
Land
purchase and leaseback agreement
On June 6, 2007, we entered into a long-term
lease agreement with the ILA in the lands and facilities of the Bar-Lev Industrial Center for an initial period of 49 years as of February
6, 2005, with an option to renew for an additional term of 49 years as of the end of the initial period. On March 31, 2011, we entered
into a land purchase and leaseback agreement with Kibbutz Sdot-Yam, pursuant to which, effective as of September 1, 2012, Kibbutz Sdot-Yam
acquired from us our rights in the lands and facilities of the Bar-Lev Industrial Park in consideration for NIS 43.7 million ($10.9 million).
Pursuant to the land purchase and leaseback agreement, we were required to obtain certain third-party consents from, among others, the
Israeli Tax Authorities and from the Israeli Investment Center. All such consents have been obtained. The land purchase and leaseback
agreement were executed simultaneously with the execution of a land use agreement. Pursuant to the land use agreement, Kibbutz Sdot-Yam
permits us to use the Bar-Lev land for a period of 10 years commencing in September 2012 that will be automatically renewed unless we
give two years prior notice, for an additional 10-year term in consideration for an annual fee of NIS 4.1 million ($1.2 million) to be
linked to the increase of the Israeli consumer price index. In accordance with the terms of the agreement, we elected to extend the term
of the agreement for another 10 years until December 31, 2021.
103
Following a request by the Kibbutz, ,
in accordance with its rights under the land lease agreements for Sdot-Yam and Bar-Lev facilities the terms of the land lease agreement,
a market assessment of an appointed independent appraiser was obtained, and amounts paid during 2021 are based on such appraisal.
Under the land use agreement, we may not
decrease or return to Kibbutz Sdot-Yam any part of the land underlying the land use agreement; however, subject to several limitations,
we may be able to sublease such lands to a person approved in advance by Kibbutz Sdot-Yam. We may assign our right under the land use
agreement pursuant to a merger with a third party and to any corporation under our control. In such event, we will continue to be liable
to Kibbutz Sdot-Yam with respect to such lands. In addition, subject to certain exceptions, if we need additional facilities on the land
that we are permitted to use by Kibbutz Sdot-Yam, subject to obtaining the permits required by law, Kibbutz Sdot-Yam may build such facilities
for us by using the proceeds of a loan that we will make to Kibbutz Sdot-Yam, which loan shall be repaid to us by off-setting the monthly
additional payment that we would pay for such new facilities and, if not fully repaid during the lease term, upon termination thereof.
Agreement
for Additional Land on the Grounds Near Our Bar-Lev Manufacturing Facility
In August 2013, we entered into the Agreement For Additional Land, pursuant to which Kibbutz Sdot-Yam acquired
additional land of approximately 12,800 square meters on the grounds near our Bar-Lev manufacturing facility, which we required in connection
with the construction of the fifth production line at our Bar-Lev manufacturing facility and leased it to us for a monthly fee of approximately
NIS 70,000 (approximately $20,000). Under the agreement, Kibbutz Sdot-Yam committed to (i) acquire the long-term leasing rights of the
Additional Bar-Lev Land from the ILA, (ii) perform preparation work and construction, in conjunction with the administrative body of Bar-Lev
industrial park and other contractors according to our plans, (iii) build a warehouse according to our plans, and (iv) obtain all permits
and approvals required for performing the preparation work of the Additional Bar-Lev Land and for the building of the warehouse. The warehouse
in Bar-Lev will be situated both on the current and new land. The financing of the building of the warehouse is to be made through a loan
that will be granted by us to Kibbutz Sdot-Yam, in the amount of the total cost related to the building of the warehouse, and such loan,
including principal and interest, shall be repaid by setoff of the lease due to Kibbutz Sdot-Yam by us for our use of the warehouse. The
principal amount of the loan will bear interest at a rate of 5.3% a year. On November 30, 2015, the land preparation work had been completed
and the holding of the Additional Bar-Lev Land was delivered to us. To date, the warehouse has not been constructed.
Pursuant to the land purchase and leaseback
agreement and agreement for additional land in connection with our Bar-Lev facility, we paid to Kibbutz Sdot-Yam an aggregate of $2.4
million in 2021 and $1.2 million in each of 2020 and 2019.
Manpower
agreement
In March 2001, we entered into a Manpower
Agreement with Kibbutz Sdot-Yam, which was amended in December 2006. Pursuant to the agreement, Kibbutz Sdot-Yam agreed to provide us
with labor services staffed by Kibbutz members, candidates for Kibbutz membership and Kibbutz residents (each a “Kibbutz
Appointee”). This agreement was replaced by a new Manpower Agreement, signed on July 20, 2011, with a term of 10 years from
January 1, 2011 that was automatically renewed on December 31, 2020 and will be further automatically renewed, unless one of the parties
gives six months’ prior notice, for additional one-year periods until December 31, 2030. Our audit committee has determined that
the term of the Manpower Agreement with Kibbutz Sdot-Yam is reasonable under the relevant circumstances except as it relates to office
holders. In November 2021, the portion of the agreement that relates to office holders terminated and was not renewed.
Under the Manpower Agreement and addendums
thereto, Kibbutz Sdot-Yam provides us with labor services staffed by Kibbutz Appointees. The consideration to be paid for each Kibbutz
Appointee is based on our total cost of employment for a non-Kibbutz Appointee employee performing a similar role. The number of Kibbutz
Appointees may change in accordance with our needs. Under the Manpower Agreement, we will notify Kibbutz Sdot-Yam of any roles that require
staffing, and if the Kibbutz offers candidates with skills similar to other candidates, we will give preference to the hiring of the relevant
Kibbutz members. Kibbutz Sdot-Yam is entitled under the Manpower Agreement, at its sole discretion, to discontinue the engagement of any
Kibbutz Appointee of manpower services through his or her employment by Kibbutz Sdot-Yam and require such appointee to become employed
directly by us.
104
Under the Manpower Agreement, we will
contribute monetarily to assist with the implementation of a professional reserve plan to encourage young Kibbutz members to obtain the
necessary education for future employment with us. We will provide up to NIS 250,000 (approximately $77 thousands) per annum for this
plan linked to changes in the Israeli consumer price index plus VAT. We will also implement a policy that prioritizes the hiring of such
young Kibbutz members as our employees upon their graduation. Pursuant to the Manpower Agreement, we paid to Kibbutz Sdot-Yam an aggregate
of $1.8 million in 2021, $2.1 million in 2020 and $2.4 million in 2019. As of December 31, 2021, we engaged 28 Kibbutz Appointees on a
permanent basis.
Services
agreement
On July 20, 2011, we entered into a services
agreement with Kibbutz Sdot-Yam, as amended on February 13, 2012 (“Original Services Agreement”).
Pursuant to the Original Services Agreement, the Kibbutz provided us with various services related to our operational needs. The Original
Services Agreement also outlined the distribution mechanism between us and Kibbutz Sdot-Yam for certain expenses and payments due to local
authorities, such as taxes and fees in connection with our business facilities. The agreement expired on March 21, 2015.
On July 30, 2015, following the approval
of our audit committee and the board, our shareholders approved an amended services agreement for a period of three years. On November
27, 2018, following the approval of our audit committee and the board, our shareholders approved a further amended services agreement
(“Amended Services Agreement”) for an additional period of three years, which was extended
in 2021 for an additional three year period. Under the Amended Services Agreement, Kibbutz Sdot-Yam continues to provide us with various
services it provides in the ordinary course of our business. The amount that we pay Kibbutz Sdot-Yam under the Amended Services Agreement
depends on the scope of services we will receive and is based on rates specified in such agreement which were determined based on market
terms, taking into account the added value of consuming services from Kibbutz Sdot-Yam, considering its physical proximity to our manufacturing
plant in Sdot-Yam and its expertise. The amounts we pay for the services are subject to certain adjustments for increases in the Israeli
consumer price index. In addition, the Amended Services Agreement grants Kibbutz Sdot-Yam a right of first proposal in special projects
with respect to the metal workshop services. The Amended Services Agreement also outlines the distribution mechanism between us and the
Kibbutz for certain expenses and payments due to local authorities, such as certain taxes and fees in connection with our business facilities.
Each party may terminate such agreement upon a material breach, following a 30-day prior notice, or upon liquidation of the other party,
following a 45-days’ prior notice. In connection with such agreements, we paid to Kibbutz Sdot-Yam an aggregate of $1.5 million
in 2021, $1.3 million in 2020 and $1.5 million in 2019.
From time to time, we enter into additional
arrangements in the ordinary course of business, at market prices and on market terms, with Kibbutz Sdot-Yam, which are not material in
accordance with related party transaction procedures adopted by our audit committee and our board of directors.
Management Services
Agreement with Tene
In November 2021, we entered into a management
services agreement with Tene Growth Capital 3 Funds Management Company Ltd., the management company of the general partner of Tene Investment
in Projects 2016, L.P., pursuant to which Tene Investment in Projects 2016, L.P. provides us with certain management services for an aggregate
annual management fee of NIS 870,000 plus VAT, paid in equal quarterly installments.
The fees for the services include (i) services provided by the active Chairman of the Board (who will
devote his time in accordance with our needs, as required from time to time, with the scope of the position estimated to be approximately
28 hours per month); (ii) one (1) director service; and (iii) regular business development advice, including financial and strategic advice
made available by Tene Management through its employees, officers and directors and/or consultants (the “Management
Services”).
105
During the term of the Management Services
Agreement, either party has the right to terminate the Management Services detailed in section (iii) of the definition of the Management
Services above at any time and for any reason or for no reason upon thirty (30) days prior written notice to the other party and following
such termination the annual management fee shall be reduced to NIS 750,000 plus VAT.
We agreed to reimburse Tene Management
for all expenses reasonably required in the performance of the Management Services under the Management Services Agreement pursuant to
the terms and conditions of our policies, as may be amended from time to time.
The Management Services pursuant to the
agreement will be provided by Dr. Ariel Halperin and Mr. Dori Brown and/or officeholders of Tene Management, and if necessary, by employees
and/or consultants of Tene Management, depending on our needs.
The term of the Management Services Agreement
is for three (3) years commencing the date the agreement was approved by our shareholders on November 17, 2021. Either party has the right
to cancel the Management Services Agreement at any time for any reason or for no reason upon thirty (30) days written notice to the other
party or effective immediately if Tene Managements’ representatives are no longer serving as our directors.
At the end of the term of the Management
Services Agreement the parties may decide to extend it, subject to the receipt of approvals required under applicable Israeli laws.
Agreements with directors
and officers
Employment
agreements
See “ITEM 6.B: Directors, Senior
Management and Employees—Compensation—Employment and consulting agreements with executive officers”.
Indemnification
agreements
See “ITEM 6.C: Directors, Senior
Management and Employees—Board Practices—Exculpation, insurance and indemnification of office holders.”
| C. |
Interests
of Experts and Counsel |
Not applicable.
ITEM
8: Financial Information
| A. |
Consolidated
Financial Statements and Other Financial Information |
Consolidated Financial
Statements
For our audited consolidated financial
statements for the year ended December 31, 2021, please see pages F-4 to F-5 of this report.
Legal Proceedings
Claim
by former South African distributor
In December 2007, we terminated our agency
agreement with our former South African agent, WOMAG, on the basis that it had breached the agreement. In the same month, we filed a claim
for NIS 1.0 million ($0.3 million) in the Israeli District Court in Haifa based on such breach. WOMAG contested jurisdiction of the Israeli
District Court, but subsequent appellate courts have dismissed WOMAG’s contest. In January 2008, WOMAG filed suit in South Africa
seeking €15.7 million ($17.1 million).
106
Following certain proceedings is Israel,
the parties commenced an arbitration in South Africa. In February 2019 the arbitrator delivered his award on the merits (the quantum is
still to be decided). The arbitrator’s award was in WOMAG’s favor as it relates to the claim that remained outstanding (WOMAG
has conceded, abandoned and seemingly withdrawn all their claims save for the one mentioned above) and imposed the costs relating to the
arbitration on us.
In July 2019, we appealed the award and
in August 2019 hearings were held. In November 2019, the appeal panel delivered its award on the merits (the quantum is still to be decided),
partially accepting the appeal and imposing 80% of the cost of arbitration and appeal on us.
Following negotiations held during 2020
between the parties, on January 15, 2021, we paid WOMAG an amount of €7.2 million ($8.9 million) as part of the settlement for the
majority of WOMAG’s claim for breach of contract.
The remaining disputed amounts relating
to the said breach, as well as WOMAG's claim for loss of profits shall be the subject of further hearings. An application for the removal
of Judge Joffe as the arbitrator, was submitted by the Company to the South Africa High Court during 2021, therefore, the Company expects
a delay in the hearing process.
Claims
related to alleged silicosis and other injuries
Overview
We are subject to numerous claims by former
employees, fabricators, their employees or the NII in Israel, alleging that workers contracted illnesses, including silicosis, through
exposure to silica particles during cutting, polishing, sawing, grinding, breaking, crushing, drilling, sanding or sculpting our products.
Engineered stones, including our products, are typically comprised of approximately (on average) 85% silica, and smaller concentrations
of silica are present in natural stones. Therefore, in some of the lawsuits it is claimed that fabrication of engineered stones creates
higher exposure to crystalline silica dust, and, accordingly, creates a higher risk of such illnesses.
Since 2008, we have been named, either
directly or as a third party defendant, in numerous lawsuits alleging damages allegedly caused by exposure to RCS related to our products
filed by individuals (including fabricators and their employees, and our former employees), their successors, employers and the State
of Israel, and in subrogation claims by the NII, WorkerCover of several states in Australia, and others.
As of December 31, 2021, we were subject to pending lawsuits with respect to 154 injured persons globally
(of which 114 were in Israel, 38 in Australia and 2 in the United States) and had received pre-litigation demand letters with respect
to additional 18 persons, in each case relating mainly to silicosis claims.
Since 2008 and through December 31, 2021,
lawsuits with respect to 185 injured persons that were filed against us were settled or dismissed (158 claims in Israel and 27 in Australia).
With respect to claims filed in Israel,
a judgment was entered by the District Court during 2013, pursuant to which we were found to be comparatively liable for 33% of the plaintiff’s
total damages. The remaining liability was imposed on the plaintiff at 40%, as contributory negligence of the plaintiff, and on the State
of Israel at 27%. Following an appeal to the Israeli Supreme Court, the parties entered into a settlement agreement and the District Court’s
ruling was cancelled, although it remains a non-binding guideline.
In November 2015 and in May 2017, we entered
into agreements with the State of Israel and with our main distributors in Israel, respectively, with the consent of our insurance carriers,
under which we agreed with the State and each of our main distributors to cooperate, subject to certain terms, with respect to the management
of the individual claims that have been filed and claims that may be submitted during a certain time period (NII claims are excluded from
our agreement with the State) and on the apportionments between us of the total liability of us, the State, and the distributors, if found,
in such claims. During January 2020, the State of Israel approved an additional 5 years extension to this agreement, and during 2021 one
of our distributors decided not to extent the agreement, due to the termination of its commercial relationship with the Company.
107
With respect to claims filed in Australia, while there is still
no precedent in Australia as to the liability of manufacturers and suppliers in silicosis claims, our insurance carriers acting within
their rights under our insurance policies have elected to negotiate and/or agree to settlements in most Australian cases. This practice
has led us to recognize these claims as probable and include a provision with respect thereto. See Note See Note 11 of the notes to the
financial statements included elsewhere in this annual report. We may still elect to defend ourselves in such claims. If we were to fail
in any claim, a precedent may be set against the Company, which may also adversely affect our position in other claims. See also “ITEM
3.D. Key Information—Risk Factors— Results of Silicosis and other bodily injury claims may have a material adverse effect
on our business, operating results, and financial condition”.
Class Action Claim
in Israel
A lawsuit by a single plaintiff and a
motion for its class certification were filed against us in April 2014 in the Central District Court in Israel mainly claiming we did
not provide adequate warnings with respect to our products and that by our conduct we violated the plaintiff’s autonomy.
On January 4, 2018, the Company and the
plaintiff submitted to the Israeli District Court a settlement agreement, which was approved in July 2021. The claim was dismissed and
the Company is liable to make payments on a one time basis, without any admission of liability, in an aggregate amount of approximately
NIS 9.0 million (approximately $2,894) to fund certain safety related expenses at fabrication facilities in Israel, as well as certain
plaintiff fees and legal expenses. The performance of the settlement agreement is expected to continue during 2022.
Our Probable Risks
Related to Outstanding Claims
We intend to contest the pending claims
against us, although there can be no assurance that we will succeed in these claims and it is probable that we will be liable for damages
in connection with such lawsuits. As of December 31, 2021, we estimated that our total exposure with respect to all then-pending lawsuits
in Israel and Australia related to 152 injured persons and the un-asserted NII claims was approximately $42.9 million, although the actual
outcome of such lawsuits may vary significantly from such estimate. The number of injured persons takes into account the claim filed with
a motion for its recognition as a class action and does not include pre-litigation demand letters and settled claims for which the settled
amount has not been paid yet.
Insurance
We currently have global product liability
insurance, which applies, subject to certain terms and limitations, to claims that may be submitted against us worldwide during the insurance
policy term. This policy covers only claims that are beyond $25 million per claim and per aggregate during the policy term from October
1, 2020 to April 1, 2022, up to an amount of $35 million per claim and per year. Our global product liability insurance policy is effective
until April 2022. The policy covers only illnesses diagnosed after February 2010. Although we will seek to renew our product liability
insurance to cover silicosis related claims, there is no assurance that we will be successful in its renewal, specifically as currently
Israeli and Australian policies do not cover newly diagnosed silicosis related claims. In addition to the global product liability policy,
we have regional product liability insurance policies in the United States and Canada, each with a coverage of up to $20 million per claim
or per year, each in its relevant local currency, subject to certain terms and limitations, with relatively low deductibles. In
India, we have a public liability insurance policy in the amount of INR 500 million ($6.7 million) effective until April 23, 2022.
Our employer liability insurance excludes
silicosis damages and, therefore, in case that we are found liable for any of our employees’ illness with silicosis, we will have
to bear compensation for such damages, after the deduction of payments made by the NII to an employee of ours, which might have an adverse
effect on our business and results of operations. However, in few cases, our carrier agreed to contribute (without admission) towards
settlements albeit the silicosis exclusions.
108
General
From time to time, we are involved in
other legal proceedings and claims in the ordinary course of business related to a range of matters, including environmental, contract,
employment claims, product liability and warranty claims, and claims related to modification and adjustment or replacement of product
surfaces sold. While the outcome of these other claims cannot be predicted with certainty, we do not believe that any such claims will
have a materially adverse effect on us, either individually or in the aggregate. See Note 11 of the notes to the financial statements
included elsewhere in this annual report.
Dividends
In February 2020, we revised our dividend
policy to provide for a quarterly cash dividend of up to 50% of reported net income attributable to controlling interest on a year-to-date
basis, less any amount already paid as dividend for the respective period (already defined as the “Calculated
Dividend”), subject in each case to approval by the Company’s board of directors. If the Calculated Dividend is less
than $0.10 per share, no dividend shall be paid. In the fourth quarter of 2019, we distributed a cash dividend in the amount of $0.15
per share, in the fourth quarter of 2020, we distributed a cash dividend in the amount of $0.14 per share, in the second quarter of 2021,
we distributed a cash dividend in the amount of $0.21 per share and in the fourth quarter of 2021, we distributed a cash dividend in the
amount of $0.10 per share, in each case subject to withholding tax of 20%. We cannot provide assurances regarding the amount or timing
of any dividend payments and may decide not to pay dividends in the future.
Under Israeli law, we may declare and
pay dividends only if, upon the determination of our board of directors, there is no reasonable concern that the distribution will prevent
us from meeting the terms of our existing and foreseeable obligations as they become due. The distribution of dividends is further limited
by Israeli law to the greater of retained earnings and earnings generated over the two most recent years. In the event that we do not
have retained earnings or earnings generated over the two most recent years legally available for distribution, we may seek the approval
of the court to distribute a dividend. The court may approve our request if it is convinced that there is no reasonable concern that a
payment of a dividend will prevent us from satisfying our existing and foreseeable obligations as they become due.
To the extent we declare a dividend, we
do not intend to distribute dividends from earnings related to our Approved/Beneficiary Enterprise programs. The taxable income exemption
provided under the Approved/Beneficiary Enterprise program is valid exclusively for undistributed earnings, and as a result, a distribution
of earnings related to our Approved/Beneficiary Enterprise programs would subject us to additional tax payments upon a distribution of
these earnings as dividends.
The payment of dividends may be subject
to Israeli withholding taxes. See “ITEM 10.E: Additional Information—Taxation—Israeli tax considerations and government
programs—Taxation of our shareholders—Dividends”.
| B. |
Significant
Changes |
Since the date of our audited financial
statements included elsewhere in this annual report, there have not been any significant changes in our financial position.
ITEM
9: The Offer and Listing
Not applicable, except for Items 9.A.4
and 9.C, which are detailed below.
| A. |
Offer
and Listing Details |
Our ordinary shares have been trading
on the Nasdaq Global Select Market under the symbol “CSTE” since March 2012.
| B. |
Plan of Distribution
|
Not applicable.
109
| C. |
Markets |
See “—Offer and Listing Details”
above.
| D. |
Selling
Shareholders |
Not applicable.
| E. |
Dilution |
Not applicable.
| F. |
Expenses
of the Issue |
Not applicable.
ITEM
10: Additional Information
| A. |
Share Capital
|
Not applicable.
| B. |
Memorandum
of Association and Articles of Association |
Our authorized share capital consists
of 200,000,000 ordinary shares, par value NIS 0.04 per share, of which 35,579,091are issued and 34,475,995 are outstanding as of March
11, 2022.
A copy of our amended and restated articles
of association is attached as Exhibit 1.1.
The information called for by this item
is set forth in Exhibit 2.1 to this annual report on Form 20-F and is incorporated herein by reference.
Listing
Our ordinary shares are listed on the
Nasdaq Global Select Market under the symbol “CSTE.”
| C. |
Material Contracts
|
Summaries of the following material contracts
and amendments to these contracts are included in this annual report in the places indicated:
|
Material Contract
|
Location in This Annual
Report |
|
Agreements with Kibbutz Sdot-Yam
|
“ITEM 7: Major Shareholders and
Related Party Transactions—Related Party Transactions—Relationship and agreements with Kibbutz Sdot-Yam.” |
|
Management Services Agreement with Tene
|
“ITEM 7: Major Shareholders and
Related Party Transactions—Related Party Transactions—Management Services Agreement with Tene.” |
|
Agreements with Breton S.p.A. (Italy)
|
“ITEM 3: Key Information—Risk
Factors—If we are unable to manufacture and/or ship our existing products globally as planned,
our results of operations and future prospects will suffer.” |
|
Form of Indemnification Agreement
|
“ITEM 6: Directors, Senior Management
and Employees—Board Practices—Exculpation, insurance and indemnification of officer holders.” |
110
| D. |
Exchange Controls
|
In 1998, Israeli currency control regulations
were liberalized significantly, so that Israeli residents generally may freely deal in foreign currency and foreign assets, and non-residents
may freely deal in Israeli currency and Israeli assets. There are currently no Israeli currency control restrictions on remittances of
dividends on the ordinary shares or the proceeds from the sale of the shares provided that all taxes were paid or withheld; however, legislation
remains in effect pursuant to which currency controls can be imposed by administrative action at any time.
Non-residents of Israel may freely hold
and trade our securities. Neither our memorandum of association nor our articles of association nor the laws of the State of Israel restrict
in any way the ownership or voting of ordinary shares by non-residents, except that such restrictions may exist with respect to citizens
of countries which are in a state of war with Israel. Israeli residents are allowed to purchase our ordinary shares.
| E. |
Taxation |
The following description is not intended
to constitute a complete analysis of all tax consequences relating to the acquisition, ownership and disposition of our ordinary shares.
You should consult your own tax advisor concerning the tax consequences of your particular situation, as well as any tax consequences
that may arise under the laws of any state, local, foreign or other taxing jurisdiction.
Israeli tax considerations
and government programs
The following is a brief summary of the
material Israeli tax laws applicable to us, and certain Israeli Government programs benefiting us. This section also contains a discussion
of material Israeli tax consequences concerning the ownership of and disposition of our ordinary shares. This summary does not discuss
all aspects of Israeli tax law that may be relevant to a particular investor in light of his or her personal investment circumstances
or to some types of investors, such as traders in securities, who are subject to special treatment under Israeli law. Because some parts
of this discussion are based on new tax legislation that has not yet been subject to judicial or administrative interpretation, we cannot
assure you that the Israeli governmental and tax authorities or the Israeli courts will accept the views expressed below. The discussion
below is subject to amendment under Israeli law or changes to the applicable judicial or administrative interpretations of Israeli law,
which could affect the tax consequences described below.
The discussion below
does not cover all possible tax considerations. Potential investors are urged to consult their own tax advisors as to the Israeli or other
tax consequences of the purchase, ownership and disposition of our ordinary shares, including, the effect of any foreign, state or local
taxes.
General
corporate tax structure in Israel
Israeli resident companies are generally
subject to corporate tax, which rate has been fluctuating during the last few years. The corporate tax rate is 23% as of 2018 and thereafter.
However, the effective corporate tax rate payable by a company that derives income from a Preferred Enterprise, a Special Preferred Enterprise,
a Preferred Technology Enterprise or Special Preferred Technology Enterprise (as discussed below) may be considerably less.
Capital gains generated by an Israeli
resident company are subject to tax at the prevailing corporate tax rate. Under Israeli tax legislation, a corporation will be considered
as an “Israeli resident company” if (i) it was incorporated in Israel or (ii) the control and management of its business are
exercised in Israel.
Foreign
Exchange Regulations:
Commencing in taxable year 2014, we had
elected and were permitted by the ITA to measure our taxable income and file our tax return under the Israeli Income Foreign Exchange
Regulations. Under the Foreign Exchange Regulations, an Israeli company may calculate its tax liability in U.S. dollars according to certain
orders. The tax liability, as calculated in U.S. dollars, is translated into NIS based on the exchange rate as of December 31 of each
year.
111
Law
for the Encouragement of Industry (Taxes), 5729-1969
The Law for the Encouragement of Industry
(Taxes), 5729-1969, generally referred to as the “Encouragement of Industry Law”, provides several tax benefits for “Industrial
Companies”. Pursuant to the Encouragement of Industry Law, a company qualifies as an Industrial Company if it is a resident of Israel
which was incorporated in Israel and at least 90% of its gross income in any tax year (exclusive of income from certain government loans)
is generated from an “Industrial Enterprise” that it owns and located in Israel or in the “Area”, in accordance
with the definition under Section 3A of the Israeli Income Tax Ordinance. An Industrial Enterprise is defined as an enterprise whose principal
activity, in a given tax year, is industrial manufacturing.
An Industrial Company is entitled to certain
tax benefits, including: (i) an amortization of the cost of a purchased patent, the right to use a patent or know-how that were purchased
in good faith and are used for the development or promotion of the Industrial Enterprise over an eight-year period, beginning from the
year in which such rights were first used, (ii) the right to elect to file consolidated tax returns, under certain conditions, with additional
Israeli Industrial Companies controlled by it, and (iii) the right to deduct expenses related to public offerings in equal amounts over
a period of three years beginning from the year of the offering.
Eligibility for benefits under the Encouragement
of Industry Law is not contingent upon the approval of any governmental authority.
There is no assurance that we qualify
or will continue to qualify as an Industrial Company or that the benefits described above will be available in the future.
Law
for the Encouragement of Capital Investments, 1959
The Investment Law provides certain incentives
for capital investment in a production facility (or other eligible assets). Generally, an investment program that is implemented in accordance
with the provisions of the Investment Law, is entitled to benefits. These benefits may include cash grants from the Israeli government
and tax benefits, based upon, among other things, the geographic location in Israel of the facility in which the investment is made. In
order to qualify for these incentives, a Preferred Enterprise, a Special Preferred Enterprise, a Preferred Technology Enterprise and a
Special Preferred Technology Enterprise is required to comply with the requirements of the Investment Law.
The Investment Law has been amended several
times over the recent years, with the three most significant changes effective as of April 1, 2005, as of January 1, 2011 (the
“2011 Amendment”) and as of January 1, 2017 (the “2017
Amendment”).The 2011 Amendment introduced new benefits instead of the benefits granted in accordance with the provisions
of the Investment Law prior to the 2011 Amendment. However, companies entitled to benefits under the Investment Law as in effect up to
January 1, 2011 were entitled to choose to continue to enjoy such benefits, provided that certain conditions are met, or elect instead,
irrevocably, to forego such benefits and elect the benefits of the 2011 Amendment. The 2017 Amendment introduces new benefits for Technological
Enterprises, alongside the existing tax benefits.
The following discussion is a summary
of the Investment Law following its most recent amendments:
The Preferred Enterprise
Regime—the 2011 Amendment
Eligible companies under the 2011 Amendment
can receive benefits as a “Preferred Enterprise.” In order to receive benefits as a Preferred Enterprise, the 2011 Amendment
states, among other requirements, that a company must meet certain conditions including owning an industrial enterprise that meets the
“Competitive Enterprise” conditions as described by the Investment Law. The benefits granted to a Preferred Enterprise are
determined depending on the location of the Preferred Enterprise within Israel.
Qualified enterprises located in specific
locations within Israel are eligible for grants and/or loans simultaneously with tax benefits. Grants and/or loans are approved by the
Investment Center.
112
Pursuant to the 2017 Amendment, in 2017
and thereafter, the corporate tax rate for Preferred Enterprise which is located in a specified development zone was decreased to 7.5%,
while the reduced corporate tax rate for other development zones remains 16%. Income derived by a Preferred Company from a ‘Special
Preferred Enterprise’ (as such term is defined in the Investment Law) would be entitled, during a benefits period of 10 years, to
further reduced tax rates of 8%, or to 5% if the Special Preferred Enterprise is located in a certain development zone. As of January
1, 2017, the definition for ‘Special Preferred Enterprise’ includes less stringent conditions.
A company that pays a dividend to Israeli
shareholders out of income generated from the Preferred Enterprise is required to withhold tax on such distribution at a rate of 20% (in
the case of non-Israeli shareholders – subject to the receipt in advance of a valid certificate from the ITA allowing for a reduced
tax rate, 20% or a reduced rate under an applicable double tax treaty). However, if such dividends are paid to an Israeli company, no
tax is required to be withheld (although, if such dividends are subsequently distributed to individuals or a non-Israeli company, withholding
tax at a rate of 20% or such lower rate as may be provided in an applicable tax treaty, will apply).
Under the 2011 Amendment and from January
1, 2011, our facilities have “Preferred Enterprise” status, which entitles us to tax benefits at a flat reduced corporate
tax rate that will apply to the industrial enterprise’s entire preferred income.. From 2017 onwards, tax rate for the income portion
related to Bar-Lev is reduced to 7.5% and Sdot-Yam tax rate remains unchanged.
There can be no assurance that we will
comply with the conditions required to remain eligible for benefits under the Investment Law in the future or that we will be entitled
to any additional benefits thereunder. The benefits available to Preferred Enterprises are conditioned upon terms stipulated in the Investment
Law and regulations. If we do not fulfill these conditions in whole or in part, the benefits can be reduced or canceled and we may be
required to refund the amount of the benefits, linked to the Israeli consumer price index, with interest or other monetary penalties.
The
New Technological Enterprise Incentives Regime—the 2017 Amendment
The 2017 Amendment provides new tax benefits
for two types of “Technology Enterprises”, as described below, and is in addition to the other existing tax beneficial programs
under the Investment Law.
The new incentives regime will apply to
“Preferred Technology Enterprises” that meet certain conditions, including: (1) the RD expenses in the three years preceding
the tax year were at least 7% on average of one year out of the company’s turnover or exceeded NIS 75 million (approximately $20
million) for a year; and (2) one of the following: (a) at least 20% of the workforce (or at least 200 employees) are employees whose full
salary has been paid and reported in the company’s financial statements as RD; (b) a venture capital investment approximately
equivalent to at least NIS 8 million (approximately $2.1 million) was previously made in the company and the company did not change its
line of business; (c) growth in sales by an average of 25% or more over the three years preceding the tax year, provided that the turnover
was at least NIS 10 million (approximately $2.7 million), in the tax year and in each of the preceding three years; or (d) growth in workforce
by an average of 25% or more over the three years preceding the tax year, provided that the company employed at least 50 employees, in
the tax year and in each of the preceding three years.
A “Special Preferred Technology
Enterprise” is an enterprise that meets conditions 1 and 2 above, and in addition has total annual consolidated revenues above NIS
10 billion (approximately $2.7 billion).
Preferred Technology Enterprises will
be subject to a reduced corporate tax rate of 12% on their income that qualifies as “Preferred Technology Income”, as defined
in the Investment Law. The tax rate is further reduced to 7.5% for a Preferred Technology Enterprise located in development zone A. These
corporate tax rates shall apply only with respect to the portion of intellectual property developed in Israel. In addition, a Preferred
Technology Company will enjoy a reduced corporate tax rate of 12% on capital gain derived from the sale of certain “Benefitted Intangible
Assets” (as defined in the Investment Law) to a related foreign company if the Benefitted Intangible Assets were acquired from a
foreign company on or after January 1, 2017 for at least NIS 200 million (approximately $53 million), and the sale receives prior approval
from the Israel Innovation Authority (previously known as the Israeli Office of the Chief Scientist) (“IIA”).
Special Preferred Technology Enterprises will be subject to 6% on “Preferred Technology Income” regardless of the company’s
geographic location within Israel. In addition, a Special Preferred Technology Enterprise will enjoy a reduced corporate tax rate of 6%
on capital gain derived from the sale of certain “Benefitted Intangible Assets” to a related foreign company if the Benefitted
Intangible Assets were either developed by the Special Preferred Enterprise or acquired from a foreign company on or after January 1,
2017, and the sale received prior approval from IIA. A Special Preferred Technology Enterprise that acquires Benefitted Intangible Assets
from a foreign company for more than NIS 500 million (approximately $133 million), will be eligible for these benefits for at least ten
years, subject to certain approvals as specified in the Investment Law.
113
Dividends distributed to Israeli shareholders
by a Preferred Technology Enterprise or a Special Preferred Technology Enterprise, paid out of Preferred Technology Income, are generally
subject to withholding tax at source at the rate of 20% (in the case of non-Israeli shareholders – subject to the receipt in advance
of a valid certificate from the ITA allowing for a reduced tax rate, 20% or such lower rate as may be provided in an applicable tax treaty).
However, if such dividends are paid to an Israeli company, no tax is required to be withheld (although, if such dividends are subsequently
distributed to individuals or a non-Israeli company, withholding tax at a rate of 20% or such lower rate as may be provided in an applicable
tax treaty, will apply). If such dividends are distributed to a parent foreign company holding, solely or together with other foreign
companies, at least 90% of the shares of the distributing company and other conditions are met, the withholding tax rate will be 4% (or
a lower rate under a tax treaty, if applicable, subject to the receipt in advance of a valid certificate from the ITA allowing for a reduced
tax rate). Currently, we do not meet the above conditions to be eligible for the tax benefits pursuant to the New Technology Enterprise
Incentives Regime—the 2017 Amendment.
The
Encouragement of Industrial Research and Development Law, 5744-1984
IIA’s grants may limit our ability
to manufacture products, or transfer technologies developed using these grants outside of Israel. If we were to seek approval to manufacture
products, to consummate a merger or acquisition transaction with a non-Israeli party or to transfer technologies developed using these
grants outside of Israel, we could be subject to additional royalty requirements or be required to pay certain redemption fees. If we
were to violate these restrictions, we could be required to refund any grants previously received, together with interest and penalties,
and may be subject to criminal charges.
Taxation
of our shareholders
Capital gains
Capital gains tax is imposed on the disposal
of capital assets by an Israeli resident and on the disposal of such assets by a non-Israeli resident if those assets are either (i) located
in Israel; (ii) shares or rights to shares in an Israeli resident company, or (iii) represent, directly or indirectly, rights to assets
located in Israel unless a tax treaty between Israel and the seller’s country of residence provides otherwise. The Israeli Income
Tax Ordinance distinguishes between “Real Capital Gain” and “Inflationary Surplus.” The Real Capital Gain on the
disposition of a capital asset is the amount of total capital gain in excess of Inflationary Surplus. Inflationary Surplus is computed,
generally, on the basis of the increase in the Israeli Consumer Price Index or, in certain circumstances, according to the change in the
foreign currency exchange rate, between the date of purchase and the date of disposal of the capital asset.
Real Capital Gain generated by a company
is generally subject to tax at the corporate tax rate (23% in 2021). As of January 1, 2012, the Real Capital Gain accrued by individuals
on the sale of our securities is taxed at the rate of 25%. However, if the individual shareholder is a “Controlling Shareholder”
(meaning, a person who holds, directly or indirectly, alone or together with another person who collaborates with such person on a permanent
basis, 10% or more of one of the Israeli resident company’s “means of control” (including, among other rights, the right
to company profits, voting rights, the right to the company’s liquidation proceeds and the right to appoint a company director)
at the time of sale or at any time during the preceding 12 month period, such gain will be taxed at the rate of 30%.
114
Individual and corporate shareholders
dealing in securities in Israel are taxed at the tax rates applicable to business income – 23% for corporations in 2021 and a marginal
tax rate of up to 47% +3% surtax, for an individual in 2021 unless the benefiting provisions of an applicable treaty applies.
Notwithstanding the foregoing, capital
gains generated from the sale of securities publicly traded on the Tel Aviv Stock Exchange or on a recognized stock exchange outside of
Israel, by a non-Israeli shareholder (individual and corporation) may be exempt under the Israeli Income Tax Ordinance from Israeli taxes
provided that all the following conditions are met: (i) the securities were purchased upon or after the registration of the securities
on a recognized stock exchange (this requirement generally does not apply to shares purchased on or after January 1, 2009), (ii) the seller
of the securities does not have a permanent establishment in Israel to which the generated capital gain is attributed and (iii) with respect
to securities listed on a recognized stock exchange outside of Israel, such shareholders are not subject to the Israeli Income Tax Law
(Inflationary Adjustments) 5745-1985. However, non-Israeli corporation will not be entitled to the foregoing exemptions if Israeli residents
(a) have a controlling interest of more than 25% in such non-Israeli corporation, or (b) are the beneficiaries of or are entitled to 25%
or more of the revenues or profits of such non-Israeli corporation, whether directly or indirectly.
In addition, the sale of the securities
may be exempt from Israeli capital gain tax under the provisions of an applicable tax treaty. For example, the Convention between the
Government of the United States of America and the Government of Israel with respect to Taxes on Income (“Israel-U.S.A.
Double Tax Treaty”) exempts U.S. residents (for purposes of the Israel-U.S.A. Double Tax Treaty) from Israeli capital gains
tax in connection with such sale, exchange or disposition provided, among others, that (i) the U.S. resident owned, directly or indirectly,
less than 10% of the Israeli resident company’s voting power at any time within the 12-month period preceding such sale; (ii) the
seller, if an individual, has been present in Israel for less than 183 days (in the aggregate) during the taxable year; (iii) the capital
gain from the sale was not generated through a permanent establishment of the U.S. resident which is maintained in Israel; the capital
gain arising from such sale, exchange or disposition is not attributed to real estate located in Israel; (v) the capital gains arising
from such sale, exchange or disposition is not attributed to royalties; and (vi) the shareholder is a U.S. resident (for purposes of the
Israel-U.S.A. Double Tax Treaty) is holding the shares as a capital asset.
The purchaser of the securities, the stockbrokers
who effected the transaction or the financial institution holding the traded securities through which payment to the seller is made are
obligated to withhold Israeli tax at source from such payment. Shareholders may be required to demonstrate that they are exempt from tax
on their capital gains in order to avoid withholding at source at the time of sale. Specifically, in transactions involving a sale of
all of the shares of an Israeli resident company, in the form of a merger or otherwise, the ITA may require from shareholders who are
not liable for Israeli tax to sign declarations in forms specified by this authority or obtain a specific exemption from the ITA to confirm
their status as non-Israeli resident, and in the absence of such declarations or exemptions, may require the purchaser of the shares to
withhold taxes at source.
A detailed return, including a computation
of the tax due, must be filed and an advance payment must be paid on January 31 and July 30 of each tax year for sales of securities traded
on a stock exchange made within the previous six months. However, if all tax due was withheld at the source according to applicable provisions
of the Israeli Income Tax Ordinance and the regulations promulgated thereunder, the return does not need to be filed provided that (i) such
income was not generated from business conducted in Israel by the taxpayer, (ii) the taxpayer has no other taxable sources of income
in Israel with respect to which a tax return is required to be filed and an advance payment does not need to be made, and (iii) the taxpayer
is not obligated to pay excess tax (as further explained below). Capital gains are also reportable on an annual income tax return.
Dividends
Israeli residents who are individuals
are generally subject to Israeli income tax for dividends paid on shares (other than bonus shares or share dividends) at the rate of 25%,
or 30% if the recipient of such dividend is a Controlling Shareholder at the time of distribution or at any time during the preceding
12-month period. However, dividends distributed from taxable income accrued from Preferred Enterprise or Preferred Technology Enterprise
to Israeli individuals are subject to withholding tax at the rate of 20%. However, if such dividends are distributed to an Israeli company,
no withholding tax is imposed (although, if such dividends are subsequently distributed to individuals or a non-Israeli company, withholding
tax at a rate of 20% or such lower rate as may be provided in an applicable tax treaty, subject to the receipt in advance of a valid certificate
from the ITA allowing for a reduced tax rate, will apply). An average rate will be set in case the dividend is distributed from mixed
types of income (regular and preferred income).
115
Israeli resident corporations are generally
exempt from Israeli corporate tax for dividends paid on shares of Israeli resident corporations.
Non-Israeli resident (either an individual
or a corporation) is generally subject to an Israeli income tax on the receipt of dividends at the rate of 25% or 30% (if the dividend
recipient is a Controlling Shareholder at the time of distribution or at any time during the preceding 12-month period) or 20% or such
lower rate as may be provided in an applicable tax treaty, subject to the receipt in advance of a valid certificate from the ITA allowing
for a reduced tax rate, if the dividend is distributed from income attributed to Preferred Enterprise or Preferred Technology Enterprise.
Such dividends are generally subject to Israeli withholding tax at a rate of 25% so long as the shares are registered with a Nominee Company
(whether the recipient is a Controlling Shareholder or not), and 20% if the dividend is distributed from income attributed to a Preferred
Enterprise or Preferred Technology Enterprise. Under the Israel-U.S.A. Double Tax Treaty the following rate will apply to dividends distributed
by an Israeli resident company to a U.S. resident (for purposes of the Israel-U.S.A. Double Tax Treaty): if (A) the U.S. resident is a
corporation which held during the portion of the taxable year preceding the date of payment of the dividend and during the whole of its
prior taxable year (if any), at least 10% of the outstanding shares of the voting stock of the Israeli resident paying company and (B)
not more than 25% of the gross income of the Israeli resident paying company for such prior taxable year (if any) consists of certain
type of interest or dividends then the maximum tax rate is 12.5% on dividends. The aforementioned rates will not apply if the dividend
income was generated through a permanent establishment of the U.S. resident which is maintained in Israel. If the dividend is attributable
partly to income derived from a Preferred Enterprise, and partly to other sources of income, the withholding rate will be a blended rate
reflecting the relative portions of the two types of income.
Our company is obligated to withhold tax,
upon the distribution of a dividend attributed to a Preferred Enterprise’s income from the amount distributed at the following rates:
(i) Israeli resident corporations – 0%, (ii) Israeli resident individuals –20% and (iii) non-Israeli residents – 25%
or 30%, and subject to the receipt in advance of a valid certificate from the ITA allowing for a reduced tax rate – 20% or a reduced
tax rate provided under the provisions of an applicable double tax treaty. If the dividend is distributed from income not attributed to
the Preferred Enterprise, the following withholding tax rates will apply: (a) for securities registered and held by a Nominee Company:
(i) Israeli resident corporations – 0%, (ii) Israeli resident individuals – 25% and (iii) non-Israeli residents – 25%,
unless a reduced tax rate is provided under the provisions of an applicable double tax treaty (subject to the receipt in advance of a
valid certificate from the ITA allowing for a reduced tax rate); (b) in all other cases: (i) Israeli resident corporations – 0%,
(ii) Israeli resident individuals – 25% or 30% (if the dividend recipient is a Controlling Shareholder at the time of the distribution
or at any time during the preceding 12 month period), and (iii) non-Israeli residents – 25% or 30% as referred to above with respect
to Israeli resident individuals, unless a reduced tax rate is provided under the provisions of an applicable double tax treaty (subject
to the receipt in advance of a valid certificate from the ITA allowing for a reduced tax rate).A non-Israeli resident who receives dividends
from which tax was withheld is generally exempt from the obligation to file tax returns in Israel with respect to such income, provided
that (i) such income was not generated from business conducted in Israel by the taxpayer, (ii) the taxpayer has no other taxable
sources of income in Israel with respect to which a tax return is required to be filed, and (iii) the taxpayer is not obligated to pay
excess tax (as further explained below).
Estate and gift tax
Israeli law presently does not impose
estate or gift taxes.
Excess Tax
Individual holders who are subject to
tax in Israel (whether any such individual is an Israeli resident or non-Israeli resident) and who have taxable income that exceeds a
certain threshold in a tax year (NIS 647,640 for 2021and NIS 663,241 for 2022), which amount is linked to the annual changes to the Israeli
Consumer Price Index), will be subject to an additional tax at the rate of 3% on his or her taxable income for such tax year that is in
excess of such amount. For this purpose, taxable income includes, but is not limited to, taxable capital gains from the sale of securities
and taxable income from interest and dividends.
116
United States federal
income taxation
The following is a description of the
material United States federal income tax consequences to a U.S. Holder (as defined below) of the acquisition, ownership and disposition
of our ordinary shares. This description addresses only the United States federal income tax consequences to holders that hold such ordinary
shares as capital assets for United States federal income tax purposes. This description does not address tax considerations applicable
to holders that may be subject to special tax rules, including, without limitation:
| • |
banks, financial institutions or insurance companies; |
| • |
real estate investment trusts, regulated investment companies or grantor trusts;
|
| • |
dealers or traders in securities, commodities or currencies; |
| • |
tax-exempt entities; |
| • |
certain former citizens or long-term residents of the United States; |
| • |
persons that received our shares as compensation for the performance of services;
|
| • |
persons that will hold our shares as part of a “hedging,” “integrated”
or “conversion” transaction or as a position in a “straddle” for United States federal income tax purposes;
|
| • |
partnerships (including entities classified as partnerships for United States
federal income tax purposes) or other pass-through entities, or holders that will hold our shares through such an entity; |
| • |
S-corporations; |
| • |
holders that acquire ordinary shares as a result of holding or owning our preferred
shares; |
| • |
U.S. Holders (as defined below) whose “functional currency” is not
the U.S. Dollar; |
| • |
persons subject to special tax accounting rules as a result of any item of gross
income with respect to our ordinary shares being taken into account in an applicable financial statement; or |
| • |
holders that own directly, indirectly or through attribution 10% or more of the
voting power or value of our shares. |
Moreover, this description does not address
the United States federal estate, gift or alternative minimum tax consequences, or any state, local or foreign tax consequences, of the
acquisition, ownership and disposition of our ordinary shares.
This description is based on the United
States Internal Revenue Code of 1986, as amended (the “Code”), existing, proposed and
temporary United States Treasury Regulations and judicial and administrative interpretations thereof, in each case as in effect and available
on the date hereof. All the foregoing is subject to change, which change could apply retroactively and could affect the tax consequences
described below. There can be no assurances that the U.S. Internal Revenue Service will not take a different position concerning the tax
consequences of the acquisition, ownership and disposition of our ordinary shares or that such a position could not be sustained.
117
For purposes of this description, a “U.S.
Holder” is a beneficial owner of our ordinary shares that, for United States federal income tax purposes, is:
| • |
an individual holder that is a citizen or resident of the United States;
|
| • |
a corporation (or other entity treated as a corporation for United States federal
income tax purposes) created or organized in or under the laws of the United States or any state thereof, including the District of Columbia;
|
| • |
an estate the income of which is subject to United States federal income taxation
regardless of its source; or |
| • |
a trust if such trust has validly elected to be treated as a United States person
for United States federal income tax purposes or if (1) a court within the United States is able to exercise primary supervision over
its administration and (2) one or more United States persons have the authority to control all of the substantial decisions of such trust.
|
If a partnership (or any other entity
treated as a partnership for United States federal income tax purposes) holds our ordinary shares, the tax treatment of a partner in such
partnership will generally depend on the status of the partner and the activities of the partnership. Such a partner or partnership should
consult its tax advisor as to its tax consequences.
You should consult
your tax advisor with respect to the United States federal, state, local and foreign tax consequences of acquiring, owning and disposing
of our ordinary shares.
Distributions
Subject to the discussion below under
“Passive foreign investment company considerations,” if you are a U.S. Holder, the gross amount of any distribution made to
you with respect to our ordinary shares before reduction for any Israeli taxes withheld therefrom, other than pro rata distributions of
our ordinary shares to all our shareholders, generally will be includible in your income as dividend income to the extent such distribution
is paid out of our current or accumulated earnings and profits as determined under United States federal income tax principles. Subject
to the discussion below under “Passive foreign investment company considerations,” non-corporate U.S. Holders may qualify
for the lower rates of taxation with respect to dividends on ordinary shares applicable to long-term capital gains (meaning, gains from
the sale of capital assets held for more than one year) provided that certain conditions are met, including certain holding period requirements
and the absence of certain risk reduction transactions. However, such dividends will not be eligible for the dividends received deduction
generally allowed to corporate U.S. Holders. Subject to the discussion below under “Passive foreign investment company considerations,”
to the extent that the amount of any distribution by us exceeds our current and accumulated earnings and profits as determined under United
States federal income tax principles, it will be treated first as a tax-free return of your adjusted tax basis in our ordinary shares
and thereafter as capital gain. We do not expect to maintain calculations of our earnings and profits under United States federal income
tax principles and, therefore, U.S. Holders should expect that the entire amount of any distribution generally will be reported as dividend
income.
Dividends paid to U.S. Holders with respect
to our ordinary shares will be treated as foreign source income, which may be relevant in calculating your foreign tax credit limitation.
Subject to certain conditions and limitations, Israeli tax withheld on dividends may be deducted from your taxable income or credited
against your United States federal income tax liability. The limitation on foreign taxes eligible for credit is calculated separately
with respect to specific classes of income. For this purpose, dividends that we distribute generally should constitute “passive
category income,” or, in the case of certain U.S. Holders, “general category income.” A foreign tax credit for foreign
taxes imposed on distributions may be denied if you do not satisfy certain minimum holding period requirements. In addition, for periods
in which we are a “United Stated-owned foreign corporation”, a portion of dividends paid by us may be treated as U.S. source
solely for purposes of the foreign tax credit. We would be treated as a United States-owned foreign corporation if 50% or more of the
total value or total voting power of our stock is owned, directly, indirectly or by attribution, by United States persons. To the extent
any portion of our dividends is treated as U.S. source income pursuant to this rule, the ability of a U.S. Holder to claim a foreign tax
credit for any Israeli withholding taxes payable in respect of our dividends may be limited. A U.S. Holder entitled to benefits under
the United States-Israel Tax Treaty may, however, elect to treat any dividends as foreign source income for foreign tax credit purposes
if the dividend income is separated from other income items for purposes of calculating the U.S. Holder’s foreign tax credit. The
rules relating to the determination of the foreign tax credit are complex, and you should consult your tax advisor to determine whether
and to what extent you will be entitled to this credit.
118
Future distributions with respect to our
ordinary shares may be paid in U.S. dollars or NIS. If a distribution is denominated in NIS, the amount of such distribution will equal
the U.S. dollar value of the NIS received, calculated by reference to the exchange rate in effect on the date that distribution is received,
whether or not the U.S. Holder in fact converts any NIS received into U.S. dollars at that time. If the distribution is converted into
U.S. dollars on the date of receipt, a U.S. Holder generally will not be required to recognize foreign currency gain or loss in respect
of the distribution. A U.S. Holder may have foreign currency gain or loss if the distribution is converted into U.S. dollars after the
date of receipt. Any gains or losses resulting from the conversion of NIS into U.S. dollars will be treated as ordinary income or loss,
as the case may be, of the U.S. Holder and will be U.S.-source.
Sale,
exchange or other disposition of ordinary shares
Subject to the discussion below under
“Passive foreign investment company considerations,” U.S. Holders generally will recognize gain or loss on the sale, exchange
or other disposition of our ordinary shares equal to the difference between the amount realized on such sale, exchange or other disposition
and such holder’s adjusted tax basis in our ordinary shares, and such gain or loss will be capital gain or loss. The adjusted tax
basis in an ordinary share generally will be equal to the cost of such ordinary share. If you are a non-corporate U.S. Holder, capital
gain from the sale, exchange or other disposition of ordinary shares is generally eligible for a preferential rate of taxation applicable
to capital gains, if your holding period for such ordinary shares exceeds one year (meaning, such gain is long-term capital gain). The
deductibility of capital losses for United States federal income tax purposes is subject to limitations under the Code. Any such gain
or loss that a U.S. Holder recognizes generally will be treated as U.S. source income or loss for foreign tax credit limitation purposes.
Passive
foreign investment company considerations
If we were to be classified as a “passive
foreign investment company,” or PFIC, in any taxable year, a U.S. Holder would be subject to special rules generally intended to
reduce or eliminate any benefits from the deferral of United States federal income tax that a U.S. Holder could derive from investing
in a non-U.S. company that does not distribute all of its earnings on a current basis.
A non-U.S. corporation will be classified
as a PFIC for United States federal income tax purposes in any taxable year in which, after applying certain look-through rules, either:
| • |
at least 75% of its gross income is “passive income”; or |
| • |
at least 50% of the average value of its gross assets is attributable to assets
that produce “passive income” or are held for the production of passive income. |
Passive income for this purpose generally includes dividends, interest, royalties, rents, gains from commodities
and securities transactions, the excess of gains over losses from the disposition of assets, which produce passive income, and includes
amounts derived by reason of the temporary investment of funds raised in offerings of our ordinary shares. If a non-U.S. corporation owns
at least 25% by value of the stock of another corporation, the non-U.S. corporation is treated for purposes of the PFIC tests as owning
its proportionate share of the assets of the other corporation and as directly receiving its proportionate share of the other corporation’s
income. If we are classified as a PFIC in any year with respect to which a U.S. Holder owns our ordinary shares, we will continue to be
treated as a PFIC with respect to such U.S. Holder in all succeeding years during which the U.S. Holder owns our ordinary shares, regardless
of whether we continue to meet the tests described above.
Based on the composition of our income,
the composition and estimated fair market value of our assets and the nature of our business, we do not believe we were a PFIC for the
taxable year ended December 31, 2021 and do not expect that we will be classified as a PFIC for the taxable year ending December 31, 2022.
However, no official determination as to our PFIC status has been made for the year ended December 31, 2021. Additionally, because PFIC
status is based on our income, assets and activities for the entire taxable year, it is not possible to determine whether we will be characterized
as a PFIC for a particular taxable year until after the close of the taxable year. Moreover, the determination of our PFIC status annually
is based on tests which are factual in nature, and our status in future years will depend on our income, assets and activities in those
years. Furthermore, because the value of our gross assets is likely to be determined in large part by reference to our market capitalization,
a decline in the value of our ordinary shares may result in our becoming a PFIC. There can be no assurance that we will not be considered
a PFIC for any taxable year. If we were a PFIC then unless you make one of the elections described below, a special tax regime will apply
to both (a) any “excess distribution” by us to you (generally, your ratable portion of distributions in any year which are
greater than 125% of the average annual distribution received by you in the shorter of the three preceding years or your holding period
for our ordinary shares) and (b) any gain realized on the sale or other disposition of the ordinary shares.
119
Under this regime, any excess distribution
and realized gain will be treated as ordinary income and will be subject to tax as if (a) the excess distribution or gain had been realized
ratably over your holding period, (b) the amount deemed realized in each year had been subject to tax in each year of that holding period
at the highest marginal rate for such year (other than income allocated to the current period or any taxable period before we became a
PFIC, which will be subject to tax at the U.S. Holder’s regular ordinary income rate for the current year and will not be subject
to the interest charge discussed below), and (c) the interest charge generally applicable to underpayments of tax had been imposed on
the taxes deemed to have been payable in those years. In addition, dividend distributions made to you will not qualify for the lower rates
of taxation applicable to long-term capital gains discussed above under “Distributions.” Certain elections may be available
that would result in an alternative treatment (such as mark-to-market treatment) of our ordinary shares. We do not intend to provide the
information necessary for U.S. Holders to make qualified electing fund elections if we are classified as a PFIC. U.S. Holders should consult
their tax advisors to determine whether any of these elections would be available and if so, what the consequences of the alternative
treatments would be in their particular circumstances.
If we are determined to be a PFIC, the
general tax treatment for U.S. Holders described in this paragraph would apply to indirect distributions and gains deemed to be realized
by U.S. Holders in respect of any of our subsidiaries that also may be determined to be PFICs.
If a U.S. Holder owns ordinary shares
during any year in which we are classified as a PFIC and the U.S. Holder recognizes gain on a disposition of our ordinary shares or receives
distributions with respect to our ordinary shares, the U.S. Holder generally will be required to file an IRS Form 8621 with respect to
the company, generally with the U.S. Holder’s federal income tax return for that year. If our company were a PFIC for a given taxable
year, then you should consult your tax advisor concerning your annual filing requirements.
U.S. Holders should consult their tax
advisors regarding whether we are a PFIC and the potential application of the PFIC rules.
Backup
withholding tax and information reporting requirements
United States backup withholding tax and
information reporting requirements may apply to certain payments to certain holders of stock. Information reporting generally will apply
to payments of dividends on, and to proceeds from the sale or redemption of, our ordinary shares made within the United States, or by
a U.S. payor or U.S. middleman, to a holder of our ordinary shares, other than an exempt recipient (including a payee that is not a United
States person that provides an appropriate certification and certain other persons). A payor will be required to withhold backup withholding
tax from any payments of dividends on, or the proceeds from the sale or redemption of, ordinary shares within the United States, or by
a U.S. payor or U.S. middleman, to a holder, other than an exempt recipient, if such holder fails to furnish its correct taxpayer identification
number or otherwise fails to comply with, or establish an exemption from, such backup withholding tax requirements. Any amounts withheld
under the backup withholding rules will be allowed as a credit against the beneficial owner’s United States federal income tax liability,
if any, and any excess amounts withheld under the backup withholding rules may be refunded, provided that the required information is
timely furnished to the U.S. Internal Revenue Service.
120
3.8%
Medicare Tax on “Net Investment Income”
Certain U.S. Holders who are individuals,
estates or trusts are required to pay an additional 3.8% tax on, among other things, dividends and capital gains from the sale or other
disposition of ordinary shares.
Foreign
asset reporting
Certain U.S. Holders, who are individuals,
are required to report information relating to an interest in our ordinary shares, subject to certain exceptions (including an exception
for shares held in accounts maintained by U.S. financial institutions). U.S. Holders are urged to consult their tax advisors regarding
their information reporting obligations, if any, with respect to their ownership and disposition of our ordinary shares.
The above description
is not intended to constitute a complete analysis of all tax consequences relating to the acquisition, ownership and disposition of our
ordinary shares. You should consult your tax advisor concerning the tax consequences of your particular situation.
| F. |
Dividends
and Paying Agents |
Not applicable.
| G. |
Statements
by Experts |
Not applicable.
| H. |
Documents
on Display |
You may read and copy this annual report
on Form 20-F, including the related exhibits and schedules, and any document we file with the SEC through the SEC’s website at http://www.sec.gov.
As a foreign private issuer, we are exempt
from the rules under the Exchange Act related to the furnishing and content of proxy statements, and our officers, directors and principal
shareholders are exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the Exchange Act. Furthermore,
as a foreign private issuer, we are also not subject to the requirements of Regulation Fair Disclosure (“FD”)
promulgated under the Exchange Act. In addition, we are not required under the Exchange Act to file annual or other reports and consolidated
financial statements with the SEC as frequently or as promptly as U.S. companies whose securities are registered under the Exchange Act.
Instead, we must file with the SEC, within 120 days after the end of each fiscal year, or such other applicable time as required by the
SEC, an annual report on Form 20-F containing consolidated financial statements audited by an independent registered public accounting
firm. We also intend to furnish certain other material information to the SEC under cover of Form 6-K.
We maintain a corporate website at http://www.caesarstone.com.
Information contained on, or that can be accessed through, our website does not constitute a part of this annual report on Form
20-F. We have included our website address in this annual report on Form 20-F solely as an inactive textual reference.
| I. |
Subsidiary
Information |
Not applicable.
ITEM
11: Quantitative and Qualitative Disclosures About Market Risk
Since July 1, 2012, our functional currency
has been the U.S. dollar. We conduct business in a large number of countries and, as a result, we are exposed to foreign currency fluctuations.
The majority of our revenues are denominated in U.S. dollars, Australian dollars and Canadian dollars. Sales in Australian dollars accounted
for 18.4%, 21.3% and 19.8% of our revenues in 2021, 2020 and 2019, respectively. Sales in Canadian dollars accounted for 13.1%, 14.9%
and 15.7% of our revenues in 2021, 2020 and 2019, respectively. As a result, devaluation of the Australian dollar, and to a lesser extent,
the Canadian dollar, relative to the U.S. dollar could reduce our profitability significantly. Our expenses are largely denominated in
U.S. dollars, NIS and Euros, and a smaller proportion in Canadian dollars, Australian dollars British pound and Singaporean dollars. As
a result, a revaluation of the NIS, or to a lesser extent, the Euro, relative to the U.S. dollar could reduce our profitability significantly.
121
The following table presents information
about the year over year percentage changes in the average exchange rates of the principal currencies that impact our results of operations:
|
Australian dollar against U.S. dollar |
Canadian dollar against U.S. dollar |
NIS against U.S. dollar |
Euro against U.S. dollar |
|||||||||||||
|
2019 |
(3.1 |
)% |
1.2 |
% |
5.3 |
% |
(1.6 |
)% | ||||||||
|
2020 |
(0.6 |
)% |
(0.9 |
)% |
3.7 |
% |
2.0 |
% | ||||||||
|
2021 |
8.7 |
% |
6.9 |
% |
6.4 |
% |
3.6 |
% | ||||||||
Assuming a 10% decrease in the Australian
dollar relative to the U.S. dollar and assuming no other changes, our operating income would have decreased by $8.6 million in 2021.
Assuming a 10% decrease in the Canadian
dollar relative to the U.S. dollar and assuming no other changes, our operating income would have decreased by $5.4 million in 2021.
Devaluation of NIS relative to the U.S.
dollar would decrease our revenues generated in Israel. However, our NIS operating costs when reported in U.S. dollars would decrease
to a greater extent, resulting in higher operating income. As a result, assuming a 10% decrease in NIS relative to the U.S. dollar and
assuming no other changes, our operating income, as reported in U.S. dollars, would increase by $9.1 million in 2021.
An appreciation of the Euro relative to
the U.S. dollar would increase our revenues generated in Europe and certain other countries. However, our Euro operating costs when reported
in U.S. dollars would increase to a greater extent, resulting in lower operating income. Assuming a 10% increase in the Euro relative
to the U.S. dollar and assuming no other changes, our operating income would have decreased by $2.4 million in 2021.
Our exposure related to exchange rate
changes on our net asset position denominated in currencies other than the U.S. dollar varies with changes in our net asset position.
Net asset position refers to financial assets, such as trade receivables and cash, less financial liabilities, such as loans and accounts
payable. The impact of any such transaction gains or losses is reflected in finance expenses, net. Our most significant exposure as of
December 31, 2021, relates to a potential change in the exchange rate of the Canadian dollar and British pound and to a lesser extent
to the Singaporean dollar, and the Indian Rupee relative to the U.S. dollar. Assuming a 10% decrease in the NIS, Australian dollar and
the EUR relative to the U.S. dollar, and assuming no other changes, finance expenses, net would have decreased by $0.2 million, $0.1 million
and $0.1 million, respectively. Assuming a 10% decrease in the Canadian dollar, GBP, Singaporean dollar relative to the U.S. dollar, and
assuming no other changes, finance expenses, net would have increased by $1.1 million, $1.2 million and $0.3 million in 2021, respectively.
We use forward contracts to manage currency
risk with respect to those currencies in which we generate revenues or incur expenses. Our functional currency is the U.S. dollar, and
we use Australian/U.S. dollar, Euro/U.S. dollar and U.S. dollar/Canadian dollar and GBP/ U.S. dollar forward contracts. The derivatives
instruments partially offset the impact of foreign currency fluctuations. We may in the future use derivative instruments to a greater
extent or engage in other transactions or invest in market risk sensitive instruments if we determine that it is necessary to offset these
risks. Currency instruments other than our U.S. dollar/NIS forward contracts are not designated as hedging accounting instruments under
ASC 815, Derivatives and Hedging. Therefore, we have been incurring financial loss or income as a result of these derivatives.
122
As of December 31, 2021, we had the following
foreign currency hedge portfolio (U.S. dollar in thousands):
|
USD/NIS |
EUR/USD |
GBP/USD |
USD/CAD |
AUD/USD |
TOTAL |
||||||||||||||||||||
|
Buy forward contracts |
Notional |
— |
26,450 |
— |
— |
— |
26,450 |
||||||||||||||||||
|
Fair value |
— |
(329 |
) |
— |
— |
— |
(329 |
) | |||||||||||||||||
|
Average rate |
— |
1.15 |
— |
— |
— |
— |
|||||||||||||||||||
|
Sell forward contracts |
Notional |
17,089 |
— |
— |
24,410 |
7,880 |
49,379 |
||||||||||||||||||
|
Fair value |
297 |
— |
— |
786 |
614 |
1,697 |
|||||||||||||||||||
|
Average rate |
3.160 |
— |
— |
1.233 |
0.788 |
— |
|||||||||||||||||||
|
Buy put options |
Notional |
— |
— |
— |
— |
— |
— |
||||||||||||||||||
|
Fair value |
— |
— |
— |
— |
— |
— |
|||||||||||||||||||
|
Average rate |
— |
— |
— |
— |
— |
— |
|||||||||||||||||||
|
Sell call options |
Notional |
— |
— |
— |
— |
— |
— |
||||||||||||||||||
|
Fair value |
— |
— |
— |
— |
— |
— |
|||||||||||||||||||
|
Average rate |
— |
— |
— |
— |
— |
— |
|||||||||||||||||||
|
Total notional value |
17,089 |
26,450 |
— |
24,401 |
7,880 |
75,829 |
|||||||||||||||||||
|
Total fair value |
$ |
297 |
$ |
(329 |
) |
— |
$ |
786 |
$ |
614 |
$ |
1,368 |
|||||||||||||
As of December 31, 2021, net embedded
gain on our foreign currency open derivatives transactions were $1.37 million. As of December 31, 2020, net embedded losses on our foreign
currency open derivatives transactions were $3.6 million. As of December 31, 2019, net embedded losses on our foreign currency open derivatives
transactions were $0.4 million.
For the year ended December 31, 2021,
our finance income resulted from derivatives including the impact of the foreign exchange rate derivatives fair value measurement were
$2.1 million. For the year ended December 31, 2020, our finance income generated from derivatives including the impact of the foreign
exchange rate derivatives fair value measurement were $0.8 million. For the year ended December 31, 2019, our finance expenses generated
from derivatives including the impact of the foreign exchange rate revaluation were $2.1 million.
Interest
rates
We had cash and short-term bank deposits totaling $74.3 million on December 31, 2021. Our cash, cash equivalents
and short-term bank deposits are held for working capital and other purposes. We do not enter into investments for trading or speculative
purposes. Due to the short-term nature of the investments in cash equivalents and our relatively low debt balances, we do not believe
that changes in interest rates will have a material impact on our financial position and results of operations and, therefore, we believe
that a sensitivity analysis would not be material to investors. However, declines in interest rates will reduce future investment income.
Inflation
Inflationary factors such as increases
in the cost of our labor may adversely affect our operating results. Although we do not believe that inflation has had a material impact
on our financial position or results of operations to date, a high rate of inflation in the future may have an adverse effect on our ability
to maintain current levels of gross profit margins and operating expenses as a percentage of revenues if the selling prices of our products
do not increase in line with increases in costs.
ITEM
12: Description of Securities Other Than Equity Securities
Not applicable.
123
PART
II
ITEM
13: Defaults, Dividend Arrearages and Delinquencies
None.
ITEM
14: Material Modifications to the Rights of Security Holders and Use of Proceeds
None.
ITEM
15: Controls and Procedures
(a) Disclosure
Controls and Procedures. Our management, including our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness
of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of December
31, 2021. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of December 31, 2021,
our disclosure controls and procedures were effective such that the information required to be disclosed by us in reports that we file
or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms,
and is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate
to allow timely decisions regarding required disclosure.
(b) Management’s
Annual Report on Internal Control Over Financial Reporting. Our management, under the supervision of our Chief Executive Officer
and Chief Financial Officer, is responsible for establishing and maintaining adequate internal control over financial reporting as defined
in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with generally
accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that:
| • |
pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of our assets; |
| • |
provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures
are being made only in accordance with authorizations of our management and directors; and |
| • |
provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of our assets that could have a material effect on the financial statements. |
Our management, including our Chief Executive
Officer and Chief Financial Officer, assessed the effectiveness of our internal control over financial reporting as of December 31, 2021.
In making this assessment, our management used the criteria established in Internal Control—Integrated
Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Our management has concluded,
based on its assessment, that our internal control over financial reporting was effective as of December 31, 2021 to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external reporting
purposes in accordance with generally accepted accounting principles.
(c) Attestation
Report of the Registered Public Accounting Firm. Our independent registered public accounting firm has audited the consolidated
financial statements included in this annual report on Form 20-F, and as part of its audit, has issued an unqualified audit report on
the effectiveness of our internal control over financial reporting as of December 31, 2021. This report is included in pages F-2 and F-3
of this annual report on Form 20-F and is incorporated herein by reference.
(d) Changes
in Internal Control Over Financial Reporting. During the period covered by this report, no changes in our internal control over
financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) have occurred that have materially
affected, or are reasonably likely to materially affect, our internal control over financial reporting.
124
ITEM
16: Reserved
ITEM
16A: Audit Committee Financial Expert
Our board of directors has determined
that each of Ms. Nurit Benjamini and Ms. Lily Ayalon qualifies as an “audit committee financial expert,” as defined by the
rules of the SEC, and has the requisite financial experience required by the Nasdaq rules. In addition, Ms. Nurit Benjamini and Ms. Lily
Ayalon are independent as such term is defined in Rule 10A-3(b)(1) under the Exchange Act and under Nasdaq rules.
ITEM
16B: Code of Ethics
The Company has adopted a code of ethics
(“Code of Ethics”) that applies to all the employees, directors and officers. We have
posted these codes on our corporate website at https://ir.caesarstone.com/governance/governance-documents/default.aspx.
Information contained on, or that can be accessed through, our website does not constitute a part of this annual report and is not incorporated
by reference herein.
Waivers of our Code of Ethics may only
be granted by the board of directors. Any amendments to this Code of Ethics or any waiver that is granted, and the basis for granting
the waiver, will be publicly communicated as appropriate. Under Item 16B of Form 20-F, if a waiver or amendment of the Code
of Ethics applies to our principal executive officer, principal financial officer, principal accounting officer, controller and other
persons performing similar functions and relates to standards promoting any of the values described in Item 16B(b) of Form 20-F,
we will disclose such waiver or amendment (i) on our website within five business days following the date of amendment or waiver in accordance
with the requirements of Instruction 4 to Item 16B or (ii) through the filing of a Form 6-K. We granted no waivers under our
Code of Ethics in 2021.
ITEM
16C: Principal Accountant Fees and Services
Fees Paid to the Auditors
The following table sets forth, for each
of the years indicated, the fees billed by our independent registered public accounting firm.
|
2021 |
2020 |
|||||||
|
(in thousands of U.S. dollars) |
||||||||
|
Audit fees(1) |
$ |
789 |
$ |
619 |
||||
|
Audit-related fees(2) |
103 |
87 |
||||||
|
Tax fees(3) |
128 |
119 |
||||||
|
All other fees(4) |
72 |
528 |
||||||
|
Total |
$ |
1,092 |
$ |
1,353 |
||||
| (1) |
“Audit fees” include fees for services performed by our independent public accounting
firm in connection with the integrated audit of our annual audit consolidated financial statements for 2021 and 2020, and its internal
control over financial reporting as of December 31, 2021 and 2020, certain procedures regarding our quarterly financial results submitted
on Form 6-K, and consultation concerning financial accounting and reporting standards. |
| (2) |
“Audit-related fees” relate to assurance and associated services that are traditionally
performed by the independent auditor. |
| (3) |
“Tax fees” include fees for professional services rendered by our independent
registered public accounting firm for tax compliance and tax advice and tax planning services on actual or contemplated transactions.
|
| (4) |
“Other fees” include fees for services rendered by our independent registered
public accounting firm with respect to supply chain consulting, governmental incentives, due diligence investigations and other matters.
|
Audit Committee’s
Pre-Approval Policies and Procedures
Our audit committee has adopted a pre-approval
policy for the engagement of our independent accountant to perform certain audit and non-audit services. Pursuant to this policy, which
is designed to assure that such engagements do not impair the independence of our auditors, the audit committee pre-approves annually
a catalog of specific audit and non-audit services in the categories of audit service, audit-related service and tax services that may
be performed by our independent accountants.
125
ITEM
16D: Exemptions from the Listing Standards for Audit Committees
Not applicable.
ITEM
16E: Purchases of Equity Securities by the Company and Affiliated Purchasers
None.
ITEM
16F: Change in Registrant’s Certifying Accountant
None.
ITEM
16G: Corporate Governance
As a foreign private issuer, we are permitted
under Nasdaq Rule 5615(a)(3) to follow Israeli corporate governance practices instead of the Nasdaq corporate governance rules, provided
we disclose which requirements we are not following and the equivalent Israeli requirement. We must also provide the Nasdaq Global Select
Market with a letter from outside counsel in our home country, Israel, certifying that our corporate governance practices are not prohibited
by Israeli law.
We rely on this “foreign private
issuer exemption” and follow the requirements of Israeli law with respect to the quorum requirement for meetings of our shareholders,
which are different from the requirements of Rule 5620(c). Under our articles of association, the quorum required for an ordinary meeting
of shareholders consists of at least two shareholders present in person, by proxy or by written ballot, who hold or represent between
them at least 25% of the voting power of our shares, instead of 33 1/3% of the issued share capital provided by under the Nasdaq rules.
At an adjourned meeting, any number of shareholders constitutes a quorum. This quorum requirement is based on the default requirement
set forth in the Companies Law. We submitted a letter to the Nasdaq Global Select Market from our outside counsel in connection with this
item prior to our IPO in March 2012.
Otherwise, we comply with the Nasdaq corporate
governance rules requiring that listed companies have a majority of independent directors and maintain a compensation and nominating committee
composed entirely of independent directors. We are also subject to Israeli corporate governance requirements applicable to companies incorporated
in Israel whose securities are listed for trading on a stock exchange outside of Israel. Finally, unlike Nasdaq rules, which requires
listed issuers to make annual reports on Form 20-F available to shareholders in one of a number of specific manners, Israeli law does
not require us to distribute such reports directly to shareholders, and the generally accepted business practice in Israel is not to distribute
such reports to shareholders but to make such reports available through a public website. In addition, we will make our annual report
on Form 20-F containing audited financial statements available to our shareholders at our offices (in addition to a public website).
We may in the future provide the Nasdaq
Global Select Market with an additional letter or letters notifying the organization that we are following our home country practices,
consistent with the Companies Law and practices, in lieu of other requirements of Nasdaq Rule 5600.
ITEM
16H: Mine Safety Disclosures
Not applicable.
ITEM
16I: Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
[Not applicable.]
126
PART
III
ITEM
17: Financial Statements
Not applicable.
ITEM
18: Financial Statements
See Financial Statements included at the
end of this report.
ITEM
19: Exhibits
INDEX OF EXHIBITS
|
Number |
Description | |
| 4.5 | ||
127
|
101.INS |
Inline XBRL Instance Document |
|
101.SCH |
Inline XBRL Taxonomy Extension Schema
Document |
|
101.PRE |
Inline XBRL Taxonomy Presentation Linkbase
Document |
|
101.CAL |
Inline XBRL Taxonomy Calculation Linkbase
Document |
|
101.LAB |
Inline XBRL Taxonomy Label Linkbase Document
|
|
101.DEF |
Inline XBRL Taxonomy Extension Definition
Linkbase Document |
|
104 |
Cover Page Interactive Data File (embedded
within the Inline XBRL document) |
___________________
| (1) |
Previously filed with the Securities and Exchange Commission on March 23, 2020 as Exhibit
1.1 to the Company’s annual report on Form 20-F for the year ended December 31, 2019 and incorporated by reference herein.
|
| (2) |
Previously filed with the Securities and Exchange Commission on March 6, 2012 as Exhibit
3.1 to the Company’s registration statement on Form F-1/A (File No. 333-179556) and incorporated by reference herein.
|
| (3) |
Previously filed with the Securities and Exchange Commission on March 23, 2020 as Exhibit
2.1 to the Company’s annual report on Form 20-F for the year ended December 31, 2019 and incorporated by reference herein.
|
| (4) |
Previously filed with the Securities and Exchange Commission on February 16, 2012 pursuant
to a registration statement on Form F-1 (File No. 333-179556) and incorporated by reference herein. |
| (5) |
Previously filed with the Securities and Exchange Commission on March 7, 2016 pursuant as
Exhibit 4.5 to the Company’s annual report on Form 20-F for the year ended December 31, 2015 and incorporated by reference
herein. |
| (6) |
Previously filed with the Securities and Exchange Commission on December 23, 2020 as Exhibit
99.1 to the Company’s Registration Statement on Form S-8 (File No. 333-251642) and incorporated by reference herein. |
| (7) |
Previously filed with the Securities and Exchange Commission on October 13, 2021 as Exhibit
99.1 to the Company’s current report on Form 6-K and incorporated by reference herein. |
| (8) |
Previously filed with the Securities and Exchange Commission on October 10, 2020 as Exhibit
99.1 to the Company’s current report on Form 6-K and incorporated by reference herein. |
| * |
Portions of this exhibit were omitted, and a complete copy of each agreement was provided
separately to the Securities and Exchange Commission pursuant to the Company’s application requesting confidential treatment under
Rule 24b-2 under the Exchange Act, which was subsequently approved by the SEC. |
| ** |
Certain confidential information contained in this document, marked by brackets, was omitted
because it is both (i) not material and (ii) would likely cause competitive harm to the Company if publicly disclosed. “(***)”
indicates where the information has been omitted from this exhibit |
| ∞ |
English translation of original Hebrew document |
128
SIGNATURES
The registrant hereby
certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to
sign this annual report on its behalf.
|
|
Caesarstone Ltd.
By: /s/
Yuval Dagim
Yuval Dagim
Chief Executive Officer |
Date: March 15, 2022
129
CAESARSTONE LTD. AND ITS SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2021
INDEX
|
|
Page
|
|
|
|
|
(PCAOB ID No.
|
F-2 - F-5
|
|
|
|
|
F-6 - F-7
|
|
|
|
|
|
F-8
|
|
|
|
|
|
F-9
|
|
|
|
|
|
F-10
|
|
|
|
|
|
F-11 - F-12
|
|
|
|
|
|
F-13 - F-74
|
|
|
|
|
|
(PCAOB ID No.
|
F-75 - F-78
|
|
|
|
- - - - - - - - - - -
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors of Caesarstone Ltd.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Caesarstone Ltd. (and subsidiaries) (the Company) as of December 31, 2021 and 2020, the related consolidated statements of income, comprehensive income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 2021, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, based on our audits and the report of other auditors, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021, in conformity with U.S. generally accepted accounting principles.
We did not audit the financial statements of Caesarstone Australia Pty Ltd., a wholly-owned subsidiary, which reflect total assets of constituting 11% at December 31, 2021 and 2020, and total revenues constituting 18% in 2021, 21% in 2020 and 20% in 2019 of the related consolidated totals. Those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for Caesarstone Australia Pty Ltd., is based solely on the report of the other auditors.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated March 15, 2022 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits and the report of other auditors provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
F - 2
|
|
|
|
|
Provision for bodily injury claims related to exposure to silica dust
|
||
|
Description of the matter
|
As described in note 11 to the consolidated financial statements, the Company is subject to numerous claims mainly by fabricators, their employees or the National Insurance Institute ("NII"), alleging that fabricators contracted illnesses, including silicosis, through exposure to silica particles during cutting, polishing, sawing, grinding, breaking, crushing, drilling, sanding or sculpting Company's products. The Company recognized a provision in relation to Silicosis claims when an unfavorable outcome was probable and the amount of the loss could be reasonably estimated. In order to determine the liability amount, the Company consults with legal counsels.
Auditing the Company’s accounting for the Silicosis provision was complex due to the significant estimation required in determining the Company’s liability amount of $43 million. The estimate of the provision involved significant estimation uncertainty primarily due to the different stages of legal claims and the probability of loss, which in turn led to a high degree of auditor judgment and effort in performing procedures and evaluating management's conclusions related to these legal claims.
|
|
|
How we addressed the matter in our audit
|
We obtained an understanding, evaluated the design and tested the operating effectiveness of internal controls over the accounting of Silicosis claims provision, including management's assessment of the assumptions and data underlying the provision valuation.
To evaluate the Company's assessment of the probability of incurrence of a loss and whether the loss was reasonably estimated, among other procedures, we read the minutes of the meeting of the committees of the board of directors and gained an understanding of the claims by inquiring of the external and internal legal counsels regarding the allegations. We also obtained external and internal legal counsels confirmation letters as well as a management representation letter.
Our substantive procedures also included testing the accuracy, completeness and reasonableness of the underlying data used in management's provision assessment and attending meetings between management and legal counsels to determine a range of reasonably possible loss. We tested management’s assumptions by comparing prior period's estimates versus actual prior period's results and evaluating events occurring up to date of the auditor's report. We also inquired the legal counsels regarding the likelihood of the outcome of the claims, and evaluated the Company’s legal contingency disclosures included in Note 11 to the consolidated financial statements.
|
F - 3
|
|
|
Valuation of Goodwill
|
||
|
Description of the matter
|
As reflected in the Company’s consolidated financial statements, at December 31, 2021, the Company’s goodwill was $45.8 million. As disclosed in Note 7 to the consolidated financial statements, goodwill is tested for impairment at least annually or more frequently if indicators of impairment require the performance of an interim impairment assessment. The Company operates as one reporting unit. As of December 31, 2021 the Company identified an indicator for goodwill impairment as the market capitalization of the Company was lower than the equity book value.
Auditing the Company's impairment test for goodwill was complex and highly judgmental due to the significant estimation uncertainty in determining the fair value of its reporting unit. In particular, the fair value estimates were sensitive to changes in significant assumptions such as discount rate, revenue growth rate, operating margins, working capital, weighted average cost of capital, estimated spend on capital expenditures and the projected cash flow growth rates. All of these assumptions are sensitive to and affected by the expected future market or economic conditions, and industry and company-specific qualitative factors. |
|
|
How we addressed the matter in our audit
|
We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s goodwill impairment assessment process. For example, we tested controls over the review of the significant assumptions in estimating the fair value of the Company.
To test the estimated fair value of the Company, our audit procedures included, among others, assessing methodologies and testing the significant assumptions and underlying data used by the Company. We evaluated the Company’s valuation process by comparing the significant assumptions to current industry and economic trends, we analyzed management’s forecasted revenue including the revenue growth rate, profitability margins, working capital, discount rate and estimated spend on capital expenditures to identify, understand and evaluate the changes as compared to the historical results and to selected guideline companies in the industry. In addition, we performed a sensitivity analysis of significant assumptions to evaluate the changes in the fair value of the Company resulting from changes in the assumptions. We involved our valuation specialists to assist with our evaluation of the methodology used by the Company and significant assumptions included in the fair value estimates. In addition, our valuation specialists performed independent comparative calculations to estimate the acquired entity’s weighted average cost of capital. We also evaluated the related disclosures included in Notes 21 and 7 to the consolidated financial statements.
|
|
/s/KOST FORER GABBAY & KASIERER
|
|
|
A Member of Ernst & Young Global
|
|
|
We have served as the Company's auditor since 2004
|
|
|
Tel-Aviv, Israel
|
|
|
March 15, 2022
|
F - 4
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Caesarstone Ltd.
Opinion on Internal Control over Financial Reporting
We have audited Caesarstone Ltd. and subsidiaries’ internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission 2013 framework (the COSO criteria). In our opinion, Caesarstone Ltd. and subsidiaries (the Company) based on our audit and the report of other auditors maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on the COSO criteria.
We did not examine the effectiveness of internal control over financial reporting of Caesarstone Australia Pty Ltd. a wholly owned subsidiary, whose financial statements reflect total assets and revenues constituting 11% and 21%, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2021. The effectiveness of Caesarstone Australia Pty Ltd.’s internal control over financial reporting was audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the effectiveness of Caesarstone Australia Pty Ltd.’s internal control over financial reporting, is based solely on the report of the other auditors.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2021 and 2020, the related consolidated statements of income, comprehensive income, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2021, and the related notes and our report dated March 15, 2022 expressed an unqualified opinion thereon, based on our audit and the report of the other auditors.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit and the report of other auditors provide a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
|
/s/
A Member of Ernst & Young Global
|
|
|
|
March 15, 2022
|
F - 5
CAESARSTONE LTD. AND ITS SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
U.S. dollars in thousands
|
December 31,
|
|||||||||||
|
Note
|
2021
|
2020
|
|||||||||
|
ASSETS
|
|||||||||||
|
CURRENT ASSETS:
|
|||||||||||
|
Cash and cash equivalents
|
$
|
|
$
|
|
|||||||
|
Short-term available for sale marketable securities
|
3
|
|
|
||||||||
|
Trade receivables (net of allowance for credit loss of $
|
|
|
|||||||||
|
Other accounts receivable and prepaid expenses
|
4
|
|
|
||||||||
|
Inventories
|
5
|
|
|
||||||||
|
Total current assets
|
|
|
|||||||||
|
LONG-TERM ASSETS:
|
|||||||||||
|
Severance pay fund
|
|
|
|||||||||
|
Other long-term receivables
|
11
|
|
|
||||||||
|
Deferred tax assets, net
|
12
|
|
|
||||||||
|
Long-term deposits and prepaid expenses
|
|
|
|||||||||
|
Long-term available for sale marketable securities
|
3
|
|
|
||||||||
|
Property, plant and equipment, net
|
6
|
|
|
||||||||
|
Operating lease right-of-use assets
|
10
|
|
|
||||||||
|
Intangible assets, net
|
7
|
|
|
||||||||
|
Goodwill
|
7
|
|
|
||||||||
|
Total long-term assets
|
|
|
|||||||||
|
Total assets
|
$
|
|
$
|
|
|||||||
The accompanying notes are an integral part of the consolidated financial statements
F - 6
CAESARSTONE LTD. AND ITS SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
U.S. dollars in thousands (except share data)
|
December 31,
|
|||||||||||
|
Note
|
221
|
2020
|
|||||||||
|
LIABILITIES AND EQUITY
|
|||||||||||
|
CURRENT LIABILITIES:
|
|||||||||||
|
Short-term bank credit and current maturities of long- term bank loan
|
8
|
$
|
|
$
|
|
||||||
|
Trade payables
|
|
|
|||||||||
|
Related party and other loan
|
14
|
|
|
||||||||
|
Short term legal settlements and loss contingencies
|
11
|
|
|
||||||||
|
Accrued expenses and other liabilities
|
9
|
|
|
||||||||
|
Total current liabilities
|
|
|
|||||||||
|
LONG-TERM LIABILITIES:
|
|||||||||||
|
Long-term other loans and financing liability of land from related parties
|
14
|
|
|
||||||||
|
Long-term bank loan
|
15
|
|
|
||||||||
|
Accrued severance pay
|
|
|
|||||||||
|
Deferred tax liabilities, net
|
12
|
|
|
||||||||
|
Long-term warranty provision
|
|
|
|||||||||
|
Long term legal settlements and loss contingencies
|
11
|
|
|
||||||||
|
Long-term operating lease liabilities
|
10
|
|
|
||||||||
|
Total long-term liabilities
|
|
|
|||||||||
|
COMMITMENTS AND CONTINGENT LIABILITIES
|
11
|
||||||||||
|
REDEEMABLE NON-CONTROLLING INTEREST
|
1,2
|
|
|
||||||||
|
EQUITY:
|
13
|
||||||||||
|
Share capital-
|
|||||||||||
|
Ordinary shares of NIS
|
|
|
|||||||||
|
Additional paid-in capital
|
|
|
|||||||||
|
Capital fund related to non-controlling interest
|
(
|
)
|
(
|
)
|
|||||||
|
Accumulated other comprehensive income (loss), net
|
(
|
)
|
|
||||||||
|
Retained earnings
|
|
|
|||||||||
|
Treasury shares at cost –
|
(
|
)
|
(
|
)
|
|||||||
|
Total equity
|
|
|
|||||||||
|
Total liabilities and equity
|
|
|
|||||||||
The accompanying notes are an integral part of the consolidated financial statements
F - 7
CONSOLIDATED STATEMENTS OF INCOME
U.S. dollars in thousands (except per share data)
|
|
Year ended December 31, | |||||||||||
|
|
2021
|
2020
|
2019
|
|||||||||
|
|
||||||||||||
|
Revenues
|
$ | $ | $ | |||||||||
|
Cost of revenues
|
||||||||||||
|
|
||||||||||||
|
Gross profit
|
||||||||||||
|
|
||||||||||||
|
Operating expenses:
|
||||||||||||
|
|
||||||||||||
|
Research and development
|
||||||||||||
|
Selling and marketing
|
||||||||||||
|
General and administrative
|
||||||||||||
|
Legal settlements and loss contingencies, net
|
||||||||||||
|
|
||||||||||||
|
Total operating expenses
|
||||||||||||
|
|
||||||||||||
|
Operating income
|
||||||||||||
|
Finance expenses, net
|
||||||||||||
|
|
||||||||||||
|
Income before taxes on income
|
||||||||||||
|
Taxes on income
|
||||||||||||
|
|
||||||||||||
|
Net income
|
$ | $ | $ | |||||||||
|
|
||||||||||||
|
Net income (loss) attributable to non-controlling interest
|
( |
) | ||||||||||
|
|
||||||||||||
|
Net income attributable to controlling interest
|
$ | $ | $ | |||||||||
|
|
||||||||||||
|
Basic and diluted net income per share of Ordinary shares
|
$ | $ | $ | |||||||||
|
|
||||||||||||
|
Weighted average number of Ordinary shares used in computing basic income per share (in thousands)
|
||||||||||||
|
|
||||||||||||
|
Weighted average number of Ordinary shares used in computing diluted income per share (in thousands)
|
||||||||||||
The accompanying notes are an integral part of the consolidated financial statements.
F - 8
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
U.S. dollars in thousands
|
|
Year ended December 31, | |||||||||||
|
|
2021 |
2020 |
2019 |
|||||||||
|
|
||||||||||||
|
Net income |
$ | $ | $ | |||||||||
|
|
||||||||||||
|
Other comprehensive income (loss) before tax: |
||||||||||||
|
|
||||||||||||
|
Foreign currency translation adjustments |
( |
) | ( |
) | ||||||||
|
Unrealized income on foreign currency cash flow hedge |
||||||||||||
|
Unrealized income (loss) on available for sale marketable securities |
( |
) | ||||||||||
|
Income tax expense related to components of other comprehensive income (loss) |
( |
) | ( |
) | ( |
) | ||||||
|
|
||||||||||||
|
Total other comprehensive income (loss), net of tax |
( |
) | ( |
) | ||||||||
|
|
||||||||||||
|
Comprehensive income |
||||||||||||
|
Less - comprehensive income (loss) attributable to non-controlling interest |
( |
) | ||||||||||
|
|
||||||||||||
|
Comprehensive income attributable to controlling interest |
$ | $ | $ | |||||||||
The accompanying notes are an integral part of the consolidated financial statements
F - 9
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
U.S. dollars in thousands (except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
|
|
|
|
|
|
|
|
|||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
fund
|
|
|
|
|
|
|
|
|||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
other
|
|
|
related to
|
|
|
|
|
|
|
|
|||||||||
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
comprehensive
|
|
|
non-
|
|
|
|
|
|
|
|
|||||||||
|
|
|
Common stock
|
|
|
paid-in
|
|
Retained
|
|
|
income (loss),
|
|
|
controlling
|
|
|
Treasury
|
|
|
Total
|
|
||||||||||||
|
|
|
Shares
|
|
|
Amount
|
|
|
capital
|
|
earnings
|
|
|
net (1)
|
|
|
interest
|
|
|
shares
|
|
|
equity
|
|
|||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
Balance as of January 1, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(
|
)
|
|
|
(
|
)
|
|
|
(
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(
|
)
|
|
|
|
|
|
|
|
|
|
|
(
|
)
|
|
|
Net income attributable to controlling interest
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity-based compensation expense related to employees (2)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend paid
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
(
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(
|
)
|
|
|
Cashless exercise of options and RSUs
|
|
|
|
|
|
|
(
|
)
|
|
|
(
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(
|
)
|
|
|
(
|
)
|
|
|
(
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity-based compensation expense related to employees (2)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend paid
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
(
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(
|
)
|
|
|
Cashless exercise of options and RSUs
|
|
|
|
|
|
|
(
|
)
|
|
|
(
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(
|
)
|
|
|
(
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(
|
)
|
|
|
|
|
|
|
|
|
|
|
(
|
)
|
|
|
Net income attributable to controlling interest
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity-based compensation expense related to employees (2)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment to redemption value of the non-controlling interest |
- |
( |
) |
( |
) | |||||||||||||||||||||||||||
|
Dividend paid
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
(
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(
|
)
|
|
|
Cashless exercise of options and RSUs
|
|
|
|
|
|
|
(
|
)
|
|
|
(
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(
|
)
|
|
|
(
|
)
|
|
|
(
|
)
|
|
|
|
|
|
|
(1)
|
|
|
(2)
|
|
|
(*)
|
|
The accompanying notes are an integral part of the consolidated financial statements.
F - 10
CONSOLIDATED STATEMENTS OF CASH FLOWS
U.S. dollars in thousands
|
Year ended December 31,
|
||||||||||||
|
2021
|
2020
|
2019
|
||||||||||
|
Cash flows from operating activities:
|
||||||||||||
|
Net income
|
$
|
|
$
|
|
$
|
|
||||||
|
Adjustments required to reconcile net income to net cash provided by operating activities:
|
||||||||||||
|
Depreciation and amortization
|
|
|
|
|||||||||
|
Share-based compensation expense
|
|
|
|
|||||||||
|
Accrued severance pay, net
|
|
(
|
)
|
(
|
)
|
|||||||
|
Changes in deferred tax, net
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||
|
Capital loss (gain) from sale of property, plant and equipment
|
(
|
)
|
|
|
||||||||
|
Decrease (increase) in trade receivables
|
|
|
(
|
)
|
||||||||
|
Decrease (increase) in other accounts receivable and prepaid expenses
|
(
|
)
|
|
(
|
)
|
|||||||
|
Decrease (increase) in inventories
|
(
|
)
|
|
|
||||||||
|
Decrease in trade payables
|
|
(
|
)
|
(
|
)
|
|||||||
|
Increase (decrease) in warranty provision
|
|
(
|
)
|
|
||||||||
|
Legal settlements and loss contingencies, net
|
|
|
|
|||||||||
|
Decrease (increase) in right of use assets
|
|
|
(
|
)
|
|
|||||||
|
Changes in lease liabilities
|
(
|
) |
|
|
||||||||
|
Contingent consideration related to acquisition
|
(
|
)
|
|
|
||||||||
|
Amortization of premium and accretion of discount on marketable securities, net
|
|
|
|
|||||||||
|
Changes in accrued interest related to marketable securities
|
|
(
|
)
|
|
||||||||
|
Increase (decrease) in accrued expenses and other liabilities including related party
|
(
|
)
|
|
|
||||||||
|
Net cash provided by operating activities
|
|
|
|
|||||||||
|
Cash flows from investing activities:
|
||||||||||||
|
Net cash paid for acquisitions
|
|
(
|
)
|
|
||||||||
|
Purchase of property, plant and equipment
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||
|
Proceeds from sale of property, plant and equipment
|
|
|
|
|||||||||
|
Repayment of assumed shareholders loan related to acquisition
|
(
|
)
|
|
|
||||||||
|
Investment in marketable securities
|
(
|
)
|
(
|
)
|
|
|||||||
|
Sales and maturity of marketable securities
|
|
|
|
|||||||||
|
Increase in long-term deposits
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||
|
Net cash used in investing activities
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||
The accompanying notes are an integral part of the consolidated financial statements
F - 11
CAESARSTONE LTD. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
U.S. dollars in thousands
|
Year ended December 31,
|
||||||||||||
|
2021
|
2020
|
2019
|
||||||||||
|
Cash flows from financing activities:
|
||||||||||||
|
Dividend paid
|
$
|
(
|
)
|
$
|
(
|
)
|
$
|
(
|
)
|
|||
|
Repayment of short-term bank credit and loans, net
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||
|
Contingent consideration related to acquisition
|
(
|
)
|
|
|
||||||||
|
Repayment of a financing liability of land
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||
|
Net cash used in financing activities
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||
|
Effect of exchange rate differences on cash and cash equivalents
|
(
|
)
|
|
|
||||||||
|
Increase (decrease) in cash and cash equivalents
|
(
|
)
|
(
|
)
|
|
|||||||
|
Cash and cash equivalents at beginning of year
|
|
|
|
|||||||||
|
Cash and cash equivalents at end of year
|
$
|
|
$
|
|
$
|
|
||||||
|
Cash received (paid) during the year for:
|
||||||||||||
|
Interest paid
|
$
|
(
|
)
|
$
|
|
$
|
|
|||||
|
Interest received
|
$
|
|
$
|
|
$
|
|
||||||
|
Tax paid
|
$
|
(
|
)
|
$
|
(
|
)
|
$
|
(
|
)
|
|||
|
Non cash activity during the year for:
|
||||||||||||
|
Changes in trade payables balances related to purchase of property, plant and equipment
|
$
|
(
|
)
|
$
|
(
|
)
|
$
|
(
|
)
|
|||
|
Operating lease liabilities and right-of-use assets
|
$
|
|
$
|
|
$
|
|
||||||
The accompanying notes are an integral part of the consolidated financial statements
F - 12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share data)
NOTE 1:-GENERAL
| a. |
General:
|
Caesarstone Ltd. (formerly: Caesarstone Sdot-Yam Ltd.), incorporated under the laws of the State of Israel, was founded in 1987.
Caesarstone Ltd. and its subsidiaries (collectively, the "Company" or "Caesarstone") develop, manufacture and market, high quality engineered quartz and other surfaces sold under the Company's premium Caesarstone brand. The Company's products are sold in over 50 countries through a combination of direct sales in certain markets and indirectly through a network of independent distributors in other markets. The Company's products are primarily used as kitchen countertops in the renovation and remodeling markets and in the new buildings’ construction market. Other applications include vanity tops, wall panels, back splashes, floor tiles, stairs and other interior surfaces that are used in a variety of residential and non-residential applications.
The Company has subsidiaries in Australia, Singapore, Canada, United Kingdom, India and the United States which are engaged in the manufacturing, marketing and selling of the Company's products in different geographic areas.
The Company manufactures its quartz products in three manufacturing facilities located in Kibbutz Sdot-Yam in central Israel, Bar-Lev Industrial Park in northern Israel and Richmond-Hill, Georgia in the U.S. which operates under the Company’s subsidiary in the United States, Caesarstone Technologies USA, Inc. Following the acquisition of Lioli (see also b below) the Company also manufacturing porcelain in its plant in India.
| b. |
Acquisition of Lioli Ceramica Pvt Ltd:
|
On October 5, 2020, the Company completed the acquisition of 55 % of the shares of Lioli Ceramica Pvt Ltd ("Lioli"), a producer of porcelain countertop slabs in the total net consideration of $13,574 .
The consideration included a contingent consideration arrangement that requires the Company to pay up to approximately $10,000 of additional consideration to Lioli’s minority shareholders subject to reaching certain EBITDA achievement. The fair value of the contingent consideration arrangement at the acquisition date was $1,492 . During 2021 the criteria was partially met, and an additional related consideration amount of approximately $1,780 paid during 2021.
As of October 5, 2020, the fair value of the 45 % non-controlling interests in Lioli amounted to $7,269 . The fair value of the non-controlling interests was valued based on the transaction price and a Put Option criterion that the minority awarded in accordance with the share purchase agreement.
As part of the agreement, the Company granted Lioli’s minority shareholders a put option and Lioli’s minority shareholders granted the Company a call option for its interest, each exercisable any time after April 1, 2024 and before the 20th anniversary of the acquisition date based on a mechanism as set forth in the agreement between the parties As of December 31, 2021, the Company revaluated its Put Option, in accordance with ASC 820 "Fair Value Measurements and Disclosures", at level 3, and based on it the non-controling interest fair value in Lioli amounted to $7,869 .
F - 13
CAESARSTONE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share data)
NOTE 1:-GENERAL (Cont.)
The Lioli acquisition was accounted for as a business combination in accordance with ASC 805 "Business Combinations”.
The preliminary fair value estimates for the assets acquired and liabilities assumed for Lioli’s acquisition were based upon preliminary calculations and valuations, and the estimates and assumptions for this acquisition were subject to change as the Company obtains additional information during the respective measurement period to the information that was existed as of the acquisition date (up to one year from the respective acquisition dates). As of December 2021 the acquisition purchase price allocation was finalized. The following table summarizes the purchase price allocation of Lioli Acquisition at the acquisition date:
|
Components of Purchase Price:
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
|
|
|
Lioli's minority shareholders loan assumed
|
|
|
|
|
|
Contingent consideration
|
|
|
|
|
|
Total purchase price
|
|
|
|
|
|
Less: Cash acquired
|
|
|
|
|
|
Net for allocation
|
|
|
|
|
|
|
|
|
|
|
|
Allocation of Purchase Price:
|
|
|
|
|
|
|
|
|
|
|
|
Net tangible assets (liabilities):
|
|
|
|
|
|
Trade receivables, net
|
|
|
|
|
|
Prepaid expenses and other current assets
|
|
|
|
|
|
Inventories, net (1)
|
|
|
|
|
|
Property, plant and equipment, net (2)
|
|
|
|
|
|
Other non-current assets
|
|
|
|
|
|
Trade payables
|
|
|
(
|
)
|
|
Loans (net of Lioli's minority shareholders loan assumed) (3)
|
|
|
(
|
)
|
|
Accrued expenses and other current liabilities
|
|
|
(
|
)
|
|
Other non-current liabilities
|
|
|
(
|
)
|
|
Total net tangible assets
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable intangible assets:
|
|
|
|
|
|
Customer relationships (4)
|
|
|
|
|
|
Deferred tax liabilities
|
|
|
(
|
)
|
|
Total identifiable intangible assets acquired
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill (5)
|
|
|
|
|
|
|
|
|
|
|
|
Non-controlling interests
|
|
|
(
|
)
|
|
|
|
|
|
|
|
Total purchase price allocation
|
|
$
|
|
|
F - 14
CAESARSTONE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share data)
NOTE 1:-GENERAL (Cont.)
(1) Including additional $1,063 fair value to bring the inventory in process to its finished good stage value. Amortization period is through two quarters in accordance with the average inventory turnovers using the straight-line method.
(2) Including additional $10,750 land and buildings fair value in accordance with a third-party appraiser.
(3) As of October 5, 2020 Lioli had a loan from its minority shareholders (the "shareholders loan"), which included in the acquired net tangible assets. According to term of the transaction the Company will assum e 55% of the shareholders loan. The assumed shareholders loan is included in the total purchase price and excluded from the loan balance in accordance to ASC 805 requirements. During 2021, the Company assumed and paid the 55 % of the sharehlders loan in the amount of approximately $1,966 .
(4) Customer relationships represent the underlying relationships and agreements with Lioli's customer base. In assessing the value of the Customer Relationships, the Company used an income approach method. The Customer Relationships’ economic useful life is estimated at approximately 5 years , amortized using the straight-line method.
(5) The goodwill is primarily attributable to expected synergies resulting from the acquisition.
In 2020, the Company recognized $545 of aggregate acquisition-related costs that were expensed in the consolidated statement of income in general and administrative expenses.
Pro forma results of operations related to this acquisition have not been prepared because they are not material to the Company’s consolidated statements of income.
| c. |
Acquisition of Omicron Supplies, LLC:
|
On December 31, 2020, the Company, through its fully owned U.S. subsidiary, completed the acquisition of 100 % of the shares of Omicron Supplies, LLC ("Omicron"), a stone supplier in the U.S., for a total net cash consideration of $18,830 .
The Omicron acquisition was accounted for as a business combination in accordance with ASC 805 "Business Combinations”.
F - 15
CAESARSTONE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share data)
NOTE 1:-GENERAL (Cont.)
The preliminary fair value estimates for the assets acquired and liabilities assumed for Omicron acquisition were based upon preliminary calculations and valuations, and the estimates and assumptions for this acquisition were subject to change as the Company obtains additional information during the respective measurement period to the information that was existed as of the acquisition date (up to one year from the respective acquisition dates). The following table summarizes the purchase price allocation of Omicron Acquisition:
|
Components of Purchase Price:
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
|
|
|
Less: Cash acquired
|
|
|
|
|
|
Net for allocation
|
|
|
|
|
|
|
|
|
|
|
|
Allocation of Purchase Price:
|
|
|
|
|
|
|
|
|
|
|
|
Net tangible assets (liabilities):
|
|
|
|
|
|
Trade receivables, net
|
|
|
|
|
|
Prepaid expenses and other current assets
|
|
|
|
|
|
Inventories, net
|
|
|
|
|
|
Property, plant and equipment, net
|
|
|
|
|
|
ROU assets and others
|
|
|
|
|
|
Trade payables
|
|
|
(
|
)
|
|
Short-term lease liability
|
|
|
(
|
)
|
|
Short-term loan, accrued expenses and other current liabilities
|
|
|
(
|
)
|
|
Long-term lease and other non-current liabilities
|
|
|
(
|
)
|
|
Total net tangible assets
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable intangible assets:
|
|
|
|
|
|
Customer relationships (1)
|
|
|
|
|
|
Deferred tax liabilities
|
|
|
(
|
)
|
|
Total identifiable intangible assets acquired
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill (2)
|
|
|
|
|
|
|
|
|
|
|
|
Total purchase price allocation
|
|
$
|
|
|
(1)Customer relationships represent the underlying relationships and agreements with Omicron's customer base. In assessing the value of the Customer Relationships, the Company used an income approach method. The Customer Relationships’ economic useful life is estimated at approximately 5 years , amortized using the straight-line method.
(2)The goodwill is primarily attributable to expected synergies resulting from the acquisition.
In 2020, the Company recognized $376 of aggregate acquisition-related costs that were expensed in the consolidated statement of income in general and administrative expenses.
F - 16
CAESARSTONE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share data)
NOTE 1:-GENERAL (Cont.)
Pro forma results of operations related to this acquisition have not been prepared because they are not material to the Company’s consolidated statements of income.
| d. |
Major suppliers:
|
In 2021, the Company acquired approximately 62 % of its quartz consumption from Turkey, of which approximately 40 % was supplied by Mikroman Madencilik San ve TIC.LTD.STI ("Mikroman"), constituting approximately 25 % of Company's total quartz, and approximately 33 % was supplied by Polat Maden Sanayi ve Ticaret A.Ş. (“Polat”), constituting approximately 20 % of Company’s total quartz. If Mikroman or Polat cease supplying the Company with quartz or if the Company's supply of quartz generally from Turkey is adversely impacted, the Company's other suppliers may be unable to meet the Company's quartz requirements. In that case, the Company would need to locate and qualify alternate suppliers, which could take time, increase costs and require adjustments to the appearance of the Company's products. As a result, the Company may experience a delay in manufacturing, which could materially and adversely impact the Company's results of operations.
| e. |
The COVID-19 Pandemic:
|
During 2020 and partially also during 2021, the Company experienced disruptions to its business impacting revenues and its financial results. In order to mitigate the impact of the decline in business as a result of the pandemic, the Company implemented cost savings measures and in addition reduced its production capacity for these periods.
While the Company expects that this public health threat will continue to be eased by global vaccination and lifted restrictions on traveling, the current macro-economic environment and current uncertainties regarding the potential impact of COVID-19 may have on the Company’s business, there can be no assurance that the Company’s estimates and assumptions used in the measurement of various assets and liabilities in the financial statements will prove to be accurate predictions of the future. If the Company’s assumptions regarding forecasted cash flows are not achieved, it is possible that an impairment review may be triggered and certain assets and liabilities in the financial statements may be impaired.
Accordingly, the COVID-19 pandemic and the related global reaction could have a material adverse effect on the Company’s business, results of operations and financial condition.
F - 17
CAESARSTONE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share data)
NOTE 2:-SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles ("U.S. GAAP").
| a. |
Use of estimates:
|
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates, judgments and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. The Company's management believes that the estimates, judgment and assumptions used are reasonable based upon information available at the time they were made.
| b. |
Financial statements in U.S. dollars:
|
The Company's revenues are generated in various currencies including in U.S. dollars (USD), Australian dollars (AUD), Canadian dollars (CAD), Euros (EUR), Singapore dollars (SGD), British pounds (GBP), Indian Rupee (INR) and New Israeli Shekels (NIS). In addition, most of the Company's costs are incurred in USD, NIS and EUR.
The Company’s management believes that the USD is the primary currency of the economic environment in which the Company operates. Thus, the functional and reporting currency of the Company is the USD.
The functional currency of the Company's foreign subsidiaries is the local currency in which the relevant subsidiary operates.
F - 18
CAESARSTONE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share data)
NOTE 2:-SIGNIFICANT ACCOUNTING POLICIES (Cont.)
Accordingly, monetary accounts maintained in currencies other than the USD are re-measured into dollars in accordance with Accounting Standards Codification ("ASC") 830, "Foreign Currency Matters" (“ASC 830”). All transaction gains and losses resulting from the re-measurement of monetary balance sheet items denominated in non-USD currencies are reflected in the statements of operations as financial income or expenses as appropriate.
The financial statements of the Company’s subsidiaries of which the functional currency is not the USD have been translated into the USD. All amounts on the balance sheets have been translated into the USD using the exchange rates in effect on the relevant balance sheet dates. All amounts in the statements of income have been translated into the USD using the monthly average exchange rate in accordance with ASC 830. The resulting translation adjustments are reported as a component of accumulated other comprehensive income (loss), net in shareholders' equity.
| c. |
Principles of consolidation:
|
The consolidated financial statements include the accounts of the Company and its wholly and majority-owned subsidiaries (see also Note 1). Inter-company transactions and balances, including profit from inter-company sales not yet realized outside of the Company, have been eliminated upon consolidation.
| d. |
Cash equivalents:
|
Cash equivalents are short-term highly liquid investments that are readily convertible to cash with original maturities of three months or less at the date acquired.
| e. |
Short-term bank deposits:
|
Short-term bank deposits are deposits with original maturities of more than three months but less than one year. Short-term bank deposits are presented at their cost, which approximates their fair value.
| f. |
Marketable securities:
|
Marketable securities consist of corporate and governmental bonds. The Company determines the appropriate classification of marketable securities at the time of purchase and re-evaluates such designation at each balance sheet date. In accordance with FASB ASC No. 320 “Investments - Debt and Equity Securities”, the Company classifies marketable securities as available-for-sale ("AFS").
Available-for-sale securities are stated at fair value, with unrealized gains and losses reported in accumulated other comprehensive income (loss), a separate component of stockholders’ equity, net of taxes.
Realized gains and losses on sales of marketable securities, as determined on a specific identification basis, are included in financial income (expenses), net. The amortized cost of marketable securities is adjusted for amortization of premium and accretion of discount to maturity, both of which, together with interest, are included in financial income (expenses), net.
F - 19
CAESARSTONE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share data)
NOTE 2:-SIGNIFICANT ACCOUNTING POLICIES (Cont.)
The Company classifies its marketable securities as either short-term or long-term based on each instrument’s underlying contractual maturity date. Marketable securities with maturities of 12 months or less are classified as short-term and marketable securities with maturities greater than 12 months are classified as long-term.
The Company assessed AFS debt securities with an amortized cost basis in excess of estimated fair value to determine what amount of that difference, if any, is caused by expected credit losses in accordance with ASC 326. Allowance for credit losses on AFS debt securities are recognized as a charge of credit loss expenses (income), net, on the consolidated statements of comprehensive income, and any remaining unrealized losses, net of taxes, are included in accumulated other comprehensive income (loss) in stockholders' equity. The Company did not record credit loss allowance on its marketable securities during the year ended December 31, 2021.
| g. |
Derivatives:
|
ASC 815, “Derivative and Hedging” ("ASC 815"), requires companies to recognize all of their derivative instruments as either assets or liabilities in the statement of financial position at fair value.
For those derivative instruments that are designated and qualify as hedging instruments, a company must designate the hedging instrument, based upon the exposure being hedged, as a fair value hedge, cash flow hedge or a hedge of a net investment in a foreign operation.
F - 20
CAESARSTONE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share data)
NOTE 2:-SIGNIFICANT ACCOUNTING POLICIES (Cont.)
Derivative instruments designated as hedging instruments:
For derivative instruments that are designated and qualify as a cash flow hedge (i.e., hedging the exposure to variability in expected future cash flows that is attributable to a particular risk), the effective portion of the gain or loss on the derivative instrument is reported as a component of other comprehensive income (loss) and reclassified into earnings in the same period during which the hedged transaction affects earnings.
The remaining gain or loss on the derivative instrument in excess of the cumulative change in the present value of future cash flows of the hedged item, if any, is recognized in current earnings during the period of change. For derivative instruments not designated as hedging instruments, the gain or loss is recognized in current earnings during the period of change.
To hedge against the risk of overall changes in cash flows resulting from foreign currency salary and other recurring payments during the periods, the Company has instituted a foreign currency cash flow hedging program. The Company hedges portions of its forecasted salary and other expenses denominated in NIS.
These forward contracts are designated as cash flow hedges, as defined by ASC 815, and are all effective, as their critical terms match the underlying transactions being hedged.
As of December 31, 2021 and 2020, the notional amount of these forward contracts into which the Company entered was $17,089 , and $0 , respectively, and the unrealized income recorded in accumulated other comprehensive income, net, from the Company's currency forward NIS transactions was $297 and $0 , respectively.
Derivative instruments not designated as hedging instruments:
In addition to the derivatives that are designated as hedges as discussed above, the Company enters into certain foreign exchange forward and options contracts to limit its exposure to foreign currencies. In addition, the Company entered into derivative instruments to partially manage its exposure to movements associated with the Styrene prices.
Gains and losses related to such derivative instruments are recorded in financial expenses, net. At December 31, 2021 and 2020, the notional amount of foreign exchange and styrene forward and option contracts into which the Company entered was $59,068 and $100,981 , respectively. The foreign exchange and styrene forward and options contracts will expire at various times through 2022.
F - 21
CAESARSTONE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share data)
NOTE 2:-SIGNIFICANT ACCOUNTING POLICIES (Cont.)
The following tables present fair value amounts of, and gains and losses recorded in relation to, the Company's derivative instruments and related hedged items:
|
|
|
Balance sheet |
|
Fair value of |
|
|||||
|
|
|
|
|
Year ended |
|
|||||
|
|
|
|
|
2021 |
|
|
2020 |
|
||
|
Derivative assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives designated as hedging instruments: |
||||||||||
|
Foreign exchange option and forward contracts |
Other accounts receivable and prepaid expenses |
|
||||||||
|
Derivatives not designated as hedging instruments: |
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange option and forward contracts |
|
Other accounts receivable and prepaid expenses |
|
|
|
|
|
|
|
|
|
Styrene forward contract |
Other accounts receivable and prepaid expenses |
|||||||||
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as hedging instruments: |
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange option and forward contracts |
|
Accrued expenses and other liabilities |
|
|
( |
) |
|
|
( |
) |
|
Styrene forward contract |
|
Accrued expenses and other liabilities |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
( |
) |
|
|
( |
) |
F - 22
CAESARSTONE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share data)
NOTE 2:-SIGNIFICANT ACCOUNTING POLICIES (Cont.)
The following tables present fair value amounts of, and gains and losses recorded in relation to, the Company's derivative instruments and related hedged items:
|
|
|
Gain recognized in other comprehensive |
|
Gain (loss) recognized in |
|
|||||||||||||||
|
|
|
Year ended |
|
Statements of income |
|
Year ended |
|
|||||||||||||
|
|
|
2021 |
|
|
2020 |
|
Item |
|
2021 |
|
|
2020 |
|
|||||||
|
Derivatives designated as hedging instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Foreign exchange forward contract |
|
|
|
|
|
|
|
|
Cost of revenues and Operating expenses |
|
|
( |
) |
|
|
|
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Derivatives not designated as hedging instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Foreign exchange forward and options contracts |
|
|
|
|
|
|
|
|
Financial expenses, net |
|
|
|
|
|
|
( |
) |
|||
|
Styrene forward contracts |
|
|
|
|
|
|
|
|
Financial expenses, net |
|
|
|
|
|
|
( |
) |
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|||
| h. |
Inventories:
|
Inventories are stated at the lower of cost and net realizable value. The Company periodically evaluates the quantities on hand relative to historical and projected sales volumes, aging, current and historical selling prices and contractual obligations to maintain certain levels of raw material quantities. Based on these evaluations, inventory provision is provided to cover risks arising from slow-moving items, discontinued products, excess inventories, net realizable value lower than cost and adjusted revenue forecasts.
Cost is determined as follows:
Raw Materials - cost is determined on a standard cost basis which approximates actual costs on a weighted average basis.
Work-in progress and finished products - are based on standard cost (which approximates actual cost on a weighted average basis) which includes raw materials cost, labor and manufacturing overhead.
Finished goods are stated at the lower of cost and net realizable value.
F - 23
CAESARSTONE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share data)
NOTE 2:-SIGNIFICANT ACCOUNTING POLICIES (Cont.)
The following table provides the details of the change in the Company's provision for inventory write-downs:
|
|
|
December 31, |
|
|||||
|
|
|
2021 |
|
|
2020 |
|
||
|
|
|
|
|
|
|
|
|
|
|
Inventory provision, beginning of year |
|
$ |
|
|
|
$ |
|
|
|
Assumed from business combination |
|
|
|
|
|
|
|
|
|
Increase in inventory provision |
|
|
|
|
|
|
|
|
|
Write off |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
Inventory provision, end of year |
|
$ |
|
|
|
$ |
|
|
| i. |
Property, plant and equipment, net:
|
| 1. |
Property, plant and equipment are stated at cost, net of accumulated depreciation and investment grants.
|
| 2. |
Costs recorded prior to a production line completion are reflected as construction in progress, which are recorded building and machinery assets at the date of purchase. Construction in progress includes direct expenditures for the construction of the production line and is stated at cost. Capitalized costs include costs incurred under the construction contract: advisory, consulting and direct internal costs (including labor) and operating costs incurred during the construction and installation phase.
|
| 3. |
Depreciation is calculated using the straight-line method over the estimated useful life of the assets at the following annual rates:
|
|
|
% |
|
|
|
|
Machinery and manufacturing equipment |
|
|
Office equipment and furniture |
|
|
Motor vehicles |
|
|
Buildings |
|
|
Prepaid expenses related to operating lease |
|
|
Leasehold improvements |
|
F - 24
CAESARSTONE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share data)
NOTE 2:-SIGNIFICANT ACCOUNTING POLICIES (Cont.)
| j. |
Leases:
|
The Company determines if an arrangement is a lease at inception and recognize in accordance with ASC 842 “Leases”. Operating leases are included in operating lease right-of-use (“ROU”) assets, other current liabilities and operating lease liabilities in the Company’s consolidated balance sheets.
ROU assets represent the right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term.
The Company uses incremental borrowing rates based on the Company's implied credit rating which was based on Moody's Investors Service Rating Methodology for the Building Materials Industry (such credit rating was notched up due to collateralization) at commencement date. The operating lease ROU asset also includes any lease payments made and excludes lease incentives, if any. Lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Lease expenses for lease payments are recognized on a straight-line basis over the lease term. See also Note 10.
| k. |
Impairment of long-lived assets:
|
The Company's long-lived assets (assets group) to be held or used, including right of use assets, tangible and finite-lived intangible assets (other than goodwill), are reviewed for impairment in accordance with ASC 360 "Property, Plant and Equipment" ("ASC 360") whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the future undiscounted cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. No impairment losses were identified during any period presented. In addition to the recoverability assessment, the Company routinely reviews the remaining estimated useful lives of property and equipment and finite-lived intangible assets. If the Company reduces the estimated useful life assumption for any asset, the remaining unamortized balance would be amortized or depreciated over the revised estimated useful life.
F - 25
CAESARSTONE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share data)
NOTE 2:-SIGNIFICANT ACCOUNTING POLICIES (Cont.)
| l. |
Goodwill:
|
Goodwill represents the excess of the cost of businesses acquired over the fair value of the net assets acquired in the acquisition. Under ASC 350, "Intangibles-Goodwill and Other" ("ASC 350") goodwill is not amortized but instead is tested for impairment at least annually (or more frequently if impairment indicators arise). The carrying amount of the reporting unit over its fair value is recognized as an impairment loss, and the carrying value of goodwill is written down to fair value.
The goodwill impairment test is performed according to the following principles:
| (1) |
An initial qualitative assessment may be performed to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount.
|
| (2) |
If the Company concludes it is more likely than not that the fair value of the reporting unit is less than its carrying amount, a quantitative fair value test is performed. An impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value is recognized.
|
The Company performs an annual goodwill impairment test during the fourth quarter of each fiscal year, or more frequently, if impairment indicators are present. The Company operates in one operating segment. The Company concluded that all of the Company's reporting units should be aggregated and deemed as a single reporting unit for the purpose of performing the goodwill impairment test in accordance with ASC 350-20-35-35, since they have similar economic characteristics.
Goodwill was tested for impairment by comparing Company’s fair value with its carrying value. As required by ASC 820, "Fair Value Measurements", the Company applies assumptions that marketplace participants would consider in determining the fair value of reporting unit.
The process of evaluating the potential impairment of goodwill is subjective and requires significant judgment at many points during the analysis. Significant estimates used in the fair value methodologies include estimates of future cash flows, future short-term and long-term growth rates and weighted average cost of capital. If these estimates or their related assumptions change in the future, the Company may be required to record impairment charges for its goodwill and intangible assets with an indefinite life. No impairment of goodwill was identified during any period presented.
F - 26
CAESARSTONE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share data)
NOTE 2:-SIGNIFICANT ACCOUNTING POLICIES (Cont.)
| m. |
Warranty:
|
The Company generally provides a standard (i.e. assurance type) warranty for its products, for various periods, depending on the type of product and the country in which the Company does business. The Company records a provision for the estimated cost to repair or replace products under warranty at the time of sale. Factors that affect the Company's warranty reserve include the number of units sold, historical and anticipated rates of warranty repairs and the cost per repair.
The following table provides the details of the change in the Company's warranty accrual:
|
|
|
2021 |
|
|
2020 |
|
||
|
|
|
|
|
|
|
|
|
|
|
January 1, |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
Charged to costs and expenses relating to new sales |
|
|
|
|
|
|
|
|
|
Costs of product warranty claims |
|
|
( |
) |
|
|
( |
) |
|
Foreign currency translation adjustments |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
$ |
|
|
|
$ |
|
|
| n. |
Revenue recognition:
|
Revenues are recognized in accordance with ASC 606, revenue from contracts with customers when control of the promised goods or services is transferred to the customers, in an amount that the Company expects in exchange for those goods or services.
The Company applies the following five steps in accordance to ASC 606: (1) identify the contract with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract, and (5) recognize revenue when a performance obligation is satisfied.
1. Identify the contract with a customer:
A contract is an agreement between two or more parties that creates enforceable rights and obligations. In evaluating the contract, the Company analyzes the customer’s intent and ability to pay the amount of promised consideration (credit risk) and considers the probability of collecting substantially all of the consideration. The Company determines whether collectability is reasonably assured on a customer-by-customer basis pursuant to various criteria including Company’s historical experience, credit insurance and other inputs.
2. Identify the performance obligations in the contract:
At a contract’s inception, the Company assesses the goods or services promised in a contract with a customer and identifies the performance obligations. The main performance obligation is a delivery of the Company’s products.
F - 27
CAESARSTONE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share data)
NOTE 2:-SIGNIFICANT ACCOUNTING POLICIES (Cont.)
3. Determine the transaction price:
The Company’s products that are sold through agreements with distributors are non-exchangeable, non-refundable, non-returnable and without any rights of price protection or stock rotation. Accordingly, the Company considers all the distributors to be end-consumers.
For certain revenue transactions with specific customers, the Company is responsible also for the fabrication and installation of its products. The Company recognizes such revenues upon receipt of acceptance evidence from the end consumer which occurs upon completion of the installation.
Although, in general, the Company does not grant rights of return, there are certain instances where such rights are granted. The Company maintains a provision for returns in accordance with ASC 606, which is estimated, based primarily on historical experience as well as management judgment, and is recorded through a reduction of revenue.
4. Allocate the transaction price to the performance obligations in the contract:
The majority of the Company’s revenues are sales of goods, therefore there is one main performance obligation that absorbs the transaction price.
5. Recognize revenue when a performance obligation is satisfied:
Revenue is recognized when or as performance obligations are satisfied by transferring control of a promised good or service to a customer. Control transfers at a point in time, which affects when revenue is recorded. The majority of Company’s revenues deriving from sales of products which are recognized when control is transferred based on the agreed International Commercial terms, or “INCOTERMS”.
| o. |
Research and development costs:
|
Research and development costs are charged to the statement of income as incurred.
| p. |
Income taxes:
|
The Company and its subsidiaries account for income taxes in accordance with ASC 740, "Income Taxes" (“ASC 740”). This statement prescribes the use of the liability method whereby deferred tax asset and liability account balances are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.
F - 28
CAESARSTONE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share data)
NOTE 2:-SIGNIFICANT ACCOUNTING POLICIES (Cont.)
The Company accounts for its uncertain tax positions in accordance with ASC 740-10. ASC 740-10 contains a two-step approach to recognizing and measuring uncertain tax positions accounted for in accordance with ASC 740. The first step is to evaluate the tax position taken or expected to be taken in a tax return by determining if the weight of available evidence indicates that it is more likely than not that, on an evaluation of the technical merits, the tax position will be sustained on audit, including resolution of any related appeals or litigation processes. The second step is to measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement. The Company classifies interest and penalties on income taxes as taxes on income.
| q. |
Advertising expenses:
|
Advertising costs are expensed as incurred. Advertising expenses for the years ended December 31, 2021, 2020 and 2019 were $15,307 , $14,457 and $16,233 , respectively.
| r. |
Concentrations of credit risk:
|
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents, marketable securities and trade receivables. The Company's cash and cash equivalents are invested primarily in USD, mainly with major banks in Israel.
The Company's debt marketable securities include investments in highly-rated corporate debentures (located mainly in U.S.) and governmental bonds. The financial institution that holds the Company's debt marketable securities is a major financial institution located in the United States. The Company believes that its marketable securities portfolio is a diverse portfolio of highly-rated securities and the Company's investment policy limits the amount the Company may invest in an issuer (see Note 2f).
The Company's trade receivables are derived from sales to customers located mainly in the United States, Australia, Canada, Israel and Europe. The Company performs ongoing credit evaluations of its customers and to date has not experienced any substantial losses. In certain circumstances, the Company requires letters of credit or prepayments. An allowance for credit losses (i.e. doubtful accounts) is provided with respect to specific receivables that the Company has determined to be doubtful of collection. For those receivables not specifically reviewed, provisions are recorded at a specific rate, based upon the age of the receivable, the collection history, current economic trends and management estimates of future economic conditions.
No customer represented 10% or more of the Company’s total accounts receivables, net as of December 31, 2021 and 2020.
F - 29
CAESARSTONE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share data)
NOTE 2:-SIGNIFICANT ACCOUNTING POLICIES (Cont.)
The following table provides the detail of the change in the Company's allowance for credit loss:
|
|
|
2021 |
|
|
2020 |
|
||
|
|
|
|
|
|
|
|
|
|
|
January 1, |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
Charges to expenses |
|
|
|
|
|
|
|
|
|
Write offs |
|
|
( |
) |
|
|
( |
) |
|
Assumed from business combinations |
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
$ |
|
|
|
$ |
|
|
| s. |
Severance pay:
|
The Company's liability for severance pay, with respect to its Israeli employees, is calculated pursuant to Israeli severance pay law and employee agreements based on the most recent salary of the employees. The Company's liability for all of its Israeli employees is provided for by monthly deposits with insurance policies and by an accrual. The value of these policies is recorded as an asset on the Company's balance sheet.
The deposited funds include profits or losses accumulated up to the balance sheet date. The deposited funds may be withdrawn only upon the fulfillment of the obligations pursuant to Israeli severance pay law or labor agreements.
Majority of the agreements with employees specifically state, in accordance with section 14 of the Severance Pay Law, 1963 ("Section 14"), that the Company's contributions for severance pay shall be instead of severance compensation and that upon release of the policy to the employee, no additional calculations shall be conducted between the parties regarding the matter of severance pay and no additional payments shall be made by the Company to the employee.
Further, since the Company has signed agreements with its employees under Section 14, the related obligation and amounts deposited on behalf of such obligation are not stated on the balance sheet, as they are legally released from obligation to employees once the deposit amounts have been paid.
Severance pay expenses for the years ended December 31, 2021, 2020 and 2019 amounted to approximately $2,539 , $2,292 and $2,189 , respectively.
F - 30
CAESARSTONE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share data)
NOTE 2:-SIGNIFICANT ACCOUNTING POLICIES (Cont.)
| t. |
Fair value of financial instruments:
|
In accordance with ASC 820, the Company measures its cash equivalents, marketable securities, and derivatives at fair value using the market approach valuation technique. Cash equivalents and marketable securities are classified within Level 1 and Level 2, respectively, because these assets are valued using quoted market prices or alternative pricing sources and models utilizing market observable inputs.
The following table sets forth the Company’s assets and liabilities that were measured at fair value as of December 31, 2021 and 2020 by level within the fair value hierarchy:
|
|
|
Fair Value |
|
Fair value measurements as of December 31, |
|
|||||
|
Description |
|
Hierarchy |
|
2021 |
|
|
2020 |
|
||
|
|
|
|
|
|
|
|
|
|
||
|
Measured at fair value on a recurring basis: |
|
|
|
|
|
|
|
|
||
|
|
|
|
|
|
|
|
|
|
||
|
Assets: |
|
|
|
|
|
|
|
|
||
|
|
|
|
|
|
|
|
|
|
||
|
Cash equivalents: |
|
|
|
|
|
|
|
|
||
|
Money market mutual funds |
|
Level 1 |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term marketable securities: |
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds |
|
Level 2 |
|
$ |
|
|
|
$ |
|
|
|
Governmental bonds |
|
Level 2 |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives: |
|
|
|
|
|
|
|
|
|
|
|
Derivative assets |
|
Level 2 |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term marketable securities: |
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds |
|
Level 2 |
|
$ |
|
|
|
$ |
|
|
|
Governmental bonds |
|
Level 2 |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives: |
|
|
|
|
|
|
|
|
|
|
|
Contingent Consideration |
|
Level 3 |
|
$ |
|
|
|
$ |
|
|
|
Derivative liabilities |
|
Level 2 |
|
$ |
( |
) |
|
$ |
( |
) |
|
Redeemable Non-Controlling Interest |
Level 3 |
$ |
|
$ |
|
|||||
The carrying amounts of financial instruments not measured at fair value, including cash and cash equivalents, trade receivables, other accounts receivables, trade payables, accrued expenses and other liabilities, short term loans and short term bank credit, approximate their fair value due to the short-term maturities of such instruments. The carrying amount of long-term loan approximates its fair value.
F - 31
CAESARSTONE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share data)
NOTE 2:-SIGNIFICANT ACCOUNTING POLICIES (Cont.)
| u. |
Basic and diluted net income per share:
|
Basic net income per share ("Basic EPS") is computed by dividing net income attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding during the period.
Diluted net income per share ("Diluted EPS") gives effect to all dilutive potential ordinary shares outstanding during the period. The computation of Diluted EPS does not assume conversion, exercise or contingent exercise of securities that would have an anti-dilutive effect on earnings. The dilutive effect of outstanding stock options is computed using the treasury stock method. For the years ended December 31, 2021, 2020 and 2019 there were 1,344,673 , 1,414,812 and 1,244,500 outstanding stock options, respectively, that were excluded from the computation of Diluted EPS, that would have had an anti dilutive effect if included.
| v. |
Comprehensive income and accumulated other comprehensive income (loss):
|
Comprehensive income consists of two components, net income and other comprehensive income ("OCI"). OCI refers to revenue, expenses, and gains and losses that under U.S. GAAP are recorded as an element of shareholders’ equity but are excluded from net income. Company’s OCI consists of foreign currency translation adjustments from those subsidiaries not using the USD as their functional currency and net deferred gains and losses on certain derivative instruments accounted for as cash flow hedges and marketable securities.
The total accumulated other comprehensive income ("AOCI"), net of tax was comprised as follows:
|
|
|
December 31, |
|
|||||
|
|
|
2021 |
|
|
2020 |
|
||
|
|
|
|
|
|
|
|
|
|
|
Accumulated gain (loss) on marketable securities |
|
$ |
( |
) |
|
$ |
|
|
| Accumulated losses on derivative instruments | ||||||||
|
Accumulated foreign currency translation differences differences and other |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total accumulated other comprehensive income loss, net |
|
$ |
( |
) |
|
$ |
|
|
F - 32
CAESARSTONE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share data)
NOTE 2:-SIGNIFICANT ACCOUNTING POLICIES (Cont.)
The following table summarizes the changes in AOCI, net of taxes for the year ended:
|
|
|
Unrealized gains (losses) on derivative instruments |
|
|
Unrealized gains (losses) on |
|
|
Accumulated foreign |
|
|
Total |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Balance at January 1, 2020 |
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss) before reclassifications |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts reclassified from AOCI |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net current period OCI |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss) before reclassifications |
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
Amounts reclassified from AOCI |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net current period OCI |
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2021 |
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
The following table shows the amounts reclassified from AOCI into the Consolidated Statements of Income, and the associated financial statement line item, for 2021 and 2020:
|
|
|
December 31, |
|
|||||
|
|
|
2021 |
|
|
2020 |
|
||
|
Affected line item in the consolidated statements of income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues |
|
$ |
( |
) |
|
$ |
|
|
|
Research and development |
|
|
( |
) |
|
|
|
|
|
Marketing and selling |
|
|
( |
) |
|
|
|
|
|
General and administrative |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gain (loss) |
|
$ |
( |
) |
|
$ |
|
|
F - 33
CAESARSTONE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share data)
NOTE 2:-SIGNIFICANT ACCOUNTING POLICIES (Cont.):
| w. |
Accounting for stock-based compensation:
|
Equity share based payment:
The Company accounts for stock-based compensation in accordance with ASC 718, "Compensation-Stock Compensation" ("ASC 718"). ASC 718 requires companies to estimate the fair value of equity-based payment awards on the date of grant using an option-pricing model.
The Company accounts for employees and directors’ share-based payment awards classified as equity awards using the grant-date fair value method. The fair value of share-based payment transactions is recognized as an expense over the requisite service period. The Company elected to recognize compensation expense for an award that has a graded vesting schedule using the accelerated method and the Company’s accounting policy is to account for forfeitures as they occur.
The exercise price of each option is generally Company's stock price on the date of the grant. Options generally become exercisable over approximately to period, subject to the continued employment. All options expire after 7 years from the date of grant. In addition, commencing in 2015 the Company granted certain of its employees and officers with restricted stock units ("RSUs"), vesting over approximately a period from the grant date. RSUs fair value is measured at the grant date based on the market value of Company's common stock. RSUs that are cancelled or forfeited become available for future grants.
In 2021 and 2020, the Company estimated the fair value of stock options granted using the Black-Scholes option pricing model with the following weighted average assumptions:
|
|
|
December 31, |
||||
|
|
|
2021 |
|
|
2020 |
|
|
|
|
|
|
|
|
|
|
Dividend yield |
|
|
% |
|
|
% |
|
Expected volatility |
|
|
% |
|
|
% |
|
Risk-free interest rate |
|
|
% |
|
|
% |
|
Expected life (in years) |
|
|
|
|
|
|
The Company used volatility data in accordance with ASC 718 and based on Company's historical data.
The computation of risk free interest rate is based on the rate available on the date of grant of a zero-coupon U.S. government bond with a remaining term equal to the expected term of the option.
F - 34
CAESARSTONE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share data)
NOTE 2:-SIGNIFICANT ACCOUNTING POLICIES (Cont.)
The expected term of options granted is calculated using the simplified method (being the average between the vesting periods and the contractual life of the options).
For the vast majority of the options granted in 2021 and 2020, the dividend yield is zero, due to adjustment mechanism with respect to the exercise price upon payment of a dividend. For those options granted without adjustment mechanism, the dividend yield applied is 3%.
| x. |
Redeemable non-controlling interest:
|
Following the acquisition of Lioli during 2020, the Company is party to a put and call arrangement with respect to the remaining 45% non-controlling interest in Lioli. Due to the existing put and call arrangements, the non-controlling interest is considered to be redeemable and is recorded on the balance sheet as a redeemable non-controlling interest outside of permanent equity.
The redeemable non-controlling interest is recognized at the higher of: i) the accumulated earnings associated with the non-controlling interest, or ii) the redemption value as of the balance sheet date (see also Note 1b).
The following table provides a reconciliation of the redeemable non-controlling interest:
|
Year ended December 31, |
||||||||||||
|
|
|
2021 |
|
|
2020 |
|
|
2019 |
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
||
|
Beginning of the year |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assuming the non controlling interest due to acquisition |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to non-controlling interest |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
Adjustment to Put option value (*) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
Redeemable non-controlling interest - end of the year |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
(*) |
|
F - 35
CAESARSTONE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share data)
NOTE 2:-SIGNIFICANT ACCOUNTING POLICIES (Cont.)
| y. |
Contingencies:
|
The Company is involved in various product liability, commercial, government investigations, environmental claims and other legal proceedings that arise from time to time in the course of business. The Company records accruals for these types of contingencies to the extent that the Company concludes their occurrence is probable and that the related liabilities are estimable. When accruing these costs, the Company will recognize an accrual in the amount within a range of loss that is the best estimate within the range. When no amount within the range is a better estimate than any other amount, the Company accrues for the minimum amount within the range. The Company records anticipated recoveries under existing insurance contracts that are probable of occurring at the amount that is expected to be collected. Legal costs are expensed as incurred. For unasserted claims or assessments, the Company followed the accounting guidance in ASC 450-20-50-6, 450-20-25-2 and 450-20-55-2 in which the Company must first determine that the probability that an assertion will be made is likely, then, a determination as to the likelihood of an unfavorable outcome and the ability to reasonably estimate the potential loss is made.
| z. |
Business combination:
|
The Company accounts for business combinations by applying the provisions of ASC 805, Business Combination, and allocates the fair value of purchase consideration to the tangible assets acquired, liabilities assumed, and intangible assets acquired based on their estimated fair values. The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill. When determining the fair values of assets acquired and liabilities assumed, management makes significant estimates and assumptions, especially with respect to intangible assets.
Significant estimates in valuing certain intangible assets include, but are not limited to future expected cash flows from acquired customer relationship and acquired trademarks from a market participant perspective, useful lives and discount rates. Management’s estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates. During the measurement period, which does not exceed one year from the acquisition date, the Company may record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill. Upon the finalization of the measurement period, any subsequent adjustments are recorded to earnings.
Acquisition-related costs are recognized separately from the acquisition and are expensed as incurred. See also Note 1.
F - 36
CAESARSTONE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share data)
NOTE 2:-SIGNIFICANT ACCOUNTING POLICIES (Cont.)
| aa. |
Impact of recently issued accounting standards:
|
Recently issued and adopted accounting standards:
| 1. |
In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes. ASU 2019-12 eliminates certain exceptions related to the approach for intra-period tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. It also clarifies and simplifies other aspects of the accounting for income taxes. This guidance is effective for public business entities for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. Early adoption is permitted, including in interim periods. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.
|
Recently issued accounting standards and not yet adopted by the Company:
| 2. |
In August 2020, the FASB issued Accounting Standards Update No. 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity's Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (ASU 2020-06), which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own equity. This guidance also eliminates the treasury stock method to calculate diluted earnings per share for convertible instruments and requires the use of the if-converted method. This guidance will be effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Early adoption is not permitted before fiscal years beginning after December 15, 2020. The Company do not expect the adoption of this guidance to have a material impact on its consolidated financial statements.
|
| 3. |
In October 2021, the FASB issued ASU No. 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers (ASU 2021-08), which clarifies that an acquirer of a business should recognize and measure contract assets and contract liabilities in a business combination in accordance with Accounting Standards Codification (ASC) Topic 606, Revenue from Contracts with Customers (Topic 606). This guidance is effective for fiscal years beginning after 15 December 2022 and interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the impact of the new guidance on its consolidated financial statements
|
F - 37
CAESARSTONE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share data)
NOTE 3: MARKETABLE SECURITIES
The following is a summary of available-for-sale marketable securities at December 31, 2021:
|
|
|
Amortized cost |
|
|
Gross unrealized gains |
|
|
Gross unrealized losses |
|
|
Accrued Interest |
|
|
Fair value |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Available-for-sale – matures within one year: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Corporate bonds |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Governmental bonds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for-sale – matures after one year: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Governmental bonds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
The following is a summary of available-for-sale marketable securities at December 31, 2020:
|
|
|
Amortized cost |
|
|
Gross unrealized gains |
|
|
Gross unrealized losses |
|
|
Accrued Interest |
|
|
Fair value |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Available-for-sale – matures within one year: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Corporate bonds |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Governmental bonds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for-sale – matures after one year: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Governmental bonds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
As of December 31, 2021 and 2020 the Company didn’t record an allowance for credit losses for its AFS marketable debt securities.
F - 38
CAESARSTONE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share data)
| NOTE 4:- |
OTHER ACCOUNTS RECEIVABLE AND PREPAID EXPENSES
|
|
December 31,
|
||||||||
|
2021
|
2020
|
|||||||
|
Prepaid expenses
|
$
|
|
$
|
|
||||
|
Government authorities
|
|
|
||||||
|
Advances to suppliers
|
|
|
||||||
|
Derivatives
|
|
|
||||||
|
Other receivables (*)
|
|
|
||||||
|
$
|
|
$
|
|
|||||
(*) Including mainly insurance receivables, see also note 11.
| NOTE 5:- |
INVENTORIES
|
|
December 31,
|
||||||||
|
2021
|
2020
|
|||||||
|
Raw materials
|
$
|
|
$
|
|
||||
|
Work-in-progress
|
|
|
||||||
|
Finished goods
|
|
|
||||||
|
$
|
|
$
|
|
|||||
F - 39
CAESARSTONE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share data)
| NOTE 6:- |
PROPERTY, PLANT AND EQUIPMENT, NET
|
|
December 31,
|
||||||||
|
2021
|
2020
|
|||||||
|
Cost:
|
||||||||
|
Machinery and manufacturing equipment, net (1)
|
$
|
|
$
|
|
||||
|
Office equipment and furniture
|
|
|
||||||
|
Motor vehicles
|
|
|
||||||
|
Buildings and leasehold improvements
|
|
|
||||||
|
Prepaid expenses related to operating lease (2)
|
|
|
||||||
|
|
|
|||||||
|
Accumulated depreciation:
|
||||||||
|
Machinery and manufacturing equipment, net
|
|
|
||||||
|
Office equipment and furniture
|
|
|
||||||
|
Motor vehicles
|
|
|
||||||
|
Buildings and leasehold improvements
|
|
|
||||||
|
Prepaid expenses related to operating lease
|
|
|
||||||
|
|
|
|||||||
|
Depreciated cost
|
$
|
|
$
|
|
||||
| (1) |
|
| (2) |
|
Depreciation expense were $
F - 40
CAESARSTONE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share data)
NOTE 7:- GOODWILL AND INTANGIBLES
|
a.
|
Goodwill:
|
The changes in the carrying amount of goodwill for the years ended December 31, 2021 and 2020 are as follows:
|
Balance as of January 1, 2020
|
$
|
|
||
|
Acquired through business combination (*)
|
|
|||
|
Foreign currency translation adjustments
|
|
|||
|
Balance as of December 31, 2020
|
|
|||
|
Foreign currency translation adjustments
|
(
|
)
|
||
|
Balance as of December 31, 2021
|
$
|
|
(*) See also Notes 1(b) and 1(c)
|
b.
|
Intangible assets:
|
|
December 31,
|
||||||||
|
2021
|
2020
|
|||||||
|
Original amounts:
|
||||||||
|
Customer relationships
|
$
|
|
$
|
|
||||
|
Accumulated amortization:
|
||||||||
|
Customer relationships
|
(
|
)
|
(
|
)
|
||||
|
Foreign currency translation adjustment
|
(
|
)
|
|
|||||
|
Total intangibles assets
|
$
|
|
$
|
|
||||
| (1) |
Amortization expense amounted to $
|
| (2) |
Estimated amortization expenses for the following years as of December 31, 2021:
|
|
2022
|
$
|
|
||
|
2023
|
|
|||
|
2024
|
|
|||
|
2025
|
|
|||
|
$
|
|
F - 41
CAESARSTONE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share data)
| NOTE 8:- |
SHORT-TERM BANK CREDIT AND CURRENT MATURITIES OF LONG-TERM LOAN
|
| a. |
Short-term bank credit and loans are classified as follows:
|
|
|
|
|
Weighted average interest
|
|
|
|
|
|
|
|||||||||
|
|
Currency
|
|
December 31,
|
|
December 31,
|
|
||||||||||||
|
|
|
|
2021
|
|
2020
|
|
2021
|
|
|
2020
|
|
|||||||
|
|
|
|
%
|
|
|
|
|
|
|
|
||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Short-term bank credit (c)
|
USD
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|||
|
Short-term bank credit
|
INR
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|||
|
Current maturities of Long-term bank loan and other (d)
|
INR
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|||
| Total | $ |
|
$ |
|
||||||||||||||
| b. |
As of December 31, 2021 and 2020, the Company had short-term and revolving credit lines of approximately $
|
The Company's current credit lines, if not extended, will expire through 2022.
| c. |
Short term bank credit assumed as part of the Omicron acquisitions and was fully repaid during 2021.
|
| d. |
As of December 2020, including mainly current maturities of long-term bank loan. As of December 31, 2021 the Company is not in compliance with the covenants under the loan agreement in Lioli and therefore presented as a short term loan.
|
The loan agreement with the bank in Lioli contains customary covenants. The financial covenants under the agreement prohibit Lioli from exceeding a ratio of net total debt to local EBITDA of 3.05:1 until its debt to the bank is repaid in full, while also requiring that Lioli maintains, at the end of each period (i) an interest coverage ratio of at least 2.77:1, (ii) ratio of principal plus interest compared to local EBITDA of at least 1.89:1 (iii) and fixed assets ratio out of the principal amount of the loan of at least 1.51:1. In addition the bank did not approve the change in controls took place upon acquisition of Lioli.
The Loan Agreement also contains certain customary negative covenants that require Lioli to refrain from certain actions unless bank’s consent obtained. Lioli debt is also secured by a floating charge on all of Lioli’s assets. See also Note 15.
During January 2022, the Company engaged with another bank and signed a new loan agreement.
F - 42
CAESARSTONE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share data)
| NOTE 9:- |
ACCRUED EXPENSES AND OTHER LIABILITIES
|
|
December 31,
|
||||||||
|
2021
|
2020
|
|||||||
|
Employees and payroll accruals
|
$
|
|
$
|
|
||||
|
Accrued expenses
|
|
|
||||||
|
Advances from customers
|
|
|
||||||
|
Taxes payable
|
|
|
||||||
|
Warranty provision
|
|
|
||||||
|
Derivatives
|
|
|
||||||
|
Sales return provision
|
|
|
||||||
|
Operating lease liability short-term
|
|
|
||||||
|
Contingent consideration liability and other
|
|
|
||||||
|
$
|
|
$
|
|
|||||
| NOTE 10:- |
LEASES
|
| a. |
As of December 31, 2021, the Company had operating lease agreements for facilities and vehicles in the United States, Canada, Australia, United Kingdom, Israel, India and Singapore. The Company’s leases have remaining lease terms of up to 15 years, some of which include options to extend the leases for up to five years. Such options are included in the lease term when it is reasonably certain that the option will be exercised. Leases with an initial term of 12 months or less are not recorded on the balance sheet, the Company recognizes lease expense for these leases on a straight-line basis over the lease term. The Company does not separate non-lease components from the lease components to which they relate, and instead accounts for each separate lease and non-lease component associated with that lease component as a single lease component for all underlying asset classes. The Company uses its estimated incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments.
|
During 2021, the Company's lease fees related to the Land Use Agreement with the Kibbutz were amended. The amendment included an increase in the lease fees and was not accounted for as a new lease. As a result of the amendment, the operating lease right of use asset and liability increased by approximately $35.6 million. See also note 14c.
F - 43
CAESARSTONE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share data)
NOTE 10:- LEASES (CONT.)
| b. |
The following table summarizes the Company’s lease-related assets and liabilities recorded on the consolidated balance sheet:
|
|
Classification
|
December 31, 2021
|
December 31, 2020
|
|||||||
|
Assets:
|
|||||||||
|
Operating lease assets
|
Operating lease right-of-use assets
|
$
|
|
$
|
|
||||
|
Total lease assets
|
$
|
|
$
|
|
|||||
|
Liabilities:
|
|||||||||
|
Current lease liabilities
|
Accrued expenses and other liabilities
|
|
|
||||||
|
Long-term lease liabilities
|
Long-term lease liabilities
|
|
|
||||||
|
Total lease liabilities
|
$
|
|
$
|
|
|||||
|
Lease term and discount rate:
|
December 31, 2021
|
December 31, 2020
|
|
|
Weighted-average remaining lease term — operating leases
|
|
|
|
|
Weighted-average discount rate — operating leases
|
|
|
F - 44
CAESARSTONE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share data)
NOTE 10:- LEASES (CONT.)
| c. |
The components of operating lease cost for the year ended December 31, 2021 were as follows:
|
|
December 31, 2021
|
December 31, 2020
|
|||||||
|
Operating lease cost:
|
||||||||
|
Operating lease expense
|
$
|
|
$
|
|
||||
|
Variable lease expense
|
|
|
||||||
|
Short-term lease expense
|
|
|
||||||
|
Sublease income
|
(
|
)
|
(
|
)
|
||||
|
Total operating lease cost
|
$
|
|
$
|
|
||||
| d. |
The maturity of the Company’s operating lease liabilities for contracts with lease term greater than one year as of December 31, 2021 are as follows:
|
|
December 31,
|
||||
|
2022
|
$
|
|
||
|
2023
|
|
|||
|
2024
|
|
|||
|
2025
|
|
|||
|
2026
|
|
|||
|
2027 and thereafter
|
|
|||
|
Total future lease payments (1, 2)
|
|
|||
|
Less imputed interest
|
(
|
)
|
||
|
Total
|
$
|
|
||
|
(1) |
|
|
|
|
|
(2) |
|
| e. |
For additional information regarding lease transactions between related parties, refer to Note 14.
|
F - 45
CAESARSTONE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share data)
NOTE 10:- LEASES (CONT.)
| f. |
The following table presents supplemental cash flow information related to the lease costs for operating leases:
|
|
December 31, 2021
|
December 31, 2020
|
|||||||
|
Cash paid for amounts included in measurement of lease liabilities:
|
||||||||
|
Operating cash flows for operating leases
|
$
|
|
$
|
|
||||
|
Right-of-use assets obtained in exchange for new operating lease liabilities:
|
||||||||
|
Operating leases
|
$
|
|
$
|
|
||||
| NOTE 11:- |
COMMITMENTS AND CONTINGENT LIABILITIES
|
| a. |
Legal proceedings and contingencies:
|
Claim by former South African distributor
In December 2007, the Company terminated its agency agreement with its former South African agent, World of Marble and Granite (“WOMAG”), on the basis that WOMAG had breached the agreement. In the same month, the Company filed a claim for NIS 1.0 million (approximately $257 ) in the Israeli District Court in Haifa based on such breach. WOMAG has contested jurisdiction of the Israeli District Court, but subsequent appellate courts have dismissed WOMAG’s claims. In January 2008, WOMAG filed suit in South Africa seeking Euro 15.7 million (approximately $17,060 ). In September 2013, the South African Court determined that since a proceeding on the same facts was pending before another court (lis alibis pendens), the South African Court will stay the matter until the conclusion of the Israeli action.
In December 2013, the magistrate’s court in Israel held that the Company was not entitled to terminate the agreement with WOMAG as it was not breached by WOMAG. In October 2015, WOMAG amended its claim, seeking a reduced amount of approximately Euro 7.1 million (approximately $7,727 ) and approximately South Africa RAND 43.7 million (approximately $2,808 ). In June 2016, WOMAG further amended its claim, seeking a reduced amount of Euro 6.2 million (approximately $6,520 ) and South Africa RAND 51.2 million (approximately $3,700 ) plus interest on any capital sum awarded. As the district court dismissed the Company’s appeal of the decision of the magistrate’s court, the Company has agreed with WOMAG to submit the matter to arbitration, for which hearings commenced in South Africa in September 2016.
F - 46
CAESARSTONE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share data)
| NOTE 11:- |
COMMITMENTS AND CONTINGENT LIABILITIES (Cont.)
|
During 2018, WOMAG once again amended its claim, seeking a reduced amount of approximately EUR 5.8 million (approximately $6,640 ) plus interest on any capital sum awarded.
In February 2019 the arbitrator has rendered an award on the merits (non-quantum), accepting the claims made by WOMAG and imposing on the Company also the legal costs of the arbitration.
In July 2019, the Company appealed the award and in August 2019 hearings were held. In November 2019, the appeal panel delivered its award on the merits (the quantum is still to be decided), partially accepting the appeal and imposing 80 % of the cost of arbitration and appeal on the Company.
Following negotiations held during 2020 between the parties, on January 15, 2021, the Company paid WOMAG an amount of approximately EUR 7.2 million ($8,900 ) as part of the settlement for the majority of WOMAG’s claim for breach of contract. The remaining disputed amounts relating to the said breach, as well as WOMAG's claim for loss of profits are subject of a further hearing.
The Company, also based on its legal advisors, believes it has provided an adequate reserve for the outstanding claims as of December 31, 2021.
Bodily injury claims related to exposure to silica dust:
Overview:
The Company is subject to numerous claims mainly by fabricators, their employees or National Insurance Institute (the Israeli insurance institute -"NII" or Australian states Workcover institutes), alleging that fabricators contracted illnesses, including silicosis, through exposure to silica particles during cutting, polishing, sawing, grinding, breaking, crushing, drilling, sanding or sculpting Company's products.
F - 47
CAESARSTONE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share data)
| NOTE 11:- |
COMMITMENTS AND CONTINGENT LIABILITIES (Cont.)
|
Individual claims in Israel
As of December 31, 2021, the Company is subject to 165 pending bodily injury claims (out of which 164 are individual claims and NII subrogation or related future probable claims, and one claim recognized as a class action) that have been submitted in Israel since 2008 against the Company directly, or that have named the Company as third-party defendant by fabricators or their employees in Israel, by the injurer's successors, by the NII or by others.
As of December 31, 2021, the Company has 18 pending pre-litigation demand letters on behalf of certain fabricators in Israel.
Most of the claims in Israel do not specify a total amount of damages sought, as the plaintiff’s future damages are intended to be determined at trial.
In November 2015 and in May 2017, the Company entered into agreements with the State of Israel and with its main distributors in Israel, respectively, with the consent of its insurance carriers, under which the Company agreed with the State and each of its main distributors to cooperate, subject to certain terms, with respect to the management of the individual claims that have been filed and claims that may be submitted during a certain time period (NII claims are excluded from the Company’s agreement with the State) and on the apportionments of the total liability between the Company , the State, and the distributors, if found, in such claims. During January 2020, the State of Israel approved an additional 5 years extension to its agreement with the company.
Class action in Israel:
In April 27, 2014, a lawsuit by a single plaintiff and a motion for the recognition of this lawsuit as a class action was filed against the Company in the Central District Court in Israel. The plaintiff alleges that, if the lawsuit is recognized as a class action, the claim against the Company is estimated to be NIS 216 million (approximately $56,180 ). In addition, the claim includes an unstated sum in compensation for special and general damages.
On January 4, 2018, the Company and the plaintiff submitted to the Israeli District Court a settlement agreement, which was approved in July 2021. The claim was dismissed and the Company is liable to make payments on a one time basis, without any admission of liability, in an aggregate amount of NIS 9.0 million (approximately $2,894 ) to fund certain safety related expenses at fabrication facilities in Israel, as well as plaintiff’s compensation and legal expenses.
During 2021 the Company received refund of NIS 7.0 million (approximately $2,100 ) from its insurence carrier which was recorded as a reduction of legal settlements expenses.
F - 48
CAESARSTONE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share data)
| NOTE 11:- |
COMMITMENTS AND CONTINGENT LIABILITIES (Cont.)
|
Individual claims in Australia:
As of December 31, 2021, Company’s subsidiary in Australia is subject to 38 pending bodily injury claims that have been submitted in Australia since 2018 against it directly, or that have named the Company as third-party defendant by fabricators in Australia.
Commencing 2021, the Company reassessed the expected outcome of the individual product liability claims in Australia following Company's and its insurance carrier consent for several settlements. Based on this development and also based on its legal advisors’ and insurer's opinions, contingent losses related to the product liability individual claims are probable, and pursuant to ASC 450, an accrual has been recorded for the loss contingencies related to such claims.
In order to reasonably estimate the losses for bodily injury claims in Israel and Australia reflected in the table below, the Company performed a case-by-case analysis with its legal advisors of the relevant facts that were reasonably available to it, related to the claims filed, including, among other things, the specific known or estimated health condition of the claimants, their ages, salaries, related probable future subrogation claims from the NII, and other factors that might have an impact on the final outcome of such claims. The Company will continue to regularly monitor changes in facts for each claim and will update its best estimate if required.
Accordingly, the reserve for all the above mentioned bodily injury claims (including class action) as of December 31, 2021 and 2020 totaled to $42,940 and $42,345 respectively, of which $22,081 and $20,435 is reported in short term legal settlements and loss contingencies and $20,859 and $21,910 is reported in long-term liabilities. The Company currently cannot estimate the number of claimants that may file claims in the future or the nature of their claims in order to conclude probability or the range of loss. The Company does not expect to incur additional material losses with respect to the outstanding bodily injury claims, that might have a material impact on its financial position, results of operations and cash flows.
The Company updated its provision in 2021, 2020 and 2019 to reflect the outstanding claims in the below table, and provided a provision also for related NII unasserted claims, based on its legal advisors’ and insurer's opinions and according to ASC 450, taking into consideration new claims filed, settlements reached and other new information available.
F - 49
CAESARSTONE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share data)
| NOTE 11:- |
COMMITMENTS AND CONTINGENT LIABILITIES (Cont.)
|
A summary of bodily injury claims for which the Company provided provision is as follows:
|
|
|
Year ended December 31, |
|
|||||||||
|
|
|
2021 |
|
|
2020 |
|
|
2019 |
|
|||
|
Outstanding claims, January 1, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New claims |
|
|
|
|
|
|
|
|
|
|
|
|
|
Settled and dismissed claims |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding claims, December 31 (*) |
|
|
|
|
|
|
|
|
|
|
|
|
|
*) |
|
Insurance
The Company maintains insurance for product liability claims, including for bodily injury claims related to exposure to silica dust. The Company has purchased insurance policies for the period from 2008 and to date from several insurance carriers that provide coverage for product liability losses, subject to certain terms and conditions, and the related defense costs up to a certain limit per case and per policy year.
As of December 31, 2021, the Company has regional product liability insurance policies, other than in Israel and Australia. Specifically, in the United States and Canada, local policy covers up to $20 mililion and CAD 20 million respectively, per claim or per year, subject to certain terms and limitations, with relatively low deductibles.
The Company currently has also a global product liability insurance (the “global policy”), which applies, subject to certain terms and limitations, to claims that may be submitted against the Company worldwide during the insurance policy term.
The global insurance is a second layer insurance which becomes effective only after a certain amount was paid by the local insurance carrier or by the Company if a local insurance doesn’t exist.
This policy covers claims received during the policy term from October 1, 2020 to April 1, 2022, up to an amount of $35 million per year or up to $25 million for any claim. The policy covers only illnesses diagnosed after February 2010. Global policy will become effective once paid for claims in Israel an amount of $20 million or in Australia AUD50 million during the term of the global policy.
Although the Company will seek to renew its product liability insurance to cover silicosis related claims, there is no assurance that the Company will be successful in its renewal.
The Company records insurance receivables for the amounts that are covered by insurance. During 2021, as in prior years, the Company's insurance carriers made payments to all settled product liability claims that were under the policies. The Company paid the deductible amounts for the settled claims per policy.
F - 50
CAESARSTONE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share data)
| NOTE 11:- |
COMMITMENTS AND CONTINGENT LIABILITIES (Cont.)
|
The collectability of the Company's insurance receivables is regularly evaluated and the amounts recorded are probable of collection. This conclusion is based on analysis of the terms of the underlying insurance policies, experience in successfully recovering individual product liability claims from Company's insurers, the insurance carrier was party to the agreement with the State of Israel and the financial ability of the insurance carriers to pay the claims and the relevant facts and applicable law.
As of December 31, 2021 and 2020, the insurance receivable totaled to $6,748 and $7,958 , respectively, of which $6,299 and $6,283 is reported in the other accounts receivable and prepaid expenses and $449 and $1,675 is in other long-term receivables.
In 2021 and 2020, the legal settlements and loss contingencies expenses related to the bodily injury claims related to exposure to silica dust totaled to $3,417 and $5,299 , respectively, which reflects the deductible amounts for claims covered by insurance policies, claims not covered and the impact of settlements including the related legal costs.
General:
From time to time, the Company is involved in other legal proceedings and claims in the ordinary course of business related to a range of matters. While the outcome of these other claims cannot be predicted with certainty, the Company monitors and estimates the possible loss deriving from these claims based on new information available and based on its legal advisors, and believes that it recorded an adequate reserve for these claims in accordance with ASC 450.
| b. |
Purchase obligation:
|
The Company's significant contractual obligations and commitments as of December 31, 2021 are for purchase obligations to certain suppliers and amounted to $36,210 for the fiscal year 2022.
| c. |
Pledges and guarantees:
|
| 1. |
As of December 31, 2021, the Company had outstanding guarantees and letters of credit with various expiration dates in a principal amount of approximately $
|
| 2. |
Lioli’s credit facilities provided by banks in India are secured with a “Negative floating pledge”, whereby the Company committed not to pledge or charge and not to undertake to pledge or charge its general floating assets.
|
| 3. |
See also note 15.
|
F - 51
CAESARSTONE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share data)
| NOTE 12:- |
TAXES ON INCOME
|
| a. |
Israeli taxation:
|
| 1. |
Corporate tax rate:
|
The corporate tax rate in Israel was 23
| 2. |
Foreign Exchange Regulations:
|
Under the Foreign Exchange Regulations, Caesarstone Ltd. calculates its tax liability in U.S. Dollars according to certain orders. The tax liability, as calculated in U.S. Dollars is translated into New Israeli Shekels according to the exchange rate as of December 31st of each year.
| 3. |
Tax benefits under Israel's Law for the Encouragement of Industry (Taxes), 1969:
|
The Company is an "Industrial Company," as defined by the Law for the Encouragement of Industry (Taxes), 1969, and as such, the Company is entitled to certain tax benefits, primarily amortization of costs relating to know-how and patents over eight years, accelerated depreciation and the right to deduct public issuance expenses for tax purposes.
| 4. |
Tax benefits under the Law for the Encouragement of Capital Investments, 1959:
|
According to the Law for the Encouragement of Capital Investments, 1959 (the "Encouragement Law"), the Company is entitled to various tax benefits by virtue of the "Preferred Enterprise" status granted to its enterprises, in accordance with the Encouragement Law.
The Company chose to be taxed according to the "Preferred Enterprise" track under Amendment No. 68 to the Encouragement Law (the "Amendment No. 68"). In order to implement Amendment No. 68 and to be taxed under the "Preferred Enterprise" track, the Company waived the tax benefits of the previous tracks -"Approved Enterprise" and "Beneficiary Enterprise" - under the Encouragement Law, starting from the 2011 tax year.
The principal benefits by virtue of the Encouragement Law are the following:
Tax benefits and reduced tax rates under the Preferred Enterprise track:
The tax rate on preferred income from a Preferred Enterprise commencing 2017 is 16% and in development area A – 7.5% (relates to Company's manufacturing plant in Bar-Lev industrial zone).
In order to receive benefits as a "Preferred Enterprise," Amendment No. 68 states certain conditions must be met. The basic condition for receiving the benefits under Amendment No. 68 is that the enterprise contributes to the country's economic growth and is a competitive factor for the gross domestic product (a "competitive enterprise"). In order to comply with this condition, the Encouragement Law prescribes various requirements.
F - 52
CAESARSTONE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share data)
| NOTE 12:- |
TAXES ON INCOME (Cont.)
|
As for industrial enterprises, in each tax year, one of the following conditions must be met:
| 1. |
Its main field of activity is biotechnology or nanotechnology as approved by the Head of the Administration of Industrial Research and Development.
|
| 2. |
The industrial enterprise's sales revenues in a specific market during the tax year do not exceed
|
| 3. |
At least
|
Amendment No. 68 also prescribes that any dividends distributed to individuals or foreign residents from the preferred enterprise's earnings as discussed above will be subject to tax at a rate of 20 % from 2014 and onwards (or a reduced rate under an applicable double tax treaty).
Since the Company chose to apply the provisions of Amendment No. 68, by submitting the waiver form before June 30, 2015, the Company is eligible to distribute taxed earnings derived from a Beneficiary Enterprise and/or Approved Enterprise to an Israeli company without being subject to withholding tax.
In development area A, in addition to the tax benefits, as mentioned above, some of the Company's facilities are eligible for grants at rate of 20 % and/or loans, subject to an approval of the Israeli Investment Center.
Accelerated depreciation:
The Company is eligible for a deduction of accelerated depreciation on machinery and equipment used by the Approved Enterprise or the Beneficiary Enterprise or the Preferred Enterprise at a rate of 200 % (or 400 % for buildings) from the first year of the asset's operation.
F - 53
CAESARSTONE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share data)
| NOTE 12:- |
TAXES ON INCOME (Cont.)
|
Conditions for entitlement to benefits:
The above mentioned benefits are contingent upon the fulfillment of the conditions stipulated by the Encouragement Law, regulations published thereunder and the letters of approval for the investments in the Preferred Enterprises, as discussed above. Non-compliance with the conditions may cancel all or part of the benefits and require a refund of the amount of the benefits, including interest. The Company's management believes that the Company meets the aforementioned conditions.
The tax-exempt income attributable to the Approved Enterprise cannot be distributed to shareholders without subjecting the Company to taxes. If dividends are distributed out of tax-exempt profits, the Company will then become liable for tax at the rate applicable to its profits from the Approved Enterprise in the year in which the income was earned, as if it was not under the "Alternative benefits track" (taxed at the rate of no more than 25% as of December 31, 2021). Under the Encouragement Law, tax-exempt income generated under the Approved Enterprise status will be taxed, among other things, upon a dividend distribution or complete liquidation in accordance with the Encouragement Law.
In November 2021, amendment No. 74 to the Investment Law (the “Trapped Earnings Law”) came into effect. Amendment 74 to the Encouragement Law:
On November 15, 2021, the Economic Efficiency Law (Legislative Amendments for Achieving Budget Targets for the 2021 and 2022 Budget Years), 2021 ("the Economic Efficiency Law"), was enacted. This Law establishes a temporary order allowing Israeli companies to release tax-exempt earnings ("trapped earnings" or "accumulated earnings") accumulated until December 31, 2020, through a mechanism established for a reduced corporate income tax rate applicable to those earnings ("the Temporary Order"). In addition to the reduced corporate income tax (CIT) rate, Article 74 to the Encouragement Law was amended whereby effective from August 15, 2021, for any dividend distribution (including a dividend as per Article 51B to the Encouragement Law) by a company which has trapped earnings, there will be a requirement to allocate a portion of that distribution to the trapped earnings.
The Company distributed a dividend during November 2021 which was partially attributed to the above amendment.
Of the Company's retained earnings as of December 31, 2021, approximately $24,631 is tax-exempt earnings attributable to its Approved Enterprise.
As of December 31, 2021, if the income attributed to the Approved Enterprise would have been distributed as a dividend, the Company would have incurred a tax liability of approximately $6,158 .
According to the Temporary Order, the reduction of CIT will apply to earnings that are released (with no requirement for an actual distribution) within a period of one year from the date of enactment of the Temporary Order. The reduction in the CIT is dependent on the proportion of the trapped earnings that are released in relation to the total trapped earnings, and on the foreign investment percentage in the years the earnings were generated. Consequently, the larger the proportion of the trapped earnings that are released, the lower the tax in respect of the distribution. The minimum tax rate applied to the company is 10%. Further, a company that elects to pay a reduced CIT is required to invest in its industrial enterprise a designated amount in accordance with the Economic Efficiency Law within a period of five years commencing from the tax year in which the election is made. The designated investment should be utilized for the acquisition of production assets, and/or investments in research and development and/or compensation to additional new employees.
The Company's current policy is not to apply to such order.
F - 54
CAESARSTONE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share data)
| NOTE 12:- |
TAXES ON INCOME (Cont.)
|
| b. |
Non-Israeli subsidiaries taxation:
|
Non-Israeli subsidiaries are taxed based on tax laws in their countries of residence.
Statutory tax rates for Non-Israeli subsidiaries are as follows:
Company incorporated in United States – 25.8 % tax rate (federal and state).
Company incorporated in Australia - 30 % tax rate.
Company incorporated in Singapore - 17 % tax rate.
Company incorporated in Canada – 26.6 % tax rate (federal and state).
Company incorporated in England – 19 % tax rate.
Company incorporated in India – 28 % tax rate.
Israeli income taxes and foreign withholding taxes were not provided for undistributed earnings of the Company's foreign subsidiaries. The Company intends to reinvest these earnings indefinitely in the foreign subsidiaries. Accordingly, no deferred income taxes have been provided. If these earnings were distributed to Israel in the form of dividends or otherwise, the Company would be subject to additional Israeli income taxes (subject to an adjustment for foreign tax credits) and foreign withholding taxes.
| c. |
Deferred income taxes:
|
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets and liabilities are as follows:
|
|
|
December 31, |
|
|||||
|
|
|
2021 |
|
|
2020 |
|
||
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill and Intangible assets |
|
$ |
|
|
|
$ |
|
|
|
Other temporary differences (1) |
|
|
|
|
|
|
|
|
|
Temporary differences related to inventory (2) |
|
|
|
|
|
|
|
|
|
Carryforward losses, deductions and credits (3) |
|
|
|
|
|
|
|
|
|
Less-valuation allowance |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment |
|
|
( |
) |
|
|
( |
) |
|
Intangible Assets |
|
|
( |
) |
|
|
( |
) |
|
Other temporary differences |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets, net |
|
$ |
|
|
|
$ |
|
|
F - 55
CAESARSTONE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share data)
| NOTE 12:- |
TAXES ON INCOME (Cont.)
|
| (1) |
|
|
(2) |
|
| (3) |
|
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the schedule of reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment.
F - 56
CAESARSTONE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share data)
| NOTE 12:- |
TAXES ON INCOME (Cont.)
|
| d. |
A reconciliation of the Company's effective tax rate to the statutory tax rate in Israel is as follows:
|
|
Year ended December 31,
|
||||||||||||
|
2021
|
2020
|
2019
|
||||||||||
|
Income before taxes on income
|
$
|
|
$
|
|
$
|
|
||||||
|
Statutory tax rate in Israel
|
|
%
|
|
%
|
|
%
|
||||||
|
Income taxes at statutory rate
|
$
|
|
$
|
|
$
|
|
||||||
|
Increase (decrease) in tax expenses resulting from:
|
||||||||||||
|
Tax benefit arising from reduced rate as an "Preferred Enterprise"
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||
|
Non-deductible expenses, net
|
|
|
|
|||||||||
|
Increase (decrease) in taxes from prior years, also related to settlement with tax authorities
|
(
|
)
|
(
|
)
|
|
|||||||
|
Tax adjustment in respect of foreign subsidiaries' different tax rates
|
(
|
)
|
(
|
)
|
|
|||||||
|
Uncertain tax position
|
|
|
|
|||||||||
|
Changes in valuation allowance
|
(
|
)
|
(
|
)
|
|
|||||||
|
Others
|
|
(
|
)
|
(
|
)
|
|||||||
|
Income tax expense
|
$
|
|
$
|
|
$
|
|
||||||
|
Effective tax rate
|
|
%
|
|
%
|
|
%
|
||||||
|
Per share amounts (basic and diluted) of the tax benefit resulting from an "Preferred Enterprise"
|
$
|
(
|
)
|
$
|
(
|
)
|
$
|
(
|
)
|
|||
F - 57
CAESARSTONE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share data)
| NOTE 12:- |
TAXES ON INCOME (Cont.)
|
| e. |
Income (loss) before taxes on income is comprised as follows:
|
|
Year ended December 31,
|
||||||||||||
|
2021
|
2020
|
|
||||||||||
|
Domestic
|
$
|
|
$
|
|
$
|
|
||||||
|
Foreign
|
|
(
|
)
|
|
||||||||
|
$
|
|
$
|
|
$
|
|
|||||||
| f. |
Tax expenses on income are comprised as follows:
|
|
Year ended December 31,
|
||||||||||||
|
2021
|
2020
|
2019
|
||||||||||
|
Current taxes
|
$
|
|
$
|
|
$
|
|
||||||
|
Deferred taxes
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||
|
$
|
|
$
|
|
$
|
|
|||||||
|
Domestic
|
$
|
|
$
|
|
$
|
|
||||||
|
Foreign
|
|
|
|
|||||||||
|
$
|
|
$
|
|
$
|
|
|||||||
| g. |
Tax assessments:
|
The Company operates in multiple jurisdictions throughout the world, and its tax returns are periodically audited or subject to review by both domestic and foreign authorities. The associated tax filings remain subject to examination by applicable tax authorities for a certain length of time following the tax year to which those filings relate. The following describes the open tax years, by major tax jurisdiction, as of December 31, 2021:
Israel 2019 – present
Australia 2017 - present
Canada 2016 - present
United States 2017 - present
Singapore 2017 - present
England 2016 – present
India 2018 - present
F - 58
CAESARSTONE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share data)
| NOTE 12:- |
TAXES ON INCOME (Cont.)
|
| h. |
Uncertain tax positions:
|
The balances at December 31, 2021 and 2020 include a liability for unrecognized tax benefits of $3,773 and $3,663 , respectively, for tax positions which are uncertain of being sustained.
A reconciliation of the beginning and ending balances of unrecognized tax benefits is as follows:
|
Gross tax liabilities at January 1, 2019
|
$
|
|
||
|
Increase in tax positions for current year
|
|
|||
|
Gross tax liabilities at December 31, 2019
|
|
|||
|
Increase in tax positions for current year
|
|
|||
|
Addition of tax position of prior years
|
|
|||
|
Decrease in tax position resulting from settlement
|
(
|
)
|
||
|
Gross tax liabilities at December 31, 2020
|
|
|||
|
Increase in tax positions for current year
|
|
|||
|
Addition of tax position of prior years
|
|
|||
|
Decrease in tax position resulting from settlement
|
|
|||
|
Gross tax liabilities at December 31, 2021
|
$
|
|
||
The Company believes that an adequate provision has been made for any adjustments that may result from tax examinations. However, the outcome of tax audits cannot be predicted with certainty. If any issues addressed in the Company's tax audits are resolved in a manner not consistent with management's expectations, the Company could be required to adjust the provision for income taxes in the period such resolution occurs. The Company does not expect uncertain tax positions to change significantly over the next 12 months, except in the case of settlements with tax authorities, the likelihood and timing of which is difficult to estimate.
F - 59
CAESARSTONE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share data)
| NOTE 13:- |
SHAREHOLDERS' EQUITY
|
| a. |
The Company's share capital consisted of the following as of December 31, 2020 and 2019:
|
|
Authorized
|
Outstanding | |||||||||||||||
|
December 31,
|
December 31,
|
|||||||||||||||
|
2021
|
2020
|
2021
|
2020
|
|||||||||||||
|
Number of shares
|
||||||||||||||||
|
Ordinary shares of NIS
|
|
|
|
|
||||||||||||
| b. |
Ordinary shares:
|
Ordinary shares confer on their holders voting rights and the right to receive dividends.
| c. |
Dividends:
|
In February 2020 the Company revised its dividend policy so that cash dividend will be distributed up to 50 % of the year to date reported net income attributable to controlling interest less any amounts already paid as dividend for the respective period, provided that such calculated dividend is not less than $0.10 . Any dividend payment is subject to approval by the Company’s board of directors.
Pursuant to the above policy the Company paid a total amount of $10,681 and $4,821 in 2021 and 2020, respectively, of dividend mostly out of its non-tax exempt profit under the beneficiary enterprise (see also note 12).
| d. |
Repurchase of shares:
|
On February 9, 2016, the Company’s Board of Directors approved a share repurchase plan authorizing the repurchase of up to $40,000 of the Company’s outstanding ordinary shares which was complete on August 3, 2016. Following the authorization, the Company repurchased 1,103,096 ordinary shares at an average price of $35.74 per share (excluding broker and transaction fees). The Company recorded shares repurchased at cost as part of its equity statement. During 2019 the Israeli tax authorities examined Company’s withholding tax filings and asserted that the Company’s buyback should be defined as dividend payment and as such is subject to 20 % withholding tax. The Company concluded this matter as part of the tax assessment during 2021.
F - 60
CAESARSTONE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share data)
| NOTE 13:- |
SHAREHOLDERS' EQUITY (Cont.)
|
| e. |
Compensation plan:
|
On January 1, 2011, the Board of Directors adopted the Caesarstone Ltd 2011 Incentive Compensation Plan (the “2011 Plan”) pursuant to which non-employee directors, officers, employees and consultants may receive stock options and RSUs exercisable for ordinary shares, if certain conditions are met. Under the plan the Company can grant up to 3,275,000 ordinary shares. On September 17, 2020 the Board of Directors adopted Caesarstone Ltd 2020 Share incentive plan (the “2020 Plan”). Under the 2020 Plan up to 2,500,000 ordinary shares may be granted. In addition, any shares that remain available for issuance under the 2011 Plan, as of the Effective Date, which shall not exceed 1,000,000 Shares, may also be granted under the 2020 Plan.
As of December 31, 2021, there were 1,683,803 options and restricted stock units (RSUs) outstanding under the Plans and 2,273,070 shares available or reserved for future issuance under the plan.
As of December 31, 2021, there was $2,722 of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted to employees and directors under the Plan. That cost is expected to be recognized over a weighted-average period of 3.1 years.
The following is a summary of activities relating to the Company’s stock options granted to employees under the Company’s plan during the year ended December 31, 2021:
|
Number
of options
|
Weighted
average
exercise
price
|
Aggregate intrinsic value
|
||||||||||
|
Outstanding - beginning of the year
|
|
|
|
|||||||||
|
Granted
|
|
|
||||||||||
|
Exercised
|
(
|
)
|
|
|||||||||
|
Forfeited
|
(
|
)
|
|
|||||||||
|
Outstanding - end of the year
|
|
|
|
|||||||||
|
Options exercisable at the end of the year
|
|
|
|
|||||||||
|
Vested and expected to vest
|
|
|
|
|||||||||
The weighted average fair value of options granted during 2021, 2020 and 2019 was $5.2 , $4.9 and $6.2 per option. The weighted average fair value of options vested during 2021, 2020 and 2019 was $14.07 $8.32 and $14.18 per option. The intrinsic value of options exercised during 2021, 2020 and 2019 was $0 , $0 and $35 .
F - 61
CAESARSTONE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share data)
| NOTE 13:- |
SHAREHOLDERS' EQUITY (Cont.)
|
The intrinsic value of exercisable options (the difference between the Company’s closing share price on the last trading day in fiscal year 2021 and the average exercise price of in-the-money options, multiplied by the number of in-the-money options) included above represents the amount that would have been received by the option holders had all option holders exercised their options on December 31, 2021. This amount changes based on the fair market value of the Company’s ordinary shares.
The following is a summary of activities relating to the Company’s RSUs granted to employees under the Plan during the year ended December 31, 2021:
|
Number
of RSUs
|
Weighted
average
fair value
|
Aggregate intrinsic value
|
||||||||||
|
Outstanding - beginning of the year
|
|
|
|
|||||||||
|
Granted
|
|
|
||||||||||
|
Exercised
|
(
|
)
|
|
|||||||||
|
Forfeited
|
(
|
)
|
|
|||||||||
|
Outstanding - end of the year
|
|
|
|
|||||||||
|
RSUs exercisable at the end of the year
|
|
|
|
|||||||||
|
Vested and expected to vest
|
|
|
|
|||||||||
The awards outstanding as of December 31, 2021 have been separated into ranges of exercise price, as follows:
|
Awards outstanding
|
Awards exercisable
|
|||||||||||||||||||||||||
|
Exercise price
|
Number
of
options
|
Weighted
average
remaining
contractual
life (years)
|
Weighted
average
exercise
price
per share
|
Number
of
options
|
Weighted
average
remaining
contractual
life (years)
|
Weighted average exercise price
|
||||||||||||||||||||
|
$
|
|
|
|
$
|
|
|
-
|
|
||||||||||||||||||
|
$
|
|
|
|
$
|
|
|
|
|
||||||||||||||||||
|
$
|
|
|
|
$
|
|
|
|
|
||||||||||||||||||
|
$
|
|
|
|
$
|
|
|
|
|
||||||||||||||||||
|
$
|
|
|
|
$
|
|
|
|
|
||||||||||||||||||
|
|
|
|||||||||||||||||||||||||
F - 62
CAESARSTONE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share data)
| NOTE 13:- |
SHAREHOLDERS' EQUITY (Cont.)
|
Compensation expenses related to options and RSUs granted were recorded in the consolidated statements of operations, as follows:
|
December 31,
|
||||||||
|
2021
|
2020
|
|||||||
|
Cost of revenues
|
$
|
|
$
|
|
||||
|
Research and development expenses
|
|
|
||||||
|
Marketing and selling expenses
|
|
|
||||||
|
General and administrative expenses
|
|
|
||||||
|
Total
|
$
|
|
$
|
|
||||
| NOTE 14:- |
TRANSACTIONS WITH RELATED PARTIES AND OTHER LOAN
|
The Company's controlling shareholder, Kibbutz Sdot-Yam (the “Kibbutz"), has an ownership interest in the Company of approximately 30.3 %, as of December 31, 2021.
On September 5, 2016, Kibbutz Sdot-Yam entered into a term sheet with Tene Investment in Projects 2016 Limited Partnership (“Tene”), pursuant to which both the Kibbutz and Tene are deemed the Company’s controlling shareholders under the Israeli Companies Law. Pursuant to the agreement, the parties agreed, among other things, to vote at general meetings of the shareholders of the Company in the same manner, following discussions intended to reach an agreement on any matters proposed to be voted upon, with Tene determining the manner in which both parties shall vote if no agreement is reached, except with respect to certain carved-out matters, with respect to which, Mifalei Sdot-Yam will determine the manner in which both parties shall vote if no agreement is reached. The term sheet provides for the sale of 1,000,000 ordinary shares by Kibbutz Sdot-Yam to Tene as well as a call option conferring upon Tene for a period of five years the right to purchase from Mifalei Sdot-Yam up to 2,000,000 ordinary shares. On February 20, 2018, the term of the call option was extended by an additional two-year period.
As of December 31, 2021 the Kibbutz and Tene beneficially own 14,029,494 ordinary shares (or approximately 40.7% of the outstanding).
The Company is party to a series of agreements with the Kibbutz that govern different aspects of the Company's relationship and are described below.
| a. |
Manpower agreement with the Kibbutz:
|
On July 2011, the Company entered into a manpower agreement with Kibbutz Sdot-Yam such was automatically renewed during 2021 for additional one year term, and will be automatically renewed again, unless one of the parties gives six months’ prior notice, for additional one-year periods.
F - 63
CAESARSTONE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share data)
| NOTE 14:- |
TRANSACTIONS WITH RELATED PARTIES AND OTHER LOAN (Cont.)
|
On July 30, 2015, and on October 14, 2018, following the approval of Company's audit committee, compensation committee and board of directors, Company's shareholders approved an addendum to the Manpower Agreement by and between Kibbutz Sdot-Yam and the Company, with respect to the engagement of office holders affiliated with Kibbutz Sdot-Yam, for an additional three-year term as of the date of the shareholders’ approval.
During 2021, following the approval of Company’s audit committee and the board of directors, the manpower agreement is valid through 2030.
Under the manpower agreement and its addendum, Kibbutz Sdot-Yam will provide the Company with labor services staffed by Kibbutz members, candidates for Kibbutz membership and Kibbutz residents (“Kibbutz Appointees”). The consideration to be paid for each Kibbutz Appointee will be based on the Company's total cost of employment for a non-Kibbutz Appointee employee performing a similar role. The number of Kibbutz Appointees may change in accordance with the Company's needs. Under the manpower agreement, the Company will notify Kibbutz Sdot-Yam of any roles that require staffing, and if the Kibbutz offers candidates with skills similar to other candidates, the Company will give preference to hiring of the relevant Kibbutz members. Kibbutz Sdot-Yam is entitled under this agreement, at its sole discretion, to discontinue the engagement of any Kibbutz Appointee of manpower services through his or her employment by Kibbutz Sdot-Yam and require such appointee to become employed directly by the Company.
The manpower agreement and addendum also includes Kibbutz Sdot-Yam’s obligation to customary liability, insurance, indemnification and confidentiality and intellectual property provisions. Office holders who are Kibbutz Appointees shall have all benefits applicable to Company's other office holders, including without limitation, directors’ and officers’ liability insurance, and Company's indemnification and exemption undertaking.
Manpower service fees paid were $1,803 , $2,106 and $2,408 for the years ended December 31, 2021, 2020 and 2019, respectively.
F - 64
CAESARSTONE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share data)
| NOTE 14:- |
TRANSACTIONS WITH RELATED PARTIES AND OTHER LOAN (Cont.)
|
| b. |
Services from the Kibbutz:
|
On July 20, 2011 the Company entered into a services agreement with the Kibbutz that was further amended on February 13, 2012 (the “Original Services Agreement”). Pursuant to the Original Services Agreement, the Kibbutz provided various services related to Company’s operational needs. The Original Services Agreement also outlined the distribution mechanism between the Company and Kibbutz Sdot-Yam, for certain expenses and payments due to local authorities, such as taxes and fees in connection with Company’s business facilities. The agreement expired on March 21, 2015.
On July 30, 2015, following the approval of the audit committee and the board, Company’s shareholders approved an amended services agreement pursuant to which, Kibbutz Sdot-Yam will continue to provide various services it provides in the ordinary course of Company's business, for a period of three years commencing as of the date of approval by the shareholders.
On October 14, 2021, following the approval of the audit committee and the board, Company’s shareholders approved a further amended services agreement (“Amended Services Agreement”) for an additional period of three years.
The amount that the Company pays to Kibbutz Sdot-Yam under the Amended Services Agreement depends on the scope of services the Company will receive and is based on rates specified in such agreement which were determined based on market terms, taking into account the added value of consuming services from Kibbutz Sdot-Yam, considering its physical proximity to Company’s manufacturing plant in Sdot-Yam and its expertise.
The amounts the Company pays for the services are subject to certain adjustments for increases in the Israeli consumer price index. In addition, the Amended Services Agreement grants Kibbutz Sdot-Yam right of first proposal in special projects with respect to the metal workshop services. The amended services agreement also outlines the distribution mechanism between the Company and the Kibbutz for certain expenses and payments due to local authorities, such as certain taxes and fees in connection with the Company’s business facilities. Each party may terminate such agreement upon a material breach, following a 30-day prior notice, or upon liquidation of the other party, following a 45-days ’ prior notice.
The Company's net service fees paid to the Kibbutz pursuant to the Original and Amended Services Agreements were $1,468 , $1,315 and $1,451 for the years ended December 31, 2021, 2020 and 2019, respectively.
F - 65
CAESARSTONE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share data)
| NOTE 14:- |
TRANSACTIONS WITH RELATED PARTIES AND OTHER LOAN (Cont.)
|
| c. |
Land Use Agreement with the Kibbutz:
|
Land leased to Kibbutz Sdot-Yam by the ILA and the Caesarea Development Corporation
The Company's principal offices and research and development facilities, as well as one of its two manufacturing facilities, are located on the grounds of the Kibbutz and include buildings spaces of approximately 30,744 square meters and unbuilt areas of approximately 60,870 square meters.
The Company signed a land use agreement with the Kibbutz, which has a term of 20 years commencing on April 1, 2012. Under the land use agreement, Kibbutz Sdot-Yam permits the Company to use approximately 100,000 square meters of land, consisting of facilities and unbuilt areas, in consideration for an annual fee of NIS 12.9 million (approximately $4,000 ) in 2013 and thereafter, (this amount does not include approximately NIS 62 ,000 (approximately $19 ) for an additional area that the Company has leased on the grounds of Kibbutz Sdot-Yam due to the Company's needs and Kibbutz Sdot-Yam's consent under the same terms as the land use agreement), plus VAT, adjusted every six months based on any increase of the Israeli consumer price index compared to the index as of January 2011.
During January 2018, the Kibbutz requested to increase the fees due to it, pursuant to the land lease agreement. Following the assessment of an appointed appraiser and negotiations between the Company and the Kibbutz, it was agreed to increase the fees under such agreement, such that for the year 2018 the Company paid additional amount of NIS 950 ,000 (approximately $250 ), and commencing 2019 and on the Company was paying an additional annual amount of NIS 1,100 ,000 (approximately $342 ).
As per the agreement, the annual fee may be adjusted after January 1, 2021 and every three years thereafter, at the election of Kibbutz Sdot-Yam by obtaining an updated appraisal. The appraiser will be mutually agreed upon or, in the absence of agreement, will be chosen by Kibbutz Sdot-Yam out of the list of appraisers recommended at that time by Bank Leumi Le-Israel ("Bank Leumi"). During 2021, The Kibbutz elected this option and the parties mutually agreed upon a land appraiser, and based on its study the fees were adjusted for 2021 onwards for annual amount of approximately NIS 18,600 ,000 (approximately $5,980 ), linked to the Israeli consumer price index.
Under the land use agreement, the Company may not terminate the operation of either of its two production lines at its plant in Kibbutz Sdot-Yam as long as the Company continues to operate production lines elsewhere in Israel, and its headquarters must remain at Kibbutz Sdot-Yam. The Company may also not decrease or return to Kibbutz Sdot-Yam any part of the land underlying the land use agreement; however, it may submit a written request to Kibbutz Sdot-Yam to return certain lands. Kibbutz Sdot-Yam will have three months to accept or reject such request, in its sole discretion, provided that if it does not respond within such three-month period, the Company will be entitled to sublease such lands to a person approved in advance by Kibbutz Sdot-Yam. In such event, the Company will continue to be liable to Kibbutz Sdot-Yam with respect to such lands.
F - 66
CAESARSTONE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share data)
| NOTE 14:- |
TRANSACTIONS WITH RELATED PARTIES AND OTHER LOAN (Cont.)
|
Pursuant to the land use agreement, if the Company needs additional facilities on the land that the Company is permitted to use in Kibbutz Sdot-Yam, subject to obtaining the permits required by law, Kibbutz Sdot-Yam will build such facilities for the Company, by using the proceeds of a loan that the Company will make to Kibbutz Sdot-Yam, which loan shall be repaid to the Company by off-setting the monthly additional payment that the Company will pay for such new facilities and, if not fully repaid during the land use agreement term, upon termination thereof.
In addition, the Company has committed to fund the cost of construction, up to a maximum of NIS 3.3 million (approximately $1,100 ) plus VAT, required to change the access road leading to Kibbutz Sdot-Yam and its facilities, such that the entrance of the Company's facilities will be separated from the entrance into Kibbutz Sdot-Yam. In addition, the Company has committed to pay NIS 200 ,000 (approximately $64 ) plus VAT to cover the cost of paving an area of land leased from Kibbutz Sdot-Yam with such payment to be deducted in monthly installments over a four-year period beginning in the year that the construction completed, from the lease payments to be made to Kibbutz Sdot-Yam under the land use agreement related to the Company's Sdot-Yam facility.
F - 67
CAESARSTONE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share data)
| NOTE 14:- |
TRANSACTIONS WITH RELATED PARTIES AND OTHER LOAN (Cont.)
|
| d. |
Financing liability of land:
|
Pursuant to the Land Use Agreement, the Company has entered into an agreement with Kibbutz Sdot-Yam dated August 6, 2013, under which Kibbutz Sdot-Yam acquired additional land of approximately 12,800 square meters on the grounds near the Company's Bar-Lev facility, which the Company required in connection with the construction of the fifth production line at the Company's Bar-Lev manufacturing facility, leased it to the Company for a monthly fee of approximately NIS 70 ,000 (approximately $22 ).
Under the agreement, Kibbutz Sdot-Yam committed to (i) acquire the long-term leasing rights of the Additional Bar-Lev Land from the ILA, (ii) perform preparation work and construction, in conjunction with the administrative body of Bar-Lev industrial park and other contractors according to Company’s plans, (iii) build a warehouse according Company’s plans, and (iv) obtain all permits and approvals required for performing the preparation work of the Additional Bar-Lev Land and for the building of the warehouse. The warehouse in Bar-Lev will be situated both on the current and new land. The finance of the building of the warehouse will be made through a loan that will be granted by the Company to Kibbutz Sdot-Yam, in the amount of the total cost related to the building of the warehouse and such loan, including principle and interest, shall be repaid by setoff of the lease due to Kibbutz Sdot Yam by the Company for its use of the warehouse. The principle amount of such loan will bear an interest at a rate of 1.4 % a year. On November 30, 2015 the land preparation work had been completed and the holding of the Additional Bar-Lev Land was delivered to the Company. As of December 31, 2021, the construction of the warehouse has not started yet.
The Company's payments pursuant to the land use agreement totaled $5,305 , $4,690 and $4,459 for the years ended December 31, 2021, 2020 and 2019, respectively.
F - 68
CAESARSTONE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share data)
| NOTE 14:- |
TRANSACTIONS WITH RELATED PARTIES AND OTHER LOAN (Cont.)
|
| d. |
Financing liability of land (cont.):
|
Pursuant to a land purchase and leaseback agreement, dated as of March 31, 2011, which became effective upon the Company’s IPO, between the Company and Kibbutz Sdot-Yam, the Company completed the selling of the rights in the lands and facilities of the Bar-Lev Industrial Center (the "Bar-Lev Grounds") to Kibbutz Sdot-Yam in consideration for NIS 43.7 million (approximately $10,900 ). The land purchase agreement was executed simultaneously with the execution of a land use agreement. Pursuant to the land use agreement, Kibbutz Sdot-Yam permits the Company to use the Bar-Lev Grounds for a period of 10 years commencing on September 2012 that will be automatically renewed, unless the Company gives two years prior notice, for a ten-year term in consideration for an annual fee of NIS 4.1 million (approximately $1,200 ) to be linked to increases in the Israeli consumer price index. As per the agreement, the fee is subject to adjustment following January 1, 2021 and every three years thereafter at the option of Kibbutz Sdot-Yam if Kibbutz Sdot-Yam chooses to obtain an appraisal that supports such an increase. The appraiser would be mutually agreed upon or, in the absence of agreement, will be chosen by Kibbutz Sdot-Yam from a list of assessors recommended at that time by Bank Leumi. During 2021, The Kibbutz elected this option and the parties mutually agreed upon a land appraiser, and based on its study the fees were adjusted for 2021 onwards for total annual amount of approximately NIS 8,100,000 (approximately $2,600 ), linked to the Israeli consumer price index.
The transaction was not qualified as "sale lease-back" accounting under both ASC 840 and ASC 842 and the Company recorded the entire amount received as consideration as a liability.
The financing liability of land from a related party is in amount of $7,138 of December 31, 2021. This liability will mature through 2022 year.
The balance at December 31, 2021 and 2020, includes $102 and $247 of deferred tax assets on the Company liability and a $680 and $725 deferred tax liability on the buildings depreciation during the next years due to temporary differences between the carrying amounts of the property and the liability for financial reporting purposes and the amounts used for income tax purposes.
The Company's payments pursuant to the land purchase agreement and leaseback totaled $2,360 , $1,244 and $1,189 for the years ended December 31, 2021, 2020 and 2019, respectively.
F - 69
CAESARSTONE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share data)
| NOTE 14:- |
TRANSACTIONS WITH RELATED PARTIES AND OTHER LOAN (Cont.)
|
| e. |
Details on transactions and balances with related parties and other loan:
|
| 1. |
The Company has, from time to time, entered into transactions with its shareholders (the Kibbutz). The following table summarizes such transactions:
|
|
Year ended December 31,
|
||||||||||||
|
2021
|
2020
|
2019
|
||||||||||
|
Cost of revenues
|
$
|
|
$
|
|
$
|
|
||||||
|
Research and development
|
$
|
|
$
|
|
$
|
|
||||||
|
Selling and marketing
|
$
|
|
$
|
|
$
|
|
||||||
|
General and administrative
|
$
|
|
$
|
|
$
|
|
||||||
|
Finance expenses, net
|
$
|
|
$
|
|
$
|
|
||||||
| 2. |
Balances with related party and other loan:
|
|
December 31,
|
||||||||
|
2021
|
2020
|
|||||||
|
Financing liability of land from related party- current maturities, and other related party balances (1)
|
$
|
|
$
|
|
||||
|
Long-term financing liability of land from a related party (1)
|
$
|
|
$
|
|
||||
|
Other loans (2)
|
$
|
|
$
|
|
||||
| 1. |
Mainly reflects a financing leaseback of $
|
F - 70
CAESARSTONE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share data)
| NOTE 14:- |
TRANSACTIONS WITH RELATED PARTIES AND OTHER LOAN (Cont.)
|
| 2. |
Balances with related party and other loan (Cont.):
|
| 2. |
Other loans:
|
| a. |
On January 17, 2011 a loan of 4 million Canadian dollars was made to Caesarstone Canada Inc. by its shareholders at that time CIOT and the Company, on a pro rata basis. Although the Company acquired CIOT ownership interest in Caesarstone Canada Inc. during December, 2018, the loan continues to bear interest until repayment at a per annum rate equal to Bank of Canada's prime business rate plus
|
| b. |
As part of the liabilities assumed in the acquisition of Lioli’s majority holdings the Company also assumed a shareholders loan and as of December 31, 2020 such loan was in the amount of approximately $
|
NOTE 15:-LONG-TERM BANK LOAN
a. As part of the Lioli’s acquisition the Company assumed also a bank loan from commercial banks in India. The long-term loan outstanding balance as of December 31, 2020 was $9,543 . As of December 31, 2021, the loan is presented under Short-term bank credit due to certain unmet covenents with the bank of India. The loan is denominated in Indian rupee and it bears interest rate of India labor plus 4.5% .
b. The loan is secured by substantially all the Lioli’s assets. Lioli is committed not to pledge or charge and not to undertake to pledge or charge its general floating assets and in addition not to enter into new loan arrangements without the prior written consent of the bank.
| NOTE 16:- |
MAJOR CUSTOMER AND GEOGRAPHIC INFORMATION
|
| a. |
The Company manages its business on the basis of one reportable segment. The data is presented in accordance with Accounting Standard Codification 280, "Segments Reporting" ("ASC 280"). The following is a summary of revenue and long-lived assets (including Property, plant and equipment, intangible assets and operating lease right-of-use assets) by geographic area. Revenues are attributed to geographic areas based on the location of end customers.
|
F - 71
CAESARSTONE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share data)
NOTE 16:-MAJOR CUSTOMER AND GEOGRAPHIC INFORMATION (Cont.)
The following table presents total revenues for the years ended December 31, 2021, 2020 and 2019, respectively:
|
Year ended December 31,
|
||||||||||||
|
2021
|
2020
|
2019
|
||||||||||
|
USA
|
$
|
|
$
|
|
$
|
|
||||||
|
Canada
|
|
|
|
|||||||||
|
Latin America
|
|
|
|
|||||||||
|
Australia
|
|
|
|
|||||||||
|
Asia
|
|
|
|
|||||||||
|
EMEA
|
|
|
|
|||||||||
|
Israel
|
|
|
|
|||||||||
|
$
|
|
$
|
|
$
|
|
|||||||
No customer represented 10% or more of the Company’s revenues for the years ended December 31, 2021, 2020 and 2019.
| b. |
The following table presents total long-lived assets as of December 31, 2021 and 2020:
|
|
December 31,
|
||||||||
|
2021
|
2020
|
|||||||
|
USA
|
$
|
|
$
|
|
||||
|
Canada
|
|
|
||||||
|
Australia
|
|
|
||||||
|
Asia
|
|
|
||||||
|
EMEA
|
|
|
||||||
|
Israel
|
|
|
||||||
|
$
|
|
$
|
|
|||||
F - 72
CAESARSTONE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share data)
| NOTE 17:- |
SELECTED SUPPLEMENTARY STATEMENTS OF INCOME DATA
|
| a. |
Finance expense, net:
|
|
Year ended December 31,
|
||||||||||||
|
2021
|
2020
|
2019
|
||||||||||
|
Finance expenses:
|
||||||||||||
|
Interest in respect credit cards and bank fees
|
$
|
|
$
|
|
$
|
|
||||||
|
Interest in respect of loans
|
|
|
|
|||||||||
|
Amortization/accretion of premium/discount on marketable securities
|
|
|
|
|||||||||
|
Realized gain/loss from marketable securities
|
|
|
|
|||||||||
|
Changes in derivatives fair value
|
|
|
|
|||||||||
|
Foreign exchange transactions losses
|
|
|
|
|||||||||
|
|
|
|
||||||||||
|
Finance income:
|
||||||||||||
|
Interest in respect of cash and cash equivalent and short-term bank deposits
|
|
|
|
|||||||||
|
Changes in derivatives fair value
|
|
|
|
|||||||||
|
Interest income from marketable securities
|
|
|
|
|||||||||
|
Foreign exchange transactions gains
|
|
|
|
|||||||||
|
|
|
|
||||||||||
|
Finance expenses, net
|
$
|
|
$
|
|
$
|
|
||||||
| b. |
Net earnings per share:
|
The following table sets forth the computation of basic and diluted net earnings per share:
Numerator:
|
Year ended December 31,
|
||||||||||||
|
2021
|
2020
|
2019
|
||||||||||
|
Net income attributable to controlling interest, as reported
|
$
|
|
$
|
|
$
|
|
||||||
|
Adjustment to redemption value of non-controlling interest
|
(
|
)
|
|
|
||||||||
|
Numerator for basic and diluted net income per share
|
$
|
|
$
|
|
$
|
|
||||||
F - 73
CAESARSTONE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share data)
| NOTE 17:- |
SELECTED SUPPLEMENTARY STATEMENTS OF INCOME DATA (Cont.)
|
Denominator:
|
Year ended December 31,
|
||||||||||||
|
2021
|
2020
|
2019
|
||||||||||
|
Denominator for basic income per share
|
|
|
|
|||||||||
|
Effect of dilutive stock based awards
|
|
|
|
|||||||||
|
Denominator for diluted income per share
|
|
|
|
|||||||||
Earnings per share:
|
Basic and diluted earnings per share
|
$
|
|
$
|
|
$
|
|
||||||
NOTE 18:-SUBSEQUENT EVENTS
| 1. |
The current conflict in Ukrain may make it difficult in the short and long term to purchase certain raw materials used in production of certain Company's products. It could also delay Company's output or supply of products, harm the relationships with customers, damage the brand and reputation, increase the raw materials and shipments costs, particularly energy related costs, and have a material adverse effect on Company's results of operations.
|
| 2. |
During March 2022, the Company participated in rights offering in Lioli, and purchased additional
|
- - - - - - - - - - -
F - 74
 |
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Caesarstone Australia Pty Ltd
|
Opinion on the financial statements
We have audited the accompanying balance sheets of Caesarstone Australia Pty Ltd (the “Company”) as of December 31, 2021 and 2020, the related statements of operations, comprehensive income, equity, and cash flows for each of the three years in the period ended December 31, 2021, and the related notes (collectively referred to as the “financial statements”) (not presented herein). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2021, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated March 15, 2022 expressed an unqualified opinion.
|
Basis for opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
|
Grant Thornton Audit Pty Ltd ACN 130 913 594
a subsidiary or related entity of Grant Thornton Australia Ltd ABN 41 127 556 389
‘Grant Thornton’ refers to the brand under which the Grant Thornton member firms provide assurance, tax and advisory services to their clients and/or refers to one or more member firms, as the context requires. Grant Thornton Australia Ltd is a member firm of Grant Thornton International Ltd (GTIL). GTIL and the member firms are not a worldwide partnership. GTIL and each member firm is a separate legal entity. Services are delivered by the member firms. GTIL does not provide services to clients. GTIL and its member firms are not agents of, and do not obligate one another and are not liable for one another’s acts or omissions. In the Australian context only, the use of the term ‘Grant Thornton’ may refer to Grant Thornton Australia Limited ABN 41 127 556 389 and its Australian subsidiaries and related entities. GTIL is not an Australian related entity to Grant Thornton Australia Limited.
Liability limited by a scheme approved under Professional Standards Legislation.
|
www.grantthornton.com.au
|
F - 75
Critical audit matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved out especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Impairment of Goodwill
In accordance with ASC 350 Intangibles – Goodwill and Other, goodwill is allocated to the Company’s reporting units. For each reporting unit to which goodwill has been allocated, the Company is required to evaluate the potential impairment of goodwill annually and whenever events or circumstances indicate the carrying value of goodwill may not be recoverable. This evaluation is performed by comparing the fair value of the reporting unit with its carrying value. If the carrying value exceeds
the fair value of the reporting unit, the Company recognizes an impairment charge.
The principal considerations for our determination that the evaluation of goodwill for impairment is a critical audit matter are that the determination of the fair value of the goodwill relies on the use of management estimates related to forecasted future cash flows and discount rates. This requires management to evaluate historical results and expectations of future operating performance based on relevant information available to them regarding expectations of industry performance, as well as, expectations for company-specific performance. Determining the discount rate requires management to evaluate the appropriate risk premium based on their judgment of industry and company-specific risks. Significant management judgments and estimates utilized to determine the fair value are subject to estimation uncertainty and require significant auditor
subjectivity in evaluating the reasonableness of those judgments and estimates.
Our procedures included, amongst others:
| • |
We tested the design and operating effectiveness of internal controls relating to management’s determination of the fair value of goodwill, including controls over the determination of key inputs and assumptions relating to forecasting of future cash flows and determination of the discount rate;
|
| • |
We assessed management’s identification of each of the reporting units based on our understanding of the nature of the Company’s business and cash flows;
|
| • |
We challenged management’s assumptions behind the cash flow projections by comparing to market-related assumptions and historical operating results;
|
| • |
We evaluated management’s historical ability to achieve forecasted revenue and operating units; and
|
| • |
We utilized a valuation specialist to assist in testing the Company’s discounted cash flow model and in evaluating the reasonableness of significant assumptions to the mode, including the discount rate.
|
/s/ Grant Thornton Audit Pty Ltd
Grant Thornton Audit Pty Ltd
We have served as the Company’s auditor since 2008.
Melbourne, Australia
March 15, 2022
March 15, 2022
F - 76
|
|
|
|
Collins Square, Tower 5
727 Collins Street
Melbourne Victoria 3008
Correspondence to:
GPO Box 4736
Melbourne Victoria 3001
T +61 3 8320 2222
F +61 3 8320 2200
E info.vic@au.gt.com
W www.grantthornton.com.au
|
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Caesarstone Australia Pty Ltd
|
Opinion on internal control over financial reporting
We have audited the internal control over financial reporting of Caesarstone Australia Pty Ltd (the “Company”) as of December 31, 2021, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on criteria established in the 2013 Internal Control—Integrated Framework issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the financial statements of the Company as of and for the year ended December 31, 2021, and our report dated March 15, 2022 expressed an unqualified opinion on those financial statements.
|
Basis for opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
|
Grant Thornton Audit Pty Ltd ACN 130 913 594
a subsidiary or related entity of Grant Thornton Australia Ltd ABN 41 127 556 389
‘Grant Thornton’ refers to the brand under which the Grant Thornton member firms provide assurance, tax and advisory services to their clients and/or refers to one or more member firms, as the context requires. Grant Thornton Australia Ltd is a member firm of Grant Thornton International Ltd (GTIL). GTIL and the member firms are not a worldwide partnership. GTIL and each member firm is a separate legal entity. Services are delivered by the member firms. GTIL does not provide services to clients. GTIL and its member firms are not agents of, and do not obligate one another and are not liable for one another’s acts or omissions. In the Australian context only, the use of the term ‘Grant Thornton’ may refer to Grant Thornton Australia Limited ABN 41 127 556 389 and its Australian subsidiaries and related entities. GTIL is not an Australian related entity to Grant Thornton Australia Limited.
Liability limited by a scheme approved under Professional Standards Legislation.
|
www.grantthornton.com.au
|
F - 77
Definition and limitations of internal control over financial reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Grant Thornton Audit Pty Ltd
March 15, 2022
F - 78
TABLE OF CONTENTS
Part IItem 1: Identity Of Directors, Senior Management and AdvisersItem 2: Offer Statistics and Expected TimetableItem 3: Key InformationItem 4: Information on The CompanyItem 4A: Unresolved Staff CommentsItem 5: Operating and Financial Review and ProspectsItem 6: Directors, Senior Management and EmployeesItem 7: Major Shareholders and Related Party TransactionsItem 8: Financial InformationItem 9: The Offer and ListingItem 10: Additional InformationItem 11: Quantitative and Qualitative Disclosures About Market RiskItem 12: Description Of Securities Other Than Equity SecuritiesPart IIItem 13: Defaults, Dividend Arrearages and DelinquenciesItem 14: Material Modifications To The Rights Of Security Holders and Use Of ProceedsItem 15: Controls and ProceduresItem 16: ReservedItem 16A: Audit Committee Financial ExpertItem 16B: Code Of EthicsItem 16C: Principal Accountant Fees and ServicesItem 16D: Exemptions From The Listing Standards For Audit CommitteesItem 16E: Purchases Of Equity Securities By The Company and Affiliated PurchasersItem 16F: Change in Registrant S Certifying AccountantItem 16G: Corporate GovernanceItem 16H: Mine Safety DisclosuresItem 16I: Disclosure Regarding Foreign Jurisdictions That Prevent InspectionsPart IIIItem 17: Financial StatementsItem 18: Financial StatementsItem 19: ExhibitsNote 1:-generalNote 1:-general (cont.)Note 2:-significant Accounting PoliciesNote 2:-significant Accounting Policies (cont.)Note 2:-significant Accounting Policies (cont.):Note 3: Marketable SecuritiesNote 4:- Other Accounts Receivable and Prepaid ExpensesNote 5:- InventoriesNote 6:- Property, Plant and Equipment, NetNote 7:- Goodwill and IntangiblesNote 8:- Short-term Bank Credit and Current Maturities Of Long-term LoanNote 9:- Accrued Expenses and Other LiabilitiesNote 10:- LeasesNote 10:- Leases (cont.)Note 11:- Commitments and Contingent LiabilitiesNote 11:- Commitments and Contingent Liabilities (cont.)Note 12:- Taxes on IncomeNote 12:- Taxes on Income (cont.)Note 13:- Shareholders' EquityNote 13:- Shareholders' Equity (cont.)Note 14:- Transactions with Related Parties and Other LoanNote 14:- Transactions with Related Parties and Other Loan (cont.)Note 14:- Transactions with Related Parties and Other Loan (cont.) D. Financing Liability Of Land (cont.):Note 14:- Transactions with Related Parties and Other Loan (cont.) 2. Balances with Related Party and Other Loan (cont.):Note 15:-long-term Bank LoanNote 16:- Major Customer and Geographic InformationNote 16:-major Customer and Geographic Information (cont.)Note 17:- Selected Supplementary Statements Of Income DataNote 17:- Selected Supplementary Statements Of Income Data (cont.)Note 18:-subsequent Events