UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F
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REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
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OR
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended December 31 , 2022
OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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OR
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SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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Date of event requiring this shell company report..........................................
For the transition period from ____________ to ____________
Commission file number. 001-32618
(Exact name of Registrant as specified in its charter)
ITURAN LOCATION AND CONTROL LTD.
(Translation of Registrant’s name into English)
(Jurisdiction of incorporation or organization)
(Address of principal executive offices)
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
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Title of each class
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Trading symbol(s)
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Name of each exchange on which registered
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Securities registered or to be registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
SEC 1852 (04-20) - Persons who respond to the collection of information contained in this form are not required to respond
unless the form displays a currently valid OMB control number.
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
None
(Title of Class)
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report:
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
☐ Yes ☒ No
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 ☒ No
Note – Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 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.
☒ Yes ☐ No
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).
☒ Yes ☐ No
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 “large accelerated filer", "accelerated filer", and "emerging growth company" in Rule 12b-2 of the Exchange Act.
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Large accelerated filer ☐
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Non-accelerated filer ☐
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Emerging growth company
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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 and 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. ☒
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
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 ☐
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Other ☐
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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
(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.
☐ Yes ☐ No
TABLE
OF CONTENTS
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iv | ||
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iv | ||
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1 | ||
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1 | ||
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1 | ||
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A. |
SELECTED FINANCIAL DATA |
1 |
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B. |
CAPITALIZATION AND INDEBTEDNESS |
3 |
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C. |
REASONS FOR THE OFFER AND USE OF PROCEEDS |
3 |
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D. |
RISK FACTORS |
3 |
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12 | ||
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A. |
HISTORY AND DEVELOPMENT OF THE COMPANY |
12 |
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B. |
BUSINESS OVERVIEW |
13 |
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C. |
ORGANIZATIONAL STRUCTURE |
24 |
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D. |
PROPERTY, PLANTS AND EQUIPMENT |
24 |
| 26 | ||
| 26 | ||
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A. |
OPERATING RESULTS |
26 |
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B. |
LIQUIDITY AND CAPITAL RESOURCES |
37 |
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C. |
RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES |
40 |
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D. |
TREND INFORMATION |
40 |
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E. |
OFF-BALANCE SHEET ARRANGEMENTS |
41 |
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F. |
TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS |
41 |
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G. |
SAFE HARBOR |
41 |
| 41 | ||
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A. |
DIRECTORS AND SENIOR MANAGEMENT |
41 |
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B. |
COMPENSATION |
45 |
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C. |
BOARD PRACTICES |
48 |
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D. |
EMPLOYEES |
52 |
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E. |
SHARE OWNERSHIP |
54 |
i
| 55 | ||
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A. |
MAJOR SHAREHOLDERS |
55 |
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B. |
RELATED PARTY TRANSACTIONS |
57 |
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C. |
INTERESTS OF EXPERTS AND COUNSEL |
61 |
| 61 | ||
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A. |
CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION |
61 |
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B. |
SIGNIFICANT CHANGES |
62 |
| 62 | ||
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A. |
OFFER AND LISTING DETAILS |
62 |
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B. |
PLAN OF DISTRIBUTION |
63 |
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C. |
MARKETS |
63 |
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D. |
SELLING SHAREHOLDERS |
63 |
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E. |
DILUTION |
63 |
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F. |
EXPENSES OF THE ISSUE |
63 |
| 63 | ||
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A. |
SHARE CAPITAL |
63 |
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B. |
MEMORANDUM AND ARTICLES OF ASSOCIATION |
63 |
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C. |
MATERIAL CONTRACTS |
70 |
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D. |
EXCHANGE CONTROLS |
70 |
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E. |
TAXATION |
71 |
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F. |
DIVIDENDS AND PAYING AGENTS |
78 |
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G. |
STATEMENT BY EXPERTS |
78 |
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H. |
DOCUMENTS ON DISPLAY |
78 |
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I. |
SUBSIDIARY INFORMATION |
78 |
| 78 | ||
| 79 | ||
| 79 | ||
| 79 |
ii
| 79 | ||
| 82 | ||
| 82 | ||
| 82 | ||
| 82 | ||
| 82 | ||
| 82 | ||
| 83 | ||
| 83 | ||
| 83 | ||
| 83 | ||
| 83 | ||
| 84 |
iii
USE
OF CERTAIN TERMS
As
used herein, and unless the context suggests otherwise, the terms “we”, “us”, “our” or “Ituran”
refer to Ituran Location and Control Ltd. and its consolidated subsidiaries.
We
have prepared our consolidated financial statements in US Dollars. Our consolidated financial statements were prepared in accordance with
accounting principles generally accepted in the United States (“U.S. GAAP”). All references herein to “dollars”
or “$” or “USD” are to United States dollars, and all references to “NIS” are to New Israeli Shekels.
FORWARD
LOOKING STATEMENTS
This
Annual Report on Form 20-F contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended,
and Section 21E of the Securities Exchange Act of 1934, as amended. The use of the words “projects,” “believes,”
“expects,” “may,” “plans” or “intends,” or words of similar import, identifies a statement
as “forward-looking.” The forward-looking statements included herein are based on current expectations that involve a number
of risks and uncertainties. These forward-looking statements are based on the assumption that we will not lose a significant customer
or customers or experience increased fluctuations of demand or rescheduling of purchase orders, that our markets will continue to grow,
that our products will remain accepted within their respective markets and will not be replaced by new technology, that competitive conditions
within our markets will not change materially or adversely, that we will retain key technical and management personnel, that our forecasts
will accurately anticipate market demand, and that there will be no material adverse change in our operations or business. Assumptions
relating to the foregoing involve judgments with respect to, among other things, future economic, competitive and market conditions, and
future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond our control. In
addition, our business and operations are subject to substantial risks which increase the uncertainty inherent in the forward-looking
statements. In light of the significant uncertainties inherent in the forward-looking information included herein, the inclusion of such
information should not be regarded as a representation by us or any other person that our objectives or plans will be achieved. Factors
that could cause actual results to differ from our expectations or projections include the risks and uncertainties described in this annual
report in Item 3D: Risk Factors. Forward-looking
statements speak only as of the date on which they are made, and we undertake no obligation to update any forward-looking statements or
other information contained in this report, whether as a result of new information, future events or otherwise. You are advised, however,
to consult any additional disclosures we make in our reports on Form 6-K filed with the U.S. Securities and Exchange Commission (“SEC”).
iv
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. SELECTED
FINANCIAL DATA
The
selected consolidated financial data below is provided under generally accepted accounting principles in the U.S. (U.S. GAAP). You should
read the selected consolidated financial data presented in this Item together with Item 5 – Operating and Financial Review and Prospects
and with our consolidated financial statements included elsewhere in this annual report.
Our
selected consolidated statements of income data for the years ended December 31, 2020, 2021 and 2022 and our selected consolidated balance
sheet data as of December 31, 2021 and 2022 have been derived from our consolidated financial statements included elsewhere in this report.
The selected consolidated statements of income data for each of the years ended December 31, 2018 and 2019, and the selected consolidated
balance sheet data as of December 31, 2018, 2019 and 2020, are derived from our audited consolidated financial statements not included
in this report.
1
Selected
Financial Data Under U.S. GAAP:
Consolidated Statements
of Income Data
|
Year Ended December 31, |
||||||||||||||||||||
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2022 |
2021 |
2020 |
2019 |
2018 |
||||||||||||||||
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In USD |
||||||||||||||||||||
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In thousands, except per
share amounts |
||||||||||||||||||||
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Revenues: |
||||||||||||||||||||
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Telematics services |
209,558 |
189,649 |
182,944 |
204,728 |
181,357 |
|||||||||||||||
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Telematics products |
83,514 |
81,235 |
62,683 |
74,604 |
71,978 |
|||||||||||||||
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Total Revenues |
293,072 |
270,884 |
245,627 |
279,332 |
253,335 |
|||||||||||||||
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Cost of Revenues: |
||||||||||||||||||||
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Telematics services |
90,129 |
83,427 |
80,339 |
89,167 |
69,347 |
|||||||||||||||
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Telematics products |
65,381 |
59,619 |
48,747 |
58,656 |
55,678 |
|||||||||||||||
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Total cost of revenues |
155,510 |
143,046 |
129,086 |
147,823 |
125,025 |
|||||||||||||||
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Gross profit |
137,562 |
127,838 |
116,541 |
131,509 |
128,310 |
|||||||||||||||
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Research and development expenses |
16,848 |
14,099 |
12,767 |
13,913 |
6,223 |
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Selling and marketing expenses |
13,327 |
13,262 |
12,040 |
13,769 |
12,322 |
|||||||||||||||
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General and administrative expenses |
48,705 |
46,118 |
49,705 |
55,166 |
47,693 |
|||||||||||||||
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Impairment of goodwill |
- |
10,508 |
12,292 |
- |
||||||||||||||||
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Impairment of intangible assets and other expenses (income) net |
(92 |
) |
(256 |
) |
3,690 |
13,715 |
(306 |
) | ||||||||||||
|
Operating Income |
58,774 |
54,615 |
27,831 |
22,654 |
62,378 |
|||||||||||||||
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|
||||||||||||||||||||
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Other income (expenses), net |
- |
(109 |
) |
(272 |
) |
(26 |
) |
13,138 |
||||||||||||
|
Financing income (expenses), net |
(5,944 |
) |
(5,538 |
) |
1,480 |
576 |
717 |
|||||||||||||
|
Income before income tax |
52,830 |
48,968 |
29,039 |
23,204 |
76,233 |
|||||||||||||||
|
|
||||||||||||||||||||
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Income tax |
(12,745 |
) |
(11,854 |
) |
(10,856 |
) |
(12,234 |
) |
(17,273 |
) | ||||||||||
|
Share in gains (losses) of affiliated companies, net |
(585 |
) |
(102 |
) |
(842 |
) |
(3,203 |
) |
4,219 |
|||||||||||
|
Net income for the year |
39,500 |
37,012 |
17,341 |
7,767 |
63,179 |
|||||||||||||||
|
|
||||||||||||||||||||
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Less: net income attributable to non-controlling interest |
(2,397 |
) |
(2,756 |
) |
(1,218 |
) |
(878 |
) |
(2,504 |
) | ||||||||||
|
Net income attributable to Company stockholders |
37,103 |
34,256 |
16,123 |
6,889 |
60,675 |
|||||||||||||||
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|
||||||||||||||||||||
|
Earnings per share |
||||||||||||||||||||
|
Basic |
1.82 |
1,65 |
0.77 |
0.33 |
2.88 |
|||||||||||||||
|
Diluted |
1.82 |
1,65 |
0.77 |
0.33 |
2.88 |
|||||||||||||||
|
Weighted average number of shares outstanding |
||||||||||||||||||||
|
Basic |
20,418 |
20,769 |
20,813 |
21,037 |
21,077 |
|||||||||||||||
|
Diluted |
20,418 |
20,769 |
20,813 |
21,037 |
21,077 |
|||||||||||||||
2
Consolidated
Balance Sheets Data:
|
Year Ended December 31, |
||||||||||||||||||||
|
2022 |
2021 |
2020 |
2019 |
2018 |
||||||||||||||||
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In USD |
||||||||||||||||||||
|
In thousands, except per
share amounts |
||||||||||||||||||||
|
Cash Cash Equivalent; and investment in trading marketable securities
|
28,166 |
54,711 |
78,846 |
54,322 |
53,295 |
|||||||||||||||
|
Working Capital |
57,680 |
58,102 |
66,708 |
73,085 |
84,214 |
|||||||||||||||
|
Total Assets |
290,927 |
293,021 |
312,472 |
339,235 |
373,792 |
|||||||||||||||
|
Total Liabilities |
138,068 |
155,218 |
182,573 |
203,321 |
213,592 |
|||||||||||||||
|
Retained Earnings |
168,963 |
143,259 |
127,684 |
116,479 |
129,580 |
|||||||||||||||
|
Stockholders’ Equity |
145,797 |
132,460 |
127,192 |
129,330 |
153,693 |
|||||||||||||||
|
Dividend declared per share |
0.56 |
0.90 |
0.24 |
0.95 |
0.95 |
|||||||||||||||
Other Data:
|
Year Ended December 31, |
||||||||||||||||||||
|
2022 |
2021 |
2020 |
2019 |
2019 |
||||||||||||||||
|
Subscribers of telematics services (1)
|
2,066,000 |
1,881,000 |
1,768,000 |
1,781,000 |
1,770,000 |
|||||||||||||||
|
Average monthly churn rate |
2.6 |
% |
3 |
% |
3 |
% |
3.3 |
% |
2.8 |
% | ||||||||||
| (1) |
Number of subscribers are rounded to the nearest thousand. |
B. CAPITALIZATION
AND INDEBTEDNESS
Not applicable.
C. REASONS
FOR THE OFFER AND USE OF PROCEEDS
Not applicable.
D. RISK
FACTORS
Our
business, operating results and financial condition could be seriously harmed due to any of the following risks, among others. If we do
not successfully address the risks to which we are subject, we could experience a material adverse effect on our business, results of
operations and financial condition and our share price may decline, which may result in a loss of all or part of your investment. We cannot
assure you that we will successfully address any of these risks. You should carefully consider the following factors as well as the other
information contained and incorporated by reference in this annual report before taking any investment decision with respect to our securities.
See “Forward Looking Statements” on page iv above.
RISKS
RELATED TO OUR BUSINESS
Failure
to maintain our existing relationships or establish new relationships with insurance companies or car manufacturers could adversely affect
our revenues and growth potential.
Revenues from our stolen
vehicle recovery services, which we refer to as SVR services, (“SVR”) and automatic vehicle location (“AVL”) products,
which we refer to as telematics products, are primarily dependent on our relationships with
insurance companies and car manufactures in Israel. Insurance companies drive demand for our SVR services and telematics products by encouraging
and, in some cases, requiring customers to subscribe to vehicle location services and purchase vehicle location products such as ours.
In certain subsidiaries in Brazil and Argentina, insurance companies enter into written agreements to subscribe to our services and purchase
or lease our products directly. Our inability to maintain our existing relationships or establish new relationships with insurance companies
could adversely affect our revenues and growth potential. In some of the territories in which we operate, we have business relation with
car manufacturers. Our inability to maintain our existing relationships or establish new relationships with car manufacturers companies
could adversely affect our revenues and growth potential.
Changes
in practices of insurance companies in the markets in which we provide our SVR services and sell our telematics products could adversely
affect our revenues and growth potential.
We depend on the practices
of insurance companies in the markets in which we provide our SVR services and sell our telematics products. In Israel, insurance companies
either mandate the use of SVR services and telematics products, or their equivalent, as a prerequisite for providing insurance coverage
to owners of certain medium- and high-end vehicles or provide insurance premium discounts to encourage vehicle owners to subscribe to
services and purchase products such as ours. In certain subsidiaries in Brazil and Argentina, insurance companies mainly lease our telematics
products directly and subsequently require their customers to subscribe to our SVR services.
Therefore, we rely on
insurance companies’ continued practice of:
| ◾ |
accepting vehicle location and recovery technology as a preferred security product; |
| ◾ |
requiring or providing a premium discount for using location and recovery services and products;
|
| ◾ |
mandating or encouraging use of our SVR services and telematics products,
or similar services and products, for vehicles with the same or similar threshold values and for the same or similar required duration
of use; and |
3
If any of these policies
or practices change, revenues from sales of our SVR services and telematics products could decline, which could adversely affect our revenues
and growth potential.
A
reduction in vehicle theft rates may adversely impact demand for our SVR services and telematics products.
Demand for our SVR services
and telematics products depends primarily on prevailing or expected vehicle theft rates. Vehicle theft rates may decline as a result of
various reasons, such as the availability of improved security systems, implementation of improved or more effective law enforcement measures,
or improved economic or political conditions in markets that have high theft rates. If vehicle theft rates in any or all of our existing
markets decline, or if insurance companies or our other customers believe that vehicle theft rates have declined or are expected to decline,
demand for our SVR services and telematics products may decline.
A
decline in sales of new cars at the markets in which we operate could result in reduced demand for our telematics services and telematics
products.
Our SVR services and
telematics products are primarily used to protect cars and are often installed before or immediately after their initial sale. Consequently,
a reduction in sales of vehicles could reduce our addressable market for SVR services and telematics products. New vehicle sales may decline
for various reasons, including an increase in new vehicle tariffs, taxes or gas prices. A decline in vehicle production levels or labor
disputes affecting the automobile industry in the markets where we operate may also impact the volume of new vehicle sales. A decline
in sales of new vehicles in the markets in which we provide our SVR services or sell our telematics products could result in reduced demand
for such services and products.
There
is significant competition in the markets in which we offer our services and products and our results of operations could be adversely
affected if we fail to compete successfully.
The markets for our services
and products are highly competitive. We compete primarily on the basis of the technological innovation, quality and price of our services
and products. Our most competitive market is the telematics services market and the related telematics products market, due to the existence
of a wide variety of competing services and products and alternative technologies that offer various levels of protection and tracking
capabilities, including global positioning systems, or GPS, satellite- or network-based cellular systems and direction-finding homing
technologies. Some of these competing services and products, such as certain GPS-based products, are installed in new cars by vehicle
manufacturers prior to their initial sale, which effectively precludes us from competing for such subscribers in the SVR market. Furthermore,
providers of competing services or products may extend their offerings to the locations in which we operate, or new competitors may enter
the telematics services market. Our telematics products also compete with less sophisticated theft protection devices such as standard
car alarms, immobilizers, steering wheel locks and homing devices, some of which may be significantly cheaper. Some of these competing
products have greater brand recognition than our telematics products.
The
development of new or improved competitive products, systems or technologies that compete with our telematics products may render our
products less competitive or obsolete, which could cause a decline in our revenues and profitability.
We are engaged in businesses
characterized by rapid technological change and frequent new product developments and enhancements. The number of companies developing
and marketing new telematics products has expanded considerably in recent years. The development of new or improved products, systems
or technologies that compete with our telematics products, for both our SVR and fleet management services, may render our products and
services less competitive and we may not be able to enhance our technology in a timely manner. In addition to the competition resulting
from new products, systems or technologies, our future product enhancements may not adequately meet the requirements of the marketplace
and may not achieve the broad market acceptance necessary to generate significant revenues. Any of the foregoing could cause a decline
in our revenues and profitability.
4
The
inability of local law enforcement agencies to timely and effectively recover the stolen vehicles we locate could negatively impact customers’
perception of the usefulness of our SVR services and telematics products, adversely affecting our revenues.
Our telematics products
identify the location of vehicles in which our products are installed. Following a notification of an unauthorized entry, or if we receive
notification of the vehicle’s theft from a subscriber, we notify the relevant law enforcement agency of the location of the subscriber’s
vehicle and generally rely on local law enforcement or governmental agencies to recover the stolen vehicle. We cannot control nor predict
the response time of the relevant local law enforcement or other governmental agencies responsible for recovering stolen vehicles, nor
that the stolen vehicles, once located, will be recovered at all. In the past, some stolen vehicles in which our telematics products were
installed were not recovered on timely manner, from the time an unauthorized entry is confirmed or reported to the time the vehicle is
recovered. To the extent that the relevant agencies do not effectively and timely respond to our calls and recover stolen vehicles, our
recovery rates would likely diminish, which may, in turn, negatively impact customers’ perception of the usefulness of our SVR services
and telematics products, adversely affecting our revenues.
The
ability to detect, deactivate, disable or otherwise inhibit the effectiveness of our telematics products could adversely affect demand
for such products and our revenues.
The effectiveness of
our telematics products is dependent, in part, on the inability of unauthorized persons to deactivate or otherwise alter the functioning
of our telematics products or the vehicle anti-theft devices that work in conjunction with our telematics products. As sales of our telematics
products increase, criminals in the markets in which we operate may become increasingly aware of our telematics products and may develop
methods or technologies to detect, deactivate or disable our tracking devices or the vehicle anti-theft devices that work in conjunction
with our telematics products. We believe that, as is the case with any product intended to prevent vehicle theft, over time, there may
be an increased ability of unauthorized persons to detect, deactivate, disable or otherwise inhibit the effectiveness of our telematics
products, although it is difficult to verify this fact. An increase in the ability of unauthorized persons to detect, deactivate, disable
or otherwise inhibit the effectiveness of our telematics products could adversely affect demand for our products and our revenues.
We
rely on some intellectual property that we license from third parties, the loss of which could preclude us from providing our SVR services
or market and sell some of our telematics products, which would adversely affect our revenues.
We license from third
parties some of the technology that we need in order to provide our SVR services and market and sell some of our telematics products.
In the event that such licenses were to be terminated, or if such licenses were rendered unenforceable or invalid and we would not be
able to license similar technology from other parties, it would require us, at a minimum, to obtain rights to a different technology and
reconfigure our telematics products accordingly. In addition, some of the licenses we obtained from third parties are non-exclusive, which
may enable other entities to obtain identical licenses from such third parties to operate in the places in which we conduct our business
resulting in increased competition and could adversely affect our revenues.
Our
ability to sell some of our services and products depends upon the prior receipt and maintenance of various governmental licenses and
approvals and our failure to obtain or maintain such licenses and approvals, or third-party use of the same licenses and frequencies,
could result in a disruption or curtailment of our operations, a significant increase in costs and a decline in revenues.
We are required to
obtain specific licenses and approvals from various governmental authorities in order to conduct our operations. For example, some of
our telematics products use radio frequencies that are licensed and renewed periodically from the Ministry of Communications in Israel
and similar agencies worldwide. As we continue to expand into additional markets, we will be required to obtain new permits and approvals
from relevant governmental authorities. Furthermore, once our telematics infrastructure is deployed and our telematics end-units are sold
to subscribers, a change in radio frequencies would require us to recalibrate all of our antennas and replace or modify all end-units
held by subscribers, which would be costly and may result in delays in the provision of our SVR services. In addition, some of the governmental
licenses for radio frequencies that we currently use may be preempted by third parties. In Israel, our license is designated as a “joint”
license, allowing the government to grant third parties a license to use the same frequencies, and in Brazil our license is designated
as a “secondary”, non-exclusive license, which allows the government to grant a third party a primary license to use such
frequencies, which third-party use could adversely affect, disrupt or curtail our operations. Our inability to maintain necessary governmental
licenses and frequency approvals, or third-party use of or interference with the same licenses or frequencies, could result in a significant
increase in costs and decline in revenues.
5
Our
SVR services business model is based on the existence of certain conditions, the loss or lack of which in existing or potential markets
could adversely affect our revenues generated in existing markets or our growth potential.
Our SVR services business
model and, consequently, our ability to provide our SVR services and sell our telematics products, relies on our ability to successfully
identify markets in which:
| ◾ |
the rate of car theft or consumer concern over vehicle safety is high; |
| ◾ |
satisfactory radio frequencies are available to us for our RF technology, that allow us to operate our
business in an uninterrupted manner; and |
| ◾ |
insurance companies, car manufacturers or owners of cars believe that the value of cars justifies incurring
the expense associated with the deployment of SVR services. |
The absence of such conditions,
our inability to locate markets in which such conditions exist or the loss of any one of the above conditions in markets we currently
serve could adversely affect our revenues generated in existing markets or our growth potential.
The
loss of key personnel could adversely affect our business and prospects for growth.
Our success depends upon
the efforts and abilities of key management personnel, including our President and our Co-Chief Executive Officers. Loss of the services
of one or more of such key personnel could adversely affect our ability to execute our business plan. In addition, we believe that our
future success depends in part upon our ability to attract, retain and motivate qualified personnel necessary for the development of our
business. If one or more members of our management team or other key technical personnel become unable or unwilling to continue in their
present positions, and if additional key personnel cannot be hired and retained as needed, our business and prospects for growth could
be adversely affected.
We
rely on third parties to manufacture our telematics products, which could affect our ability to provide such products in a timely and
cost-effective manner, adversely impacting our revenues and profit margins.
We outsource the manufacturing
of a significant part of our telematics products to third parties. We use manufacturers for production of our telematics products and
we do not maintain significant levels of inventories to support us in the event of an unexpected interruption in its manufacturing process.
If our principal manufacturer or any of our other manufacturers is unable to or fails to manufacture our products in a timely manner,
we may not be able to secure alternative manufacturing facilities without experiencing an interruption in the supply of our products or
an increase in production costs. Any such interruption or increase in production costs could affect our ability to provide our telematics
products in a timely and cost-effective manner, adversely impacting our revenues and profit margins.
We
rely on two major suppliers to supply us with various products and software. Each of these suppliers supply us with different type of
products and services and act as single supplier of such products and services.
We rely on two major
suppliers to supply us with various products and software, one of them is our subsidiary. Each of these suppliers supply us with different
type of products and software and act as single supplier of such products and services.
Termination of relations
with one of our major suppliers would adversely affect our operations and revenues.
We
depend on the use of specialized quality assurance testing equipment for the production of our telematics products, the loss or unavailability
of which could adversely affect our results of operations.
We and our third-party
manufacturers use specialized quality assurance testing equipment in the production of our products. The replacement of any such equipment
as a result of its failure or loss could result in a disruption of our production process or an increase in costs, which could adversely
affect our results of operations.
Cancellation
of use of Generation 2.0 in Israel
The Israeli Ministry
of Telecommunications has decided that from 2026 Generation 2.0 used by customers of Ituran in Israel will not be in operation. This is
a general decision which applies to us too.In case such decision is not abolished or postponed, then we shall need to cooperate with another
Israeli cellular company. Such cooperation may cost us up to 4 Million USD per annum during the 3-5 years to follow.
6
The
adoption of industry standards that do not incorporate the technology we use may decrease or eliminate the demand for our services or
products and could harm our results of operations.
There are no established
industry standards in all of the businesses in which we sell our telematics products. For example, vehicle location devices may operate
by employing various technologies, including network triangulation, GPS, satellite-based or network-based cellular or direction-finding
homing systems. The development of industry standards that do not incorporate the technology we use may decrease or eliminate the demand
for our services or products and we may not be able to develop new services and products that are in compliance with such new industry
standards on a cost-effective basis. If industry standards develop and such standards do not incorporate our telematics products and we
are unable to effectively adapt to such new standards, such development could harm our results of operations.
Expansion
of our operations to new markets involves risks and our failure to manage such risks may delay or preclude our ability to generate anticipated
revenues and may impede our overall growth strategy.
We anticipate future
growth to be attributable to our business activities in new markets, particularly in developing countries, where we may encounter additional
risks and challenges, such as longer payment cycles, potentially adverse tax consequences, potential difficulties in collecting receivables
and potential difficulties in enforcing agreements or other rights in foreign legal systems. The challenges and risks of entering a new
market may delay or preclude our ability to generate anticipated revenues and may impede our overall growth strategy.
Part
of our services rely on GPS/GPRS-based technology owned and controlled by others, the loss, impairment or increased expense of which could
negatively impact our immediate and future revenues from, or growth of, our services and adversely affect our results of operations.
Part of our business
relies on signals from GPS/GPRS satellites built and maintained by third parties. If GPS/GPRS satellites become unavailable to us, or
if the costs associated with using GPS/GPRS technology increase such that it is no longer feasible or cost-effective for us to use such
technology, we will not be able to adequately provide our services. In addition, if one or more GPS/GPRS satellites malfunction, there
could be a substantial delay before such satellites are repaired or replaced, if at all. The occurrence of any of the foregoing events
could negatively impact our immediate and future revenues from, or growth of, our telematics services and adversely affect our results
of operations.
Material
cyber security failure may harm our operations, which rely on use of information technology and wireless transmission.
Our telematics and SVR
services, relies on the use of information technology which under a major cyber security breach, could harm our operations. We are using
physical services, wireless transmitting stations, GPRS/GPS, and in lesser account cloud computing to provide our services. There are
risks associated with storing and transmitting data, which due to cyber security breach may be corrupted, and the store data on remote
servers may be destroyed, damaged, seized, or otherwise no longer accessible, which may temporary decrease our ability to deliver telematics
and SVR services.
We implemented cyber
security controls – which consists of three pillars: prevention, detection and response (data recovery in the event of a cyber breach).
We perform an ongoing review of our systems and an annual external review of our cyber security controls and their implementation. However,
such cyber security controls may not be able to prevent all unexpected weaknesses. In the event of a cyber-attack, we could experience
the corruption or loss of data, misappropriation of assets or sensitive information, including customer information, or operational disruption.
This could result in response costs and various financial loss and may subject us to litigation and cause damage to our reputation, for
which we may not be covered under our current insurance policies and may lead to substantial loss of revenues.
Some
of our employees in our subsidiaries in Brazil and Argentina are members of labor unions and a dispute between us and any such labor union
could result in a labor strike that could delay or preclude altogether our ability to generate revenues in the markets where such employees
are located.
Some of our employees
in our subsidiaries in Brazil and Argentina are members of labor unions. If a labor dispute were to develop between us and our unionized
employees, such employees could go on strike and we could suffer work stoppage for a significant period of time. A labor dispute can be
difficult to resolve and may require us to seek arbitration for resolution, which arbitration can be time consuming, distracting to management,
expensive and difficult to predict. The occurrence of a labor dispute with our unionized employees could delay or preclude altogether
our ability to generate revenues in the markets where such employees are located.
7
Inflation and shortage
of semiconductor supplies
In periods of shortages
impacting the semiconductor industry during year 2022, we have placed and may continue to place non-cancellable inventory orders in advance
of our historical lead times, and pay premiums and/or provide deposits to secure future supply and capacity. For example, while we previously
placed orders with approximately six months’ lead time, we have begun placing orders at least twelve months in advance. Our inventory
and purchase commitments reflect our demand expectations for our future quarters and long-term supply and capacity needs. However, we
may not be able to accurately predict when such periods of shortage will end, nor do we know whether those inventory orders accurately
address our current and future demand needs. These actions increased some of our product costs .If this shortage will sustain we may suffer
same economic extra costs in the future.
During the year 2022,
we have encountered growing inflation rates and growing interest rates in the main territories where we operate. This has caused additional
costs to our financing and operations. This environment has a potential negative impact on our results, as long as it sustains.
Regional or Global Health
Pandemic
A regional or a global
health pandemic, such as COVID-19, could severely affect our business, results of operations and financial condition due to impacts
on our suppliers and customers, as well as impacts from remote work arrangements, actions taken to contain the disease or treat its
impact and the speed and extent of the recovery.
We are subject to litigation
that could result in significant costs to us.
On July 13, 2015, we
received a purported class action lawsuit which was filed against the Company in the District Court of Central Region in Tel-Aviv by one
plaintiff who is a subscriber of the Company, alleging that the Company, which was declared a monopoly under the Israeli Antitrust Law,
unlawfully abused its power as a monopoly and discriminated between its customers. The lawsuit is yet to be approved as a class action.
The total amount claimed if the lawsuit is approved as a class action was estimated by the plaintiff to be approximately NIS 300 million
(approximately USD 85.2 million). Based on an opinion of its legal counsels, the Company believes that the lawsuit lacks substantiation,
and that the Company has good defence arguments in respect of claims made by the plaintiff and that the chances that the suit will not
be approved as a class action lawsuit are more likely than not. While we cannot predict the outcome of this case, if we are not successful
in defending our claim, we could be subject to significant costs, adversely affecting our results of operations.
For additional information
on these lawsuits and for information concerning additional litigation proceedings, please refer to Item 8.A – “Consolidated
financial Statements and other Financial Information” under the caption “Material Legal Proceedings” below.
We
have not applied nor obtained for several of the permits required for the operation of some of our base sites. To the extent enforcement
is sought, the breadth, quality and capacity of our network coverage could be materially affected.
The provision of our
SVR services depends upon adequate network coverage for accurate tracking information. In Israel, we have installed 98 base sites that
provide complete communications coverage in Israel. Similarly, we have communications coverage in Sao Paulo (121 sites), Rio (6 sites),
Brazil and Buenos Aires, Argentina (37 sites). The installation and operation of most of our base sites require building permits from
local or regional zoning authorities as well as a number of additional permits from governmental and regulatory authorities.
Currently most of our
base sites in Israel and Brazil and some of our base sites in Argentina operate without local building permits or the equivalent. Although
relevant authorities in Israel, Brazil and Argentina have not historically enforced penalties for non-compliance with certain permit regulations,
following ongoing press coverage and actions by various public interest groups, relevant Israeli authorities have begun seeking enforcement
of permit regulations, especially with respect to antennas constructed for cellular phone operators. Some possible enforcement measures
include the closure or demolition of existing base sites or the imposition of limitation on the building of new base stations. Should
these enforcement measures be imposed upon us in Israel, Brazil or Argentina, the extent, quality and capacity of our network coverage
and, as a result, our ability to provide SVR services, may be adversely affected. In Israel we are in process of achieving compliance
with the regulation of our base stations, such process can take several years.
8
Currency
fluctuations may result in valuation adjustments in our assets and liabilities and could cause our results of operations to decline.
The valuation of our
assets and liabilities, our revenues received, and the related expenses incurred are not always denominated in the same currency. This
lack of correlation between revenues and expenses exposes us to risks resulting from currency fluctuations. These currency fluctuations
could have an adverse effect on our results of operations, such currency fluctuations take place in several countries in which we operate
which affects our operation results in these countries. In addition, fluctuations in currencies may result in valuation adjustments in
our assets and liabilities which could cause our results of operations to decline.
RISKS
RELATED TO OUR OPERATIONS IN ISRAEL
We
are headquartered in Israel and therefore our results of operations may be adversely affected by political, economic and military instability
in Israel.
Our headquarters are
located in Israel and most our key employees, officers and directors are residents of Israel. Accordingly, security, political and economic
conditions in Israel directly affect our business. Over the past several decades, a number of armed conflicts have taken place between
Israel and its Arab neighbours. During the recent years Israel was engaged in an armed conflicts with a militant group and political party
who controls the Gaza Strip. These conflicts involved missile strikes against civilian targets in various parts of Israel, including areas
in which our employees and some of our consultants are located, and negatively affected business conditions in Israel. Continued or increased
hostilities, future armed conflicts, political developments in other states in the region or continued or increased terrorism could make
it more difficult for us to conduct our operations in Israel, which could increase our costs and adversely affect our financial results.
Furthermore, there are
number of countries, primarily in the Middle East, that still restrict business with Israel or Israeli companies and as a result our company
is precluded from marketing its products in these countries. Restrictive laws or policies directed toward Israel or Israeli businesses
could have an adverse effect on our ability to grow our business and our results of operations.
The Israeli government
is currently pursuing extensive changes to Israel’s judicial system. This has sparked extensive political debate. In response to
the foregoing developments, many individuals, organizations and institutions, both within and outside of Israel, have voiced concerns
that the proposed changes may negatively impact the business environment in Israel, due to potential reluctance of foreign investors to
invest or transact business in Israel, increased currency fluctuations, downgrades in credit rating, increased interest rates, increased
volatility in securities markets, and other changes in macroeconomic conditions. To the extent that any of these negative developments
occur, they may have an adverse effect on our business, our results of operations, or our ability to raise additional funds.
Under
Israeli law, we are considered a “monopoly” and therefore subject to certain restrictions that may negatively impact our ability
to grow our business in Israel.
We have been declared
a monopoly under the Israeli Economy competition Law (formerly known as Restrictive Trade Practices Law, 1988) (the “Israeli Antitrust
Law”), in the market for the provision of systems for the location of vehicles. Under Israeli law, a monopoly is prohibited from
taking certain actions, such as predatory pricing and the provision of loyalty discounts, which prohibitions do not apply to other companies.
The Israeli antitrust authority (under its new name - Competition Authority) may further declare that we have abused our position in the
market. Any such declaration in any suit in which it is claimed that we engage in anti-competitive conduct would serve as prima
facie evidence that we are a monopoly or that we have engaged in anti-competitive behaviour. Furthermore, we may be ordered
to take or refrain from taking certain actions, such as set maximum prices, in order to protect against unfair competition. If we breach
certain provisions of the Israeli Antitrust Law, including as a monopoly, the Israeli Competition authority may also impose on us in an
administrative procedure, financial sanctions in an amount of up to the lower of NIS 100 million (approximately US$28.4 million, according
to the USD-NIS exchange rate, as of December 31, 2022) or 8% of our annual revenues for the last financial year prior to such breach.
Restraints on our operations as a result of being considered a “monopoly” in Israel could adversely affect our ability to
grow our business in Israel.
9
It
may be difficult and costly to enforce a judgment issued in the United States against us, our executive officers and directors, or to
assert United States securities laws claims in Israel or serve process on our officers and directors.
We are incorporated and
headquartered in Israel. As a result, our executive officers and directors are non-residents of the United States and a substantial portion
of our assets and the assets of these persons are located outside of the United States. Therefore, service of process upon any of these
officers or directors may be difficult to effect in the United States. Furthermore, it may be difficult to enforce a judgment issued against
us in the United States or any of such persons in both United States courts and other courts abroad.
Additionally, there is
doubt as to the enforceability of civil liabilities under United States federal securities laws in actions originally instituted in Israel
or in actions for the enforcement of a judgment obtained in the United States on the basis of civil liabilities in Israel.
Provisions
of Israeli corporate and tax law may delay, prevent or otherwise encumber a merger with, or an acquisition of, our company, which could
prevent a change of control, even when the terms of such transaction are favourable to us and our shareholders.
We may be subject to
Israeli corporate law which regulates mergers, requires tender offers for acquisitions of shares above specified thresholds, requires
special approvals for transactions involving directors, officers or significant shareholders and regulates other matters that may be relevant
to these types of transactions. In addition, our articles of association contain, among other things, provisions that may make it more
difficult to acquire our company, such as classified board provisions and certain restrictions on the members of our board pursuant to
regulatory requirements of the Israeli Ministry of Communication. Furthermore, Israeli tax considerations may make potential transaction
structures involving the acquisition of our company unappealing to us or to some of our shareholders. See Item 10.B. – “Memorandum
and Articles of Association” - “Our Corporate Practices under the Israeli Companies Law” under the caption “Approval
of Transactions under Israeli law” and Item 10.E. – “Taxation” under the caption “Israeli Tax Considerations”
for additional discussion of some anti-takeover effects of Israeli law. These provisions of Israeli law and our articles of association
may delay, prevent or otherwise encumber a merger with, or an acquisition of, our company or any of our assets, which could have the effect
of delaying or preventing a change in control of our company, even when the terms of such a transaction could be favourable to our shareholders.
The
rights and responsibilities of our shareholders will be governed by Israeli law and may differ in some respects from the rights and responsibilities
of shareholders under United States law.
We are incorporated under
Israeli law. The rights and responsibilities of holders of our ordinary shares are governed by our memorandum of association, articles
of association and by Israeli law. These rights and responsibilities differ in some respects from the rights and responsibilities of shareholders
in typical US-based corporations. In particular, a shareholder of an Israeli company has a duty to act in good faith toward the company
and other shareholders and to refrain from abusing his, her or its power in the company, including, among other things, in voting at the
general meeting of shareholders on certain matters. Israeli corporate law has undergone extensive revisions in recent years and, as a
result, there is little case law available to assist in understanding the implications of these provisions that govern shareholders’
actions, which may be interpreted to impose additional obligations on holders of our ordinary shares that are typically not imposed on
shareholders of US-based corporations.
GENERAL
RISKS RELATED TO OUR ORDINARY SHARES AND THE ECONOMY
Future
sales of our ordinary shares could reduce the market price of our ordinary shares.
If we or our shareholders
sell substantial amounts of our ordinary shares on the Nasdaq Global Select Market, the market price of our ordinary shares may decline.
10
The market price of our ordinary shares is subject
to fluctuation, which could result in substantial losses for our investors.
The stock market in general,
and the market price of our ordinary shares in particular, are subject to fluctuation, and changes in our share price may be unrelated
to our operating performance. The market price of our ordinary shares has fluctuated in the past, and we expect it will continue to do
so, as a result of a number of factors, including:
| ◾ |
the gain or loss of significant orders or customers; |
| ◾ |
recruitment or departure of key personnel; |
| ◾ |
the announcement of new products or service enhancements by us or our competitors; |
| ◾ |
quarterly variations in our or our competitors' results of operations; |
| ◾ |
announcements related to litigation; |
| ◾ |
changes in earnings estimates, investors' perceptions, recommendations by securities analysts or our
failure to achieve analysts' earnings estimates; |
| ◾ |
developments in our industry; and |
| ◾ |
general market conditions and other factors unrelated to our operating performance or the operating performance
of our competitors. |
These factors and price
fluctuations may materially and adversely affect the market price of our ordinary shares and result in substantial losses to our investors.
Somewhat
significant portion of our ordinary shares are held by a small number of existing shareholders and our articles of association provide
for a staggered board, which may hinder change of control.
Moked Ituran Ltd. currently
beneficially owns approximately 20.27% of our outstanding ordinary shares (not including treasury stock held by us). Other than applicable
regulatory requirements under applicable law, Moked Ituran Ltd., is not prohibited from selling an interest in our company to a third
party. In addition, our articles of association provide for a staggered board which may delay, prevent or deter a change in control. For
additional information concerning our staggered board, see Item 6.A – Directors and Senior Management.
U.S.
investors in our company could suffer adverse tax consequences if we are characterized as a passive foreign investment company.
If, for any taxable year,
our passive income or our assets that produce passive income exceed levels established by the Internal Revenue Code, we may be characterized
as a passive foreign investment company, which we refer to as PFIC, for US federal income tax purposes. This characterization could result
in adverse US tax consequences to our shareholders who are U.S. Holders. See Item 10.E. – “Taxation” under the caption
“United States Tax Considerations” below, for more information about which shareholders may qualify as U.S. Holders. If we
were classified as a PFIC, a U.S. Holder could be subject to increased tax liability upon the sale or other disposition of our ordinary
shares or upon the receipt of amounts treated as “excess distributions.” Under such rules, the excess distribution and any
gain would be allocated ratably over the U.S. Holder’s holding period for the ordinary shares and the amount allocated to the current
taxable year and any taxable year prior to the first taxable year in which we were a PFIC would be taxed as ordinary income. The amount
allocated to each of the other taxable years would be subject to tax at the highest marginal rate in effect for the applicable class of
taxpayer for that year, and an interest charge for the deemed deferral benefit would be imposed on the resulting tax allocated to such
other taxable years. In addition, U.S holders of shares in a PFIC may not receive a “step-up” in basis on shares acquired
from a decedent. U.S. Holders should consult with their own U.S. tax advisors with respect to the United States tax consequences of investing
in our ordinary shares as well as the specific application of the “excess distribution” and other rules discussed in this
paragraph. For a discussion of how we might be characterized as a PFIC and related tax consequences, please see Item 10.E. – “Taxation”
under the caption “United States Tax Considerations–Passive foreign investment company considerations”.
Securities
we issue to fund our operations or in connection with acquisitions could dilute our shareholders ownership or impact the value of our
ordinary shares.
We may decide to raise
additional funds through a public or private debt or equity financing to fund our operations or finance acquisitions. If we issue additional
equity securities, the percentage of ownership of our shareholders will be reduced and the new equity securities may have rights superior
to those of our ordinary shares, which may, in turn, adversely affect the value of our ordinary shares.
11
Global
and local economic downturns could reduce the level of consumer spending and available credit within the automobile industry, which could
adversely affect demand for our products and services and negatively impact our financial results.
Current and future economic
conditions could adversely affect consumer spending in the automobile industry, as such spending is often discretionary and may decline
during economic downturns when consumers have less disposable income. Consequently, changes in general economic conditions resulting in
a significant decrease in dealer automobile sales or in a tightening of credit in financial markets, such as the 2007 U.S. subprime mortgage
crisis and resulting credit crunch, could adversely impact our future revenue and earnings. Such decreases could also affect the financial
security of the automobile dealers and manufactures with whom we do business. The delayed payment from or closure of our larger dealer
groups could affect our ability to collect on our receivables. Similar effects could result from local economic downturns in either one
of our main markets of operations, i.e. Israel, Brazil, Mexico, Colombia, Ecuador and Argentina. Given the volatile nature of the current
market disruption, we may not timely anticipate or manage such existing or new risks. Our failure to do so could materially and adversely
affect our business, financial condition, results of operations and prospects.
| ITEM 4. |
INFORMATION ON THE COMPANY |
| A. |
HISTORY AND DEVELOPMENT OF THE COMPANY |
Our
History
Our legal name is Ituran
Location and Control Ltd. and we were incorporated under the laws of the State of Israel on February 1994 as a subsidiary of Tadiran Ltd.,
an Israeli-based designer and manufacturer of telecommunications equipment, software and defence electronic systems, whose original business
purpose was to adapt military-grade technologies for the civilian market.
We are mainly engaged
in the area of Telematics services, consisting of stolen vehicle recovery, fleet management services, connected cars, UBI, and other tracking
services. We also provide telematics products used in connection with our Telematics services and various other applications. We currently
primarily provide our services as well as sell and lease our products in Israel, Brazil, Argentina, Mexico, Ecuador, Colombia, Canada
and the United States .(and fleet management in other countries through distributors ).
In May 1998, we completed
the initial public offering of our ordinary shares in Israel and our ordinary shares began trading on the Tel-Aviv Stock Exchange. In
September 2005, we publicly offered our ordinary shares in the United States. On May 25, 2016 our shares were voluntarily delisted from
the Tel Aviv stock exchange, and our ordinary shares are currently quoted only on Nasdaq under the symbol “ITRN”.
During the period of
the years 2018-2021 we closed in two steps, the acquisition of whole of the shares of Road Track Holding S.L, (following transaction
name was changed to Ituran Spain Holdings S.L) a telematics company operating primarily in the Latin American region ("RTH Transaction").
The total cost of the RTH transaction was 103 Million USD – combination of shares and cash.
We are subject to
the provisions of the Israeli Companies Law, 5759-1999. Our principal executive offices are located at 3 Hashikma Street, Azour 58001,
Israel, and our telephone number is +972-3-557-1333. Our website address is www.ituran.com (the
information contained therein or linked thereto shall not be considered incorporated by reference in this annual report). Our agent for
service of process in the United States Ituran USA Inc.1700 NW 64th ST. SUITE 100 Fort Lauderdale, Florida 33309, and its telephone number
is +1 (866) 543-5433.
Principal Capital Expenditures
We had capital expenditures
of $26.5 million in 2022, $ 16.6 million in 2021 and $ 10.2 million in 2020. We have financed our capital expenditures with cash generated
from our operations.
Our capital expenditures
in ,2022, 2021, and 2020 consisted primarily of acquisition of operational equipment for $ 16.7 $ million, 7.0 million, and $3.9
million, respectively.
12
| B. |
BUSINESS OVERVIEW |
Overview
We believe we are a leading
provider of telematics services, consisting predominantly of stolen vehicle recovery, fleet management services and other tracking services
as well as connected car and UBI (usage base insurance). We also provide telematics products used in connection with our telematics services.
We currently primarily provide our services and sell and lease our products in Israel, Brazil, Argentina, Mexico, Ecuador, Colombia, United
States, Canada and other regions through our distributers. We utilize technologies that enable precise and secure high-speed data transmission
and analysis. Some of the technology underlying our products was originally developed for the Israeli Defence Forces in order to locate
downed pilots.
We generate our revenues
from subscription fees paid for our telematics services and from the sale and lease of our telematics products.
We describe below the
principal markets in which we compete. For a breakdown of total revenues by category of activity and geographic market for each of the
last three financial years, please see Item 5.A - Operating Results under the caption “Revenues”.
Telematics Services
In 2022,71.5% of our
revenues were attributable to our telematics services. As of December 31, 2022, we provided our services in Israel, Brazil, and other
countries to approximately, 738,000, 558,000, and 770,000 subscribers, respectively.
Following RTH Transaction
we have direct agreements with 2 major car manufacturers and our products developed by RTH subsidiary are embedded in the cars or otherwise
approved by the car manufacturer. This connection requires us to stand up for the highest car manufacturer automotive standards.
Stolen vehicle recovery
services
Our stolen vehicle recovery
and tracking services, which we refer to as SVR services, enable us to locate, track and recover stolen vehicles for our subscribers.
Our customers include individual vehicle owners who subscribe to our services directly, car manufacturers and insurance companies that
either require their customers to install a security system or offer their customers financial incentives to subscribe to SVR services
such as ours. In certain countries, insurance companies directly subscribe to our SVR services on behalf of their customers.
Fleet management services
Our
fleet management services enable corporate and individual customers to track and manage their vehicles in real time. Our services improve
appointment scheduling, route management and fleet usage tracking, thereby increasing efficiency and reducing operating costs for our
customers. We market and sell our services to a broad range of vehicle fleet operators and individual vehicle owners in different geographic
locations and industries. As of December 31, 2022, we provided our services to approximately504,000 end-users through corporate customers
in countries where we operate directly and through 24,000
distributers.
Value-added services
The locator services
that we offer allow customers to protect valuable merchandise and equipment. We currently provide locator services in Israel, Brazil,
Mexico, Colombia, Ecuador and Argentina. In addition, through a call center, we provide 24-hour on-demand navigation guidance, information
and assistance to our customers. Such services include the provision of traffic reports, help with directions and information on the location
gas stations, car repair shops, post offices, hospitals and other facilities. We offer our concierge services to our subscribers in Israel,
Argentina, Ecuador, Colombia and Brazil.
"Connected Car"- The
service platform includes a back office application, a telematics device installed in the vehicle, mobile apps for both IOS and Android
and an interface using the car infotainment screen. Such services include information on car service history, information on some car
systems, remote communication with the car in order to detect malfunctions, and to provide pre-emptive car maintenance alerts for both
mechanical failures and operational issues such as a low tire pressure alert. The system also enables booking service appointments, both
from the infotainment system interface in the system and from the user's mobile app and additional related operational, and marketing
services, as well as information analysis. "Connected Car" is operating in Israel, Brazil, Colombia, Mexico, Argentina and Ecuador.
13
“Usage Based Insurance”
(UBI) – we have developed a unique product (hardware and software) that measure and analyse the driving behaviour in a verity of
aspects by the driver, which enables insurance companies to offer a tailor -made and personalized insurance policy. The UBI has already
been implemented and marketed by the majority of the insurance companies in Israel.
“Auto Financing”
- A strong second-hand car market in many of our geographies in Latin America, and new fintech start-ups as well as the banks enter
this segment to provide the financing in this market. However, they need a provider of location-based and connected-car technology, such
as Ituran, to monitor the car location and driver’s behaviour and thereby to decrease the risk of the loan pledged against the car.
Telematics
Products
In 2022, 28.5% of our
revenues were attributable to the sale of our telematics products. Our telematics products employ short - and medium-range communication
between two-way wireless modems and are used for various applications, including automatic vehicle location, which we refer to as telematics
products.
Our telematics products
enable the location and tracking of vehicles, as well as assets, and are used by us primarily to provide SVR and fleet management services
to our customers. Each subscriber to our services has our telematics end-unit installed in his or her vehicle. Subscribers to services
for locating equipment and merchandise will use our SMART and GPS/GPRS products.
Our
Services and Products
Telematics
services
Stolen vehicle recovery
Our stolen vehicle recovery
system is based on three main components: a telematics end-unit that is installed in the vehicle, a network of base stations and a 24-hour
manned control center. Once the control center receives indication of an unauthorized entry into a vehicle equipped with our telematics
end-unit, our operators decide whether it is a false alarm or an actual unauthorized entry. If it is determined to be an unauthorized
entry, or if a notification of the vehicle’s theft is received directly from the vehicle operator, our operators transmit a signal
that activates the transmitter installed in the vehicle. We then pinpoint the location of the transmitter with terrestrial network triangulation
technology or GPRS technology and notify the relevant law enforcement agency. In Israel, Brazil, Mexico, Colombia, Ecuador and Argentina,
we also maintain private enforcement units, which work together with local police to recover the vehicle. In addition, we have the capability
to immobilize vehicles remotely from our control centers.
Fleet management
We offer our customers
the ability to use a comprehensive application for fleet management both by using an Internet site and workstations. Our system allows
our customers 24-hour access to information on their fleets through our active control center and we are able to tailor our system to
our customers’ specific needs.
Our solutions allow our
subscribers to effectively manage and control their fleet, and thereby to reduce their operating costs, optimize work hours and appointment
scheduling and improve their services and operations. Our system includes the following features:
| • |
the ability to locate the fleet’s vehicles; |
| • |
continuous data communication with the fleet’s vehicles; |
| • |
real-time vehicle status indicators: speed, distance driven, direction of travel, driver name, motion
start/stop, engine start/stop, speeding, diagnostic alerts, driver behaviour and more; |
| • |
recording of determined events and analysis of data over time to improve driving and vehicle use;
|
| • |
remote monitoring and processing of data, such as temperature control in refrigerated or chilled compartments,
time stamp, tire pressure and heat and other complementary data; |
14
| • |
connection to standard organization systems; |
| • |
accident notification; |
| • |
task management optimization. |
Value-added services
Locator
services. Our services allow consumers to protect valuable merchandise and
equipment. We provide our locator services in Israel, Brazil, Ecuador, Colombia, Mexico and Argentina.
Concierge
services. Through a call center, we provide 24-hour on-demand navigation
guidance, information and assistance to our customers. Such services include the provision of traffic reports, help with directions and
information on the location of gas stations, car repair shops, post offices, hospitals and other facilities. We provide our concierge
services to subscribers in Argentina, Ecuador, Colombia and Israel.
“UBI”
and "Connected Car". We provide UBI services in Israel through seven insurance
companies, and Connected Car services in Israel, Brazil, Colombia, Mexico, Argentina and Ecuador. For additional information on the service,
see Item 4.B. – “Information on the Company “ - “Business Overview” under the caption “Telematics
Services”
Telematics
products
Our telematics products
are used for various applications in the telematics markets and primarily in connection with our telematics services described above.
Our telematics products
enable the location and tracking of vehicles, as well as assets or persons, and are primarily used by us in providing our telematics services.
Each subscriber to our services has at least one of our end-units installed in his or her vehicle. Subscribers to services for locating
persons or valuables will use our SMART and GPS/GPRS products. Our key telematics products for telematics applications include:
| ■ |
Base
Site: a radio receiver, which includes a processor and a data computation
unit to collect and send data to and from transponders and send that data to control centers as part of the terrestrial infrastructure
of the location system; |
| ■ |
Control
Center: a center consisting of software used to collect data from various
base sites, conduct location calculations and transmit location data to various customers and law enforcement agencies; |
| ■ |
GPS/GPRS-based
products: navigation and tracking devices installed in vehicles; and
|
| ■ |
SMART:
a portable transmitter installed in vehicles (including motorcycles) that sends a signal to the base site, enabling the location
of vehicles, equipment or an individual; |
15
Geographical
Information
The following table lists the key services
and products that we currently sell or lease in different regions of the world:
|
Country |
|
Services offered |
|
Products sold |
|
Israel
|
|
SVR,
Fleet Management,
Value-added services, including:
Connected Car,
UBI |
|
Telematics Products |
|
Brazil
|
|
SVR,
Fleet Management,
Value-added services, including:
Connected Car, |
|
Telematics Products |
|
|
|
|
|
|
|
Mexico, Ecuador, Colombia |
|
SVR,
Fleet Management,
Value-added services, including:
Connected Car |
|
Telematics Products |
|
|
|
|
|
|
|
United States |
|
SVR,
Fleet Management,
Value-added services, including:
Asset protection to Auto Lenders |
|
Telematics Products |
|
|
|
|
|
|
|
Argentina
|
SVR,
Fleet Management,
Value-added services, including:
Connected Car |
Telematics Products
|
In each of the above countries we maintain
a control center, which is operated 24 hours a day, 365 days a year. The following is a short description of key operating statistics
about our telematics services in the countries in which we operate (including through RTH subsidiaries):
| ■ |
Israel: We
commenced operations in Israel in 1995 and we had approximately 738,000 subscribers as of December 31, 2022. The operations in Israel
were expended through M A transactions with local companies (following the RTH Transaction) as well as organic growth. We operate
throughout Israel in providing services through GPS/GPRS and RF based products and services. |
| ◾ |
Brazil: We
commenced operations in Brazil in 2000 and we had approximately 558,000 subscribers as of December 31, 2022. The operations were expended
through organic growth. We currently provide RF based products and services only in the metropolitan areas of Sao Paulo, Campinas, Americans
and Rio de Janeiro. However, we operate throughout Brazil in providing GPS/GPRS based products and services. |
| ■ |
Argentina: We
commenced operations in Argentina in 2002. We currently provide to our current
customers (not for new installations) RF based products
and services only in the metropolitan area of Buenos Aires. However, we also operate throughout Argentina in providing GPS/GPRS based
products and services. |
| ■ |
United
States: We commenced operations in the United States in 2000. We provide
GPS/GPRS products and services throughout the United States. |
| ■ |
Mexico: We
acquired the operations in Mexico in September 2018 as part of the RTH Transaction. We currently provide GPS/GPRS based products and services.
|
16
| ■ |
Ecuador: We
acquired the operations in Ecuador in September 2018 as part of the RTH Transaction. We currently provide GPS/GPRS based products and
services. |
| ■ |
Colombia: We
acquired the operations in Colombia in September 2018 as part of the RTH Transaction. We currently provide GPS/GPRS based products and
services. |
In all of the abovementioned countries (except
of Israel and Brazil), and others, we had approximately 770,000 subscribers as of December 31, 2022.
Customers,
Marketing and Sales
We market and sell our
products and services to a broad range of customers that vary in size, geographic location and industry. In 2020 ,2021 and 2022 no single
customer or group of related customers comprised more than 10% of our total annual revenues.
Our selling and marketing
objective is to achieve broad market penetration through targeted marketing and sales activities. As of December 31, 2022, our selling
and marketing team consisted of 92 employees.
(A) Telematics services
Stolen vehicle recovery
Our customers in the
SVR market include insurance companies, car manufactures and individual vehicle owners. As of December 31, 2022, majority of our subscribers
use SVR services.
Our marketing and sales
efforts are principally focused on five target groups: insurance companies and agents, car manufacturers, dealers and importers, cooperative
sales channels (mostly vehicle fleet operators and owners) and private subscribers.
We maintain marketing
and sales departments in each geographical market in which we operate. Each department is responsible for maintaining our relationships
with our principal target groups. These responsibilities also include advertising and branding, sales promotions and sweepstakes.
In Israel, we focus our
marketing efforts on insurance companies and agents, dealers and importers, cooperative sales channels (mostly vehicle fleet operators
and owners) and private subscribers.
In Brazil and Argentina
our marketing and sales efforts are principally focused in all five target groups, as described above. In the United States, we believe
that insurance companies do not constitute a material influence in the marketing of SVR services or telematics products.
Most of our sales in
the United States are made through car dealerships and dealers for new or used cars and cooperative sales channels. In Mexico, Colombia
and Ecuador we focus our marketing efforts on dealers and importers, cooperative sales channels (mostly vehicle fleet operators and owners),
private subscribers and car manufactures.
Fleet management
Vehicle fleet management
systems are primarily marketed through vehicle fleets’ departments, which form a part of our regional marketing departments. We
conduct in-depth research to identify companies that will gain efficiency and cost savings through the implementation of our products
and services and conduct targeted marketing campaigns to these companies. In addition, we participate in professional conventions and
advertise in professional publications and journals designed for our target customers. Our customers in the fleet management market include
small-, mid- and large-size enterprises and individuals. As of December 31, 2022, we provided our services to approximately end users
through504,000 corporate customers and individuals in Israel, Brazil, Argentina, United States, Mexico, Colombia, Ecuador and through
distributers in other regions.
Value-added services
“Concierge Services”
- Our concierge services are provided to existing SVR customers. A few thousands SMART devices were installed in valuable merchandise
and equipment.
17
"Connected Car"- The
service platform includes a back-office application, a telematics device installed in the vehicle, mobile apps for both IOS and Android
and an interface using the car infotainment screen. Such services include information on car service history, information on some car
systems, remote communication with the car in order to detect malfunctions, and to provide pre-emptive car maintenance alerts for both
mechanical failures and operational issues such as a low tire pressure alert. The system also enables booking service appointments, both
from the infotainment system interface in the system and from the user's mobile app, and additional related operational, and marketing
services, as well as information analysis.” Connected Car’ is operating in Israel, Brazil, Colombia, Mexico, Argentina and
Ecuador.
“Usage Based Insurance
(UBI)" – we have developed a unique product (hardware and software) that measure and analyze the driving behavior in a verity of
aspects by the driver, which enables insurance companies to offer a tailor -made and personalized insurance policy. The UBI has already
been implemented and marketed by the majority of the insurance companies in Israel, and we intend to accelerate its marketing and work
with additional insurance companies in year 2022.
(B) Telematics products
Our telematics end-units
are primarily used by us in providing our telematics services, including, SVR, fleet management, "Connected Car" and value-added services,
at the regions we operate.
Competition
We face strong competition
for our services and products in each market in which we operate. We compete primarily on technology edge, functionality, ease of use,
quality, price, service availability, geographic coverage, track record of recovery rates and response times and financial strength.
(A) Telematics services
We compete with a variety
of companies in each of our markets. The three major technologies utilized by our competitors are GPS/cellular, network-based cellular
and radio frequency-based homing systems. In addition, new competitors utilizing other technologies may continue to enter the market.
Stolen vehicle recovery
| ◾ |
Israel. Our
primary competitors in Israel are Pointer and Skylock Ltd. |
| ◾ |
Brazil. Brazil
is a highly fragmented market with many companies selling competing products and services (including immobilizers and other less-sophisticated
vehicle security systems). Our main competitors in Brazil are Sascar, Zatix, CEABS, Car Systems, Sat-Company, 3S.
|
| ◾ |
Argentina. Argentina
is a highly fragmented market with many companies selling competing products and services (including immobilizers and other less-sophisticated
vehicle security systems). Our main competitors in Argentina are LoJack Corporation, Pointer Argentina S.A., Prosegur S.A. and Megatrans
S.A. |
| ◾ |
United
States. In the United States, there are several major companies offering
various theft protection and recovery products that compete with our product and service offerings, including LoJack Corporation, OnStar
Corporation, Advantage GPS/Procon Analytics, Sarekon GPS, Calamp, Spireon (which also includes SysLocate and GoldStar), PassTime, Guide
Point, Icon and I-Metrik SVR. |
| ◾ |
Colombia. Colombia is
a highly fragmented market. Main companies operate under the satellite/cellular infrastructure. Our main competitors are LoJack Corporation
(under Detekor Brand), Prosegur, SATRACK (Local Company). |
| ◾ |
Mexico.
Mexico is a highly fragmented market in tracking and satellite location services, in which there are multiple companies dedicated to providing
comprehensive satellite tracking, fleet management and vehicle recovery solutions with GPS technology through the marketing of similar
devices and technologies to ours, highly specialized in fleet management. The direct competitors are LoJack Corporation, Encontrack S.A.
and Pointer Recuperación S.A. |
18
| ◾ |
Ecuador. Ecuador
is highly fragmented market. Main companies operate under the satellite/cellular infrastructure. Our
main competitors are Hunter (Lojack Corporation),Tracklink and Carsync.
|
We believe that we are a leading provider
of telematics services in Israel, as we are deemed a monopoly in this field; however, we are unable to provide specific market share information
in the markets of our operations for various reasons, including the broad range of services and products that compete in these markets,
the non-existence of trade publications with respect to the products and services we offer in such markets and the lack of meaningful
or accurate market research or data available to us.
Fleet Management
The vehicle fleet management
market is highly fragmented with many corporations offering location products and services. Our major competitors are:
| • |
Israel:
Pointer
Telocation, ISR, Traffilog and Skylock; |
| • |
United
States: GPS Insight, Trimble, Network Fleet, Street Eagle, FleetMatics,
Navtrack, Teletrac, Trim Track, FleetBoss, PassTime, Verizon, ATT, Geotab, Fleet-Complete,Sprint, Zubie, and Spireon;
|
| • |
Brazil:
Sascar, Zatix, CEABS, 3S and GolSat; |
| • |
Argentina:
LoJack Corporation, Megatrans SA., Sitrac S.A., American Tracer, Ubicar S.A.,Sky Cop. and YPF S.A; |
| • |
Mexico:
LoJack Corporation, Encotrack, Easytrack, Geotab and Tracker; |
| • |
Ecuador:
Hunter (LoJack Corporation), Tracklink, Carsync and Sherlock; |
| • |
Colombia: Satrack,
Detector and Prosegur. |
(B) Telematics products
Our telematics system
for automatic vehicle location is based on terrestrial network triangulation technology and GPS/GPRS and primarily competes with
companies that use one of three main technologies: GPS/GPRS (in combination with telematics), network-based cellular communication and
radio frequency-based homing.
Telematics products based
on GPS, network-based cellular and homing technologies do not require the construction of a separate infrastructure of base stations as
with terrestrial network triangulation systems.
GPS receivers require
line of sight to at least three satellites, which reduces their effectiveness in areas where the satellite signals are subject to interference
and “noise” (such as urban areas, buildings or parking garages, forests and other enclosed or underground spaces). GPS and
network-based cellular systems are also prone to jamming since the tracking signal receivers are located in the vehicle and can be easily
tampered with. In addition, the satellites utilized by GPS devices are managed by the United States Department of Defence and can be subject
to forced temporary outages. The main disadvantage of homing systems is that they provide only the general direction and not the precise
location of the end-unit. In addition, homing systems require that the vehicle be reported stolen before the tracking signal can be activated,
which may result in a delay between vehicle theft and recovery.
The GPS technology can
receive and transmit a massive capacity of data which enable us to provide a better data analysis and variety of additional services.
Terrestrial
network triangulation system does not require line of sight and the signals are not easily interrupted in densely populated or obstructed
areas. Also, the signals are transmitted from the end-unit in the vehicle to a network of base stations. Therefore, in order to jam the
system, receivers in each individual base station within range of the end-unit would have to be jammed, which is difficult to accomplish.
Additionally, since the primary application of terrestrial network triangulation systems in the telematics industry is vehicle location
and not continuous two-way communication, short bursts of data are sufficient for tracking purposes, which enable the network of
base stations to be deployed at a much lower density in the coverage area than traditional network-based cellular base stations. Terrestrial
network triangulation systems are capable of determining the precise location, and not just the general direction, of a vehicle at any
moment in time. Furthermore, when connected with the existing theft protection system in the vehicle, terrestrial network triangulation
systems automatically alert the control center when a vehicle is stolen and do not require that the vehicle be reported stolen, which
can potentially reduce stolen vehicle recovery times to a few minutes. The main disadvantage of terrestrial network triangulation systems
is the necessity to deploy a physical infrastructure, including the construction, development and deployment of a network of base stations
and a control center and the need to address the various financial, legal and practical issues associated with such deployment. Any such
deployment entails an investment of a sizable amount of money prior to the receipt of any revenues.
19
Since our telematics
end-units are primarily used by us in providing our telematics services, the information provided above concerning our competition in
this market is applicable to the competition in the telematics products’ market as well.
Manufacturing
Operations and Suppliers
Our telematics products
are manufactured and assembled by a limited number of manufacturers in Israel (including our subsidiary E.R.M) and in China. We engage
with our manufacturers on a full turn-key basis, where we supply detailed production files and materials list and receive a final product
that we sell directly to our clients. Other than our dependency on manufacturing suppliers, as described in Item 3D. -“Risk
Factors” above, we do not depend on a single manufacturer for the production of our products. Our quality assurance and testing
operations are performed by our manufacturers at their facilities, while using our quality assurance and testing equipment and in accordance
with the test procedures designated by us. We monitor quality with respect to key stages of the production process, including the selection
of components and subassembly suppliers, warehouse procedures, assembly of goods, final testing, packaging and shipping. We are ISO 9001
certified. Some of our products are within the highest car manufacture automotive standard. We believe that our quality assurance procedures
have been instrumental in achieving the high degree of reliability of our products. Due to the recent shortage of several components,
prices of several components accelerated.
Several components and
subassemblies included in our products are presently obtainable from a single source or a limited group of suppliers and subcontractors.
We maintain strong relationships with our manufacturers and suppliers to ensure that we receive an adequate supply of products, components
and raw materials at favorable prices and to access their latest technologies and product specifications.
Proprietary
Rights
We seek to protect our
intellectual property through patents, trademarks, contractual rights, trade secrets, know-how, technical measures and confidentiality,
non-disclosure and assignment of inventions agreements and other appropriate protective measures to protect our proprietary rights in
the primary markets in which we operate. The continued use of some licenses granted by third parties to use their intellectual property
is material to our business. Please refer to Item 3D. – Risk Factors, under the caption “We rely on some intellectual property
that we license from third parties, the loss of which could preclude us from providing our SVR services or market and sell some of our
telematics products, which would adversely affect our revenues” above.
We typically enter into
non-disclosure and confidentiality agreements with our employees and consultants. We also seek these protective agreements from some of
our suppliers and subcontractors who have access to sensitive information regarding our intellectual property. These agreements provide
that confidential information developed or made known during the course of a relationship with us is to be kept confidential and not disclosed
to third parties, except in specific circumstances.
Our stolen vehicle recovery
system is based on three main components: (i) a telematics end-unit that is installed in the vehicle, (ii) (for RF technology based telematics
units) a network of base stations that relay information between the vehicle location units and the control center, certain components
of which were developed by third parties and are currently licensed to us and (iii) a 24-hour manned control center consisting of software
used to manage communications and the exchange of information among the hardware components of the telematics system, certain components
of which were developed by third parties and licensed to us.
“Ituran”
and “Mr. Big” and the related logos are our trademarks, the former has been registered in Israel, Hong Kong and as a European
Union and the latter has been registered in Israel. “Mapa” trademark and its related logos where sold as part of the sale
of Mapa to an unrelated party to us.
Environmental, Social
and Governance (ESG) Practices
As a global brand with
material social and economic influence, we recognize that our success can only be built alongside the success of our stakeholders, including,
our users, partners, and employees. We aim to achieve high ESG standards while continuing to develop our business and executing on our
strategy.
20
We conduct our business
activities and develop policies based on a firm commitment to ethical practices and corporate governance best practices. This includes
the “code of business conduct and ethics” and anti-bribery/corruption area where we have a policy of zero tolerance for corruption.
This also includes a “Whistle Blower” procedure whose purpose is to dissuade and to prevent illegal activity and conduct of
business that may harm our good reputation. Our code of business conduct and ethics, and the Whistle Blower procedure are published in
our website.
We promote and support
fair social and economic opportunities in the professional services global market. We recognize that there are systemic and cultural biases,
caused by age, gender, race, ethnicity, sexual orientation, religion, or ability, and we know these biases can reduce the accessibility
to opportunities on a global scale. It is our mission to reduce these accessibility gaps worldwide through our services, the programs
we support, and the partners with whom we work. We invest resources into data privacy and how we can protect our users by, among other
things, building key infrastructures and policies to safeguard the data on our platform and the privacy of our users.
We advance fairness and
transparency in our workforce and we promote and implement fair labor practices and employees' human rights throughout our organization.
We respect data privacy relating to our employees. We act to prevent sexual harassment and workplace bullying. We also implement non-discriminatory
hiring and promotion practices and actively pursue gender diversity in our workforce.
We value and celebrate
diversity within our community. Our work environment seeks to foster an inclusive culture, where our employees feel challenged and in
possession of the tools to thrive at work. We are continuously learning and looking at ways to continue to create an environment that
is an inclusive place of work. Furthermore, we recognize the importance of environmental matters.
In
addition, we also have an “environmental policy”. This policy sets goals in terms of preserving the environment, raising employee's
awareness and developing and promotion products that will help our customers to save fuel and as a result to reduce waste, air pollution
and gas emissions greenhouse. We also adopted a “Code of conduct of Ituran's Suppliers and Agents” which sets high standards
in choosing our suppliers, In terms of business honestly, ethically and quality drive. Our environmental policy and the Code of conduct
of Ituran's Suppliers and Agents our both published in our website at https://www.ituran.com/
.
Regulatory
Environment
In order to provide our
SVR services in the locations where we currently operate, we need to obtain four primary types of licenses and permits: (i) for our products
utilizing the RF technology - a license that allows us to use designated frequencies for broadcasting, transmission or reception of signals
and information and to provide telecommunication services to our customers, (ii) for our products utilizing the RF technology - a building
permit, which permits us to erect our base sites and transmit therefrom, (iii) product specific licenses (commonly known as type approvals),
which enable us to use the equipment necessary for our services, and (iv) a general commerce license, which allows us to offer our services
to the public.
The telecommunication
services and frequency license and general commerce licenses we require are granted by the applicable national agency regulating communications
in the markets in which we operate, specifically, the Ministry of Communication, in Israel, Anatel. Agencia Nacional de Telecomunicatoes
in Brazil. Modernization Ministry in Argentina and the Federal Communications Commission in USA. The product specific licenses we
require are granted in Israel by the Ministry of Communication, in Brazil by IBRACE (the Instituto Brasileiro de Certificatao de Productos
para Telecominicatoes), in Argentina by the Autoridad Federal de Tecnologias de la Información y las Comunicaciones, in the United
States by the Federal Communications Commission, and Ministry of Information Technology and Communications and Regulatory Communications
Commission in Colombia. In Mexico, the regulatory authority is the Federal Telecommunications Commission, however, because of the type
of services we provide, we are not obligated entities; In Ecuador's case, the regulatory body is the Telecommunications Regulatory and
Control Agency, however, we are not subject to either.
In Brazil, the general
commerce licenses, such as the city permits, are granted by the local municipalities and other specific entities, depending on the licenses
required.
Our frequency licenses
in all of the locations where we operate are “secondary” or “joint”, which means that the government may grant
another person or persons, typically a cellular operator, a primary license to the same frequencies and, to the extent our operations
interfere with the operations of the other person, we would have to modify our operations to accommodate the joint use of the frequencies.
All of these licenses are also subject to revocation, alteration or limitation by the respective authority granting them. While any events
that would cause us to change frequencies or to modify our operations could have a material adverse effect on us, we do not believe that
this is a likely event in any of the locations where we provide our SVR services.
21
Our frequency license
in Israel was renewed for a term of five (5) years until January 31, 2023. Following new regulations since October 2022, there is no need
any more for the extension of our frequency license, and registration with a specific registrar is sufficient. Our frequency licenses
in Brazil will expire in 2034. Except in Brazil, we have options to extend all of our frequency licenses for periods ranging from three-
to ten-years. A renewal application in Brazil will be submitted 6 months before the frequency license expiration date, to provide us a
new license for a period of ten (10) years. In Argentina, on July 15, 1999, the SECOM (Secretary of Communication dependent of Economy
Ministry) granted us a license to provide services in a Secondary Band. On December 2015, SECOM was converted into the Modernization Ministry,
with ENACOM (National Communication Entity) which is a decentralized entity that works within the scope of the Modernization Ministry.
Nevertheless, our frequency
is still authorized, there is a new entrant with ENACOM Authorization to provide LTE service. If this entrant starts the activity, we
will face an incompatibility situation. We received the authorization from ENACOM to use a 12-month trial in Band 8 902-905/947-950 MHz bands
additionally to our current frequencies. During this period, we will perform a test to obtain a definitive authorization. Due to
the Covid-19 Pandemic we have not managed an extension to the trial period so as not to compromise future network development. We
have decided to wait for a formal request from ENACOM to start again with this trail.
On December 9, 2016,
we were informed that one of the cellular providers in Argentina, which shares some of our frequencies, intends to implement on them 4G
cellular service. Such service may cause Interference that may impede the provision of our SVR service in Argentina. We are negotiating
with ENACOM to define new frequency which we will migrate into. Subject to the applicable laws, and ENACOM decision, the migration process
may take few years, and will be determined by ENACOM.
In Israel and Brazil,
like our competitors and most cellular operators, we are not in compliance with all relevant laws and regulations in connection with the
erection of transmission antennas (our base sites). As of the date hereof, most of our base sites in Israel and Brazil are operating without
local building permits. Currently, there is heightened awareness of this issue in Israel, particularly in connection with base sites of
cellular providers, and possible sanctions could include fines and even the closure or demolition of these base sites. In Brazil, Brazilian
authorities enforce permit requirements and impose penalties for non-compliance with such requirements. However, we do not believe this
is likely. Obtaining such required permits may involve additional fees as well as payments to the Land Administration Authority.
In Israel the required
permits and approvals for the erection of the base sites include:
| ◾ |
erection and operating permits from the Israeli Ministry of the Environment; |
| ◾ |
permits from the Israeli Civil Aviation Authority, in certain cases; |
| ◾ |
permits from the Israeli Defense Forces; |
| ◾ |
approval from Israel’s Land Administration and/or from Civil Administration in the Territories,
which usually also involves payment for the land use rights; and |
| ◾ |
building permits from local or regional zoning authorities in Israel and Brazil. |
We are continuously in
the process of obtaining the relevant permits required for the construction of our base sites in Israel, however, to date, we have been
issued only 15 of these permits (13
of them have expired). With respect to the general permit from Israel’s Land Administration, in 2005 we entered into an agreement
with the Israel’s Land Administration, pursuant to which the general permit has been issued to us against an annual consideration
based on the date of approval of our base sites. The agreement had expired on December 31, 2010. In the event that the Israel Land
Administration claims consideration for the building of the base sites without a permit, we may be subject to penalties and payment of
annual consideration for the years of use of those base sites.
22
In Brazil, very few providers
of wireless telecommunications services obtain the required permits for the erection of transmission antennas due to the nature of the
approval process. Currently we do not have such permits (except Anatel permits). In Brazil, we try to minimize our risk by locating most
of our equipment in sub-leased sites which are already used by other telecommunication service providers, such as cellular operators.
In Brazil the required
permits for the building of our base sites include:
| • |
a permit from Anatel (National Agency for Telecommunication) |
| • |
a permit from IBAMA (Environment national agency) and/or state EPAs |
| • |
Municipal permits |
| • |
a permit from the fire department; and a |
| • |
permit from COMAR (Aviation authorities) |
ANATEL permits are required
only for sites where we have transmission equipment and we have obtained all the permits required with this agency. Special IBAMA permits
need to be obtained only for ground sites which are located in certain preservation areas. We have few sites of this kind, most of them
are collocated sites where we pay for the right of use and permits are undertaken by the landowner. Fire Department permits are required
only for equipment rooms and we have not applied for any as of this date. COMAR permits are needed only for a very few of our sites, most
of which are collocated.
In Argentina, the installation
of an antenna support structure requires the authorization of the owner of the building or the land in which it is intended to be install.
The Municipalities regulate through specific Municipal Ordinances are granting urban licenses for our base stations’ installation.
The regulation referred
to the civil work of the support structure of the antenna, (masts / towers / anchors / bracing, etc.) is not the competence of ENACOM
(National Communication Entity), so it cannot exercise jurisdiction over it. This situation is determined in articles 39, 40 and 41 of
the National Law 19798/72, and in Resolution No. 795 CNT / 92, ratified by Resolution 302 SC / 99. Therefore, the claims and queries related
to the installation, the deterioration or poor conditions or related to the support structures, should be addressed to the municipalities. It
should be noted that the owner of a station in operation assumes responsibility for the works and accessory facilities that must be executed
to install a radio station, attributing the technical responsibility of a civil work, to the designer and the director of the same, being
this situation framed in what is established in articles 1273 and following of the Civil and Commercial Code of the Nation.
We are not in compliance
with all relevant laws and regulations in connection with the erection of antennas; some of them in the past were demolished by Municipalities.
As of the date hereof, most of our base sites operating without local Municipality permits, possible sanctions could include fines and
even the closure of those sites. In Argentina authorities enforce permit requirements and impose penalties for non-compliance with such
requirements. Obtaining such required permits may involve additional fees as well as payments to Municipality Authority.
We have been declared
a monopoly under the Israeli Antitrust Law, 1988, in the provision of systems for the location of vehicles in Israel. This law prohibits
a monopoly from abusing its market position in a manner that might reduce competition in the market or negatively affect the public. For
instance, a monopoly is prohibited from engaging in predatory pricing and providing loyalty discounts, which prohibitions do not apply
to other companies. The law empowers the Commissioner of Competition to instruct a monopoly abusing its market power to perform certain
acts or to refrain from taking certain acts in order to prevent the abuse. Additionally, any declaration by the Israeli Competition authority
that a monopoly has abused its position in the market may serve in any suit in which it is claimed that such a monopoly engages in anti-competitive
conduct, as prima facie evidence that it has engaged in anti-competitive behavior. Our
declaration as a monopoly in the market of “provision of systems for the location of vehicles in Israel” was not accompanied
with any instructions or special restrictions beyond the provisions of The Economic Competition Law. Although we may be ordered to take
or refrain from taking certain actions, to date we have not been subject to such restrictions.
In Colombia we have to
pay 2.2% on the annual gross income generated by the provision of our services to the Ministry of Information Technologies and Communications
(MINTIC) for use of telecommunication spectrum (resolution 0290 MINTIC) and 0.1% to Commission Regulatory of Communications (CRC) in the
same terms (resolution 5807 CRC).
In Ecuador and Mexico
there are no levies imposed on our activities.
Other
Investments
As part of our ongoing
business we are engaged and encountered by many potential investments which may have correlation to our core business. The following are
the main investments we have consummated during last seven years.
23
Bringg
- On December 2013 the Company invested $1.4 million in Bringg delivery technologies Ltd. (formerly Overvyoo Ltd.), an Israeli start-up
company developing solutions for the management of mobile/field workforce. On January and July, 2015, we invested additional amounts of
$1.1 million and US$ 2 million, respectively. During the years 2015 - 2020, additional investors, which are not related to us, invested
in Bringg a total amount of approximately $80 million, which reduced our capital share in Bringg. During 2021, Bringg, raised an
additional $100 million, which sets Bringg’s valuation at $1 billion. Following such investment, we now hold 16.9% of Bringg’s
share capital.
SaverOne Ltd - On March
2017, we invested an amount of $0.9 million in SaverOne 2014 Ltd., an Israeli start-up company developing a system that
aims to reduce the occurrence of road accidents by preventing the use of distracting mobile apps while driving (The system prevents the
driver from using texting applications while the vehicle is in motion, leaving other passengers unaffected).
During the years 2017
– 2021 we invested additional amount of approximately $0.8 million.
On
June 2020 SaverOne have consummated public registration on the Israeli Stock Market (“TASE”)
and thus its shares became equity investment with readily determinable fair value. We now hold approximately 3.2% of SaverOne’s
share capital.
As of December 31, 2022,
the fair value of our investment in SaverOne is approximately US$0.2 million.
in June 2022, SaverOne
filed with the SEC for an IPO, and as of today, shares are also traded on Nasdaq Capital Market (Symbol: SVRE).
C. ORGANIZATIONAL
STRUCTURE
In July 1995, Moked Ituran
Ltd. purchased our company and the assets used in connection with its operations from Tadiran and Tadiran Public Offerings Ltd. In September
2018, we acquired a majority of the shares of Road Track, a telematics company operating primarily in the Latin American region.
List of Significant Subsidiaries
|
Name of Subsidiary |
|
Country of Incorporation |
|
Proportion of Ownership Interest |
|
|
|
|
|
|
|
Ituran USA Holdings Inc
|
|
USA |
|
100% |
|
Ituran USA Inc
|
|
USA |
|
85.80% |
|
Ituran de Argentina S.A
|
|
Argentina |
|
100% |
|
Ituran Sistemas de Monitoramento Ltda
|
|
Brazil |
|
98.75% |
|
Ituran Instalacoes Ltda
|
|
Brazil |
|
98.75% |
|
Teleran Holding Ltda
|
|
Brazil |
|
99.99% |
|
Ituran servicos Ltda
|
|
Brazil |
|
98.75% |
|
E.R.M. Electronic Systems Limited
|
|
Israel |
|
49.5%1
|
|
Mapa Mapping Publishing Ltd
|
|
Israel |
|
100% |
|
Ituran Spain Holding S.L
|
|
Spain |
|
100% |
|
Ituran Road Track Monitaramento de Veiculos LTDA
|
|
Brazil |
|
100% |
|
Ituran Road Track Argentina, S.A
|
|
Argentina |
|
100% |
|
Global Telematics Solutions HK, Limited
|
|
Hong Kong |
|
100% |
|
Road Track De Colombia S.A.S
|
|
Colombia |
|
100% |
|
Road Track Ecuador, S.A.
|
|
Ecuador |
|
100% |
|
Road Track Mexico S.A. De C.V
|
|
Mexico |
|
100% |
|
Road Track HK Telematics Limited
|
|
Hong Kong |
|
100% |
|
E.D.T.E – Drive Technology Ltd
|
|
Israel |
|
100% |
|
Ituran Tech Ltd
|
|
Israel |
|
100% |
D. PROPERTY, PLANTS AND EQUIPMENT
As of the date of this
report, we don’t own any real estate other than the following properties: An office building of 8 floors in the area of approximately
5,356 sqm (57,651 square feet), which was purchased by our subsidiary Ituran Sistemas de Monitoramento Ltda (Ituran Brazil) in Sao Paulo,
Brazil, and was later, on December 3, 2014 sold to Ituran Location and Control Ltd, A building located in Rua Joao pessoa 450, Sao Caetano
do Sul, Estado de Sao Paulo in Sao Paulo, Brazil in the area of approximately 36,936 square feet which was purchased by our subsidiary
Ituran Road Track Monitoramento de Veiculos, Ltda which serve as an Operating center, A building located in Avenida del Taller No.36 Col.
Transito in Mexico in the area of approximately 21,132 square feet which was purchased by our subsidiary Road Track Mexico, S.A de C.V
which serve as an Operating center, a building located in Manuel Najas Oel 81 and Juan de Selis in Quito, Ecuador in the area of approximately
24,176 square feet which was purchased by our subsidiary Road Track Ecuador, S.A which serve as an Operating center, and a building located
in Keren Ha' Yesod 15, Tirat Ha'Carmel, Israel at the area of approximately 5,025 square feet which was purchased by our subsidiary E.D.T.E
– Drive Technology Ltd which serve as an office space and a warehouse.
1 The
proportion of voting power is 51%
24
Other than the property
in Brazil, Ecuador and Mexico and Israel, all of our offices, headquarters, control centers and facilities are leased in accordance with
our specific needs in the areas in which we operate. Additionally, we lease space for our base sites, in order to operate the reception
and transmission stations of the system, in each area in which we provide our SVR services.
In 2022 we leased an
aggregate of approximately 64,750 square feet of office space in Azour and Holon, Israel. In 2022, the annual lease payments for these
facilities were approximately 1,323,000. The lease ends by April 2029. These premises include our executive offices and the administrative
and operational centers for our operations as well as our customer service, value-added services and technical support centers and warehouse
for the Israeli market. We also lease 3,000 square feet for a warehouse and offices in Tirat Ha’Carmel for $ 62,000 annually.
In
Buenos Aires, Argentina, we lease approximately 8,611 square feet for office space for the total amount of AR$12.772.992 ($ 98.253) annually,
approximately 1,238 square feet for our control center (C3) and Data Center
for AR$ 3.258.000 ($ 25.061) annually and approximately 2,121 square feet for our warehouse for AR$ 2.040.000 ($ 15,692) annually.
In Bogota, Colombia,
we lease approximately 9,035 square feet for office space and Operating center for the amount of $60,797 annually.
In Mexico City, Mexico,
we lease approximately 3,875 square feet for Corporate Office for the amount of $ 35,000 annually. This was terminated in November 2020.
Additionally, we lease a warehouse for the amount of $3,000 annually.
We leased approximately
12,916 square feet of office space, stores and warehouse in Brazil for approximately 264,000 ($51,000) Brazilian Real annually. The lease
agreements will expire and will have to be renewed on August 21, 2026 and December 2024, as applicable to each engagement.
In
Guayaquil, Ecuador, we lease approximately 7,828 square feet for Warehouse for the amount of $ 30,000 annually. In Quito, Ecuador, we
lease approximately 3,229 square feet for Warehouse for the amount of $ 11,700 annually. In Cuenca, Ecuador, we lease approximately 538
square feet for Warehouse for the amount of $ 3,521 annually. In Ibarra, Ecuador, we lease approximately 1,108 square feet for Corporate
Office for the amount of $ 2,600 annually.
We leased approximately
9,260 square feet for our offices and control center in Florida for an amount of $ 166,500 annually for period of 60 months commencing
March 24, 2016 and ended March 23, 2021, and a 12 months extension starting March 24, 2021 at a reduced annual rate of $145,000 annually.
This lease was extended until March 2023, for $156,000 annually.
We believe that our facilities
are suitable and adequate for our operations as currently conducted. In the event that additional facilities will be required, we believe
that we could obtain such facilities at commercially reasonable rates.
25
The size of our base
station sites varies from approximately 11 to 44 square feet. In Israel, we have 98base stations and we rent most base station sites independently
for a monthly rate ranging from $200 to $2,200 per site depending on the location, size and other factors; for certain sites we do not
pay any rent. The typical duration of a lease agreement for our base stations in Israel is five years and we generally have a right to
renew the term of the lease agreements for a period ranging between two and five years. In Brazil, we have 147 base station sites, of
which 23 sites are leased from the same entity under a 15 years-contract, (commencing from 2012) for a monthly rate ranging from $500
to $1,750 per site. The remaining 124 sites are leased independently for an annual rate ranging from $200 to $550 depending on the location,
size and other factors, and the typical duration for these leases is five years. In Argentina, we have 37 base station sites, all of which
are leased from six entities for a monthly rate ranging from $215 to $930 per site. The duration of the lease ranges from one to two years.
We do not believe that
we have a legal retirement obligation associated with the operating leases for our base sites pursuant to the relevant accounting standards,
since we do not own any real property. However, we are obligated pursuant to certain of the operating leases for our base sites, mainly
for base sites in Israel, Brazil and Argentina, to restore facilities or remove equipment at the end of the lease term. Since the restoration
is limited to any construction or property installed on the property, which in our case is only the installed antennas, we do not believe
that these obligations, individually or in the aggregate, will result in us incurring a material expense.
| ITEM 4.A. |
UNRESOLVED STAFF COMMENTS |
Not applicable
| ITEM 5: |
OPERATING AND FINANCIAL REVIEW AND PROSPECTS |
| A. |
OPERATING RESULTS |
The
following discussion and analysis should be read in conjunction with our consolidated financial statements and notes thereto included
elsewhere in this report.
Introduction
We believe we are a leading
provider of telematics services, consisting predominantly of stolen vehicle recovery, which we refer to as SVR, and tracking services.
We also provide telematics products used in connection with our SVR services and for various other applications. We currently provide
our services and sell and lease our products mainly in Israel, Brazil, Argentina and the United States and since September 2018 also in
Colombia, Mexico and Ecuador.
Our operations consist
of two segments: Telematics services and telematics products.
Our telematics services
segment consists of our SVR, "Connected Car" fleet management, UBI, and other value-added services. We currently operate our telematics
services throughout the regions we operate.
Our telematics products
segment consists of our short - and medium-range two-way telematics products. We sell our telematics end-units to customers that
subscribe to our telematics services.
Outlook
We have historically
experienced growth in most of the markets in which we provide our telematics services. These markets, which are the main markets that
we operate in, are generally characterized by high car theft rates, insurance companies and car manufactures that are seeking solutions
to limit their actual losses resulting from car theft and increase their sales by adding additional value to the customer, and hence the
Brazilian market continues to represent growth potential for our telematics services. The growth in subscribers within our telematics
services segment also has a direct impact on the sale or lease of our telematics products, as they are an integral component of our telematics
services and are installed in each subscriber’s vehicle. In Israel, in recent years the market experienced an increased car sales
which positively affect our sales as compared with previous years.
Please refer to Item
3D. – Risk Factors above in respect of factors that could negatively impact our business.
26
Geographical breakdown
Telematics services’
subscriber base
The following table sets
forth the geographic breakdown of subscribers to our telematics services as of the dates indicated:
|
|
As of December 31, |
|||||||||||
|
|
2022 |
2021 |
2020 |
|||||||||
|
Israel |
738,000 |
653,000 |
643,000 |
|||||||||
|
Brazil |
558,000 |
453,000 |
452,000 |
|||||||||
|
Others |
770,000 |
775,000 |
673,000 |
|||||||||
|
|
||||||||||||
|
Total(1)
|
2,066,000 |
1,881,000 |
1,768,000 |
|||||||||
(1) All numbers provided
are rounded, and therefore totals may be slightly different than the results obtained by adding the numbers provided.
Revenues
The following table sets
forth the geographic breakdown of our revenues for each of our business segments for the relevant periods indicated.
|
|
2022 |
2021 |
2020 |
|||||||||||||||||||||
|
|
Telematics
services |
Telematics
products |
Telematics
services |
Telematics products |
Telematics
services |
Telematics
products |
||||||||||||||||||
|
Israel |
103.3 |
48.0 |
96.5 |
44.1 |
85.1 |
35.4 |
||||||||||||||||||
|
Brazil |
66.7 |
2.4 |
55.2 |
2.6 |
60.0 |
1.5 |
||||||||||||||||||
|
Others |
39.6 |
33.1 |
37.9 |
34.6 |
37.8 |
25.8 |
||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total(1)
|
209.6 |
83.5 |
189.6 |
81.3 |
182.9 |
62.7 |
||||||||||||||||||
(1)
We attribute revenues to countries based on the location of the customer.
Telematics services
segment
We generate revenues
from rendering our SVR, fleet management connected car,UBI and other value-added services. A majority of our revenues represent subscription
fees paid to us by our customers. We recognize revenues from subscription fees on a monthly basis. Most of our customers are free to terminate
their subscription at any time. In the absence of such termination, the subscription term continues automatically. We also generate subscription
fees from our fleet management services. Assuming no additional growth in our subscriber base and based on our historical average churn
rates of 3% per month in this segment, we can anticipate that at least 90% of our subscription fees generated in a prior quarter will
recur in the following quarter.
Telematics products
segment
We generate revenues
from sale of our telematics products to customers in Israel, Brazil, Argentina, Mexico, Colombia, Ecuador and the United States. We currently
sell or lease our telematics end-units in each of the above regions. Growth in our subscriber base is the principal driver for the sale
of our telematics products. We recognize revenues from sales of our telematics products upon transfer of control to the customer (usually
upon delivery).
Cost of revenues
Telematics services
segment
The cost of revenues
in our telematics services segment consists primarily of staffing, maintenance and operation of our control centers and base stations,
costs associated with our staff and costs incurred for private enforcement, licenses, permits and royalties, as well as communication
costs and costs due to depreciation of leased products and installation fees. Cost of revenues for sales of our fleet management services
also includes payments to a third party who markets our services.
27
Telematics products
segment
The cost of revenues
in our telematics products segment consists primarily of production costs of our third-party manufacturers and costs associated with installation
fees.
Operating expenses
Research and development
Our research and development
expenses consist primarily of salaries, costs of materials and other overhead expenses, primarily in connection with the design and development
of our telematics products. We expense some of our research and development costs as incurred. Subject to certain criteria we capitalize
software development costs. For further information see Note 1S to our consolidated financial statements.
Selling and marketing
Our selling and marketing
expenses consist primarily of advertising, salaries, commissions and other employee expenses related to our selling and marketing team
and promotional and public relations expenses.
General and administrative
Our general and administrative
expenses consist primarily of salaries, bonuses, accounting and other general corporate expenses.
Operating Income
Telematics services
segment
Operating income in our
telematics services segment is primarily affected by increases in our subscriber base and our ability to increase the resulting revenues
without a commensurate increase in our corresponding costs.
Telematics products
segment
Operating income in our
telematics products segment is primarily affected by our ability to increase sales of our telematics products.
Financing expenses (income),
net
Financing income (expenses),
net ,include, inter alia ,short-term and long-term interest expenses, financial commissions, income (expenses) in respect of changes in
obligation to purchase non-controlling interests ,and gains (losses) from currency fluctuations from the translation of monetary balance
sheet items denominated in currencies other than the functional currency of each entity in the group, gains (losses) in respect of marketable
securities and other investments, and expenses related to tax positions.
Taxes on income
Income earned from our
services and product sales is subject to tax in the country in which we provide our services or from which we sell our products.
Critical Accounting Policies
and Estimates
Our critical accounting
policies are more fully described in Note 1 to our consolidated financial statements appearing elsewhere in this report. However, certain
of our accounting policies require us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues
and expenses and related disclosure of contingent assets and liabilities. We evaluate our estimates on a periodic basis. We base our estimates
on historical experience, industry trends, authoritative pronouncements and various other assumptions that we believe to be reasonable
under the circumstances. Such assumptions and estimates are subject to an inherent degree of uncertainty.
The following are our
critical accounting policies and the significant judgments and estimates affecting the application of those policies in our consolidated
financial statements. See Note 1 to our consolidated financial statements included elsewhere in this report.
28
Revenue recognition
We and our subsidiaries
generate revenue from subscriber fees for the provision of services and sales of systems and products, mainly in respect of fleet management
services, stolen vehicle recovery services and other value-added services. To a lesser extent, revenues are also derived from technical
support services. We and our subsidiaries sell the systems primarily through their direct sales force and indirectly through resellers.
Revenue recognition accounting
policy applied from January 1, 2018 (following the adoption of ASC Topic 606);
We
apply ASC Topic 606, Revenue from Contracts with Customers (“ASC 606”) ”) to all contracts, using the modified retrospective
method.
In accordance with ASC 606, we determine
revenue recognition through the following five steps:
| • |
Identification of the contract, or contracts, with a customer; |
| • |
Identification of the performance obligations in the contract; |
| • |
Determination of the transaction price; |
| • |
Allocation of the transaction price to the performance obligations in the contract; and |
| • |
Recognition of revenue when, or as, we satisfy a performance obligation. |
A contract with a customer
exists when all of the following criteria are met: the parties to the contract have approved it (in writing, orally, or in accordance
with other customary business practices) and are committed to perform their respective obligations, we can identify each party’s
rights regarding the distinct goods or services to be transferred (“performance obligations”), we can determine the transaction
price for the goods or services to be transferred, the contract has commercial substance and it is probable that we will collect substantially
all of the consideration to which it will be entitled in exchange for the goods or services that will be transferred to the customer.
For each type of contract,
at inception, we assess the goods or service promised in a contract with a customer and identifies the performance obligations. With respect
to contracts that are determined to have multiple performance obligations, such as contracts that combine product with services (mostly
SVR services) and/or rights to use assets, we allocate the contract’s transaction price to each performance obligation using either
its best estimate of the relative standalone selling price of each distinct good or service in the contract. The primary method used to
estimate the relative standalone selling price is expected costs of satisfying a performance obligation and an appropriate margin for
that distinct good or service. or when applicable we use the residual approach (an entity under certain conditions may estimate the standalone
selling price by reference to the total transaction price less the sum of the observable standalone selling prices of other goods or services
promised in the contract). However, when applicable (see below), we estimate the selling prices of certain services using the residual
approach.Revenues are recognized when, or as, control of services or products is transferred to the customers at a point in time or over
time, as applicable to each performance obligation.
Revenues are recorded
in the amount of consideration to which we expect to be entitled in exchange for performance obligations upon transfer of control to the
customer, excluding amounts collected on behalf of other third parties and sales taxes.
We do not adjust the
amount of consideration for the effects of a significant financing component since we expect, at most contracts' inception, that the period
between the time of transfer of the promised goods or services to the customer and the time the customer pays for these goods or services
to be generally one year or less, based on the practical expedient. Our credit terms to customers are, on average, between thirty and
ninety days.
Contingencies
We and our subsidiaries
are involved in certain legal proceedings that arise from time to time in the ordinary course of their business and in connection with
certain agreements with third parties. Except for income tax contingencies, we records accruals for contingencies to the extent that the
management concludes that the occurrence is probable and that the related liabilities are estimable. Legal expenses associated with contingencies
are expensed as incurred.
29
Goodwill
and intangible assets
Goodwill represents the
excess of the purchase price over the fair value of the identifiable net assets acquired in business combinations accounted for in accordance
with the "purchase method" and is allocated to reporting units at acquisition. Goodwill is not amortized but rather tested
for impairment at least annually in accordance with the provisions of ASC Topic 350, "Intangibles - Goodwill and Other".
We elected to perform the goodwill annual
impairment test for its operating units as follows: the entire balance of goodwill (an amount of approximately $39.5 million (as of December 31,
2022) relates to four different reporting units . is tested for impairments on December 31,each year or more often.
As required by ASC Topic
350, we choose either to perform a qualitative assessment whether the quantitative goodwill impairment test is necessary or proceeds directly
to the quantitative goodwill impairment test. Such determination is made for each reporting unit on a stand-alone basis. The qualitative
assessment includes various factors such as macroeconomic conditions, industry and market considerations, cost factors, overall financial
performance, earnings multiples, gross margin and cash flows from operating activities and other relevant factors. When we choose to perform
a qualitative assessment and determines that it is more likely than not (more than 50 percent likelihood) that the fair value of the reporting
unit is less than its carrying value, then we proceed to the quantitative goodwill impairment test. If we determine otherwise, no further
evaluation is necessary.
With
respect to goodwill impairment tests performed before the adoption of ASU 2017-04 (which became effective for annual or any interim goodwill
impairment tests in fiscal years beginning after December 15,2019), when we decided or were required to perform the quantitative goodwill
impairment test, we firstly were required to compare the fair value of the reporting unit to its carrying value ("step 1"). If the fair
value of the reporting unit exceeded the carrying value of the reporting unit net assets (including the goodwill allocated to such reporting
unit), goodwill was considered not to be impaired, and no further testing was required. If the carrying value was determined to exceed
the fair value of the reporting unit, then the implied fair value of goodwill was determined by subtracting the fair value of all the
identifiable net assets from the fair value of the reporting unit. An impairment loss was recorded for the excess, if any, of the carrying
value of the goodwill allocated to the reporting unit over its implied fair value ("step 2").
Commencing fiscal 2022,upon
the adoption of ASU 2017-04 (which eliminated Step 2 from the goodwill impairment, when we decide or are required to perform the quantitative
goodwill impairment test, we compare the fair value of the reporting unit to its carrying value and an impairment charge is recognized
for the amount by which the carrying amount exceeds the reporting unit’s fair value, if any. In the performance of the quantitative
analysis we apply assumptions that market participants would consider in determining the fair value of each reporting unit.
As of December 31, 2022,
2021 and 2020, we had four reporting units which include goodwill.
Telematics
services:
Under the telematics
services segment there are two reporting units with goodwill. For one of which (resulted from past acquisitions) with an allocated amount
of approximately US$1.7 millions of goodwill, we performed a qualitative assessment as of December 31, 2022 and 2021, and concluded that
the qualitative assessment did not result in a more likely than not indication of impairment, and therefore no further impairment testing
was required, with respect to such units.
For the second reporting
unit (resulted from RT acquisition) with an allocated amount of approximately US$ 32.2 million of goodwill (as of December 31, 2022),
we performed the annual impairment test, as of December 31, 2022and reached to a conclusion that no impairment should be recorded at that
point.
We have
historically performed an annual goodwill assessment for such reporting unit as of June 30 of each year or more often if indicators of
impairment are presented. following the second closing of the RT acquisition, we decided to change the date of its annual impairment assessment
from June 30 to December 31.
We
performed a qualitative assessment as of December 31, 2022 and concluded that the qualitative assessment did not result in a more likely
than not indication of impairment, and therefore no further impairment testing was required, with respect to such units.
Telematics
products:
Under the telematics
products segment there are two reporting units with goodwill, for one of which (resulted from past acquisitions) with an allocated amount
of approximately US$_2million of goodwill, we performed a qualitative assessment as of December 31, 2022 and 2021, and concluded
that the qualitative assessment did not result in a more likely than not indication of impairment, and therefore no further impairment
testing was required, with respect to such units.
30
For
the second reporting unit (resulted from RT acquisition) with an allocated amount of approximately US$ 3.6 million of goodwill (as of
December 31, 2022), we performed the annual impairment test, as of December 31, 2022 and reached to a conclusion that no impairment should
be recorded at that point. We have historically performed an annual goodwill assessment as of June 30 of each year or more often if indicators
of impairment are presented. following the second closing of the RT acquisition, we decided to change the date of its annual impairment
assessment from June 30 to December 31. We performed a qualitative assessment as of December 31, 2022 and concluded that the qualitative
assessment did not result in a more likely than not indication of impairment, and therefore no further impairment testing was required,
with respect to such unit.
Results of Operations
The following table sets
forth for the periods indicated selected items from our consolidated statements of income as a percentage of our total revenues.
|
|
Year Ended December 31, |
|||||||||||
|
|
% |
|||||||||||
|
Consolidated statements of operations data: |
2022 |
2021 |
2020 |
|||||||||
|
Revenues: |
||||||||||||
|
Telematics services
|
71.5 |
70.0 |
74.5 |
|||||||||
|
Telematics product
|
28.5 |
30.0 |
25.5 |
|||||||||
|
Total Revenues |
100 |
100 |
100 |
|||||||||
|
Cost of Revenues: |
||||||||||||
|
Telematics services
|
30.8 |
30.8 |
32.7 |
|||||||||
|
Telematics products
|
22.3 |
22.0 |
19.8 |
|||||||||
|
Total cost of revenues
|
53.1 |
52.8 |
52.5 |
|||||||||
|
Gross profit |
46.9 |
47.2 |
47.5 |
|||||||||
|
Operating Expenses: |
||||||||||||
|
Research and development expenses
|
5.7 |
5.2 |
5.2 |
|||||||||
|
Selling and marketing Expenses
|
4.5 |
4.9 |
5.0 |
|||||||||
|
General and administrative expenses, net
|
16.6 |
17.0 |
20.2 |
|||||||||
|
Impairment of goodwill
|
- |
- |
4.3 |
|||||||||
|
Impairment of intangible assets and other expenses (income), net |
- |
(0.1 |
) |
1.5 |
||||||||
|
Total operating expenses
|
26.8 |
27.0 |
36.2 |
|||||||||
|
Operating Income
|
20.1 |
20.2 |
11.3 |
|||||||||
|
Other income expenses, net
|
- |
(0.1 |
) |
(0.1 |
) | |||||||
|
Financing income, net
|
(2.0 |
) |
(2.0 |
) |
0.6 |
|||||||
|
Income before income tax
|
18.1 |
18.1 |
11.8 |
|||||||||
|
Income tax |
(4.4 |
) |
(4.4 |
) |
(4.4 |
|||||||
|
Share in gains (losses) of affiliated companies, net
|
(0.2 |
) |
(0.1 |
) |
(0.3 |
) | ||||||
|
Net income for the year
|
13.5 |
13.6 |
7.1 |
|||||||||
|
Less: net income attributable to non-controlling interests |
(0.8 |
) |
(1.0 |
) |
(0.5 |
) | ||||||
|
Net income attributable to company stockholders
|
12.7 |
12.6 |
6.6 |
|||||||||
31
Analysis
of our Operation Results for the Year ended December 31, 2022 as compared to the Year ended December 31, 2021
Revenues
Total revenues increased
from $270.9 million in 2021 to $293.1 million in 2022 or 8.2 %. This decrease consisted an increase of $ 19.9 million from subscription
fees from our telematics services and an increase of $2.3 million from sales of our telematics products.
Telematics services
segment
Revenues
in our telematics services segment increased by $19.9 million from $ 189.6 million in 2021 to $ 209.6 million in 2022, or 10.5 %. Mainly
due to an increase in our average annual number of subscribers from 1,830,000 in 2021 to 1,996,000 in 2022.
Telematics products
segment
Revenues in our telematics
products segment increased from $ 81.2million in 2021, to $83.5 million in 2022 or 2.8 %. This increase of $2.3 million is primarily due
to an increase in sales, mainly in Israel.
Cost of revenues
Total cost of revenues
increased from $143.0million in 2021, to $155.5 million in 2022 or 8.7 %. This increase consisted of an increase of $6.7 million in the
Telematics services segment and an increase of $5.8 million in the telematics product segment. As a percentage of total revenues, cost
of revenues increased slightly from52.8 % in 2021to 53.0 % in 2022.
Telematics services
segment
Cost of revenues for
our Telematics services segment increased from $ 83.4 million in 2021, to $ 90.1 million in 2022 or 8.0 %. This increase was primarily
due to an increase in salary expenses of approximately $ 1.7million, an increase in depreciation and amortization expenses of approximately
$ 2.2 million and increase in installation and communication costs expenses of approximately $2 million, As a percentage of total revenues
for this segment, cost of revenues decreased from 44% in 2021 to 43 % in 2022.
Telematics products
segment
Cost of revenues for
our telematics products segment increased from $59.6 million in 2021, to $65.4 million in 2022 or 9.7 %. This increase was mainly due
to the increase in our products’ sales and the change in the mixture of products sales as well as increase in our cost due to the
electronic component shortage. As a percentage of total revenues for this segment, cost of revenues increased from 73.4% in 2021, to 78.3
% in 2022.
32
Operating expenses
Research and development
Our research and development
expenses increased from $ 14.1 million in 2021 to $ 16.8 million in 2022. As a percentage of total revenues, research and development
expenses increased from 5.2 % in 2021 to 5.7 % in 2022.
Selling and marketing
Our selling and marketing
expenses remain in the same level of $13.3 million. As a percentage of total revenues, selling and marketing expenses decreased from 4.9
% in 2021 to 4.5 % in 2022.
General and administrative
General and administrative
expenses increased from $ 46.1 million in 2021, to $ 48.7 million in 2022 or 5.6 %. The increase was mainly due to an increase in salary
expenses of approximately $ 0.9 million and an increase in expenses related to returning to work in offices in amount of $1.3 million.
As a percentage of total revenues, general and administrative expenses decreased from 17 % in 2021 to 16.6 % in 2022.
Impairment of goodwill
During 2021 and 2022
we recorded no goodwill impairment .
Impairment of intangible
assets and Other expenses (income), net
During 2021 and 2022
we recorded no intangible assets impairment.
Operating income
Total operating income
increased from $54.6 million in 2021, to $58.8 million in 2022 or 7.6 %. This increase of approximately $4.2
million reflects an increase of $ 8.2 million in the operating income in the telematics service segment and a decrease of $4.0 million
in the operating loss in the telematics products segment.
Telematics services
segment
Operating income in our
telematics services segment increased from $48.1 million in 2021 to $56.3 million in 2022, or 17.1 %. This increase was mainly attributed
to the increase of our average base of subscribers from 1,825,000 subscribers in 2021 to 1,974,000 subscribers in 2022.
As a percentage of income
in our telematics services segment revenues, operating income in our telematics services segment increased from 25.3 % in 2021 to 26.9
% in 2022.
Telematics products
segment
Operating income in our
telematics products segment decreased from $ 6.5 million in 2021 to $ 2.5 million in 2022. This decrease in operating income was
mainly attributed to the increase in our product costs due to the higher components’ prices which resulted due to the global shortage
of electronic components.
As a percentage of income
in our telematics products segment revenues, operating income in our telematics products segment decreased from 8.1 % in 2021 to 3.0
% in 2022.
33
Financing expenses ,
net
Financing expenses, net,
was $5.5 million in 2021 compared with $ 5.9 million in 2022.
The increase in the financing
expenses was mainly due to an increase in losses in respect of marketable securities and other investments in an amount of $1.5
million. The abovementioned were offset by a decrease in income in respect of changes in obligation to purchase non-controlling interests
in an amount of $1.0 million.
Income Tax
Income Tax expenses increased
from $11.9 million in 2021, to $12.7 million in 2022 or 6.7 %. As a percentage of income before tax, income tax expenses decreased
slightly from 24.2 % in 2021 to 24.1 % in 2022.
Analysis
of our Operation Results for the Year ended December 31, 2021 as compared to the Year ended December 31, 2020
Revenues
Total revenues increased from $245.6 million
in 2020 to $270.9 million in 2021 or 10%. This increase consisted of an increase of $ 6.7 million from subscription fees from our telematics
services and an increase of $ 18.6 million from sales of our telematics products.
Telematics services segment
Revenues in our telematics services segment
increased by $ 6.7 million from $ 182.9 million in 2020 to $189.6 million in 2021, or 4 %. Mainly due to the Increase in 113,000 subscribers
Telematics products segment
Revenues in our telematics products segment
increased from $ 62.7 million in 2020, to $81.2 million in 2021 or 29.5 %. This increase of $18.50 million is primarily due to an increase
in sales, mainly in our business in Israel. This increase was also effected by a positive impact of exchange rate fluctuations of the
NIS vs the USD in an amount of approximate $ 3.7 million.
Cost of revenues
Total cost of revenues increased from $ 129.1
million in 2020, to $143.0 million in 2021 or 11%. This increase consisted of an increase of $3.4 million in the telematics services segment
and an increase of $10.9 million in the telematics product segment. As a percentage of total revenues, cost of revenues increased slightly
from 52.5% to 52.8%.
Telematics services segment
Cost of revenues for our telematics services
segment increased from $81.4 million in 2020, to $84.8 million in 2021 or 4 %. This increase was primarily due to the effect of exchange
rate fluctuations in an amount of approximately $ 1.4 million and an increase in salary expenses of approximately $2.3 million. As a percentage
of total revenues for this segment, cost of revenues increased from 44.5% in 2020 to 44.7% in 2021.
Telematics products segment
Cost of revenues for our telematics products
segment increased from $ 48.7 million in 2020, to $ 59.6 million in 2021 or 22%. This increase was mainly due to the increase in our products’
sales. As a percentage of total revenues for this segment, cost of revenues decreased from 77.8 % in 2020, to 73.4% in 2021.
34
Operating expenses
Research and development
Our research and development expenses increased
from $ 12.8 million in 2020 to $ 14.1 million in 2021. As a percentage of total revenues, research and development expenses did not increase,
and remain at 5.2 % in 2020 and in 2021.
Selling and marketing
Our selling and marketing
expenses increased from $ 2.0 million in 2020 to $ 13.3 million in 2021. As a percentage of total revenues, selling and marketing expenses
decreased slightly from 5.0 % in 2020 to 4.9 % in 2021.
General and administrative
General and administrative
expenses decreased from $49.7 million in 2020, to $ 46.1 million in 2021 or 7%. The decrease was mainly due to the effect of allowance
for doubtful accounts in amount of $4.2 million, the abovementioned were offset primarily due to an increase in salaries expenses in an
amount of $0.8 million. As a percentage of total revenues, general and administrative expenses decreased from 20.2% in 2020 to 17.0% in
2021.
Impairment of goodwill
During 2021, we did not record any goodwill
impairment loss.
On June 30,2020, an impairment
of approximately $10.5 million was recorded, primarily due to increase in the country’s risk indicator, as part of the effects of
Covid - 19.
Impairment of intangible assets and other
expenses (income), net
During 2021 no intangible assets impairment
loss was recorded. During 2020 the company recorded an intangible assets impairment loss in the amount of approximately US$ 3.7 million,
respectively. The impairment was recorded in the consolidated statement of income under "Impairment of intangible assets and other expenses".
Operating income
Total operating income increased from $ 27.8
million in 2020, to $54.6 million in 2021 or 96 %. This increase of approximately $ 26.8 million was mainly due to the impairment loss
in an amount of approximately $ 14.2 million record in 2020. The increase of approximately $ 12.6 million reflects an increase of $ 8.1
million in the operating income in the telematics service segment and an increase of $ 4.5 million in the operating income in the telematics
products segment.
Telematics services segment
Operating income in our telematics services
segment increased from $28.6 million in 2020 to $ 48.1 million in 2021, or 68 %. This increase was mainly attributed to the decrease in
the impairment of goodwill and of impairment of intangible assets of $11.3 million and from the increase of our subscriber’s client
base.
As a percentage of our telematics services
segment revenues, operating income in our telematics services segment increased from 15.7 % in 2020 to 25 % in 2021.
Telematics products segment
Operating income (loss) in our telematics
products segment increased from loss of $0.8 million in 2020 to income of $6.5 million in 2021. This increase in operating income was
mainly attributed to the decrease in the impairment of goodwill and intangible assets of $2.8 million in. And from the increase of our
gross revenues in our telematics products segment.
As a percentage of our telematics product
segment revenues, operating losses in our telematics productrs segment increased from (1.3) % in 2020 to 8 % in 2021.
35
Financing income, net
Financing income, net, were $ 1.5 million
in 2020 compared with an expense of $ 5.5 million in 2021.
The increase in the financing expense was
mainly due to an increase in losses in respect of marketable securities in an amount of $2.4 million in 2021, compared to an increase
of $ 4.3 million in 2020.
Income Tax
Income Tax expenses increase from $ 10.9 million
in 2020, to $ 11.9 million in 2021 or 9%. As a percentage of income before tax, income tax expenses decreased from 37.4% in 2020 to 24.2%
in 2021 primarily due to an (non- deductible for tax) impairment in goodwill and intangible assets related to RTH transaction in 2020
in an amount of $ 14.2 million, and no impairment in goodwill and intangible assets related to RTH transaction in 2021. Also, a (non-deductible
for tax) gain in 2020 and losses in 2021 in respect of marketable securities value.
As a percentage from
income before tax, exclude the impairment which mentioned above, income tax expenses decreased from 25.5% in 2020 to 24.2% in 2021.
Impact of Currency Fluctuations on Results
of Operations, Liabilities and Assets
Although we report our consolidated financial
statements in dollars, in 2020, 2021 and 2022, a portion of our revenues and direct expenses was derived in other currencies. For fiscal
years 2020, 2021 and 2022 we derived approximately30.6 %26.6% and_24.8 % of our revenues in dollars and other currencies, 49.2 %,
52.0 % and 51.6 % in NIS, 20.2 %, 21.4% and 23.6 % in Brazilian Reals. In fiscal years 2020, 2021 and 2022, 29.0 %, 30.9 % and 28.1
% of our expenses were incurred in dollars and other currencies, 50.6 %, 52.3% and 53.4 % in NIS and 20.4%, 16.8%, and 18.5 % in Brazilian
Reals.
Exchange differences upon conversion from
our functional currency to dollars (presentation currency) are accumulated as a separate component of accumulated other comprehensive
income under stockholders’ equity. In the year 2022, accumulated other comprehensive income decreased by $ 3.9 million. In the year
2021, accumulated other comprehensive income decreased by $ 2.9 million. In 2020, accumulated other comprehensive income decreased by
$ 12.9 million.
36
The fluctuation of the other currencies in
which we incur our expenses or generate revenues against the dollar has had the effect of increasing or decreasing (as applicable) reported
revenues, cost of revenues and operating expenses in such foreign currencies when converted into dollars from period to period. The following
table illustrates the effect of the changes in exchange rates on our revenues, gross profit and operating income for the periods indicated:
|
|
Year Ended December 31, |
|||||||||||||||||||||||
|
|
2020 |
2021 |
2022 |
|||||||||||||||||||||
|
|
Actual |
At 2019
exchange rates (1) |
Actual |
At 2020
exchange rates (1) |
Actual |
At 2021
exchange rates (1) |
||||||||||||||||||
|
|
(In thousands of US$) |
|||||||||||||||||||||||
|
Revenues
|
245,627 |
262,529 |
270,884 |
264,507 |
293,072 |
296,752 |
||||||||||||||||||
|
Gross profit
|
115,515 |
122,708 |
127,838 |
125,090 |
137,562 |
139,120 |
||||||||||||||||||
|
Operating income |
27,831 |
31,229 |
54,615 |
53,595 |
58,774 |
59,218 |
||||||||||||||||||
(1) Based
on average exchange rates during the period. Those columns are Non GAAP information.
Our policy remains to
reduce exposure to exchange rate fluctuations by entering into foreign currency forward transactions that mainly qualify as hedging transactions
under ASC Topic 815, “Derivatives and Hedging”, the results of which are reflected
in our income statements as revenues or cost of revenues. The result of these transactions, which are affected by fluctuations in exchange
rates, could cause our revenues, cost of revenues, gross profit and operating income to fluctuate.
| B. |
LIQUIDITY AND CAPITAL RESOURCES |
We fund our operations primarily from cash
and cash equivalents generated from operations. As of December, 31, 2020 ,2021 and 2022, we had, $78.8 million and $54.7 million and
$28.2million in cash and marketable securities and $66.7 million , $58.1 million and $57.3 million in working capital, respectively.
We hold most of our cash and cash equivalents in US dollars or the local currency of their location.
As of December 31, 2022 we had a long term
loan at the amount of $ 0.4 million and a short term loans at the amount of $ 11.8 million As of December 31, 2021 we had a long-
term loan from an Israeli bank at the amount of $ 13.7 million and a short term loans at the amount of $ 17.8 million. As of December,
2020 we had a long – term loan from an Israeli bank at the amount of $ 34.1 million and a short term loans at the amount of $ 20.4
million. As of December, 2020 ,2021and 2022, we also had $ 1.9 million, $1.6 million and $1.7 million, respectively, available to us under
existing lines of credit. As of December 31, 2020 we utilized $0.3 million of our credit line, as of December 31,2021 we utilized
$ 0.7 million of our credit line and, and as of December 31,2022 we utilized $ 0.6 millions of our credit line.
We believe that our
cash flow from operations, availability under our lines of credit and cash and marketable securities will be adequate to fund our capital
expenditures, contractual commitments and other demands and commitments for the foreseeable future as well as for the long-term. We believe
that cash flow generated from operations and cash available to us from our credit facilities will be sufficient to cover future expansion
of our various businesses into new geographical markets or new products, as currently contemplated and as we describe herein. However,
if existing cash and cash generated from operations are insufficient to satisfy our liquidity requirements, we may seek financing elsewhere
by selling additional equity or debt securities or by obtaining additional credit facilities.
As of December 31, 2020,2021 and 2022 we
had long-term liabilities of $19.7 million, $22.5 million, and $ 21.2 million, respectively, for employee rights upon retirement for certain
of our employees that become payable upon their retirement. Our Israeli employees are entitled to one month’s salary, equal to the
applicable monthly salary at the time of such employee’s retirement, for each year of employment, or a portion thereof, upon retirement.
This liability is partially funded by deposit balances maintained for these employee benefits in the amount of $13.6 million , $16.2
million and $15.1 million, as of December , 2020 ,2021 and 2022 respectively. The deposited funds include profits accumulated up to the
balance sheet date and may be withdrawn upon the fulfilment of the obligation pursuant to Israeli severance pay laws or labor agreements.
37
In Argentina, new economic
policies related to the external sector have been in effect since August 2019, motivated by the liabilities in dollars and the inability
of the Government to deal with it in the initially agreed terms. These measures were initially taken by the outgoing Government and then
deepened by the new elected Government that began on December 10, 2019. The following regulations currently apply:
1. Currency market:
a. Individuals can
only acquire dollars for savings, in the amount of US $ 200 per month. On this purchase applies 65% taxes. The taxes for all abroad and
tourism expenses is 100%.
b. Companies are not
allowed to acquire dollars.
2. Imports:
a. The Information
System called SIMI is maintained. Imports and their payments require prior authorization from the government.
b. Payment for the
importation of services also requires authorization from the government.
c. Both types of imports
(goods and services) require compliance with Transfer Pricing Report and other tax regulations.
3. Income Tax and Dividends:
a. Payment of dividends
to shareholders abroad requires prior authorization from the Central Bank.
b. The following chart
shows the new scenario for the Corporate Income Tax rate that will apply for fiscal years commencing since January 1st,
2021.
The amount will be adjusted
by inflation since January 2022.
|
Accumulated net taxable profit |
will pay a fix amount of |
plus a % over the following amount | ||||||
|
More than AR$ |
up to AR$ |
|||||||
|
AR$
|
- |
AR$ |
7.604.948,57 |
AR$ |
- |
25% |
AR$ |
0 |
|
AR$ |
7.604.948,58 |
AR$ |
76.049.485,68 |
AR$ |
1.901.237,14 |
30% |
AR$ |
7.604.948,57 |
|
AR$ |
76.049.485,69 |
on |
AR$ |
22.434.598,28 |
35% |
AR$ |
76.049.485,68 | |
c. On dividends originated
7% tax will be withheld as shareholders Income Tax.
In Ecuador, there are
two unique Laws which are relevant to our activities:
| 1. |
Remittance tax (Impuesto a la Salida de Divisas) - Remittance tax of 5% is imposed on the transfer of
money abroad in cash or through pay checks, transfers, or courier of any nature carried out with or without the mediation of the Ecuadorian
financial system, including transfer from foreign bank accounts. Dividends are exempt from this tax, under certain considerations.
|
| 2. |
Labor profit sharing - Although it is not considered a tax, companies are obligated to pay 15% of their
pre-tax earnings to their employees. This payment is considered a deductible expense for CIT computation purposes. |
In Mexico, All Mexican
employers, whether individuals or entities, are required to calculate and pay mandatory profit- sharing payments to employees within 60
days following the filing of their annual Mexican tax return. The obligation for employers to make such payments is based on the legal
provisions in Section IX of Article 123 of the Political Constitution of the United Mexican States, which establishes that employees shall
have the right to participate in their employer’s profits in the amount of 10% of such employer’s taxable income. As such,
the following types of employees have the right to receive profit sharing payments: (a) permanent employees hired to carry out normal,
long-term work for an employer, without regard to the number of days worked during the January 1 through December 31, 2019 fiscal year;
(b) eventual permanent employees who have worked for an employer fewer than 60 days, whether continuously or sporadically, during the
fiscal year referred to above; (c) former employees who have the right to claim profit sharing payments, when such rights have not lapsed.
38
Dividends
On February 26, 2017
we have revised our dividend policy, which came in force starting from 2017, that our dividends will be declared and distributed on a
quarterly basis in an amount of at least 5 million USD subject to the provisions of the Israeli laws concerning lawful distribution of
dividends.
Dividend we declared
in respect to 2020 result:
On May 13, 2020, we declared
the suspension of the dividend distribution due to the Covid-19 pandemic. On March 3, 2021, we declared the renewal of the dividend distribution
policy of at least $3 million a quarter. On the same date we also declared a quarterly dividend in an amount of $10 million, which was
paid (net of taxes at the rate of 25%) on April 6, 2021 with respect to the fourth quarter of 2020.
Dividend we declared
in respect to 2021 result:
On May 25, 2021, we declared
a quarterly dividend in the amount of $3 million, which was paid (net of taxes at the rate of 25%) on July 14, 2021, with respect to the
first quarter of 2021. On August 23, 2021, we
declared a quarterly dividend in the amount of $3 million, which was paid (net of taxes at the rate of 25%) on October 13, 2021, with
respect to the second quarter of 2021. On November 16, 2021, we declared a quarterly dividend on the amount of $3 million, which was paid
(net of taxes at the rate of 25%) on January 5, 2022, with respect to the third quarter of 2021. On March 7, 2022, we declared a quarterly
dividend of $3 million, which was paid (net of taxes at the rate of 25%) on April 6, 2022, with respect to the fourth quarter of 2021.
Dividend we declared
in respect to 2022 result:
On May 24, 2022, we declared
a quarterly dividend in the amount of 3 million, which was paid (net of taxes at the rate of 25%) on July 14, 2022, with respect to the
first quarter of 2022. On August 29. 2022, we declared a quarterly dividend in the amount of 3, million, which was paid (net of taxes
at the rate of 25%) on October 13, 2022, with respect to the second quarter of 2022. On November 21, 2022, we declared a quarterly dividend
in the amount of 3 million, which was paid (net of taxes at the rate of 25%) on January 4, 2023.
Until the RTH Transaction,
we have repurchased 2,507,314 of our shares, out of these shares (373,489 shares) were resold as part of the consideration in the RTH
Transaction. As part of the RTH Transaction price adjustment 300,472 shares were returned to us in April 2019. As part of implementation
of our Board of Directors decision of 25 million USD share repurchase program, Share repurchases were funded by our wholly owned subsidiary
with available cash. Repurchases of the Company’s ordinary shares were based on Rule10b-18 terms. During the years 2019 and 2021
we purchased 227,828 and 228,725 of our shares for approximately $6 million each year. During the year 2021, we also directly
purchased additional 50,995 shares for approximately $ 1.3 million not through publicly announced plans. During 2022 we purchased additional
357,362 shares.
As
of the date of this report, the updated quantity of treasury shares is 3,366,934 (including the aforementioned, 603,142 shares which are
entitled to dividend distributed). The following table sets forth the components of our historical cash flows for the periods indicated:
|
|
Year ended December 31, |
|||||||||||
|
|
2022 |
2021 |
2020 |
|||||||||
|
|
(In thousands) |
|||||||||||
|
|
||||||||||||
|
Net cash provided by operating activities |
45,118 |
55,790 |
60,068 |
|||||||||
|
Net cash used in investing activities |
(27,354 |
) |
(18,524 |
) |
(11,479 |
) | ||||||
|
Net cash used in financing activities |
(36,360 |
) |
(58,666 |
) |
(29,449 |
) | ||||||
|
Effect of exchange rate changes on cash and cash equivalents |
(3,860 |
) |
(477 |
) |
(921 |
) | ||||||
|
Net increase/decrease in cash and cash equivalents |
(22,456 |
) |
(21,877 |
) |
18,219 |
|||||||
39
Years ended December
31, 2022, December 31, 2021 and December 31, 2020
Net cash provided by operating activities
Our operating activities provided cash of
$60.1 million in 2020 , $55.8 million in 2021 and $45.1 million in 2022.
Cash from operating activities in 2022 decreased
in an amount of approximately $ 10.7 million, this decreased was mainly due to a growth of the operation in Brazil.
Net cash used in investing activities
Net cash used in investing activities in 2022
in an amount of approximately $27.4 million, included capital expenditure in the amount of $26.5 million.
Net cash used in investing activities in 2021
in an amount of approximately $ 18.2 million, included capital expenditure in the amount of $ 16.6 million.
Net cash used in investing activities in 2020
in an amount of approximately $11.5 million, included capital expenditure in the amount of $ 10.2 million.
Net cash used in financing activities
Net cash used in financing
activities in 2022 in an amount of approximately $36.4 million consisted primarily a repayment of short and long term credit from financial
institution in an amount of $16.5 million, cash dividend payment in an amount of approximately $ 11.5 million and acquisition of company
shares in an amount of approximately $ 8.5 million.
Net cash used in by financing
activities in 2021 in an amount of approximately $ 58.9 million consisted primarily of a repayment of short and long term credit from
financial institution in amount of $ 23.8 million, cash dividend payment in an amount of approximately $ 15.8 million a cash payment to
settle the obligation to purchase non-controlling interest in an amount of approximately $ 11.3 million and an acquisition of company
shares in an amount of approximately $ 7.3 million.
Net cash used in by financing
activities in 2020 in an amount of approximately $ 29.4 million consisted primarily of a repayment of short and long term credit from
financial institution in amount of $ 17 million, cash dividend payment in an amount of approximately $ 10 million and a cash dividend
payment in an amount of approximately $ 1.7 million paid by our subsidiary to the non - controlling interests.
| C. |
RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES |
Most of our research
and development activities take place in Israel, Mexico, Colombia and Ecuador. Our Research and Design department is constantly working
on upgrading the service infrastructure and improving our fleet management applications, including by introducing new services and uses
of the system, while utilizing both internal development staff and outsourcing such activities to third parties, as well as developing
new service platforms for cellular/GPS based devices.
Expenditures for research
and development activities undertaken by us were approximately $ 16.8 million in 2022, $14.1 million in 2021, and $ 12.8 million
in 2020.
| D. |
TREND INFORMATION |
The COVID-19 pandemic,
had little impact on our business during year 2022. Nevertheless, in case this pandemic or similar in effect will erupt this may have
an adverse effect on our business.
Please see Item 4.A.
– History and Development of the Company and Item 4.B. – Business Overview above for trend information.
40
| E. |
OFF-BALANCE SHEET ARRANGEMENTS |
We do not have off-balance
sheet arrangements (as such term is defined in Item 5E. of the Form 20-F) that have or are reasonably likely to have a current or future
effect on our financial condition, changes in financial conditions, revenues or expenses, results of operations, liquidity, capital expenditures
or capital resources that are material to investors.
| F. |
TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS |
Contractual obligations
and commercial commitments
The following table summarizes
our material contractual obligations as of December 31, 2022:
|
|
Payments due by period |
|||||||||||||||||||
|
Contractual obligations |
Total |
Less than 1 year |
1-3 years |
3-5 years |
After 5 years |
|||||||||||||||
|
|
(In USD thousands) |
|||||||||||||||||||
|
|
||||||||||||||||||||
|
Operating leases 2
|
11,580 |
3,287 |
3,617 |
2,674 |
2,002 |
|||||||||||||||
|
Purchase Obligations
|
13,127 |
13,127 |
- |
- |
- |
|||||||||||||||
|
Long – term debt obligations
|
12,190 |
11,845 |
345 |
- |
- |
|||||||||||||||
|
Total
|
30,571 |
21,933 |
3,962 |
2,674 |
2,002 |
|||||||||||||||
| G. |
SAFE HARBOR |
The safe harbour provided
in Section 27A of the Securities Act and Sections 21E of the Exchange Act shall apply, among other things, to forward looking information
provided in Item 5. F.
ITEM 6.
DIRECTORS,
SENIOR MANAGEMENT AND EMPLOYEES
| A. |
DIRECTORS AND SENIOR MANAGEMENT |
The following persons
are our directors, senior management and employees upon whose work we are dependent:
|
Name |
Age
|
Position
|
|
|
|
|
|
Izzy Sheratzky |
76 |
President and director |
|
Yehuda Kahane |
78 |
Director |
|
Ze’ev Koren
|
78 |
Chairman of the Board of Directors and an independent director |
|
Efraim Sheratzky
|
70 |
Director |
|
Eyal Sheratzky |
54 |
Co-Chief Executive Officer and Director |
|
Nir Sheratzky |
51 |
Co-Chief Executive Officer and Director |
|
Gil Sheratzky |
45 |
CEO of our Subsidiary, International Activity and Business Development Officer and
a Director |
|
Yoav Kahane(1)(2)
|
49 |
Director and an independent Director |
|
Yigal Shani |
78 |
Director |
|
Israel Baron (1)(2)(3) +
|
69 |
External Director |
|
Gidon Kotler (1)(2)(3)
|
82 |
External Director |
|
Tal Sheratzky- Jaffa
|
45 |
Director and an independent director |
|
Ami Saranga |
59 |
Deputy Chief Executive Officer |
|
Eli Kamer |
56 |
Executive Vice President, Finance; Chief Financial Officer |
|
Guy Aharonov |
57 |
General Counsel |
|
Udi Mizrahi |
51 |
Deputy Chief Executive Officer International Operation and VP of Finance |
Notes:
(1)
Member of audit committee
(2)
Member of compensation committee
(3)
External director elected in accordance with the Israeli Companies Law
+ Chairperson
of all committees
2
Please see consolidated financial statements, Note 7.
41
Izzy
Sheratzky is a co-founder of our company and its President. He has
previously served as the Chairman of our Board of Directors, which in our company constitutes both an officer and director positions,
ever since our company was acquired from Tadiran in 1995. Until 2003, Mr. Sheratzky also served as our Chief Executive Officer. Mr. Sheratzky
also serves as the Chairman of the Board of Directors of Moked (1973) Investigations Company Ltd., Moked Services, Information and Investments
Ltd., and Moked Ituran. He also serves as a director in Tikal Document Collection Ltd. Mr. Sheratzky is the father of Eyal, Nir and Gil
Sheratzky, Brother of Efraim Sheratzky and uncle of Tal Sheratzky-Jaffa.
Yehuda
Kahane is a co-founder of our company and has served on our board since
1995. Professor Kahane is an entrepreneur in both the academic and business arenas. He is a Fellow of the World Academy of Art and Science.
He received the 2011 highest international award for his lasting contribution to the theory, practice and education in insurance and risk
management, as well as a lifetime achievements award by the Israeli Insurance industry. He is a co-founder and chairperson of the YK Center
for Preparing for the New Economy. Kahane is a Professor (Emeritus) from the Collar Business, Tel Aviv University where he headed the
Institute for Business and the Environment. He taught at many business schools around the world, including the Wharton School, the University
of Texas (Austin), the University of Toronto and the University of Florida, and has founded and served as the first Dean of the Israeli
Academic School of Insurance. Professor Kahane chairs and is a major owner of Capital Point Ltd., and is active in the formation, seed
investment and management of start-up companies and technological incubators, unrelated to our company. He chairs the association for
the visually impaired people in Herzliya and Sharon district, and a board member of the Center for Blind People in Israel (The Umbrella
organization). He is an honorary member of the Israel-Brazil Chamber of Commerce. Professor Kahane holds a BA degree in Economics and
Statistics, an MA degree in Business Administration and a PhD in Finance from the Hebrew University of Jerusalem and is a Fellow of the
Israeli Association of Actuaries. He specializes in insurance, risk management, environmental issues and technological forecasting. He
is the father of Yoav Kahane.
Zeev
Koren has served as a director of our company since 2006 and since
2011 serves as the Chairman of the Board of Directors of the Company. In 1988 Brigadier Gen. (Res) Koren retired from the Israel Defence
Forces after a career of 25 years, where in his final position he served as the head of human resources planning for the general staff
division. Since then he has served in a senior capacity in companies in the fields of international forwarding and medical services. During
the past ten years he has also served as the general manager of a Provident Management Company. He holds a B.A. in Political Science and
Criminology from Bar Ilan University.
Efraim
Sheratzky was appointed to the board on February
9, 2015 to replace Mr. Amos Kurz, as a Class A Director. Efraim Sheratzky studied insurance in the Israeli Insurance College. Efraim Sheratzky
owns together with Yigal Shani, Tzivtit Insurance Agency (1998) Ltd. Efraim Sheratzky served as our director from 1999 and until 2005.
Efraim Sheratzky is the brother of Izzy Sheratzky and the uncle of Eyal, Nir and Gil Sheratzky and father of Ms. Tal Sheratzky-Jaffa.
Mr. Efraim Sheratzky was
elected, on December 14, 2022, in annual general shareholders meeting, to serve as a director in Class A for additional period until third
succeeding Annual General meeting, thereafter.
Eyal
Sheratzky has served as a director of our company
since its acquisition from Tadiran in 1995 and currently serves as a Co-Chief Executive Officer since 2003. Prior to 2003, he served as
Vice President of Business Development during the years 1999 through 2002. Mr. Sheratzky also serves as a director of Moked Ituran and
certain of our other subsidiaries, including Ituran Network. From 1994 to 1999, he served as the Chief Executive Officer of Moked Services,
Information and Investments and as legal advisor to several of our affiliated companies. Mr. Sheratzky holds LLB and LLM degrees from
Tel Aviv University School of Law and an Executive MBA degree from the Kellogg School of Management at Northwestern University, USA. Mr.
Sheratzky is the son of Izzy Sheratzky and the brother of Nir and Gil Sheratzky and nephew of Effraim Sheratzky.
Mr. Eyal Sheratzky was elected,
on December 14, 2022, in annual general shareholders meeting, to serve as a director in Class A for additional period until third succeeding
Annual General meeting, thereafter.
Nir
Sheratzky has served as a director of our company since its acquisition
from Tadiran in 1995 and currently serves as a Co-Chief Executive Officer since 2003. Prior to 2003, Mr. Sheratzky served as an Executive
Officer in our company from 1995 to 2003. Mr. Sheratzky is also a director in Moked Ituran. He holds BA and MA degrees in Economics from
Tel Aviv University. Nir is the son of Izzy Sheratzky and the brother of Eyal and Gil Sheratzky and nephew of Effraim Sheratzky.
42
Gil
Sheratzky serves as a director of our company and since 2013 as our
International Activity and Business Development Officer. Mr. Sheratzky has been serving since January 23, 2007 as the Chief Executive
Officer of our subsidiary, E-Com Global Electronic Commerce Ltd. From 2003 and until 2013 Mr. Sheratzky served as our marketing communication
officer. During the years 2000 - 2001 Gil worked in our control center, and during the years 2001 - 2002 he worked in an advertising agency. Mr.
Sheratzky holds a BA in Business Administration from the Herzliya Interdisciplinary Center, and an MBA degree from the Booth School of
Business at Chicago University, USA. Gil serves also as director in Saver One Bringg and chairman of Mapa GIS (a subsidiary of Ituran).
Gil Sheratzky is the son of Izzy Sheratzky and the brother of Eyal Sheratzky and Nir Sheratzky and nephew of Effraim Sheratzky
Yoav
Kahane (Director and an Independent Director, and also
a member of audit committee and a member of compensation committee) has served as director of our company since 1998. Mr. Kahane
is serving as the Chief Executive Officer of Vizo Specs Ltd,a start up company he co-founded that develop a non-invasive technology for
immediate enhancement of attention and the treatment of ADHD .During 2020 he served as CBO of PrintCB ,developer and manufacturer of advanced
copper materials for car electrification. a. During 2006-2014, Mr. Kahane has worked for Enzymotec in various managerial positions including
Director of Business Development, VP Sales Marketing, Infant Nutrition Business Unit Manager, Chief Executive Officer and Chairman
of Advanced Lipids AB, a joint venture of AAK AB and Enzymotec, specializing in nutritional ingredients to the infant nutrition industry.
During the years 2004-2005, Mr. Kahane served as Vice President of Sales and Marketing in Elbit Vision Systems Ltd. During the years 2001
and 2002, he served as Manager of Business Development in Denver Holdings and Investments Ltd. In 2000, Mr. Kahane established Ituran
Florida Corp. and served as its Chief Executive Officer until 2001. Mr. Kahane holds a BA degree in Life Sciences from Tel-Aviv University,
a BA degree in Insurance and an MBA degree from the University of Haifa. Yoav Kahane is the son of Professor Yehuda Kahane..
Mr. Kahane. Mr. Kahane was elected, on December 14, 2022, in annual general shareholders meeting, to serve as an Independent Director
in Class A for additional period until third succeeding Annual General meeting, thereafter.
Yigal
Shani has served as a director of our copany since its acquisition
from Tadiran in 1995. Mr. Shani is an insurance agent and a partner in the insurance agency Tzivtit Insurance Agency (1998) Ltd. together
with Efraim Sheratzky, which provides insurance services to our company. Mr. Shani, has resigned
on March 13, 2014 in order to allow compliance with the provisions of the Israeli Companies Law, which require that the board of directors
to include at least one female and was reappointed on February 9, 2015 to replace Mr. Avner Kurz, as a Class B Director.
Israel
Baron has been serving as an external director of our company since
2003 and is the Chairman of our board’s committees. Mr. Baron served as a director in Poalim Trust Services Ltd., a fully owned
subsidiary of Bank Hapoalim Ltd from 2009 until 2017. In addition, Mr. Baron has been serving as Chief Executive Officer of several public
sector employee retirement and saving plans since 2003. Prior to 2003, Mr. Baron managed an organizational consulting firm, served as
an investment manager in the Isaac Tshuva group during the years 1999 to 2001 and as Chief Executive Officer of Gmulot Investment Company
Ltd. Mr. Baron serves as a director of Quality Baron Management Services Ltd. and until 2004 he served as a director of Brill Shoe Industries
Ltd. Mr. Baron is a certified CPA and holds a BA degree in Economics and Accounting from the Bar-Ilan University in Ramat-Gan, Israel.
Israel Baron was re-elected on December 10, 2020 for additional 3-year term to serve as external director.
Gidon
Kotler is an external director of our company. He was nominated on
April 30, 2014. Prior to his retirement on 2016, Mr. Kotler has been serving as the assets manager of Strauss-Group Ltd., one of Israel’s
largest public companies, since 1997. Prior to that, Mr. Kotler has served for 3 years as the chief executive officer of the Tel-Aviv
New Central Bus Station, and for 14 years as the chief executive officer of the Dizengof Center’s management company. Mr. Kotler
has served as an external director of Elran Real Estate Ltd. from 2007 until 2010. On December 28, 2016, an annual general shareholders
meeting approved the extension of the term of Mr. Gideon Kotler, our external director, for additional three years (beginning April 30,
2017). On December 12, 2019, an annual general shareholder meeting approved additional extension of the term of Mr. Gideon Kotler, our
external director, for additional three years (beginning April 30, 2020), which was extended for an additional three years (beginning
April 30, 2023), in an annual shareholder's general meeting held on December 14, 2022.
Ms.
Tal Sheratzky-Jaffa was until recently a Vice President at Margalit
Startup City, a unique Israeli organization focused on building and creating centers of excellence worldwide. Prior to joining Margalit
Startup City, Ms. Sheratzky-Jaffa was a Strategy and Development Manager at Reality Investment Funds, Israeli value-add real estate fund.
Prior to joining Reality Investment Funds, Ms. Sheratzky-Jaffa was a partner at the Israeli law firm Amit, Pollak, Matalon and Co., specializing
in the fields of investment funds, mergers and acquisitions, high-tech and corporate governance, and an associate at the New York offices
of the US law firm Akin Gump Strauss Hauer Feld. Ms. Sheratzky-Jaffa holds LL.M degree from Columbia University (New York), LL.B
from Haifa University and B.A (economics) from Haifa University, and is a member of the Israeli Bar Association and the New York State
Bar. Ms. Sheratzky-Jaffa is the nephew of Izzy Sheratzky and the cousin of Eyal, Nir and Gil Sheratzky and the daughter of Efraim Sheratzky.
Ms. Sheratzky – Jaffa was elected, on December 14, 2022, in annual general shareholders meeting, to serve as director in Class A
for additional period until third succeeding Annual General meeting, thereafter.
43
Ami
Saranga has been serving as the Deputy Chief Executive Officer of our
company since 2011. Prior to that Mr. Saranga served as our VP Marketing since 2008. Prior to 2008, Mr. Saranga managed the SME division
of Pelephone Communications Ltd., one of Israel’s largest telecommunication network operators. Mr. Saranga holds a BA degree in
Business Administration from Ruppin Academic Center, Israel.
Eli
Kamer has served as Executive Vice President, Finance and Chief Financial
Officer of our company since 1999, after serving as its Finance Department Manager since 1997. Prior such date, Mr. Kamer worked as an
accountant in Fahn Kanne Co., our independent registered public accountant. Mr. Kamer is a CPA and holds a BA degree in Business
Administration from the Israel College of Management and an MBA degree in business administration from Bar Ilan University.
Guy
Aharonov has served as our in-house legal counsel since 1999. Prior
to joining our company, he has worked as an attorney in Cohen Lahat Co. Mr. Aharonov holds LLB and LLM degrees from Tel Aviv University.
Udi
Mizrahi has served as our VP Finance since 2000. On his current position
Mr. Mizrahi serve as a Deputy Chief Executive Officer International Operation and VP of Finance. Mr. Mizrahi is a CPA and holds a BA degree
in accounting and economics from Ruppin Academic Center, Israel.
Shahar
Sheratzky has served in different marketing roles in our company since 2007.
On January 2022 Mr. Shahar Sheratzky was nominated to Vice president, head of our business division. Among his responsibilities are the
marketing, selling and digital fields. Mr. Sheratzky holds a MBA degree in business administration with a specialization in global marketing
from Reichman University, Israel. Mr. Shahar Sheratzky is the nephew of Izzy Sheratzky and the cousin of Eyal, Nir and Gil Sheratzky and
the son of Efraim Sheratzky.
Our articles of association
provide for staggered three-year terms for all of our directors (except our external directors, who are elected in accordance with the
provisions of the Israeli Companies Law). The directors on our board (excluding the external directors) are divided into three classes,
and each class of directors serves for a term of three years, as follows: Izzy Sheratzky, Gil Sheratzky and Zeev Koren (class C), who
were re-elected on December 13, 2021; Nir Sheratzky, Yigal Shani and Yehuda Kahane (class B), who were re-elected on December 10,
2020; and Eyal Sheratzky, Efraim Sheratzky, Tal Sheratzky-Jaffa and Yoav Kahane (class A), who were re-elected on December 12, 2019. This
classification of the board of directors may delay or prevent a change of control of our company.
On December 28, 2016,
an annual general shareholders meeting approved the extension of the term of Mr. Gideon Kotler, our external director, for additional
three years (beginning April 30, 2017), which was extended for an additional term of three years commencing from April 30, 2023. On December
10, 2020, an annual general and special shareholders meeting approved the re-election of Mr. Israel Baron, our external director,
for additional three years.
44
Diversity
of the Board of Directors
The table below provides certain information
regarding the composition of our Board. Each of the categories listed in the below table has the meaning as it is used in Nasdaq
Rule 5605(f) and related instructions.
Board
Diversity Matrix (As of April 10 , 2023)
|
Country of Principal Executive Offices |
Israel | ||||
|
Foreign Private Issuer |
Yes | ||||
|
Disclosure Prohibited under Home Country Law |
No | ||||
|
Total Number of Directors |
12 | ||||
|
Part I: Gender Identity |
Female |
Male |
Non-Binary |
Did Not Disclose
Gender | |
|
Directors |
1 |
11 |
|
| |
|
Part II: Demographic Background |
| ||||
|
Underrepresented Individual in Home Country Jurisdiction |
0 | ||||
|
LGBTQ+ |
0 | ||||
|
Did Not Disclose Demographic Background |
0 | ||||
Shareholders Agreement
and Articles of Association of Moked Ituran Ltd.
Pursuant to Moked Ituran
Ltd's articles of association and agreement (as amended) between its shareholders, there is a mechanism in place with regard to directors
to be designated and voted for election by Moked Ituran Ltd in each of our annual shareholdings meeting for the relevant class of directors
(four directors in class A and B and three in class C). The aforementioned is in effect only for as long as Moked Ituran Ltd holds at
least 15% of our issued and outstanding share capital.
| B. |
COMPENSATION |
The aggregate direct
compensation we paid to our directors who are not officers for their services as directors as a group for the year ended December 31,
2022 was approximately $ 294,000. Directors are reimbursed for expenses incurred in connection with their attendance of board or committee
meetings. The compensation payable to external directors is determined in accordance with regulations promulgated under the Israeli Companies
Law. See Item 6.C - Board Practices under the caption “External directors” below. Our audit committee and board of directors
approved compensation for Mr. Ze’ev Koren, for serving as the Chairman of our board of directors, and for Mr. Yoav Kahane, for serving
as a member of our board committees, such that they shall be compensated in the same manner as our external directors are compensated,
annually and per meeting, in accordance with the Companies Regulations (Rules for the Compensation and Expenses of an External Director),
2000-5760. In 2022, we paid the sum of NIS 486,000 (approximately $ 145,000) to our external directors, NIS 200,000 (approximately $ 60,000)
to Mr. Ze’ev Koren, NIS 174,000 (approximately $ 52,000) to Mr. Yoav Kahane, NIS 127,000 (approximately $ 38,000) to Ms. Tal
Sheratzky-Jaffa. We do not have any agreements with directors providing for benefits upon termination of their respective services as
such.
45
The aggregate costs to
the Company of the compensation to our Co-Chief Executive Officers in 2022 were $ 3.2 million. The aggregate compensation paid to all
of our officers as a group during 2022 was approximately $ 10.7 million. In 2022 we paid an aggregate amount of $ 70,000 to one
director who provided us with services. The above compensation amounts include amounts attributable to automobiles made available to our
officers and other fringe benefits commonly reimbursed or paid by companies in Israel. Employee directors do not receive additional fees
for their services as directors.
The following table sets
forth the breakdown of the compensation of our 5 highest paid officers in 2022 according to our 2022 financial reports:
|
Management fees |
Wage |
Social components |
Car value |
Bonus (results based) |
Bonus (Share yield based) |
Total |
||||||||||||||||||||||
|
Compensation components (in thousand US Dollars) |
||||||||||||||||||||||||||||
|
Izzy Sheratzky (President)
|
824 |
- |
- |
- |
1,152 |
- |
1,976 |
|||||||||||||||||||||
|
Eyal Sheratzky (Co-Chief Executive Officer |
641 |
- |
- |
- |
938 |
- |
1,579 |
|||||||||||||||||||||
|
Nir Sheratzky (Co-Chief Executive Officer) |
641 |
- |
- |
- |
938 |
- |
1,579 |
|||||||||||||||||||||
|
Gil Sheratzky (CEO of our Subsidiary. International Activity
and Business Development Officer) |
446 |
- |
- |
- |
670 |
- |
1,116 |
|||||||||||||||||||||
|
Shachar Sheratzky (Vice president, head of our business division)
|
183 |
32 |
31 |
220 |
- |
466 |
||||||||||||||||||||||
|
Total of our 5 highest paid officers $ 6,716,000
|
||||||||||||||||||||||||||||
46
During 2022, we set aside $ 486,000 for the
benefit of our officers for pension, retirement or similar benefits. We do not set aside any funds for the benefit of our directors who
are not employees for any pension, retirement or similar benefits.
All numbers in this section are rounded to
the nearest thousand.
During 2022, Messrs.
Izzy Sheratzky, Eyal Sheratzky, Nir Sheratzky and Gil Sheratzky provided their services as President, Co-Chief Executive Officers and
CEO of our Subsidiary International Activity and Business Development Officer respectively, as independent contractors pursuant
to services agreements, which were adopted by our shareholders meeting in January 2014, which terms correspond to our compensation policy
as described below.
On December 10, 2020
our annual general meeting of shareholders approved the extension of service agreements as independent contractors, of Messrs. Izzy Sheratzky,
Eyal Sheratzky, Nir Sheratzky and Gil Sheratzky for a period of additional three years.
For further details concerning
such terms of service, please see Item 7.B – Related Parties Transactions under the caption “Transactions with our directors
and principal officers.”
In 2006, our compensation
committee has devised a bonus scheme pursuant to which some of our officers and employees received shares of our profit before tax on
a consolidated basis, based on their seniority, level of global and domestic involvement, contribution to our operations and other criteria
set by the compensation committee. In 2010, our compensation committee resolved that additional managers shall be entitled to receive
bonuses under this bonus scheme and that some of the grantees should continue to receive a bonus based on our consolidated results and
some should receive a bonus based only on our solo financial statements. During 2022, we paid a total of $ 1,037,000 to our officers and
employees pursuant to the above bonus schemes.
Our
compensation policy for office holders
In December 2012, amendment
no. 20 to the Israeli Companies Law became effective. Among other things, this amendment requires Israeli public companies to set forth
their policy regarding their office holders’ terms of office, including fixed compensation, target-based incentives, equity awards,
severance and other benefits. The amendments also set forth the considerations that should be applied when devising a compensation policy
for office holders.
The term “office
holder” is defined in the Israeli Companies Law, to mean the chief executive officer, chief business officer, deputy chief executive
officer, vice chief executive officer, any other person fulfilling such position even if his title is different, as well as a director
or a manager directly subordinate to the chief executive officer.
The compensation policy
must be approved every three years by the board of directors, after considering the recommendations of the compensation committee; and
generally requires the approval of the company’s general meeting of shareholders by a special majority of shareholders who are not
controlling shareholders and who do not have a personal interest in the approval of the policy; or, alternatively, that the non-controlling
shareholders and shareholders who do not have a personal interest in the matter who are present and vote against the policy hold two percent
or less of the voting power of the company.
The compensation policy
does not intend to amend any officer’s existing terms of office; nor to bestow any officer with a right to receive the compensation,
or any element thereof set forth therein. However, generally, once the compensation policy is approved, all future terms of service of
office holders should conform to its provisions. The specific terms of office of each officer shall be separately determined in accordance
with the relevant provisions of the Israeli Companies Law and the regulations promulgated thereunder.
Our general shareholders
meeting approved our compensation policy for office holders on October 31, 2013, and on November 7, 2016, and later on December 14, 2022
approved a renewal of the compensation policy . The policy applies to office holders of the Company (see definition above),
who serve as the Company’s President, Chief Executive Officer(s) and other executives who are deemed office holders of the
Company, as well as office holders of the Company’s Israeli wholly owned subsidiaries, provided they report to the chief executive
officer. The policy also applies to directors of the Company.
Our compensation policy
for office holders was formulated in view of our belief that our business success is the result of the excellence of our human resources
and their devotion to the achievement of our company’s goals. Therefore, it is aimed at offering our officers with a competitive
compensation package that will align their incentives with those of our company and our shareholders, and at motivating them to achieve
the goals of our company, while avoiding undue pressure to take excessive risks. Among other factors, our compensation committee and board
of directors have considered, as required by amendment no. 20 to the Israeli Companies Law and as reflected in the policy: (a) the advancement
of the company’s goals, its business plan and its policy with a long-term view; (b) the creation of appropriate incentives for office
holders, considering the company’s risk management policy; (c) the size of the company and the nature of its business; (d) with
respect to variable components of the terms of office – the contribution of the office holders to the achievement of the company’s
goals and to the maximization of its profits, with a long-term view and in accordance with the position of the office holder.
The compensation policy
incorporates all matters required to be included in a compensation policy as mandated by amendment 20 to the Israeli Companies Law, including
(without limitation): (a) the requirement to consider the office holders’ education, skills, professional experience, expertise,
position and past compensation agreements; (b) consideration of the ratios between overall compensation of the officers and the average
and median salary of the other employees of the Company; (c) the board’s right to reduce variable compensation; (d) the determination
of a maximum period for advanced and transition periods upon termination of services; (e) basing variable components of compensation on
key performance indicators and on measurable criteria; (f) determining the ratio between fixed and variable components of compensation
and setting forth caps on the amount of variable compensation payable; and (g) a claw-back provision with respect to restatements of financial
statements. For further details, see our full compensation policy for office holders, which is filed herewith as Exhibit 4.24 under Item
19 – Exhibits.
47
| C. |
BOARD PRACTICES |
Board of Directors
Pursuant to our articles
of association as presently in effect, our board of directors generally consists of twelve directors, including at least three independent
directors in accordance with the listing rules of Nasdaq concerning the composition of audit committees, of whom two directors are external
directors as required by Israeli law. Our independent directors, as such term is defined under the Nasdaq listing rules, are Mr. Baron,
Mr. Kotler, Mr. Koren, Mr. Yoav Kahane and Ms. Tal Sheratzky - Jaffa, Pursuant to our articles of association, other than the external
directors, for whom special election requirements apply (see “External directors” below), our directors are elected, by majority
of our shareholders and may be removed by special majority. However, see Item 6.A – Directors and Senior Management for a description
of our staggered board and the shareholders agreement and articles of association of Moked Ituran Ltd. Our board of directors may at any
time and from time to time appoint any other person as a director to fill a vacancy until the general meeting of shareholders in which
the term of service of the replaced director was scheduled to expire.
Pursuant to the Israeli
Companies Law, our chairman convenes and presides over the meetings of the board. In addition, any two directors may convene a meeting
of the board of directors, as well as a director who becomes aware of a company’s matter that allegedly involves a breach of the
law or an improper business conduct. A quorum consists of a majority of the members of the board, and decisions are taken by a vote of
the majority of the members present. Our articles of association provide that such quorum will in no event be less than two directors.
We are incorporated in
Israel and are therefore subject to the provisions of the Israeli Companies Law, including certain corporate governance provisions. Our
ordinary shares are listed on the Nasdaq Global Select Market (Our shares were delisted from the Tel Aviv stock exchange on May 25, 2016,
for additional information see Item 9.A – Price History of Our Shares), and we are therefore subject to certain provisions of the
Israeli securities laws, the U.S. securities Laws and the Nasdaq listing rules. See also Item 16.G. – Corporate Governance below
for additional information concerning our compliance with the Nasdaq listing rules and exemptions therefrom.
According to our Articles
of Association, some of our officers and employees (including the chairman of our board and at least one third member of the Board) should
be citizens and residents of Israel and receive clearance approval from the Israeli General Security Service. All the members of our board
comply with these requirements.
On February 26, 2017
our board has adopted an Internal Compliance policy, which following review of our internal process included a comprehensive update of
our internal regulations and codification of our internal regulations, all pursuant to the applicable Israeli laws.
External directors
Under Israeli law, the
board of directors of companies whose shares are publicly traded are required to include at least two members who qualify as external
directors. External directors are to be elected by a majority vote at a shareholders’ meeting, provided that either:
| ◾ |
Such majority includes at least the majority of the shares held by all non-controlling shareholders or
those having personal interest in the nomination, except personal interest which is not resulting from connections with controlling shareholders,
present and voting at such meeting; or |
| ◾ |
The total number of shares voted against the election of the external director and held by shareholders
other than controlling shareholders or those having personal interest in the nomination, except personal interest which is not resulting
from connections with controlling shareholders, must not exceed 2% of the shares whose holders are entitled to vote at any meeting of
shareholders. |
External directors are
generally elected to serve an initial term of three years and may be re-elected to serve in that capacity for two additional three-year
terms; however, companies whose securities are listed on recognized foreign exchanges, such as Nasdaq, may extend the service terms of
their external directors for additional unlimited terms, each of no more of than three years , subject to the approval of the audit committee
and the board of directors that such extension is for the benefit of the company in view of the directors’ expertise and special
contribution to the operation of the board and its committees and these reasons together with the term served by the external director
were presented to the shareholders prior to their approval (see the Israeli Companies Regulations (Allowances for Companies with Securities
Listed on an Exchange Outside Israel), 2000-5760). The appointment of an external director for additional terms may be brought for the
approval of the shareholders either by the board of directors or by a shareholder that holds at least 1% of the company’s voting
rights, provided that the nominee is not a related or competing shareholder (as defined below) or a relative thereof, at the time of the
appointment, and does not have an affinity to such shareholder (as defined below) at the time of the appointment or the two years preceding
such appointment. The term “related or competing shareholder” means the shareholder who proposed the appointment or a 5% shareholder
of the company if, at the time of the appointment, his controlling person or a company controlled by either of them, has business relations
with the company, or if he, his controlling person or a company controlled by either of them are competitors of the company. The term
“affinity” means the on-going existence of work relationship, business or professional relationship or control and the service
as an officer.
48
External directors may
generally be removed from office by the same majority of shareholders required for their election or by a court, in each case, only under
limited circumstances, including if they cease to meet the statutory qualification for their appointment or violate the duty of loyalty
to the company.
If at the time of the
appointment of an external director, all directors who are not controlling persons or their relatives are of the same gender, then the
elected external director must be of the other gender.
Each committee of the
board of directors that is vested with an authority of the board must include at least one external director, except that the audit committee
and compensation committee must include all external directors then serving on the board of directors. The Israeli Companies Law prohibits
external directors from receiving, directly or indirectly, any compensation other than for services as an external director pursuant to
the provisions and limitations set forth in the applicable regulations promulgated under the Israeli Companies Law.
Israeli law provides
that a person is not qualified to serve as an external director if he is a relative (as defined in the Israeli Companies Law) of the company’s
controlling person, or if, at the time of his/her appointment and/or at any time during the two years preceding his or her appointment,
that person, a relative, partner or employer of that person, or any entity under that person’s control, has or has had an affinity
(as defined above) to the company, its controlling person or its relative or to any entity that, as of the date of appointment, or at
any time during the two years preceding that date, is controlled by the company or by its controlling person. In addition, no person may
serve as an external director if that person’s professional activities create, or may create, a conflict of interest with that person’s
responsibilities as a director or otherwise interfere with that person’s ability to serve as a director; and, a person already serving
as a director of one company may not be appointed as an external director of the company if at that time a director of the company is
serving as an external director of the first company. In addition, a company, controlling shareholder and any other entity controlled
by the controlling shareholder may not grant to such external director, its spouse or child, any benefits, directly or indirectly, and
the external director, its spouse or child may not be appointed to serve in any position, may not be employed by and may not, directly
or indirectly, render any professional services to the company, such controlling shareholder or any other entity controlled by the controlling
shareholder, during the first two years following such external director’s termination of tenure of office, and with respect to
a relative who is not the external director’s spouse or child – during the first year following such termination.
Mr. Israel Baron is now
serving his seventh term as an external director of the Company, who was reelected on of December 10, 2020 for a term of 3 years. Mr.
Gideon Kotler was appointed on April 30, 2014 by an extraordinary shareholders meeting as our new external director, following the death
of our former external director, Dr. Orna Ophir, in January 2014 and was reelected by our general shareholders meeting on December 28,
2016, for his second term, of additional 3 years term starting from April 30, 2017, which was later extended for additional term of three
years beginning April 30, 2020, and thereafter extended for an additional term of three years commencing from April 30, 2023.
Audit committee
Under Israeli law, the
board of directors of a public company must appoint an audit committee. The audit committee must comprise of at least three directors,
including all of the external directors and the chairman of the audit committee must be an external director. In addition, the majority
of the members of the audit committee must be independent directors. Under the Israeli Companies Law, a director is considered “independent”
if he/she is an external director or if he/she meets the qualifications of an external director, has not served as a director of the company
for over 9 consecutive years, and has been classified as such. Under Israeli regulations a director who serves more than 9 consecutive
years as a director may still be deemed as "independent director" provided the Audit committee and thereafter the board of directors resolved
that his-her tenure as a director for an extend term is for the benefit of the company based on his/her expertise and unique contribution
to the board and its committees. Our Audit committee and board of directors so resolved with regard to Messrs. Israel Baron Gidon Kotler.
The audit committee may not include the chairman of the board, any director who is employed by the company or regularly provides services
to the company (other than as a board member), a controlling shareholder or any relative of such person. All audit committee decisions
must be approved by a majority of the committee members of which the majority of members present are independent directors. Furthermore,
a person who is not eligible to serve on the audit committee is restricted from participating in its meetings and votes, unless the chairman
of the audit committee determines that such person’s presence is necessary in order to present a certain matter, provided however,
that the company employees who are not controlling shareholders or relatives of such shareholders may be present in the meetings but not
in the actual votes and likewise, company counsel and secretary who are not controlling shareholders or relatives of such shareholders
may be present in meetings and decisions of such present is requested by the audit committee.
49
Our audit committee must
also meet the requirements of the Nasdaq listing rules concerning audit committees.
Our board of directors
has formed an audit committee that is empowered, among other things, to exercise the powers of the board of directors concerning our accounting,
reporting and financial control practices. Our audit committee operates in accordance with a charter, which complies with the provisions
of the Israeli Companies Law and the Nasdaq listing rules. The members of the audit committee are currently Messrs. Israel Baron, Gidon
Kotler and Yoav Kahane, all of whom are independent as required of members of the audit committee under the Nasdaq listing rules. Mr.
Gidon Kotler was appointed on April 30, 2014 to replace Dr. Orna Ophir who passed away in January 2014. Our board of directors has determined
that Mr. Israel Baron possesses financial sophistication as required by Rule 5605(c)(2) under the Nasdaq listing rules, and that both
Mr. Baron and Mr. Kotler possess accounting and financial expertise as defined by Israeli regulations.
Pursuant to the Israeli
Companies Regulations (Provisions and Conditions regarding the Financial Statements’ Authorization Process), 2010, a reporting entity,
except for a reporting entity that is subject to Chapter E(3) of the Israeli Securities Act, is required to establish a committee of the
board of directors for the examination of financial statements. Since we are a reporting entity under Chapter E(3), we are not obliged
to constitute a committee for the examination of financial statements; and therefore, commencing with the financial statements for the
first quarter of 2013, we ceased holding meetings of the examination of financial statements committee; and instead, our audit committee
considers the financial statements prior to their approval by the board.
Pursuant to the 22nd amendment
in the Israeli Company law, which was set to define new rules to approve transaction of the public company with its controlling shareholders,
or the transaction in which the controlling shareholder has interest. The law requires from our Audit committee to set up rules to define
the criteria for classification of transactions, which are neither Insignificant Transactions nor extraordinary transactions, and their
procedures of approval that will be determined per each year in advance. In addition, the law requires from the Audit Committee to set
methods of examining transactions with the controlling shareholders, in order to enable their classification and their comparison to the
conditions in the free market. The Audit Committee resolved on September 29, 2014 as follows:
| 1. |
Transaction that is neither extraordinary, nor insignificant. |
Definition: the relevant
criteria that is calculated for the transaction is such transaction which is higher than 0.25% of the equity of the company according
to its last combined financial reports, or higher than 1% of average net revenue of the past 3 years of the company in their absolute
value, in the last 2 calendar years prior to the date of the transaction is being reported according the last financial report of the
company.
Methods of approval:
approval by the senior management of the company (from vice chief executive officer and higher) and report to the Board. The following
transactions will require also the approval of the Audit Committee:
| (1) |
Transaction which is higher than 4.5% of the equity of the company according to its last combined financial
reports which were published prior to the approval of the transaction. |
| (2) |
Transaction that involves risks or significant exposure beyond mere monetary liabilities or obligations.
|
| (3) |
Transaction in which the company enters a new activity field or exits from an existing activity field.
|
| 2. |
Insignificant transaction: |
Definition: such transaction
which is not higher than 0.25% of the equity of the company according to its last combined financial reports or is not higher than 1%
of average net revenue of the past 3 years of the company in their absolute value, in the last 2 calendar years prior to the date of the
transaction is being reported according to the last financial report of the company.
Methods of approval:
Approval by the management of the company or by the officer in charge in the company (vice chief executive officer, other officer or other
in charged body in the company according to the decisions of the company).
50
| 3. |
General rules: |
| (1) |
Any transaction with a controlling shareholder or any transaction that a controlling shareholder has
an interest in, will be brought before the Audit Committee, which will determine its type and decide on case by case basis on defining
it as an insignificant transaction or other kind of transaction, and will decide on its review and on its approval. |
| (2) |
According to the adopted criteria, transactions with Tzivtit Insurance Agency (1998) Ltd. and with Rinat
Yogev Nadlan Ltd. shall be classified as insignificant transactions. If the extent of such transactions will remain similar during the
following years, our management shall be deemed qualified to approve such transactions and to report them to the Audit Committee.
|
| (3) |
Every year the criteria for classifying transactions as set up above shall be brought for re-approval
by the Audit Committee. |
Compensation committee
The Israeli Companies
Law mandates the appointment of a compensation committee comprising of at least three directors. The compensation committee must include
all of the external directors, who shall constitute the majority of the members thereof, and its remaining members shall be directors
whose terms of service comply with the provisions promulgated concerning the remuneration of external directors. The chairman of the committee
must be an external director. The members of the Compensation committee are currently Israel Baron, Gideon Kotler and Yoav Kahane. Mr.
Gidon Kotler was appointed on April 30, 2014 to replace Dr. Orna Ophir who passed away in January 2014. All members of our compensation
committee are independent directors as defined by the Nasdaq listing rules, and all of whom meet the composition requirements under the
Israeli Companies Law. Since February 2016, the Israeli Companies Law permits that Audit Committee can serve also as a Compensation committee,
provided that it will comply with requirements of the Compensation Committee as explained above.
Under the Israeli Companies
Law, the compensation committee is responsible for: (i) making recommendations to the board of directors with respect to the approval
of the compensation policy for office holders 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 of office holders; and (iv) determining whether or
not to exempt a transaction with a candidate for chief executive officer from shareholders' approval.
Furthermore, our compensation
committee oversees, on behalf of the Board, the management of Ituran’s compensation and other human resources-related issues and
otherwise carries out on behalf of the Board its responsibilities relating to these issues. The committee is responsible for establishing
annual and long-term performance goals and objectives for our executive officers. In addition, as required under the Nasdaq listing rules,
our compensation committee is responsible for the appointment, compensation and oversight of the work of any compensation consultant,
legal counsel and other adviser retained by the committee; and may retain such advice only after taking into account the considerations
set forth in the Nasdaq listing rules in this respect. Our compensation committee operates in accordance with a charter, which complies
with the provisions of the Israeli Companies Law and the Nasdaq listing rules.
According to our compensation
committee charter, the compensation committee, among its other duties, is responsible on reviewing the disclosure in this form which concerns
the Compensation Policy and the sections describing the Terms of Service of Officers, controlling persons and their relatives.
Internal auditor
Under the Israeli Companies
Law, the board of directors of a public company must appoint an internal auditor nominated by the audit committee. An internal auditor
may not be:
| ◾ |
a person (or a relative of a person) who holds more than 5% of the company’s shares or voting rights;
|
| ◾ |
a person (or a relative of a person) who has the power to appoint a director or the general manager of
the company; |
| ◾ |
an executive officer, director or other affiliate of the company; or |
| ◾ |
a member of the company’s independent accounting firm. |
The role of the internal
auditor is to examine, among other things, the compliance of the company’s conduct with applicable law and orderly business procedures.
Our internal auditor in 2020 was Shimon Yarel, CPA, who has served as our internal auditor since January 1999. On March 2, 2021,
the audit committee and the board of directors approved the appointment of Ms. Alexandra Meron Yarel as an internal auditor
instead of Mr Shimon Yarel, and that is due to his retirement.
51
| D. |
EMPLOYEES |
The following table sets
forth the total number of our employees at the end of each of the past three years, and a breakdown of such employees by main category
of activity and by geographic location:
|
|
Year Ended December 31, |
|||||||||||
|
|
2022 |
2021 |
2020 |
|||||||||
|
By area of activity: |
||||||||||||
|
Control Center
|
385 |
520 |
568 |
|||||||||
|
Research and Development
|
159 |
136 |
137 |
|||||||||
|
Sales and Marketing
|
92 |
84 |
71 |
|||||||||
|
Technical support and IT
|
501 |
489 |
494 |
|||||||||
|
Finance, Administration and Management
|
356 |
375 |
351 |
|||||||||
|
Private enforcement and operations
|
1,075 |
1,041 |
1,015 |
|||||||||
|
Manufacturing
|
168 |
169 |
125 |
|||||||||
|
Total
|
2,736 |
2,814 |
2,761 |
|||||||||
|
|
||||||||||||
|
By geographic location (out of total):
|
||||||||||||
|
Israel
|
795 |
864 |
855 |
|||||||||
|
Brazil
|
861 |
782 |
820 |
|||||||||
|
Others
|
1,080 |
1,168 |
1,086 |
|||||||||
|
Total
|
2,736 |
2,814 |
2,761 |
|||||||||
We consider our relations
with our employees to be satisfactory and have no ongoing major labor disputes or material labor-related litigation. Our employees are
subject to local labor laws and regulations, which in some countries are more stringent than others. Some of our senior executives also
have employment agreements that may grant them rights in excess of those provided by the applicable laws.
Israel
Our employees in Israel
are subject to Israeli labor laws and regulations and employment customs. The applicable labor laws and regulations principally concern
matters such as paid annual vacation, paid sick days, length of the workday, payment for overtime and severance pay. Israeli law generally
requires severance pay equal to one month’s salary for each year of employment upon retirement or death of an employee or termination
of employment without cause. Furthermore, Israeli employees and employers are required to pay predetermined sums to the National Insurance
Institute, which is similar to the United States Social Security Administration. Since January 1, 1995, these amounts also include payments
for national health insurance.
Israeli labor laws impose
on employers increased liability, including monetary sanctions and criminal liability, in cases of violations of certain labor laws and
certain violations by contractors providing maintenance, security and cleaning services.
Brazil
Our employment agreements
in Brazil are subject to Brazilian labor laws and regulations, to collective labor agreements or bargaining arrangements with unions and
contract. The laws and regulations in Brazil govern almost all aspects of an employment relationship and do not leave much room to be
negotiated with the employee. Still, employment contracts create obligations to the parties if they are in compliance with the law. The
Labor Code mainly governs the employees’ right to paid annual vacation, paid sick days, the maximum length of a workday, minimum
payment for overtime and statutory severance pay. Brazilian law generally requires severance pay equal to 40% of the balance of the employee’s
FGTS account (a mandatory fund to guarantee severance and unemployment). The FGTS can also be withdrawn when the employee retires, dies
or his employment is terminated without cause, among others. Brazilian employers are required to purchase health insurance for employees
only in the event it is set forth by the applicable collective labor agreement, contract or company policy, and are required to cover
employees’ food and travel costs whenever a business trip is required, and to make deposits into a Guarantee Severance Fund (the
so-called “FGTS”). Furthermore, Brazilian employees and employers are required to make contributions to the National Insurance
Institute (“INSS”), similar to the United States Social Security Administration. Our collections to the National Insurance
Institute amount to 34.8% to 39.8% of the payrolls, out of which 8% to 11% (limited to R$5,839.45 of individual salary) corresponds to
contributions by the employees deducted from salaries and 26.8% is the fixed part we pay. Our contribution of 26.8% includes mandatory
contribution to the Public Insurance for Labor Accidents and Diseases (SAT). According to Decree Law 6957/2009 such portion, which varies
from 1% to 3% of payroll, should be multiplied by another factor (FAP) from 0.5 to 2 in order to reduce or increase our burden to reflect
statistics of occupational accidents and diseases in our business.
52
All of our employees
in Brazil, excluding the chief executive officer, some directors (VPs) and some IT providers are represented by a labor union and the
employees’ mandatory contributions to their union are paid by us. The law no. 13.467/2017, which entered into force on November
11, 2017, made the labor union contribution optional (i.e., discounted only upon the employees’ consent).
Argentina
Our employees in Argentina
are subject to Argentine labor laws and regulations and other special practices and employment customs. The laws and regulations in Argentina
control all aspects of labor relations and designate a general Employment Contract with which all employees and employers must comply.
This general Employment Contract adopts by reference the provisions of the Labor Law which principally concerns matters such as paid annual
vacation, paid sick days, the length of the workday, and payment for overtime and severance pay.
Argentine law generally
requires severance pay equal to one month per year of service upon the termination of employment without a justified cause.
Argentine
employers are also required to contribute for the following items: (a) Pension funds 20.70 % (b) health insurance for employees 6% (c)
occupational accident insurance 1.56% for January to December 2023 and 1,74% since December 2021 on %; and (d) Retirement fund insurance
2.5% (only this item is for Union Employees). All the rates should be applied on the gross salary. Those
rates are the effective ones in December 2022.
Our employees in Argentina,
excluding the chief executive officer and several other employees, are members of a labor union and the employee member fees are paid
by them.
United States
We have no collective
bargaining agreements with any of our employees in the United States and none of our employees are members of a union.
Mexico
The hiring of employees
in Mexico is subject to the regulations of the Federal Labor Law, the Social Security Law, the Infonavit Law, the Income Tax Law, Afore,
and Infonacot In these laws both workers and employers have obligations and rights; the percentage corresponding to the employer is 40%
in Payroll and Employee Tax depending on their level of income. The working relationship between employer and employee is regulated by
the Individual work contract In Mexico we have several modalities of types of Labor Contract, according to the permanence and type of
contract, example: Contract for a Determined Time, Permanent Contract, and Contract for Determined Work. In these Contracts the conditions
of the work are specified. Within our company we also have working relationships through outsourcing, where our employees have the same
rights and obligations and adhere to the same internal and legal guidelines. Contract terminations without cause by the employer require
the payment of 3 months' salary as a concept of damages.
Ecuador
Our employees in Ecuador
are subject by the Ecuadorian Labor Code. The Labor Code provides for a 40-hour work week, 15 calendar days of annual paid vacation, restrictions
and sanctions for those who employ child labor, general protection of worker health and safety, minimum wages and bonuses, maternity and
paternity leave, and employer-provided benefits. The 2008 Constitution bans child labor, requires hiring workers with disabilities, and
unpaid internships are not permitted in Ecuador. The law also mandates that employees’ thirteenth and fourteenth month bonuses,
which are required by law, be paid in instalments throughout the year instead of in lump sums. Employees have the option to opt out of
this change and continue to receive the payments in lump sums. The law eliminates fixed-term employee contracts and replaced them with
indefinite contracts, which shortens the allowable trial period for employees to 90 days. The Law for Labor Justice and Recognition of
Work in the Home, which included several changes related to labor and social security, took effect in April 2015. Workers in the private
sector have the constitutional right to form trade unions and local law allows for unionization of any company with more than 30 employees.
Private employers are required to engage in collective bargaining with recognized unions. The Labor Code provides for resolution of union´s conflicts
through a tripartite arbitration and conciliation board process. The Code also prohibits discrimination against union members and requires
that employers provide space for union activities.
53
Colombia
Our employees in Colombia
are subject to Colombian labor laws and regulations. All employees have an indefinite term employment contract and the law determines
a minimum monthly salary (SMM), which is increased annually by the government and used to calculate labor obligations. 48 hours are the
maximum hours for a week. All employees are affiliated with the Social Security System (Health, Pension and Occupational Risks), a percentage
is paid by the company and the other by the employee, the calculation depends on the salary. The law determines additional benefits called
social benefits payable by the company: Holidays: 15 working days for each year worked; Premium corresponds to the payment of 15 days
of salary per semester worked or fraction; Unemployment corresponds to the payment of 30 days of salary per year worked or fraction; Unemployment
interest corresponds to 12% of severance pay; Employees who earn less than 2 SMM must be given 3 times a year clothing and footwear or
equivalent in bonuses. Termination of employment relationship by the company without a justified reason, is coupled with compensation
to the employee. Additionally, for every 20 employees, the company must hire an apprentice who will receive financial support from 1 SMM,
and who will be employed for a period of 6 months. Currently the company doesn't have any unionized employee. For year 2022, Income Tax
raises to 35%, as a result of tax reform approved by Colombia congress on 2021 (2021 income tax rate was 31%).
| E. |
SHARE OWNERSHIP |
The
following sets forth, as April 10, 2023 the
share ownership of our directors and executive officers listed in Item 6.A above. All of the information with respect to beneficial ownership
by our directors and executive officers has been furnished by the respective director or executive officer, as the case may be.
|
Name of Director/Officer (1) |
Number of Ordinary Shares Beneficially Owned (2) |
Percentage of beneficial ownership (3) |
||||||
|
Izzy Sheratzky (4)
|
4,077,317 |
20.27 |
||||||
|
Professor Yehuda Kahane (5)
|
1,451,137 |
7.22 |
||||||
|
Zeev Koren
|
- |
- |
||||||
|
Efraim Sheratzky (6)
|
219,158 |
10.9 |
||||||
|
Yigal Shani (7)
|
225,802 |
11.23 |
||||||
|
Eyal Sheratzky
|
- |
- |
||||||
|
Nir Sheratzky
|
- |
- |
||||||
|
Gil Sheratzky
|
- |
- |
||||||
|
Yoav Kahane
|
- |
- |
||||||
|
Tal Sheratzky-Jaffa
|
2,403 |
* |
0.01 |
* | ||||
|
Israel Baron
|
- |
- |
||||||
|
Gidon Kotler
|
105 |
* |
* |
|||||
|
Ami Saranga
|
- |
- |
||||||
|
Eli Kamer
|
- |
- |
||||||
|
Guy Aharonov
|
- |
- |
||||||
|
Udi Mizrahi
|
- |
- |
||||||
|
Shahar Sheratzky
|
- |
- |
||||||
* Own less than one percent of our shares.
| (1) |
This table includes only current directors and officers that beneficially hold our shares. |
| (2) |
Beneficial ownership’ is determined in accordance with the rules of the Securities and Exchange
Commission (as defined in Rule 13d – 3 under the Securities Exchange Act of 1934) and shares deemed beneficially owned by virtue
of the right of any person or group to acquire such ordinary shares within 60 days are treated as outstanding only for the purposes of
determining the percent owned by such person or group. To our knowledge, the persons and entities named in the table above are believed
to have sole voting and investment power with respect to all ordinary shares shown as owned by them, except as described below.
|
54
| (3) |
Amounts in
this column are based on 23,475,431 ordinary shares issued as of April 10,
2023, less 3,366,934 treasury shares held by us. |
| (4) |
Shares beneficially owned include: (a) 4,075,952 shares owned by Moked Ituran Ltd., which Mr. Sheratzky
is deemed to beneficially owns due to his shared voting and investment power over such shares in accordance with those certain shareholders
agreement, dated May 18, 1998 as amended on September 6, 2005 and on September 17, 2014, among Moked Ituran and its shareholders, which
we refer to as the Moked Shareholders Agreement. For further information concerning the Moked Shareholders Agreement see the discussion
under Item 6.A. – Directors and Senior Management under the caption “Shareholders Agreement and Articles of Association of
Moked Ituran Ltd.” above; (b) 1,365 shares that are directly held by Mr. Sheratzky’s wife, Maddie Sheratzky. |
| (5) |
Shares beneficially owned include: (a) 13,264 shares directly owned by Professor Kahane jointly with
his wife, Rivka Kahane;(b) 5,782 shares owned by Yehuda Kahane Ltd., which Professor Kahane may be considered to beneficially own by virtue
of his shared voting and investment control of the company through his 50% shareholdings thereof, the other 50% being owned by his wife,
Rivka Kahane; and (c) 1,432,091 shares owned by Moked Ituran Ltd., which Professor Kahane may be considered to beneficially own by virtue
of his right to direct the disposition of such shares in accordance with Moked’s articles of association. Professor Kahane has shared
voting and investment control over Yehuda Kahane Ltd., a holder of 35.13% of the shares of Moked Ituran. |
| (6) |
Shares beneficially owned include: (a) 3,356 shares directly owned by Efraim Sheratzky, (b) 18,500 shares
owned by Tzivtit Insurance Agency (1998) Ltd., which Efraim Sheratzky may be considered to beneficially own by virtue of his shared voting
and investment control over such shares through his 50% ownership thereof, the other 50% of the shares held by Yigal Shani, and (c) 206,552
shares owned by Moked Ituran, which Mr. Sheratzky may be considered to beneficially own by virtue of his right to direct the disposition
of such shares in accordance with Moked’s articles of association. Mr. Sheratzky may be considered to beneficially own such shares
by virtue of his sole voting and investment control over his wholly owned G T.S.D. Holdings Ltd, the holder of 3.75% of Moked’s
shares. |
| (7) |
Shares beneficially owned include: (a) 10,000 shares directly owned by Yigal Shani, (b) 18,500 shares
owned by Tzivtit Insurance Agency (1998) Ltd., which Yigal Shani may be considered to beneficially own by virtue of his shared voting
and investment control over such shares through his 50% ownership thereof, the other 50% of the shares held by Efraim Sheratzky, and (c)
206,552 shares owned by Moked Ituran, which Mr. Shani may be considered to beneficially own by virtue of his right to direct the disposition
of such shares in accordance with Moked’s articles of association. Mr. Shani may be considered to beneficially own such shares by
virtue of his sole voting and investment control over his wholly owned G.N.S. Holdings, the holder of 3.75% of Moked’s shares.
|
| ITEM 7. |
MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS |
| A. |
MAJOR SHAREHOLDERS |
The following table shows
the number of our ordinary shares beneficially owned by (a) the shareholders known to us as of April 10, 2023, to beneficially own more
than 5% of our outstanding ordinary shares and (b) all of our directors and executive officers as a group.
Please also see Item
6.E above.
There are no shares underlying
options or warrants held by such persons.
55
The shareholders listed
below do not have any different or special voting rights from any other shareholders of our company. Except where otherwise indicated,
we believe, based on information furnished by the owners, that the beneficial owners of the ordinary shares listed below have sole investment
and voting power with respect to such shares.
|
Shareholder |
Number of
Ordinary
Shares
Beneficially
Owned |
% Voting |
||||||
|
Moked Ituran Ltd. (1)
|
4,075,952 |
20.27 |
||||||
|
All directors and executive officers as a group (2).
|
4,137,827 |
20.58 |
||||||
|
Vulcan Value Partners (3)
|
2,429,641 |
12.08 |
||||||
|
FMR LLC. (4)
|
1,327,561 |
6.6 |
||||||
|
Renaissance Technologies LLC. (5)
|
1,121,100 |
5.58 |
||||||
|
The Phoenix Holdings Ltd(6)
|
1,857,597 |
9.24 |
||||||
|
Ibex Investors LLC(7)
|
1,256,500 |
6.25 |
||||||
|
B.Y.M. Mor Investments Ltd. (8) |
1,036,215
|
5.15 |
||||||
|
Treasury shares
|
3,366,934 |
|||||||
(1) Moked’s
articles of association provides that each of Moked’s shareholders shall have the right to direct Moked to dispose of such number
of our shares corresponding to his or her relative shareholdings in Moked. In addition, ownership of all shares held by Moked are attributed
to Mr. Izzy Sheratzky by virtue of his holdings in Moked. Please see Item 6.E above for the ownership of our shares attributed to Moked’s
shareholders. For further information please see Item 6.A – Directors and Senior Management under the caption “Shareholders
Agreement and Articles of Association of Moked Ituran Ltd” above.
(2) Includes
shares held by Moked Ituran Ltd., which ownership are attributed to some of these directors and executive officers.
(3) The
information presented herein is based on Form 13G filed by Vulcan Value Partners, LLC (“Vulcan”) on February 14, 2023. According
to the information presented on such Form 13G, Vulcan is an investment adviser, and various persons, including the investment companies
and owners of the separate accounts to which Vulcan serves as investment adviser, have the right to receive or the power to direct the
receipt of dividends from, or the proceeds from the sale of, the Company’s securities that are the subject of Form 13G.
(4) The
information presented herein is based on Form 13G filed by FMR LLC. (“FMR”) on February 9, 2023. According to
the information presented on such Form 13G, the shares are beneficially owned by members of the Johnson family, including Abigail P. Johnson,
are the predominant owners, directly or through trusts, of Series B voting common shares of FMR LLC, representing 49% of the voting power
of FMR LLC. For further information on the beneficial ownership by the portfolio accounts, please refer to Form 13G filed by FMR on February
9, 2023.
(5) The
information presented herein is based on Form 13G filed by Renaissance Technologies LLC. (“RTC”) Renaissance Technologies
Holdings Corporation (“RTHC”) on February 13, 2023. According to the information
presented on such Form 13G, the shares are beneficially owned by RTC, which is a Delaware limited liability company. For further information
on the beneficial ownership by the portfolio accounts, please refer to Form 13G filed by RTC on February 13, 2023.
(6) The
information presented herein is based on Form 13G filed by The Phoenix Holdings Ltd. (“The Phoenix”) on February 14,
2023. According to the information presented on such Form 13G, the shares are beneficially owned by The Phoneix Group. For further information
on the beneficial ownership by the portfolio accounts, please refer to Form 13G filed by The Phoneix on February 14, 2023.
(7) The
information presented herein is based on Form 13G filed by Ibex Investors LLC (“Ibex”) on January 25, 2023. According to the
information presented on such Form 13G, the shares are directly beneficially owned by Ibex Israel Fund LLLP, a Delaware limited
liability partnership (the “Fund”), and Ibex is the investment manager of the Fund.
For further information on the beneficial ownership please refer to Form 13G filed by Ibex on January 25, 2023.
(8)
The information presented herein is based on Form 13G filed by B.Y.M. Mor Investments Ltd. on February 13, 2023.
56
As of December 2022,
we had a total of approximately 970 shareholders (including the Depository Trust Company) of record in the United States with registered
addresses in the United States. The number of record holders in the United States is not representative of the number of beneficial holders
nor is it representative of where such beneficial holders are resident since many of these ordinary shares were held of record by brokers
or other nominees.
| B. |
RELATED PARTY TRANSACTIONS |
Transactions with our
directors and principal officers
We purchase our insurance
policies, including our directors’ and officers’ insurance, through Tzivtit Insurance Agency (1998) Ltd., an insurance agency
owned by Efraim Sheratzky, a director of the company and a shareholder of Moked, the brother of the President of our company and the uncle
of both of our Co-Chief Executive Officers, and by Yigal Shani, who is one of our directors and is a shareholder of Moked. During 2022
We paid an annual aggregate amount of NIS 1,685,000 or $ 502,000, for our basic insurance policies and NIS 2,924,000 or $ 870,000 for
our directors’ and officers’ insurance policy. During 2022 Tzivtit Insurance Agency was entitled to commissions in an aggregate
amount of NIS388,000 or $ _115,000 which is paid by the insurance company on account of these policies.
We have entered into
indemnification agreements with each of our directors and officers and the officers and directors of our subsidiaries providing them with
indemnification for liabilities or expenses incurred as a result of acts performed by them in their capacity as our directors and officers.
Our general meeting of shareholders approved on January 28, 2014 an amendment to these indemnification agreements and the grant thereof
to office holders, including controlling persons and their relatives, who serve at our company and its subsidiaries from time to time.
For the full indemnification agreements as so approved, please see Exhibit 4.19 under Item 19 – Exhibits.
Our general meeting of
shareholders has also approved on January 28, 2014 the procurement from time to time of directors’ and officers’ insurance
policies covering the liability of office holders, including controlling persons and their relatives, who serve at the Company and its
subsidiaries from time to time, under the following terms: (a) the principal terms of the DO insurance policies shall not materially
deviate from the terms of our current directors’ and officers’ insurance policy; or (b) to the extent that the Company shall
desire to procure a DO insurance policy, which a material term thereof adversely deviates ( from our company’s point of view)
from the terms of the current policy, then our company’s board of the directors shall confirm that, notwithstanding such deviation,
our procurement of such policy is compatible with market terms and does not materially affect our profitability, assets or liabilities..
In February 2014, following
the approval of our general meeting of shareholders on January 28, 2014, we entered into service agreements, setting forth the terms of
service of our President and Co-Chief Executive Officers in compliance with our compensation policy for office holders; and E-Com entered
into a service agreement setting forth the terms of service of its Chief Executive Officer in compliance with our compensation policy
for officer holders. The principal terms of these agreements are as follows:
Mr.
Izzy Sheratzky shall provide his services as an
independent contractor through A. Sheratzky Holdings Ltd., which shall be entitled to a monthly payment of NIS 225,000 (or $64,000) plus
VAT, linked to the consumer price index for December 2013. At the request of the service provider, part of the fixed monthly pay may be
granted through benefits, such as the provision of a company car for the use o/f Mr. Sheratzky and the payment of its maintenance costs
and the cost of tax resulting there from the fixed monthly pay shall also include Mr. Sheratzky’s entitlement for a 25 days’
vacation and sick days as provided by law. The service provider shall also be entitled to payment or reimbursement of expenses, including
hosting expenses, subsistence allowance abroad and participation in work-related home telephone expenses. The service provider shall be
entitled to Target-based Cash Incentives and Excess Return Cash Incentives as detailed below. The agreement shall be in force for a period
of 3 years and may be terminated upon 180 days’ advance notice of termination; however, the company may terminate the agreement
without an advance notice and without compensation if the following shall occur: (a) Mr. Sheratzky is convicted of a criminal offense
involving moral turpitude; (b) a final court ruling (without the possibility of appeal) determines that Mr. Sheratzky has breached his
fiduciary duty towards the company; (c) a final court ruling (without the possibility of appeal) determines that Mr. Sheratzky has materially
breached the agreement through the unauthorized disclosure of company’s secrets or competition with the company. The
aggregate amounts paid to A. Sheratzky Holdings according this new service agreement in , 2020 ,2021and 2022 were approximately
$ 1,096,000 , $ 3,412,000 and $ 3,380,000 respectively (the numbers include 17% value added tax).Mr.
Eyal Sheratzky shall provide his services as an independent contractor through ORAS Capital
Ltd. which shall be entitled to a monthly payment of NIS 175,000 (or $ 50,000) plus VAT, linked to the consumer price index for December
2013. At the request of the service provider, part of the fixed monthly pay may be granted through benefits, such as the provision of
a company car for the use of Mr. Sheratzky and the payment of its maintenance costs and the cost of tax resulting therefrom. The fixed
monthly pay shall also include Mr. Sheratzky’s entitlement for a 25 days’ vacation and sick days as provided by law. The service
provider shall also be entitled to payment or reimbursement of expenses, including hosting expenses and subsistence allowance abroad.
The service provider shall be entitled to Target-based Cash Incentives and Excess Return Cash Incentives as detailed below. The agreement
shall be in force for a period of 3 years and may be terminated upon 180 days’ advance notice of termination; however, the company
may terminate the agreement without an advance notice and without compensation if the following shall occur: (a) Mr. Sheratzky is convicted
of a criminal offense involving moral turpitude; (b) a final court ruling (without the possibility of appeal) determines that Mr. Sheratzky
has breached his fiduciary duty towards the company; (c) a final court ruling (without the possibility of appeal) determines that Mr.
Sheratzky has materially breached the agreement through the unauthorized disclosure of company’s secrets or competition with the
company. The aggregate amount paid to ORAS Capital Ltd in , 2020, 2021 and 2022 was approximately, $ 864,000, $ 2,692,000 and $ 2,679,000,
respectively (the numbers include value added tax).
57
Mr.
Nir Sheratzky shall provide his services as an
independent contractor through Galnir Management and Investments Ltd., which shall be entitled to a monthly payment of NIS 175,000 (or
$ 50,000) plus VAT, linked to the consumer price index for December 2013. At the request of the service provider, part of the fixed monthly
pay may be granted through benefits, such as the provision of a company car for the use of Mr. Sheratzky and the payment of its maintenance
costs and the cost of tax resulting therefrom. The fixed monthly pay shall also include Mr. Sheratzky’s entitlement for a 25 days’
vacation and sick days as provided by law. The service provider shall also be entitled to payment or reimbursement of expenses, including
hosting expenses and subsistence allowance abroad. The service provider shall be entitled to Target-based Cash Incentives and Excess Return
Cash Incentives as detailed below. The agreement shall be in force for a period of 3 years and may be terminated upon 180 days’
advance notice of termination; however, the company may terminate the agreement without an advance notice and without compensation if
the following shall occur: (a) Mr. Sheratzky is convicted of a criminal offense involving moral turpitude; (b) a final court ruling (without
the possibility of appeal) determines that Mr. Sheratzky has breached his fiduciary duty towards the company; (c) a final court ruling
(without the possibility of appeal) determines that Mr. Sheratzky has materially breached the agreement through the unauthorized disclosure
of company’s secrets or competition with the company. The aggregate
amount paid to Galnir Management and Investments Ltd, in 2020 ,2021 and 2022 was approximately, $ 864,000, $ 2,692,000 and $ 2,679,000
respectively (the numbers include value added tax).
Mr.
Gil Sheratzky shall provide his services as an
independent contractor through ZERO-TO-ONE S.B.L. INVESTMENTS LTD., which shall be entitled to a monthly payment of NIS 125,000 (or $
36,000) plus VAT, linked to the consumer price index for December 2013. At the request of the service provider, part of the fixed monthly
pay may be granted through benefits, such as the provision of a company car for the use of Mr. Sheratzky and the payment of its maintenance
costs and the cost of tax resulting therefrom. The fixed monthly pay shall also include Mr. Sheratzky’s entitlement for a 25 days’
vacation and sick days as provided by law. The service provider shall also be entitled to payment or reimbursement of expenses, including
hosting expenses and subsistence allowance abroad. The service provider shall be entitled to Target-based Cash Incentives and Excess Return
Cash Incentives as detailed below. The agreement shall be in force for a period of 3 years and may be terminated upon two months’
advance notice of termination; however, E-Com may terminate the agreement without an advance notice and without compensation if the following
shall occur: (a) Mr. Sheratzky is convicted of a criminal offense involving moral turpitude; (b) a final court ruling (without the possibility
of appeal) determines that Mr. Sheratzky has breached his fiduciary duty towards E-Com; (c) a final court ruling (without the possibility
of appeal) determines that Mr. Sheratzky has materially breached the agreement through the unauthorized disclosure of E-Com’ and/or
company’s secrets or competition with E-Com and/or the company. The aggregate amount paid to ZERO-TO-ONE S.B.L. INVESTMENTS LTD,
in 2020,2021 and 2022 according to this new service agreement, were approximately $ 518,000 , $ 1,934,000 and $1,841,000
respectively (the numbers include value added tax).Messrs Izzy Sheratzky, Eyal Sheratzky, Nir Sheratzky
and Gil Sheratzky, due to the Covid-19 effect on the society in general and including the Company, based on their own initiative, agreed
temporarily to decrease their base salary by 25% from April 2020, for an indefinite period. Such reduction was in effect until March 2021.
Each of the above agreements
also provides that the executives may request to provide their services to the company as an employee, and not through a service provider,
and in such event, the they shall execute an employment agreement with the company, in lieu of the above service agreements, which shall
also set forth the provisions of social security and other benefits that the company usually grants its senior executive officers (which
may not deviate from the provisions of the Compensation Policy in this respect). In any event, it was agreed that the nature of the agreement
pursuant to which the services are provided shall not affect the cost to us of the provision of the services as set forth in the service
agreements.
58
The aforementioned agreements
were extended on April 20, 2020 (commencing as of February 1, 2020) subject to the approval of our next general shareholders meeting,
for additional three years, with accordance to the provisions of Israeli Company Law and Israeli Companies Regulations (Relaxations in
Transactions with Interested Parties) 5760-2000, and were approved accordingly by our compensation committee and our board of directors.
Our shareholders meeting approved the aforementioned agreements for an additional period of three years on December 10, 2020.
All agreements mentioned
above are in compliance with our amended compensation policy as approved on November 7, 2016 and re approved on December 12, 2019, and
thereafter on December 14, 2022, by the Company’s general meeting of shareholders, which sets forth the principles of our office
holders’ compensation.
The terms of the Cash
Incentives applicable to each of Messrs. Izzy Sheratzky, Eyal Sheratzky, Nir Sheratzky and Gil Sheratzky (the “Executive
Office Holders”), as set forth in their agreements referred to above (the “Agreements”),
are as follows:
| • |
“Target-based Cash Incentives” means a cash incentive awarded to the Executive Office
Holders for the company’s achievement of the following Profit-Before-Tax targets in each calendar year following the effective date
of the above agreements, in which the Minimum Threshold (as defined below) has been achieved: |
|
Company’s Profit-Before-Tax Targets
(in USD thousands) |
Level of Incentive - As a Percentage of the
Executive Office Holder’s Annual Cost of Pay |
|
24,001 - 27,500
|
20% |
|
27,501-31,000 |
45% |
|
31,001-35,000 |
75% |
|
35,001-39,000 |
110% |
|
Above 39,001 |
150% |
“Minimum Threshold”
means, with respect to a particular calendar year, a Minimum Company’s Return on Equity (as defined below) of 15%, and a minimum
company’s Profit before Tax of USD 24 million.
“Return on Equity”
means, with respect to a particular calendar year, the ratio between the net income for such year and the average of the shareholders’
equity at the beginning of such calendar year and at the end of each calendar quarter of such year; calculated in accordance with the
company’s audited or reviewed consolidated financial statements for such year, as the case may be, after taking into account Executive
Officers’ compensation, but excluding adjustments of the value of assets and obligations to their fair value in accordance with
accounting standards.
“Profit-Before-Tax”
means, with respect to a particular calendar year, the company’s profit before tax for such year in accordance with the company’s
audited consolidated financial statements for such year, after taking into account Executive Officers’ compensation, but excluding
adjustments of the value of assets and obligations to their fair value in accordance with accounting standards.
“Executive Officers”
means Office Holders of the Company (“Nosei Misra”, as such term is defined in the Companies Law) who serve as the company’s
President, Co-CEOs and other executives who are deemed Office Holders of the company, as well as Office Holders of the company’s
Israeli wholly owned subsidiaries, provided they report to the CEO.
“Cost of Pay”
means, with respect to independent contractors – their invoice amount plus company car and related expenses; and with respect to
employees - their base pay (i.e. fixed gross amount payable to the employee in return for his services, excluding expenses, benefits and
bonuses) plus 40% thereof.
| • |
Target-based Cash Incentives shall become payable upon the lapse of 30 days from the date of publication
of the company’s audited annual financial statements (the “Entitlement Date”);
and such cash incentive shall be paid on such date. However, if an Executive Office Holder’s Target-based Cash Incentives exceed
an amount equal to 100% of such Executive Office Holder’s annual Cost of Pay (the “100% Threshold”),
then 20% of the amount by which the Target-based Cash Incentives exceed the 100% Threshold (the “Deferred
Portion”) shall not be paid on their Entitlement Date, but rather shall be deferred and paid in two equal instalments on
the first and second anniversary of the Entitlement Date, provided that the Minimum Threshold was achieved during the first calendar year
(for the first instalment) and during the second calendar year (for the second instalment) following the Entitlement Date, respectively.
The Deferred Portion shall be linked to the consumer price index known on the Entitlement Date. |
59
| • |
The company may pay to the Executive Office Holders advances on account of expected Target-based Cash
Incentives, based on the company’s reviewed financial statements, prior to the Entitlement Date; provided that if on the Entitlement
Date, it turns out that such advances exceed the Target-based Cash Incentives to which the Executive Office Holders are entitled, then
the excess amounts shall be returned to the Company or shall be deducted from the payment of the remainder Target-based Cash Incentives
on the Entitlement Date, as the case may be. |
| • |
“Excess Return Cash Incentives” means a cash
grant based on the company’s Stock Yield as compared to the Russell 2000 Index’s Yield, as set forth below. |
“Company’s
Stock Yield” means the percentage of increase or decrease of the company’s stock price on Nasdaq over an Examined Period
(as defined below), as adjusted for dividend distribution, calculated based on the average adjusted closing price of the company’s
shares on the Nasdaq during the 5 business days prior to and the 5 business days after the commencement and end of such Examined Period.
“Russell
2000 Index’s Yield” means the percentage of increase or decrease of the Russell 2000 Index over an Examined Period,
calculated based on the average Russell 2000 Index closing quotes during the 5 business days prior to and the 5 business days after
the commencement and end of such Examined Period.
At the end of each calendar
year, the company shall examine the Company’s Stock Yield since January 1 of such year or, with respect to the first year of such
grant – since the date of its approval (an “Examined Period”), as compared to the Russell 2000 Index’s Yield over
such Examined Period; and to the extent that the Company’s Stock Yield exceeds the Russell 2000 Index’s Yield for such period,
each of the Executive Office Holders shall receive an amount equal to 50% of his monthly Cost of Pay for each 1% of excess return (in
percentage points’ terms), or a relative amount in the event of a partial excess return. For the avoidance of doubt, in the event
that the Company’s Stock Yield during such period is negative, no grant shall be awarded.
The Excess Return Cash
Incentive for each year shall not exceed an amount equal to the Executive Officer Holder’s annual Cost of Pay.
| • |
In the event that an Agreement is terminated during a calendar year, the company’s compensation
committee and board of directors shall determine the relative amounts out of the Target-based Cash Incentives and/or Excess Return Cash
Incentives to which the relevant Executive Office Holder is entitled for the portion of the year during which the Agreement was in force;
and these amounts shall be paid within 30 days after the termination of service/employment, as the case may be. |
| • |
On the date of determination of each Executive Office Holder’s entitlement for a Target-based Cash
Incentive for a particular year, the company’s compensation committee shall examine whether the total amount of grants to which
Executive Officers are entitled with respect to such calendar year and which constitute variable components of their terms of services
(the “Total Amount of Grants to Executive Officers”), exceed an amount equal to 10% of the Company’s EBITDA for such
year (the “EBITDA’s Threshold”), as calculated in accordance with data extracted from the company’s audited consolidated
annual financial statements, after taking into account the Executive Officers’ fixed compensation but excluding their variable compensation.
In such event, the amount by which the Total Amount of Grants to Executive Officers exceeds the EBITDA’s Threshold shall be referred
to as the “Excess Amount”. |
| • |
In the event that the Total Amount of Grants to Executive Officers exceeds the EBITDA’s Threshold,
then the Target-based Cash Incentive and the Excess Return Cash Incentive to which an Executive Office Holder is entitled (together, the
“Grants”) shall be reduced by an amount equal to the Executive Office Holder’s Rate of Grants (as defined below) out
of the Excess Amount. The term “Executive Office Holder’s Rate of Grants” means, with respect to a particular Executive
Office Holder, the percentage which such Executive Office Holder’s Grants constitute out of the Total Amount of Grants to Executive
Officers. |
60
| • |
The company’s board of directors shall have the right, under special circumstances at its discretion,
to reduce the amount of Grants to which the Executive Office Holders are entitled, upon a 60 days prior notice. |
| • |
The Executive Office Holder shall be required to return any compensation paid to them on the basis of
results included in financial statements that turned out to be erroneous and were subsequently restated in the company’s financial
statements published during the three year period following publication of the erroneous financial statements; to the extent they would
not have been entitled to the compensation actually received had it been determined based on the restated financial statements. In such
case, compensation amounts will be returned within 60 days from the date of publication of the restated financial statements, net of taxes
that were withheld thereon. If the Executive Office Holder has a right to reclaim such tax payments with respect to Grants which were
paid in excess, from the relevant tax authorities, then the Executive Office Holder shall reasonably act to reclaim such amounts from
the tax authorities and upon their receipt, shall remit them to the company.
|
In 2022 Executive Office
Holders were eligible to Target based cash incentives at the maximum rate of (150%) as follows (which is included in the aforementioned
payments according to the above new service agreements).
|
Executive Office Holders |
Target-based Cash Incentive |
Deferred Portion for the next 2 years
|
Deferred Portion from last 2 years |
Total to be paid for 2022: |
||||||||||||
|
|
In US$ thousands |
|||||||||||||||
|
Izzy Sheratzky |
1,151,923 |
(80,367 |
) |
80,367 |
1,151,923 |
|||||||||||
|
Eyal Sheratzky |
937,612 |
(62,507 |
) |
62,507 |
937,612 |
|||||||||||
|
Nir Sheratzky |
937,612 |
(62,507 |
) |
62,507 |
937,612 |
|||||||||||
|
Gil Sheratzky |
669,723 |
(44,648 |
) |
44,648 |
669,723 |
|||||||||||
For the full-service
agreements regarding the services of our President, Co-Chief Executive Officers and the Chief Executive Officer of E-Com, please see Exhibits
4.9-4.12(a) attached hereto.
On January 28, 2014,
our general meeting of shareholders re-approved the terms of engagement of Professor Yehuda Kahane, which were set forth in a financial
services agreement, dated March 23, 1998, between our company and Professor Kahane. Pursuant to this agreement, as amended in May 2003,
we are obligated to pay Professor Kahane a monthly consulting fee of NIS 15,000, or approximately $ 4,000, linked to the Israeli consumer
price index as known on May 1, 2003. The term of the agreement automatically renews every two-years; however, either party may terminate
it by providing a 180-day prior notice. The aggregate amounts paid to Professor Kahane by virtue of this agreement in each of the years
2020, 2021,2022 were approximately $ 64,000 , $ 69,000 and $ 70,000, respectively.
Transactions with our
affiliates and associates
We purchase our GPS/GPRS
equipment from our subsidiary, E.R.M Electronic Systems Limited. In , 2020, 2021 and 2022, Ituran, including its subsidiaries in Brazil,
Argentina and USA, purchased GPS/GPRS equipment from E.R.M in the sum of approximately NIS 54.5 Million (or $ 15.8 Million), NIS 64.6
Million (or $ 20.0 Million) and NIS 96.2 million (or $ 28.6 million), respectively.
| C. |
INTERESTS OF EXPERTS AND COUNSEL |
Not applicable
| ITEM 8. |
FINANCIAL INFORMATION |
| A. |
CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION |
For the audited financial
statements and audit reports required to be contained in this annual report, please see Item 18 below.
61
Material Legal Proceedings
During
year 2016 Brazilian Federal Communication Agency – Anatel issued a tax assessment for FUST contribution (contribution on telecommunication
services) levied on the monitoring services rendered by us and additional tax assessment for FUNTELL contribution (contribution to Fund
for the Technological Development of Telecommunication) levied on the monitoring services rendered by us regarding, all for the period
2007-2012.Total amounts of approximately R$23.0 million (US$ 4.4 million). as of December 2022 including interest and penalties. The reason
Anatel demand the payment of FUST and FUNTELL from us is the fact that in order to provide monitoring services we need to operate telecommunication
equipment in a given radio frequency. We hold a telecommunication license from Anatel (for information on our licenses see item 4B. “Information
on the company” – “Business overview” under the caption “Regulatory Environment”). The authorities
have construed that we render telecommunication services and taxes should be levied in relation to Net Revenues. Based on the legal opinion
of the subsidiary’s Brazilian legal counsel we believe that such claim is without merit, the interpretation of the legislation is
mistaken, given that we don’t render telecommunication services, but rather services of monitoring goods and persons for security
purposes and therefore the chances of our success are more likely than not. We have filed our defence against such claims. We are
currently awaiting the Lower Court or Administrative decisions on all the aforementioned FUST and FUNTELL claims.
On
July 13, 2015 we received a purported class action lawsuit which was filed against the Company in the District Court of Central Region
in Tel-Aviv, by one plaintiff who is a subscriber of the Company, alleging that the Company, which was declared a monopoly under the Israeli
Antitrust Law, 1988, unlawfully abused its power as a monopoly and discriminated between its customers. The plaintiff claims that the
alleged discrimination resulted from the Company charging higher monthly subscription fees from customers who are obliged by insurance
company requirements to install location and recovery systems in their vehicles than the monthly subscription fees that are charged from
customers who are not required by insurance companies to install location and recovery systems in their vehicles. In addition, the plaintiff
claims that the Company offers to customers who are not required by insurance companies to install location and recovery systems in their
vehicles, a discounted warrantee service to their location and recovery systems. The plaintiff claims in addition to the above, that such
actions raise additional causes of action against the Company such as negotiations without good faith, executing contract without good
faith, breach of contract, unjust enrichment, breach of consumer protection laws, tort laws, and breach of statutory duty. The lawsuit
is yet to be approved as a class action. The total amount claimed if the lawsuit is approved as a class action was estimated by the plaintiff
to be approximately NIS 300 million (approximately USD 85.2 million). Our defence against the approval of the class action lawsuit was
filed on January 3, 2016. The plaintiff has responded to our defence on February 29, 2016. Hearing for first stage, i.e. whether claim
will be approved as a class action are over and parties filed their summaries. On November 17, 2020, the court informed the parties
that it decided to stall his decision whether to prove the class action, until The Supreme Court of Israel will render its decision in
another case that involves a relevant issue. Such a decision was issued and we now wait for a court's decision. A class action lawsuit
based on similar claims, against the Company, which was filed on form 6-K on March 22, 2011, was dismissed by the court on the request
of both parties, on March 5, 2012 for a small compensation to the plaintiff and his attorneys, in a total amount of NIS 30,000 (approximately
USD 8,500). Such dismissal of a similar class action lawsuit may have a positive effect on the Company’s defence against the current
lawsuit. Based on an opinion of our legal counsels, we have good defence.
10.B. – “Memorandum
and Articles of Association” - “Our Corporate Practices under the Israeli Companies Law” under the caption “Approval
of Transactions under Israeli law”
Dividend distribution
policy
For a description of
our dividend policy, see Item 5.B – Liquidity and Capital Resources above.
| B. |
SIGNIFICANT CHANGES |
Except as stated in this
annual report, there are no significant changes since December 31, 2022.
ITEM 9.
THE OFFER AND LISTING
| A. |
LISTING DETAILS AND MARKET PRICE INFORMATION |
Our ordinary shares have
been trading on Nasdaq under the symbol “ITRN” since September 2005.
62
| B. |
PLAN OF DISTRIBUTION |
Not applicable
| C. |
MARKETS |
Our ordinary shares are
quoted on the Nasdaq Global Select Market under the symbol “ITRN”.
| 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 AND ARTICLES OF ASSOCIATION |
Our number with the Israeli
Registrar of Companies is 52-004381-1. Our purpose appears in our memorandum of association and includes engaging in any lawful business.
Articles
of Association; Israeli Companies Law
Articles of Association
Pursuant to our articles
of association our objectives are to engage in any lawful business and our purpose is to operate in accordance with business considerations
to maximize our profits. We may take into consideration, inter alia, the interests of our creditors, employee and the public interest.
Please also see a summarized description of our purposes and activities under the caption “Overview” in Item B.4. above.
Our Corporate Practice
Under the Israeli Companies Law
Approval
of Transactions under Israeli Law
Directors and executive
officers
Fiduciary duties
Israeli law codifies
the fiduciary duties that office holders owe to a company. An office holder is defined as any director, managing director, general manager,
chief executive officer, executive vice president, vice president, other manager directly subordinate to the general manager or any other
person assuming the responsibilities of any of these positions regardless of that person’s title. Each person listed in the table
under “Management—Executive Officers and Directors” is an office holder of our company under the Israeli Companies Law.
An office holder’s
fiduciary duties consist of a duty of loyalty and a duty of care. The duty of loyalty requires the office holder to avoid any conflict
of interest between the office holder’s position in the company and personal affairs, and proscribes any competition with the company
or the exploitation of any business opportunity of the company in order to receive personal advantage for himself or others. This duty
also requires him or her to reveal to the company any information or documents relating to the company’s affairs that the office
holder has received due to his or her position as an office holder. The duty of care requires an office holder to act with a level of
care that a reasonable office holder in the same position would employ under the same circumstances. This includes the duty to use reasonable
means to obtain information regarding the advisability of a given action submitted for his or her approval or performed by virtue of his
or her position and all other relevant information pertaining to these actions.
63
Disclosure of Personal
interest
Israeli law requires
that an office holder promptly disclose to the board of directors any personal interest that he or she may have and all related material
information known to him or her concerning any existing or proposed transaction with the company. A personal interest, as defined by the
Israeli Companies Law, includes a personal interest of any person in an act or transaction of the company, including a personal interest
of one’s relative or of a corporate body in which such person or a relative of such person is a 5% or greater shareholder, a holder
of 5% or more of the voting rights, a director or general manager, or in which he or she has the right to appoint at least one director
or the general manager, but excluding a personal interest stemming solely from one’s ownership of shares in the company. A personal
interest also includes personal interest of a person voting pursuant to a proxy given by another person even if the other person does
not have personal interest, regardless of whether the person given the proxy to vote at the meeting is given directions to vote in a certain
manner or given discretion to vote independently. An office holder must disclose his personal interest no later than the first meeting
of the company’s board of directors that discusses the particular transaction. An office holder is not obliged to disclose such
information if the personal interest of the office holder derives solely of the personal interest of his or her relative in a transaction
that is not an “extraordinary transaction.” The Israeli Companies Law defines an “extraordinary transaction” as
a transaction not in the ordinary course of business, not on market terms or that is likely to have a material impact on the company’s
profitability, assets or liabilities. The term “relative” is defined by the Israeli Companies Law as a spouse, sibling, parent,
grandparent, descendent, and descendent, brother, sister or parent of a spouse or the spouse of any of the foregoing.
The Israeli Companies
Law provides that once an office holder has complied with the 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, or approve an action by the office
holder that would otherwise be deemed a breach of duty of loyalty. Such a transaction generally requires approval by the board of directors,
unless the articles of association provide otherwise. Our articles of association do not provide otherwise. If the transaction considered
is an extraordinary transaction, audit committee approval is required prior to approval by the board of directors. For the approval of
arrangements regarding the compensation, indemnification or insurance of executive officers and directors, see “Compensation arrangements”
below. A company may not approve a transaction or action that is adverse to the company’s interest or that is not performed by the
office holder in good faith.
A director who has a
personal interest in a matter involving an extraordinary transaction, as defined in the Israeli Companies Law, which is considered at
a meeting of the board of directors or the audit committee may not attend that meeting or vote on that matter, unless a majority of the
directors or members of the audit committee, as applicable, also have a personal interest in the matter. Any transaction in which a majority
of the directors has a personal interest requires shareholder approval.
Compensation arrangements
Subject to the provisions
relating to related-party transactions as described below, the terms of office of office holders other than the chief executive officer
and directors, require the approval of both our compensation committee and the board of directors; and the terms of office of chief executive
officers and directors require the approval of the compensation committee, the board of directors and our shareholders. However due to
the change in the Israeli Company law, from February 2016, the extension or renewal of terms of office of chief executive officer,
which terms are not improving the previous terms or not significantly different, and are according to the compensation policy, shall not
require approval by the shareholders meeting. In addition, according to recent changes in Israeli Company law, chief executive officer
can decide upon insignificant change in the terms of office of his subordinate officers, subject to additional conditions and requirement
to include such right in the compensation policy of the company (such requirement was fulfilled in our renewed compensation policy
which was approved by our shareholder’s committee on November 7, 2016). In addition, according to Israeli Company Regulations (Relaxations
in Transactions with Interested Parties) 5760-2000, transaction with board members and chief executive, on their term of office, which
is according to the compensation policy and according to terms of office which are not better than the terms of office of previous holder
of such position or there is no significant difference between the two engagements and relevant circumstances, including the scope of
employment, may be approved by our compensation committee and the board of directors, and will not require general shareholders meeting
approval until the next general meeting which will be announced by the company. “terms of office” includes the grant of an
exemption, insurance, undertaking to indemnify or indemnification, retirement compensation, and any benefit, other payment or an undertaking
to pay, which are granted by virtue of serving as an office holder.
64
Shareholders
Controlling shareholders
Pursuant to Israeli law,
the disclosure requirements regarding personal interests that apply to an office holder also apply to a “controlling shareholder”
of a public company. A “controlling shareholder” is a shareholder who has the ability to direct the activities of a company,
and for the purpose of the disclosure requirements and approval of related party transactions, the term includes any shareholder holding
25% or more of the voting rights if no other shareholder holds more than 50% of the voting rights in the company. Two or more shareholders
with a personal interest in the approval of the same transaction are deemed to be one shareholder. Currently there is no shareholder of
us who holds more than 25% of the voting rights.
Required approval
Extraordinary transactions
of a public company and 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, a transaction concerning the terms of compensation of the controlling
shareholder or the controlling shareholder’s relative, directly or indirectly, through a company controlled by him in respect of
receipt of services from same and if he is an office holder or an employee – the terms of his employment, generally require the
approval of the audit committee (or with respect to Terms of Office and Employment – the compensation committee), the board of directors
and the shareholders, in that order. If required, shareholder approval must include the majority of shares voted at the meeting. In addition,
either:
| ◾ |
the majority must include at least the majority of the shares of disinterested shareholders voted at
the meeting; or |
| ◾ |
the total number of shares of disinterested shareholders who voted against the transaction must not exceed
2% of the aggregate voting rights in the company. |
Transactions for a period
of more than three years generally need to be brought for approval in accordance with the above procedures every three years.
A Shareholder is required
according to Israeli Companies Law in certain votes on transactions to disclose his/her personal interest. Failure to disclose such interest
will invalidate the casted vote of such shareholder and the Company shall not count it. According to our Articles of Association, a Shareholder
seeking to vote using a proxy with respect to a resolution which requires that the majority for its adoption include at least a specified
majority of the votes of all those not having a personal interest (as defined in the Companies Law) shall mark on the Proxy, if he or
she has Personal Interest in such resolution, and in such case the Company will not count his/her vote for such resolution. In event the
shareholder will vote by other means than Proxy, he/she shall notify the company of his/her Personal Interest in writing prior to the
time of the General Meeting. Such notice either in Proxy or in writing (as applicable) shall be a condition for the right to vote with
respect to a resolution which requires that the majority for its adoption include at least a specified majority of the votes of all those
not having a Personal Interest.
Shareholder duties
Pursuant to the Israeli
Companies Law, a shareholder has a duty to act in good faith and in customary way toward the company and other shareholders and to refrain
from abusing his or her power in the company, including, among other things, in voting at the general meeting of shareholders and class
meetings with respect to the following matters:
| ◾ |
an amendment to the company’s articles of association; |
| ◾ |
an increase of the company’s authorized share capital; |
| ◾ |
a merger; or |
| ◾ |
interested party transactions that require shareholder approval. |
In addition, specified
shareholders have a duty of fairness toward the company. These shareholders include any controlling shareholder, any shareholder who knows
that it possesses the power to determine the outcome of a shareholder vote and any shareholder who has the power to appoint or to prevent
the appointment of an office holder of the company or other power towards the company. The Israeli 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.
65
Anti
take-over provisions; mergers and acquisitions under Israeli Law
Tender offers
Full
Tender Offer. A person wishing to acquire shares or any class of shares,
or voting rights of a publicly traded Israeli company and who would, as a result, hold over 90% of the company’s issued and outstanding
share capital or of a class of shares that are listed, is required by the Israeli Companies Law to make a tender offer to all of the company’s
shareholders or all shareholders of such class of shares, as applicable, for the purchase of all of the issued and outstanding shares
of the company or of that class of shares, as applicable. If the shareholders who do not respond to the offer hold less than 5% of the
issued share capital of the company or of that class of shares, as applicable, and the majority of shareholders who are disinterested
accepted the offer, then all of the shares that the acquirer offered to purchase will be transferred to the acquirer by operation of law
(however, full tender offer shall be accepted if shareholders who objected to the offer constituted less than 2% of the issued and outstanding
share capital of the company to which the offer relates). However, the shareholders may petition the court to determine that the consideration
for the shares constituted less than their fair value and that their fair value should be paid to the offerees. If the full tender offer
is not accepted as described above, the acquirer may not acquire shares from shareholders who accepted the tender offer that would provide
it over 90% of the company’s issued and outstanding share capital or of the shares comprising such class, as applicable.
Special
Tender Offer. The Israeli Companies Law provides that an acquisition of
shares of a public company must be made by means of a tender offer if as a result of the acquisition the purchaser would become a holder
of 25% or more of the voting rights of the company. This rule does not apply if there is already another holder of 25% or more of the
voting rights of the company. Similarly, the Israeli Companies Law provides that an acquisition of shares in a public company must be
made by means of a tender offer if as a result of the acquisition the purchaser would become a holder of more than 45% of the voting rights
of the company, if there is no other holder of more than 45% of the voting rights of the company. The foregoing provisions do not apply
to:
| ◾ |
a private placement in which the company’s shareholders approved such holder owning 25% or more
of the voting rights of the company (provided that there is no other shareholder that holds 25% or more of the voting rights of the company);
or more than 45% of the voting rights of the company (provided that there is no other shareholder that holds 45% or more of the voting
rights of the company); or |
| ◾ |
a purchase from an existing holder of 25% or more of the voting rights of the company that results in
another person becoming a holder of 25% or more of the voting rights of the company; or |
| ◾ |
purchase from an existing holder of more than 45% of the voting rights of the company that results in
another person becoming a holder of more than 45% of the voting rights of the company. |
In the event that a special
tender offer is made, a company’s board of directors is required to express its opinion on the advisability of the offer or shall
abstain from expressing any opinion if it is unable to do so, provided that it gives the reasons for its abstention. An office holder
in a target company who, in his or her capacity as an office holder, performs an action the purpose of which is to cause the failure of
an existing or foreseeable special tender offer or is to impair the chances of its acceptance, is liable to the potential purchaser and
shareholders for damages, unless such office holder acted in good faith and had reasonable grounds to believe he or she was acting for
the benefit of the company. However, office holders of the target company may negotiate with the potential purchaser in order to improve
the terms of the special tender offer and may further negotiate with third parties in order to obtain a competing offer.
If a special tender offer
was accepted by a majority of the shareholders who announced their stand on such offer, then shareholders who did not announce their stand
or who had objected to the offer may accept the offer within four days of the last day set for the acceptance of the offer.
In the event that a special
tender offer is accepted, the purchaser or any person or entity controlling it at the time of the offer or under common control with the
purchaser or such controlling person or entity shall refrain from making a subsequent tender offer for the purchase of shares of the target
company and cannot execute a merger with the target company for a period of one year from the date of the offer, unless the purchaser
or such person or entity undertook to effect such an offer or merger in the initial special tender offer.
Regulations promulgated
under the Israeli Companies Law provide that these tender offer requirements do not apply to companies whose shares are listed for trading
outside of Israel if, according to the law in the country in which the shares are traded or the rules and regulations of the stock exchange
on which the shares are traded:
| • |
There is a limitation on acquisition of any level of control of the company, or |
| • |
The acquisition of any level of control requires the purchaser to offer a tender offer to the public.
|
66
Merger
The Israeli Companies
Law permits merger transactions if approved by each party’s board of directors and shareholders. Pursuant to the Israeli Companies
Law and our articles of association as currently in effect, merger transactions may be approved by holders of a simple majority of our
shares present, in person or by proxy, at a general meeting and voting on the transaction. In determining whether the required majority
has approved the merger in the event of “cross ownership” between the merging companies, namely, if our shares are held by
the other party to the merger, or by any person holding at least 25% of the outstanding voting shares or 25% of the means of appointing
directors of the other party to the merger, then a vote against the merger by holders of the majority of the shares present and voting,
excluding shares held by the other party or by such person, or anyone acting on behalf of either of them, including any of their affiliates,
is sufficient to reject the merger transaction. If the transaction would have been approved but for the exclusion of the votes of certain
shareholders as provided above, a court may still approve the merger upon the request of holders of at least 25% of the voting rights
of a company, if the court holds that the merger is fair and reasonable, taking into account the value of the parties to the merger and
the consideration offered to the shareholders. Upon the request of a creditor of either party to the proposed merger, the court may delay
or prevent the merger if it concludes that there exists a reasonable concern that, as a result of the merger, the surviving company will
be unable to satisfy the obligations of any of the parties to the merger. In addition, a merger may not be consummated unless at least
50 days have passed from the time that a proposal for approval of the merger has been filed with the Israeli Registrar of Companies and
30 days have passed from the date of the approval of the shareholders of the merging companies.
The Israeli Companies
Law further provides that the foregoing approval requirements will not apply to shareholders of a wholly owned subsidiary in a roll-up
merger transaction, or to the shareholders of the acquirer if:
| ◾ |
the transaction is not accompanied by an amendment to the acquirer’s memorandum or articles of
association; |
| ◾ |
the transaction does not contemplate the issuance of more than 20% of the voting rights of the acquirer
that would result in any shareholder becoming a controlling shareholder; and |
| ◾ |
there is no “cross-ownership” of shares of the merging companies, as described above.
|
For these purposes, “controlling
shareholder” is a shareholder who has the ability to direct the activities of a company, including a shareholder who owns 25% or
more of the voting rights if no other shareholder owns more than 50% of the voting rights.
The Israeli Companies
Law allows us to create and issue shares having rights different from those attached to our ordinary shares, including shares providing
certain preferred or additional rights to voting, distributions or other matters and shares having preemptive rights. In the future, if
we do create and issue a class of shares other than our ordinary shares, such class of shares, depending on the specific rights that may
be attached to them, may delay or prevent a takeover or otherwise prevent our shareholders from realizing a potential premium over the
market value of their ordinary shares. The authorization of a new class of shares will require an amendment to our articles of association.
Shareholders voting at such a meeting will be subject to the restrictions under the Israeli Companies Law. See “Voting, Shareholder
Meetings and Resolutions” below.
Dividend
and Liquidation Rights.
We may declare a dividend
to be paid to the holders of our ordinary shares according to their rights and interests in our profits. If we dissolve, after satisfaction
of liabilities to creditors, our assets will be distributed to the holders of our ordinary shares in proportion to their shareholdings.
This right may be affected by the grant of preferential dividend or distribution rights to the holders of a class of shares with preferential
rights that may be authorized in the future. Our articles of association provide that shareholder approval would not be required for the
declaration of dividends. Dividends may only be paid out of our retained earnings or “profits” accrued over a period of two
years, as defined in the Israeli Companies Law, whichever is greater, according to the last reviewed or audited financial reports of the
company, provided that the date of the financial reports is not more than six months before the date of distribution (the “profits”
test), and further provided 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, as determined by our Board of Directors. However, if we do not meet the profit requirement,
a court may allow us to distribute a dividend, as long as the court is convinced that there is no reasonable risk that a distribution
might prevent us from being able to meet our existing and anticipated obligations as they become due. For more information on our ability
to grant or declare dividends, see Item 8.A – Financial Information under the caption “Dividend Distribution Policy”
above.
Voting,
Shareholder Meetings and Resolutions.
As a foreign private
issuer, we have elected to follow our home country practices in lieu of the Nasdaq Marketplace Rule requiring an issuer to hold its annual
meeting of its shareholders no later than one year after the end of the issuer’s fiscal year-end. Specifically, according to the
Israeli Companies Law, we are required to hold an annual general meeting of our shareholders once every calendar year, and no later than
15 months after the date of the previous annual general meeting. All meetings other than the annual general meeting of shareholders are
referred to as special meetings. Our Board of Directors may call special meetings whenever it sees fit, at such time and place, within
or outside of Israel, as it may determine. In addition, the Israeli Companies Law provides that the board of directors of a public company
is required to convene a special meeting upon the request of (a) any two directors of the company or one quarter of its board of directors
or (b) one or more shareholders holding, in the aggregate, (i) 5% of the outstanding shares of the company and 1% of the voting power
in the company or (ii) 5% of the voting power in the company.
67
Pursuant to our articles
of association, shareholders are entitled to participate and vote at general meetings and are the shareholders of record on a date to
be decided by our Board of Directors, provided that such date is not more than 40 days, nor less than four days, prior to the date of
the general meeting, except as otherwise permitted by the Israeli Companies Law. Furthermore, the Israeli Companies Law dictates that
resolutions regarding the following matters must be passed at a general meeting of our shareholders:
| ◾ |
amendments to our articles of association; |
| ◾ |
appointment or termination of our auditors; |
| ◾ |
appointment and dismissal of external directors; |
| ◾ |
approval of acts and transactions requiring general meeting approval pursuant to the Israeli Companies
Law; |
| ◾ |
increase or reduction of our authorized share capital; |
| ◾ |
a merger; and |
| ◾ |
the exercise of the Board of Directors’ powers by a general meeting, if the Board of Directors
is unable to exercise its powers and the exercise of any of its powers is required for our proper management. |
The Israeli Companies
Law and our articles of association require that a notice of any annual or special shareholders meeting will be provided 21 days prior
to the meeting, except where the regulation prescribe for a period of not less than 35 days if the agenda includes certain resolutions
to be adopted at the general meeting.
Pursuant to our articles
of association, holders of ordinary shares have one vote for each ordinary share held on all matters submitted to a vote of the shareholders.
These voting rights may be affected by the grant of any special voting rights to the holders of a class of shares with preferential rights
that we may authorize in the future. The quorum required for our ordinary meetings of shareholders consists of at least two shareholders
present in person or by proxy, who hold or represent between them at least thirty-three and one-third percent of the total outstanding
voting rights. A meeting adjourned for lack of a quorum generally is adjourned to the same day in the following week at the same time
and place or on a later date specified in the summons or notice of the meeting. At the reconvened meeting, any number of our shareholders
present in person or by proxy shall constitute a lawful quorum.
Our articles of association
provide that, other than with respect to the amendment of the provisions of the articles of association with respect to the appointment
of directors and a resolution for removal of a director and the resolution of removal of a director, which action requires a majority
vote of 75%, all resolutions of the shareholders require a simple majority.
Israeli law does not
provide for public companies such as ours to have shareholder resolutions adopted by means of a written consent in lieu of a shareholders
meeting. The Israeli Companies Law provides that a shareholder, in exercising his or her rights and performing his or her obligations
toward the company and its other shareholders, must act in good faith and in an acceptable manner and avoid abusing his or her powers.
This is required, among other things, when voting at general meetings on matters such as changes to the articles of association, increasing
the company’s registered capital, mergers and approval of related-party transactions. In addition, pursuant to the Israeli Companies
Law, any controlling shareholder, any shareholder who knows that its vote can determine the outcome of a shareholder vote and any shareholder
who, under the company’s articles of association, can appoint or prevent the appointment of an office holder, is required to act
with fairness towards the company.
An ordinary resolution
requires approval by the holders of a simple majority of the voting rights represented at the meeting, in person, by proxy or by written
ballot, and voting on the resolution. Under the Israeli Companies Law, unless otherwise provided in the articles of association or applicable
law, all resolutions of the shareholders require a simple majority. A resolution for the voluntary winding up of the company requires
the approval of holders of 75% of the voting rights represented at the meeting, in person, by proxy or by written ballot and voting on
the resolution. For information regarding the majority required for approval of related party transactions, see “Approval of related
party transactions under Israeli law” above.
68
Transfer
of Shares and Notice.
Our ordinary shares that
are fully paid are issued in registered form and may be freely transferred under our articles of association unless the transfer is restricted
or prohibited by applicable law or rules of a stock exchange on which the shares are traded.
Election
of Directors.
Our
ordinary shares do not have cumulative voting rights in the election of directors. As a result, the holders of a majority of the voting
power represented at a shareholders meeting have the power to elect all of our directors, subject to the special approval requirements
for external directors described under the caption “External directors” in Item 6.C. – “Board Practices”
above. Pursuant to the Israeli Companies Law, the procedures for the appointment and removal and the term of office of directors, other
than external directors, may be contained in the articles of association of a company. Our articles of association provide for staggered
terms for directors. This provision may be amended only by a vote of 75% of our shares voting at a meeting of shareholders. The appointing
mechanism of our directors is further described under the caption “Shareholders Agreement and Articles of Association of Moked Ituran
Ltd.” in item 6.A. – “Directors and Senior Management” above.
Insurance,
Indemnification and Exculpation of Directors and Officers.
Under the Israeli 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
do not include such a provision. An Israeli company may not exculpate a director for liability arising out of a breach of duty of care
in respect of a prohibited dividend or distribution to shareholders.
Under the Israeli Companies
Law, a company may indemnify an office holder in respect of the following liabilities and expenses incurred for acts performed as an office
holder, either in advance of an event or following an event, provided a provision authorizing such indemnification is included in its
articles of association:
| • |
Financial liability imposed on him or her in favor of another person pursuant to a judgment, 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 an undertaking must be limited to 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 abovementioned events and amount
or criteria. |
| • |
Reasonable litigation expenses, including 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, such as a criminal penalty, 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 monetary penalty. |
| • |
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. Under the Israeli Companies Law, a company may obtain insurance for an office holder against liabilities incurred in his or her
capacity 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, 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 to the company or to a third party, including a breach arising out of the negligent
conduct of the office holder. |
| • |
A financial liability imposed on the office holder in favor of a third party. |
69
An Israeli company may
not indemnify or insure an office holder against any of the following:
| • |
a breach of duty of loyalty, except 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, civil fine, monetary penalty or forfeit levied against the office holder. |
Under the Israeli Companies
Law, exculpation, indemnification and insurance of office holders must be approved by our compensation committee and our board of directors
and, in respect to our chief executive officer, directors and controlling persons, by our shareholders. However due to the change in the
Israeli Company law, from February 2016, the extension or renewal of terms of office (which includes exculpation, indemnification and
insurance) of chief executive officer, which terms are not improving the previous terms or not significantly different, and are according
to the compensation policy, shall not require approval by the shareholders meeting. In addition, according to changes in Israeli Company
law from March 2016, chief executive officer can decide upon insignificant change in the terms of office of his subordinate officers,
subject to additional conditions and requirement to include such right in the compensation policy of the company.
Our articles of association
allow us to indemnify and ensure our office holders to the fullest extent permitted by the Israeli Companies Law. Our articles of association
also allow us to insure or indemnify any person who is not an office holder, including any employee, agent, consultant or contractor who
is not an office holder.
We currently have directors’
and officers’ liability insurance covering our officers and directors (including the officers and directors of our subsidiaries)
against certain claims. No claims for liability have been filed under this policy to date.
Our compensation committee,
board of directors and shareholders have resolved to indemnify our directors and officers to the fullest extent permitted by law and by
our articles of association for liabilities that are of certain enumerated types of events, subject to an aggregate sum equal to 25% of
the shareholders equity outstanding at the time a claim for identification is made as indicated by our then latest financial statements
(which sum also includes all insurance amounts received by such directors and officers under directors and officers insurance policies
maintained by us). For further details, see Item 7.B – Related Party Transactions above.
Change
in Capital.
Our articles of association
enable us to increase or reduce our share capital. Any such changes are subject to the provisions of the Israeli Companies Law and must
be approved by a resolution duly passed by our shareholders at a general meeting and voting on such change in the capital. In addition,
transactions that have the effect of reducing capital, such as the declaration and payment of dividends in the absence of sufficient retained
earnings and profits and an issuance of shares for less than their nominal value, require a resolution of the Board of Directors and court
approval.
| C. |
MATERIAL CONTRACTS |
For information concerning
our service contracts with our President and Co-Chief Executive Officers, see Item 7.B – Related Party Transactions.
| D. |
EXCHANGE CONTROLS |
Ordinary shares purchased
by non-residents of Israel with certain non-Israeli currencies (including dollars) and any amounts payable upon the dissolution, liquidation
or winding up of our affairs, as well as the proceeds of any sale in Israel of our securities to an Israeli resident, may be paid in non-Israeli
currencies (including US dollars) or, if paid in NIS, may be converted into freely repatriable currencies at the rate of exchange prevailing
at the time of conversion – pursuant to the general permit issued under the Israeli Currency Control Law, 1978, provided that Israeli
income tax has been paid on (or withheld from) such payments. Because exchange rates between the NIS and the U.S. dollar fluctuate continuously,
U.S. shareholders will be subject to any such currency fluctuation during the period from when a dividend is declared through the date
payment is made in U.S. dollars. Investments outside Israel by our company no longer require specific approval from the Controller of
Foreign Currency at the Bank of Israel.
70
| E. |
TAXATION |
The following describes
certain income tax issues relating to us and also certain income tax consequences arising from the purchase, ownership and disposition
of our ordinary shares. This discussion is for general information only and is not intended, and
should not be construed, as legal or professional tax advice and does not cover all possible tax considerations. To the extent
that the discussion is based on legislation yet to be judicially or administratively interpreted, there can be no assurance that the views
expressed herein will accord with any such interpretation in the future. Accordingly, holders of our ordinary shares should consult their
own tax advisor as to the particular tax consequences arising from your purchase, ownership and disposition of ordinary shares, including
the effects of applicable Israeli, United States and other laws and possible changes in the tax laws.
The following discussion
represents a summary of the material United States Israeli tax laws affecting us and our shareholders.
United
States Tax Considerations
The following discussion
is a description of the material United States, or US, federal income tax considerations applicable to the acquisition, ownership and
disposition of our ordinary shares by US Holders who hold such ordinary shares as “capital assets”. As used in this section,
the term “US Holder” means a beneficial owner of an ordinary share who is:
| ◾ |
an individual citizen or resident of the United States; |
| ◾ |
a corporation or partnership created or organized in or under the laws of the United States or of any
state of the United States or the District of Columbia (other than a partnership, including any entity treated as a partnership for U.S.
tax purposes, that is not treated as a US person under any applicable Treasury regulations); |
| ◾ |
an estate, the income of which is subject to United States federal income taxation regardless of its
source; or |
| ◾ |
a trust if the trust has elected validly to be treated as a US person for United States federal income
tax purposes or if a US court is able to exercise primary supervision over the trust’s administration and one or more US persons
have the authority to control all of the trust’s substantial decisions. |
The term “Non-US
Holder” means a beneficial owner of an ordinary share who is not a US Holder. The tax consequences to a Non-US Holder may differ
substantially from the tax consequences to a US Holder. This discussion does not address any aspects of US federal income tax which may
be relevant to a Non-US Holder. Accordingly, Non-US Holders are strongly urged to consult with their own tax advisors.
This description is based
on provisions of the United States Internal Revenue Code of 1986, as amended, existing, proposed and temporary US Treasury regulations
and administrative and judicial interpretations thereof, each as available and in effect as of the date of this report. These sources
may change, possibly with retroactive effect, and are open to differing interpretations. This description does not discuss all aspects
of US federal income taxation that may be applicable to investors in light of their particular circumstances or to investors who are subject
to special treatment under US federal income tax law, including:
| ◾ |
insurance companies; |
| ◾ |
dealers or traders in stocks, securities or currencies; |
| ◾ |
financial institutions and financial services entities; |
| ◾ |
real estate investment trusts; |
| ◾ |
regulated investment companies; |
| ◾ |
grantor trusts; |
| ◾ |
persons that receive ordinary shares as compensation for the performance of services; |
| ◾ |
tax-exempt organizations; |
| ◾ |
persons that hold ordinary shares as a position in a straddle or as part of a hedging, conversion or
other integrated instrument; |
| ◾ |
individual retirement and other tax-deferred accounts; |
| ◾ |
expatriates of the United States; |
| ◾ |
persons having a functional currency that is not the US dollar; or |
| ◾ |
direct, indirect or constructive owners of 10% or more, by voting power or value, of our ordinary shares.
|
This description also
does not consider the US federal gift or estate tax or alternative minimum tax consequences of the acquisition, ownership and disposition
of our ordinary shares.
If a partnership (or
any other entity treated as a partnership for US 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 should consult
its tax advisor as to its tax consequences.
We
urge our shareholders to consult with your own tax advisor regarding the tax consequences of acquiring, owning or disposing of our ordinary
shares, including the effects of US federal, state, local and foreign and other tax laws. This summary does not constitute, and should
not be construed as, legal or tax advice to holders of our shares.
71
Medicare Tax
Beginning
January 1, 2013, certain individuals, estates and trusts, which have income above the statutory threshold amounts, generally will be subject
to a 3.8% Medicare tax on their investment income and gain, with limited exceptions. US Holders should consult their own tax advisors
concerning Medicare tax consequences, if any, of owning or disposing of our ordinary shares.
Distribution Paid on
the Ordinary Shares
As
of November 16, 2009, our dividend policy provides for an annual dividend distribution in an amount not less than 50% of our net profits,
calculated based on the audited financial statements for the period ending on December 31 of the fiscal year with respect to which the
relevant dividend is paid. On February 21, 2012, we revised our dividend policy so that our dividends will be declared and distributed
on a quarterly basis in an amount not less than 50% of our net profits, calculated on the basis of our reviewed quarterly financial statements
each fiscal year. On February 27, 2017, the board of directors approved a change in the dividend policy. This policy called for a dividend
of $5 million, at minimum per quarter. this policy became effective starting from the dividends for the first quarter of 2017. During
2020 and due to the Covid-19 effects, such distribution was suspended. On March 3, 2021, we declared the renewal of the dividend distribution
policy of at least $3 million a quarter. This new policy became effective starting from the fourth quarter of 2020.
Subject to the discussion
below under “Passive Foreign Investment Company Considerations”, US Holders, for US federal income tax purposes, will generally
be required to include in their gross income as ordinary dividend income (unless qualifies as “qualified dividend income”)
in the amount of any distributions made to them in cash or property (other than certain distributions, if any, of our ordinary shares
distributed pro rata to all our shareholders), with respect to their ordinary shares, before reduction for any Israeli taxes withheld
(without regard to whether any portion of such tax may be refunded to them by the Israeli tax authorities), to the extent that those distributions
are paid out of our current or accumulated earnings and profits as determined for US federal income tax purposes. Subject to the discussion
below under “Passive Foreign Investment Company Considerations”, distributions in excess of our current and accumulated earnings
and profits as determined under US federal income tax principles will be applied first against, and will reduce their tax basis in, your
ordinary shares and, to the extent they exceed that tax basis, will then be treated as capital gain. We do not maintain calculations of
our earnings and profits under US federal income tax principles. Our dividends will not qualify for the dividends-received deduction generally
available to corporate US Holders.
For a US Holder, if we
pay a dividend in NIS, any such dividend, including the amount of any Israeli taxes withheld, will be includible in such US Holder’s
income in a US dollar amount calculated by reference to the currency exchange rate in effect on the day the distribution is includible
in your income, regardless of whether the NIS are converted into US dollars. Any gain or loss resulting from currency exchange fluctuations
during the period from the date the dividend is includible in such US Holder’s income to the date that payment is converted into
US dollars generally will be treated as ordinary income or loss.
A non-corporate US Holder’s
“qualified dividend income” currently is subject to tax at reduced rates not exceeding 23.8% (including, if applicable, Medicare
tax at a rate of 3.8%). For purposes of determining whether a non-corporate US Holders will have “qualified dividend income”,
“qualified dividend income” generally includes dividends paid by a foreign corporation if either:
| ◾ |
the stock of that corporation with respect to which the dividends are paid is readily tradable on an
established securities market in the US, or |
| ◾ |
that corporation is eligible for benefits of a comprehensive income tax treaty with the US that includes
an information exchange program and is determined to be satisfactory by the US Secretary of the Treasury. The Internal Revenue Service
has determined that the US-Israel Tax Treaty is satisfactory for this purpose. |
In addition, under current
law, a non-corporate US Holder must generally hold his ordinary shares for more than 60 days during the 121-day period beginning 60 days
prior to the ex-dividend date in order for the dividend to qualify as “qualified dividend income”.
Dividends paid by a foreign
corporation will not be treated as “qualified dividend income”, however, if such corporation is treated, for the tax year
in which the dividend is paid or the preceding tax year, as a “passive foreign investment company” for US federal income tax
purposes. We do not believe that we will be classified as a “passive foreign investment company” for US federal income tax
purposes for our current taxable year. However, see the discussion under “Passive Foreign Investment Company Considerations”
below.
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Foreign Tax Credit
Any dividends paid by
us to a US Holder with respect to our ordinary shares generally will be treated as foreign source passive income for US foreign tax credit
purposes. Subject to the foreign tax credit limitations, a US Holder may elect to credit any Israeli income taxes withheld from dividends
paid on our ordinary shares against such shareholder’s US federal income tax liability (provided, inter
alia, such shareholder satisfies certain holding requirements with respect to our ordinary shares). Amounts withheld in excess
of the Treaty tax rate, however, will not be creditable against such shareholder’s US federal income tax liability. As an alternative
to claiming a foreign tax credit, such shareholder may instead claim a deduction for any withheld Israeli income taxes, but only for a
year in which such shareholder elects to do so with respect to all foreign income taxes. The amount of foreign income taxes that may be
claimed as a credit in any year is subject to complex limitations and restrictions, which must be determined on an individual basis by
each shareholder. Accordingly, our shareholders should consult their own tax advisor to determine whether their income with respect to
their ordinary shares would be foreign source income and whether and to what extent they would be entitled to the credit.
Disposition of Ordinary
Shares
Upon the sale or other
disposition of ordinary shares, subject to the discussion below under “Passive Foreign Investment Company Considerations”,
if a holder of our shares is a US Holder, such shareholder generally will recognize capital gain or loss equal to the difference between
the amount realized on the disposition and such shareholder’s adjusted tax basis in the ordinary shares, which is usually the cost
of such shares, in dollars. US Holders should consult their own advisors with respect to the tax consequences of the receipt of a currency
other than dollars upon such sale or other disposition.
Gain or loss upon the
disposition of the ordinary shares will be treated as long-term if, at the time of the disposition, the ordinary shares were held for
more than one year. Long-term capital gains realized by non-corporate US Holders generally are subject to a lower maximum marginal US
federal income tax rate than the maximum marginal US federal income tax rate applicable to ordinary income, other than qualified dividend
income, as defined above, generally, not exceeding 23.8% (including, if applicable, Medicare tax at a rate of 3.8%). The deductibility
of capital losses by a US Holder is subject to limitations. In general, any gain or loss recognized by a US Holder on the sale or other
disposition of ordinary shares will be US source income or loss for US foreign tax credit purposes. US Holders should consult their own
tax advisors concerning the source of income for US foreign tax credit purposes and the effect of the US-Israel Tax Treaty on the source
of income.
Passive Foreign Investment
Company Considerations
Special US federal income
tax rules apply to US Holders owning shares of a “passive foreign investment company”, or a PFIC, for US federal income tax
purposes. A non-US corporation will be considered a PFIC for any taxable year in which, after applying look-through rules, either
| ◾ |
75% or more of its gross income consists of specified types of passive income, or |
| ◾ |
50% or more of the average value of its assets consists of passive assets, which generally means assets
that generate, or are held for the production of, “passive income.” |
| ◾ |
Passive income for this purpose generally includes dividends, interest, royalties, rents and gains from
commodities and securities transactions and includes amounts derived by reason of the temporary investment of funds. If we were classified
as a PFIC, and you are a US Holder, you could be subject to increased tax liability upon the sale or other disposition of ordinary shares
or upon the receipt of amounts treated as “excess distributions” (generally, your ratable portion of distributions in any
year which are greater than 125% of the average annual distribution received by you either in the shorter of the three preceding years
or your holding period). Under these rules, the excess distribution and any gain would be allocated ratably over our shareholders’
holding period for the ordinary shares, and the amount allocated to the current taxable year and any taxable year prior to the first taxable
year in which we were a PFIC would be taxed as ordinary income. The amount allocated to each of the other taxable years would be subject
to tax at the highest marginal rate in effect for the applicable class of taxpayer for that year, and an interest charge for the deemed
deferral benefit would be imposed on the resulting tax allocated to such other taxable years. In addition, holders of stock in a PFIC
may not receive a “step-up” in basis on shares acquired from a decedent. If any of our shareholders are US Holders who hold
ordinary shares during a period when we are a PFIC, such shareholders be subject to the foregoing rules even if we cease to be a PFIC.
|
We believe that we will
not be classified as a PFIC for US federal income tax purposes for our current taxable year and we anticipate that we will not become
a PFIC in any future taxable year based on our financial statements, our current expectations regarding the value and nature of our assets,
and the sources and nature of our income. This conclusion, however, is a factual determination that must be made annually based on income
and assets for the entire taxable year and thus may be subject to change. It is not possible to determine whether we will be a PFIC for
the current taxable year until after the close of the year and our status in future years depends on our income, assets and activities
in those years. In addition, because the market price of our ordinary shares is likely to fluctuate and the market price of the shares
of technology companies has been especially volatile, and because that market price may affect the determination of whether we will be
considered a PFIC, we cannot assure any US Holder that we will not be considered a PFIC for any taxable year.
73
If we were a PFIC, our
shareholders could avoid certain tax consequences referred to above by making an election to treat us as a qualified electing fund or
by electing to mark the ordinary shares to market. A US Holder may make a qualified electing fund election only if we furnish the US Holder
with certain tax information and we do not presently intend to prepare or provide this information. Alternatively, a US Holder of PFIC
stock that is publicly traded may elect to mark the stock to market annually and recognize as ordinary income or loss each year an amount
equal to the difference as of the close of the taxable year between the fair market value of the PFIC stock and the US Holder’s
adjusted tax basis in the PFIC stock. Losses would be allowed only to the extent of net mark-to-market gain previously included by the
US Holder under the election for prior taxable years. This election is available for as long as our ordinary shares constitute “marketable
stock,” which includes stock that is “regularly traded” on a “qualified exchange or other market.” We believe
that the Nasdaq Global Select Market will constitute a qualified exchange or other market for this purpose. However, no assurances can
be provided that our ordinary shares will continue to trade on the Nasdaq Global Select Market or that the shares will be regularly traded
for this purpose.
According to law amendments
effective in 2010, US persons that are shareholders in a PFIC generally will be required to file an annual report disclosing the ownership
of such shares and certain other information.
The rules applicable
to owning shares of a PFIC are complex, and our shareholders should consult with their own tax advisor regarding the tax consequences
that would arise if we were treated as a PFIC.
Information Reporting
and Back-up Withholding
Dividend payments with
respect to ordinary shares and proceeds from the sale or disposition of ordinary shares made within the United States or by a US payor
or US middleman may be subject to information reporting to the Internal Revenue Service and possible US backup withholding. Certain exempt
recipients (such as corporations) are not subject to these information reporting requirements. Backup withholding also will not apply
to a US Holder who furnishes a correct taxpayer identification number and makes any other required certification or otherwise is exempt
from US backup withholding requirements. US Holders who are required to establish their exempt status must provide such certification
on Internal Revenue Service Form W-9. US Holders should consult their tax advisors regarding the application of the US information reporting
and backup withholding rules.
Backup withholding is
not an additional tax. Amounts withheld under the backup withholding rules may be credited against a US Holder’s US federal income
tax liability and a US Holder may obtain a refund of any excess amounts withheld by filing the appropriate claim for refund with the Internal
Revenue Service and furnishing any required information in a timely manner. The above description
is not intended to constitute a complete analysis of all tax consequences relating to acquisition, ownership and disposition of our ordinary
shares. Our shareholders are urged to consult their own tax advisor concerning the tax consequences of their particular situation.
Israeli
Tax Considerations
The following is a summary
of the current material Israeli tax laws applicable to companies in Israel with special reference to its effect on us. This section also
contains a discussion of certain Israeli government programs from which we may benefit and some Israeli tax consequences to persons acquiring
ordinary shares. This summary does not discuss all the acts 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 subject to special treatment under Israeli law. Examples
of this kind of investor include residents of Israel, traders in securities or persons that own, directly or indirectly, 10% or more of
our outstanding capital, all of whom are subject to special tax regimes not covered in this discussion. Some parts of this discussion
are based on new tax legislation that has not been subject to judicial or administrative interpretation. Accordingly, we cannot assure
you that the views expressed in the discussion will be accepted by the tax authorities in question. The discussion is not intended and
should not be construed as legal or professional tax advice and does not cover all possible tax considerations.
74
The discussion below
should not be construed as legal or professional tax advice and 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 in particular, the effect of any foreign, state or local taxes.
General Corporate Tax
Structure in Israel
Israeli companies are
generally subject to corporate tax on their taxable income. In 2013 the corporate tax rate was 25%. On August 5, 2013 the Israeli Parliament
amended the Income Tax Ordinance, by which, inter alia, the corporate tax rate was raised by 1.5% to a rate of 26.5% s from 2014, and
in 2015was 26.5%, and for 2016 the corporate tax decreased to a rate of 25%. According to new amendment, the regular corporate tax for
2017 decreased to a rate of 24% and, as of 2018 and thereafter, there will be a further reduction to 23%. Capital gains derived after
January 1, 2010 are subject to a corporate tax rate imposed in the sale year.
Tax Benefits Under the
Law for the Encouragement of Capital Investments, 1959, as amended
Under the Israeli law,
Israeli subsidiary of the company is entitled to various tax benefits by virtue of the “Preferred Enterprise” status that
was granted to her production under the “Investment Law”. There can be no assurance that this Israeli subsidiary will continue
to qualify as “Preferred Enterprises” in the future or that the benefits will be granted in the future.
Reform
of the Investments Law under the 2010 and 2013 Amendments
On December 29, 2010,
the Israeli parliament approved an amendment to the Investments Law, effective as of January 1, 2011, which introduces a new status of
“Preferred Company” and “Preferred Enterprise”.
The amendment allows enterprises meeting certain required criteria to enjoy grants as well as tax benefits. The amendment also introduces
certain changes to the map of geographic development areas for purposes of the Investments Law, which will take effect in future years.
The amendment generally abolishes the previous tax benefit routes that were afforded under the Investment Law, specifically the tax-exemption
periods previously allowed, and introduces new tax benefits for industrial enterprises meeting the criteria of the law, which include
among others the following:
On August 5, 2013 the
Israeli Parliament amended the Investments Law, by which, inter alia, it canceled the scheduled progressive reduction in the corporate
tax rate for Preferred Enterprises and set it at 16% for enterprises located elsewhere as of January 1, 2014.
On December 2016 the
Israeli Parliament amended the Investments Law, by which, inter alia, it reduced for Preferred Enterprises which is located in areas other
than “Development Zone A” and set it at 7.5% for enterprises located elsewhere as of January 1, 2017.
| • |
The reduced tax rates will no longer be contingent upon making a minimum qualifying investment in productive
assets. |
| • |
A definition of “preferred income” was introduced into the Investments Law to include certain
types of income that are generated by the Israeli production activity of a preferred enterprise. |
A Preferred Company (as
defined in the Investments Law) may generally elect to apply the provisions of the amendment to preferred income produced or generated
by it commencing from January 1, 2011. The amendment provides various transitional provisions which allow, under certain circumstances,
to apply the new regime to investment programs previously approved or elected under the Investments Law in its previous form, or to continue
existing investment programs under the provisions of the Investment Law in its previous form for a certain period of time.
As of December 31, 2022,
only 1 of our Israeli subsidiaries is entitled to a “Preferred Company” status pursuant to the Investments Law.(see Note 15
c.2 to the Financial Statements).
Tax
Benefits under the 2016 Amendment
In December 2016 new
legislation amended the Investment Law (the “2016 Amendment”). Under the 2016 Amendment a new status of “Technological
Preferred Enterprise” was introduced to the Investment Law.
Technological Preferred
Enterprise – an enterprise which, amongst other conditions, is part of a consolidated group with consolidated revenues of less than
NIS 10 billion. A Technological Preferred Enterprise which is located in areas other than Development Zone A will be subject to tax at
a rate of 12% on profits derived from intellectual property, and a Technological Preferred Enterprise in Development Zone A will be subject
to tax at a rate of 7.5%. Income not eligible for Technological Preferred Enterprise is taxed
at the regular corporate tax rate or at the preferred tax rate as mentioned above, as the case may be.
75
As of December 31, 2022,
2 of our Israeli subsidiaries are entitled to a “Technological Preferred Enterprise” status pursuant to the Investments Law.
Taxation of Non-Israeli
Subsidiaries
Non-Israeli subsidiaries
are generally taxed based upon tax laws applicable in their countries of residence. In accordance with the provisions of Israeli-controlled
foreign corporation rules, certain income of a non-Israeli subsidiary, if the subsidiary’s primary source of income is passive income
(such as interest, dividends, royalties, rental income or income from capital gains), may be deemed distributed as a dividend to the Israeli
parent company and consequently is subject to Israeli taxation. An Israeli company that is subject to Israeli taxes on such deemed dividend
income of its non-Israeli subsidiaries may generally receive a credit for non-Israeli income taxes paid by the subsidiary in its country
of residence or are to be withheld from the actual dividend distributions.
On December 23, 2013
the Israeli Parliament amended the Income Tax Ordinance, with profound changes to the tax treatment of CFC, mainly with regard to the
following:
| • |
Reducing the tax rate criterion: a company is considered CFC If the tax rate applicable to passive income
does not exceed 15 % (instead of 20 %). |
| • |
Sale of a security will be considered passive income, unless the holding duration is less than one year
and it has been shown that the security served in a business. |
| • |
Cancel the notional credit mechanism and replacing it with dividend deduction against the actual dividend
distribution. Tax refund may be allowed under certain conditions. |
| • |
Dividends derived from income that was taxed at a rate of at least 15% shall not be considered “passive
income” under certain conditions. |
Taxation of our shareholders
Capital Gains Taxes
Applicable to Israeli Resident Shareholders
The income tax rate applicable
to Real Capital Gain derived by an Israeli individual from the sale of shares which had been purchased after January 1, 2012, whether
listed on a stock exchange or not, is 25%. However, if such shareholder is considered a “Substantial Shareholder” (as defined
below) 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%. A “substantial
shareholder” is generally a person who alone, or together with his relative or another person who collaborates with him on
a permanent basis, hold, directly or indirectly, at least 10% of any of the “means of control” of the corporation. “Means
of control” generally include the right to vote, receive profits, nominate a director or an officer, receive assets upon
liquidation, or order someone who holds any of the aforesaid rights how to act, and all regardless of the source of such right.
Generally, as of January
1, 2012, the tax rate applicable to capital gains derived from by Israeli resident company on the sale of shares, whether listed on a
stock market or not, is the corporate tax rate in Israel (commencing from January 1, 2018, 23%).
Commencing as of January 1, 2017, an individual
whose taxable income during a tax year is in excess of NIS 640,000, will be liable for an additional 3% on the portion that is in excess
of NIS 640,000 (as of January 1, 2023, the amount is 698,280 NIS).
Moreover, capital gains
derived by a shareholder who is a dealer or trader in securities, or to whom such income is otherwise taxable as ordinary business income,
are taxed in Israel at ordinary income rates (currently up to 48% for individuals in 2014). Pursuant to Amendment No. 234 to the Income
Tax Ordinance there was a decrease of 1% and stands at 47% from January 1, 2017 and onwards.
Taxation of Israeli
shareholders on receipt of dividends
Israeli resident individuals
are subject to Israeli income tax on the receipt of dividends paid, at the rate of 25%, or 30% for a shareholder that is considered a
“Substantial Shareholder” (as defined above) at any time during the 12-month period preceding such distribution. A distribution
of dividend to Israeli resident individuals from income attributed to a Preferred Enterprise income or a Technological Preferred Enterprise
income will be generally subject to a withholding tax rate of 20%. An individual whose taxable income during a tax year is in excess of
NIS 810,720, will be liable for an additional 2% on the portion that is in excess of NIS 810,720. From January 1, 2017 taxpayers having
taxable income of NIS 640,000 will be subject to an additional tax payment at the rate of 2% (and commencing from January 1, 2017 –
an additional tax payment at the rate of 3%) on the portion of their taxable income for such tax year that is in excess such threshold.
For this purpose, taxable income includes taxable capital gains from the sale of our shares and taxable income from dividend distributions.
76
Dividends
paid from income derived from Preferred Enterprises are subject to withholding at the rate of 20%. Any dividends distributed to foreign
companies, as defined in the Investment law, derived from income from the Technological Preferred Enterprise will be subject to tax at
a rate of 4%, provided the foreign company holds over 90% of the outstanding shareholding.
Dividends paid on our
ordinary shares to Israeli companies are exempt from such tax, except for dividends distributed from income derived outside of Israel,
which are subject to the corporate tax rate.
Taxation
of non-Israeli shareholders on receipt of dividends.
Non-residents of Israel
are subject to income tax on income accrued or derived from sources in Israel, including dividends paid by Israeli companies. On distributions
of dividends other than stock dividends, income tax (generally collected by means of withholding) will generally apply at the rate of
25%, or 30% for a shareholder that is considered a significant shareholder (as defined above) at any time during the 12-month period preceding
such distribution, unless a different rate is provided in a treaty between Israel and the shareholder’s country of residence. Dividends
paid from income derived from Approved or Benefited Enterprises are subject to withholding at the rate of 20%, or 4% for Benefited Enterprises
in the Ireland Track. Under the U.S.-Israel Tax Treaty, the maximum tax on dividends paid to a holder of ordinary shares who qualifies
as a resident of the United States within the meaning of the U.S.-Israel Tax Treaty is 25%. The treaty provides for reduced tax rates
on dividends if (a) the shareholder is a U.S. corporation holding at least 10% of our issued voting power during the part of the tax year
that precedes the date of payment of the dividend and held such minimal percentage during the whole of its prior tax year, and (b) not
more than 25% of the Israeli company’s gross income consists of interest or dividends, other than dividends or interest received
from subsidiary corporations or corporations 50% or more of the outstanding voting shares of which is owned by the Israeli company. The
reduced treaty rate, if applicable, is 15% in the case of dividends paid from income derived from Approved, Benefited or Preferred Enterprise
or 12.5% otherwise and subject that the non-Israeli shareholder would provide to prior to the divided distribution a certificate from
the Israeli Tax Authority for the reduce tax rates under the tax treaty with their country of residence and additional conditions must
be meet. A distribution of dividend to non-Israeli resident from income attributed to a Preferred Enterprise will be generally subject
to withholding tax rates of 20%, subject to a reduced rate under the provisions of any applicable double tax treaty.
A non-resident of Israel
who receives dividends from which full tax was withheld is generally exempt from the duty to file returns in Israel in respect of such
income, provided such income was not derived from a business conducted in Israel by the taxpayer, and the taxpayer has no other taxable
sources of income in Israel.
Capital Gains Taxes
Applicable to Non-Israeli Resident Shareholders.
Israeli law generally
imposes a capital gains tax on the sale of securities and any other capital asset. But, generally non-Israeli residents are exempt
from Israeli capital gains tax on any gains derived from the sale of shares of Israeli companies publicly traded on a recognized stock
exchange or regulated market outside of Israel, provided that the shares were purchased after January 1, 2009, capital gain does not belong
to the foreign resident’s permanent establishment in Israel, the security was not acquired by the foreign resident from a relative
and the shares are not listed on Israeli stock exchange upon the sale of the shares. After the company’s shares had been listed
for trading on a foreign Exchange capital gain does not belong to the foreign resident’s permanent establishment in Israel, the
shares had to be acquired after the listing of the shares of the company on a stock exchange outside of Israel, and the provisions of
section 101 of the Ordinance, the provisions of the Adjustments Law and provisions under section 130A of the Ordinance do not apply to
the capital gain, non-Israeli corporations will not be entitled to such exemption if an Israeli resident (i) has a controlling interest
of more than 25% in such non-Israeli corporation, or (ii) is the beneficiary or is entitled to 25% or more of the revenues or profits
of such non-Israeli corporation, whether directly or indirectly.
In some instances where
our shareholders may be liable to Israeli tax on the sale of their ordinary shares, the payment of the consideration may be subject to
the withholding of Israeli tax at the source.
77
| F. |
DIVIDENDS AND PAYING AGENTS |
Not applicable
| G. |
STATEMENT BY EXPERTS |
Not applicable.
| H. |
DOCUMENTS ON DISPLAY |
We are required to file
reports and other information with the Securities and Exchange Commission under the Securities Exchange Act of 1934 and the regulations
thereunder applicable to foreign private issuers. Reports and other information filed by us with the Securities and Exchange Commission
may be inspected and copied at the Securities and Exchange Commission’s public reference facilities described below. We are not
required to file periodic information as frequently or as promptly as United States companies. As a foreign private issuer, we are also
exempt from the rules under the Exchange Act prescribing the furnishing and content of proxy statements; and our officers, directors and
principal shareholders are exempt from the reporting and other provisions of Section 16 of the Exchange Act.
You may review a copy
of our filings with the Securities and Exchange Commission, including any exhibits and schedules, at the Securities and Exchange Commission’s
public reference facilities at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. You may also obtain copies of such materials at
prescribed rates by writing to the Public Reference Section of the Securities and Exchange Commission at 100 F Street, N.E., Washington,
D.C. 20549. You may call the Securities and Exchange Commission at 1-800-SEC-0330 for further information on the public reference rooms.
As a foreign private issuer, we are now required to file through the Securities and Exchange Commission’s EDGAR system and our periodic
filings are therefore available on the Securities and Exchange Commission’s Web site at http://www.sec.gov. You may read and copy
any reports, statements or other information that we file with the Securities and Exchange Commission at the Securities and Exchange Commission
facilities listed above. These Securities and Exchange Commission filings are also available to the public from commercial document retrieval
services.
| I. |
SUBSIDIARY INFORMATION |
Not applicable
ITEM 11.
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
The principal market
risks to which we are exposed as a result of our operations are foreign exchange rate risks and interest rate risks.
Foreign exchange rate risk
Although we report our consolidated financial
statements in dollars, in 2020, 2021 and 2022, a portion of our revenues and direct expenses was derived in other currencies. For fiscal
years 2020, 2021 and 2022 we derived approximately 30.6%, 26.6% and 24.8% of our revenues in dollars and other currencies, 49.2%, 52.0%
and 51.6% in NIS, 20.2%, 21.4% and 23.6% in Brazilian Reals. In fiscal years 2020, 2021 and 2022, 29.0%, 30.9% and 28.1% of our expenses
were incurred in dollars and other currencies, 50.6 %, 52.3% and 53.4% in NIS and 20.4%, 16.8% and 18.5% in Brazilian Reals.
Although we report our consolidated financial
statements in dollars, in 2020, 2021 and 2022, a portion of our revenues and direct expenses was derived in other currencies. For fiscal
years 2020 ,2021 and 2022, we derived approximately 30.6%, 24.3% and 24.8% of our revenues in dollars and other currencies, 49.2%, 55.1%
and 51.6% in NIS, 20.2%, 21.4% and 23.6% in Brazilian Reals. In fiscal years, 2020, 2021 and 2022, 29.0%, 30.9% and 28.1% of our expenses
were incurred in dollars and other currencies, 50.6%, 52.3% and 53.4% in NIS and 20.4%, 16.8% and 18.5% in Brazilian Reals.
Exchange differences upon conversion from
our functional currency to dollars (presentation currency) are accumulated as a separate component of accumulated other comprehensive
loss under stockholders’ equity. In the year 2022 a loss of $ 4.6 Million. In the year 2021, a loss of $ 2.9 Million. In the year
2020 accumulated other comprehensive loss was $12.9 Million.
78
The fluctuation of the
other currencies in which we incur our expenses or generate revenues against the dollar has had the effect of increasing or decreasing
(as applicable) reported revenues, cost of revenues and operating expenses in such foreign currencies when converted into dollars from
period to period. The following table illustrates the effect of the changes in exchange rates on our revenues, gross profit and operating
income for the periods indicated:
|
|
Year Ended December 31, |
|||||||||||||||||||||||
|
|
2020 |
2021 |
2022 |
|||||||||||||||||||||
|
|
Actual |
At 2019
exchange rates (1) |
Actual |
At 2020
exchange rates (1) |
Actual |
At 2021
exchange rates (1) |
||||||||||||||||||
|
|
(In US$ thousands) |
|||||||||||||||||||||||
|
Revenues |
245,627 |
262,529 |
270,884 |
264,507 |
293,072 |
296,752 |
||||||||||||||||||
|
Gross profit |
115,515 |
122,708 |
126,482 |
123,734 |
137,562 |
139,120 |
||||||||||||||||||
|
Operating income |
27,831 |
31,229 |
54,615 |
53,595 |
58,774 |
59,218 |
||||||||||||||||||
(1) Based
on average exchange rates during the period. Those columns are Non GAAP information.
Our
policy remains to reduce exposure to exchange rate fluctuations by entering into foreign currency forward transactions that mainly qualify
as hedging transactions under ASC Topic 815, “Derivatives and Hedging” the
results of which are reflected in our income statements as revenues or cost of revenues. Currently, the item most likely to be affected
by the foreign currency risk is our inventory purchase price. Therefore, from time to time, we enter into such forward contracts, generally
of 3 to 20 months’ duration in order to hedge a portion of our foreign currency risk on the inventory purchase price. The result
of these transactions, which are affected by fluctuations in exchange rates, could cause our cost of revenues, gross profit and operating
income to fluctuate.
Interest rate risk
We invest our cash balances
in each country in local currency in bank deposits and therefore, we are exposed to interest rate fluctuation in those currencies, but
we do not believe such risks to be material. We do not use derivative financial instruments to limit exposure to interest rate risk.
ITEM 12.
DESCRIPTIONS OF SECURITIES OTHER THAN EQUITY SECURITIES
Not applicable.
PART
II
ITEM 13.
DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
Not applicable
ITEM 14.A
MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
None
ITEM 15.
CONTROLS AND PROCEDURES
(A) Disclosure Controls
and Procedures
Our co-chief executive
officers and chief financial officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in Rule
13a-15(e) of the Securities Exchange Act of 1934, as amended) as of December 31, 2022 have concluded that, as of such date, our disclosure
controls and procedures were effective to ensure that information required to be disclosed by us in reports that we file or submit under
the Exchange Act is accumulated and communicated to our management, including our co-chief executive officers and chief financial officer,
to allow timely decisions regarding required disclosure and is recorded, processed, summarized and reported within the periods specified
by the SEC’s rules and forms.
79
(B) Management’s
Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing
and maintaining adequate internal control over our financial reporting. Internal control over financial reporting is designed to provide
reasonable assurance to our management and the board of directors regarding the reliability of financial reporting and the preparation
and fair presentation of published financial statements. Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurances
with respect to financial statement preparation and presentation. 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 decline.
Our management assessed
the effectiveness of our internal control over financial reporting, as of December 31, 2022. In making this assessment, our management
used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated
Framework (2013 Framework).
Based on such assessment,
our management has concluded that, as of December 31, 2022, our internal control over financial reporting is effective.
Fahn Kanne Co. Grant Thornton Israel,
our independent registered public accounting firm, has issued an attestation report on our internal control over financial reporting,
as of December 31, 2022 and such report is included elsewhere in this Form 20 -F.
Change
in Internal Control over Financial Reporting
There have not been any
changes in our internal control over financial reporting during the year ended December 31, 2022 that have materially affected, or are
reasonably likely to materially affect, our internal control over financial reporting.
(C) Attestation
Report of the Registered Public Accounting Firm.
80
|
|
Fahn Kanne Co. |
|
|
Head Office |
|
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM |
32 Hamasger Street |
|
|
Tel-Aviv 6721118, |
|
Board of Directors and Stockholders |
ISRAEL |
|
|
PO Box 36172, 6136101 |
|
ITURAN LOCATION AND CONTROL LTD. |
|
|
|
T +972 3 7106666 |
|
|
F +972 3 7106660 |
|
|
www.gtfk.co.il |
Opinion on internal control
over financial reporting
We have audited the
internal control over financial reporting of Ituran Location and Control Ltd. and Subsidiaries (the “Company”) as of December
31, 2022, 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, based on our audit, the
Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2022, 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 consolidated
financial statements of the Company as of and for the year ended December 31, 2022, and our report dated April 19, 2023, 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.
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/ FAHN KANNE
CO. GRANT THORNTON ISRAEL
Certified Public Accountants (Isr.)
Tel-Aviv, Israel
April 19, 2023
81
ITEM 16.
[RESERVED]
ITEM 16A.
AUDIT COMMITTEE FINANCIAL EXPERT
Our board of directors
determined that Mr. Israel Baron, one of our independent directors, is an “audit committee financial expert”, as defined by
the applicable regulations promulgated under Section 407 of the Sarbanes-Oxley Act. For information concerning the experience of Mr. Baron,
please refer to Item 6.A – Directors and Senior Management, above.(YLC- to review)
ITEM 16B. CODE
OF ETHICS
In 2005, we adopted a
Code of Ethics that applies to our senior management, including chief executive officer, chief financial officer, internal auditor and
other individuals performing similar functions. Code of Business Conduct and Ethics was revised on February 26, 2017 as part of our Internal
Compliance Program. The amendments were imposing on our employee’s stricter rules on compliance with Intellectual properties laws,
compliance with Foreign Corrupt Practices Act, restrictions and rules on posting information on Ituran on social media and online networking
websites, adding additional disciplinary measures and providing contact details of our compliance officer. The Code of Business Conduct
and Ethics has been posted on our website at www.ituran.com.
ITEM 16C. PRINCIPAL
ACCOUNTANT FEES AND SERVICES
Fahn Kanne Co.
Grant Thornton Israel (“Grant Thornton”), has served as our independent auditors. On December 14, 2022 they have been re-elected
by our shareholders to serve as our independent auditors for the year 2022, until the next general meeting of the shareholders. The following
table presents aggregate fees for professional audit services and other services rendered by Grant Thornton, for 2021 and 2022:
|
|
2021 |
2022 |
||||||
|
|
(in thousands, USD) |
|||||||
|
Audit Fees (1)
|
573 |
581 |
||||||
|
Tax Fees (2)
|
7 |
13 |
||||||
|
Total
|
580 |
594 |
||||||
| (1) |
The audit fees for the years ended December 31, 2021 and 2022 respectively, were for professional services
rendered for the audits of our annual consolidated financial statements, review of consolidated quarterly financial statements and statutory
audits. |
| (2) |
Consists of all tax related services. |
Our audit committee has
approved the above audit and non-audit services provided by Grant Thornton, during the years 2021 and 2022.
ITEM 16D.
EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
Not applicable.
| ITEM 16E. |
PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS |
During
2020, the Company did not purchase any of its shares. In year 2019 we purchased through our wholly owned subsidiary 227,828 of our shares.
In 2019 we announced a purchase plan under Rule 10b-5 and Rule 10b-18 to purchase our shares up to $ 25 million. Plan was terminated on
December 31, 2019. Plan was publicly filed on July 1,2019. On August 2, 2021, we renewed the agreement for the year 2021 and purchased
an additional 279,720 of our shares. During the year 2021, we purchased through our only owned subsidiary under the Plan 228,725 shares
and an additional 50,995 shares not through publicly announced plans. During
the year 2022 we purchased additional 357,362 of our shares.
|
Period |
Total Number of Shares |
Average Price Paid per Share |
Total Proceeds |
Maximum Approximate Value that May Yet to Be
Purchased Under the Program |
|
April |
44,938 |
23.26 |
1,045,433 |
10,675,525 |
|
May |
50,536 |
23.13 |
1,169,053 |
9,506,472 |
|
June |
51,115 |
24.08 |
1,230,760 |
8,275,712 |
|
August 2022 |
37,890 |
26.39 |
999,989 |
7,275,723 |
|
September 2022 |
41,926 |
23.85 |
999,833 |
6,275,890 |
|
October 2022 |
43,529 |
22.97 |
999,994 |
5,275,896 |
|
November 2022 |
42,990 |
23.26 |
999,984 |
4,275,912 |
|
December 2022 |
44,438 |
22.50 |
999,978 |
3,275,934 |
|
Total
2022 |
357,362 |
23.63 |
8,445,024 |
3,275,934 |
82
ITEM 16F. CHANGES
IN REGISTRANT’S CERTIFYING ACCOUNTANT
Not applicable.
ITEM 16G.
CORPORATE
GOVERNANCE
Under NASDAQ Marketplace
Rule 5615(a)(3), foreign private issuers, such as our company, are permitted to follow certain home country corporate governance practices
instead of certain provisions of the Rule 5600 series and the requirement to distribute annual and interim reports. A foreign private
issuer that elects to follow a home country practice instead of any of such provisions, must disclose in its annual reports each requirement
that it does not follow, describe the home country practice followed by the company in lieu of such requirements, satisfy the voting rights
(Rule 5640) requirements, have an audit committee that satisfies Rule 5605(c)(3), and ensure that such audit committee’s members
meet the independence requirement in Rule 5605(c)(2)(A). In reliance upon Rule 5615(a)(3), as a foreign private issuer, we have elected
to follow our home country practices, absent home country rules requiring otherwise, in lieu of certain Nasdaq Marketplace Rules. Specifically,
in Israel, it is not required that a public company have (i) a majority of independent board members or that independent directors have
regularly scheduled meetings at which only independent directors are present, or (iii) independent oversight of director nominations.
As a result, we have elected to follow Israeli law regarding the independence requirements of our board of directors. See “External
directors” above. In addition, our board of directors has not appointed a nominating committee and, instead, elects to follow Israeli
law, which provides that a company may determine its method of nominating its directors.
ITEM 16H. MINE
SAFETY DISCLOSURE
Not applicable.
PART III
ITEM 17.
FINANCIAL STATEMENTS
See “Item 18—Financial Statements.”
ITEM 18.
FINANCIAL STATEMENTS
The following consolidated
financial statements and related registered public accounting firms’ reports are filed as part of this annual report:
|
|
Page |
|
Report of Independent Registered Public Accounting Firm
|
F-2 - F-4 |
|
Consolidated Balance Sheets
|
F-5 - F-6 |
|
Consolidated Statements of Income
|
F-7 - F-7 |
|
Statements of Comprehensive Income
|
F-8 - F-8 |
|
Statement of Changes in Equity
|
F-9 - F-9 |
|
Consolidated Statements of Cash Flows
|
F-10 - F-11 |
|
Notes to Consolidated Financial Statements
|
F-12 - F-47 |
83
ITEM 19.
EXHIBITS
|
|
Description of Document |
|
|
|
84
| (1) |
Filed as an exhibit to the Registrant’s Registration Statement on Form F-1 (File No. 333-128028)
filed on September 23, 2005 and incorporated herein by reference. |
| (2) |
Filed as an exhibit to the annual report on Form 20-F for the year ended December 31, 2007 and incorporated
herein by reference. |
| (3) |
Filed as an exhibit to the annual report on Form 20-F for the year ended December 31, 2010 and incorporated
herein by reference. |
| (4) |
The current lessee under this agreement is the Registrant. |
| (5) |
Filed as an exhibit to Form 13G of Yehuda Kahane for the year ended December 31, 2014, filed on February
17, 2015, and incorporated herein by reference. |
| (6) |
Filed as an exhibit to the annual report on Form 20-F for the year ended December 31, 2013 and incorporated
herein by reference. |
| (7) |
Filed as an exhibit to the annual report on Form 20-F for the year ended December 31, 2016 and incorporated
herein by reference. |
* Certain
portions of this exhibit have been omitted pursuant to an order granting confidential treatment by the United States Securities and Exchange
Commission. The omitted non-public information has been filed with the United States Securities and Exchange Commission
** Previously filed
*** Certain portions
of this exhibit have been omitted.
85
ITURAN LOCATION AND CONTROL LTD.
Consolidated Financial Statements
as of December 31, 2022
ITURAN LOCATION AND CONTROL LTD.
Consolidated Financial Statements
as of December 31, 2022
Table of Contents
|
Page
|
|
|
(PCAOB ID
|
F-2
|
|
Consolidated Financial Statements:
|
|
|
F-5
|
|
|
F-7
|
|
|
F-8
|
|
|
F-9
|
|
|
F-10
|
|
|
F-12
|
=======================
=============
|
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
ITURAN LOCATION AND CONTROL LTD.
|
Fahn Kanne & Co.
Head Office
32 Hamasger Street
Tel-Aviv 6721118, ISRAEL
PO Box 36172, 6136101
T +972 3 7106666
F +972 3 7106660
www.gtfk.co.il
|
Opinion on the financial statements
We have audited the accompanying consolidated balance sheets of Ituran Location and Control Ltd. and subsidiaries (the “Company”) as of December 31, 2022 and 2021, the related consolidated statements of income, comprehensive income, changes in equity, and cash flows for each of the three years in the period ended December 31, 2022, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022, 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, 2022, 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 April 19, 2023 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 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 provide a reasonable basis for our opinion.
Certified Public Accountants
Fahn Kanne & Co. is the Israeli member firm of Grant Thornton International Ltd
F - 2
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the consolidated 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 matter below, providing separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Goodwill and intangible assets impairment analysis
As described further in Note 1N, Note 8 and Note 9 to the consolidated financial statement, the Company’s consolidated goodwill and intangible assets balances were US$39,510 and US$12,620 thousand, respectively, as of December 31, 2022. As disclosed by management, goodwill is assigned to reporting units and tested for impairment at least annually, and whenever events or changes in circumstances indicate that the carrying amount of goodwill may not be recoverable. Management determines the fair value of its reporting units using the income approach. Within the income approach, the method that was used is the discounted cash flow method with respect to the goodwill impairment analysis. Management started with a forecast of all the expected net cash flows associated with the reporting units, which includes the application of a terminal value, and then applied a discount rate to arrive at a net present value amount. Cash flow projections are based on management’s estimates of revenue growth rates and operating margins, taking into consideration industry and market conditions. With respect to the intangible asset's impairment analysis, management measures the recoverability of such assets to be held and used by a comparison of the carrying amount of the asset to the future undiscounted cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment recognized is measured by the amount by which the carrying amount of the asset exceeds its fair value.
We identified the goodwill and intangible assets impairment analysis as a critical audit matter. The principal considerations for our determination that performing procedures relating to the goodwill and intangible assets impairment analysis is a critical audit matter are due to the significant judgment by management when determining the fair value measurement of the reporting units and the intangible assets. This in turn led to a high degree of auditor judgment, effort and subjectivity in performing procedures and evaluating management’s fair value estimate, which included significant assumptions related to revenue growth rates, expected cash flows, discount rate and terminal growth rate. In addition, the audit effort involved the use of professionals with specialized skill and knowledge to assist in performing these procedures and evaluating the audit evidence obtained.
Certified Public Accountants
Fahn Kanne & Co. is the Israeli member firm of Grant Thornton International Ltd
F - 3
Our audit procedures related to this matter included the following, among others. We tested the effectiveness of controls relating to management’s goodwill and intangible assets impairment analysis, including controls over the valuation. We tested management’s process for determining the fair value estimate, which included evaluating the appropriateness of the discounted cash flow model; testing the completeness, accuracy and relevance of underlying data used in the model; and evaluating the reasonableness of significant assumptions used by management, including revenue growth rates, discount rate and terminal growth rate with respect to goodwill and future revenues and discount rate with respect to other intangible assets. Evaluating management’s assumptions related to revenue growth rates and terminal growth rate involved evaluating whether the assumptions used by management were reasonable considering (1) the current and past performance of the reporting units, (2) the consistency with external market and industry data, and (3) the consistency of the assumptions used with evidence obtained in other areas of the audit. We also used professionals with specialized skill and knowledge to assist in the evaluation of management’s discounted cash flow model, and certain significant assumptions, including the discount rate.
Certified Public Accountants (Isr.)
We have served as the Company’s auditor since 1997.
April 19, 2023
F - 4
ITURAN LOCATION AND CONTROL LTD.
CONSOLIDATED BALANCE SHEETS
|
US dollars
|
||||||||
|
December 31,
|
||||||||
|
(in thousands)
|
2022
|
2021
|
||||||
|
Current assets
|
||||||||
|
Cash and cash equivalents
|
|
|
||||||
|
Investment in marketable securities
|
|
|
||||||
|
Accounts receivable (net of allowance for doubtful accounts)
|
|
|
||||||
|
Other current assets (Note 2)
|
|
|
||||||
|
Inventories (Note 3)
|
|
|
||||||
|
|
|
|||||||
|
Long-term investments and other assets
|
||||||||
|
Investments in affiliated companies (Note 4A)
|
|
|
||||||
|
Investments in other companies (Note 4B)
|
|
|
||||||
|
Other non-current assets (Note 5)
|
|
|
||||||
|
Deferred income taxes (Note 15)
|
|
|
||||||
|
Funds in respect of employee rights upon retirement
|
|
|
||||||
|
|
|
|||||||
|
Property and equipment, net (Note 6)
|
|
|
||||||
|
Operating lease right of use assets, net (Note 7)
|
|
|
||||||
|
Intangible assets, net (Note 8)
|
|
|
||||||
|
Goodwill (Note 9)
|
|
|
||||||
|
Total assets
|
|
|
||||||
The accompanying notes are an integral part of the consolidated financial statements.
F - 5
ITURAN LOCATION AND CONTROL LTD.
CONSOLIDATED BALANCE SHEETS
|
US dollars
|
||||||||
|
December 31,
|
||||||||
|
(in thousands, except share data)
|
2022
|
2021
|
||||||
|
Current liabilities
|
||||||||
|
Credit from banking institutions (Note 10A)
|
|
|
||||||
|
Accounts payable
|
|
|
||||||
|
Deferred revenues
|
|
|
||||||
|
Other current liabilities (Note 11)
|
|
|
||||||
|
|
|
|||||||
|
Long-term liabilities
|
||||||||
|
Deferred income taxes (Note 15)
|
|
|
||||||
|
Loan from bank institution (Note 10B)
|
|
|
||||||
|
Liability for employee rights upon retirement
|
|
|
||||||
|
Deferred revenues
|
|
|
||||||
|
Operating lease liabilities, non-current
|
|
|
||||||
|
Other non-current liabilities
|
|
|
||||||
|
|
|
|||||||
|
Contingent liabilities(Note 12)
|
||||||||
|
Equity:
|
||||||||
|
Stockholders’ equity (Note 13)
|
||||||||
|
Share capital – ordinary shares of NIS
|
|
|
||||||
|
Authorized – December 31, 2022 and 2021 –
|
||||||||
|
Issued and outstanding – December 31, 2022 and 2021 –
|
||||||||
|
Additional paid- in capital
|
|
|
||||||
|
Accumulated other comprehensive loss
|
(
|
)
|
(
|
)
|
||||
|
Retained earnings
|
|
|
||||||
|
Treasury stock at cost – December 31, 2022–
|
(
|
)
|
(
|
)
|
||||
|
Stockholders’ equity
|
|
|
||||||
|
Non-controlling interests
|
|
|
||||||
|
Total equity
|
|
|
||||||
|
Total liabilities and equity
|
|
|
||||||
The accompanying notes are an integral part of the consolidated financial statements.
F - 6
ITURAN LOCATION AND CONTROL LTD.
CONSOLIDATED STATEMENTS OF INCOME
|
US dollars
|
||||||||||||
|
Year ended December 31,
|
||||||||||||
|
(in thousands except earnings per share)
|
2022
|
2021
|
2020
|
|||||||||
|
Revenues:
|
||||||||||||
|
Telematics services
|
|
|
|
|||||||||
|
Telematics products
|
|
|
|
|||||||||
|
|
|
|
||||||||||
|
Cost of revenues:
|
||||||||||||
|
Telematics services
|
|
|
|
|||||||||
|
Telematics products
|
|
|
|
|||||||||
|
|
|
|
||||||||||
|
Gross profit
|
|
|
|
|||||||||
|
Research and development expenses
|
|
|
|
|||||||||
|
Selling and marketing expenses
|
|
|
|
|||||||||
|
General and administrative expenses
|
|
|
|
|||||||||
|
Impairment of goodwill (Note 9)
|
|
|
|
|||||||||
|
Impairment of intangible assets and other expenses (income), net (Note 8)
|
(
|
)
|
(
|
)
|
|
|||||||
|
Operating income
|
|
|
|
|||||||||
|
Other expense, net
|
|
(
|
)
|
(
|
)
|
|||||||
|
Financing income (expenses), net (Note 14)
|
(
|
)
|
(
|
)
|
|
|||||||
|
Income before income tax
|
|
|
|
|||||||||
|
Income tax expenses (Note 15)
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||
|
Share in losses of affiliated companies, net (Note 4A)
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||
|
Net income for the year
|
|
|
|
|||||||||
|
Less: Net income attributable to non-controlling interest
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||
|
Net income attributable to the Company
|
|
|
|
|||||||||
|
Basic and diluted earnings per share attributable to Company’s stockholders (Note 16)
|
|
|
|
|||||||||
|
Basic and diluted weighted average number of shares outstanding
|
|
|
|
|||||||||
The accompanying notes are an integral part of the consolidated financial statements.
F - 7
ITURAN LOCATION AND CONTROL LTD.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
|
US dollars
|
||||||||||||
|
Year ended December 31,
|
||||||||||||
|
(in thousands)
|
2022
|
2021
|
2020
|
|||||||||
|
Net income for the year
|
|
|
|
|||||||||
|
Other comprehensive loss, net of tax:
|
||||||||||||
|
Foreign currency translation adjustments
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||
|
Other comprehensive loss, net of tax
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||
|
Comprehensive income
|
|
|
|
|||||||||
|
Less: comprehensive income attributable to non-controlling interests
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||
|
Comprehensive income attributable to the Company
|
|
|
|
|||||||||
The accompanying notes are an integral part of the consolidated financial statements.
F - 8
ITURAN LOCATION AND CONTROL LTD.
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
|
(in thousands)
|
||||||||||||||||||||||||||||||||
|
COMPANY STOCKHOLDERS
|
||||||||||||||||||||||||||||||||
|
Ordinary shares
|
||||||||||||||||||||||||||||||||
|
Number
of shares |
Share
capital
amount
|
Additional
paid - in
capital
|
Accumulated
other
comprehensive
loss
|
Retained
earnings
|
Treasury
stock
|
Non-
controlling
interests
|
Total
|
|||||||||||||||||||||||||
|
US dollars (except for number of shares)
|
||||||||||||||||||||||||||||||||
|
Balance as of January 1, 2020
|
|
|
|
(
|
)
|
|
(
|
)
|
|
|
||||||||||||||||||||||
|
Changes during 2020:
|
||||||||||||||||||||||||||||||||
|
Net income
|
-
|
-
|
-
|
-
|
|
-
|
|
|
||||||||||||||||||||||||
|
Other comprehensive loss
|
-
|
-
|
-
|
(
|
)
|
-
|
-
|
|
(
|
)
|
||||||||||||||||||||||
|
Dividend paid to non-controlling interests
|
-
|
-
|
-
|
-
|
-
|
-
|
(
|
)
|
(
|
)
|
||||||||||||||||||||||
|
Dividend paid
|
-
|
-
|
-
|
-
|
(
|
)
|
-
|
-
|
(
|
)
|
||||||||||||||||||||||
|
Dividend declared to non-controlling interests
|
-
|
-
|
-
|
-
|
-
|
-
|
(
|
)
|
(
|
)
|
||||||||||||||||||||||
|
Purchase of subsidiary shares from non-controlling interests
|
-
|
-
|
(
|
)
|
-
|
-
|
-
|
(
|
)
|
(
|
)
|
|||||||||||||||||||||
|
Stock-based compensation in a subsidiary company
|
-
|
-
|
|
-
|
-
|
-
|
-
|
|
||||||||||||||||||||||||
|
Balance as of December 31, 2020
|
|
|
|
(
|
)
|
|
(
|
)
|
|
|
||||||||||||||||||||||
|
Changes during 2021:
|
||||||||||||||||||||||||||||||||
|
Net income
|
-
|
-
|
-
|
-
|
|
-
|
|
|
||||||||||||||||||||||||
|
Other comprehensive loss
|
-
|
-
|
-
|
(
|
)
|
-
|
-
|
|
(
|
)
|
||||||||||||||||||||||
|
Dividend paid to non-controlling interests
|
-
|
-
|
-
|
-
|
-
|
-
|
(
|
)
|
(
|
)
|
||||||||||||||||||||||
|
Dividend paid
|
-
|
-
|
-
|
-
|
(
|
)
|
-
|
-
|
(
|
)
|
||||||||||||||||||||||
|
Dividend declared
|
-
|
-
|
-
|
-
|
(
|
)
|
-
|
-
|
(
|
)
|
||||||||||||||||||||||
|
Purchase of treasury shares (*)
|
-
|
-
|
(
|
)
|
(
|
)
|
||||||||||||||||||||||||||
|
Stock-based compensation in a subsidiary company
|
-
|
-
|
|
-
|
-
|
-
|
-
|
|
||||||||||||||||||||||||
|
Balance as of December 31, 2021
|
|
|
|
(
|
)
|
|
(
|
)
|
|
|
||||||||||||||||||||||
|
Changes during 2022:
|
||||||||||||||||||||||||||||||||
|
Net income
|
-
|
-
|
-
|
-
|
|
-
|
|
|
||||||||||||||||||||||||
|
Other comprehensive loss
|
-
|
-
|
-
|
(
|
)
|
-
|
-
|
(
|
)
|
(
|
)
|
|||||||||||||||||||||
|
Dividend paid
|
-
|
-
|
-
|
-
|
(
|
)
|
-
|
-
|
(
|
)
|
||||||||||||||||||||||
|
Dividend declared
|
-
|
-
|
-
|
-
|
(
|
)
|
-
|
-
|
(
|
)
|
||||||||||||||||||||||
|
Purchase of treasury shares (*)
|
-
|
-
|
-
|
-
|
-
|
(
|
)
|
-
|
(
|
)
|
||||||||||||||||||||||
|
Stock-based compensation in a subsidiary company
|
-
|
-
|
|
-
|
-
|
-
|
-
|
|
||||||||||||||||||||||||
|
Balance as of December 31, 2022
|
|
|
|
(
|
)
|
|
(
|
)
|
|
|
||||||||||||||||||||||
(*) See Note 13A6.
The accompanying notes are an integral part of the consolidated financial statements.
F - 9
ITURAN LOCATION AND CONTROL LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
US dollars
|
||||||||||||
|
Year ended December 31,
|
||||||||||||
|
(in thousands)
|
2022
|
2021
|
2020
|
|||||||||
|
Cash flows from operating activities
|
||||||||||||
|
Net income for the year
|
|
|
|
|||||||||
|
Adjustments to reconcile net income to net cash from operating activities:
|
||||||||||||
|
Depreciation and amortization
|
|
|
|
|||||||||
|
Interest and exchange rate on long term credit
|
|
(
|
)
|
(
|
)
|
|||||||
|
Loss (gains) in respect of trading marketable securities and other investments
|
|
|
(
|
)
|
||||||||
|
Increase in liability for employee rights upon retirement
|
|
|
|
|||||||||
|
Share in losses of affiliated companies, net
|
|
|
|
|||||||||
|
Deferred income taxes
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||
|
Capital loss (gain) on sale of property and equipment, net
|
(
|
)
|
(
|
)
|
|
|||||||
|
Decrease (increase) in accounts receivable
|
(
|
)
|
(
|
)
|
|
|||||||
|
Decrease (increase) in other current and non-current assets
|
(
|
)
|
|
|
||||||||
|
Increase (decrease) in inventories
|
(
|
)
|
(
|
)
|
|
|||||||
|
Increase (decrease) in accounts payable
|
|
|
(
|
)
|
||||||||
|
Increase (decrease) in deferred revenues
|
|
|
(
|
)
|
||||||||
|
Increase (decrease) in obligation to purchase non-controlling interests
|
|
|
(
|
)
|
||||||||
|
Impairment of goodwill
|
|
|
|
|||||||||
|
Impairment of other intangible assets
|
|
|
|
|||||||||
|
Increase (decrease) in other current and non-current liabilities
|
(
|
)
|
|
|
||||||||
|
Net cash provided by operating activities
|
|
|
|
|||||||||
|
Cash flows from investment activities
|
||||||||||||
|
Increase in funds in respect of employee rights upon retirement,
net of withdrawals |
(
|
)
|
(
|
)
|
(
|
)
|
||||||
|
Capital expenditures
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||
|
Investment in affiliated company
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||
|
Investment in marketable securities
|
(
|
)
|
|
|
||||||||
|
Investments in (repayment of) long - term deposit
|
|
(
|
)
|
(
|
)
|
|||||||
|
Investments in other companies, net
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||
|
Proceeds from sale of property and equipment
|
|
|
|
|||||||||
|
Sale of marketable securities
|
|
|
|
|||||||||
|
Net cash used in investment activities
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||
|
Cash flows from financing activities
|
||||||||||||
|
Repayment of long-term loan
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||
|
Settlement of obligation to purchase non-controlling interests
|
|
(
|
)
|
|
||||||||
|
Short term credit from banking institutions
|
|
|
|
|||||||||
|
Acquisition of company shares
|
(
|
)
|
(
|
)
|
|
|||||||
|
Purchase of shares from non-controlling interests
|
|
|
(
|
)
|
||||||||
|
Dividend paid
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||
|
Dividend paid to non-controlling interests
|
|
(
|
)
|
(
|
)
|
|||||||
|
Net cash used in financing activities
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||
|
Effect of exchange rate changes on cash and cash equivalents
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||
|
Net change in cash and cash equivalents
|
(
|
)
|
(
|
)
|
|
|||||||
|
Balance of cash and cash equivalents at beginning of year
|
|
|
|
|||||||||
|
Balance of cash and cash equivalents at end of year
|
|
|
|
|||||||||
Supplementary information on investing and financing activities not involving cash flows:
In November 2022, the Company declared a dividend in an amount of US$ 3 million. The dividend was paid in January 2023.
In June 2020, an Israeli investee have completed public registration in Israel and its shares became equity investment with readily determinable fair value. As a result, the Company reclassified the above-mentioned investment (in the amount of approximately US$3.6 million) from investment in other companies (under long-term investments and other assets) to investment in marketable securities (under current assets).
The accompanying notes are an integral part of the consolidated financial statements.
F - 10
ITURAN LOCATION AND CONTROL LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS (cont.)
Supplementary disclosure of cash flow information
|
US dollars
|
||||||||||||
|
Year ended December 31,
|
||||||||||||
|
(in thousands)
|
2022
|
2021
|
2020
|
|||||||||
|
Interest paid
|
|
|
|
|||||||||
|
Income taxes paid, net of refunds
|
|
|
|
|||||||||
The accompanying notes are an integral part of the consolidated financial statements.
F - 11
ITURAN LOCATION AND CONTROL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| NOTE 1 | - | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
| A. |
General
|
| 1. |
Operations
Ituran Location and Control Ltd. (the “Company”) commenced operations in 1994. The Company and its subsidiaries (the “Company”) are engaged in the provision of Location based Telematics services and machine-to-machine Telematics products for use in stolen vehicle recovery, fleet management and other applications.
On September 13, 2018, the Company closed the acquisition of
On September 22, 2021 the Company purchased the remaining
|
| 2. |
Functional currency and translation to the reporting currency
The functional currency of the Company and its subsidiaries located in Israel (except those that are held through the subsidiary “Road track”) is the New Israeli Shekel (“NIS”), which is the local currency in which those entities operate. The functional currency of the foreign subsidiaries located in Brazil, Mexico and Colombia is the local currency in each country and the functional currency of the rest of the subsidiaries (including Argentinian subsidiaries that operates in highly inflationary economy) is the US Dollar. Regarding the Argentinian subsidiaries see below.
The consolidated financial statements of the Company and all of its subsidiaries were translated into U.S. dollars in accordance with the standards of the Financial Accounting Standards Board ("FASB"). Accordingly, assets and liabilities were translated from local currencies to U.S. dollars using yearend exchange rates, and income and expense items were translated at average exchange rates during the year.
Gains or losses resulting from translation adjustments (which result from translating an entity’s financial statements into U.S. dollars if its functional currency is different than the U.S. dollar) are reported in other comprehensive income and are reflected in equity, under “accumulated other comprehensive income (loss)”. Translation gains and losses resulting from changes in exchange rates used in the translation of intercompany balances that are long term investment nature (i.e. which their settlement is not planned or anticipated) are also included in other comprehensive income (loss).
When an economy in which a foreign entity of the Company operates, becomes highly inflationary environment (an economy with a cumulative inflation rate of approximately 100% or more over a three-year period, such as the Company's subsidiaries in Argentina), the financial statements of that foreign entity are remeasured as if its functional currency is the reporting currency of its parent.
Balances denominated in, or linked to foreign currency are stated on the basis of the exchange rates prevailing at the balance sheet date. For foreign currency transactions included in the statement of income, the exchange rates applicable on the relevant transaction dates are used. Transaction gains or losses arising from changes in the exchange rates used in the translation of such balances are carried to financing income or expenses as applicable.
|
F - 12
ITURAN LOCATION AND CONTROL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)
| NOTE 1 |
- |
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)
|
| A. |
General (cont.)
|
| 2. |
Functional currency and translation to the reporting currency (cont.)
|
|
The following table presents data regarding the dollar exchange rate of relevant currencies and the Israeli CPI:
|
|
Exchange rate
of one US dollar |
Israeli CPI(*)
|
||
|
NIS
|
Brazilian Real
|
||
|
At December 31,
|
|||
|
2022
|
|
|
|
|
2021
|
|
|
|
|
2020
|
|
|
|
|
Increase (decrease) during the year:
|
|||
|
2022
|
|
(
|
|
|
2021
|
(
|
|
|
|
2020
|
(
|
|
(
|
|
(*) |
|
| 3. |
Basis of presentation
The consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”).
|
| 4. |
Use of estimates in the preparation of financial statements
The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from the estimates.
As applicable to these consolidated financial statements, the most significant estimates and assumptions relate to legal contingencies, valuation of goodwill and other intangible assets and revenue recognition and related deferred expenses (contract costs).
As of December 31, 2021, the impact of the outbreak of COVID-19 continues to unfold. As a result, some of the Company's estimates and assumptions required increased judgment and carry a higher degree of variability and volatility. As events continue to evolve and additional information becomes available, the Company's estimates may change materially in future periods.
|
| B. |
Principles of consolidation
The consolidated financial statements include the accounts of the Company and all of its subsidiaries. In these financial statements, the term “subsidiary” refers to a company over which the Company exerts control and the financial statements of which are consolidated with those of the Company. Significant intercompany transactions and balances are eliminated upon consolidation; profits from intercompany sales, not yet realized outside of the Company, are also eliminated. Non-controlling interests are presented in equity.
Changes in the Company ownership interest in a subsidiary while the control is retained are accounted for as equity transactions and accordingly no gain or loss is recognized in consolidated net income or comprehensive income. Upon such transaction, the carrying amount of the non-controlling interest is adjusted to reflect the change in its ownership interest in the subsidiary and any difference between the fair value of the consideration received or paid and the amount by which the non-controlling interest was adjusted is recognized in additional paid-in capital.
|
F - 13
ITURAN LOCATION AND CONTROL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)
| NOTE 1 |
- |
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)
|
| C. |
Cash and cash equivalents
The Company considers all highly liquid investments, which include short-term bank deposits that are not restricted as to withdrawal or use, and short-term debentures, with original periods to maturity not exceeding three months, to be cash equivalents.
|
| D. |
Marketable securities
The Company account for its investments in marketable debt securities in accordance with ASC Topic 320-10, which is applicable to Debt Securities only, while equity securities are accounted for in accordance with ASC Topic 321-10, "Investments - Equity Securities" (“ASC Topic 321-10”).
According to ASC Topic 321-10, equity securities with readily determinable fair value are measured upon initial recognition and in subsequent periods at fair value with gains and losses reported periodically in earnings as financing income or expenses.
The investments in debt and equity securities that were held by the Company during the reported periods and were subject to the provisions of ASC Topic 320-10 were designated by management as trading securities. The security was acquired with intent to sell it in the near future.
Changes in fair value measurement of debt and equity securities for the years 2022, 2021 and 2020 amounted to gain (loss) of approximately US$ (
|
| E. |
Treasury stock
Company shares held by the Company and a wholly owned subsidiary are presented as a reduction of equity, at their cost, under the caption “Treasury Stock”. Gains and losses upon sale of these shares, net of related income taxes, are recorded as additional paid in capital.
|
| F. |
Allowance for doubtful accounts
The allowance for doubtful accounts is determined with respect to amounts the Company has determined to be doubtful of collection, in order to reflect the expected credit losses on accounts receivable balances. Judgment is required in the estimation of the allowance for doubtful accounts and the Company evaluates the collectability of its accounts receivable based on a combination of factors including , among other things, the past experience with customers, the length of time that the balance is past due using an aging schedule, the customer's current ability to pay and their the creditworthiness using all available information about the credit risk on such customers taking into consideration the current business environment. If it becomes aware of a customer’s inability to meet its financial obligations, a specific allowance is recorded to reduce the net receivable to the amount reasonably believed to be collectible from such customer.
Accounts receivable are written off against the allowance for uncollectible accounts when the Company determines amounts are no longer collectible
See also Note 19A.
The allowance in respect of accounts receivable at December 31, 2022 and 2021 was US$
|
| G. |
Inventories
Inventories are stated at the lower of cost or net realizable value. Cost of raw materials and finished products is mainly determined on the basis of first-in, first-out (FIFO). Other method which is utilized for determining the value of inventories is the moving average. The Company regularly reviews its inventories for obsolescence and other impairment risks and reserves are established when necessary.
|
F - 14
ITURAN LOCATION AND CONTROL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)
| NOTE 1 |
- |
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)
|
| H. |
Investment in affiliated companies
Investments in companies in which the Company has significant influence but less than controlling interests, are accounted for by the equity method. Income on intercompany sales, not yet realized outside of the Company, was eliminated. The Company also reviews these investments for impairment whenever events indicate the carrying amount may not be recoverable.
In accordance with ASC Topic 323-10-40-1, a change in the Company’s proportionate share of an investee’s equity, resulting from issuance of shares by the investee to third parties, is accounted for as if the Company had sold a proportionate share of its investment. Any gain or loss resulting from an investee’s share issuance is recognized in earnings.
When the Company obtain control of an affiliated company that was previously accounted for by the equity method, the investment is then remeasured at its fair value as of the date of which control was obtained and any remeasurement gain or loss is recognized in earnings.
Management evaluates investments in affiliated companies, for evidence of other-than-temporary declines in value. Such evaluation is dependent on the specific facts and circumstances and includes analysis of relevant financial information (e.g., budgets, business plans, financial statements, etc.). During 2022, 2021 and 2020, no impairment was identified with respect to such affiliated companies.
Investments in companies in which the Company no longer has significant influence, are classified as "investments in other companies". See I below.
|
| I. |
Investment in other companies
Equity investments without readily determinable fair values are measured at cost, less impairment, and plus or minus subsequent adjustments for observable price changes. Periodic changes in the basis of these equity investments are reported in current earnings. In addition, at each reporting period a qualitative assessment is performed to identify impairment. When a qualitative assessment indicates an impairment exists, the Company estimates the fair value of the investment and recognize in current earnings an impairment loss equal to the difference between the fair value and the carrying amount of the equity investment.
In June 2020, an Israeli investee have completed public registration in Israel and its shares became equity investment with readily determinable fair value. As a result, the Company remeasured the investment to its fair value and recorded gain in the amount of approximately $
|
| J. |
Derivatives
The Company applies the provisions of ASC Topic 815, "Derivatives and Hedging". In accordance with ASC Topic 815, all the derivative financial instruments are recognized as either assets or liabilities on the balance sheet at fair value. The accounting for changes in the fair value of a derivative financial instrument depends on whether it has been designated and qualifies as part of a hedging relationship and further, on the type of hedging relationship. For derivative financial instruments that are designated and qualify as hedging instruments for accounting purposes, 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.
From time to time the Company carries out transactions involving foreign exchange derivative financial instruments mainly (forward exchange contracts) which are mostly designed to hedge the cash flows expected to be paid with respect to forecasted monthly purchases of inventory, denominated in currencies other than the functional currency of the Company. Such transactions were designated as hedging instruments on the date that the Company entered into such derivative contracts, and were determined to qualify as cash flow hedges under ASC Topic 815.
|
F - 15
ITURAN LOCATION AND CONTROL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)
| NOTE 1 |
- |
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.) |
| J. |
Derivatives (cont.)
|
|
|
|
The entire changes in fair value of the derivative instruments designated for hedging purposes that were determined as qualifying for hedging purposes (including the ineffective components of the hedging relationship) are reported as other comprehensive income (loss), net of tax under the caption "unrealized gains (losses) in respect of derivative financial instruments designated for cash flow hedge" and are reclassified to the statements of income when the hedged transaction realizes.
For all other derivative financial instruments that are not designated or qualify as hedging instruments for accounting purposes, the changes in fair value are recognized periodically in profit or loss, as incurred. As of December 31, 2022 and 2021 and during the years then ended, the Company did not have material financial derivatives.
|
| K. |
Property and equipment
|
| 1. |
Property and equipment are stated at cost, net of accumulated depreciation. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets. Leasehold improvements are depreciated on the straight-line method over the shorter of the estimated useful life of the property or the duration of the lease.
|
| 2. |
Rates of depreciation:
|
|
%
|
|
|
Operating equipment (mainly
|
|
|
Office furniture, equipment and computers
|
|
|
Buildings
|
|
|
Vehicles
|
|
|
Leasehold improvements
|
is less or equal to useful life. |
| L. |
Impairment of long-lived assets
The Company’s long-lived assets (including finite-lived intangible assets) are reviewed for impairment, 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 asset exceeds its fair value (see also Note 1N).
|
| M. |
Income taxes
The Company accounts for income taxes in accordance with ASC Topic 740-10, "Income Taxes". According to this guidance, deferred income taxes are determined utilizing the asset and liability method based on the estimated future tax effects of differences between the financial accounting and the tax bases of assets and liabilities under the applicable tax law. Deferred tax balances are computed using the tax rates expected to be in effect at the time when these differences reverse. Valuation allowances in respect of the deferred tax assets are provided for if, based upon the weight of available evidence, it is more likely than not that all or a portion of the deferred income tax assets will not be realized. Deferred tax balances are presented as non-current amounts.
|
F - 16
ITURAN LOCATION AND CONTROL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)
| NOTE 1 |
- |
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.) |
| M. |
Income taxes (cont.)
|
|
US GAAP provides that the tax effects from an uncertain tax position can be recognized in the financial statements only if the position is "more-likely-than-not" to be sustained were to be challenged by a taxing authority. The assessment of a tax position is based solely on the technical merits of the position, without regard the likelihood that the tax position may be challenged. If an uncertain tax position meets the "more-likely-than-not" threshold, the largest amount of tax benefit that is greater than 50% likely to be recognized upon ultimate settlement with the taxing authority is recorded.
The Company recognizes interest as interest expenses (among financing expenses) and penalties, if any, related to unrecognized tax benefits in its provision for income tax.
|
| N. |
Goodwill and intangible assets
|
| 1. |
Goodwill represents the excess of the purchase price over the fair value of the identifiable net assets acquired in business combinations accounted for in accordance with the "purchase method" and is allocated to reporting units at acquisition. Goodwill is not amortized but rather tested for impairment at least annually in accordance with the provisions of ASC Topic 350, "Intangibles - Goodwill and Other".
As required by ASC Topic 350, the Company chooses either to perform a qualitative assessment whether the quantitative goodwill impairment test is necessary or proceeds directly to the quantitative goodwill impairment test. Such determination is made for each reporting unit on a stand-alone basis. The qualitative assessment includes various factors such as macroeconomic conditions, industry and market considerations, cost factors, overall financial performance, earnings multiples, gross margin and cash flows from operating activities and other relevant factors. When the Company chooses to perform a qualitative assessment and determines that it is more likely than not (more than 50 percent likelihood) that the fair value of the reporting unit is less than its carrying value, then the Company proceeds to the quantitative goodwill impairment test. If the Company determines otherwise, no further evaluation is necessary.
|
F - 17
ITURAN LOCATION AND CONTROL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)
| NOTE 1 |
- |
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.) |
| N. |
Goodwill and intangible assets (cont.)
|
| 1. |
(cont.)
|
|
|
Commencing fiscal 2020, upon the adoption of ASU 2017-04 (which eliminated Step 2 from the goodwill impairment test), when the Company decides or is required to perform the quantitative goodwill impairment test, the Company compares the fair value of the reporting unit to its carrying value and an impairment charge is recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value, if any. In the performance of the quantitative analysis the Company applies assumptions that market participants would consider in determining the fair value of each reporting unit.
As of December 31, 2022, 2021 and 2020, the Company had four reporting units which include goodwill.
Telematics services:
Under the telematics services segment there are two reporting units with goodwill. For one of which with an allocated amount of approximately US$
For the second reporting unit (resulted from RT acquisition) with an allocated amount of approximately US$
Telematics products:
Under the telematics products segment there are two reporting units with goodwill, for one of which with an allocated amount of approximately US$
For the second reporting unit (resulted from RT acquisition) with an allocated amount of approximately US$
The Company has historically performed an annual goodwill assessment for such reporting unit as of June 30 of each year or more often if indicators of impairment are presented. Following the second closing of the RT acquisition, the Company decided to change the date of its annual impairment assessment from June 30 to December 31. Accordingly, the Company performed a qualitative assessment as of December 31, 2021, and concluded that the qualitative assessment did not result in a more likely than not indication of impairment, and therefore no further impairment testing was required.
|
F - 18
ITURAN LOCATION AND CONTROL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)
| NOTE 1 |
- |
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.) |
| N. |
Goodwill and intangible assets (cont.)
|
|
| 2. |
Intangible assets with finite live are amortized using the straight-line basis over their useful lives, to reflect the pattern in which the economic benefits of the intangible assets are consumed or otherwise used up.
As of December 31, 2022, the intangible assets are amortized as follows:
|
|
|
Years
|
|
Customer relationship
|
|
|
Technology services
|
|
|
Other
|
|
|
During 2022 and 2021, the Company did not record any impairment. During 2020, the Company recorded an intangible assets impairment loss in the amount of approximately US$
Recoverability of intangible assets is measured as described in Note 1L above.
|
| O. |
Contingencies
The Company and its subsidiaries are involved in certain legal proceedings that arise from time to time in the ordinary course of their business and in connection with certain agreements with third parties. Except for income tax contingencies, the Company records accruals for contingencies to the extent that the management concludes that the occurrence is probable and that the related liabilities are estimable. Legal expenses associated with contingencies are expensed as incurred.
|
| P. |
Funds in respect of, and liability for employee rights upon retirement
The Company's liability for employee rights upon retirement with respect to its Israeli employees is calculated, pursuant to Israeli severance pay law, based on the most recent salary of each employee multiplied by the number of years of employment, as of the balance sheet date. Employees are entitled to one month's salary for each year of employment, or a portion thereof. The Company makes monthly deposits to insurance policies and severance pay funds. The liability of the Company is fully provided for. The Company also has defined contribution plans for which it makes contributions to severance pay funds and appropriate insurance policies
The deposited funds include profits or losses accumulated up to the balance sheet date. The deposited funds may be withdrawn upon the fulfillment of the obligation pursuant to Israeli severance pay laws or labor agreements. The value of the deposited funds is based on the cash surrender value of these policies, and includes profits or losses. Withdrawal of the reserve monies is contingent upon the fulfillment of detailed provision in the Law.
The liability for employee rights upon retirement in respect of the employees of the non-Israeli subsidiaries of the Company, is calculated on the basis of the labor laws of the country in which the subsidiary is located and is covered by an appropriate accrual.
Severance payments for the abovementioned policies for the years ended December 31, 2022, 2021 and 2020, amounted to US$
|
F - 19
ITURAN LOCATION AND CONTROL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)
| NOTE 1 |
- |
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.) |
| Q. |
Revenue recognition
The Company and its subsidiaries generate revenue from subscriber fees for the provision of services and sales of systems and products, mainly in respect of fleet management services, stolen vehicle recovery services and other value-added services. To a lesser extent, revenues are also derived from technical support services. The Company and its subsidiaries sell the systems primarily through their direct sales force and indirectly through resellers.
The Company applies ASC Topic 606, Revenue from Contracts with Customers (“ASC 606”).
In accordance with ASC 606, the Company determines revenue recognition through the following five steps:
|
| 1. |
Identification of the contract, or contracts, with a customer;
|
| 2. |
Identification of the performance obligations in the contract;
|
| 3. |
Determination of the transaction price;
|
| 4. |
Allocation of the transaction price to the performance obligations in the contract; and
|
| 5. |
Recognition of revenue when, or as, the Company satisfies a performance obligation.
|
|
A contract with a customer exists when all of the following criteria are met: the parties to the contract have approved it (in writing, orally, or in accordance with other customary business practices) and are committed to perform their respective obligations, the Company can identify each party’s rights regarding the distinct goods or services to be transferred (“performance obligations”), the Company can determine the transaction price for the goods or services to be transferred, the contract has commercial substance and it is probable that the Company will collect substantially all of the consideration to which it will be entitled in exchange for the goods or services that will be transferred to the customer.
For each type of contract, at inception, the Company assesses the goods or service promised in a contract with a customer and identifies the performance obligations. With respect to contracts that are determined to have multiple performance obligations, such as contracts that combine product with services (mostly SVR services) and/or rights to use assets, the Company allocates the contract’s transaction price to each performance obligation using its best estimate of the relative standalone selling price of each distinct good or service in the contract. However, when applicable (see below), the company estimates the selling prices of certain services using the residual approach.
Revenues are recognized when, or as, control of services or products is transferred to the customers at a point in time or over time, as applicable to each performance obligation.
Revenues are recorded in the amount of consideration to which the Company expects to be entitled in exchange for performance obligations upon transfer of control to the customer, excluding amounts collected on behalf of other third parties and sales taxes.
The Company does not adjust the amount of consideration for the effects of a significant financing component since the Company expects, at most contracts inception, that the period between the time of transfer of the promised goods or services to the customer and the time the customer pays for these goods or services to be generally one year or less, based on the practical expedient. The Company’s credit terms to customers are, on average, between thirty and ninety days.
|
F - 20
ITURAN LOCATION AND CONTROL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)
| NOTE 1 |
- | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.) |
| Q. |
Revenue recognition (cont.)
|
|
In accordance with ASC 606, the Company’s revenues are recognized as follows:
|
| 1. |
Revenues from sales of Automatic Vehicle Location ("AVL") products are recognized when the control of the product passed to the customer (usually upon delivery).
|
| 2. |
Revenues from provision of SVR services are recognized over time, as the customers simultaneously receive and consume the benefits provided by the Company performance as the Company performs.
|
| 3. |
For arrangements that involve the delivery or performance of multiple products (mostly, AVL products), services (such as SVR services) and/or rights to use assets, the Company analyzes whether the goods or services that were promised to the customer are distinct. A good or service promised to a customer is considered ‘distinct’ if both of the following criteria are met: 1. The customer can benefit from the good or service, either on its own or together with other resources that are readily available to the customer; and, 2. The Company’s promise to transfer the good or service to the customer is separately identifiable from other promises in the contract. When the above criteria are met, the revenue recognition for the related products and/or services are recognized as described in 1 and 2 above, as applicable.
With respect to arrangement that are determined to have multiple performance obligations that are distinct, the Company allocates the contract’s transaction price to each performance obligation using the relative standalone selling price of each distinct good or service in the contract. However, in certain circumstances, the company estimates the selling prices of the SVR services (which are sold together with AVL products) using the residual approach. Under the residual approach, the standalone selling price of the SVR services is estimated by reference to the total transaction price less the sum of the observable standalone selling prices of all other goods or services promised in the contract. Such approach is used since the Company sells the same type of service in those jurisdictions to different customers (at or near the same time) for a broad range of amounts (thus, the stand-alone selling price is highly variable).
Revenues from SVR services subscription fees and from installation services (related to AVL products that remain as the company property), sold to customers within a single contractually binding arrangement were accounted for revenue recognition purposes, as a single performance obligation, since the installation services element was determined not to be ‘distinct’. Accordingly, the entire contract fee for the two deliverables was recognized over time, on a straight-line basis over the subscription period.
|
| 4. |
Amounts earned by certain Brazilian subsidiary for arranging a bundle transaction of SVR services subscription and installation services together with insurance services to be supplied by a third party insurance company, are recognized ratably on a straight-line basis over the subscription period (see 2 above), since the amount allocated to the Company (for the SVR services subscription, installation services and for arranging the transaction), is contingent upon the delivery of the SVR services. As the insurance company is acting as a principal with respect to the insurance component, the Company recognized only the net amounts as revenues, after deduction of amounts related to the insurance component.
|
| 5. |
Deferred revenues include unearned amounts received from customers (mostly for the provision of installation, future subscription services and extended warranty) but not yet recognized as revenues. Such deferred revenues are recognized as described in paragraph 2 above or paragraph 6 below, as applicable.
|
| 6. |
Extended warranty
In the majority of countries, in which the Company operates, the statutory warranty period is one year, and the extended warranty covers periods beyond year one. Revenues from extended warranty include warranty services which were sold separately for a monthly fee, or warranty services that were determined to represent a separate performance obligation and were sold together with an AVL unit. Such revenues are recognized over the duration of the warranty periods.
|
F - 21
ITURAN LOCATION AND CONTROL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)
| NOTE 1 |
- |
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.) |
| R. |
Warranty costs
The Company provides a standard warranty for its products to end-users at no extra charge. The Company estimates the costs that may be incurred under its warranty obligation and records a liability at the time the related revenues are recognized.
Among the factors affecting the warranty liability are the number of installed units and historical percentages of warranty claims. The Company periodically assesses the adequacy of the recorded warranty liability and adjusts the amount to the extent necessary. To date, warranty costs and the related liabilities related to the standard warranty period have not been material.
|
| S. |
Research and development costs
|
| 1. |
Research and development costs (other than computer software related expenses) are expensed as incurred.
|
| 2. |
Software Development Costs
All research and development costs incurred in the process of software development before establishment of technological feasibility are charged to expenses as incurred. Costs incurred subsequent to the establishment of technological feasibility are capitalized according to the principles set forth in ASC Topic 985-20, “Costs of Software to be Sold, Leased or Marketed”.
Capitalized software costs are amortized on a product-by-product basis by the straight-line method over the estimated useful life of the software product (
The Company assesses the recoverability of these intangible assets on a regular basis by assessing the net realizable value of such intangible assets based on the estimated future gross revenues from each product net of the estimated future costs of completing and disposing of that product (including the estimated costs of performing maintenance and customer support over the remaining economical useful life), cost of completion of products and cost of delivery to customers over its remaining economical useful life. During each of the years ended December 31, 2022 and 2021, no such unrecoverable amounts were identified.
|
| T. |
Advertising costs
Advertising costs are expensed as incurred.
Advertising expenses for the years ended December 31, 2022, 2021 and 2020 amounted to US$
|
| U. |
Earnings per share
Basic earnings per share are computed by dividing net income attributable to the common shares, by the weighted average number of shares outstanding during the year, net of the weighted average number of treasury stock.
In computing diluted earnings per share, basic earnings per share are adjusted to reflect the effect of any potential dilutive ordinary shares. During the reporting periods there were no such potential shares.
|
| V. |
Fair value measurements
The Company measures fair value and discloses fair value measurements for financial and non-financial assets and liabilities. Fair value is based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
|
F - 22
ITURAN LOCATION AND CONTROL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)
| NOTE 1 |
- |
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.) |
| V. |
Fair value measurements (cont.)
|
|
|
As such, fair value is a market-based measurement that is required to be determined based on the assumptions that market participants would use to determine the price of an asset or a liability.
As a basis for considering such assumptions, fair value accounting standard establishes the following fair value hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value:
Level 1 - Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs.
Level 2 - Observable prices that are based on inputs not quoted on active markets, but corroborated by market data.
Level 3 - Unobservable inputs are used when little or no market data is available. Level 3 inputs are considered as the lowest priority under the fair value hierarchy.
In determining fair value, companies are required to utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible as well as to consider counterparty credit risk in the assessment of fair value.
Regarding the fair value measurements of financial assets and liabilities and the fair value hierarchy of such measurements, see Note 19C.
The Company also measures certain non-financial assets, consisting mainly of certain reporting units (as part of goodwill impairment test) and intangible assets at fair value on a nonrecurring basis. These assets are adjusted to fair value when they are considered to be impaired (see 1N and 1L above).
|
| W. |
Contract costs and prepaid expenses
Direct installation expenses by certain Brazilian subsidiary were determined not to represent a separate performance obligation for revenue recognition purposes in accordance with the principles of ASC 606, as they were determined not to be considered ‘distinct’ (see Note 1Q above). The Company has determined that such installation expenses, and certain other commission and other direct expenses incurred by the company's subsidiaries, relate directly to obtaining or fulfilling contract with a specific subscriber, they generate or enhance the Company resources and are expected to be recovered.
In accordance with ASC 340-40, Other Assets and Deferred Costs: Contracts with Customers, such costs are capitalized and presented as "contract costs" within the balances "Other current assets" and "Other non-current assets", as applicable.
|
|
The contract costs are amortized over the estimated life of the related subscription arrangements by the straight-line method. Costs that do not meet the aforementioned criteria, are recognized immediately as expenses.
|
|
Prepaid expenses, consist mainly of amounts paid by certain Brazilian subsidiary to insurance companies as a prepaid insurance on behalf of its customers as part of bundle transactions of SVR services together with insurance services to be supplied by a third-party insurance company. Under such transactions, the customers are required accordingly to pay to the Brazilian subsidiary a monthly fee for all the bundled services (see Note 1Q regarding the revenue recognition of such bundle transactions). The insurance companies are obligated to refund any unearned insurance amounts to the Brazilian subsidiary in the event of termination of the transaction by the customers. The prepaid expenses are amortized over the contractual life of the insurance service with the insurance company (usually 12 months) by the straight-line method. The amortization is netted against the monthly receipts from customers for the bundled services.
|
F - 23
ITURAN LOCATION AND CONTROL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)
| NOTE 1 |
- |
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.) |
| X. |
Stock-based compensation
The Company accounts for stock-based compensation to employees and non-employees in accordance with ASC 718, "Compensation - Stock Compensation", ("ASC 718"). The fair value of the award, is recognized in the Company's consolidated statement of income as an expense over the requisite service periods. However, when a grant includes a performance condition (that is not considered as 'market condition'), the compensation cost is recognized if and when it is probable that the condition will be achieved. During the reported periods there were no significant grants of equity-based payment awards.
The Company measures and recognizes compensation expense for cash bonuses to senior employees, which are based, or partly based, on the price of the Company’s shares in accordance with ASC 718 -30, "Compensation-Stock Compensation - Awards Classified as Liabilities" (See Note 19C regarding "Excess Return Cash Incentives").
The awards are measured at the grant date at their fair value and remeasured at the end of each reporting period through settlement, with changes in the fair value recognized as compensation cost over the requisite service period. Compensation cost for awards that are subject to market conditions are be attributed separately for each vesting tranche of the award (generally calendar year).
|
| Y. |
Obligation to purchase non-controlling interests
An obligation to acquire shares of a subsidiary held by Non-controlling interests at a stated future date, represented liability under ASC Topic 480. Upon initial recognition such liability was measured at fair value in accordance with ASC Topic 480-10-30-3 at the amount of cash that would be paid under the conditions specified in the contract if the shares were repurchased immediately and in subsequent periods at the amount of cash that would be paid under the conditions specified in the contract if settlement occurred at the reporting date with any change in value from the previous reporting date recognized as interest cost. In addition, the Non-controlling interests subject to such obligation were not recognized and no earnings were allocated to them.
On September 22, 2021, the Company settled the obligation to purchase the remaining
|
| Z. |
Leases
The Company entered into several non-cancelable lease agreements for real estate (mainly offices, warehouses and base sites), network equipment and vehicles for use in its operations, which are classified as operating leases.
Lease accounting policy applied from January 1, 2019 (following the adoption of ASC Topic 842):
The Company determines if an arrangement is a lease at inception.
|
F - 24
ITURAN LOCATION AND CONTROL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)
| NOTE 1 |
- |
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.) |
| Z. |
Leases (cont.)
|
|
|
A classification of a lease is determined based on the following criteria:
|
| 1. |
The lease transfers ownership of the underlying asset to the lessee by the end of the lease term.
|
| 2. |
The lease grants the lessee an option to purchase the underlying asset that the lessee is reasonably certain to exercise.
|
| 3. |
The lease term is for the major part of the remaining economic life of the underlying asset (Generally, 75% or more of the remaining economic life of the underlying assets).
|
| 4. |
The present value of the sum of the lease payments and any residual value guaranteed by the lessee equals or exceeds substantially all of the fair value of the underlying asset (Generally, 90% or more of the fair value of the underlying asset).
|
| 5. |
The underlying asset is of such a specialized nature that it is expected to have no alternative use to the lessor at the end of the lease term.
|
|
If any of these five criteria is met, the lease is classified as a finance lease. Otherwise, the lease is classified as an operating lease.
With the exception of short-term leases, Operating leases are included at the commencement date as a lease liability, which represent the Company ‘s obligation to make lease payments arising from a lease, measured on a discounted basis. As the leases do not provide an implicit interest rate, the Company uses its incremental borrowing rate based on information available on the commencement date in determining the present value of lease payments. Concurrently, the Company recognizes a right-of-use asset ("ROU") at the same amount of the liability, adjusted for any prepaid or accrued lease payments, plus initial direct costs incurred in respect of the lease which represents the Company’s right to use, or control the use of, a specified asset for the lease term. In subsequent periods the ROU asset is measured at the present value of the remaining lease payments, adjusted for the remaining balance of any lease incentives received, any cumulative prepaid or accrued rent if the lease payments are uneven throughout the lease term and any unamortized initial direct costs. Further, the Company recognizes lease expenses on a straight-line basis over the lease term.
Lease liabilities are classified as current and non-current liabilities in the consolidated balance sheets. ROU assets are presented as non-current assets.
See also Note 7.
|
| AA. |
Reclassification
|
|
Certain comparative figures have been reclassified to conform to the current year presentation. Such reclassifications did not have any significant impact on the Company's equity, net income or cash flows.
|
||
F - 25
ITURAN LOCATION AND CONTROL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)
| NOTE 1 |
- |
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.) |
| AB. |
Recently issued accounting pronouncements, not yet adopted
In October 2021, the FASB issued ASU 2021-08 “Business Combinations (Topic 805), Accounting for Contract Assets and Contract Liabilities from Contracts with Customers,” which requires contract assets and contract liabilities acquired in a business combination to be recognized and measured by the acquirer on the acquisition date in accordance with ASC 606, Revenue from Contracts with Customers. The guidance will result in the acquirer recognizing contract assets and contract liabilities at the same amounts recorded by the acquiree. The guidance should be applied prospectively to acquisitions occurring on or after the effective date. The guidance is effective for the fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Early adoption is permitted, including in interim periods, for any financial statements that have not yet been issued. Adopting the new guidance in an interim period other than the first fiscal quarter requires an entity to apply the new guidance to all prior business combinations that have occurred since the beginning of the annual period in which the new guidance was adopted. The Company plans to adopt the new accounting standard effective January 1, 2023 and will apply the guidance prospectively to all business combinations with an acquisition date occurring on or after January 2023.
|
| NOTE 2 | - | OTHER CURRENT ASSETS |
|
US dollars
|
||||||||
|
December 31,
|
||||||||
|
(in thousands)
|
2022
|
2021
|
||||||
|
Prepaid expenses
|
|
|
||||||
|
Government institutions
|
|
|
||||||
|
Deferred contract costs
|
|
|
||||||
|
Advances to suppliers
|
|
|
||||||
|
Employees
|
|
|
||||||
|
Others
|
|
|
||||||
|
|
|
|||||||
| NOTE 3 | - |
INVENTORIES |
|
US dollars |
||||||||
|
December 31, |
||||||||
|
(in thousands) |
2022 |
2021 |
||||||
|
Finished products |
|
|
||||||
|
Raw materials |
|
|
||||||
|
|
|
|||||||
F - 26
ITURAN LOCATION AND CONTROL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)
| NOTE 4 | - |
INVESTMENTS IN AFFILIATED AND OTHER COMPANIES |
A.Investment in affiliated companies
|
US dollars |
||||||||
|
December 31, |
||||||||
|
(in thousands) |
2022 |
2021 |
||||||
|
Bringg |
|
|
||||||
|
Lumax |
|
|
||||||
|
Ituran MOB |
||||||||
|
Cellutrack |
|
|
||||||
|
|
|
|||||||
B.Investment in other companies
During the years 2021-2022, the Company made additional investments in two Israeli startups
The total investments in such companies were US $
| NOTE 5 | - |
OTHER NON-CURRENT ASSETS
|
|
US dollars |
||||||||
|
December 31, |
||||||||
|
(in thousands) |
2022 |
2021 |
||||||
|
|
||||||||
|
Deferred contract costs (*) |
|
|
||||||
|
Deposits |
|
|
||||||
|
|
|
|||||||
|
(*) |
See Note 1W. |
F - 27
ITURAN LOCATION AND CONTROL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)
| NOTE 6 |
- |
PROPERTY AND EQUIPMENT, NET |
| A. |
Property and equipment, net consists of the following:
|
|
US dollars
|
||||||||
|
December 31,
|
||||||||
|
(in thousands)
|
2022
|
2021
|
||||||
|
Cost:
|
||||||||
|
Operating equipment (*)
|
|
|
||||||
|
Office furniture, equipment and computers
|
|
|
||||||
|
Land
|
|
|
||||||
|
Buildings
|
|
|
||||||
|
Vehicles
|
|
|
||||||
|
Leasehold improvements
|
|
|
||||||
|
|
|
|||||||
|
Less – accumulated depreciation (**)
|
(
|
)
|
(
|
)
|
||||
|
Total property and equipment, net
|
|
|
||||||
| (*) |
As of December 31, 2022 and 2021, an amount of US$
|
| (**) |
As of December 31, 2022 and 2021, an amount of US$
|
| B. |
During the years ended December 31, 2022, 2021 and 2020, depreciation expenses were US$
|
|
NOTE 7 |
- |
LEASES
|
The Company have entered into several non-cancelable operating lease agreements for real estate (mainly offices, warehouse and base stations), vehicles and certain network equipment. In addition to rent, the leases may require payment of maintenance, insurance and other operating expenses. The Company's leases have original lease periods expiring between 2022 and 2030. Payments due under such lease contracts include primarily fixed payments. The Company does not assume renewals in the determination of the lease term unless the renewals are deemed to be reasonably assured at lease commencement (or become as such in future date). The Company's lease agreements do not contain any material residual value guarantees or material restrictive covenants.
F - 28
ITURAN LOCATION AND CONTROL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)
| NOTE 7 | - |
LEASES (cont.)
|
|
The components of lease costs, lease term and discount rate are as follows:
|
|
|
US dollars
|
|||
|
|
Year Ended
|
|||
|
(in thousands)
|
December 31, 2022
|
|||
|
Operating lease cost:
|
||||
|
Office and warehouse space
|
|
|||
|
Base stations
|
|
|||
|
Vehicle
|
|
|||
|
Others
|
|
|||
|
|
|
|||
|
Weighted Average Remaining Lease Term (years):
|
||||
|
Office space
|
|
|||
|
Base stations
|
|
|||
|
Vehicle
|
|
|||
|
Others
|
|
|||
|
|
||||
|
Weighted Average Discount Rate (%):
|
||||
|
Office space
|
|
|||
|
Base stations
|
|
|||
|
vehicle
|
|
|||
|
Others
|
|
|||
Supplemental cash flow information related to operating leases was as follows:
|
|
US dollars
|
|||
|
|
Year Ended
|
|||
|
(in million)
|
December 31, 2022
|
|||
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|||
|
Operating cash flows from operating leases
|
||||
|
The following is a schedule, by years, of maturities of operating lease liabilities as of December 31, 2022:
|
|
|
US dollars
|
|||
|
(in thousands)
|
December 31, 2022
|
|||
|
|
||||
|
Period:
|
||||
|
2023
|
|
|||
|
2024
|
|
|||
|
2025
|
|
|||
|
2026
|
|
|||
|
2027
|
|
|||
|
Thereafter
|
|
|||
|
Total operating lease payments
|
|
|||
|
Less: imputed interest
|
(
|
)
|
||
|
Present value of lease liabilities
|
|
|||
F - 29
ITURAN LOCATION AND CONTROL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)
| NOTE 8 |
- |
INTANGIBLE ASSETS, NET |
|
US dollars
|
||||||||||||||||||||||||
|
December 31,
|
Year ended December 31,
|
December 31,
|
||||||||||||||||||||||
|
2020
|
2021
|
2021
|
||||||||||||||||||||||
|
(in thousands)
|
Opening balance
|
Impairment (*)
|
Amortization (**)
|
Additions
|
Translation differences
|
Closing balance
|
||||||||||||||||||
|
Costumer relationship
|
|
|
(
|
)
|
|
|
|
|||||||||||||||||
|
Technology
|
|
|
(
|
)
|
|
|
|
|||||||||||||||||
|
Others
|
|
|
(
|
)
|
|
(
|
)
|
|
||||||||||||||||
|
|
|
(
|
)
|
|
(
|
)
|
|
|||||||||||||||||
|
US dollars
|
||||||||||||||||||||||||
|
December 31,
|
Year ended December 31,
|
December 31,
|
||||||||||||||||||||||
|
2021
|
2022
|
2022
|
||||||||||||||||||||||
|
(in thousands)
|
Opening balance
|
Impairment
|
Amortization (**)
|
Additions
|
Translation differences
|
Closing balance
|
||||||||||||||||||
|
Costumer relationship
|
|
|
(
|
)
|
|
|
|
|||||||||||||||||
|
Technology
|
|
|
(
|
)
|
|
(
|
)
|
|
||||||||||||||||
|
Others
|
|
|
(
|
)
|
|
|
|
|||||||||||||||||
|
|
|
(
|
)
|
|
(
|
)
|
|
|||||||||||||||||
| (*) |
Due to the decline in the results of Road Track in the first half of 2020 and the expectation of management for further potential decrease in Road Track anticipated performance, the Company performed on June 30, 2020, an impairment analysis of the intangible assets which relate directly to the operation of Road Track. Based on such analysis the Company recorded an impairment charge further described below:
To determine the fair value of such intangible assets, the Company, based on a valuation performed by the management, with the assistance of a third-party appraiser, utilized the "Relief from Royalties" valuation method. Accordingly, certain assumptions and judgments were made in order to determine the future income from which royalties will be derived from and in order to determine the appropriate rate of royalties and rate of discount.
As a result of the above, the Company recorded, an impairment loss in an amount of US$
|
| (**) |
As of December 31, 2022, the estimated aggregate amortization of intangible assets for the next five years is as follows: 2023- US$
|
|
F - 30
ITURAN LOCATION AND CONTROL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)
| NOTE 9 |
- |
GOODWILL
The changes in the carrying amount of goodwill for the years ended December 31, 2021 and 2020 are as follows:
|
|
US dollars
|
||||||||||||
|
Telematics
services |
Telematics products
|
Total
|
||||||||||
|
(in thousands)
|
||||||||||||
|
Balance as of January 1, 2021
|
|
|
|
|||||||||
|
Changes during 2021:
|
||||||||||||
|
Impairment (**)
|
|
|
|
|||||||||
|
Translation differences
|
|
|
|
|||||||||
|
Balance as of December 31, 2021 (*)
|
|
|
|
|||||||||
|
Changes during 2022:
|
||||||||||||
|
Translation differences
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||
|
Balance as of December 31, 2022 (*)
|
|
|
|
|||||||||
| (*) |
The accumulated amount of goodwill impairment loss as of December 31, 2022, and 2021 was US$
|
| (**) |
As a result of the circumstances described in note 8(*) the Company recorded on June 30, 2020, a goodwill impairment in the total amount of US$
The Company, with the assistance of a third-party appraiser, performed the annual goodwill impairment test, as of June 30, 2021 and reached to a conclusion that no impairment should be recorded at that point.
The Company has historically performed an annual goodwill assessment as of June 30 of each year or more often if indicators of impairment are presented. following the second closing of the RT acquisition (which was completed on September 22,2021), the Company decided to change the date of its annual impairment assessment from June 30 to December 31.
The Company performed annual assessments as of December 31, 2022 and 2021, and reached a conclusion that no impairment should be recorded at both points of time.
|
| NOTE 10 |
- |
CREDIT FROM BANKING INSTITUTIONS |
| A. |
Short term loans:
|
|
US dollars
|
||||||||
|
December 31,
|
||||||||
|
(in thousands)
|
2022
|
2021
|
||||||
|
Short-term loans - linked to the Mexican Pezo
|
|
|
||||||
|
Current maturities of long-term loan (Note 10B)
|
|
|
||||||
|
|
|
|||||||
F - 31
ITURAN LOCATION AND CONTROL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)
| NOTE 10 |
- |
CREDIT FROM BANKING INSTITUTIONS (cont.) |
| B. |
Long term loan:
In August 2018, the Company signed on Loan Agreement (the “Loan agreement”) with commercial Israeli bank (the “Bank”) under which the Company has received an amount of approximately
According to the loan agreement the Company is obligated to comply with the following covenants (the “Loan Covenants”):
|
| • |
Equity to total assets Ratio - The Ratio will not be less than
|
| • |
Total equity - Total equity will not be less than $
|
| • |
Net debt to EBITDA Ratio - The Ratio will not exceed 4.
|
| • |
EBITDA - EBITDA will not be less than $
|
|
The company is required to maintain such covenants on a quarterly basis
Upon noncompliance with any of the abovementioned covenants, the bank shall have the right to demand immediate repayment of the remaining balance of the loan.
During 2021, 2022 and as of December 31, 2022, and 2021, the Company was in compliance with the Loan Covenants.
|
| C. |
Maturity dates:
|
|
US dollars
|
||||
|
December 31,
|
||||
|
(in thousands)
|
2022
|
|||
|
First year
|
|
|||
|
Second year
|
|
|||
|
Third year
|
|
|||
|
|
||||
| D. |
Lines of credit:
Unutilized short-term lines of credit of the Company as of December 31, 2022, aggregated to US$
|
| NOTE 11 |
- |
OTHER CURRENT LIABILITIES
Composition:
|
|
US dollars
|
||||||||
|
December 31,
|
||||||||
|
(in thousands)
|
2022
|
2021
|
||||||
|
Accrued expenses
|
|
|
||||||
|
Accrued payroll and related taxes
|
|
|
||||||
|
Government institutions
|
|
|
||||||
|
Accrued dividend
|
|
|
||||||
|
Operating lease liabilities, current
|
|
|
||||||
|
Others
|
|
|
||||||
|
|
|
|||||||
F - 32
ITURAN LOCATION AND CONTROL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)
| NOTE 12 |
- |
CONTINGENT LIABILITIES |
| A. |
Claims
|
| 1. |
During year 2016 Brazilian Federal Communication Agency – Anatel issued a tax assessment for FUST contribution (contribution on telecommunication services) levied on the monitoring services rendered by us and additional tax assessment for FUNTELL contribution (contribution to Fund for the Technological Development of Telecommunication) levied on the monitoring services rendered by us regarding all for the period 2007-2012.Total amounts of approximately R$
|
| 2. |
On July 13, 2015 the company received a purported class action lawsuit which was filed against the Company in the District Court of Central Region in Tel-Aviv, by one plaintiff who is a subscriber of the Company, alleging that the Company, which was declared a monopoly under the Israeli Antitrust Law, 1988, unlawfully abused its power as a monopoly and discriminated between its customers. The plaintiff claims that the alleged discrimination resulted from the Company charging higher monthly subscription fees from customers who are obliged by insurance company requirements to install location and recovery systems in their vehicles than the monthly subscription fees that are charged from customers who are not required by insurance companies to install location and recovery systems in their vehicles. In addition, the plaintiff claims that the Company offers to customers who are not required by insurance companies to install location and recovery systems in their vehicles, a discounted warranty service to their location and recovery systems. The plaintiff claims in addition to the above, that such actions raise additional causes of action against the Company such as negotiations without good faith, executing contract without good faith, breach of contract, unjust enrichment, breach of consumer protection laws, tort laws, and breach of statutory duty. The lawsuit is yet to be approved as a class action. The total amount claimed if the lawsuit is approved as a class action was estimated by the plaintiff to be approximately NIS
|
| 3. |
Claims are filed against the Company and its subsidiaries from time to time during the ordinary course of business, usually with respect to civil, labor and commercial matters. The Company's management believes, based on its legal counsels' assessment, that the provision for contingencies recognized in the balance sheet is sufficient and that currently there are no claims (other than those described in this Note above) that are material, to the consolidated financial statements as a whole.
|
F - 33
ITURAN LOCATION AND CONTROL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)
| NOTE 12 |
- |
CONTINGENT LIABILITIES (cont.) |
| B. |
The Company was declared a monopoly under the Israeli Antitrust Law, 1988, in the market for the provision of systems for the location of vehicles in Israel. Under Israeli law, a monopoly is prohibited from taking certain actions, such as predatory pricing and the provision of loyalty discounts, which prohibitions do not apply to other companies. The Israeli Competition Authority may further declare that the Company has abused its position in the market. Any such declaration in any suit in which it is claimed that the Company engages in anticompetitive conduct may serve as prima facie evidence that the Company is either a monopoly or that it has engaged in anticompetitive behavior. Furthermore, it may be ordered to take or refrain from taking certain actions, such as setting maximum prices, in order to protect against unfair competition.
|
| C. |
Commitments
As of December 31, 2022, minimum future rentals under operating leases of buildings, vehicles and base station sites for periods were as follows: 2023 – US$
The leasing fees expensed in each of the years ended December 31, 2022, 2021 and 2020, were US$
|
| NOTE 13 |
- |
STOCKHOLDERS’ EQUITY |
| A. |
Share capital:
|
| 1. |
Composition:
|
|
December 31, 2022 and 2021
|
Registered
|
Issued and outstanding
|
||||||
|
Ordinary shares of NIS
|
|
|
||||||
| 2. |
In September 2005, the Company registered its ordinary shares for trade in the United States.
|
| 3. |
The Ordinary shares of the Company confer upon their holders the right to receive notice to participate and vote in general meetings of the Company and the right to receive dividends, if and when, declared.
|
| 4. |
On May 21, 2019, the board of directors approved a share buyback program, which Ituran has commenced. Under which, the Company is able to repurchase Ituran shares in an amount up to $
|
| 5. |
During 2019, the Company's fully owned subsidiary had repurchased a total of
During 2021, a Company's fully owned subsidiary had repurchased a total of
During 2021, the Company had repurchased a total of
During 2022, a Company's fully owned subsidiary had repurchased a total of
During 2022, the Company had repurchased a total of
As of December 31, 2022, an amount of
|
F - 34
ITURAN LOCATION AND CONTROL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)
| NOTE 13 | - | STOCKHOLDERS’ EQUITY (Cont.) |
| A. |
Share capital (Cont.):
|
| 6. |
Treasury stock have no voting rights.
|
| B. |
Retained earnings
|
| 1. |
In determining the amount of retained earnings available for distribution as a dividend, the Israeli Companies Law stipulates that the cost of the Company’s shares acquired either by the Company or its subsidiary (presented as a separate item in the consolidated balance sheet and the statement of changes in equity) must be deducted from the amount of retained earnings.
|
| 2. |
Dividends are declared and paid in NIS. Dividends paid to stockholders outside Israel are converted into dollars on the basis of the exchange rate prevailing at the date of declaration.
|
| 3. |
During May 2020 (As part of the steps the Company did in order to cope with Covid-19), the Company's board of directors unanimously approved a freeze on the dividend distribution policy until further notice.
|
| 4. |
On March 3, 2021, the board of directors unanimously approved the unfreeze of the dividend policy and approved the distribution of a cash dividend in the amount of $
|
| 5. |
On March 3, 2021, the board of directors also approved a dividend policy of $
|
| 6. |
During the years ended December 31, 2022, 2021 and 2020, the Company declared dividends in the amount of US$
|
| NOTE 14 | - | FINANCING INCOME (EXPENSES), NET |
|
US dollars
|
||||||||||||
|
Year ended December 31,
|
||||||||||||
|
(in thousands)
|
2022
|
2021
|
2020
|
|||||||||
|
Short-term interest expenses commissions and other
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||
|
Gains (loss) in respect of marketable securities and other investments
|
(
|
)
|
(
|
)
|
|
|||||||
|
Interest expenses in respect of long-term loans
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||
|
Interest income in respect of deposits
|
|
|
|
|||||||||
|
Income (expenses) related to taxes positions
|
|
|
(
|
)
|
||||||||
|
Exchange rate differences and others, net
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||
|
Income (expenses) in respect of changes in obligation to purchase non-controlling interests (*)
|
|
(
|
)
|
|
||||||||
|
(
|
)
|
(
|
)
|
|
||||||||
(*) See Note 1Y
F - 35
ITURAN LOCATION AND CONTROL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)
| NOTE 15 |
- |
INCOME TAX |
| A. |
Taxes on income included in the statements of income:
|
|
US dollars
|
||||||||||||
|
Year ended December 31,
|
||||||||||||
|
(in thousands)
|
2022
|
2021
|
2020
|
|||||||||
|
Income taxes (tax benefit):
|
||||||||||||
|
Current taxes:
|
||||||||||||
|
In Israel
|
|
|
|
|||||||||
|
Outside Israel
|
|
|
|
|||||||||
|
|
|
|
||||||||||
|
Deferred taxes:
|
||||||||||||
|
In Israel
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||
|
Outside Israel
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||
|
(
|
)
|
(
|
)
|
(
|
)
|
|||||||
|
Taxes in respect of prior years:
|
||||||||||||
|
In Israel
|
(
|
)
|
|
(*)
|
||||||||
|
Outside Israel
|
|
|
|
|||||||||
|
(
|
)
|
|
|
|||||||||
|
|
|
|
||||||||||
| (*) |
During November 2020, the Company has received tax assessments from the Israeli tax authority ("ITA") for the years 2016-2018 amounting to approximately NIS
|
| B. |
Measurement of results for tax purposes under the Income Tax (Inflationary Adjustments) Law, 1985 (the “Inflationary Adjustment Law”)
Until December 31, 2007, the Company and its Israeli subsidiaries reported income for tax purposes in accordance with the provisions of the Inflationary Adjustments Law, whereby taxable income was measured in NIS, adjusted for changes in the Israeli Consumer Price Index ("CPI"). Commencing January 1, 2008, this law became void, and in its place, there are transition provisions, whereby the results of operations for tax purposes are measured on a nominal basis.
|
| C. |
The Law for the Encouragement of Capital Investments, 1959 (the "Investment Law")
|
| 1. |
On December 22, 2016, the Israeli parliament passed the Law for Economic Efficiency (Legislative Amendments for Achieving Budget Objectives in the Budget Years 2017 and 2018) – 2016 (hereinafter – the “Economic Efficiency Law”) and on December 29, 2016, the Law was publicized in the Official Gazette. The Economic Efficiency Law, among other things, reduced the tax rate applicable to a preferred enterprise located in Development Zone A from
|
F - 36
ITURAN LOCATION AND CONTROL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)
| NOTE 15 | - | INCOME TAX (cont.) |
| C. |
The Law for the Encouragement of Capital Investments, 1959 (the "Investment Law") (cont.)
|
| 2. |
As of December 31, 2022, one Israeli subsidiary (located in areas other than Development Zone A) is entitled to a "Preferred Company " status pursuant to the investment law and subject to 16% corporate tax rate.
|
| D. |
The Law for the Encouragement of Capital Investments, 1959, under the 2016 amendment (the "Investment Law")
|
| 1. |
In December 2016 new legislation amended the Investments Law (the "2016 amendment"). Under the 2016 amendment a new status of "Technological Preferred Enterprise" was introduced to the Investment Law.
Technological Preferred Enterprise – an enterprise which, amongst other condition, is part of a consolidated Company with consolidated revenues of less than NIS
|
| 2. |
As of December 31, 2022, two Israeli subsidiaries (located in areas other than Development Zone A) are entitled to a "Technological Preferred Enterprise" status pursuant to the investment (under the 2016 amendment) law and subject to
|
| E. |
Israeli corporate tax rates
Taxable income of the Company and its Israeli subsidiaries (that are not entitled to special tax rates as described above) is subject to a corporate tax rate of 23% in 2020, 2021 and 2022.
|
| F. |
Non-Israeli subsidiaries
Non-Israeli subsidiaries are taxed according to the tax laws and rates in their country of residence.
|
| G. |
Use of assumptions and judgments
The application of income tax law is inherently complex. Laws and regulations in this area are voluminous and can be ambiguous; the Company is, therefore, obliged to make many subjective assumptions and judgments regarding the application of such laws and regulations to its facts and circumstances. In addition, interpretations of and guidance surrounding income tax laws and regulations are subject to changes over time. Any changes in the Company's subjective assumptions and judgments could materially affect amounts recognized in its consolidated balance sheets and statements of income.
|
| H. |
Tax assessments
The Company and certain Israeli subsidiary have received final tax assessments through the 2018, One of the subsidiaries in Brazil has received final tax assessments through the 2015 tax year. The other subsidiaries have not yet been assessed since incorporation.
|
| I. |
Carry forward foreign tax credits and tax losses
As of December 31, 2022, there are no losses carried forward that are likely to be used in the near future.
|
F - 37
ITURAN LOCATION AND CONTROL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)
| NOTE 15 | - | INCOME TAX (cont.) |
| J. |
The following is reconciliation between the theoretical tax on pretax income, at the applicable Israeli tax rate, and the tax expense reported in the financial statements:
|
|
US dollars
|
||||||||||||
|
Year ended December 31,
|
||||||||||||
|
(in thousands)
|
2022
|
2021
|
2020
|
|||||||||
|
Pretax income
|
|
|
|
|||||||||
|
Statutory tax rate
|
|
%
|
|
%
|
|
%
|
||||||
|
Tax computed at the ordinary tax rate
|
|
|
|
|||||||||
|
Nondeductible expenses (income)
|
|
(
|
)
|
|
||||||||
|
Losses and timing differences in respect of which no deferred taxes assets were recognized
|
|
|
|
|||||||||
|
Tax adjustment in respect of different tax rates
|
|
|
|
|||||||||
|
Adjustment in respect of tax rate deriving from “approved enterprises”
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||
|
Tax related to previous years
|
(
|
)
|
|
|
||||||||
|
Others
|
(
|
)
|
|
(
|
)
|
|||||||
|
|
|
|
||||||||||
| K. |
Summary of deferred taxes
|
|
|
Composition: |
|
US dollars
|
||||||||
|
December 31,
|
||||||||
|
(in thousands)
|
2022
|
2021
|
||||||
|
Deferred taxes
|
||||||||
|
Provision for vacation, recreation and bad debt
|
|
|
||||||
|
Provision for other employee related obligations
|
|
|
||||||
|
Provision for deferred revenues/expenses and other obligations
|
|
|
||||||
|
Other temporary differences, net
|
|
|
||||||
|
|
|
|||||||
|
US dollars
|
||||||||
|
December 31,
|
||||||||
|
(in thousands)
|
2022
|
2021
|
||||||
|
Deferred income taxes included in long-term investments and other assets
|
|
|
||||||
|
Deferred income taxes included in long-term liabilities
|
(
|
)
|
(
|
)
|
||||
|
|
|
|||||||
F - 38
ITURAN LOCATION AND CONTROL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)
| NOTE 15 | - | INCOME TAX (cont.) |
| L. |
Income before income taxes is composed as follows:
|
|
US dollars
|
||||||||||||
|
Year ended December 31,
|
||||||||||||
|
(in thousands)
|
2022
|
2021
|
2020
|
|||||||||
|
The Company and its Israeli subsidiaries
|
|
|
|
|||||||||
|
Non-Israeli subsidiaries
|
|
|
(
|
)
|
||||||||
|
|
|
|
||||||||||
| NOTE 16 | - | EARNINGS PER SHARE |
During the periods, there were no potential instruments that could be exercised or converted to ordinary shares. The net income and the weighted average number of shares used in computing basic and diluted earnings per share for the years ended December 31, 2022, 2021 and 2020, are as follows:
|
US dollars
|
||||||||||||
|
Year ended December 31,
|
||||||||||||
|
(in thousands)
|
2022
|
2021
|
2020
|
|||||||||
|
Net income attributable to stockholder's used for the computation of basic and diluted earnings per share
|
|
|
|
|||||||||
|
Number of shares
|
||||||||||||
|
Year ended December 31,
|
||||||||||||
|
(in thousands)
|
2022
|
2021
|
2020
|
|||||||||
|
Weighted average number of shares used in the computation of basic and diluted earnings per share
|
|
|
|
|||||||||
| NOTE 17 | - | RELATED PARTIES |
| A. |
The Tzivtit Insurance Ltd. (“Tzivtit Insurance”), owned by a director of the Company, serves as the Company’s insurance agent and provides the Company with elementary insurance and managers insurance.
In respect of these insurance services, Tzivtit Insurance is entitled to receive commissions at various rates, paid by the insurance company (which is not considered a related party).
With respect to basic insurance policies, and directors and offices insurance policies, the Company paid to the insurance company in 2022, US$
Tzivtit Insurance is entitled to commissions in an aggregate amount of NIS
|
| B. |
With a financial consulting to pay the consultant monthly consulting fees of NIS
|
F - 39
ITURAN LOCATION AND CONTROL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)
| NOTE 17 | - | RELATED PARTIES (cont.) |
| C. |
In February 2014, following the approval of the Company's general meeting of shareholders on January 28, 2014, the Company entered into new service agreements, setting forth the terms of service of its President, Co-Chief Executive Officers and its International Activity and Business Development Officer, in compliance with the Company's compensation policy for office holders; and E-Com entered into a service agreement setting forth the terms of service of its Chief Executive Officer in compliance with the Company's compensation policy for officer holders. The principal terms of these agreements are as follows:
Messrs. Izzy Sheratzky, Eyal Sheratzky, Nir Sheratzky and Gil Sheratzky (the "Executive Offices Holders" or "the Executives"), shall provide services as independent contractors, which shall be entitled to a monthly payment of NIS
Each of the above agreements also provides that the executives may request to provide their services to the Company as employees, and not through a service provider, and in such event, the they shall execute an employment agreement with the Company, in lieu of the above service agreements, which shall also set forth the provisions of social security and other benefits that the Company usually grants its senior executive officers (which may not deviate from the provisions of the Compensation policy in this respect). In any event, it was agreed that the nature of the agreement pursuant to which the services are provided shall not affect the company's provision of the services as set forth in the service agreements.
The terms of the Cash incentives applicable to the "Executive Offices Holders", as set forth in their agreements referred to above (the "Agreements"), are as follows:
|
| • |
"Target-based Cash Incentives" means a cash incentive awarded to the Executive Office Holders for the Company's achievement of the following Profit-Before-Tax targets in each calendar year following the effective date of the above agreements, in which the Minimum Threshold (as defined below) has been achieved:
|
|
Company's Profit-Before-Tax Targets
(In US$thousands) (*)
|
Level of Incentive - As a Percentage of the
Executive Office Holder's Annual Cost of Pay
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Above
|
|
"Minimum Threshold" means, with respect to a particular calendar year, a minimum Company's Return on Equity of 15 %, and a minimum company's Profit before Tax of USD 24 million.
| (*) |
Profit before tax target will not include adjustment of the value of assets and obligations to their fair value in accordance with accounting standards.
|
F - 40
ITURAN LOCATION AND CONTROL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)
| NOTE 17 | - | RELATED PARTIES (cont.) |
C. (cont.)
| • |
"Excess Return Cash Incentives" means that at the end of each calendar year, the Company shall examine the Company's Stock Yield since January 1 of such year or, with respect to the first year of such grant –
The Excess Return Cash Incentive for each year shall not exceed an amount equal to the Executive Officer Holder's annual Cost of Pay.
In the event that an Agreement is terminated during a calendar year, the Company's compensation committee and board of directors shall determine the relative amounts out of the Target-based Cash Incentives and/or Excess Return Cash Incentives to which the relevant Executive Office Holder is entitled for the portion of the year during which the Agreement was in force; and these amounts shall be paid within
On the date of determination of each Executive Office Holder's entitlement for a Target-based Cash Incentive for a particular year, the Company's compensation committee shall examine whether the total amount of grants to which Executive Officers are entitled with respect to such calendar year and which constitute variable components of their terms of services (the "Total Amount of Grants to Executive Officers"), exceed an amount equal to
In the event that the Total Amount of Grants to Executive Officers exceeds the EBITDA's Threshold, then the Target-based Cash Incentive and the Excess Return Cash Incentive to which an Executive Office Holder is entitled (together, the "Grants") shall be reduced by an amount equal to the Executive Office Holder's Rate of Grants (as defined below) out of the Excess Amount. The term "Executive Office Holder's Rate of Grants" means, with respect to a particular Executive Office Holder, the percentage which such Executive Office Holder's Grants constitute out of the Total Amount of Grants to Executive Officers.
The Company's board of directors shall have the right, under special circumstances at its discretion, to reduce the amount of Grants to which the Executive Office Holders are entitled, upon a
The Executive Office Holder shall be required to return any compensation paid to them on the basis of results included in financial statements that turned out to be erroneous and were subsequently restated in the Company's financial statements published during the three year period following publication of the erroneous financial statements; to the extent they would not have been entitled to the compensation actually received had it been determined based on the restated financial statements. In such case, compensation amounts will be returned within
|
F - 41
ITURAN LOCATION AND CONTROL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)
| NOTE 17 | - | RELATED PARTIES (cont.) |
C. (cont.)
In 2022 and 2021 Executive Offices Holders were entitled to Target based cash incentives at the maximum rate of (150 %).
Due to the Covid-19 effects and based on their own initiative, the Company's Executive Office Holders agreed to temporarily decrease their base salary by 25 % from April 2020, for an indefinite period until they will perceive that the effect of Covid -19 on Company’s business will be less significant. In April 2021, the temporarily decrease in their base salary reduction was canceled.
The Company's Executive Office Holders also agreed to temporarily delay the payment of their Target-based Cash Incentives for 2020, during the first quarter of 2021 the Company paid the Executive Office Holders the incentives for 2020 (additional amount of $3 million).
The table below summarizes the aggregate amounts paid to the companys' Executive Office Holders:
|
US dollars
|
||||||||||||
|
Year ended December 31,
|
||||||||||||
|
(in thousands)
|
2022
|
2021
|
2020
|
|||||||||
|
Izzy Sheratzky
|
|
|
|
|||||||||
|
Eyal Sheratzky
|
|
|
|
|||||||||
|
Nir Sheratzky
|
|
|
|
|||||||||
|
Gil Sheratzky
|
|
|
|
|||||||||
| NOTE 18 | - | SEGMENT REPORTING |
| A. |
General information:
The operations of the Company are conducted through two different core activities: Location based services ("Telematics services") and Wireless communications products ("Telematics products"). These activities also represent the reportable segments of the Company.
The reportable segments are viewed and evaluated separately by Chief Operating Decision Maker (the Company's Co-Chief Executive Officers), since the marketing strategies, processes and expected long term financial performances of the segments are different.
Telematics services:
The telematics services segment consists predominantly of regionally- based stolen vehicle recovery (SVR) services, fleet management services and value-added services that include among others, connected car, UBI (usage base insurance), personal advanced locater services and concierge services.
The Company provides Location based services in Israel, Brazil, Argentina, Colombia, Mexico, Ecuador and the United States.
Telematics products:
The telematics product segment consists mainly of short and medium range two-way machine-to-machine wireless communications products that are used for various applications, including automatic vehicle location, and automatic vehicle identification.
|
F - 42
ITURAN LOCATION AND CONTROL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)
| NOTE 18 | - | SEGMENT REPORTING (cont.) |
| B. |
Information about reported segment profit or loss and assets:
|
|
US dollars
|
||||||||||||
|
(in thousands)
|
Telematics services
|
Telematics products
|
Total
|
|||||||||
|
Year ended December 31, 2022
|
||||||||||||
|
Revenues
|
|
|
|
|||||||||
|
Operating income
|
|
|
|
|||||||||
|
Assets
|
|
|
|
|||||||||
|
Goodwill
|
|
|
|
|||||||||
|
Expenditures for assets
|
|
|
|
|||||||||
|
Depreciation and amortization
|
|
|
|
|||||||||
|
Year ended December 31, 2021
|
||||||||||||
|
Revenues
|
|
|
|
|||||||||
|
Operating income
|
|
|
|
|||||||||
|
Assets
|
|
|
|
|||||||||
|
Goodwill
|
|
|
|
|||||||||
|
Expenditures for assets
|
|
|
|
|||||||||
|
Depreciation and amortization
|
|
|
|
|||||||||
|
Year ended December 31, 2020
|
||||||||||||
|
Revenues
|
|
|
|
|||||||||
|
Operating income (loss)
|
|
(
|
)
|
|
||||||||
|
Assets
|
|
|
|
|||||||||
|
Goodwill
|
|
|
|
|||||||||
|
Expenditures for assets
|
|
|
|
|||||||||
|
Depreciation and amortization
|
|
|
|
|||||||||
|
Impairment of goodwill
|
|
|
|
|||||||||
|
Impairment of intangible assets
|
|
|
|
|||||||||
| C. |
Information about reported segment profit or loss and assets:
The evaluation of performance is based on the operating income of each of the two reportable segments.
Accounting policies of the segments are the same as those described in the accounting policies applied in the consolidated financial statements.
Due to the nature of the reportable segments, there have been no inter-segment sales or transfers during the reported periods.
Financing expenses, net, non-operating other expenses, net, taxes on income and the share of the Company in losses of affiliated companies were not allocated to the reportable segments, since these items are carried and evaluated on the enterprise level.
|
F - 43
ITURAN LOCATION AND CONTROL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)
| NOTE 18 | - | SEGMENT REPORTING (cont.) |
| D. |
Reconciliations of reportable segment revenues, profit or loss, and assets, to the enterprise’s consolidated totals:
|
|
US dollars
|
||||||||||||
|
Year ended December 31,
|
||||||||||||
|
(in thousands)
|
2022
|
2021
|
2020
|
|||||||||
|
Total revenues of reportable segment and consolidated revenues
|
|
|
|
|||||||||
|
Operating income
|
||||||||||||
|
Total operating income for reportable segments
|
|
|
|
|||||||||
|
Unallocated amounts:
|
||||||||||||
|
Financing income, net
|
(
|
)
|
(
|
)
|
|
|||||||
|
Other expense, net
|
|
(
|
)
|
(
|
)
|
|||||||
|
Consolidated income before taxes on income
|
|
|
|
|||||||||
|
Assets
|
||||||||||||
|
Total assets for reportable segments (*)
|
|
|
|
|||||||||
|
Other unallocated amounts:
|
||||||||||||
|
Current assets
|
|
|
|
|||||||||
|
Investments in affiliated and other companies
|
|
|
|
|||||||||
|
Property and equipment, net
|
|
|
|
|||||||||
|
Other unallocated amounts
|
|
|
|
|||||||||
|
Consolidated total assets (at year end)
|
|
|
|
|||||||||
|
Other significant items
|
||||||||||||
|
Total expenditures for assets of reportable segments
|
|
|
|
|||||||||
|
Unallocated amounts
|
|
|
|
|||||||||
|
Consolidated total expenditures for assets
|
|
|
|
|||||||||
|
Total depreciation, amortization and impairment for reportable segments
|
|
|
|
|||||||||
|
Unallocated amounts
|
|
|
|
|||||||||
|
Consolidated total depreciation, amortization and impairment
|
|
|
|
|||||||||
| (*) |
Including goodwill.
|
F - 44
ITURAN LOCATION AND CONTROL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)
| NOTE 18 | - | SEGMENT REPORTING (cont.) |
|
E. |
Geographic information |
|
Revenues |
||||||||||||
|
Year ended December 31, |
||||||||||||
|
(in thousands) |
2022 |
2021 |
2020 |
|||||||||
|
|
||||||||||||
|
Israel |
|
|
|
|||||||||
|
Brazil |
|
|
|
|||||||||
|
Others |
|
|
|
|||||||||
|
Total |
|
|
|
|||||||||
|
Property and equipment, net |
||||||||||||
|
December 31, |
||||||||||||
|
(in thousands) |
2022 |
2021 |
2020 |
|||||||||
|
|
||||||||||||
|
Israel |
|
|
|
|||||||||
|
Brazil |
|
|
|
|||||||||
|
Others |
|
|
|
|||||||||
|
Total |
|
|
|
|||||||||
| - | Revenues were attributed to countries based on customer location. | |
| - | Property and equipment were classified based on major geographic areas in which the Company operates. |
F. Major customers
During 2020, 2021 and 2022 there were no sales exceeding 10% of total revenues to none of the Company customers.
G. Major product lines and timing of revenue recognition
In the following table, revenue is disaggregated by primary major product lines, and timing of revenue recognition for the years ended December 31, 2021 and 2022:
|
US dollars |
||||||||||||||||||||||||
|
Reportable segments result of operations |
||||||||||||||||||||||||
|
(in thousands) |
Year ended December 31, 2021 |
Year ended December 31, 2022 |
||||||||||||||||||||||
|
Telematics services |
Telematics products |
Total |
Telematics services |
Telematics products |
Total |
|||||||||||||||||||
|
At a point of time |
|
|
|
|
|
|
||||||||||||||||||
|
Over a period of time |
|
|
|
|
|
|
||||||||||||||||||
|
|
|
|
|
|
|
|||||||||||||||||||
In the following table, revenue is disaggregated by primary major product lines, and timing of revenue recognition for the year ended December 31, 2020:
|
US dollars |
||||||||||||
|
Reportable segments result of operations |
||||||||||||
|
(in thousands) |
Year ended December 31, 2020 |
|||||||||||
|
Telematics services |
Telematics products |
Total |
||||||||||
|
At a point of time |
|
|
|
|||||||||
|
Over a period of time |
|
|
|
|||||||||
|
|
|
|
||||||||||
F - 45
ITURAN LOCATION AND CONTROL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)
| NOTE 19 | - | FINANCIAL INSTRUMENTS AND RISKS MANAGEMENT |
| A. |
Concentrations of credit risks
Financial instruments that potentially subject the Company and its subsidiaries to concentrations of credit risk consist principally of cash and cash equivalents, accounts receivables and marketable securities.
Most of the Company’s cash and cash equivalents, deposits in short-term investments (and investments in trading marketable securities), as of December 31, 2022 and 2021, were deposited with major banks with high credit rating. The Company is of the opinion that the credit risk in respect of these balances is immaterial.
Most of the Company’s sales are made in Israel, Brazil, Argentina, Mexico, Ecuador, Colombia and the United States to a large number of customers, including insurance companies and Car manufacturers. Management periodically evaluates the collectability of the trade receivables to determine the amounts that are doubtful of collection and determine a proper allowance for doubtful accounts. Accordingly, management believes that the Company’s trade receivables do not represent a substantial concentration of credit risk.
From time to time the Company enters into foreign exchange forward contracts intended to protect against the increase in the purchase price of forecasted inventory purchases dominated in currencies other than the functional currency of the purchasing entity.
However, during the years ended December 31, 2022, and 2021 such activity was limited.
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| B. |
Foreign exchange risk management
The Company operates internationally, which gives rise to exposure to market risks mainly from changes in exchange rates of foreign currencies in relation to the functional currency of each of the entities of the Company.
During the years 2022 and 2021 the company did not have hedging activity, and as of December 31, 2022, and 2021 there were no material forward exchange contracts outstanding.
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F - 46
ITURAN LOCATION AND CONTROL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)
| NOTE 19 |
- |
FINANCIAL INSTRUMENTS AND RISKS MANAGEMENT (cont.) |
| C. |
Fair value of financial instruments
The Company measures fair value and discloses fair value measurements for financial assets and liabilities. Fair value is an exit price, representing the amount that would be received to sell an asset or the amount that would be paid to transfer a liability in an orderly transaction between market participants.
The Company measured cash and cash equivalents, marketable securities and derivative financial instruments at fair value. Such financial instruments are measured at fair value, on a recurring basis. The measurement of cash and cash equivalents and marketable securities are classified within Level 1. The fair value of derivatives generally reflects the estimated amounts that the Company would receive or pay to terminate the contracts at the reporting dates, based on the prevailing currency prices and the relevant interest rates. Such measurement is classified within Level 2. However, as of December 31, 2022 and 2021, the company did not have material financial derivatives.
The fair value of the financial instruments included in the working capital of the Company (cash and cash equivalents, accounts receivable, accounts payable and other current assets and liabilities) approximates their carrying value, due to the short-term maturity of such instruments.
The fair value of the long-term liability (loans from bank institutions) approximates its fair value, as the loan carries variable interest rate.
See Note 1N regarding non-recurring measurement of the fair value of certain non-financial assets (mainly reporting units with goodwill and other definite-lite intangible assets).
The Company's financial assets measured at fair value on a recurring basis, consisted of the following types of instruments as of December 31, 2022 and 2021:
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December 31, 2022
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(in thousands)
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Level 1
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Level 2
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Level 3
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|||||||||
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Trading securities
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Total
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December 31, 2021
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(in thousands)
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Level 1
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Level 2
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Level 3
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|||||||||
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Trading securities
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|
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Total
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F - 47
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.
ITURAN LOCATION AND CONTROL LTD.
(Registrant)
By: /s/ Eyal Sheratzky | /s/ Nir Sheratzky | ||
Eyal Sheratzky | Nir Sheratzky | ||
Co-Chief Executive Officers |
Dated: April 19, 2023
86
TABLE OF CONTENTS
Part I: Gender IdentityPart Ii: Demographic BackgroundItem 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. Descriptions Of Securities Other Than Equity SecuritiesPart IIItem 13. Defaults, Dividend Arrearages and DelinquenciesItem 14. A Material Modifications To The Rights Of Security Holders and Use Of ProceedsItem 15. Controls and ProceduresItem 16. [reserved]Item 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 Issuer and Affiliated PurchasersItem 16F. Changes in Registrant S Certifying AccountantItem 16G. Corporate GovernanceItem 16H. Mine Safety DisclosurePart IIIItem 17. Financial StatementsItem 18. Financial StatementsItem 19. ExhibitsNote 1 - Summary Of Significant Accounting PoliciesNote 1 - Summary Of Significant Accounting Policies (cont.)Note 1 - Summary Of Significant Accounting Policies (cont.) J. Derivatives (cont.)Note 1 - Summary Of Significant Accounting Policies (cont.) M. Income Taxes (cont.)Note 1 - Summary Of Significant Accounting Policies (cont.) N. Goodwill and Intangible Assets (cont.) 1. (cont.)Note 1 - Summary Of Significant Accounting Policies (cont.) N. Goodwill and Intangible Assets (cont.)Note 1 - Summary Of Significant Accounting Policies (cont.) Q. Revenue Recognition (cont.)Note 1 - Summary Of Significant Accounting Policies (cont.) V. Fair Value Measurements (cont.)Note 1 - Summary Of Significant Accounting Policies (cont.) Z. Leases (cont.)Note 2 - Other Current AssetsNote 3 - InventoriesNote 4 - Investments in Affiliated and Other CompaniesNote 5 - Other Non-current AssetsNote 6 - Property and Equipment, NetNote 7 - LeasesNote 7 - Leases (cont.)Note 8 - Intangible Assets, NetNote 9 - Goodwill The Changes in The Carrying Amount Of Goodwill For The Years Ended December 31, 2021 and 2020 Are As Follows:Note 10 - Credit From Banking InstitutionsNote 10 - Credit From Banking Institutions (cont.)Note 11 - Other Current Liabilities Composition:Note 12 - Contingent LiabilitiesNote 12 - Contingent Liabilities (cont.)Note 13 - Stockholders EquityNote 13 - Stockholders Equity (cont.)Note 14 - Financing Income (expenses), NetNote 15 - Income TaxNote 15 - Income Tax (cont.)Note 16 - Earnings Per ShareNote 17 - Related PartiesNote 17 - Related Parties (cont.)Note 18 - Segment ReportingNote 18 - Segment Reporting (cont.)Note 19 - Financial Instruments and Risks ManagementNote 19 - Financial Instruments and Risks Management (cont.)