UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________
Form 20-F
(Mark One)
☐☐
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
☒☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2020
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
☐☐
For the transition period from ______ to ______
OR
SHELL COMPANY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
☐☐
Date of event requiring this shell company report.
Commission File Number 001-35464
CAESARSTONE LTD.
(Exact Name of Registrant as specified in its charter)
ISRAEL
(Jurisdiction of incorporation or organization)
Kibbutz Sdot-Yam
MP Menashe, 3780400
Israel
(Address of principal executive offices)
Yuval Dagim
Chief Executive Officer
Caesarstone Ltd.
MP Menashe, 3780400
Israel
Telephone: +972 (4) 636-4555
Facsimile: +972 (4) 636-4400
(Name, telephone, email and/or facsimile number and address of company contact person)
Securities registered or to be registered pursuant to Section 12(b) of the Securities Act of 1933:
Title of each class
Ordinary Shares, par value NIS 0.04 per share
Trading Symbol
CSTE
Name of each exchange on which registered
The Nasdaq Stock Market LLC
Securities registered or to be registered pursuant to Section 12(g) of the Act: None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of December 31, 2020: 34,437,296 ordinary shares
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 ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12
months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days:
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 “accelerated filer,” “large accelerated filer” and “emerging growth company” in Rule 12b-2 of the Exchange Act (Check one):
Large accelerated filer ☐
Accelerated filer ☒
Non-accelerated filer ☐
Emerging growth company ☐
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use
the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act. ☐
† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards
Codification after April 5, 2012.
Indicate by check mark whether the registrant has filed a report on the attestation to its management’s assessment of the effectiveness of its internal control over
financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit
report. ☒
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
U.S. GAAP ☒
International Financial Reporting Standards as issued
by the International Accounting Standards Board ☐
Other ☐
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow:
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 ☒
Item 17 ☐ Item 18 ☐
Introduction
PRELIMINARY NOTES
As used herein, and unless the context suggests otherwise, the terms “Caesarstone,” “Company,” “we,” “us” or “ours” refer to Caesarstone Ltd. and its consolidated
subsidiaries. In this document, references to “NIS” or “shekels” are to New Israeli Shekels, and references to “dollars,” “USD” or “$” refer to U.S. dollars.
Our reporting currency is the United States (“U.S.”) dollar. The functional currency of each of our non-U.S. subsidiaries is the local currency in which it operates.
These subsidiaries’ financial statements are translated into the U.S. dollar, the parent company’s functional currency, using the current rate method.
Other financial data appearing in this annual report that is not included in our consolidated financial statements and that relate to transactions that occurred prior to
December 31, 2020 are reflected using the exchange rate on the relevant transaction date. With respect to all future transactions, U.S. dollar translations of NIS
amounts presented in this annual report are translated at the rate of $1.00 = NIS 3.2150, the representative exchange rate published by the Bank of Israel as of
December 31, 2020.
Market and Industry Data and Forecasts
This annual report includes data, forecasts and information obtained from industry publications and surveys and other information available to us. Some data is also
based on our good faith estimates, which are derived from management’s knowledge of the industry and independent sources. Forecasts and other metrics included
in this annual report to describe the countertop industry are inherently uncertain and speculative in nature and actual results for any period may materially differ.
We have not independently verified any of the data from third-party sources, nor have we ascertained the underlying assumptions relied upon therein. While we are
not aware of any misstatements regarding the industry data presented herein, estimates and forecasts involve uncertainties and risks and are subject to change based
on various factors, including those discussed under the headings “—Forward-Looking Statements” and “ITEM 3: Key Information—Risk Factors” in this annual
report.
Unless otherwise noted in this annual report, Freedonia Custom Research, a division of MarketResearch.com, Inc. (“Freedonia”) is the source for third-party
industry data and forecasts. The Freedonia report, dated March 12, 2021 (“Freedonia Report”), represents data, research opinion or viewpoints developed
independently by Freedonia and does not constitute a specific guide to action. In preparing the report, Freedonia used various sources, including publicly available
third-party financial statements; government statistical reports; press releases; industry magazines; and interviews with manufacturers of related products (including
us), manufacturers of competitive products, distributors of related products, and government and trade associations. Growth rates in the Freedonia Report are based
on many variables, such as currency exchange rates, raw material costs and pricing of competitive products, and such variables are subject to wide fluctuations over
time. The Freedonia Report speaks as of its final publication date (and not as of the date of this filing), and the opinions and forecasts expressed in the Freedonia
Report are subject to change by Freedonia without notice. Management believes this third-party report to be reputable, but has not independently verified the
underlying data sources, methodologies, or assumptions. The report and other publications referenced are generally available to the public and were not
commissioned by the Company.
iii
Special Note Regarding Forward-Looking Statements and Risk Factor Summary
This annual report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (“Securities Act”), Section
21E of the Securities Exchange Act of 1934, as amended (“Exchange Act”), and the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of
1995, that are based on our management’s beliefs and assumptions and on information currently available to our management. Forward-looking statements include
information concerning our possible or assumed future results of operations, business strategies, financing plans, competitive position, industry environment,
potential growth opportunities, potential market opportunities and the effects of competition. Forward-looking statements include all statements that are not
historical facts and can be identified by terms such as “anticipates,” “believes,” “could,” “seeks,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,”
“predicts,” “projects,” “should,” “will,” “would” or similar expressions that convey uncertainty of future events or outcomes and the negatives of those terms.
These statements may be found in several sections of this annual report, including, but not limited to “ITEM 3: Key Information—Risk Factors,” “ITEM 4:
Information on the Company,” “ITEM 5: Operating and Financial Review and Prospects,” “ITEM 10: Additional Information—Taxation—United States Federal
Income Taxation—Passive foreign investment company considerations.” Forward-looking statements reflect our current views with respect to future events and are
based on assumptions and are subject to risks and uncertainties, including those described in “ITEM 3.D. Key Information—Risk Factors.” Important factors that
could affect our actual results and cause them to differ materially from those expressed in forward-looking statements include, but are not limited to, the items in
the following list, which also summarizes some of our principal risks:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
the impact of the coronavirus (COVID-19) pandemic on end-consumers, the global economy and our business and results of operations;
downturns in the home renovation, remodeling and residential construction sectors or the economy generally;
competitive pressures from other manufacturers of quartz and other surface materials;
the outcome of litigation regarding silicosis, other bodily injury claims or other legal proceedings in which we are involved, and our ability to use our
insurance policy to cover damages;
regulatory requirements and any changes thereto relating to crystalline silica dust and related hazards;
the effects of enforcements against us, our officers and directors in the United States;
our ability to compete with lower-priced products and any changes to countervailing measures, antidumping duties or similar tariffs;
impacts on revenue from sales disruptions in our geographic concentrations or key markets;
our ability to manufacture our existing products globally as planned;
disturbances to our operations, the operations of our suppliers, distributors, customers, consumers or other third parties;
our ability to effectively manage changes to our production and supply chain and effectively collaborate with Original Equipment Manufacturer (“OEM”)
suppliers;
future foreign exchange rates and fluctuations in such rates, particularly the NIS, Australian dollar, Canadian dollar, British pound, Indian Rupee and the
Euro;
changes to the prices of our raw materials or to the suppliers of our raw materials;
the extent of our liability for environmental, health and safety, product liability and other matters;
our ability to execute our strategy to expand sales in certain markets;
our ability to cooperate with large retailers;
delays in manufacturing if we are required to change the suppliers for the raw materials used in the production of our products;
our ability to effectively manage our inventory and successfully pursue a wider product offering;
our ability to effectively manage our international operations, including risks associated with changes in trade policy or the imposition of tariffs;
iv
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
quarterly fluctuations in our results of operations as a result of seasonal factors and building construction cycles;
competition for business combination or acquisition opportunities;
our ability to successfully consummate business combinations or acquisitions and our success in integrating our most recently acquired Lioli and Omicron
businesses into our operations;
our reliance on third-party distributors, re-sellers and a limited number of large retailers;
disruptions to our information technology systems globally;
the protection of our brand, technology and intellectual property;
costs and other conditions required to receive certain tax benefits;
our exposure to tax liabilities and related consequences under the U.S. Internal Revenue Code;
our ability to retain our senior management team and other skilled and experienced personnel;
our ability to manage or resolve conflicts of interest arising from employee affiliations with Kibbutz Sdot-Yam (the “Kibbutz”) and with Tene Investment
in Projects 2016 Limited Partnership (“Tene”);
the effect of substantially share ownership by the Kibbutz and Tene;
our ability to maintain our lease agreements with the Kibbutz, the Israeli Lands Administration (the “ILA”) and Caesarea Development Corporation;
coverage by equity research analysts, publicly announced financial guidance, investor perceptions and our ability to meet other expectations (such as
Environmental Social and Governance);
compliance with and impacts of Israeli law, such as the Rest Law and Israeli Competition Law and with respect to mergers, acquisitions or related
transactions;
the impacts of conditions in Israel, such as negative economic conditions or labor unrest;
differences in the governance of shareholders’ rights under Israeli law;
the continued availability of certain tax benefits granted by the Israeli government;
the amount and timing of our dividend payments;
price volatility of, and effects of future sales on, our ordinary shares;
our status as a foreign private issuer and related exemptions with respect thereto; and
our expectations regarding regulatory matters applicable to us. The preceding list is not intended to be an exhaustive list of all our forward-looking statements.
Forward-looking statements reflect our current views with respect to future events and are based on assumptions and are subject to risks and uncertainties,
including those described in “ITEM 3.D. Key Information—Risk Factors.”
You should not put undue reliance on any forward-looking statements. Actual results could differ materially from those anticipated in these forward-looking
statements as a result of various factors described in this annual report, including factors beyond our ability to control or predict. Although we believe that the
expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that future results, levels of activity, performance and events and
circumstances reflected in the forward-looking statements will be achieved or will occur. Any forward-looking statement made in this annual report speaks only as
of the date hereof. Except as required by law, we undertake no obligation to update publicly any forward-looking statements for any reason after the date of this
annual report, to conform these statements to actual results or to changes in our expectations.
v
TABLE OF CONTENTS
PART I
ITEM 1: Identity of Directors, Senior Management and Advisers
ITEM 2: Offer Statistics and Expected Timetable
ITEM 3: Key Information
A. Selected Financial Data
B. Capitalization and Indebtedness
C. Reasons for the Offer and Use of Proceeds
D. Risk Factors
ITEM 4: Information on the Company
A. History and Development of the Company
B. Business Overview
C. Organizational Structure
D. Property, Plants and Equipment
ITEM 4A: Unresolved Staff Comments
ITEM 5: Operating and Financial Review and Prospects
A. Operating Results
B. Liquidity and Capital Resources
C. Research and Development, Patents and Licenses
D. Trend Information
E. Off-Balance Sheet Arrangements
F. Contractual Obligations
ITEM 6: Directors, Senior Management and Employees
A. Directors and Senior Management
B. Compensation of Officers and Directors
C. Board Practices
D. Employees
E. Share Ownership
ITEM 7: Major Shareholders and Related Party Transactions
A. Major Shareholders
B. Related Party Transactions
C. Interests of Experts and Counsel
ITEM 8: Financial Information
A. Consolidated Financial Statements and Other Financial Information
B. Significant Changes
ITEM 9: The Offer and Listing
A. Offer and Listing Details
B. Plan of Distribution
C. Markets
D. Selling Shareholders
E. Dilution
F. Expenses of the Issue
ITEM 10: Additional Information
A. Share Capital
B. Memorandum of Association and Articles of Association
C. Material Contracts
D. Exchange Controls
E. Taxation
F. Dividends and Paying Agents
G. Statements by Experts
H. Documents on Display
I. Subsidiary Information
ITEM 11: Quantitative and Qualitative Disclosures About Market Risk
ITEM 12: Description of Securities Other Than Equity Securities
1
1
1
1
1
4
4
4
37
37
38
49
49
51
51
51
68
70
71
72
72
73
73
77
81
96
97
97
97
100
105
106
106
109
109
109
109
109
109
109
109
109
109
110
114
115
115
125
125
125
125
126
127
PART II
ITEM 13: Defaults, Dividend Arrearages and Delinquencies
ITEM 14: Material Modifications to the Rights of Security Holders and Use of Proceeds
ITEM 15: Controls and Procedures
ITEM 16: Reserved
ITEM 16A: Audit Committee Financial Expert
ITEM 16B: Code of Ethics
ITEM 16C: Principal Accountant Fees and Services
ITEM 16D: Exemptions from the Listing Standards for Audit Committees
ITEM 16E: Purchases of Equity Securities by the Company and Affiliated Purchasers
ITEM 16F: Change in Registrant’s Certifying Accountant
ITEM 16G: Corporate Governance
ITEM 16H: Mine Safety Disclosures
PART III
ITEM 17: Financial Statements
ITEM 18: Financial Statements
ITEM 19: Exhibits
128
128
128
128
129
129
129
129
130
130
130
130
130
131
131
131
131
ITEM 1: Identity of Directors, Senior Management and Advisers
Not applicable.
ITEM 2: Offer Statistics and Expected Timetable
PART I
Not applicable.
ITEM 3: Key Information
A. Selected Financial Data
You should read the following selected consolidated financial data in conjunction with “ITEM 5: Operating and Financial Review and Prospects” and our
consolidated financial statements and the related notes included elsewhere in this annual report. The consolidated income statement data for the years ended
December 31, 2020, 2019, and 2018 and the consolidated balance sheet data as of December 31, 2020 and 2019 are derived from our audited consolidated financial
statements included in “ITEM 18: Financial Statements,” which have been prepared in accordance with generally accepted accounting principles in the United
States (“U.S. GAAP”). The consolidated income statement data for the years ended December 31, 2017 and 2016 and the consolidated balance sheet data as of
December 31, 2018, 2017 and 2016 have been derived from our audited consolidated financial statements, which are not included in this annual report. All the
financial data set forth below are in thousands (except share and per share amounts). The information presented below under the caption “Other Financial Data”
and “Dividends declared per share” contains information that is not derived from our financial statements.
2020
2019
2018
2017
2016
Consolidated Income Statement Data:
Revenues
Cost of revenues
Gross profit
Operating expenses:
Research and development
Marketing and selling
General and administrative
Legal settlements and loss contingencies, net
Total operating expenses
Operating income
Finance expenses, net
Income before taxes on income
Taxes on income
Net income
Net income attributable to non-controlling interest
Net income attributable to controlling interest
Basic net income per ordinary share*
Diluted net income per ordinary share*
Weighted average number of ordinary shares used in computing
basic income per share
Weighted average number of ordinary shares used in computing
diluted income per share
$
$
$
$
486,412
352,470
133,942
3,974
62,047
39,081
6,319
111,421
22,521
10,199
12,322
4,700
7,622
404
7,218
0.21
0.21
34,419
34,474
1
$
$
545,974
397,335
148,639
4,146
66,770
40,681
12,359
123,956
24,683
5,578
19,105
6,243
12,862
—
12,862
0.37
0.37
34,384
34,460
$
$
575,871
412,457
163,414
3,635
74,786
43,323
8,903
130,647
32,767
3,639
29,128
4,560
24,568
163
24,405
0.72
0.72
34,358
34,409
$
$
588,147
390,924
197,223
4,164
81,789
45,930
24,797
156,680
40,543
5,583
34,960
7,402
27,558
1,356
26,202
0.73
0.73
34,334
34,386
538,543
326,057
212,486
3,290
70,343
40,181
5,868
119,682
92,804
3,318
89,486
13,003
76,483
1,887
74,596
2.08
2.08
34,706
34,764
Consolidated Balance Sheet Data:
Cash, cash equivalents and short-term bank deposits
Available for sale marketable securities
Working capital (1)
Total assets
Total Bank debt
Total liabilities
Redeemable non-controlling interest
Shareholders’ equity
Other Financial Data:
Adjusted Gross profit (2)
Adjusted EBITDA (2)
Adjusted net income attributable to controlling interest (2)
Capital expenditures
Depreciation and amortization
2020
2019
2018
2017
2016
$
$
$
114,248
19,038
228,721
820,921
22,665
325,870
7,701
487,350
$
139,372
—
248,040
703,866
—
226,142
—
477,724
$
93,562
—
238,823
616,922
—
150,421
—
466,501
$
138,707
—
250,510
652,987
—
166,611
16,481
469,895
106,270
—
216,963
584,700
—
134,108
12,939
437,653
2020
2019
2018
2017
2016
$
134,887
62,079
16,463
19,824
29,460
$
149,084
69,046
26,724
23,590
28,587
$
165,518
75,206
36,085
20,962
28,591
$
$
197,223
100,429
49,819
22,675
29,926
212,486
130,260
81,184
22,943
28,254
______________________
* See also note 17 to our financial statements included elsewhere in this report.
(1)
(2)
Working capital is defined as total current assets minus total current liabilities.
The tables below reconcile gross profit to adjusted gross profit, net income to adjusted EBITDA and net income attributable to controlling interest to
adjusted net income attributable to controlling interest for the periods presented and are unaudited.
We use certain non-GAAP financial measures to evaluate our performance in conjunction with other performance metrics. The following are examples of
how we use such non-GAAP measures:
• Our annual budget is based in part on these non-GAAP measures.
• Our management and board of directors use these non-GAAP measures to evaluate our operational performance and to compare it against our work plan
and budget.
Our non-GAAP financial measures, adjusted gross profit, adjusted EBITDA and adjusted net income attributable to controlling interest, have no
standardized meaning and accordingly have limitations in their usefulness to investors. We provide such non-GAAP data because management believes that such
data provide useful information to investors. However, investors are cautioned that, unlike financial measures prepared in accordance with U.S. GAAP, non-GAAP
measures may not be comparable with similar measures used by other companies. These non-GAAP financial measures are presented solely to permit investors to
more fully understand how management and our board assesses our performance. The limitations of these non-GAAP financial measures as performance measures
are that they provide a view of our results of operations without reflecting all events during a period and may not provide a comparable view of our performance to
other companies in our industry.
Investors should consider non-GAAP financial measures in addition to, and not as replacements for, or superior to, measures of financial performance
prepared in accordance with GAAP.
In arriving at our presentation of non-GAAP financial measures, we exclude items that either have a non-recurring impact on our income statement or
which, in the judgment of our management, are items that, either as a result of their nature or size, could, were they not singled out, potentially cause investors to
extrapolate future performance from an improper base. In addition, we also exclude share-based compensation expenses to facilitate a better understanding of our
operating performance, since these expenses are non-cash and accordingly, we believe do not affect our business operations. While not all inclusive, examples of
these items include:
•
•
amortization of purchased intangible assets;
legal settlements (both gain or loss) and loss contingencies, due to the difficulty in predicting future events, their timing and size;
2
excess cost of acquired inventory;
expenses related to our share-based compensation;
• material items related to business combination activities important to understanding our ongoing performance;
•
•
•
•
• material extraordinary tax and other awards or settlements, both amounts paid and received; and
•
significant one-time non-recurring items (both gain or loss);
significant one-time offering costs;
tax effects of the foregoing items.
2020
2019
2018
2017
2016
Reconciliation of Gross profit to Adjusted Gross profit:
Gross profit
Share-based compensation expense (a)
Non-recurring import related expenses (income)
Amortization of assets related to acquisitions
Other non-recurring items (b)
Adjusted Gross profit
$
$
133,942
416
—
529
—
134,887
$
$
148,639
285
(1,501)
—
1,661
149,084
$
$
163,414
163
2,104
—
—
165,681
$
$
197,223
285
—
—
—
197,508
$
$
212,486
452
—
—
—
212,938
(a)
(b)
Share-based compensation includes expenses related to stock options and restricted stock units granted to employees and directors of the Company.
In 2019, reflects mainly to one-time amortization of machinery equipment with no future alternative use, and one-time inventory write down due to
discontinuation of certain product group manufacturing.
Reconciliation of Net Income to Adjusted EBITDA:
Net income
Finance expenses, net
Taxes on income
Depreciation and amortization
Legal settlements and loss contingencies, net (a)
Compensation paid by a shareholder (b)
Share-based compensation expense (c)
Provision for employee fringe benefits (d)
Non-recurring import related expense (income)
Acquisition-related expenses
Other non-recurring items (e)
Adjusted EBITDA
2020
2019
2018
2017
2016
$
$
7,622
10,199
4,700
29,460
6,319
—
2,858
—
—
921
—
62,079
$
$
12,862
5,578
6,243
28,587
12,359
—
3,632
—
(1,501)
—
1,286
69,046
$
$
24,568
3,639
4,560
28,591
8,903
—
1,684
—
2,104
—
1,157
75,206
$
$
27,558
5,583
7,402
29,926
24,797
—
5,277
(114)
—
—
—
100,429
$
$
76,483
3,318
13,003
28,254
5,868
266
3,068
—
—
—
—
130,260
(a)
(b)
(c)
(d)
(e)
Consists of legal settlements expenses and loss contingencies, net related to product liability claims and other adjustments to ongoing legal claims, including
related legal fees. In 2017, this also includes Kfar Giladi arbitration results.
One-time bonus paid by a shareholder to our employees in Israel other than officers.
Share-based compensation includes expenses related to stock options and restricted stock units granted to our employees and directors, as well as phantom
awards and related payroll expenses as a result of exercises.
Relates to an adjustment of provision for taxable employee fringe benefits as a result of a settlement with the Israel Tax Authority and with the Israeli
National Insurance Institute (“NII”).
In 2019, relates to non-recurring expenses related to North American region establishment, one-time charge related to reduction in headcount and certain
activities including discontinuation of certain product group manufacturing, and in 2018 also relocation expenses of Caesarstone USA headquarters
(Company’s subsidiary).
3
2020
2019
2018
2017
2016
Reconciliation of Net Income Attributable to Controlling
Interest to Adjusted Net Income Attributable to Controlling
Interest:
Net income attributable to controlling interest
Legal settlements and loss contingencies, net (a)
Amortization of assets related to acquisitions, net of tax
Compensation paid by a shareholder (b)
Share-based compensation expense (c)
Provision for employee fringe benefits (d)
Tax adjustment (e)
Non-cash revaluation of lease liabilities (f)
Non-recurring import related expense (income)
Acquisition-related expenses
Other non-recurring items (g)
Total adjustments before tax
Less tax on above adjustments (h)
Total adjustments after tax
Adjusted net income attributable to controlling interest
$
$
$
7,218
6,319
446
—
2,858
—
—
3,189
—
921
—
13,733
4,488
9,245
16,463
$
$
$
12,862
12,359
—
—
3,632
—
—
3,615
(1,501)
—
2,486
20,591
6,729
13,862
26,724
$
$
$
24,405
8,903
—
—
1,684
—
—
—
2,104
—
1,157
13,848
2,168
11,680
36,085
$
$
26,202
24,797
—
—
5,277
(114)
—
—
—
—
29,960
6,343
23,617
49,819
$
$
74,596
5,868
—
266
3,068
—
(1,158)
—
—
—
8,044
1,456
6,588
81,184
__________________________
(a)
Consists of legal settlements expenses and loss contingencies, net related to product liability claims and other adjustments to ongoing legal claims, including
related legal fees. In 2017, this also includes Kfar Giladi arbitration results.
One-time bonus paid by a shareholder to our employees in Israel other than officers.
Share-based compensation includes expenses related to stock options and restricted stock units granted to our employees and directors, as well as phantom
awards and related payroll expenses as a result of exercises.
Relates to an adjustment of provision for taxable employee fringe benefits as a result of a settlement with the Israel Tax Authority and with the NII.
Relates to an adjustment in taxes as a result of a tax settlement we reached with Israeli tax authorities.
Exchange rate differences deriving from revaluation of lease contracts in accordance with FASB ASC 842.
In 2019, relates to non-recurring expenses related to North American region establishment, one time charge related to reduction in headcount and certain
activities including discontinuation of certain product group manufacturing, one time amortization of machinery equipment with no future alternative use,
and in 2018 also relocation expenses of Caesarstone USA headquarters (Company’s subsidiary).
Based on the effective tax rates of the relevant periods.
(b)
(c)
(d)
(e)
(f)
(g)
(h)
B.
Capitalization and Indebtedness
Not applicable.
C.
Reasons for the Offer and Use of Proceeds
Not applicable.
D.
Risk Factors
Summary of Risk Factors
Our business faces significant risks and uncertainties. You should carefully consider all the information set forth in this annual report and in our other filings with
the United States Securities and Exchange Commission (“SEC”). Our business, financial condition and results of operations could be materially and adversely
affected by any of these risks. In that event, the trading price of our ordinary shares would likely decline, and you might lose all or part of your investment. This
report also contains forward-looking statements that involve risks and uncertainties. Our results could materially differ from those anticipated in these forward-
looking statements, as a result of certain factors including the risks described below and elsewhere in this report and our other SEC filings. See also “Special Note
Regarding Forward-Looking Statements and Risk Factor Summary” on page iv of this annual report.
4
Risks Related to our Business
Economic and External Risks
The COVID-19 pandemic could further impact end-consumers and the global economy in general, lower demand for our products, disrupt our operations and
materially and adversely affect our business and financial results.
The COVID-19 pandemic has increased market uncertainty and volatility and led to travel and other restrictions including individual quarantines imposed globally,
significantly affecting consumer and businesses behaviors. The volatility in stock markets around the world has already and may continue to materially and
adversely impact stock prices and trading volumes for us and other corporations. The culmination of these dramatic large-scale events could result in a global
economic recession and significantly decrease home renovation and remodeling activity and new residential construction, and in turn reduce the demand for our
products, thus materially and adversely affecting our business and results of operations.
The COVID-19 pandemic may also adversely affect our ability to conduct our business effectively due to disruptions to our production capabilities, supply chain,
availability and cost of shipping services, availability and productivity of personnel, while we simultaneously attempt to comply with rapidly changing restrictions,
such as travel restrictions, curfews and others. Following recommendations from the Israeli Ministry of Health and the Ministry of Finance, in April 2020,
September 2020 and January 2021, the Israeli government imposed full nationwide lockdowns, shuttering schools and nonessential businesses, restricting
gatherings and people’s movement. In addition, starting in March 2020, in periods other than the full lockdowns, the government has systematically limited
operations of the private sector, including reductions of onsite workforce, imposed travel and gathering restrictions and reduced workforce in the public sector.
Currently travel to and from work is still permitted, however the authorities may place additional, more restrictive measures on businesses and individuals. Though
we may still operate our facilities under such regulations, any additional actions taken by the Israeli government could further limit that ability which may have a
material adverse effect on our operations and financial results. The widespread outbreak of certain diseases, such as the recent COVID-19 pandemic, adversely
affected our business, and may further disrupt our ability to manufacture products and impact the operations of our customers and modes of shipping, any of which
could lead to reduction in customer orders and sales to certain regions and end-markets. During 2020 our revenue decreased by 11%, which we believe relates
mainly to the impact of the COVID-19 pandemic. In addition, the COVID-19 pandemic increased risks for insolvency due to cash-flow management and credit
availability, and as some customers may be impacted more severely, we could face collection difficulties, which would have an adverse effect on our financial
results.
In addition, we are facing challenges to recruit plant workers, particularly at our Sdot-Yam facility. Such challenges are partially due to the Israel social security
scheme, which provides unemployment payments to workers laid off due to COVID-19 until mid-2021.
A significant reduction in our workforce, inability to recruit required personnel and/or our compliance with instructions imposed by Israeli authorities may harm
our ability to continue operating our business and materially and adversely affect our operations and financial condition. Further, we cannot assure you that we will
be designated an “essential business”, as defined under the government instructions, and moreover, we cannot foresee whether the Israeli authorities will impose
further restrictive instructions, which if implemented may lead to significant changes and potentially a shutdown of our operations.
Authorities around the world have and may continue implementing similar restrictions on business and individuals in their jurisdictions. We cannot assure you that
we will be able to continue to manage our international operations and business effectively, which would have material adverse effect on our results of operations.
See “—Our operating results may suffer due to our failure to manage our international operations effectively or due to regulatory changes in foreign jurisdictions
where we operate”.
Additional restrictions and regulations related to the COVID-19 pandemic containment efforts may further challenge our ability to conduct our operations and, as a
result, may materially and adversely affect our financial results. Currently the trajectory of the COVID-19 outbreak remains highly uncertain and we cannot predict
the duration, severity or effect of the pandemic or any future containment effort.
5
Downturns in the home renovation and remodeling and new residential construction sectors or the economy generally and a lack of availability of consumer
credit could materially and adversely impact end-consumers and lower demand for our products, which could cause our revenues and net income to decrease.
Our products are primarily used as countertops in residential kitchens. As a result, our sales depend significantly on home renovation and remodeling spending, as
well as new residential construction spending. In each of our key existing markets, the United States, Australia (unless stated otherwise, reference to Australia in
this report includes Australia and New Zealand), Canada and Israel, we estimate that approximately 60% to 70% of our business is generated from home renovation
and remodeling and approximately 25% to 35% is driven by new residential construction. For example, since 2019 there have been downturns in the home
renovation and remodeling and new residential construction sectors in Australia that already adversely impacted our revenues and profit in Australia. We are
uncertain whether such downturn will persist or occur in other key markets, which in turn could materially and adversely impact our financial condition. Spending
on home renovation and remodeling and new residential construction depends significantly on the availability of consumer credit, as well as other factors such as
interest rates, consumer confidence, government programs and unemployment. Any of these factors could result in a tightening of lending standards by financial
institutions and reduce the ability of consumers to finance renovation and remodeling expenditures or home purchases. Consumers’ ability to access financing
varies across our operating markets. If the housing market is negatively impacted as a result of an economic downturn or if other significant economic negative
trends occur, we may be unable to grow or sustain our business and our revenues and net income may be materially and adversely affected. See also “—The
COVID-19 pandemic could further impact end-consumers and the global economy in general, lower demand for our products, disrupt our operations and materially
and adversely affect our business and results of operations” and “—Disturbances to our operations or the operations of our suppliers, distributors, customers,
consumers or other third parties could materially adversely affect our business.”
Our results of operations may be materially and adversely affected by fluctuations in currency exchange rates, and we may not have adequately hedged against
them.
We conduct business in multiple countries, which exposes us to risks associated with fluctuations in currency exchange rates between the U.S. dollar (our
functional currency) and other currencies in which we conduct business. In 2020, 44.3%% of our revenues were denominated in U.S. dollars, 8.4% in NIS, 6.8% in
Euros, 14.9% in Canadian dollars, 21.3% in Australian dollars and a smaller portion in other currencies. In 2020, the majority of our expenses were denominated in
U.S. dollars, NIS and Euros, and a smaller proportion in Canadian and Australian dollars and other currencies. As a result, weakening of the Australian and
Canadian dollars and strengthening of the NIS and, to a lesser extent, strengthening of the Euro against the U.S. dollar presents a significant risk to us and may
impact our business significantly. For example, during 2020 the NIS appreciated 7.5% against the USD and resulted in finance expenses of approximately $6.8
million See “ITEM 11: Quantitative and Qualitative Disclosures About Market Risk.” for the impact of currencies fluctuation on our operating income. We
translate sales and other results denominated in foreign currency into U.S. dollars for our financial statements; therefore, during periods of a strengthening dollar,
our reported international sales and earnings could be reduced because foreign currencies may translate into fewer U.S. dollars.
Although we currently engage in derivatives transactions, such as forward and option contracts, to minimize our currency risk, we do not hedge all the exposure.
We have been using a dynamic hedging strategy to hedge our cash flow exposures. This strategy involves consistent hedging of exchange rate risk in variable ratios
ranging up to 100% of the exposure over rolling 12 months. As of December 31, 2020, our average hedging ratio was approximately 24% out of our expected
currencies exposure for 2021. Therefore, future currency exchange rate fluctuations against which we have not adequately hedged could materially and adversely
affect our profitability. Moreover, our currency derivatives, except for our U.S. dollar/NIS forward contracts, are currently not designated as hedging accounting
instruments under Accounting Standards Codification (“ASC”) 815, Derivatives and Hedging. Hedging results are charged to finance expenses, net, and therefore,
do not offset the impact of currency fluctuations on our operating income. Our U.S. dollar/NIS forward contracts are charged to operating expenses as designated
hedge instruments, partially offsetting the impact of the U.S. dollar/NIS currency fluctuations on our operating income. See “ITEM 11: Quantitative and Qualitative
Disclosures About Market Risk.”
6
If we are unable to compete with lower-priced products perceived as comparable to ours, our market share may decrease, and our financial results may be
adversely and materially impacted.
We have invested considerable resources to position our quartz surface products as premium branded products. Due to our products’ high quality and positioning,
we generally set our prices—especially for our differentiated products—at a higher level than alternate surfaces and quartz surfaces provided by other
manufacturers. Manufacturers located in the Asia-Pacific region (predominantly China) and certain parts of Europe can produce quartz surface products at a lower
cost, including quartz surface products which imitate our products and designs.
Even if we seek to lower the price of our products, we may be unable to do so due to costs entailed with producing at our facilities, such as compliance with
environmental health and safety standards, labor, energy, raw material costs and taxes. If the amounts of these low-priced products increase, our sales could
decline. In addition, sales of these low-priced products may negatively impact our pricing.
During 2018 and 2019, antidumping and countervailing duty (“AD/CVD”) petitions were filed with the U.S. Department of Commerce (“DOC”) and the
International Trade Commission (“ITC”). The petitions, which were filed by a U.S. quartz manufacturer, alleged that Chinese, and subsequently Indian and
Turkish manufacturers injured the U.S. domestic quartz industry and therefore duties were required to offset such unfair trade practices. Ultimately, the DOC and
ITC imposed AD/CVD duties ranging approximately between 265% and 340% for Chinese, and between 3.81% and 80.79% for Indian and Turkish manufacturers.
The imposition of AD/CVD orders have driven some of the affected manufacturers to direct their products into other markets in which we operate (including
markets in which we hold a higher market share than in the U.S., such as Australia) thereby adversely impacting our operations and financial results. Finally, any
duties and tariffs imposed by the U.S. or other regulators may not succeed in remediation of any impact caused by the relevant imports. Chinese, Indian and
Turkish exporters may shift their focus to other, competing materials, to circumvent the duties. As a result, our market share may decrease, and our financial results
may be adversely and materially impacted.
Operational Risks
We face intense competitive pressures from manufacturers of other surface materials, which could materially and adversely affect our results of operations and
financial condition.
Our surface products compete with several surface materials such as granite, laminate, marble, manufactured solid surface, concrete, stainless steel, wood, and
other porcelain and quartz surfaces. We compete with manufacturers of these surface materials with respect to a range of factors. These factors include, among
other things, brand awareness and brand position, product quality, product differentiation, design and breadth of product offerings, slab dimensions, new product
development and time to market, availability and supply time, technological innovation, popular home interior design trends, pricing, availability of inventory on
demand, distribution coverage, customer service and versatility in products portfolio.
Since we seek to position our products as a premium alternative to other surface materials, the perception among end-consumers and other stakeholders of our
products is a key competitive differentiator. If we are unable to anticipate or react quickly to changes in consumer preference in these areas, we may lose market
share and our results of operations may suffer. If consumer preference shifts away from materials we are offering to other materials, or away from branded
surfaces, our market share may be reduced, and our financial results may be materially and adversely impacted.
Competition increases with increased global production capacity by new and existing competitors. Should our competitors be able to produce products more
efficiently at lower prices, adapt more quickly to changes in consumer preferences and demands, have a diversified product offering, or acquire complementary
businesses, we may lose market share and our financial results may suffer.
7
Fully integrating Lioli’s and Omicron’s businesses may be more difficult, costly and time-consuming than expected, which may adversely affect our results of
operations and the value of our common shares.
In October 2020, we acquired a majority stake in Lioli Ceramica Pvt. Ltd (“Lioli”), an India-based producer of porcelain slabs (the “Lioli Acquisition”) For more
information see “Item 5: Operating and Financial Review and Prospects – Recent acquisitions”.
In December 2020, we acquired Omicron Granite and Tile (“Omicron”), a stone supplier operating 17 locations across Florida, Ohio, Michigan and Louisiana for a
cash consideration of $19 million, including Omicron’s outstanding debt of approximately $8 million (the “Omicron Acquisition”).
While our management has made progress in integrating Lioli’s and Omicron’s businesses with our existing business, integration efforts are still underway and are
expected to continue through 2021 and 2022. The combination of independent businesses is a complex, costly and time-consuming process and we and our
management may face significant, ongoing challenges in implementing such integration, many of which may be beyond our control, including but not limited to,
difficulties in achieving anticipated cost savings, synergies, business opportunities and growth prospects. For more information, see “—Our limited resources and
significant competition for business combination or acquisition opportunities may make it difficult for us to complete a combination or acquisition, and any
combination or acquisition that we complete may disrupt our business and fail to achieve our intended objectives.”
We may also be subject to claims and uncertainties arising from the operations of Lioli’s and Omicron’s businesses from periods prior to the dates we acquired
them. For example, although we believe that we have a good and marketable title to the Lioli manufacturing facility in Morbi, Gujarat, India, there are certain
historic discrepancies between records of different local and regional authorities in Gujarat, India, including records of titles to physically non-existing plots, that
might result in our ownership to the facility or its parts being challenged, including by title holders of existing and non-existing adjacent plots. Other pre-
acquisition claims or liabilities could also be significant. Our ability to seek indemnification from the former owners for these claims or liabilities is limited by
various factors, including the specific limitations contained in the respective acquisition agreements and the financial ability of the former owners to satisfy such
claims or liabilities. If we are unable to enforce any indemnification rights we may have against the former owners or if the former owners are unable to satisfy
their obligations for any reason, including because of their current financial position, or if we do not have any right to indemnification, we could be held liable for
the costs or obligations associated with such claims or liabilities, which could adversely affect our operating performance.
In addition, as a result of the Lioli Acquisition and the Omicron Acquisition we carry a significant amount of intangible assets (including goodwill) on our balance
sheet. As of December 31, 2020, our goodwill and other intangible assets amounted to $47.5 million and $12.1 million, respectively. The future occurrence of
potential indicators of impairment could include, for example, a significant adverse change in business climate, an adverse action or assessment by a regulator,
unanticipated competition, a material negative change in relationships with significant customers, strategic decisions made in response to economic or competitive
conditions, loss of key personnel, or a more-likely-than-not expectation that a reporting unit or a significant portion of a reporting unit will be sold or disposed of,
and could result in goodwill impairment charges. Although we have not recorded goodwill impairment charges in the past, we cannot guarantee that we will not
experience goodwill impairments in the future.
If we fail to effectively manage required changes in our production and supply chain, we may be unable to serve the market or suffer additional inefficiencies.
Our production and supply chain processes are complex and rely on our estimates and forecasts in terms of volume as well as product mix. Our 2020 acquisitions
of Lioli and Omicron expanded our production and supply chain, as well as product offering, further increasing complexity of effective management of our
business as a whole (for more information, see “ITEM 4: Information on the Company—History and Development of the Company—Our History.”) If we fail to
accurately forecast demand, it may hinder the availability of our products in the market, result in loss of sales, increase shipping costs and harm our relationships
with our customers, damage our brand and reputation and have a materially adverse effect on our results of operations. If we are unsuccessful in adjusting our
manufacturing operations to changes in the demand for our products, we may be unable to grow our business and revenue, maintain our competitive position or
improve our profitability.
8
If we are unable to manufacture and/or ship our existing products globally as planned, our results of operations and prospects will suffer.
Difficulties with or interruptions of our manufacturing operations could delay our output of products and harm our relationships with our customers, damage our
brand and reputation and have a material adverse effect on our results of operations. We currently manufacture our products at our two facilities in Israel, one in the
U.S. and one in India. In addition, we source a portion of our supply chain from OEMs. We cannot assure you that we will be able to successfully manage
manufacturing facilities in a timely or profitable manner. Moreover, if we are unable to hire, train and retain skilled employees or successfully transfer or continue
to transfer our manufacturing processes in a timely and cost-effective manner, or at all, then we may experience operating disruptions and may be unable to meet
demand for our products, which could have a negative impact on our business and financial results.
Specifically, since opening our facilities in the U.S. in 2015, we have experienced certain inefficiencies due to challenges related to the ramp up of the plant, such
as establishing an experienced workforce, processes implementation, engineering optimization and successful transfer of know-how and other factors. Although we
have improved the performance of our U.S plant, such inefficiencies led to lower than expected throughput, yield and, as a result, higher than expected
manufacturing cost per square meter produced and therefore our business and financial results were and may continue to be negatively impacted.
We have purchased the majority of our manufacturing production lines from Breton S.p.A. (“Breton”), a manufacturer of lines to produce engineered stone slabs.
We depend on Breton for certain spare parts for our production line equipment and for their support and know-how required to resolve specific technical problems
in their manufacturing equipment and anticipate we will continue to do so in the future. Inability or delays in obtaining specialty machine components and spare
parts, know-how or technical support from Breton could prevent or delay our output of products.
Damage to our manufacturing facilities or products caused by human error or negligence or other failures or circumstances beyond our control, as well as limited
availability, increased costs or irregularities in the shipping market related to the COVID-19 pandemic or otherwise, could interrupt or delay our manufacturing,
shipping or other operations. See “—The COVID-19 pandemic could further impact end-consumers and the global economy in general, lower demand for our
products, disrupt our operations and materially and adversely affect our business and results of operations” and “—Disturbances to our operations or the operations
of our suppliers, distributors, customers, consumers or other third parties could materially adversely affect our business.”
Our insurance policies have limited coverage in case of significant damage to our manufacturing facilities and may not fully compensate us for the cost of
replacement and any loss from business interruptions. Any damage to our facilities or interruption in manufacturing, whether due to limitations in manufacturing
capacity or arising from factors outside of our control, could result in delays or failure in meeting contractual obligations and could have a materially adverse effect
on our relationships with our distributors and customers, and on our financial results.
9
Failure to effectively collaborate with OEM suppliers or problems inherent in the use of OEMs could materially adversely affect our competitive position or
profitability.
In order to optimize our production and adjust to changes in markets dynamics, we acquire certain basic models of products from third-party engineered stone
OEMs, primarily from China, and are considering increasing this activity in 2021. Although we aim at diversifying our OEMs, in 2020 more than half of our third-
party engineered stone OEM purchases came from the same supplier. If we are unable to successfully manage our relationships with OEMs, if we experience
delays in delivery of products from OEMs or if the quality of products produced by these OEMs shall not meet our standards, our brand and reputation could be
impaired and warranty claims from end-customers could increase. Damage or disruption to the ability of our OEM suppliers to develop, manufacture and transport
our products as a result of factors within or outside their control could result in adverse effects on our business, financial condition or results of operations. See “—
Disturbances to our operations or the operations of our suppliers, distributors, customers, consumers or other third parties could materially adversely affect our
business. ” Failure by such third-party suppliers to comply with applicable laws and regulations or accepted industry standards could further impair our brand and
reputation, result in potential liability and materially adversely affect our competitive position and profitability. Additionally, if we are unable to agree on the
commercial terms with such vendors, or effectively enforce the terms of any verbal or written agreements, such manufacturers could cease manufacturing in the
amounts required to meet the demand for our products, or at all. In such cases, we may need to locate and qualify alternative manufacturers or produce the products
using our facilities, which could cause substantial delays in manufacturing, increase our costs, negatively impact the quality of our products in case we rely on new
vendors and require us to adjust our products and our manufacturing processes. We may be unable to successfully optimize our operations and reduce costs through
OEM. All these factors could materially and adversely impact our reputation, revenues and results of operations. In addition, cooperation with third party
manufacturers may require us to expose certain intellectual property relating to our products and designs, the confidentiality of which we may not be able to further
control or enforce. If we experience demand for our products that exceeds our manufacturing capacity and we fail to acquire slab models from third parties, we may
not have sufficient inventory to meet our customers’ demands, which would negatively impact our revenues, reputation and potentially cause us to lose market
share.
Changes in the prices of our raw materials have increased our costs and decreased our margins and net income in the past and may increase our costs and
decrease our margins in the future.
In 2020, raw materials accounted for approximately 34% of our cost of goods sold (excluding the cost of OEM products sold, which accounted for less than 10% of
our cost of goods sold). The cost of raw materials consists of the purchase prices of such materials and costs related to the logistics of delivering the materials to
our manufacturing facilities. Our raw materials costs are also impacted by changes in foreign currency exchange rates, mainly the Euro as it relates to polyester and
other raw materials purchased from Europe.
Quartz, which includes quartz, quartzite and other dry minerals and engineered materials containing high amounts of silica (together referred to in this annual report
as “quartz” unless otherwise specifically stated), is the main raw material component used in our engineered quartz products. Quartz accounted for approximately
39% of our raw materials cost in 2020. Our cost of sales and overall results of operations may be impacted significantly by fluctuations in quartz prices. For
example, if the cost of quartz had risen by 10% in 2020, we would have experienced a decrease of approximately 1% in our gross profit margin in such year. In
2020, our average cost of quartz increased by 3.2%, while in 2019 decreased by 3.4%. Any future increases in quartz prices could also materially and adversely
impact our margins and net income.
Polyester, which acts as a binding agent in our products, accounted for approximately 31% of our raw materials costs in 2020. Accordingly, our cost of sales and
overall results of operations may be impacted significantly by fluctuations in polyester prices. For example, if the cost of polyester had risen by 10% in 2020, we
would have experienced a decrease of approximately 0.8% in our gross profit margin in such year. The cost of polyester we incur is a function of, among other
things, manufacturing capacity, demand and the price of crude oil and more specifically benzene. Our cost of polyester fluctuated significantly over the years. In
2020, our average polyester cost decreased by approximately 18% and in 2019 decreased by approximately 12%. We acquire polyester on an annual framework
basis, or a purchase order basis based on our projected needs for the subsequent one to three months. Going forward, we may experience pressure from our
polyester suppliers to increase prices even during a period covered by purchase orders.
Since 2020, we have been using a dynamic hedging strategy to reduce our exposure to changes in the polyester prices. This strategy involves hedging certain
components of our polyester formula in variable ratios of the exposure over rolling 12 months. Therefore, future fluctuations in polyester prices which we have not
adequately hedged could materially and adversely affect our profitability. Moreover, our polyester contract derivatives are currently not designated as hedging
accounting instruments under Accounting Standards Codification (“ASC”) 815, Derivatives and Hedging. Hedging results are charged to finance expenses, net, and
therefore, do not offset the impact of polyester prices on our operating income.
10
Pigments are also used to manufacture our products. Although pigments account for a significantly lower percentage of our raw material costs than polyester, we
encountered in the past and may experience in the future fluctuations in pigment prices. For example, the cost of titanium dioxide, our principal white pigmentation
agent, decreased by approximately 0.2% and decreased by approximately 10% in 2020 and 2019, respectively. Such prices fluctuations may also have a materially
adverse impact on our margins and net income.
We have found that increases in prices may be difficult to pass on to our customers. If we are unable to pass on to our customers increases in raw materials prices,
specifically in quartz, polyester and pigments, our margins and net income may be materially and adversely impacted. For cost of our raw materials in 2020 and
prior years, see “ITEM 5.A: Operating Results and Financial Review and Prospects—Operating Results— Cost of revenues and gross profit margin.”
A key element of our strategy is to expand our sales in certain markets, such as the United States. Failure to expand such sales would have a materially adverse
effect on our future growth and prospects.
A key element of our strategy is to grow our business by expanding sales of our products in certain existing markets that we believe have high growth potential, as
well as in selected new markets. In 2020 we made strategic investments in the U.S. sales force by increasing headcount adjusting the U.S. logistic footprint and
through the Omicron Acquisition and intend to continue to focus our growth efforts on the United States. In 2020, according to Freedonia, engineered quartz
surfaces represented 20% of the total countertops by volume installed in the United States. We estimate that the penetration of engineered quartz and porcelain
surfaces in the countertops market in the United States still has significant potential to grow. We face several challenges in generating demand for our products and
brand in the United States or other markets, including driving consumers’ desire to use our surfaces for their kitchen countertops and other interior settings. If the
market for surfaces in these regions does not develop as we expect, develops slower than expected or develops more at the lower price segment, our future growth,
business, prospects, financial condition and operating results will be adversely affected. In addition, changes in the U.S. trade environment, including imposition of
import tariffs or withdrawal from or revisions to international trade policies or agreements, may affect our growth potential globally, and further impact other
markets in which we operate. See “—Competition from manufacturers of lower priced products may reduce our market share, alter consumer preferences and
materially and adversely affect our results of operations and financial condition”. We may also face certain challenges in supplying materials to large retailers in
these regions. For more information, see “—A sizable proportion of our sales in North America is attributable to a limited number of large retailers; any
deterioration of our relationships with such retailers or deterioration in their business performance (in fields relevant to the sale of our products) could adversely
impact our results of operations.” Additionally, our reliance on third-party suppliers to provide installation and fabrication services to large retailers could impair
our relationship with our customers, which could also materially harm our business and results of operations.” Our success will depend, in large part, upon
consumer acceptance and adoption of our products and brand in these markets, on the level of our execution, our go-to market strategy and its implementation and
the timely availability of our products across regions, and if we do not effectively expand into these markets, there could be an adverse impact on our sales and
financial condition.
A sizable proportion of our sales in North America is attributable to a limited number of large retailers; any deterioration of our relationships with such
retailers or deterioration in their business performance (in fields relevant to the sale of our products) could adversely impact our results of operations.
Since 2013 and 2014, we have supplied our products to IKEA in the U.S. and Canada, respectively, pursuant to exclusive agreements, which have been periodically
extended. Pursuant to such agreements, we supply and, through our contractors, fabricate and install countertops, primarily from our quartz surfaces, which are
marketed by IKEA as private label. We expect that the IKEA agreements will continue to be extended and renewed beyond their current terms and currently, their
amended terms are being discussed by the parties as IKEA amends its standard purchase arrangements; however, there is no assurance that such renewal will be
made on similar terms or at all. In case they are terminated or not renewed, the cessation of our sales through IKEA U.S. and IKEA Canada would cause our
revenue in the U.S. and Canada to significantly decrease. For more information on our sales through IKEA, see “ITEM 5: Operating and Financial Review and
Prospects.”
11
In 2019 we began collaborating with Home Depot in the U.S. and during the fourth quarter of 2019 introduced Caesarstone branded products at Home Depot stores
in the U.S. There is no assurance that current arrangements will continue to be renewed on similar terms or at all.
Our sales to any retailers, including IKEA and Home Depot, may be affected, among other things, by their sales and promotional events, the timing, scope and
terms of which is determined exclusively by the retailers and can impact our sales volume. Accordingly, our sales to IKEA and Home Depot have been, and may
continue to be, volatile, and we may not be able to maintain or increase such sales or to maintain its current profitability level. In particular, as a result of COVID-
19, governments across the limited or shut down non-essential businesses, including IKEA, Home Depot and other retailers selling our products, which negatively
affected our sales volumes in 2020. Such limitations or shutdowns, if they continue to occur as the pandemic remains ongoing, could continue to negatively affect
our sales volumes in the future and have a material adverse impact on our business. See also “—The COVID-19 pandemic could further impact end-consumers and
the global economy in general, lower demand for our products, disrupt our operations and materially and adversely affect our business and results of operations”
and “—Disturbances to our operations or the operations of our suppliers, distributors, customers, consumers or other third parties could materially adversely affect
our business”.
We have entered arrangements with third parties for the supply of fabrication and installation services to IKEA and we may enter into such agreements with other
third parties, in addition to or in lieu of the existing ones. The success of these third-party relationships may impact our supply of countertops, inventory levels,
quality and service level standards and ability to manage the installation and fabrication of countertops to meet customers’ demands and at reasonable prices. If we
are unable to successfully manage the installation and fabrication services performed for us by these third-party fabricators and installers, we may experience
relatively high waste of our products used by fabricators for such works, and complaints from end-consumers with respect to supply time, quality and service level
of the fabrication and installation, including defects and damages. Such risks could expose us to warranty-related damages, which if not covered back-to-back by
the fabricators engaged by us, could have a materially adverse effect on our financial results, reputation and brand position and lead to the termination of our
agreements with IKEA.
We may encounter significant delays in manufacturing if we are required to change the suppliers for the raw materials used in the production of our products.
Our principal raw materials for engineered quartz products are quartz, polyester and pigments. We acquire quartz from quartz manufacturers from Turkey, India,
Israel and several European countries. We typically transact business with our quartz suppliers on an annual framework basis, under which we execute purchase
orders from time to time. In 2020, approximately 67% of our quartz was imported from several suppliers in Turkey and we expect a slightly lower level in 2021 as
we continue to develop additional quartz sources. We acquire polyester from several suppliers, mainly from Europe, on an annual framework basis, or on a
purchase order basis based on our projected needs for the subsequent one to three months. We acquire other raw materials used in our engineered quartz products
from a limited number of suppliers on a purchase order basis, and our ability to preset prices in advance is limited. The principal raw materials for our porcelain
products are clay minerals, natural minerals (such as feldspar) and chemical additives. We typically transact business with our suppliers of raw materials for
porcelain products on an annual framework basis, under which we execute purchase orders from time to time.
We cannot be certain that any of our current suppliers will continue to provide us with the quantities of raw materials that we require or satisfy our anticipated
specifications and quality requirements. We may also experience a shortage of such materials if, for example, demand for our products increases. For instance, in
recent years, there have been significant tensions between Turkey and the State of Israel that have raised questions as to whether commercial arrangements between
companies in these countries would be adversely impacted to a material extent. If tensions between Turkey and Israel worsen, our Turkish suppliers may not
provide us with quartz shipments. If our Turkish quartz suppliers fail to perform in accordance with our arrangements, we may not be successful in enforcing them.
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If we are unable to agree upon prices with suppliers of our raw materials, or effectively enforce the terms of any verbal or written agreements or understandings,
which we may have with any of them, our suppliers could cease supplying us with the raw materials required for our products. If our supply of raw materials is
adversely impacted to a material extent or if, for any other reason, any of our suppliers do not perform in accordance with our agreements with them or cease
supplying us with the relevant material, for any reason, we would need to locate and qualify alternate suppliers. This could result in substantial delays in
manufacturing, increase our costs, negatively impact the quality of our products or require us to adjust our products and our manufacturing processes. Any such
delays in or disruptions to the manufacturing process could materially and adversely impact our reputation, revenues and results of operations as well as other
business aspects, such as our ability to serve our customers and meet their order requests.
For more information with regards to suppliers of raw materials used in our products, see “ITEM 4.B: Information on the Company—Business Overview—Raw
materials and Service Provider Relationships.”
In addition to our traditional engineered quartz offering, we have commenced manufacturing of porcelain products and sales of porcelain, natural stone and
other materials, and may pursue a further expansion of our product offering, including introducing new products and materials, which may be unsuccessful,
and may divert management’s attention and negatively affect our margins and results of operations.
Our competitive advantage is due, in part, to our ability to develop and introduce innovative new and improved products and to strengthen our brand. To maintain
such advantage, we may develop our own new products or acquire manufacturers of products that are competing with, or complimentary to, ours. Such new
products may include new surface materials and complementary products. Introducing new products involves uncertainties, such as predicting changing consumer
preferences, developing, manufacturing, marketing and selling new technologies, products and materials, and entering new market segments.
For example, as a result of the Lioli Acquisition, we have commenced manufacturing and sales of porcelain slabs for different applications, including flooring and
cladding, and we intend to extend our produced porcelain offering to countertops. In addition, our recently acquired Omicron locations in the U.S. also sell natural
stone and ancillary products for kitchen installation and fabrication. Although we believe that the expansion into new products, materials and, in some cases,
applications represents an opportunity to leverage our existing business, no guarantee can be given as to customer demand for the new products. Moreover, in the
future we may decide to introduce additional new products and enter new markets, whether through cooperation with third-party manufacturers or manufacturing at
our own facilities.
Despite our intention to expand our manufacturing and sales of porcelain or other additional products, we may not be successful in capturing the market share
dominated by competitors in this area, offer innovative alternatives ahead of the competition or maintain the strength of our brand. Such new initiatives may require
increased time and resources from our management, result in higher than expected expenses and have a material adverse effect on our margins and results of
operation.
Our revenues are subject to significant geographic concentration and any disruption to sales within one of our key existing markets, or to sales to a major
customer therein, could materially and adversely impact our results of operations and prospects.
Our sales are subject to significant geographic concentration, with four largest markets accounting for 87.3% of revenues. In 2020, sales in the United States,
Australia (including New Zealand), Canada and Israel accounted for 42.7%, 21.3%, 14.9% and 8.4% of our revenues, respectively. Each country has different
characteristics and our results of operations could be materially and adversely impacted by a range of factors, including spending on home renovation and
remodeling and new residential construction in the region (as discussed above), local competitive changes, changes in consumers’ quartz surface or countertop
preferences and regulatory changes that specifically impact these markets (such as imposition of antidumping and countervailing duties in the U.S. as discussed
above), as well as by our performance in each of these markets. Sales in our main markets could be materially and adversely impacted by other general economic
conditions, including increases in imports of cheaper quartz surfaces from low cost countries manufacturers into such markets, especially the United States,
Australia and Canada. Stronger local currencies could make lower-priced imported goods more competitive than our products. Although we face different
challenges and risks in each of the markets in which we operate, due to the existence of a high level of geographic concentration, should an adverse event occur in
any of these jurisdictions, our results of operations and prospects could be impacted disproportionately.
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In addition, we derived a mid-single digit percentage of our total revenues in 2020 from one customer, IKEA. Revenues from this significant customer declined
during 2020. The loss of or a further decrease in business from such customer could have a material adverse effect on our revenues, results of operations and our
financial condition.
Our business is subject to quarterly fluctuations in revenues and net income as a result of seasonal factors, weather-related conditions, and building
construction cycles, which are hard to predict with certainty.
Our results of operations are impacted by seasonal factors, weather-related conditions, and construction and renovation cycles. The levels of manufacturing,
fabrication, distribution, and installation of our products generally follow activity in the construction and renovation industries. Severe weather conditions, such as
unusually prolonged cold conditions, hurricanes, severe storms, earthquakes, floods, fires, droughts, other natural disasters or similar events could reduce, delay or
halt the construction and renovation industries in the markets in which we operate, and our businesses may be adversely affected. Markets in which we operate that
are impacted by winter weather, such as snow storms and extended periods of rain, may experience a slowdown in construction activity during the beginning and
the end of each calendar year, and this winter slowdown contributes to lower sales in our first and fourth quarters. Traditionally, the second and third quarters of the
year exhibit higher sales volumes than first and fourth quarters. For more information, see “ITEM 5.A: Operating and Financial Review and Prospects—Operating
Results—Factors impacting our results of operations” and “ITEM 5.A: Operating and Financial Review and Prospects—Operating Results—Quarterly results of
operations and seasonality.” Adverse weather in a particular quarter or a prolonged winter period can also impact our quarterly results. Our future results of
operations may experience substantial fluctuations from period to period as a consequence of such adverse weather. Increased or unexpected quarterly fluctuations
in our results of operations may increase the volatility of our share price and cause declines in our share price even if they do not reflect a change in the overall
performance of our business.
Our distributors’ actions may have a materially adverse effect on our business and results of operations. Our results of operations may be further impacted by
the actions of our re-sellers.
Sales to third-party distributors accounted for approximately 10% of our revenues in 2020. In our indirect markets, we depend on the success of the selling and
marketing efforts of our third-party distributors, and any disruption in our distribution network could materially impair our ability to sell our products or market our
brand, which could materially and adversely affect our business and results of operations. As we have limited control over these distributors, their actions could
also materially harm our brand and company reputation in the marketplace.
In the majority of our distribution arrangements, we operate based on an initial agreement or general terms of sale or, in certain cases, without any agreement, in
writing or at all. The lack of a written agreement with many of our distributors may lead to ambiguities, costs and challenges in enforcing terms of such
arrangements, including where we wish to terminate early due to the distributor’s failure to meet annual sales targets. We have experienced difficulties, including
litigation, in connection with the termination of certain of our distributors due to disputes regarding their terms of engagement. See “ITEM 8.A: Financial
Information—Consolidated Financial Statements and Other Financial Information—Legal proceedings.” Additionally, we may be unable to distribute our products
through another distributor within the territory during the period in which we must give prior termination notice, or to identify and retain new distributors upon
termination, which may materially and adversely impact our market share, results of operations, relationships with our customers and end-consumers and brand
reputation. Because some of our distributors operate on nonexclusive terms, distributors may also distribute competitors’ countertop surfaces or other surface
materials, which may cause us to lose market share. If we opt to distribute our products directly upon termination of existing arrangements with our distributors,
ramping up our logistics and shipping capabilities could require significant time and financial commitments, which could materially and adversely impact our
market share and results of operations. We cannot assure you that we will be able to successfully transition to direct distribution in a timely or profitable manner.
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In the U.S., we supply our products in part to sellers who in turn re-sell them to fabricators, contractors, developers and builders. Certain actions by such third
parties may also materially harm our brand and reputation.
The termination of arrangements with distributors and re-sellers may lead to litigation, resulting in significant legal fees for us and detracting our management’s
effort, time and resources. In addition, our distributors and re-sellers generally disclose to us sales volumes and other information on a monthly or quarterly basis.
Inaccurate sales forecasts, on which we have already relied on in our production planning or our failure to understand correctly the information in a sales report
could cause significant, unexpected volatility in our sales and may impact our ability to make plans regarding our supply chain. Any of these events could
materially and adversely affect or cause unexpected fluctuations in our results of operations.
Legal, Regulatory, Safety and Security Risks
Silicosis and other bodily injury claims may have a material adverse effect on our business, operating results and financial condition.
Silicosis is a potentially fatal progressive occupational lung disease and is characterized by scarring of the lungs and damage to the breathing function. Inhalation of
dust containing fine silica particles (respirable crystalline silica, or RCS) may occur while performing certain tasks, including among others, processing materials
that contain crystalline silica (with quartz having a relatively high crystalline silica content) if safety measures are not implemented, which in turn can cause
silicosis and other health issues.
Since 2008, we have been named, either directly or as a third party defendant, in numerous lawsuits alleging damages caused by exposure to RCS related to our
products filed by individuals (including fabricators and their employees, and our former employees), their successors, employers and the State of Israel, and in
subrogation claims by the National Insurance Institute of Israel (the “NII”), WorkerCover Queensland, Australia, and others. As of December 31, 2020, we were
subject to pending lawsuits with respect to 169 injured persons globally (of which 138 were in Israel, 30 in Australia and one in the United States) and had received
pre-litigation demand letters with respect to additional 13 persons, in each case relating to silicosis claims. One of the injured persons filed against us a lawsuit in
the Central District Court in Israel with a motion for its recognition as a class action; though we reached a settlement agreement with the lead-plaintiff with respect
to this claim, it has not yet received court approval, which may on various grounds demand changes to such proposed settlement. Most of the claims asserted
against us do not specify a total amount of damages sought and the plaintiffs’ future damages, if any, is intended to be determined at trial or settlement discussions.
Although we intend to vigorously contest the pending claims, we cannot provide any assurance that we will be successful. As of December 31, 2020, we estimated
based on the current legal condition in Israel that our total exposure with respect to all then-pending lawsuits in Israel related to 138 injured persons and the un-
asserted NII claims was approximately $42.3 million (which we made a provision for on our balance sheet), however, the actual outcome of such lawsuits may vary
from our estimate. We believe that we have $8.0 million of coverage under our product liability insurance and, accordingly, our net exposure with respect to such
pending claims is estimated to be $34.4 million. The number of injured persons takes into account the claim filed with a motion for its recognition as a class action
and does not include pre-litigation demand letters and settled claims for which the settled amount has not been paid yet. It is too early to estimate the probability of
the claims filed against us in Australia, which we intend to vigorously defend. However, as there is still no precedent in Australia as to the liability of
manufacturers and suppliers in silicosis claims, if we fail to defend ourselves in such claims, a negative precedent may be set, which may adversely affect our
position in other claims, and accordingly our financial results.
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Any pending or future litigation is subject to significant uncertainty. Our estimated total net exposure with respect to pending claims is subject to change for a
variety of reasons, including an unpredictable adverse development in the pending cases. We cannot estimate the number of potential claimants that may file claims
against us, the jurisdictions in which such claims may be filed, who the claimants are or the nature of the claims. Consistent with the experience of other companies
involved in silica-related litigation, there may be an increase in the number of asserted claims against us. In addition, punitive damages may be awarded in certain
jurisdictions, even though they are rare in Israel. We may be also subject to putative class action lawsuits in the future in Israel and abroad and we cannot be certain
whether such claims will succeed in being certified or on their merits. An actual outcome which is higher than our estimate could have a material adverse effect on
our financial results and cash flow.
Any uninsured damages to which we are subject in existing or future potential litigation, the cost of defending any uninsured claims, compliance costs, and the loss
of business from fabricators who no longer find it practical to fabricate our products, may have a material adverse impact on our revenues and profits. Moreover,
even if we are found only partially liable to a plaintiff’s damages, in some jurisdictions the plaintiff may seek to collect all his damages from us, requiring us to
collect separately from our co-defendants their allocated portion of the damages and there can be no assurance that we will succeed in such collection.
As of December 31, 2020, 22 of our employees, out of which 12 were employed in our plants in Israel as of such date, were banned by occupational physicians
from working in a workplace with dust due to diagnose or suspected diagnose of silicosis or other lung diseases, and any expenses not covered by the National
Insurance Institute of Israel which we may incur in this respect are not covered by our employer liability insurance. However, so far, we managed to receive
contribution in settlements also from insurers of fabricators, although insurers (such as ours) alleged that there is no insurance coverage for silicosis in employer
liability insurance. In addition, as of December 31, 2020 there were two outstanding lawsuits that had been filed against us by former employees.
We currently have limited product liability insurance policies, which apply to us and our subsidiaries and cover claims related to bodily injuries though in most
cases these policies exclude damages caused by exposure to hazardous dust. In recent years, we have been able to obtain such insurance only on less favorable
terms than previously. If we are unable to renew our product liability insurances at all or in part, if we cannot obtain insurance on as favorable terms as previously,
or if our insurance is terminated early, decreased, provides inadequate coverage or if we are subject to silicosis-related claims excluded by our product liability
insurance policy or by our employer liability insurance policy, we may incur significant legal expenses and become liable for damages, in each case, that are not
covered by insurance. For example, as of April 2020 our Australian product liability insurance ceased coverage of newly diagnosed silicosis related claims. Such
events might have a material adverse effect on our business and results of operations. As of December 31, 2020, our insurance receivables for silicosis-related
claims totaled $8.0 million. Although we believe that it is probable that such receivables will be paid to us when such payments are due, if our insurers become
insolvent in the future or for other reason do not pay such amounts in full or on a timely basis, such failure could have a material adverse effect on our financial
results and cash flow.
In addition, media coverage regarding the hazards associated with exposure to RCS in the engineered quartz surfaces, which intensified significantly primarily in
Australia during 2020, may adversely affect consumer preferences toward our products, damage our brand and reputation and lead to loss of sales and a material
adverse effect to our revenues and financial results. Increased awareness of this issue, and media focus may also trigger greater governmental and regulatory
scrutiny and action, which may increase our costs of compliance therewith, lead to greater propensity for litigation against us or ultimately even result in a ban of
quartz-based products.
Any of the risks described above relating to claims regarding silicosis and other bodily injury claims may have a material adverse effect on our business, operating
results and financial condition. For more information, see “ITEM 8.A: Financial Information—Legal Proceedings—Claims related to alleged silicosis and other
injuries.” See also Note 10 to the financial statements included elsewhere in this report.
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Regulatory requirements and any changes thereto relating to hazards associated with exposure to RCS in stone and engineered quartz surfaces may adversely
and materially affect our business.
During recent years, after identifying exposure to silica in the engineered quartz and stone countertop industry as a health hazard to workers involved in
manufacturing, cutting, fabricating, finishing and installing quartz and stone countertops, several local regulatory bodies have issued safety alerts and promoted
new regulations. For example, in 2015, the Israeli Ministry of Economy and Industry (“IMEI”) proposed a new law aimed at improving the health, protection and
safety of persons engaged in fabrication of engineered quartz surfaces by imposing, among other things, obligations to obtain permits for operating a fabrication
business. While, that law did not pass, there is still a possibility of regulatory involvement or renewed attempts for legislation that could adversely affect our market
and so results of our operations. In July 2019, the Australian federal government established a national dust disease taskforce in light of the re-emergence of
silicosis. In October 2019, Queensland State in Australia approved a new code of practice on managing RCS exposure in the stone benchtop industry, that included,
among others, prohibiting uncontrolled dry cutting and periodic air monitoring requirements. In early 2020, Victoria State in Australia announced its intention to
execute a licensing initiative in its territory, after prohibiting uncontrolled dry cutting of engineered stone. Western Australia State recently changed its exposure
standard for RCS, in addition to launching a new health surveillance requirement for silica, according to which employers will be required to provide a low-dose
high-resolution CT scan instead of the previously required chest X-ray. In February 2020, the U.S. Occupational Safety and Health Administration published a
National Emphasis Program addressing the hazards of silica in various industries. Contemplated and current regulatory initiatives in the U.S., Australia and Israel
are necessary to improve health and safety, however, these changes may also disrupt the market or impose burdens on fabricators and distributors potentially
causing them to shift towards using other materials, which could materially and adversely impact our business. Further regulatory changes regarding the ability to
use, process or sell stone countertops, particularly engineered quartz, and the safety measures required in such activities may materially adversely affect our
business.
In New-South Wales, Australia, a Legislative Council Committee was formed to review the State’s response to silicosis in the manufactured stone industry. The
Legislative Council Committee issued its final report in March 2020 after receiving submission and holding hearings with interested parties, and recommended,
among other things: providing all manufactured stone workers a low-dose high-resolution CT scan (instead of X-ray); obliging all manufacturers and suppliers to
provide safety data sheets and to affix standardized warning labels on all manufactured stone products; further reducing the workplace exposure standard for RCS;
and establishing a silicosis register.
We may be required to incur additional expenses associated with exposure to RCS in the engineered quartz surfaces industry to enhance our compliance with
current and future laws, regulations or standards. Failure to comply with existing regulatory requirements or any changes thereto may expose us to regulatory
actions (as detailed below in “—The extent of our liability for environmental, health and safety, product liability and other matters may be difficult or impossible to
estimate and could negatively impact our financial condition and results of operations”) as well as to lawsuits by our employees. Greater regulatory scrutiny and
action may also lead to greater propensity for litigation against us or ultimately result in a government ban of our products.
Environmental, health and safety regulations, product liability regulations, industry standards and other similar matters may be costly, difficult or impossible
to comply with under our existing operations and could negatively impact our financial condition and results of operations.
Our manufacturing facilities are subject to numerous Israeli, U.S. federal and state (Georgia) and Indian federal and (Gujarati)laws and regulations, as well as to
industry standards and policies imposed by our customers (such as IKEA and Home Depot), relating to environmental, health and safety, use of our products and
other matters such as dust, acetone and styrene control, as detailed in “ITEM 4.B: Information on the Company—Business Overview—Environmental and Other
Regulatory Matters.” Other aspects of our activities are subject to local laws wherever we operate, including Canada, Australia, Singapore and the United
Kingdom. Our recently purchased plant in India is relatively new, thus is still in the stages of adjustments to comply with local regulations and permits, including
issues of groundwater abstraction and water consumption, gas use, diesel generator capacity use and emission standards. Violations of environmental, health and
safety laws and regulations may lead to civil and criminal sanctions against us, our directors, officers or employees. Liability under these laws and regulations and
compliance with various industry standards and policies involves inherent uncertainties and in some cases may compel the installation of additional equipment and
subject us to substantial penalties, injunctive orders and facility shutdowns, as well as damages to our reputation and brand and may therefore lead to loss in
revenue. If our operations are enjoined because of failure to comply with such regulations, or if we are required to install expensive equipment in order to meet
regulatory requirements, it could materially adversely affect our results of operations. Any contemplated expansion of our facilities will also need to meet standards
imposed by laws, regulations and other industry standards. Violations of environmental laws could also result in obligations to investigate or remediate potential
contamination, third-party property damage or personal injury claims resulting from potential migration of contaminants off-site. Violations of such laws and
regulations may also constitute a breach of current or future commercial contracts we have with third parties and impact our cooperation with customers and
suppliers. We have identified in the past and may identify in the future compliance risks related to environmental and health and safety regulation standards.
Preparation and implementation of mitigation plans for such risks may take time during which we may not be in full compliance with applicable laws and
standards.
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In addition, the operation of our manufacturing facilities in Israel, the United States (Georgia) and India (Gujarat) is subject to applicable permits, standards,
licenses and approvals. Any expansions or improvements to our facilities will be subject to obtaining appropriate permits, and we cannot be certain that such
permits will be obtained in a timely matter, or at all. For detailed information, see “ITEM 4.B: Information on the Company—Business Overview—Environmental
and Other Regulatory Matters”. We expect our business licenses to be extended by the relevant authorities for a specified term and we intend to seek subsequent
extensions on an ongoing basis. Generally, failure to obtain a permit or license required for the operation of our facilities, or failure to comply with the
requirements thereunder, may result in civil and criminal penalties, fines, court injunctions, imprisonment, and operations stoppages. If we are unable to obtain,
extend or maintain the business license for any of our plants, we would be required to cease operations at such location, which would materially adversely affect
our results of operations. Our ability to obtain necessary permits and approvals for our manufacturing facilities may be subject to additional costs and possible
delays beyond our initial projections. In addition, to demonstrate compliance with underlying permits licenses or approvals, we are required to perform a
considerable amount of monitoring, record-keeping and reporting. We may not have been, or may not be, at all times, in complete compliance with such
requirements and we may incur material costs or liabilities in connection with such violations, or in connection with remediation at our sites or certain third-party
manufacturing sites if we are found liable in relation thereto.
From time to time, we face compliance issues related to our manufacturing facilities. See “ITEM 4.B: Information on the Company—Business Overview—
Environmental and Other Regulatory Matters” for additional information on compliance with environmental, health and safety and other relevant regulations
relating to our facilities, including with respect to our compliance with styrene ambient air standards and dust emission occupational health standards.
New environmental laws and regulations, new interpretations of existing laws and regulations, increased governmental enforcement or other developments in
Israel, the United States (Georgia) and India (Gujarat) could require us to make additional unforeseen expenditures. These expenditures and other costs for
environmental compliance could have a material adverse effect on our business’s results of operations, financial condition and profitability. The range of
reasonably possible losses from our exposure to environmental liabilities in excess of amounts accrued to date cannot be reasonably estimated at this time. For
example, recently the Israeli Ministry of Environmental Protection added to the requirements involved in extending a plant's toxin permit additional conditions
regarding cyber risk management, which apply immediately.
In addition, our manufacturing, distribution and other facilities are subject to health and safety regulations, including workplace safety and transportation. Although
we introduced safety rules and procedures at all our facilities and provide safety trainings to our employees and contractors on a regular basis, breaches of such
safety measures have occurred in the past and may occur in the future. If our employees or contractors do not follow and we do not successfully enforce the safety
procedures established in our facilities or otherwise do not meet the relevant laws and standards, our employees or contractors may be subject to work-related
injuries. As a result, we and our officers and directors could be subject to claims, fines, orders and injunctions due to workplace accidents involving our employees
or contractors. For example, in recent years, serious accidents related to our operations occurred in Canada. Although we believe that such accidents resulted from
safety breaches by our contractors, for one of these accidents, proceedings were filed against us by the local authorities. Although we maintain workers’
compensation and liability insurance, it may not provide adequate coverage against potential liabilities and can expose us, our directors and officers to
administrative and criminal proceedings.
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Other than as described above, we cannot predict whether we may become liable under environmental, product liability and health and safety statutes, rules,
regulations and case law of the countries in which we operate. The amount of any such liability in the future or its impact on our business operation otherwise could
be significant and may adversely impact our financial condition and results of operations.
From time to time, we are subject to litigation, disputes or other proceedings, which could result in unexpected expenses and time and resources that could
have a materially adverse impact on our results of operation, profit margins, financial condition and liquidity.
We are currently involved in several legal disputes, including against certain fabricators (our customers) and their employees in Israel and Australia, as well as
against our former workers, as further detailed in “ITEM 8.A: Financial Information—Consolidated Financial Statements and Other Financial Information—Legal
Proceedings.” In addition, from time to time, we are involved in other legal proceedings and claims in the ordinary course of business related to a range of matters,
including contract law, intellectual property rights, employment, product liability and warranty claims, and claims related to modification and adjustment or
replacement of product surfaces sold.
The outcome of litigation and other legal matters is always uncertain, and the actual outcome of any such proceedings may materially differ from estimates. An
adverse ruling in these proceedings could have a materially adverse effect on us. If we are unsuccessful in defending such claims or elect to settle any of these
claims, we could incur material costs and could be required to pay varying amounts of monetary damages, some of which may be significant, and/or incur other
penalties or sanctions, some or all of which may not be covered by insurance. For example, we have recently settled a lawsuit that was filed against us by a
customer, according to which we have paid approximately $0.5 million. Although we maintain product liability insurance, we cannot be certain that our coverage,
if applicable, will be adequate for liabilities actually incurred or that insurance will continue to be available to us on economically reasonable terms, or at all. These
material costs could have a materially adverse effect on our business, results of operations and financial condition.
Our operating results may suffer due to our failure to manage our international operations effectively or due to regulatory changes in foreign jurisdictions
where we operate.
Our products are sold in over 50 countries throughout the world, our raw materials, equipment and machinery are acquired in different countries, our products are
manufactured in Israel, the United States (“U.S.”) and India, and our global management operates from Israel. We are therefore subject to risks associated with
having international operations and expanding globally. Accordingly, our sales, purchases and operations are subject to risks and uncertainties, including:
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fluctuations in exchange rates;
fluctuations in land and sea transportation costs, as well as delays in transportation and other time-to-market delays, including as a result of strikes;
unpredictability of foreign currency exchange controls;
compliance with unexpected changes in regulatory requirements;
compliance with a variety of regulations and laws in each relevant jurisdiction;
difficulties in collecting accounts receivable and longer collection periods;
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changes in tax laws and interpretation of those laws;
taxes, tariffs, quotas, custom duties, trade barriers and other similar restrictions on our sales, purchases and exports which could be imposed by certain
jurisdictions;
negative or unforeseen consequences resulting from the introduction, termination, modification, or renegotiation of international trade agreements or
treaties or the imposition of countervailing measures or antidumping duties or similar tariffs;
difficulties enforcing intellectual property and contractual rights in certain jurisdictions; and
economic changes, geopolitical regional conflicts, terrorist activity, political unrest, civil strife, acts of war, strikes and other economic or political
uncertainties.
Significant political developments could also have a materially adverse effect on us. In the United States (“U.S.”), due to our substantial sales, distribution, import
and manufacturing operations, potential or actual changes in fiscal, tax and labor policies could have uncertain and unexpected consequences that materially impact
our business, results of operations and financial condition.
Tariffs, taxes or other trade barriers could require us to change manufacturing sources, reduce prices, increase spending on marketing or product development,
withdraw from or not enter certain markets or otherwise take actions that could be adverse to us. For example, in the United States, the Trump administration has
imposed tariffs on imports from China, Mexico, Canada and other countries, and has expressed support for greater restrictions on free trade and increase tariffs on
goods imported into the United States. For example, in the United States, the recent change in administration may cause changes to the prior imposition of tariffs on
imports from China, Mexico, Canada and other countries under the Trump Administration. Any such changes may impact the level of free trade or tariff prices on
goods imported into the United States Changes in U.S. political, regulatory and economic conditions or in its policies governing international trade and foreign
manufacturing and investment in the U.S. could adversely affect our sales in the U.S. In Europe, the U.K. formally exited the European Union (“E.U.”) on January
31, 2020 (“Brexit”). The European Commission and the U.K. government announced a withdrawal agreement providing for a transition period, during which E.U.
law was applicable to and in the U.K. and which ended on December 31, 2020. Although on December 30, 2020, a Trade and Cooperation Agreement was signed
between the E.U. and the U.K., which is provisionally applied as of January 1, 2021, significant uncertainty exists as to the scope, nature and terms of any future
relationship, and potentially divergent national laws and regulations may result. Although the E.U. is not a key market of ours, Brexit has and for the foreseeable
future will continue to adversely affect economic and market conditions in the U.K., the E.U. and its member states and elsewhere, and contribute to uncertainty
and instability in global financial markets, which may adversely affect our business and financial condition to the extent the global economy or home renovation,
remodeling and construction sectors are negatively impacted or harm our ability to further expand into the European and U.K. markets.
The regulatory framework for privacy and data security issues worldwide is currently in flux and is likely to remain so for the foreseeable future. A failure by us or
a third-party contractor providing services to us to comply with applicable privacy and data security laws and regulations may result in sanctions, statutory or
contractual damages or litigation.
All these risks could also result in increased costs or decreased revenues, either of which could have a materially adverse effect on our profitability. As we continue
to expand our business globally, we may have difficulty anticipating and effectively managing these and other risks that our global operations may face, which may
materially and adversely affect our business outside of Israel and our financial condition and results of operations.
We may have exposure to greater-than-anticipated tax liabilities.
The determination of our worldwide provision for income taxes and other tax liabilities requires significant judgment, and there are many transactions and
calculations where the ultimate tax determination is uncertain. We have applied the guidance in ASC 740, “Income Taxes” in determining our accrued liability for
unrecognized tax benefits, which totaled approximately $3.7 million as of December 31, 2020. See also note 12 to our financial statements included elsewhere in
this report. Although we believe our estimates are reasonable, the ultimate outcome may differ from the amounts recorded in our financial statements and may
materially affect our financial results in the period or periods for which such determination is made.
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We have entered transfer pricing arrangements that establish transfer prices for our inter-company operations. However, our transfer pricing procedures are not
binding on the applicable taxing authorities. The amount of income tax that we pay could be materially and adversely affected by earnings being lower than
anticipated in jurisdictions where we have lower statutory rates and higher than anticipated in jurisdictions where we have higher statutory rates. From 2015
onward, our U.S. manufacturing operations also carry inter-company transactions at transfer prices and arrangements set by us. We cannot be certain that tax
authorities will not disfavor our inter-company arrangements and transfer prices in the relevant jurisdictions. Taxing authorities outside of Israel could challenge
our allocation of income between us and our subsidiaries and contend that a larger portion of our income is subject to tax in their jurisdictions, which may have
higher tax rates than the rates applicable to such income in Israel. Any adjustment in one country while not followed by counter-adjustment in the other country,
may lead naturally to double taxation for the group. Any change to the allocation of our income as a result of review by such taxing authorities could have a
negative effect on our operating results and financial condition.
Our facilities in Israel receive different tax benefits as “Preferred Enterprises” under the Israeli Law for the Encouragement of Capital Investments, 1959
(“Investment Law”), with our production lines qualifying to receive different grants and/or reduced company tax rates. Therefore, some of our production lines
also receive tax benefits based on our revenues and the allocation of those revenues between the two facilities in Israel. As a result, the Israeli taxing authorities
could challenge our allocation of income between these two facilities and contend that a larger portion of our income is subject to higher tax rates. In Israel, there
are no tax benefits to production outside of the country. As such, our portion of taxable income in Israel that relates to the U.S. manufacturing facility might not
have tax benefits, based on certain interpretations. The Israel Tax Authority (“ITA”) could challenge the allocation of income related to production in Israel and
income related to production outside of Israel, which may result in significantly higher taxes. There are currently no legal regulations governing this allocation and
certain of the ITA’s internal guidelines have ambiguities. Moreover, we may lose all our tax benefits in Israel in the event that our manufacturing operations outside
of Israel exceed certain production levels (currently set at 50% of the overall production and subject to future changes by the ITA).
In the United States, H.R. 1, originally known as the 2017 Tax Cuts and Jobs Act (the “TCJA”) made significant changes to the U.S. Internal Revenue Code,
including a reduction in the federal income corporate tax rate from a top marginal rate of 35% to a flat rate of 21% and limitations on certain corporate deductions
and credits. In addition, the TCJA requires complex computations to be performed that were not previously required in U.S. tax law, significant judgments to be
made in interpretation of the provisions of the TCJA and significant estimates in calculations, and the preparation and analysis of information not previously
relevant or regularly produced. The U.S. Treasury Department, the IRS, and other standard-setting bodies could interpret or issue guidance on how provisions of
the TCJA will be applied or otherwise administered that is different from our interpretation. Finally, foreign governments may enact tax laws in response to the
TCJA that could result in further changes to global taxation and materially affect our financial position and results of operations. While we have provided the effect
of the TCJA in our Consolidated Financial Statements as included in Note 12 to our financial statements included elsewhere in this report, the application of
accounting guidance for various items and the ultimate impact of the TCJA on our business are currently uncertain.
We are entitled to a property tax abatement (starting in the 2014 tax year) with respect to our U.S manufacturing facility and the capital investment made in such
facility for ten years at 100% and an additional five years at 50% subject to our satisfaction of certain qualifying terms with respect to headcount, average salaries
paid to our employees and total capital investment amount in our U.S manufacturing facility. The tax abatement is granted pursuant to bond purchase loan
agreements we entered with the Development Authority of Bryan County. If we do not meet the qualifying terms of the bond, we will bear the applicable property
tax, which will be recognized in our operating costs and which would materially and adversely impact our projected margins and results of operations. See “ITEM
4.D: Information on the Company—Property, Plants and Equipment.”
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Certain U.S. holders of our ordinary shares may suffer adverse tax consequences if we or any of our non-U.S. subsidiaries are characterized as a “controlled
foreign corporation”, or a CFC, under Section 957(a) of the Internal Revenue Code of 1986, as amended.
A non-U.S. corporation is considered a CFC if more than 50% of (1) the total combined voting power of all classes of stock of such corporation entitled to vote, or
(2) the total value of the stock of such corporation, is owned, or is considered as owned by applying certain constructive ownership rules, by United States
shareholders who each own stock representing 10% or more of the vote or 10% or more of the value on any day during the taxable year of such non-U.S.
corporation (“10% U.S. Shareholder”). Because our group includes one or more U.S. subsidiaries, certain of our non-U.S. subsidiaries could be treated as CFCs
(regardless of whether we are treated as a CFC). Generally, 10% U.S. Shareholders of a CFC are required to report annually and include currently in its U.S.
taxable income such 10% U.S. Shareholder’s pro rata share of the CFC’s “Subpart F income”, “global intangible low-taxed income”, and investments in U.S.
property by CFCs, regardless of whether we make an actual distribution to such shareholders. “Subpart F income” includes, among other things, certain passive
income (such as income from dividends, interests, royalties, rents and annuities or gain from the sale of property that produces such types of income) and certain
sales and services income arising in connection with transactions between the CFC and a person related to the CFC. An individual that is a 10% U.S. Shareholder
with respect to a CFC generally would not be allowed certain tax deductions or foreign tax credits that would be allowed to a 10% U.S. Shareholder that is a U.S.
corporation. Failure to comply with these reporting obligations may subject a 10% U.S. Shareholder to significant monetary penalties and may prevent the statute
of limitations with respect to such shareholder’s U.S. federal income tax return for the year for which reporting was due from starting. We cannot provide any
assurances that we will assist investors in determining whether any of our non-U.S. subsidiaries is treated as a CFC or whether any investor is treated as a 10% U.S.
Shareholder with respect to any such CFC or furnish to any 10% U.S. Shareholders information that may be necessary to comply with the aforementioned reporting
and tax payment obligations. A United States investor should consult its tax advisors regarding the potential application of these rules to an investment in our
ordinary shares.
The steps that we have taken to protect our brand, technology and other intellectual property may not be adequate, and we may not succeed in preventing
others from appropriating our intellectual property.
We believe that our trademarks (registered and unregistered) are important to our brand, success and competitive position. We anticipate that, as the countertop
market becomes increasingly competitive, maintaining and enhancing our brand, proprietary technology and other intellectual property may become more
important, difficult and expensive. In the past, some of our trademark applications for certain classes of applications of our products have been rejected or opposed
in certain markets. We have in the past, are currently, and may in the future be, subject to opposition proceedings with respect to applications for registration of our
intellectual property, such as our trademarks. As with all intellectual property rights, such application may be rejected entirely or awarded subject to certain
limitations such as territories, any current or future markets or applications. These limitations to registering our brand names and trademarks in various countries
and applications may restrict our ability to promote and maintain a cohesive brand throughout our key markets, which could materially harm our competitive
position and materially and adversely impact our results of operations. Additionally, if we are unsuccessful in challenging a third party’s products based on
trademark infringement, continued sales of such products could materially and adversely affect our sales and our brand and result in the shift of consumer
preference away from our products.
There can be no assurance that new or pending patent applications for our technologies and products will be approved in a timely manner or at all, or that, if
granted, such patents will effectively protect our intellectual property. There can be no assurance that we will develop patentable intellectual property in the future,
and we have chosen and may further choose not to pursue patents for innovations that are material to our business.
While we continue to make significant investments in innovating the design of our products and register design patents on selected models, it may not be adequate
to prevent our competitors from imitating our designs and copying our innovative ideas.
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Despite our efforts to execute confidentiality agreements with our consultants, suppliers, customers, employees and managers, our know-how and trade secrets
could be disclosed to third parties, which could cause us to lose any competitive advantage resulting from such know-how or trade secrets, as well as related
intellectual property protections in certain cases.
The actions we take to establish and protect our intellectual property may not be adequate to prevent unlawful copy and use of our technology by third parties or
imitation of our products and the offering of them under our trademarks by others. These actions may also not be adequate to prevent others, including our
competitors, from obtaining intellectual property rights overcoming ours, and limiting or blocking the production and sales of our existing or future products and
applying certain technologies. Our competitors may seek to limit our marketing and offering of products relying on their alleged intellectual property rights.
We may face significant expenses and liability in connection with the protection of our intellectual property rights in and outside the United States. The laws of
certain foreign countries may not protect intellectual property rights to the same extent as the laws of the United States.
Third parties have claimed, and may from time to time claim, that our current or future products infringe their patent or other intellectual property rights. Under
such circumstances, we may be required to expend significant resources in order to contest such claims and, in the event that we do not prevail, we may be required
to seek a license for certain technologies, develop non-infringing technologies or discontinue some of our products. In addition, any future intellectual property
litigation, regardless of its outcome, may be expensive, divert the efforts of our personnel and disrupt or damage relationships with our customers.
For more information, see “ITEM 4.B: Information on the Company—Business Overview—Intellectual Property.”
Disruptions to or our failure to upgrade and adjust our information technology systems globally, may materially impair our operations, hinder our growth and
materially and adversely affect our business and results of operations.
We believe that an appropriate information technology (“IT”) infrastructure is important in order to support our daily operations and the growth of our business. To
this end, we are implementing a digital transformation within the Company to better streamline processes and support our business strategy. Our technological and
digital investments are geared towards operational enhancements in supply chain management and production, along with improvement of our go-to-market tools.
If we experience difficulties in implementing new or upgraded information systems or experience significant system failures, or if we are unable to successfully
modify our management information systems or respond to changes in our business needs, we may not be able to effectively manage and grow our business, and
we may fail to meet our reporting obligations. Additionally, if our current back-up storage arrangements and our disaster recovery plan are not operated as planned,
we may not be able to effectively recover our information system in the event of a crisis, which may materially and adversely affect our business and results of
operations.
In the current environment, there are numerous and evolving risks to cybersecurity and privacy, including criminal hackers, hacktivists, state-sponsored intrusions,
industrial espionage, employee malfeasance and human or technological error. High-profile security breaches at other companies and in government agencies have
increased in recent years. Although we take steps designed to secure our IT infrastructure and sensitive data, we can provide no assurance that our current IT
system or any updates or upgrades thereto, the current or future IT systems of our distributors or re-sellers or the IT systems of online paying agents that we use or
may use in the future, are fully protected against third-party intrusions, viruses, hacker attacks, information or data theft or other similar risks.
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We have experienced and expect to continue to experience actual and attempted cyber-attacks of our IT networks, such as through phishing scams and ransomware.
Although none of these actual or attempted cyber-attacks has had a material adverse impact on our operations or financial condition, we cannot guarantee that any
such incidents will not have such an impact in the future. Furthermore, a cyber-attack that bypasses our IT security systems or those of our distributors, re-sellers,
online paying agents or other third party contractors, causing an IT security breach, could lead to a material disruption of our information systems, the loss of
business information and loss of service to our customers. There is no assurance that we will be insulated from claims relating to cyber-attacks or withstand legal
challenges in relation to our agreements with third parties. Additionally, we have access to sensitive information relating to our employees as well as business
partners and customers in the ordinary course of business. Any failure or perceived failure by us, or our third-party contractors on our behalf, to comply with local
and foreign laws regarding privacy and data security, as well as contractual commitments in this respect, may result in governmental enforcement actions, fines, or
litigation, which could have an adverse effect on our reputation and business. If a significant data breach occurred, our reputation could be materially and adversely
affected, confidence among our customers may be diminished, or we may be subject to legal claims, any of which may contribute to the loss of customers and have
a material adverse effect on us. To the extent that such disruptions or uncertainties result in delays or cancellations of customer orders or the manufacture or
shipment of our products, or in theft, destruction, loss, misappropriation or release of our confidential data or our intellectual property, our business and results of
operations could be materially and adversely affected.
These risks will increase as we increase our cooperation with and reliance on third party contractors that provide cloud solutions and store increasingly large
amounts of data, as part of our digital focus and enhancement of go to market tools.
Legislative or regulatory action in these areas is also evolving, and we may be unable to adapt our IT systems or to manage the IT systems of third parties to
accommodate these changes. Increasing regulatory focus on information security and data privacy issues and expanding laws in these areas may result in increased
compliance costs and expose us to increased liability. Globally, new and emerging laws, such as the General Data Protection Regulation (“GDPR”) in Europe and
state laws in the U.S. on privacy, data and related technologies, such as the California Consumer Privacy Act (“CCPA”), create new compliance obligations, create
new private rights of action and expand the scope of potential liability, either jointly or severally with our customers and suppliers. The GDPR, which became
effective on May 25, 2018, imposed new compliance obligations for the collection, use, retention, security, processing, transfer and deletion of personally
identifiable information of individuals and created enhanced rights for individuals. The CCPA, which grants expanded rights to access and delete personal
information, and the right to opt out of the sale of personal information, among other things, became effective on January 1, 2020. These and any other new and
emerging laws and regulations, may force us to bear the burden of more onerous obligations in our contracts or otherwise increase our potential liability to
customers, regulators, or other third parties.
Cybersecurity and complying with personal data rights pose economic, operational and reputational risks. If we are unable to implement the technological and
digital projects required to support our future growth and profitability in compliance with applicable rules and regulations, our business and results of operations
will be materially adversely affected.
Risks Related to our Relationship with Kibbutz Sdot-Yam
Our directors and executive officers who are members of Kibbutz Sdot-Yam and Tene may have conflicts of interest with respect to matters involving the
Company.
As of March 18, 2021, the Kibbutz, together Tene, being parties to a voting agreement, beneficially owned 40.7% of our shares. Both the Kibbutz and Tene are
deemed our controlling shareholders under the Israeli Companies Law. The Kibbutz and Tene also agreed to use their best efforts to prevent any dilutive
transactions that would reduce the Kibbutz’s holdings in us below 26% on a fully diluted basis and to cause that at least four directors on behalf of the parties are
elected to our board of directors. For more information, see “ITEM 7.A. Major Shareholders and Related Party Transactions—Major Shareholders.” Two members
of our board of directors and a number of our key employees are members of the Kibbutz. Certain of these individuals also serve in different positions in the
Kibbutz, including business manager of the Kibbutz. Such individuals have fiduciary duties to both us and Kibbutz Sdot-Yam. As a result, our directors and
executive officers who are members of the Kibbutz may have real or apparent conflicts of interest on matters affecting both us and the Kibbutz and, in some
circumstances, such individuals may have interests adverse to us. For example, in the annual general meeting of our shareholders held in December 2015, the
Kibbutz opposed the independent nominees our board of directors proposed to nominate to the board and suggested two alternative nominees identified by the
Kibbutz as independent. In addition, two members of our board of directors, including the chairman of the board of directors, also serve as partners in Tene. Since
these individuals have fiduciary duties to both us and Tene, there may be real or apparent conflicts of interest in this respect as well. See “ITEM 6.A: Directors,
Senior Management and Employees—Directors and Senior Management.”
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Our headquarters and one of our two manufacturing facilities in Israel are located on lands leased by Kibbutz Sdot-Yam from the Israel Lands Administration
and the Edmond Benjamin de Rothschild Caesarea Development Corporation Ltd. If we are unable to continue to lease such lands from Kibbutz Sdot-Yam,
our business and future business prospects may suffer.
One of our manufacturing facilities, our headquarters and our research and development facilities are located on lands leased by the Kibbutz pursuant to two lease
agreements between the Kibbutz and the ILA, and an additional lease agreement between the Kibbutz and the Edmond Benjamin de Rothschild Caesarea
Development Corporation Ltd. (“Caesarea Development Corporation”).
The first lease agreement between the Kibbutz and the ILA has been extended through 2060. The second agreement between the Kibbutz and the ILA expired in
late 2009, and in February 2017, the District Court approved a settlement pursuant to which the Kibbutz and the ILA will enter into a new lease agreement for a
period of 49 years, with an option to renew for additional 49 years. Based on information we received from the Kibbutz, the parties are still in the process of
finalizing the terms of the lease agreement. Previous agreements between the Kibbutz and the ILA with respect to this property contained restrictions with respect
to the use of the property by the Kibbutz. We cannot assure you that our current use of the property and the rights granted to us by the Kibbutz pursuant to the land
use agreement will not provide the ILA with the right to terminate the rights of the Kibbutz to the property.
The lease agreement between the Kibbutz and the Caesarea Development Corporation permits the Kibbutz to use the property for the community needs of the
Kibbutz and is in effect until year 2037. Caesarea Development Corporation charges the Kibbutz based on the use of the relevant portion of the property for
industrial purposes, and thus, has provided recognition to the Kibbutz’s use of such portion of the property for industrial purposes.
Each of the ILA and the Caesarea Development Corporation may terminate their respective lease in certain circumstances, including if the Kibbutz breaches its
agreements therewith, commences proceedings to disband or liquidate, or in the event that the Kibbutz ceases to be organized as a “kibbutz” as defined in the lease
(meaning, a registered cooperative society classified as a kibbutz). If any of the leases and the rights of Kibbutz Sdot-Yam to use the properties described above
terminate, we may be unable to maintain our operations on these lands, which would have a materially adverse effect on our operations.
For more information on these agreements, see “ITEM 7.B: Major Shareholders and Related Party Transactions—Related Party Transactions.”
Pursuant to certain agreements between us and Kibbutz Sdot-Yam, we depend on Kibbutz Sdot-Yam with respect to leasing the buildings and areas of our
manufacturing facilities in Israel, acquiring new land as well as building additional facilities should we need them.
Our Bar-Lev facility is leased from the Kibbutz pursuant to a land purchase and leaseback agreement effective as of September 1, 2012. The land purchase and
leaseback agreement was simultaneously executed with a land use agreement pursuant to which the Kibbutz permits us to use the site for a period of ten years with
an automatic renewal for an additional ten years unless we provide the Kibbutz two years’ advance notice that we do not wish to renew the lease.
Our Sdot-Yam facility, located in the Kibbutz, is also leased from the Kibbutz, pursuant to a land use agreement effective as of March 2012 for a period of 20
years. We may not terminate the operation of either of the two production lines at our Sdot-Yam facility as long as we continue to operate production lines
elsewhere in Israel. Additionally, our headquarters must remain at the Kibbutz. As a result of these restrictions, our ability to reorganize our manufacturing
operations and headquarters in Israel is limited.
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In addition, pursuant to the agreements we entered into with the Kibbutz with respect to our Bar-Lev and Sdot-Yam facilities, in the event of a material change in
the payments made by the Kibbutz to the ILA or the Caesarea Development Corporation or changes in the market conditions, every three years the Kibbutz may
appoint an independent appraiser to reassess the fees we agreed to pay to the Kibbutz in light of such changes. If an independent appraiser concludes that the fees
payable by us to the Kibbutz for the Bar-Lev and Sdot-Yam facilities are below market, the Kibbutz can, in its sole discretion, adjust such fees to the market value
with a binding effect on us.
Pursuant to the land use agreements between us and the Kibbutz, subject to certain exceptions, if we need additional facilities on the land that we are permitted to
use under such land use agreements, then, subject to obtaining the permits required by law, the Kibbutz will build such facilities for us by using the proceeds of a
loan that we will make to the Kibbutz, which loan shall be repaid to us by off-setting the additional monthly payment that we would pay for such new facilities and,
if not fully repaid during the lease term, upon termination thereof. As a result, we depend on the Kibbutz to build such facilities in a timely manner. While the
Kibbutz is responsible under the agreement for obtaining various licenses, permits, approvals and authorizations necessary for our use of the property, with respect
to our use of property in Sdot-Yam, we have waived any monetary recourse against the Kibbutz for failure to receive such licenses, permits, approvals and
authorizations.
If we are unable to renew our existing lease agreements with the Kibbutz in the future, we may be required to move our Israeli facilities and headquarters to an
alternate location. In addition, the Kibbutz may not be able, in a timely manner, to purchase additional land or build additional facilities that we may require due to
increased demand for our products or obtain the necessary licenses or permits for existing or current property. This could result in increased costs, substantial
delays and disruptions to the manufacturing process, which could materially and adversely impact our reputation, revenues and results of operations as well as other
business aspects, such as our ability to serve our customers and meet the existing or increased demand for our products. We may also suffer losses to the extent we
have waived monetary recourse against the Kibbutz for failure to obtain licenses and permits for some of our currently leased property. For more information with
respect to our agreements with the Kibbutz, see “ITEM 7.B: Major Shareholders and Related Party Transactions—Related Party Transactions”.
Regulators and other third parties may question whether our agreements with Kibbutz Sdot-Yam are no less favorable to us than if they had been negotiated
with unaffiliated third parties.
Our headquarters, research and development facilities and our two manufacturing facilities in Israel are located on lands leased by the Kibbutz. We have entered
into certain agreements with the Kibbutz pursuant to which the Kibbutz provides us with, among other things, a portion of our labor force, electricity, maintenance,
security and other services. We believe that such services are rendered to us in the normal course of business and they represent terms no less favorable than those
that would have been obtained from an unaffiliated third party. Nevertheless, a determination with respect to such matters requires subjective judgments regarding
valuations, and regulators and other third parties may question whether our agreements with the Kibbutz are in the ordinary course of our business and are no less
favorable to us than if they had been negotiated with unaffiliated third parties. As a result, the tax treatment for these transactions may also be called into question,
which could have a materially adverse impact on our operating results and financial condition. See “ITEM 7.B: Major Shareholders and Related Party Transactions
—Related Party Transactions.”
Under Israeli law, our board, audit committee and shareholders may be required to reapprove certain of our agreements with Kibbutz Sdot-Yam every three
years, and their failure to do so may expose us to liability and cause significant disruption to our business.
The Companies Law requires that the authorized corporate organs of a public company approve every three years any extraordinary transaction in which a
controlling shareholder has a personal interest and that has a term of more than three years, unless a company’s audit committee determines, solely with respect to
agreements that do not involve compensation to a controlling shareholder or his or her relatives, in connection with services rendered by any of them to the
company or their employment with the company, that a longer term is reasonable under the circumstances. Our implementation of this requirement with respect to
the agreements entered between us and the Kibbutz may be challenged by regulators and other third parties.
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Our audit committee has determined that the terms of all the agreements entered into between us and the Kibbutz are reasonable under the relevant circumstances,
except for the manpower agreement entered into between the Kibbutz and us on January 1, 2011, as it relates to office holders, and the services agreement entered
into between the Kibbutz and us on July 20, 2011 (as amended). See “ITEM 7.B: Major Shareholders and Related Party Transactions—Related Party
Transactions.” Our manpower agreement (as it relates to office holders) and our services agreement, each with the Kibbutz, have been reapproved by our
shareholders in November 2018 under the Companies Law requirements and are subject to re-approval in 2021.
If our audit committee, board and shareholders do not re-approve the manpower agreement and the services agreement in accordance with the Companies Law, or
if it is determined that re-approval of our other agreements with the Kibbutz is required every three years and the re-approval is not obtained, we will be required to
terminate such agreements, which may be considered a breach under the terms of such agreements, and could expose us to damage claims and legal fees, and cause
significant disruption to our business. In addition, we would be required to find suitable replacements for the services provided to us by the Kibbutz under the
manpower agreement and the service agreement, which may take time, and we can provide no assurance that we can obtain the same or better terms with a third
party than those we have agreed to with the Kibbutz.
Risks Related to our Ordinary Shares
We cannot provide any assurance regarding the amount or timing of dividend payments.
In February 2018, we declared the distribution of a special cash dividend in the amount of $0.29 per share, paid on March 14, 2018, subject to withholding tax of
20%. We also adopted a dividend policy pursuant to which we pay a quarterly cash dividend in the range of $0.10-$0.15 per share (subject to the applicable tax) up
to the lesser of 50% of the reported net income attributable to controlling interest (i) on a quarterly basis or (ii) on a year-to-date basis, subject in each case to the
approval of our board of directors. Payments of dividends pursuant to the dividend policy are based on the recommendation of our board of directors, after taking
into account applicable legal requirements under Israeli law, the benefit of the Company and its obligations, growth plans and contractual limitations under our
credit agreements, and other factors that our board of directors may deem relevant. In the fourth quarter of 2019, we distributed a cash dividend in the amount of
$0.15 per share subject to withholding tax of 20%. In February 2020, we revised our dividend policy to provide for a quarterly cash dividend of up to 50% of
reported net income attributable to controlling interest on a year-to-date basis, less any amount already paid as dividend for the respective period (the “calculated
dividend”), subject in each case to approval by the Company’s board of directors. In the fourth quarter of 2020, we distributed a cash dividend in the amount of
$0.14 per share subject to withholding tax of 20%. In the event that the calculated dividend is less than $0.10 per share, no dividend shall be paid. We cannot
provide assurances regarding the amount or timing of any dividend payments and may decide not to pay dividends in the future.
The price of our ordinary shares may be volatile.
The market price of our ordinary shares could be highly volatile and may fluctuate substantially as a result of many factors, including but not limited to (i) actual or
anticipated fluctuations in our results of operations; (ii) variance in our financial performance from the expectations of market analysts; (iii) announcements by us
or our competitors of significant business developments, changes in distributor relationships, acquisitions or expansion plans; (iv) changes in the prices of our raw
materials or the products we sell; (v) our involvement in litigation, specifically for example, any adverse precedent set in Australia in connection with silica related
claims; (vi) our sale of ordinary shares or other securities in the future; (vii) market conditions in our industry; (viii) changes in key personnel; (ix) the trading
volume of our ordinary shares; (x) changes in the estimation of the future size and growth rate of our markets; (xi) changes in our board of directors, including
director resignations; (xii) actions of investors and shareholders, including short seller reports and proxy contests; and (xiii) general economic and market
conditions unrelated to our business or performance, such as increased shipping and handling markets. See also “—The COVID-19 pandemic could further impact
end-consumers and the global economy in general, lower demand for our products, disrupt our operations and materially and adversely affect our business and
results of operations”.
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In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been instituted against that
company relating to the price of shares. We have been in the past subject to a putative securities class action which was settled and covered by our insurance
carriers. We cannot assure you that in the future we may not be subject to further litigation or that it will be fully covered by our insurance carriers.
Our share price is impacted by reports from research analysts, publicly announced financial guidance, investor perceptions and our ability to meet other
expectations about our business.
The trading market for our ordinary shares relies in part on the research and reports that equity research analysts publish about us and our business. Recently, two
analysts discontinued research coverage of our business. If additional analysts do not establish research coverage, or if the current research analyst ceases coverage
of our company or fails to publish reports on our Company regularly, we could lose visibility in the market and demand for our shares may decline, which might
cause our share price and trading volume to decline.
The price of our ordinary shares could also decline if one or more securities analysts downgrade our ordinary shares or if one or more of those analysts issue other
unfavorable commentary. The market price for our ordinary shares has been in the past, and may be in the future, materially and adversely affected by statements
made in reports issued by short sellers regarding our business model, our management and our financial accounting. We have also faced difficulty in the past
accurately projecting our earnings and have missed certain of our publicly announced guidance. If our financial results for a period do not meet our guidance or if
we reduce our guidance for future periods, the market price of our ordinary shares may decline. We have experienced in the past, and may experience in the future,
a decline in the value of our shares as a result of the foregoing factors.
Public environmental, social and governance (“ESG”) and sustainability reporting is becoming more broadly expected by investors, shareholders and other third
parties. We may face reputational damage in the event our corporate responsibility initiatives or objectives do not meet the standards set by our investors,
shareholders, lawmakers, listing exchanges or other constituencies, or if we are unable to achieve an acceptable ESG or sustainability rating. A low ESG or
sustainability rating by a third-party rating service could also result in the exclusion of our common stock from consideration by certain investors. Ongoing focus
on corporate responsibility matters by investors and other parties as described above may impose additional costs or expose us to new risks.
The substantial share ownership position of Kibbutz Sdot-Yam and Tene will limit your ability to influence corporate matters.
As of March 18, 2021, the Kibbutz and Tene beneficially owned 40.7% of our outstanding ordinary shares. As a result of this concentration of share ownership and
their voting agreement described above, the Kibbutz and Tene are considered controlling shareholders under the Israeli Companies Law, and, acting on their own or
together, will continue to have significant voting power on all matters submitted to our shareholders for approval. These matters include:
•
•
•
the composition of our board of directors (other than external directors);
approving or rejecting a merger, consolidation or other business combination; and
amending our articles of association, which govern the rights attached to our ordinary shares.
This concentration of ownership of our ordinary shares could delay or prevent proxy contests initiated by other shareholders, mergers, tender offers, open-market
purchase programs or other purchases of our ordinary shares that might otherwise give you the opportunity to realize a premium over then-prevailing market price
of our ordinary shares. The interests of the Kibbutz or Tene may not always coincide with the interests of our other shareholders. This concentration of ownership
may also lead to proxy contests. For example, prior to the voting arrangement between Tene and the Kibbutz, in connection with our annual general meeting of
shareholders held in December 2015, the Kibbutz issued a proxy to our shareholders, in which it opposed the independent nominees our board of directors proposed
to nominate to the board and suggested two alternative nominees. Such initiatives, which may not coincide with the interests of our other shareholders, result in us
incurring unexpected costs and could divert our management’s time and attention. This concentration of ownership may also materially and adversely affect our
share price.
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In recent years, Israeli issuers listed on securities exchanges in the United States have also been faced with governance-related demands from activist shareholders,
unsolicited tender offers and proxy contests. Responding to these types of actions by activist shareholders could be costly and time-consuming for management and
our employees and could disrupt our operations or business model in a way that would interfere with our ability to execute our strategic plan.
As a foreign private issuer whose shares are listed on the Nasdaq Global Select Market, we may follow certain home country corporate governance practices
instead of certain Nasdaq requirements.
As a foreign private issuer whose shares are listed on the Nasdaq Global Select Market, we are permitted to follow certain home country corporate governance
practices instead of certain requirements of the rules of Nasdaq. As permitted under the Israeli Companies Law, our articles of association provide that the quorum
for any ordinary meeting of shareholders shall be the presence of at least two shareholders present in person, by proxy or by a voting instrument, who hold at least
25% of the voting power of our shares instead of 33 1/3% of the issued share capital required under Nasdaq requirements. At an adjourned meeting, any number of
shareholders constitutes a quorum.
In the future, we may also choose to follow Israeli corporate governance practices instead of Nasdaq requirements with regard to, among other things, the
composition of our board of directors, compensation of officers and director nomination procedures. In addition, we may choose to follow Israeli corporate
governance practice instead of Nasdaq requirements with respect to shareholder approval for certain dilutive events (such as for issuances that will result in a
change of control of the company, certain transactions other than a public offering involving issuances of a 20% or more interest in the company and certain
acquisitions of the stock or assets of another company) and for the adoption of, and material changes to, equity incentive plans. Accordingly, our shareholders may
not be afforded the same protection as provided under Nasdaq corporate governance rules. Following our home country governance practices, as opposed to the
requirements that would otherwise apply to a U.S. company listed on the Nasdaq Global Select Market, may provide less protection than is accorded to investors of
domestic issuers. See “ITEM 16G: Corporate Governance.”
As a foreign private issuer, we are not subject to the provisions of Regulation FD or U.S. proxy rules and are exempt from filing certain Exchange Act reports.
As a foreign private issuer, we are exempt from the rules and regulations under the Exchange Act related to the furnishing and content of proxy statements, and our
officers, directors and principal shareholders are exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the Exchange
Act. In addition, we are not required under the Exchange Act to file annual and current reports and financial statements with the SEC as frequently or as promptly
as U.S. domestic companies whose securities are registered under the Exchange Act, we are permitted to disclose limited compensation information for our
executive officers on an individual basis and we are generally exempt from filing quarterly reports with the SEC under the Exchange Act. Moreover, we are not
required to comply with Regulation FD, which restricts the selective disclosure of material nonpublic information to, among others, broker-dealers and holders of a
company’s securities under circumstances in which it is reasonably foreseeable that the holder will trade in the company’s securities on the basis of the information.
These exemptions and leniencies reduce the frequency and scope of information and protections to which you may otherwise have been eligible in relation to a U.S.
domestic issuer.
We would lose our foreign private issuer status if (a) a majority of our outstanding voting securities were either directly or indirectly owned of record by residents
of the United States and (b)(i) a majority of our executive officers or directors were United States citizens or residents, (ii) more than 50% of our assets were
located in the United States or (iii) our business were administered principally in the United States. Our loss of foreign private issuer status would make U.S.
regulatory provisions mandatory. The regulatory and compliance costs to us under U.S. securities laws as a U.S. domestic issuer may be significantly higher. If we
are not a foreign private issuer, we will be required to file periodic reports and registration statements on U.S. domestic issuer forms with the SEC, which are more
detailed and extensive than the forms available to a foreign private issuer. We would also be required to follow U.S. proxy disclosure requirements, including the
requirement to disclose, under U.S. law, more detailed information about the compensation of our senior executive officers on an individual basis. We may also be
required to modify certain of our policies to comply with accepted governance practices associated with U.S. domestic issuers. Such conversion and modifications
will involve additional costs. In addition, we would lose our ability to rely upon Nasdaq exemptions from certain corporate governance requirements that are
available to foreign private issuers.
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The market price of our ordinary shares could be negatively affected by future sales of our ordinary shares.
As of March 18, 2021, we had 34,441,321 shares outstanding. This included approximately 14,029,494 ordinary shares, or 40.7% of our outstanding ordinary
shares, beneficially owned by the Kibbutz and Tene, which can be resold into the public markets in accordance with the restrictions of Rule 144, including volume
limitations, applicable to resales by affiliates or holders of restricted securities.
Sales by us or by the Kibbutz, Tene or other large shareholders of a substantial number of our ordinary shares in the public market, or the perception that these sales
might occur, could cause the market price of our ordinary shares to decline or could materially impair our ability to raise capital through a future sale of, or pay for
acquisitions using, our equity securities.
The Kibbutz and Tene may require us to affect a registered offering of up to an additional 11,440,000 shares under the Securities Act for resale into the public
markets. All shares sold pursuant to an offering covered by such registration statement or statements will be freely transferable. See “ITEM 7.B: Major
Shareholders and Related Party Transactions—Related Party Transactions—Registration rights agreement.”
In addition to these registration rights, as of March 18, 2021, 3,033,556 ordinary shares were reserved for issuance under our 2011 option plan and our 2020 Share
Incentive Plan of which options to purchase 1,464,500 ordinary shares were outstanding, with a weighted average exercise price of $17.9 per share, and 87,703
restricted stock units (“RSUs”) were outstanding. To the extent they are covered by our registration statements on Form S-8, these shares may be freely sold in the
public market upon issuance, except for shares held by affiliates who have certain restrictions on their ability to sell.
Risks Relating to our Incorporation and Location in Israel
If we fail to comply with Israeli law restrictions concerning employment of Jewish employees on Saturdays and Jewish holidays, we and our office holders may
be exposed to administrative and criminal liabilities and our operational and financial results may be materially and adversely impacted.
We are subject to the Israeli Hours of Work and Rest Law, 1951 (“Rest Law”), which imposes certain restriction on the employment terms and conditions of our
employees. Among others, the Rest Law prohibits the employment of Jewish employees on Saturdays and Jewish holidays, unless a permit is obtained from the
Israeli Ministry of Economy and Industry (the “IMEI”). Employment of Jewish employees on such days without a permit constitutes a violation of the Rest Law.
We received a permit from the IMEI to employ Jewish employees on Saturdays and Jewish holidays in connection with most of the production machinery in our
Sdot-Yam facility, effective until December 31, 2022. There is no assurance that we will be able to maintain such permit while we do not actually employ Jewish
employees on Saturdays, or, if cancelled by the IMEI, that we will be able to obtain such permit in the future. If we fail to obtain such permit in the future or if we
are deemed to be in any violation of the Rest Law, we may be required to halt operations of our manufacturing facilities on Saturdays and Jewish holidays, we and
our officers may be exposed to administrative and criminal liabilities, including fines, and our ability to utilize our Sdot-Yam facility and therefore our operational
and financial results could be materially and adversely impacted.
Conditions in Israel could materially and adversely affect our business.
We are incorporated under Israeli law and our principal offices and two of our manufacturing facilities (Sdot-Yam and Bar-Lev) are located in Israel. Accordingly,
political, economic and military conditions in Israel directly affect our business. Since the establishment of the State of Israel in 1948, a number of armed conflicts
have occurred between Israel and its neighboring countries. These conflicts involved missile strikes against civilian targets in various parts of Israel including most
recently, central Israel, and negatively affected business conditions in Israel as well as home starts and the building industry in Israel.
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Our facilities are in range of rockets that may be fired from Lebanon, Syria or the Gaza Strip into Israel. In the event that our facilities are damaged as a result of
hostile action or hostilities otherwise disrupt the ongoing operation of our facilities, our ability to deliver products to customers could be materially and adversely
affected. Our commercial insurance in Israel covers losses that may occur as a result of acts of war or terrorist attacks on our facilities and disruption to the ongoing
operations for damages of up to $40 million, if such damages are not covered by the Israeli government, which in certain cases covers direct damages caused by
terrorist attacks or acts of war. Even if insurance is maintained and adequate, we cannot assure you that it will reduce or prevent any losses that may occur as a
result of such actions or will be exercised in a timely manner to meet our contractual obligations with customers and vendors.
In addition, popular uprisings in various countries in the Middle East and North Africa have affected the political stability of those countries. Such instability may
lead to deterioration in the political and trade relationships that exist between the State of Israel and these countries, such as Turkey, from which we import a
significant amount of our raw materials. Moreover, some countries around the world restrict doing business with Israel and Israeli companies, and additional
countries may impose restrictions on doing business with Israel and Israeli companies if hostilities in Israel or political instability in the region continues or
increases. These restrictions may limit materially our ability to obtain raw materials from these countries or sell our products to companies and customers in these
countries. In addition, there have been increased efforts by activists to cause companies and consumers to boycott Israeli goods. Such efforts, particularly if they
become more widespread, may materially and adversely impact our ability to sell our products out of Israel.
Our employees in Israel, generally males, including executive officers, may be called upon to perform military service on an annual basis until they reach the age of
40 (and in some cases, up to 45 or 49). In emergency circumstances, they could be called to immediate and prolonged active duty. Our operations could be
disrupted by the absence of a significant number of our employees related to military service or the absence for extended periods of one or more of our key
employees for military service. Such disruption could materially and adversely affect our business and results of operations. Additionally, the absence of a
significant number of the employees of our Israeli suppliers and contract manufacturers related to military service may disrupt their operations, in which event our
ability to deliver products to customers may be materially and adversely affected.
Any hostilities involving Israel or the interruption or curtailment of trade between Israel and its present trading partners, or a significant downturn in the economic
or financial condition of Israel, could materially and adversely affect our operations and product development, cause our revenues to decrease and materially harm
the share price of publicly traded companies with operations in Israel, such as us.
In early January 2020, certain events contributed to an increase in hostilities between the United States and Iran, and as a result Iran issued multiple public
statements threatening to attack Israel and the United States. These events, coupled with the already mounting tensions between Israel and Iran, may threaten to
destabilize the Middle East on a political level, the result of which may impact our ability to conduct our business effectively.
On Israel’s domestic front there is currently a level of unprecedented political instability. The Israeli government has been in a transitionary phase since December
of 2018, when the Israeli Parliament, or the Knesset, first resolved to dissolve itself and call for new general elections. In 2019, Israel held general elections twice –
in April and September – and a third general election in March 2020. In December 2020, the Knesset was once again dissolved, and the date for the next general
elections was set for March 23, 2021. The Knesset, for reasons related to this extended political transition, has failed to pass a budget for the year 2020, and certain
government ministries, which may be critical to the operation of our business, are without necessary resources and may not receive sufficient funding moving
forward. Given the likelihood that the current political stalemate might not be resolved during the next calendar year, our ability to collaborate effectively with
governmental bodies could be adversely materially affected.
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Our operations may be affected by negative economic conditions or labor unrest in Israel.
General strikes or work stoppages, including at Israeli seaports, have occurred periodically or have been threatened in the past by Israeli trade unions due to labor
disputes. These general strikes or work stoppages may have a materially adverse effect on the Israeli economy and on our business, including our ability to deliver
products to our customers and to receive raw materials from our suppliers in a timely manner. These general strikes or work stoppages, in Israel or in other
countries where we, our subsidiaries, suppliers and distributors operate, may prevent us from shipping raw materials and equipment required for our production and
shipping our products by sea or otherwise to our customers, which could have a materially adverse effect on our results of operations.
Since none of our employees work under any collective bargaining agreements, extension orders issued by the IMEI apply to us and affect matters such as cost of
living adjustments to salaries, length of working hours and work week, recuperation pay, travel expenses, and pension rights. Any labor disputes over such matters
could result in a work stoppage or strikes by employees that could delay or interrupt our output of products. Any strike, work stoppages or interruption in
manufacturing could result in a failure to meet contractual obligations or in delays, including in our ability to manufacture and deliver products to our customers in
a timely manner, and could have a materially adverse effect on our relationships with our distributors and on our financial results.
If a union of our employees is formed in the future, we may enter into a collective bargaining agreement with our employees, which may increase our costs and
limit our managerial freedom, and if we are unable to reach a collective bargaining agreement, we may become subject to strikes and work stoppages, all of which
may materially and adversely affect our business.
The tax benefits that are available to us require us to continue to meet various conditions and may be terminated or reduced in the future, which could increase
our costs and taxes.
Some of our Israeli facilities have been granted “Approved Enterprise” status by the Israeli Authority for Investment and Development of the Industry and
Economy (“Investment Center”) or have the status of a “Beneficiary Enterprise” or “Preferred Enterprise” which provides us with investment grants (in respect of
certain Approved Enterprise programs) and makes us eligible for tax benefits under the Investment Law.
In order to remain eligible for the tax benefits of an “Approved Enterprise”, a “Beneficiary Enterprise” and/or a “Preferred Enterprise” we must continue to meet
certain conditions stipulated in the Investment Law and its regulations, as amended, and in certificates of approval issued by the Investment Center (in respect of
Approved Enterprise programs), which may include, among other things, selling more than 25% of our products to markets of over 14 million residents in 2012
(such export criteria will further be increased in the future by 1.4% per annum) in a specific tax year, making specified investments in fixed assets and equipment,
financing a percentage of those investments with our capital contributions, filing certain reports with the Investment Center, complying with provisions regarding
intellectual property and the criteria set forth in the specific certificate of approval issued by the Investment Center or the ITA. If we do not meet these
requirements, the tax benefits could be canceled and we could be required to refund any tax benefits and investment grants that we received in the past adjusted to
the Israeli consumer price index and interest, or other monetary penalties. Further, in the future, these tax benefits may be reduced or discontinued. If these tax
benefits are cancelled, our Israeli taxable income would be subject to regular Israeli corporate tax rates. The standard corporate tax rate for Israeli companies is
23% in 2018 and thereafter.
Effective as of January 1, 2011, the Investment Law was amended (“Amendment No. 68” or the “2011 Amendment”). Under Amendment No. 68, the criteria for
receiving tax benefits were revised. In the future, we may not be eligible to receive additional tax benefits under this law. The termination or reduction of these tax
benefits would increase our tax liability, which would reduce our profits. Additionally, if we increase our activities outside of Israel through acquisitions, for
example, our expanded activities might not be eligible to be included in future Israeli tax benefit programs. We may lose all our tax benefits in Israel in the event
that our manufacturing operations outside of Israel exceed certain production levels (currently set at 50% of the overall production and subject to future changes by
the ITA). We do not foresee such circumstances as probable in the coming years. Our current Preferred Enterprise tax rates between 2015 and 2017 were 16% for
the portion of our income related to the Sdot-Yam manufacturing facility and 9% for the portion of our income related to the Bar-Lev manufacturing facility. From
2018 onward, the tax rate for the portion of our income related to the Bar-Lev manufacturing facility was reduced to 7.5% and Sdot-Yam tax rate remains
unchanged.
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Historically, some portions of income were tax exempt, but that is no longer the case. In the event of a distribution of a dividend from the tax-exempt income
described above, we will be subject to tax at the corporate tax rate applicable to our Approved Enterprise’s and Beneficiary Enterprise’s income on the amount
distributed (grossed-up to reflect the pre-tax income that it would have had to earn in order to distribute the dividend) in accordance with the effective corporate tax
rate that would have been applied had we not relied on the exemption. In addition to the reduced tax rate, a distribution of income attributed to an “Approved
Enterprise” and a “Beneficiary Enterprise” will be subject to 15% withholding tax (or a reduced rate under an applicable double tax treaty, subject to the receipt in
advance of a valid certificate from the ITA allowing for a reduced tax rate). As for a “Preferred Enterprise,” dividends are generally subject to 20% withholding tax
from 2014 (or a reduced rate under an applicable double tax treaty, subject to the receipt in advance of a valid certificate from the ITA allowing for a reduced tax
rate). However, because we announced our election to apply the provisions of Amendment No. 68 prior to June 30, 2015, we will be entitled to distribute exempt
income generated by any Approved/Beneficiary Enterprise to our Israeli corporate shareholders tax free (See “ITEM 10.E: Additional Information—Taxation—
Israeli tax considerations and government programs—Law for the Encouragement of Capital Investments, 1959”).
The amendment to the Investment Law stipulated that investments in subsidiaries, including in the form of acquisitions of subsidiaries from an unrelated party, may
also be considered as a deemed dividend distribution event, increasing the risk of triggering a deemed dividend distribution event and potential tax exposure. The
ITA’s interpretation is that this provision applies retroactively to investments and acquisitions made prior to the amendment.
It may be difficult to enforce a U.S. judgment against us, our officers and directors in Israel or the United States, or to assert U.S. securities laws claims in
Israel or serve process on our officers and directors.
We are incorporated in Israel. Other than one director, none of our directors, or our independent registered public accounting firm, is a resident of the United States.
None of our executive officers is resident in the United States. The majority of our assets and the assets of these persons are located outside the United States.
Therefore, it may be difficult for an investor, or any other person or entity, to enforce a U.S. court judgment based upon the civil liability provisions of the U.S.
federal securities laws against us or any of these persons in a U.S. or Israeli court, or to effect service of process upon these persons in the United States.
Additionally, it may be difficult for an investor, or any other person or entity, to assert U.S. securities law claims in original actions instituted in Israel. Israeli
courts may refuse to hear a claim based on a violation of U.S. securities laws on the grounds that Israel is not the most appropriate forum in which to bring such a
claim. Even if an Israeli court agrees to hear a claim, it may determine that Israeli law and not U.S. law is applicable to the claim. If U.S. law is found to be
applicable, the content of applicable U.S. law must be proved as a fact, which can be a time-consuming and costly process. Certain matters of procedure will also
be governed by Israeli law. There is little binding case law in Israel addressing the matters described above.
Your rights and responsibilities as our shareholder will be governed by Israeli law which may differ in some respects from the rights and responsibilities of
shareholders of United States corporations.
Since we are incorporated under Israeli law, the rights and responsibilities of our shareholders are governed by our articles of association and Israeli law. These
rights and responsibilities differ in some respects from the rights and responsibilities of shareholders in U.S.-based corporations. In particular, a shareholder of an
Israeli company has a duty to act in good faith and in a customary manner in exercising its rights and performing its obligations towards the company and other
shareholders and to refrain from abusing its power in the company, including, among other things, in voting at the general meeting of shareholders on certain
matters, such as an amendment to the company’s articles of association, an increase of the company’s authorized share capital, a merger of the company and
approval of related party transactions that require shareholder approval. A shareholder also has a general duty to refrain from discriminating against other
shareholders. In addition, a controlling shareholder or a shareholder who knows that it possesses the power to determine the outcome of a shareholders’ vote or to
appoint or prevent the appointment of an office holder in the company or has another power with respect to the company, has a duty to act in fairness towards the
company. However, Israeli law does not define the substance of this duty of fairness. See “ITEM 6.C: Directors, Senior Management and Employees—Board
Practices— Board Practices—Fiduciary duties and approval of specified related party transactions under Israeli law—Duties of shareholders.” Additionally, the
parameters and implications of the provisions that govern shareholder behavior have not been clearly determined by the Israeli courts. These provisions may be
interpreted to impose additional obligations and liabilities on our shareholders that are not typically imposed on shareholders of United States corporations.
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Provisions of Israeli law may delay, prevent or make undesirable a merger transaction, or an acquisition of all or a significant portion of our shares.
Israeli corporate law regulates mergers by mandating certain procedures and voting requirements and requires that a tender offer be affected when more than a
specified percentage of shares in a company are purchased. Further, Israeli tax considerations may make potential transactions undesirable to us or to some of our
shareholders whose country of residence does not have a tax treaty with Israel granting tax relief to such shareholders from Israeli tax. With respect to mergers,
Israeli tax law allows for tax deferral in certain circumstances but makes the deferral contingent on the fulfillment of numerous conditions, including a holding
period of two years from the date of the transaction during which certain sales and dispositions of shares of the participating companies are restricted. Moreover,
with respect to certain share swap transactions, the tax deferral is limited in time, and when such time expires, the tax becomes payable even if no actual disposition
of the shares has occurred. See “ITEM 10.B: Additional Information—Memorandum and Articles of Association—Acquisitions under Israeli law.”
Under Israeli law, our two external directors have terms of office of three years. Our current external directors have been elected by our shareholders to serve for a
three-year term commencing December 1, 2020.
These provisions of Israeli law could have the effect of delaying or preventing a change in control and may make it more difficult for a third party to acquire us or
our shareholders to elect different individuals to our board of directors, even if doing so would be beneficial to our shareholders, and may limit the price that
investors may be willing to pay in the future for our ordinary shares.
If we are considered a “monopoly” under Israeli law, we could be subject to certain restrictions that may limit our ability to freely conduct our business to
which our competitors may not be subject.
Under the Israeli Economic Competition law (formerly, the Restrictive Trade Practices Law, 1988) (the “Israeli Competition Law”), a company that either
supplies more than 50% of any asset or service in Israel or, in some cases, in a specific geographical area in Israel, or holds market power in a relevant market, is
deemed to be a monopoly. The determination of monopoly status depends on an analysis of the relevant product or service market, but it does not require a positive
declaration, and the status is achieved by virtue of such market share threshold being crossed or the existence of market power.
Depending on the analysis and the definition of the relevant product market in which we operate, we may be deemed to be a “monopoly” under Israeli law. Under
the Israeli Competition Law, a monopoly is prohibited from participating in certain business practices, including unreasonably refusing to provide the relevant
product or service, or abuse of market power by means of discriminating between similar transactions or charging what are considered to be unfair prices, and from
engaging in certain other practices. The Israeli Competition Commissioner may determine that a company that is a monopoly has abused its position in the market
and may subsequently order such company to change its conduct in matters that may materially and adversely affect the public, including imposing business
restrictions on a company determined to be a monopoly and giving instructions with respect to the prices charged by the monopoly. If we are indeed deemed to be a
monopoly and the Commissioner finds that we have abused our position in the market by taking anticompetitive actions and using anti-competitive practices, such
as those described above, it would serve as prima facie evidence in private actions and class actions against us alleging that we have engaged in anti-competitive
behavior. Furthermore, the Commissioner may order us to take or refrain from taking certain actions, which could limit our ability to freely conduct our business.
Violations of the Israeli Competition Law can constitute a criminal offence, may lead to civil claims, administrative penalties and may expose a company to class
actions.
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Sales in Israel accounted for approximately 8.4% of our revenues in 2020. We have a significant market position in certain jurisdictions outside of Israel and cannot
assure you that we are not, or will not become, subject to the laws relating to the use of dominant product positions in particular countries, which laws could limit
our business practices and our ability to consummate acquisitions.
General Risk Factors
Disturbances to our operations or the operations of our suppliers, distributors, customers, consumers or other third parties could materially adversely affect
our business.
Our ability, and that of our suppliers, OEM suppliers, distributors, customers and other third parties, to develop, manufacture, transport, distribute, sell, install and
use our products is critical to our success. Damage or disruption to our or their operations could occur due to various factors, some of which cannot be foreseen,
including, among others, adverse weather conditions (including any potential effects of climate change) or natural disasters, such as a hurricane, tornado,
earthquake, wildfire or flooding; government action; economic or political uncertainties or instability; fire; terrorism; outbreak or escalation of armed hostilities;
safety warnings or recalls; health epidemics or pandemics or other contagious outbreaks, such as the ongoing COVID-19 pandemic discussed above; supply and
commodity shortages; unplanned delays or unexpected problems associated with repairs or enhancements of facilities in which such products are made,
manufactured, distributed or sold; loss or impairment of key manufacturing sites; cyber incidents, including the disruption or shutdown of computer systems or
other information technology systems at our offices, plants, warehouses, distribution centers or other facilities or those of our suppliers and other third parties;
industrial accidents or other occupational health and safety issues; telecommunications failures; power, fuel or water shortages; strikes, labor disputes or lack of
availability of qualified personnel; or other reasons beyond our control or the control of such third parties. Failure to take adequate steps to mitigate the likelihood
or potential impact of such events, or to effectively manage such events if they occur, could continue to result in adverse effects on our business, financial condition
or results of operations.
If we do not manage our inventory effectively, our results of operations could be materially adversely affected.
We must manage our inventory effectively in order to meet the demand for our products. If our forecasts for any Specific Stock Keeping unit (“SKU”) exceed
actual demand, we could experience excess inventory, resulting in increased logistic costs. If we ultimately determine that we have excess inventory, we may have
to reduce our prices and write-down inventory which could have an adverse effect on our business, financial condition and results of operations. If we have
insufficient inventory levels, we may not be able to respond to the market demand for our products, resulting in reduced sales and market share.
Changes in trade policy in the United States and other countries, the imposition of tariffs and the resulting consequences, may materially adversely impact our
business, results of operations and financial condition.
The U.S. government has indicated and demonstrated its intent to alter its approach to international trade policy through the renegotiation, and potential
termination, of certain existing bilateral or multi-lateral trade agreements and treaties with, and the imposition of tariffs on a wide range of products and other
goods from, a number of countries. It is currently unclear whether the recent change in administration could result in changes to the prior imposition of tariffs on
imports from China under the Trump Administration. Given the unpredictable nature of the U.S.-China relationship and its sizable impact on global economic
stability, our business and operating success may be materially adversely affected if recent normalization attempts by these two countries do not endure and
additional tariffs or other restrictions on free trade are imposed by either country. In addition, we have been and may continue to be affected by antidumping and
countervailing duty orders by the DOC and ITC that prevent Chinese, Indian and Turkish importers from selling quartz surface products at less than fair value in
the U.S. For more information, see “If we are unable to compete with lower-priced products perceived as comparable to ours, our market share may decrease, and
our financial results may be adversely and materially impacted.”
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Our limited resources and significant competition for business combination or acquisition opportunities may make it difficult for us to complete a combination
or acquisition, and any combination or acquisition that we complete may disrupt our business and fail to achieve our intended objectives.
We have in the past and intend to continue growing our business through a combination of organic growth and acquisitions. For more information, see “ITEM 4:
Information on the Company—History and Development of the Company—Our History.” While we believe there are a number of target businesses we might
consider acquiring, including, in certain instances, our distributors, manufacturers of quartz surfaces and other surfaces like ceramic, we may be unable to persuade
those targets of the benefits of a combination or acquisition. Our ability to compete with respect to a combination with or acquisition of certain larger target
businesses will be determined by, among other factors, our available financial resources. This inherent competitive limitation may give others an advantage in
pursuing such combinations or acquisitions.
Any combination or acquisition that we effect will be accompanied by several risks, including, but not limited to:
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the difficulty of integrating the operations and personnel of the acquired business;
the potential disruption of our ongoing business;
the potential distraction of management;
expenses related to the acquisition;
potential unknown liabilities associated with acquired businesses;
challenges integrating completed combinations or acquisitions in an efficient and timely manner; and
failure to realize the expected synergies or benefits in connection with a future combination or acquisition.
If we are not successful in completing combinations or acquisitions that we pursue in the future, we may incur substantial expenses and devote significant
management time and resources without a successful result. Acquisitions which may include the expansion of our business into new products, like ceramic, and
new applications, could distract the attention of management, impose high expenses and investments and expose our business to additional risks. Such acquisitions
carry further risks associated with the entry into new business lines in which we do not have prior experience, and there can be no assurance that any such business
expansion would be successful. In addition, future combinations or acquisitions could require the use of substantial portions of our available cash, incur significant
debt that could impact the way that we run our business, or result in dilutive issuances of securities. For more information, see “—Fully integrating Lioli’s and
Omicron’s businesses may be more difficult, costly and time-consuming than expected, which may adversely affect our results of operations and the value of our
common shares” and “—In addition to our traditional engineered quartz offering, we have commenced manufacturing of porcelain products and sales of porcelain,
natural stone and other materials, and may pursue a further expansion of our product offering, including introducing new products and materials, which may be
unsuccessful, and may divert management’s attention and negatively affect our margins and results of operations.” These factors could each adversely impact our
share price and, additionally, our share price may be adversely impacted if the market assesses that we overpaid for a particular acquisition.
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We depend on our senior management team and other skilled and experienced personnel to operate our business effectively, and the loss of any of these
individuals could materially and adversely affect our business and our future financial condition or results of operations.
We are dependent on the skills and experience of our senior management team and other skilled and experienced personnel. These individuals possess strategic,
managerial, sales, marketing, operational, manufacturing, logistical, financial and administrative skills that are important to the operation of our business. We have
experienced and may continue to experience employee and management turnover. Retention of institutional knowledge and the ability to attract and retain
personnel, as well as the ability to successfully onboard our senior management as a team comprised of several new members, are crucial for implementing our
business strategy, without which our business and our future financial condition or results of operations could suffer materially and adversely. We do not carry key
man insurance with respect to any of our executive officers or other employees. We cannot assure you that we will be able to retain all our existing senior
management personnel and key personnel or to attract additional qualified personnel when needed.
In addition, factors beyond our control may damage or disrupt the ability of our senior management or key employees to perform their critical roles in the
Company. In particular, the ongoing COVID-19 pandemic may affect the health and livelihood of our management and employees. The pandemic has led
governments in the jurisdictions in which we operate, including the location of our headquarters and manufacturing facilities, to implement reductions in onsite
workforce, travel restrictions and individual quarantines. Such limitations may lead to significant changes in the operations of our business, such as reduction in
number of shifts at our plants, reduced sales activity and lack of back office support, and materially adversely affect our business and financial condition. See also
“—The COVID-19 pandemic could further impact end-consumers and the global economy in general, lower demand for our products, disrupt our operations and
materially and adversely affect our business and financial results” and “—Disturbances to our operations or the operations of our suppliers, distributors, customers,
consumers or other third parties could materially adversely affect our business.”
ITEM 4: Information on the Company
A.
History and Development of the Company
Our History
Caesarstone Ltd. was founded in 1987 and incorporated in 1989 in the State of Israel. We are a leading manufacturer and reseller of high-end engineered surfaces
used primarily as countertops in residential and commercial buildings. We design, develop and produce engineered quartz and porcelain products that offer
aesthetic appeal and functionality through a distinct variety of colors, styles, textures, and finishes used in countertops, vanities, and other interior and exterior
surfaces.
Our products are currently sold in over 50 countries through a combination of direct sales in certain markets performed by our subsidiaries and indirectly through a
network of independent distributors in other markets. We acquired the businesses of our former Australian, Canadian, U.S. and Singaporean distributors, and
established such businesses within our own subsidiaries in such countries See Note 1 to our Consolidated Financial Statements for the year ended December 31,
2020 for further information regarding the acquisition of our Canadian subsidiary. In March 2012, we listed our shares on the Nasdaq Global Select Market. In
2017, we started selling our products in the U.K. directly through our U.K. subsidiary, Caesarstone (UK) Ltd. In December 2020, we acquired Omicron, a premier
stone supplier operating 17 locations across Florida, Ohio, Michigan and Louisiana. We now generate a substantial portion of our revenues in the United States,
Australia and Canada from direct distribution of our products. In addition, in October 2020, we acquired a majority stake in Lioli, an India-based producer of
porcelain slabs.
We are a company limited by shares organized under the laws of the State of Israel. We are registered with the Israeli Registrar of Companies in Jerusalem. Our
registration number is 51-143950-7. Our principal executive offices are located at Kibbutz Sdot-Yam, MP Menashe, 3780400, Israel, and our telephone number is
+972 (4) 610-9368. We have irrevocably appointed Caesarstone USA as our agent for service of process in any action against us in any United States federal or
state court. The address of Caesarstone USA is 1401 W. Morehead Street, Suite 100, Charlotte, NC, 28208. The SEC maintains an internet site at
http:/www.sec.gov that contains reports and other information regarding issues that file electronically with the SEC. Our securities filings, including this annual
report and the exhibits thereto, are available on the SEC’s website. For more information about us, our website is www.caesarstone.com. The information contained
in, or connected with, our SEC filings on the SEC internet site and our website shall not be deemed to be incorporated by reference in this annual report.
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Principal Capital Expenditures
Our capital expenditures for fiscal years 2020, 2019 and 2018 amounted to $19.8 million, $23.6 million and $21.0 million, respectively. The majority of our
investment activities have historically been related to the purchase of manufacturing equipment and components for our production lines. In 2014 and 2015, our
principal capital expenditures were attributed to the construction of the Richmond Hill manufacturing facility with two production lines in the United States. We
anticipate that our capital expenditures in 2021 will increase compared to the level of previous years as we are resuming our operational investments, which were to
some extent postponed due to the COVID-19 pandemic.
B.
Business Overview
The global countertop industry generated approximately $117 billion in sales to end consumers in 2020 based on average installed price, which includes
fabrication, installation and other service related costs, as per the following charts:
The majority of our sales are at the wholesale level to fabricators and distributors and exclude fabrication, installation and other service related costs.
We are a leading manufacturer and reseller of high-end engineered surfaces used primarily as countertops in residential and commercial settings. We design,
develop produce and source engineered quartz and porcelain products that offer aesthetic appeal and functionality through a distinct variety of colors, styles,
textures, and finishes used in countertops, vanities, and other interior and exterior surfaces. Engineered quartz is a growing category in the countertop market and
continues to take market share from other materials, such as granite, manufactured solid surfaces and laminate. Between 1999 and 2020, global engineered quartz
sales to end-consumers grew at a compound annual growth rate of 16.6% compared to a 5.0% compound annual growth rate in total global countertop sales to end-
consumers during the same period. Following the Lioli Acquisition, we intend to commence marketing and sales of porcelain countertops under our Caesarstone
brand. Porcelain represents one of the fastest growing categories in the global countertop market. and between 2014 and 2020, the porcelain sales to end-consumers
grew at a compound annual growth rate of 14.9%.
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In recent years, quartz penetration rate, by volume, other than in Israel, increased in our key markets, as detailed in the following chart:
Quartz penetration in our key markets
Region
United States
Australia (not including New Zealand)
Canada
Israel (*)
2020
For the year ended December 31,
2014
2012
2016
2010
20%
47%
28%
67%
14%
45%
24%
87%
8%
39%
18%
86%
6%
35%
12%
85%
5%
32%
9%
82%
(*) In Israel the quartz lost market share mainly to porcelain which increased its share in the market from a de-minimis rate in 2016 to 22% in 2020.
Our products consist primarily of engineered quartz and porcelain slabs that are currently sold in over 50 countries through a combination of direct sales in certain
markets and indirectly through a network of independent distributors in other markets. Our products are primarily used as kitchen countertops in the renovation and
remodeling and residential construction end markets. Other applications for our products include vanity tops, back splashes, furniture, and other interior and
exterior surfaces that are used in a variety of residential and non-residential applications. High quality engineered quartz offers hardness, non-porous
characteristics, superior scratch, stains and heat resistance levels, making it durable and ideal for kitchen and other applications relative to competing products such
as granite, manufactured solid surfaces and laminate. Porcelain is characterized by durability and stain resistance, as well as extreme heat and UV resistance.
Through our design and manufacturing processes we can offer a wide variety of colors, styles, designs and textures.
From 2010 to 2020, our revenue grew at a compound annual growth rate of 8.5%. From 2019 to 2020, our revenue declined at an annual rate of 10.9%. In 2020, we
generated revenue of $486.4 million, net income attributable to controlling interest of $7.2 million, adjusted EBITDA of $62.1 million and adjusted net income
attributable to controlling interest of $16.5 million. Adjusted EBITDA and adjusted net income attributable to controlling interest are non-GAAP financial
measures. See “ITEM 3.A: Key Information—Selected Financial Data” for a description of how we define adjusted EBITDA and adjusted net income attributable
to controlling interest and reconciliations of net income to adjusted EBITDA and net income attributable to controlling interest to adjusted net income attributable
to controlling interest.
Our Products
Our engineered quartz products are generally marketed under the Caesarstone brand. Currently, our porcelain products manufactured in India are marketed under
the existing Lioli brand mainly flooring and cladding applications. We intend to move to more high-end porcelain offering, primarily focusing on countertops, and
commence marketing and sales of such products under our Caesarstone brand. The majority of our products are installed as countertops in residential kitchens.
Other applications of our products include vanity tops, back splashes and exterior surfaces. Our standard size engineered quartz slabs measure 120 inches long by
56 1/2 inches wide, and 131 1/2 inches long by 64 1/2 inches wide for the jumbo slabs, with a thickness of 1/2 of an inch, 3/4 of an inch or 1 1/4 inches, and 3/4 of
an inch or 1 1/4 inches for the jumbo slabs. On average engineered quartz surfaces are typically comprised of approximately 85% quartz and approximately 15%
polyester and pigments. Our engineered quartz products’ composition gives them superior strength and resistance levels to heat impact, scratches, cracks and chips.
Polyester, which acts as a binding agent in our engineered quartz products, make such products non-porous and highly resistant to stains. Pigments act as a dyeing
agent to vary our products’ colors and patterns. Our standard size porcelain slabs measure 126 inches long by 63 inches wide, 94 inches long by 47 inches wide and
47 inches by 47 inches mm, with a thickness of 1/2 inches, 1/3 inches and 1/4 inches, in matt and polished finishes. Porcelain surfaces are typically comprised of
clay minerals, natural minerals and chemical additives, and offer non-porous characteristics as well as scratch and heat resistance.
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We design our products with a wide range of colors, finishes, textures, thicknesses and physical properties, which help us meet the different functional and
aesthetic demands of end-consumers. Our designs range from fine-grained patterns to coarse-grained color blends with a variegated visual texture. Through
offering new designs, we capitalize on Caesarstone’s brand name and foster our position as a leading innovator in the engineered quartz surface industry.
Our product offerings consist of four collections (after the discontinuation of the Concetto product line), each of which is designed to have a distinct aesthetic
appeal. We use a multi-tiered pricing model across our products and within each product collection ranging from lower price points to higher price points. Each
product collection is designed, branded and marketed with the goal of reinforcing our products’ premium quality.
We introduced our original product collection, Classico, in 1987, and today, this collection still generates more revenue than our other collections. Launched in
2012, our Supernatural collection, which is marketed as specialty high-end, offers designs inspired by natural stone and which are manufactured using proprietary
technology. In 2018, we launched our new Metropolitan collection, inspired by the rough and unpolished textures found in industrial architecture. In 2020, we
introduced our Outdoor collection, an innovative product category, which comprises stain resistant, easy-to-clean surfaces, made of a highly durable material,
proven to withstand UV-rays and the most extreme environmental conditions over a long term, intended for use in outdoor cooking spaces.
We regularly introduce new colors and designs to our product collections based on consumer trends. We offer over 70 different colors, with five textures and three
thicknesses generally available for each collection. Each year we typically introduce between four to eight new colors and models.
In 2018, we began to offer porcelain slabs sourced through OEMs in Israel and following the Lioli Acquisition, we intend to increase our porcelain offering.
In addition, following the Omicron Acquisition, we now offer to our customers in the United States resale of natural stone, as well as fabrication and installation
accessories.
A key focus of our product development is a commitment to substantiating our claim of our products’ superior quality, strength and durability. Our products
undergo regular tests for durability and strength internally by our laboratory operations group and by external accreditation organizations. Products in our portfolio
are accredited by organizations overseeing safety and environment performance, such as the NSF International and GREENGUARD Indoor Air Quality. Generally,
our products support green building projects and allow contractors to receive Leadership in Energy and Design (“LEED”) points for projects incorporating our
products.
Distribution
Our four largest markets based on sales are currently the United States, Australia (including New Zealand), Canada and Israel. In 2020, sales of our products in
these markets accounted for 42.7%, 21.3%, 14.9% and 8.4% of our revenues, respectively. Total sales in these markets accounted for 87.3% of our revenues in
2020. For a breakdown of revenues by geographic market for the last three fiscal years, see “ITEM 5.A: Operating Results and Financial Review and Prospects—
Operating Results.”
Direct Markets
We currently have direct sales channels in the United States, Australia, Canada, Israel, the United Kingdom (“U.K.”) and Singapore. Our direct sales channels
allow us to maintain greater control over the entire sales channel within a market. As a result, we gain greater insight into market trends, receive feedback more
readily from end-consumers, fabricators, architects and designers regarding new developments in tastes and preferences, and have greater control over inventory
management. Our subsidiaries’ warehouses in each of these countries maintain inventories of our products and are connected to each subsidiary’s sales department.
We supply our products primarily to fabricators, who in turn resell them to contractors, developers, builders and consumers, who are generally advised by architects
and designers. In certain market channels in the U.S. and Canada, such as IKEA, we also provide, together with our products, fabrication and installation services,
which we source from third party fabricators. We believe that our supply of a fabricated and installed Caesarstone countertop is a competitive advantage in such
channels, which enables us to better control our products’ prices as well as to promote a full solution to our customers.
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In Israel, where our headquarters are located, we distribute our products directly to several local distributors who in turn sell them to fabricators. This arrangement
reduces our financial exposure and simplifies our logistics in the Israeli market. Although we sell our products to distributors in this market, we consider this a
direct market due to the warranty we provide to end-consumers, as well as our fabricator technical and health and safety instruction programs and our local sales
and marketing activities. In the United States, Australia, Canada, the United Kingdom, and Singapore we have established direct distribution channels with
distribution locations in major urban centers complemented by arrangements with various third parties, sub-distributors or stone suppliers in certain areas of the
United States.
Since 2013 and 2014, we have provided quartz countertops to IKEA customers in the United States and Canada, respectively, which we fabricate and install
through third parties. Such countertops are then marketed by IKEA not under our brand name. We have engaged several third-party fabricators to provide us with
the fabrication and installation services designated for IKEA customers. Since the fourth quarter of 2019 we have provided quartz countertops to Home Depot
customers in the United States, under the Caesarstone brand name, whereas the fabrication and installation services are managed by Home Depot.
Indirect Markets
We distribute our products in other territories in which we do not have a direct sales channel through third-party distributors, who generally distribute our products
to fabricators on an exclusive or non-exclusive basis in a specific country or region. Fabricators sell our products to contractors, developers, builders and
consumers. In some cases, our distributors operate their own fabrication facilities. Additionally, our distributors may sell to sub-distributors located within the
territory who in turn sell to fabricators.
In most cases, we engage one or more distributors to serve a country or territory. Today, we sell our products in over 45 countries through third-party distributors,
and over 50 countries in total. Sales to third-party distributors accounted for approximately 10% of our revenues in 2020. This strategy often allows us to accelerate
our penetration into multiple new markets. Our distributors typically have prior stone surface experience and close relationships with fabricators, builders and
contractors within their respective territory.
We work closely with our distributors to assist them in preparing and executing a marketing strategy and comprehensive business plan. Ultimately, however, our
distributors are responsible for the sales and marketing of our products and providing technical support to their customers within their respective territories. To
assist some of our distributors in the promotion of our brand in these markets, we provide marketing materials and in certain cases, monetary participation in
marketing activities. Our distributors devote significant effort and resources to generating and maintaining demand for our products along all levels of the product
supply chain in their territory. To this end, distributors use our marketing products and strategies to develop relationships with local builders, contractors,
developers, architects and designers. Certain distributors, as well as sub-distributors, do not engage in brand promotion activities and their activities are limited to
sales promotion, warehousing and distributing to fabricators or other customers.
We do not control the pricing terms of our distributors’ or sub-distributors’ sales to customers. As a result, prices for our products may vary.
Sales and Marketing
Sales
We manufacture or source our products based upon our rolling projections of the demand for our products.
Since 2019, we have operated under a regional structure which consists of North America, APAC, EMEA and Israel. Under this structure, each region manages the
direct distribution channels and focuses on penetrating new markets within its territory, as well as further develops its key growth indirect sales markets.
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We believe our products still have significant growth opportunities in the United States, Canada and Europe. For information on sales trends in the markets in
which we operate, see “ITEM 5: Operating and Financial Review and Prospects—Components of statement of income”. In 2016, we established a direct sales
channel in the United Kingdom and starting in January 2017 we have been selling and distributing our products in the U.K. directly through our U.K. subsidiary. In
December 2020, we acquired Omicron, a premier stone supplier servicing the Florida, Ohio, Michigan and Louisiana markets in the U.S. We intend to continue to
invest resources to further strengthen and increase our penetration in our existing markets. We are also exploring alternative sales channels and methodologies to
further enhance our presence in each market.
Marketing
We position our engineered quartz, porcelain and natural stone surfaces as premium branded products in terms of their designs, quality and pricing. Through our
marketing, we seek to convey our products’ ability to elevate the overall quality of an entire kitchen or other setting. Our marketing strategy is to deliver this
message every time our end-consumers, customers, fabricators, architects and designers meet our brand. We also aim to communicate our position as a design-
oriented global leader in engineered surfaces innovation and technology.
The goal of our marketing activities is to drive marketing and sales efforts across the regions, while creating demand for our products from end-consumers,
fabricators, contractors, architects and designers, which we refer to as a “push-and-pull demand strategy.” We combine both pushing our products through all levels
of the product supply chain while generating demand from end-consumers as a complementary strategy.
We implement a multi-channel marketing strategy in each of our territories and market not only to our direct customers, but to the entire product supply chain,
including fabricators, developers, contractors, kitchen retailers, builders, architects and designers. We use multiple marketing channels, including advertisements in
home interior magazines and websites, the placement of our display stands and sample books in kitchen retails stores and our company website. We share
knowledge with fabricators about our products and their capabilities, installation methods and safety requirements through manuals and seminars. In addition, as of
2019 we are operating our “Master of Stone” program, which includes an online training center, aimed at helping us communicate with our fabricators on the topics
of Health & Safety, professional know-how and added value content for fabrication plant managers and making safety and professional working guidelines
accessible to our fabricators worldwide.
Our marketing materials are developed by our global marketing department in Israel and are used globally. In 2020, we spent $14.5 million on direct advertising
and promotional activities.
Our websites are a key part of our marketing strategy enabling us to create data-driven personal relationship, on and off site, in order to increase engagement and
conversion to sale. Our websites enable our business partners, customers and end-consumers to view currently available designs, photo galleries of installations of
our products in a wide range of settings, instructions with respect to the correct usage of our products and offer an innovative cutting-edge experience with rich
content and interactive tools to empower and guide consumers at any stage of their renovation journey. We also conduct marketing activity in the social media
arena mainly to increase our brand awareness among end-consumers, architects and designers.
During 2020, we opened a new Israeli showroom named “Caesarstone Concept House” where we introduced innovative technology-driven consumer experience.
We also seek to increase awareness of our brand and products through a range of other methods, such as home design shows, design competitions, media
campaigns and through our products’ use in high profile projects and iconic buildings. In recent years, we have collaborated with renowned designers, who created
exhibitions and particles from our products. Our design initiatives attracted press coverage around the world.
Research and Development
Our research and development (“R&D”) department is located in Israel. As of December 31, 2020, our R&D department was comprised of 17 employees, all of
whom have extensive experience in engineered quartz surface manufacturing, polymer science, engineering, product design and engineered quartz surface
applications. In 2020, R&D costs accounted for approximately 0.8% of our revenues.
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The strategic mission of our R&D team is to develop and maintain innovative and leading technologies and top-quality designs, develop new and innovative
products according to our marketing department’s roadmap, increase the cost-effectiveness of our manufacturing processes and raw materials, and generate and
protect company intellectual property in order to enhance our position in the engineered quartz surface industry. We also study and evaluate consumer trends by
attending industry exhibitions and hosting international design workshops with market and design specialists from various regions.
Customer Service
We believe that our ability to provide outstanding customer service is a strong competitive differentiator. Our relationships with our customers are established and
maintained through the coordinated efforts of our sales, marketing, production and customer service personnel. In our direct markets, the warranty period varies.
We provide end-consumers with limited lifetime warranties in the United States, Canada and Israel and a ten-year limited warranty in Australia. In our indirect
markets, end-consumers, warranty issues on our products are addressed by our local distributor. We provide all our distributors a limited direct manufacturing
defect warranty and our distributors are responsible for providing warranty coverage to end-customers. The warranties provided by our distributors vary in term. In
our direct markets, following an end-consumer call, our technicians are sent to the product site within a short time. We provide readily accessible resources and
tools regarding the fabrication, installation, care and maintenance of our products. We believe our comprehensive global customer service capabilities and the
sharing of our service-related know-how differentiate our company from our competitors.
Raw Materials and Service Provider Relationships
Quartz, polyester and pigment are the primary raw materials used in the production of our engineered quarts products. We acquire raw materials from third-party
suppliers. Suppliers ship raw materials for our engineered quartz products to our manufacturing facilities in Israel and the U.S. primarily by sea. Our raw materials
are generally inspected at the suppliers’ facilities and upon arrival at our manufacturing facilities in Israel and the U.S. The cost of our raw materials consists of the
purchase prices of such materials and costs related to the logistics of delivering the materials to our manufacturing facilities. Our raw materials costs are also
impacted by changes in foreign currency exchange rates.
Quartz is the main raw material component used in our engineered quartz products. Raw quartz must be processed into finer grades of sand and powder before we
use it in our manufacturing process. We purchase quartz from our quartz suppliers after it was already processed by them. We acquire quartz from suppliers
primarily in Turkey, Belgium, India, Portugal, the U.S. and Israel. In 2020, approximately 67% of our quartz, including mainly quartzite, which is used across all of
our engineered quartz products was imported from several suppliers in Turkey, out of which approximately 35% (23% of our total quartz) was acquired from each
of Mikroman Madencilik San ve TIC.LTD.STI (“Mikroman”) and Polat Maden Sanayi ve Ticaret A.S (“Polat”). Our current supply arrangements with Polat and
Mikroman for 2021 are set forth in letter agreements.
Similar to our arrangements with Mikroman and Polat described above, we typically transact business with our quartz suppliers on an annual framework basis,
under which we execute purchase orders from time to time. Quartz imported from Turkey, Europe and Israel for our U.S. manufacturing facility entails higher
transportation costs.
In most cases, we acquire polyester from several suppliers, on an annual framework basis or purchase order basis based on our projected needs for the subsequent
one to three months. Typically suppliers are unwilling to agree to preset prices for periods longer than a quarter and suppliers’ prices may vary during a quarter as
well.
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Pigments for our engineered quartz production in Israel are purchased from Israel and suppliers abroad. Pigments for our U.S. engineered quartz production are
primarily purchased from U.S. vendors.
The principal raw materials for our porcelain products are clay minerals (such as Ukraine clay, bentonite), natural minerals (such as feldspar) and chemical
additives. While we acquire feldspar locally from Indian suppliers, Ukraine clay and bentonite are imported from the relevant regions. We typically transact
business with our suppliers of raw materials for porcelain products on an annual framework basis, under which we execute purchase orders from time to time.
Our strategy is to maintain, whenever practicable, multiple sources for the purchase of our raw materials to achieve competitive pricing, provide flexibility and
protect against supply disruption.
See “ITEM 3.D. Key Information—Risk Factors—We may encounter significant delays in manufacturing if we are required to change the suppliers for the raw
materials used in the production of our products.” For our cost of raw materials in 2020 and prior years, see “ITEM 5.A: Operating Results and Financial Review
and Prospects—Operating Results—Cost of revenues and gross profit margin.”
Manufacturing and Facilities
Our products are manufactured at our four manufacturing facilities located in Kibbutz Sdot-Yam in central Israel, Bar-Lev Industrial Park in northern Israel,
Richmond Hill, Georgia in the U.S. and, following the Lioli Acquisition, in Morbi, Gujarat in India. Our Sdot-Yam facility includes our first two production lines.
We completed our Bar-Lev manufacturing facility in 2005, which included our third production line, and we established our fourth production line at this facility in
2007 and our fifth production line at this facility in 2013. We completed our U.S. manufacturing facility in 2015, where we began to operate our sixth production
line in the second quarter of 2015 and our seventh line in the fourth quarter of 2015. In addition to a $135 million as an initial investment, we have the option to
further invest and expand in Richmond Hill to accommodate additional manufacturing capacity in the future as needed to satisfy potential demand. During 2020, in
response to the pandemic impact on our business we reduced the utilization of our production facilities in Israel and the U.S. to the expected demand for our
products. As part of the Lioli Acquisition, in 2020 we acquired a porcelain slab manufacturing facility, which is comprised of one production line currently in
operation.
Finished slabs are shipped from our facilities in Israel and the U.S. to our distribution centers worldwide, directly to customers and to third-party distributors
worldwide. Finished porcelain slabs manufactured at our Morbi facility are distributed via third-party distributors and are shipped from India worldwide. For
further discussion of our facilities, see “ITEM 4.D: Information on the Company—Property, plants, and equipment.”
The manufacturing process for our engineered quartz products typically involves blending, on average, of approximately 85% quartz with approximately 15%
polyester and pigments. Using machinery acquired primarily from Breton, the leading supplier of engineered stone manufacturing equipment, together with our
proprietary manufacturing enhancements, this mixture is compacted into slabs by a vacuum and vibration process. The slabs are then moved to a curing kiln where
the cross-linking of the polyester is completed. Lastly, the slabs are gauged, calibrated and polished to enhance shine.
The manufacturing process for our porcelain products typically involves blending of clay, natural minerals (such as feldspar) and chemical additives required for
the shaping process. The multi-ingredient mixture is fed to a ball mill, together with water, to achieve fine grinding. The excess water is then removed, and the
resulting powder is shaped into slabs. Slabs are first moved to dryers and then passed through a glaze line, where they are decorated with different applicators.
Decorated slabs are passed through digital printing machines and then go into a curing kiln for final firing process. Lastly, the slabs are gauged, calibrated and
polished to enhance shine.
We maintain strict quality control and safety standards for our products and manufacturing process. Our manufacturing facilities have several safety certifications
from third-party organizations, including an OHSAS 18001 safety certification from the International Quality Network for superior manufacturing safety
operations.
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In addition, since 2018 we have increased our outsourcing capabilities and currently purchase a certain portion of our engineered quartz slabs from third-party
quartz manufacturers that meet our specifications. We conduct quality control and quality assurance processes with respect to such outsourcing of our products. In
2020, OEMs products accounted for approximately 15% of our total sales by volume of slabs and approximately 10% of revenues, and we are aiming to increase
purchases from OEMs in 2021. For more information, see ITEM 3: Key Information - Operational Risks.
Seasonality
For a discussion of seasonality, please refer to “ITEM 5.A: Operating and Financial Review and Prospects—Operating Results—Factors impacting our results of
operations” and “ITEM 5.A: Operating and Financial Review and Prospects—Operating Results—Quarterly results of operations and seasonality.”
Competition
We believe that we compete principally based upon product quality, breadth of colors and designs offering and innovation, brand awareness and position, pricing
and customer service. We believe that we differentiate ourselves from competitors on the basis of our premium brand, our signature product designs, our products
and designs innovation, our ability to offer directly our products in major markets globally, our focus on the quality of our product offerings, our customer service-
oriented culture, our high involvement in the product supply chain and our leading distribution partners.
The dominant surface materials used by end-consumers in each market vary. Our engineered quartz and porcelain products compete with a number of other surface
materials such as granite, laminate, marble, manufactured solid surface, concrete, stainless steel and wood. The manufacturers of these products consist of a number
of regional and global competitors. Some of our competitors may have greater resources than we have, and may adapt to changes in consumer preferences and
demand more quickly, expand their materials offering, devote greater resources to design innovation and establishing brand recognition, manufacture more
versatile slab sizes and implement processes to lower costs.
The engineered quartz and porcelain surface market is highly fragmented and is also served by a number of regional and global competitors. We also face growing
competition from low-cost manufacturers from Asia, especially from China, and from Europe. Large multinational companies have also invested in their
engineered quartz and porcelain surface production capabilities. For more information, see “ITEM 3.D. Key Information—Risk Factors—We face intense
competitive pressures from manufacturers of other surface materials, which could materially and adversely affect our results of operations and financial condition”
and “ITEM 3.D. Key Information—Risk Factors—Competition from manufacturers of lower priced products may reduce our market share, alter consumer
preferences and materially and adversely affect our results of operations and financial condition”.
Information Technology Systems
We believe that an appropriate information technology infrastructure is important in order to support our daily operations and the growth of our business.
We implemented various IT systems to support our business and operations. Our Enterprise Resource Planning (“ERP”) software provides us with accessible
quality data that support our forecasting, planning and reporting. Accurate planning is important in order to support sales and optimize working capital and cost as
our products can be built in a number of combinations of sizes, colors, textures and finishes. Given our global expansion, we implemented a global ERP based on
an Oracle platform. Our MES systems manage work processes on the production floor in our facilities and Salesforce enhances our Customer Relationship
Management (“CRM”) infrastructure.
We are implementing a digital transformation within our organization to better streamline processes and support our business strategy. We continued investing in
our digital transformation projects for better consumer engagement and customer experience. Our technological and digital investments will be geared towards
operational enhancements in inventory management and production, along with transforming our go-to-market tools. We seek to update our IT infrastructure to
enhance our ability to prevent and respond to cyber threats and conduct training for our employees in this respect. For further details, see “ITEM 3.D. Key
Information—Risk Factors—Disruptions to or our failure to upgrade and adjust our information technology systems globally, may materially impair our operations,
hinder our growth and materially and adversely affect our business and results of operations.”
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Intellectual Property
Our Caesarstone brand is central to our business strategy, and we believe that maintaining and enhancing the Caesarstone brand is critical to expanding our
business.
We have obtained trademark registrations in certain jurisdictions that we consider material to the marketing of our products, including CAESARSTONE® and our
Caesarstone logo. We have obtained trademark registrations for additional marks that we use to identify certain product collections, as well as other marks used for
certain of our products. While we expect our current and future applications to mature into registrations, we cannot be certain that we will obtain such registrations.
In many of our markets we also have trademarks, including registered and unregistered marks, on the colors and models of our products. We believe that our
trademarks are important to our brand, success and competitive position. In order to mitigate the risk of infringement, we conduct an ongoing review process before
applying for registration. However, we cannot be certain that third parties will not oppose our application or that the application will not be rejected in whole or in
part. In the past, some of our trademark applications for certain classes of our products’ applications have been rejected or opposed in certain markets and may be
rejected for certain classes in the future, in all or parts of our markets, including without limitation, for flooring and wall cladding. We are currently subject to
opposition proceedings with respect to applications for registration of our trademark Caesarstone in certain jurisdictions.
To protect our know-how and trade secrets, we customarily require our employees and managers to execute confidentiality agreements or otherwise agree to keep
our proprietary information confidential. Typically, our employment contracts also include clauses requiring these employees to assign to us all inventions and
intellectual property rights they develop in the course of their employment and agree not to disclose our confidential information. We limit access to our trade
secrets and implement certain protections to allow our know-how and trade secret to remain confidential.
In addition to confidentiality agreements, we seek patent protection for some of our latest technologies. We have obtained patents for certain of our technologies
and have pending patent applications that were filed in various jurisdictions, including the United States, Europe, Australia, Canada, China and Israel, which relate
to our manufacturing technology and certain products. No patent application of ours is material to the overall conduct of our business. There can be no assurance
that pending applications will be approved in a timely manner or at all, or that such patents will effectively protect our intellectual property. There can be no
assurance that we will develop patentable intellectual property in the future, and we have chosen and may further choose not to pursue patents for innovations that
are material to our business.
Environmental and Other Regulatory Matters
Environmental and Health and Safety Regulations
Our manufacturing facilities and operations in Israel, our manufacturing facility in Georgia, United States and our manufacturing facility in Gujarat, India are
subject to numerous Israeli, U.S. and Indian environmental and workers’ health and safety laws and regulations, respectively, and our supply chain operations are
subject to applicable local laws and regulations. For instance, applicable U.S. laws and regulations include federal, state and local laws and regulations, including
Georgia state laws. Laws and regulations in the U.S. and other countries govern, among other things, exposure to pollutants, protection of the environment; setting
standards for emissions; generation, treatment, import, purchase, use, storage, handling, disposal and transport of hazardous wastes, chemicals and materials,
including sludge; discharges or releases of hazardous materials into the environment, soil or water; permissible exposure levels to hazardous materials; product
specifications; nuisance prevention; soil, water or other contamination from hazardous materials and remediation requirements arising therefrom; and protection of
workers’ health and safety.
46
In addition to being subject to regulatory and legal requirements, our manufacturing facilities in Israel, the United States and India operate under applicable
permits, licenses and approvals with terms and conditions containing a significant number of prescriptive limits and performance standards. Business licenses for
our facilities in Israel contain conditions related to a number of requirements, including with respect to dust emissions, air quality, the disposal of effluents and
process sludge, and the handling of waste, chemicals and hazardous materials. Subject to certain terms, the business license for our Sdot-Yam plant is in effect until
December 31, 2025. The business license for our Bar-Lev plant is in effect until May 31, 2021, and the Company is in process of its extension. The business license
for our U.S. facility is renewed every year subject to a fee paid to the city and county. Our site in India has a Factory License which is a basic license issued by the
Inspectorate of Factories, which is in effect until December 31, 2023. The site in India has also obtained a Consent to Operate (the “CTO”) from the State Pollution
Control Board, which is a permit issued to any factory in India with all the compliance requirements related to environmental aspects, such as air emission, water
and wastewater management, waste management. The CTO is valid until September 28, 2023. We operate in Israel under poison permits that regulate our use of
poisons and hazardous materials. Our current poison permits are valid until January 2022 for our Bar-Lev facility and February 2022 for our Sdot-Yam facility. In
addition, we dispose of wastewater from our Israeli manufacturing facilities to a treatment plant pursuant to permits obtained from the Israeli Ministry of
Environmental Protection (“IMEP”), which are effective until December 31, 2022. Our facility in the United States is required to obtain and follow a General
Permit for Storm Water Discharges Associated with Industrial Activity of the Georgia Environmental Protection Division (“GEPD”), an air quality permit from
GEPD and other requirements and regulations including among others specific limitations on emission levels of hazardous substances, such as styrene, specific
limitations on RCS levels inside our plant, allowable wastewater discharge limits, oil spill prevention rule, hazardous waste handling requirements and fire
protection measures requirements. Our site in India is required to comply with all applicable conditions, including with respect to water consumption, wastewater
discharge, air emission monitoring and pollution control devices, hazardous wastes storage and disposal, specified in the CTO. In all our manufacturing facilities,
we are implementing measures on an ongoing basis in order to achieve and maintain compliance with dust and styrene environmental and occupational emissions
standards and to reduce such emissions to minimum thresholds.
Each of these permits, licenses and standards require a significant amount of monitoring, record-keeping and reporting in order for us to demonstrate compliance
therewith. Our recently purchased plant in India is relatively new, thus still in the process of obtaining all required permits and licenses, as well as making the
required adjustments in order to comply with local regulations and the terms of relevant permits and licenses, including issues of groundwater abstraction and water
consumption, gas use, diesel generator capacity use and emission standards.
Official representatives of the health and safety and environment authorities in Israel, the States of Georgia and Gujarat visit our facilities from time to time, to
inspect issues such as workplace safety, industrial hygiene, monitoring lockout tag out programs, exposure and emissions, water treatment, noise and others. Such
inspections may result in citations, penalties, revocation of our business license or limitation or shut down of our facilities’ operations. It may also require us to
make further investments in our facilities.
From time to time, we face environmental and health and safety compliance issues related to our manufacturing facilities
•
Emissions - Israel. In December 2019, the IMEP issued the additional terms to the business license for our Bar-Lev facility, which require among
others, performing a constant monitoring of styrene emission. Accordingly, an online styrene emission monitoring system was installed at our Bar-
Lev facility during September 2020. We are in the process of implementing all other terms. Similarly, in June 2019 we received from the IMEP a
draft of the additional terms to the business license for our Sdot-Yam facility, which required, among others, implementation of a constant monitoring
of styrene emission. The IMEP agreed to postpone performing a constant monitoring of styrene emission to May 2021 and some of the terms, such as
pump & valves, to October 2021. We are in the process of implementing such requirements, and the IMEP is closely monitoring out emissions,
specifically of styrene.
47
• Dust emissions and exposure. The Israeli Ministry of Labor, Social Affairs and Social Services (“IMLSS”) conducts an annual audit of our plants, in
which, among other things, it examines if there were any deviations from permitted ambient levels of RCS, styrene and acetone in the plants. We
seek, on an ongoing basis, to continue reducing the level of exposure of our employees to RCS, styrene and acetone, while enforcing our employees’
use of personal protection equipment.
•
Safety. In October 2020, representatives of the U.S. Occupational Safety and Health Administration (“OSHA”) inspected our U.S. plant in response
to the incident occurring on September 15, 2020 in which an employee’s foot was slightly injured while working. The inspection resulted in a citation
and notification of penalty in the amount of $0.1 million due to alleged violations of certain safety standards. We participated in an informal
conference with OSHA’s representatives in order to reach a settlement, and currently await of approval of such settlement. In the interim, we filed a
notice of contest to the citations and penalties, in which we denied the existence of any violations and contested the amount of penalties.
Violations of environmental, health and safety laws, regulations, standards and permit conditions may lead to, among other things, civil and criminal sanctions,
injunctive orders as well as permit revocations and facility shutdowns as further described in “ITEM 3.D: Key Information—Risk Factors—Environmental, health
and safety regulations, product liability regulations, industry standards and other similar matters may be costly, difficult or impossible to comply with under our
existing operations, and could negatively impact our financial condition and results of operations”.
Other Regulations
We are subject to the Israeli Rest Law, which, among other things, prohibits the employment of Jewish employees on Saturdays and Jewish holidays, unless a
permit is obtained from the IMEI. We received a permit from the IMEI to employ Jewish employees on Saturdays and Jewish holidays in connection with most of
the production machinery in our Sdot-Yam facility, effective until December 31, 2022.
If we are deemed to be in violation of the Rest Law, we may be required to halt operations of our manufacturing facilities on Saturdays and Jewish holidays, we
and our officers may be exposed to administrative and criminal liabilities, including fines, and our operational and financial results could be materially and
adversely impacted. For more information, see “Item 3.D. Risk Factors—Risks relating to our incorporation and location in Israel—If we fail to comply with Israeli
law restrictions concerning employment of Jewish employees on Saturdays and Jewish holidays, we and our office holders may be exposed to administrative and
criminal liabilities and our operational and financial results may be materially and adversely impacted.”
For information on other regulations applicable, or potentially applicable, to us, see the following risks factors in “ITEM 3.D. Key Information—Risk Factors”:
•
•
•
•
“Risks related to our business and industry—We may have exposure to greater-than-anticipated tax liabilities.”
“Risks related to our incorporation and location in Israel— Conditions in Israel could materially and adversely affect our business.”
“Risks related to our incorporation and location in Israel—The tax benefits that are available to us require us to continue to meet various conditions and
may be terminated or reduced in the future, which could increase our costs and taxes.”
“Risks related to our incorporation and location in Israel—If we are considered a ‘monopoly’ under Israeli law, we could be subject to certain restrictions
that may limit our ability to freely conduct our business to which our competitors may not be subject.
48
Legal Proceedings
See “ITEM 8.A: Financial Information—Consolidated Financial Statements and Other Financial Information—Legal Proceedings.”
C.
Organizational Structure
The legal name of our company is Caesarstone Ltd. On June 9, 2016, the Israeli Register of Companies approved to change our name from Caesarstone Sdot-Yam
Ltd. to Caesarstone Ltd.
Caesarstone was organized under the laws of the State of Israel. We have five direct wholly-owned subsidiaries: Caesarstone Australia PTY Limited, which is
incorporated in Australia, Caesarstone South East Asia PTE LTD, which is incorporated in Singapore, Caesarstone (UK) Ltd., which is incorporated in the United
Kingdom, Caesarstone Canada, which is incorporated in Canada and Caesarstone USA, Inc., which, together with its two wholly-owned subsidiaries, Caesarstone
Technologies USA, Inc. and Omicron Marble and Granite LLC, are incorporated in the United States. In addition, following the Lioli Acquisition, Caesarstone Ltd.
holds a majority interest of Lioli Ceramica Private Limited, incorporated in India, and therefore is consolidating the results of its operations in our Consolidated
Financial Statements.
In 2019, we transitioned into a new regional structure which consists of North America, APAC, EMEA and Israel.
D.
Property, Plants and Equipment
Our manufacturing facilities are located on the following properties in Israel, the United States and India:
Properties
Issuer’s rights
Location
Purpose
Size
Kibbutz Sdot-Yam(1)
Land Use Agreement
Caesarea, Central Israel
Headquarters,
manufacturing facility,
research and development
center
Bar-Lev Industrial Park
manufacturing facility(2)
Land Use Agreement &
Ownership
Carmiel, Northern Israel
Manufacturing facility
Belfast Industrial
Center(3),(4)
Ownership
Richmond Hill, Georgia,
United States
Manufacturing facility
Bharat Nagar(5)
Ownership
Morbi, Gujarat, India
Manufacturing facility
Approximately 30,000
square meters of facility
and approximately 48,000
square meters of un-
covered yard*
Approximately 23,000
square meters of facility
and approximately 50,000
square meters of un-
covered yard**
Approximately 26,000
square meters of facility
and approximately 401,000
square meters of un-
covered yard (excluding
56,089 square meters of
wetland)
Approximately 60,000
square meters of facility
and approximately 55,000
square meters of open land,
gas yard, effluent treatment
plant, labor colony and
roads
* Square-meter figures with respect to properties in Israel are based on data measured by the relevant municipalities used for local tax purposes.
** Square-meter figures based on data used by Israeli municipalities for local tax purpose is adjusted to reflect the property leased from Kibbutz Sdot-Yam as
agreed between us and the Kibbutz during 2014. This does not include additional 5,000 square meters adjacent to the manufacturing facility, which we acquired in
December 2019.
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(1)
Leased pursuant to a land use agreement with Kibbutz Sdot-Yam entered in March 2012 with a term of 20 years, which replaced the former land use
agreement. Starting from September 2014 we use an additional 9,000 square meters pursuant to Kibbutz Sdot-Yam’s consent under terms materially
similar to the land use agreement. However, we have the right to return such additional office space and premises to Kibbutz Sdot-Yam at any time
upon 90 days’ prior written notice. In September 2016, we exercised our right to return to the Kibbutz an additional office space of approximately 400
square meters which we used since January 2014 under terms materially similar to the land use agreement. The lands on which these facilities are
located are held by the ILA and leased or subleased by Kibbutz Sdot-Yam pursuant to agreements described in “ITEM 7.B: Major Shareholders and
Related Party Transactions—Related Party Transactions—Relationship and agreements with Kibbutz Sdot-Yam—Land use agreement.”
(2) We own 2,673 square meters of facility and 2,550 square meters of uncovered yard, and the remainder is leased pursuant to a land use agreement with
Kibbutz Sdot-Yam entered into in March 2011, with a term of 10 years commencing in September 2012, which will be automatically renewed, unless
we give two years’ prior notice, for an additional 10-year term. This agreement was executed simultaneously with the land purchase and leaseback
agreement we entered into with Kibbutz Sdot-Yam, according to which Kibbutz Sdot-Yam acquired from us our rights in the lands and facilities of the
Bar-Lev industrial center, under a long term lease agreement we entered into with the ILA on June 6, 2007 to use the premises for an initial period of 49
years as of February 6, 2005, with an option to renew for an additional term of 49 years as of the end of the initial period. For more information, see
“ITEM 7.B: Major Shareholders and Related Party Transactions—Related Party Transactions—Relationship and agreements with Kibbutz Sdot-Yam—
Land purchase agreement and leaseback.”
(3)
On September 17, 2013, we entered into a purchase agreement for the purchase of approximately 45 acres of land in Richmond Hill, Georgia, United
States, comprising approximately 36.6 acres of upland and approximately 9 acres of wetland for our new U.S. manufacturing facility, the construction
of which was completed in 2015. On June 22, 2015, we exercised a purchase option in the agreement and acquired approximately 19.4 acres of land,
comprising approximately 18.0 acres of upland. On November 25, 2015, we entered into a new purchase agreement for the purchase of approximately
54.9 acres of additional land situated adjacent to the previously purchased land, comprising approximately 51.1 acres of upland.
50
(4)
In December 2014, we entered into a bond purchase loan agreement, were issued a taxable revenue bond on December 1, 2014, and executed a
corresponding lease agreement. Pursuant to these agreements, the Development Authority of Bryan County, an instrumentality of the State of Georgia
and a public corporation (“DABC”), has acquired legal title of our facility in Richmond Hill, in the State of Georgia, U.S., and in consideration leased
such facilities back to us. In addition, the facility was pledged by DABC in favor of us and DABC has committed to re-convey title to the facility to us
upon the maturity of the bond or at any time at our request, upon our payment of $100 to DABC. Therefore, we consider such facilities to be owned by
us. This arrangement was structured to grant us property tax abatement for ten years at 100% and additional five years at 50%, subject to our satisfying
certain qualifying conditions with respect to headcount, average salaries paid to our employees and the total capital investment amount in our U.S.
plant. In December 2015, we entered into an additional bond purchase loan agreement with the Development Authority of Bryan County, and were
issued a second taxable revenue bond on December 22, 2015, to cover additional funds and assets which were utilized in the framework of constructing,
acquiring and equipping our U.S. facility. If we were to expand our current U.S. facility, we would have been entitled to an additional taxable revenue
bond and a corresponding property tax abatement. In 2017, we notified DABC that we will not be utilizing such additional bond at this time and,
accordingly, it has expired.
(5)
In October 2020, we acquired a majority stake, in Lioli, which owns the Bharat Nagar facility in Morbi, Gujarat, India. For more information on our
title to the property in Morbi, Gujarat, India, see “ITEM 3.D. Key Information—Risk Factors—Operational Risks—Fully integrating Lioli’s and
Omicron’s businesses may be more difficult, costly and time-consuming than expected, which may adversely affect our results of operations and the
value of our common shares.”
For further discussion and details of the productive capacity of our facilities, see “ITEM 4.B: Information on the Company—Business Overview—Manufacturing
and Facilities.” Various environmental issues may affect our utilization of the above-mentioned facilities. For a further discussion, see “Item 4.B. Information on
the Company—Business Overview—Environmental and Other Regulatory Matters—Environmental and Health and Safety Regulations” above.
ITEM 4A: Unresolved Staff Comments
Not applicable.
ITEM 5: Operating and Financial Review and Prospects
A.
Operating Results
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial information presented in
“ITEM 3: Key Information,” our audited consolidated balance sheets as of December 31, 2020 and 2019, the related consolidated income statements and cash
flow statements for each of the three years ended December 31, 2020, 2019 and 2018, and related notes and the information contained elsewhere in this annual
report. Our financial statements have been prepared in accordance with U.S. GAAP. See “ITEM 3.D: Risk Factors” and “Special Note Regarding Forward-
Looking Statements.”
Company overview
We are a leading manufacturer and reseller of high-end engineered surfaces used primarily as countertops in residential and commercial buildings. We design,
develop and produce engineered quartz and porcelain products that offer aesthetic appeal and functionality through a distinct variety of colors, styles, textures, and
finishes used in countertops, vanities, and other interior and exterior surfaces. Our high-quality engineered quartz surfaces are marketed and sold under our
premium Caesarstone brand. We have grown to become one of the largest global providers of engineered quartz surfaces. Our products accounted for
approximately 5% of global engineered quartz by volume in 2020. Our sales in the United States, Australia (including New Zealand), Canada and Israel, our four
largest markets, accounted for 42.7%, 21.3%, 14.9% and 8.4% of our revenues in 2020. We believe that our revenues will continue to be highly concentrated
among a relatively small number of geographic regions for the foreseeable future. For further information with respect to our geographic concentration, see “ITEM
3.D: Key Information—Risk Factors—Our revenues are subject to significant geographic concentration and any disruption to sales within one of our key existing
markets could materially and adversely impact our results of operations and prospects.”
51
We experienced annual compound revenue growth of 8.5% between 2015 and 2017, driven mainly by the continued quartz penetration, increased remodeling
spending in all our top three markets and growth in the residential segment in the United States, our largest market. In addition, the portion of innovative designs
within our offering increased over time. Revenue declined by 10.9% between 2019 and 2020 mainly due to COVID-19 pandemic-related business disruptions,
mainly in the U.S, Canada and Australia. See “—Comparison of period-to-period results of operations—Year ended December 31, 2020 compared to year ended
December 31, 2019—Revenues” for additional information. From 2019 to 2020, our gross profit margin increased from 27.2% to 27.5%, adjusted EBITDA margin
increased from 12.6% to 12.8%, and adjusted net income margin attributable to controlling interest decreased from 4.9% to 3.4% over the same period. We define
each of such margins by dividing gross profit, adjusted EBITDA and adjusted net income attributable to controlling interest, respectively, by revenues. Adjusted
EBITDA and adjusted net income attributable to controlling interest are non-GAAP financial measures, see “ITEM 3.A: Key Information—Selected Financial
Data” for a description of how we define adjusted EBITDA and adjusted net income attributable to controlling interest and reconciliations of net income to adjusted
EBITDA and net income attributable to controlling interest to adjusted net income attributable to controlling interest. We attribute the increase in the adjusted
EBITDA margin mainly to improved efficiency, lower raw material costs and improved product mix, which were partly offset by the impact of lower sales volume,
lower sale prices and less favorable regional mix. The decrease in the adjusted net income margin attributable to increase in finance expenses due to unfavorable
foreign exchange rates and impact of our hedging instruments.
Our mission is to be the first brand of choice for countertops all around the world. We believe that a significant portion of our future growth will come from our
U.S. market where we see the greatest growth opportunity. We believe that transitioning to direct sales will contribute to our future growth in the long term. We
believe that in order to remain competitive in the long term, we will need to grow our business both organically and through acquisitions.
Recent Acquisitions
Lioli Acquisition
On August 31, 2020, the Company entered into a definitive agreement with Lioli Ceramica Pvt. Ltd. (“Lioli”) to acquire a majority stake in Lioli, an India-based
developer and producer of porcelain countertop slabs with manufacturing facilities in Asia. The terms of the agreement provided that at the first closing the
Company would pay a cash investment of approximately $12 million, representing an enterprise value of approximately $34 million, including the assumption of
debt of approximately $17.9 million and additional consideration of up to approximately $10 million to be paid in case certain conditions are to be met. As part of
the Lioli Acquisition, the Company granted Lioli’s minority shareholders a put option under which they have the right to require us to purchase their remaining
shares in Lioli, and likewise, the Company has a call option under which we have the right to require the minority shareholders to sell us their minority shares in
Lioli. The consideration to be paid for the shares transferred pursuant to these options is based on an EBITDA multiplier. These options become exercisable as of
April 1, 2024 and until the 20th anniversary of the Lioli Acquisition.
Omicron Acquisition
On December 31, 2020, the Company simultaneously signed and closed on its transaction to acquire the entire membership interests Omicron Granite and Tile, a
premier stone supplier operating in 16 locations across the United States in Florida, Ohio and Louisiana. Under the terms of the transaction agreement, Caesarstone
acquired Omicron for an approximately $19 million.
52
Factors impacting our results of operations
We consider the following factors to be important in analyzing our results of operations:
•
•
Our sales are impacted by home renovation and remodeling and new residential construction, and to a lesser extent, commercial construction. We estimate
that approximately 60%-70% of our revenue is related to renovation and remodeling activities, while 30% to 40% is related to new residential
construction. Renovation and remodeling spending increased by 4% and 3% in the United State and Australia, respectively, during 2020 compared to
2019. In Canada renovation and remodeling spending experienced decline in 2020.
Our revenues and results of operations exhibit some quarterly fluctuations as a result of seasonal influences which impact construction and renovation
cycles. Due to the fact that certain of our operating costs are fixed, the impact of such fluctuations on our profitability is material. We believe that the
second and third quarters tend to exhibit higher sales volumes than the other quarters because demand for quartz surface products is generally higher
during the summer months in the northern hemisphere with the effort to complete new construction and renovation projects before the new school year.
Conversely, the first quarter is typically impacted by the winter slowdown in the northern hemisphere in the construction industry and might impact sales
in Israel depending on the timing of the spring holiday a particular year. Similarly, sales in Australia during the first quarter are negatively impacted by
fewer construction and renovation projects. The fourth quarter is susceptible to being impacted by the onset of winter in the northern hemisphere.
• We conduct business in multiple countries in North America, South America, Europe, Asia-Pacific, Australia and the Middle East and as a result, we are
exposed to risks associated with fluctuations in currency exchange rates between the U.S. dollar and certain other currencies in which we conduct
business. A significant portion of our revenues is generated in U.S dollar, and to a lesser extent the Australian dollar, Canadian dollar, Euro and NIS. In
2020, 44.3% of our revenues were denominated in U.S. dollars, 21.3% in Australian dollars, 14.9% in Canadian dollars, 6.8% in Euros and 8.4% in NIS.
As a result, devaluations of the Australian dollars, and to a lesser extent, the Canadian dollar relative to the U.S. dollar may unfavorably impact our
profitability. Our expenses are largely denominated in U.S. dollars, NIS and Euro, with a smaller portion in Canadian dollars and Australian dollars. As a
result, appreciation of the NIS, and to a lesser extent, the Euro relative to the U.S. dollar may unfavorably affect our profitability. We attempt to limit our
exposure to foreign currency fluctuations through forward and option contracts, which, except for U.S. dollar/NIS forward contracts, are not designated as
hedging accounting instruments under ASC 815, Derivatives and Hedging. As of December 31, 2020, we had outstanding forward contracts with a
notional amount of $96.7 million. These transactions were for a period of up to 12 months. The fair value of these foreign currency derivative contracts
was negative $3.6 million, which is included in current assets and current liabilities, as of December 31, 2020. For further discussion of our foreign
currency derivative contracts, see “ITEM 11: Quantitative and Qualitative Disclosures About Market Risk.” In addition, we entered derivative instruments
not designated as hedging accounting to partially manage our exposure to fluctuations of styrene prices. As of December 31, 2020, we had outstanding
forward contracts with a notional amount of $101 million. These transactions were for a period of up to 12 months. The fair value of these styrene forward
derivative contracts was negative $0.3 million, which is included in current liabilities, as of December 31, 2020.
53
Components of statements of income
Revenues
We derive our revenues from sales of quartz and, to a lesser extent, porcelain surfaces, mostly to fabricators and resellers in our direct markets and to third-party
distributors in our indirect markets. In the United States, Australia, Canada and Singapore the initial purchasers of our products are primarily fabricators. In Israel,
the purchasers are local distributors who, in turn, sell to fabricators. In the United States, we also sell our products to a small number of sub-distributors, stone
resellers as well as to IKEA and Home Depot. We consider Israel to be a direct market due to the warranty we provide to end-consumers, our local fabricators’
technical instruction programs and our local sales and marketing activities. The purchasers of our products in our other markets are our third-party distributors who,
in turn, sell to sub-distributors and fabricators. Our direct sales accounted for 90% and 91.5%, for the years ended December 31, 2020 and 2019, respectively.
Revenue is recognized when a customer obtains control of promised goods or services in an amount that reflects the consideration the entity expects to receive in
exchange for those goods or services.
The warranties that we provide vary by market. In our indirect markets, we provide all our distributors with a limited direct manufacturing defect warranty. In all
our indirect markets, distributors are responsible for providing warranty coverage to end-customers. In Australia, Canada, the United States, the United Kingdom
and Singapore we provide end-consumers with a limited warranty on our products for interior countertop applications. In Israel, we typically provide end-
consumers with a direct limited manufacturing defect warranty on our products. Based on historical experience, warranty issues are generally identified within one
and a half years after the shipment of the product and a significant portion of defects are identified before installation. We record a reserve on account of possible
warranty claims, included in our cost of revenues. Historically, warranty claims expenses have been low, accounting for approximately 0.3% of our total goods sold
in 2020.
The following table sets forth the geographic breakdown of our revenues during the periods indicated:
Geographical Region
United States
Canada
Latin America
Australia (incl. New Zealand)
Asia
EMEA
Israel
Total
2020
Year ended December 31,
2019
2018
% of total
revenues
Revenues in
thousands of
USD
% of total
revenues
Revenues in
thousands of
USD
% of total
revenues
Revenues in
thousands of
USD
42.7% $
14.9
0.4
21.3
3.0
9.3
8.4
100.0% $
207,496
72,492
2,149
103,587
14,566
45,201
40,921
486,412
45.9% $
15.7
0.8
19.8
2.8
7.9
7.1
100.0% $
250,471
85,979
4,115
108,150
15,514
43,054
38,692
545,974
41.5% $
17.4
0.9
22.8
3.1
7.4
6.9
100.0% $
239,241
99,679
5,397
131,085
17,715
42,861
39,893
575,871
Revenue in 2020 was $486.4 million compared to $546.0 million in the prior year. On a constant currency basis, 2020 revenue was lower by 11.0% year-over-year,
primarily due to the COVID-19 pandemic-related disruptions impacting our business since the second quarter of 2020.
Revenues in the U.S. decreased by 17.2% in 2020 compared to 2019 and an increase of 4.7% as compared between 2019 and 2018.
Revenues in Canada decreased by 15.7% in 2020 compared to a decline of 13.7% in 2019, representing a 15.1% decrease and 11.7% decrease on a constant-
currency basis, respectively.
Revenues in Latin America decreased by 47.8 % in 2020 compared to a decrease of 23.8% in 2019. The 2020 increase in revenue is mainly attributed to the Lioli
Acquisition and its sales in the Latin America region in the fourth quarter of 2020.
54
Revenues in Australia decreased by 4.2% in 2020 compared to a decrease of 17.5% in 2019. On a constant currency basis, revenues in Australia decreased by 3.7%
in 2020 and declined by 11.4% in 2019.
Revenues in Asia decreased by 6.1% in 2020 compared to a decrease of 12.4% in 2019. On a constant currency basis, revenues in Asia decreased by 5.4% in 2020
and declined by 11.3% in 2019.
Revenues in EMEA increased by 5.0% in 2020 and increased by 0.4% in 2019. On a constant-currency basis, growth in EMEA was 4.1% in 2020 and 5.0% in
2019.
Revenues in Israel increased by 5.8% in 2020 compared to a decrease of 3.0% in 2019. On a constant currency basis, revenues increased by 2% in 2020 and
decreased by 3.5% in 2019.
For additional information, see “—Comparison of period-to-period results of operations—Year ended December 31, 2020 compared to year ended December 31,
2019—Revenues.”
Cost of revenues and gross profit margin
Approximately 34% of our cost of revenues is raw material costs (excluding the cost of OEM products sold during the year ended December 31, 2020, which
accounted for less than 10% out of our cost of revenues in the relevant year). The cost of our raw materials consists of the purchase prices of such materials and
costs related to the logistics of delivering the materials to our manufacturing facilities. Our raw materials costs are also impacted by changes in foreign exchange
rates. Our principal raw materials, quartz and polyester jointly accounted for approximately 70% of our total raw material cost in 2020. The balance of our cost of
revenues consists primarily of manufacturing costs and related overhead. Cost of revenues in our direct distribution channels also includes the cost of delivery from
our manufacturing facilities to our warehouses, warehouse operational costs, as well as additional delivery costs associated with the shipment of our products to
customer sites in certain markets. In the U.S. and Canada, we also incur fabrication and installation costs related mainly to IKEA. In the case of our indirect
distribution channels, we bear the cost of delivery to the seaport closest to our production plants and our distributors bear the cost of delivery from the seaport to
their warehouses.
Quartz is one of our principal raw materials. In 2020, approximately 67% of our total quartz was from several suppliers in Turkey, with the major part acquired
from Mikroman and Polat.
Quartz accounted for approximately 39% of our raw materials cost in 2020. Accordingly, our cost of sales and overall results of operations are impacted
significantly by fluctuations in quartz prices. In 2020 and 2019, the average cost of quartz increased by 3.2% and decreased 3.4%, respectively. The increase in
2020 was primarily due to a more expensive sand mix, caused by a more expensive product mix, and also an increase in shipping costs, while the decrease in 2019
was mainly a result of a lower import of quartz to our U.S. manufacturing facility that bore substantially higher shipping costs in addition to a decrease in
transportation prices. Any future increases in quartz costs may adversely impact our margins and net income.
Given the significance of polyester costs relative to our total raw material expenditures, our cost of sales and overall results of operations are impacted significantly
by fluctuations in polyester prices, which generally correlate with benzine prices. In 2020, our average polyester costs decreased by approximately 18% as a result
of market conditions (a sharp decrease in cost of raw materials composing resin due to lower energy prices affected by the COVID-19 pandemic) as well as
improved sourcing. In 2019, our average polyester costs decreased by approximately 12%, due to better market conditions and adding alternative suppliers. Any
future increases in polyester costs may adversely impact our margins and net income.
We are exposed to fluctuations in the prices of pigments, although to a lesser extent than with polyester. For example, the cost of titanium dioxide, our principal
white pigmentation agent, decreased by approximately 0.2% and approximately 10% in 2020 and 2019, respectively. Any future increases in pigments costs may
adversely impact our margins and net income.
The gross profit margins on sales in our direct markets are generally higher than in our indirect markets in which we use third-party distributors, due to the
elimination of the third-party distributor’s margin. In many markets, our expansion strategy is to work with third-party distributors who we believe will be able to
increase sales more rapidly in their market and more cost effective than if we distributed our products directly. However, in several markets we distribute directly,
including the United States, Australia, Canada and in the United Kingdom. In the future, we intend to evaluate other potential markets to distribute directly.
55
Research and development, net
Our research and development expenses consist primarily of salaries and related personnel costs, as well as costs for subcontractor services and costs of materials
consumed in connection with the design and development of our products. We expense all our research and development costs as incurred.
Marketing and selling
Marketing and selling expenses consist primarily of compensation and associated costs for personnel engaged in sales, marketing, distribution and advertising and
promotional expenses. In 2020 our advertising and promotional expenses as well as marketing assistance expenses decreased mainly due to cost-cutting efforts to
mitigate COVID-19 pandemic-related impacts. In each of 2019 and 2018, our expenses decreased as part of our cost-savings initiatives mainly attributed to the
U.S. and the decrease was also partially attributable to the formation of the North America region at the beginning of 2019 that yielded cost savings due to
synergies. This was partially offset by increased costs in the United Kingdom to support growth in the newly established direct distribution operations.
General and administrative
General and administrative expenses consist primarily of compensation and associated costs for personnel engaged in finance, human resources, information
technology, legal and other administrative activities, as well as fees for legal and accounting services. See “—Other factors impacting our results of operations—
Agreements with Kibbutz Sdot-Yam” and “ITEM 7: Major Shareholders and Related Party Transactions—Related Party Transactions.”
Legal settlements and loss contingencies, net
Legal settlements and loss contingencies, net consists of expenses related to settlements expenses and estimated exposure not covered by our insurance applicable
to individual silicosis claims and other ongoing claims. We recorded $6.3 million of such expenses in 2020, $12.4 million (including a provision related to the
developments in the WOMAG arbitration, see “Financial Information—Consolidated Financial Statements and Other Financial Information—Legal Proceedings—
Claim by former South African distributor) in 2019 and $8.9 million in 2018. The decrease in 2020 compared to 2019 expenses is mainly due to a provision
recorded during 2019 related to WOMAG claim.
Finance expenses, net
Finance expenses, net, consist primarily of bank and credit card fees, borrowing costs and exchange rate differences arising from changes in the value of monetary
assets and monetary liabilities stated in currencies other than the functional currency of each entity. These expenses are partially offset by interest income on our
cash balances and gains on derivative instruments. The increase in finance expenses during 2020 related mainly to unfavorable exchange rates, specifically the NIS,
which appreciated against the USD, and their impact on liabilities denominated in NIS, in addition to realized and unrealized losses on derivatives not designated as
hedge instruments.
Corporate taxes
As we operate in a number of countries, our income is subject to taxation in different jurisdictions with a range of tax rates. Our effective tax rate was 38.1% in
2020, 32.7% in 2019 and 15.7% in 2018. In 2020 and 2019, a higher portion of our pre-tax income was attributable to our subsidiaries which are subject to higher
tax rates compared to our income derived in Israel. In addition, non-deductible expenses related to new lease accounting standard revaluation resulted in increase of
approximately 3% and 4% in the effective tax rate, respectively.
56
The standard corporate tax rate for Israeli companies was 23% in each of 2020, 2019 and 2018. Our non-Israeli subsidiaries are taxed according to the tax laws in
their respective countries of origination.
Effective January 1, 2011, with the enactment of Amendment No. 68 to the Israeli Tax Law, both of our Israeli facilities operate under a consolidated “Preferred
Enterprise” status. The “Preferred Enterprise” status provides the portion related to the Bar-Lev manufacturing facility with the potential to be eligible for grants of
up to 20% of the investment value in approved assets and a reduced flat corporate tax rate, which applies to the industrial enterprise’s entire preferred income, of
9% in the three years of 2014 through 2016 and 7.5% in 2017 onward. For the portion related to the Sdot-Yam facility, this status provides us with a reduced flat
corporate tax rate, which applies to the industrial enterprise’s entire preferred income, which was 16% during the same period.
In December 2017, the U.S. enacted significant tax reform commencing with the year ended December 31, 2017, including, but not limited to (1) reducing the U.S.
federal corporate income tax rate to 21% effective 2018; and (2) imposing a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries of U.S.
companies that had not been previously taxed in the U.S.
The TCJA also established new tax provisions affecting 2018, including, but not limited to (1) creating a new provision designed to tax global intangible low-tax
income; (2) generally eliminating U.S. federal taxes on dividends from foreign subsidiaries; (3) eliminating the corporate alternative minimum tax; (4) creating the
base erosion anti-abuse tax; (5) establishing a deduction for foreign derived intangible income; (6) repealing the domestic production activity deduction; and (7)
establishing new limitations on deductible interest expense and certain executive compensation.
The reduction of the U.S. federal corporate income tax rate required us to remeasure our deferred tax assets and liabilities as of the date of enactment. For the year
ended December 31, 2017, we decreased the net deferred tax liability as a result of such remeasurement, resulting in tax income benefit for the year ended
December 31, 2017.
As of December 31, 2019, certain provisions of the TCJA remains subject to Internal Revenue Service as well as state tax authorities’ guidance and interpretation
which could have a material adverse effect on our cash tax liabilities, results of operations, and financial condition. In addition, the TCJA could be subject to
potential amendments and technical corrections, any of which could materially lessen or increase certain adverse impacts of the legislation on us and our business.
We will continue to evaluate the effects of the TCJA on us as federal and state tax authorities issue additional regulations and guidance.
On March 27, 2020, the CARES Act was enacted in response to the COVID-19 pandemic. The CARES Act has a number of beneficial tax provisions. Among the
provision of the CARES Act, the business interest deduction limit under Code Sec. 163(j) is increased to 50 percent of our adjusted taxable income in the U.S. for
tax year 2020. In addition, Net operating losses (NOLs) arising in tax years beginning in 2018, 2019, and 2020 now have a five-year carryback period and an
unlimited carryforward period. Under the CARES Act we carryback our U.S. NOL for the year ended December 31, 2020 to prior taxable years.
For more information about the tax benefits available to us as an Approved Enterprise or as a Beneficiary Enterprise or as Preferred Enterprise, see “ITEM 10.E:
Additional Information—Taxation—Israeli tax considerations and government programs.”
Net income attributable to non-controlling interest
In October 2020, we acquired a majority stake in Lioli and 45% of Lioli’s net income is attributed to its minority shareholders.
In October 2010, we closed a transaction for the establishment of a joint venture with our former third-party distributor in Eastern Canada, Canadian Quartz
Holdings Inc. (“Ciot”). Ciot acquired a 45% ownership interest in the new subsidiary, Caesarstone Canada Inc., and 45% of Caesarstone Canada Inc.’s net income
is attributed to Ciot. In December 2018, the Company purchased Ciot’s 45% ownership interest in Caesarstone Canada Inc. and increased its ownership interest to
100%.
57
Other factors impacting our results of operations
Share-based compensation
We recorded share-based compensation expenses related to the above grants of $2.9 million, $3.6 million and $1.7 million in 2020, 2019 and 2018, respectively
and expect to record $2.7 million over a weighted average period of 1.5 years from December 31, 2020. For more information, see also Note 13 to our financial
statements included elsewhere in this report.
Agreements with Kibbutz Sdot-Yam
We are party to a series of agreements with our largest shareholder, the Kibbutz, which govern different aspects of our relationship. Pursuant to these agreements,
in consideration for using facilities leased to us or for services provided by the Kibbutz, we paid to the Kibbutz an aggregate of $9.4 million in 2020, $9.5 million in
2019 and $9.3 million in 2018 (excluding VAT). During 2018 and following the assessment of an appointed appraiser and negotiations between us and the Kibbutz,
it was agreed to increase the fees under such agreement, such that for the year ended December 31, 2018 we paid additional amount of NIS 950,000 (approximately
$250,000 USD), and starting in 2019 and on we pay an additional annual amount of NIS 1,100,000 (approximately $342,000 USD).
For more information on these agreements, see “ITEM 7.B: Major Shareholders and Related Party Transactions—Related Party Transactions.”
Comparison of period-to-period results of operations
The following table sets forth our results of operations as a percentage of revenues for the periods indicated:
Consolidated Income Statement Data:
Revenues:
Cost of revenues
Gross profit
Operating expenses:
Research and development, net
Marketing and selling
General and administrative
Legal settlements and loss contingencies, net
Total operating expenses
Operating income
Finance expenses, net
Income before taxes on income
Taxes on income
Net income
Net income attributable to non-controlling interest
Net income attributable to controlling interest
2020
Year ended December 31,
2019
2018
Amount
% of
Revenue
Amount
% of
Revenue
Amount
% of
Revenue
(in thousands of U.S. dollars)
$
$
$
486,412
352,470
133,942
3,974
62,047
39,081
6,319
111,421
22,521
10,199
12,322
4,700
7,622
404
7,218
58
100.0% $
72.5
27.5
0.8
12.8
8.0
1.3
22.9
4.6
2.1
2.5
0.9
1.6% $
0.1
1.5% $
545,974
397,335
148,639
4,146
66,770
40,681
12,359
123,956
24,683
5,578
19,105
6,243
12,862
—
12,862
100.0% $
72.8
27.2
0.8
12.2
7.5
2.3
22.7
4.5
1.1
3.5
1.1
2.4% $
—
2.4% $
575,871
412,457
163,414
3,635
74,786
43,323
8,903
130,647
32,767
3,639
29,128
4,560
24,568
163
24,405
100.0%
71.6
28.4
0.6
13.0
7.5
1.6
22.7
5.7
0.6
5.1
0.8
4.3%
0.1
4.2%
Year ended December 31, 2020 compared to year ended December 31, 2019
Revenues
Revenues decreased by $59.6 million, or 10.9%, to $486.4 million in 2020 from $546.0 million in 2019 mainly due to an 11.0% decrease volume, of approximately
$56.0 million. We experienced volume declines in all regions primarily due to COVID-19 pandemic-related disruptions impacting our business since the second
quarter of 2020.
Cost of revenues and gross profit margins
Cost of revenues decreased by $44.8 million, or 11.3%, to $352.5 million in 2020 from $397.3 million in 2019.
Gross profit decreased from $148.6 million in 2019 to $133.9 million in 2020, with an increase in gross margin of 30 basis points, from 27.2% in 2019 to 27.5% in
2020. The changes in cost of revenues and margin were driven primarily by improved efficiency, lower raw material costs and improved product mix, which were
partly offset by the impact of lower sales volume, lower sale prices and less favorable regional mix.
Operating expenses
Research and development. Research and development expenses remained relatively stable and amounted to $4.0 million in 2020 and $4.1 million in 2019.
Marketing and selling. Marketing and selling expenses decreased by $4.8 million, or 7.2%, to $62.0 million in 2020 from $66.8 million in 2019. Marketing
expenses as percent of revenue rose from 12.2% in 2019 to 12.8% in 2020. This was mainly due to cost-cutting efforts to mitigate negative effects of the COVID-
19 pandemic.
General and administrative. General and administrative expenses decreased by $1.6 million, or 3.9%, to $39.1 million in 2020 from $40.7 million in 2019. This
decrease mainly attributable to cost-cutting efforts to mitigate negative COVID-19 pandemic-related impacts partially offset by an increase in allowance for credit
loss.
Legal settlements and loss contingencies, net. Legal settlements and loss contingencies, net decreased by $6.1 million, or 49.2%, from $12.4 million in 2019 to $6.3
million in 2020. This decrease is mainly attributed to a provision related to WOMAG’s claim recorded in 2019.
Finance expenses, net
Finance expenses, net were doubled, to $10.2 million in 2020 from $5.6 million in 2019. This was mostly the result of the adverse impact of foreign currency
exchange rates.
Taxes on income
Taxes on income declined by $1.5 million to $4.7 million in 2020 from $6.2 million in 2019. Our effective tax rate was 38% in 2020 compared with 33% in 2019.
This was mostly due to lower taxable income attributable to CSI results and carry’s lower effective tax rate (11%) of lower consolidated profit before taxes. In
addition to higher nondeductible expenses related the new lease accounting standard foreign currency fluctuations and provisions for uncertain tax positions all out
of lower profit before taxes.
Net income attributable to non-controlling interest
In 2020, net income attributable to non-controlling interest amounted to $0.4 million and was fully attributable to the majority stake in Lioli acquired in the fourth
quarter of 2020. We did not record any net income attributable to non-controlling interest in 2019.
Year ended December 31, 2019 compared to year ended December 31, 2018
For a comparison of the years ended December 31, 2019 and 2018, see “ITEM 5.A. Operating and Financial Review and Prospects—Operating Results—Year
ended December 31, 2019 compared to year ended December 31, 2018” included in our annual report on Form 20-F for the year ended December 31, 2019, filed
with the SEC on March 23, 2020, which comparative information is herein incorporated by reference.
59
Quarterly results of operations and seasonality
The following table presents our unaudited condensed consolidated quarterly results of operations for the eight quarters in the period from January 1, 2019 to
December 31, 2020. We also present reconciliations of gross margins to adjusted gross margins, net income to adjusted EBITDA and net income attributable to
controlling interest to adjusted net income attributable to controlling interest for the same periods. This information should be read in conjunction with our
consolidated financial statements and related notes included elsewhere in this annual report. For more information on our use of non-GAAP financial measures, see
“ITEM 3.A. Key Information—Selected Financial Data.” We have prepared the unaudited condensed consolidated quarterly financial information for the quarters
presented below on the same basis as our audited consolidated financial statements. The historical quarterly results presented below are not necessarily indicative of
the results that may be expected for any future quarters or periods.
Consolidated Income
Statement Data:
Revenues:
Gross profit
Operating income (loss)
Net income (loss)
Consolidated Income
Statement Data:
Revenues:
Revenues as a percentage of
annual revenue
Gross profit
Operating income (loss)
Net income (loss)
Other financial data:
Adjusted Gross profit
Adjusted Gross profit as a
percentage of annual adjusted
Gross profit
Adjusted EBITDA
Adjusted EBITDA as a
percentage of annual adjusted
EBITDA
Adjusted net income attributable
to controlling interest
Adjusted net income attributable
to controlling interest as a
percentage of annual adjusted
net income
Dec. 31,
2020
Sept. 30,
2020
June 30,
2020
Three months ended
Dec. 31,
Mar. 31,
2020
2019
(as a % of revenue)
Sept. 30,
2019
June 30,
2019
Mar. 31,
2019
100.0%
28.1
5.9
(1.4)
100.0%
31.4
12.1
10.3
100.0%
20.4
(2.9)
(5.9)
100.0%
28.8
1.8
2.1
100.0%
26.1
0.4
(0.2)
100.0%
29.8
9.1
5.0
100.0%
28.2
7.5
4.5
100.0%
24.4
0.5
(0.3)
Dec. 31,
2020
Sept. 30,
2020
June 30,
2020
Three months ended
Dec. 31,
2019
Mar. 31,
2020
(in thousands of U.S. dollars)
Sept. 30,
2019
June 30,
2019
Mar. 31,
2019
$
$
$ 136,896
$
28.1%
38,515
8,091
(1,981)
$
$
123,922
25.5%
38,854
15,047
12,807
$
$
99,037
20.4%
20,172
(2,904)
(5,882)
$
$
126,557
26.0%
36,401
2,287
2,678
$
$
133,867
24.5%
34,983
497
(275)
$
$
142,839
26.2%
42,624
12,939
7,128
$
$
141,071
25.8%
39,763
10,603
6,414
128,197
23.5%
31,269
644
(405)
39,107
38,954
20,294
36,532
35,287
42,760
38,582
32,455
29.0%
28.9%
15.0%
27.1%
23.7%
28.7%
25.9%
21.7%
$
18,750
$
23,662
$
6,521
$
13,146
$
15,741
$
22,515
$
19,156
$
11,634
30.2%
38.1%
10.5%
21.2%
22.8%
32.6%
37.7%
16.9%
$
1,642
$
14,110
$
(3,498)
$
4,607
$
5,474
$
10,009
$
7,996
$
3,245
9.7%
83.7%
(20.7)%
27.3%
20.5%
37.5%
29.9%
12.1%
60
Dec. 31,
2020
Sept. 30,
2020
June 30,
2020
Three months ended
Mar. 31,
2020
Dec. 31,
2019
(in thousands of U.S. dollars)
Sept. 30,
2019
June 30,
2019
Mar. 31,
2019
$
38,515
$
38,854
$
20,172
$
36,401
$
34,983
$
42,624
$
39,763
$
31,269
63
—
100
—
122
—
131
—
10
—
136
—
63
76
(2,611)
1,110
529
—
39,107
$
—
—
38,954
$
—
—
20,294
$
—
—
36,532
$
—
294
35,287
$
—
—
42,760
$
—
1,367
38,582
$
—
—
32,455
Reconciliation of Gross profit
to Adjusted Gross profit:
Gross profit
Share-based compensation
expense (a)
Non-recurring import related
expenses (income)
Amortization of assets related to
acquisitions
Other non-recurring items (b)
Adjusted Gross profit
$
(a)
(b)
Share-based compensation includes expenses related to stock options and restricted stock units granted to our employees and directors. In addition, includes
expenses for phantom awards granted and the related payroll expenses as a result of exercises.
Reflects mainly to one-time amortization of machinery equipment with no future alternative use, and one-time inventory write down due to discontinuation
of certain product group manufacturing.
Dec. 31,
2020
Sept. 30,
2020
June 30,
2020
Three months ended
Mar. 31,
2020
Dec. 31,
2019
(in thousands of U.S. dollars)
Sept. 30,
2019
June 30,
2019
Mar. 31,
2019
Reconciliation of Net Income
(loss) to Adjusted EBITDA:
Net income (loss)
Finance (income) expenses, net
Taxes on income
Depreciation and amortization
related to acquisitions
Legal settlements and loss
contingencies,
net (a)
Share-based compensation
expense (b)
Non-recurring import related
expense (income)
Acquisition-related expenses
Other non-recurring items (c)
Adjusted EBITDA
$
$
$
(1,981)
8,613
1,459
$
12,807
(52)
2,292
$
(5,882)
2,507
471
8,300
7,058
6,987
1,392
523
—
444
—
18,750
$
452
628
—
477
—
23,662
$
1,637
801
—
—
—
6,521
$
2,678
(869)
478
7,115
2,838
906
—
—
—
13,146
$
$
(275) $
(622)
1,394
6,970
7,201
779
—
—
294
15,741
$
7,128
4,053
1,758
6,755
1,853
968
—
—
—
22,515
$
$
$
6,414
1,825
2,364
8,099
1,729
832
(2,611)
—
504
19,156
$
(405)
322
727
6,763
1,576
1,052
1,110
—
489
11,634
(a)
(b)
(c)
Consists of legal settlements expenses and loss contingencies, net, related primarily to product liability claims and other adjustments to ongoing legal claims.
Share-based compensation includes expenses related to stock options and restricted stock units granted to our employees and directors. In addition, includes
expenses for phantom awards granted and the related payroll expenses as a result of exercises.
Relates to non-recurring expenses related to North American region establishment, one-time charge related to reduction in headcount and certain activities
including discontinuation of certain product group manufacturing.
61
Reconciliation of Net Income
(loss) Attributable to
Controlling Interest to
Adjusted Net Income
Attributable to Controlling
Interest:
Net income (loss) attributable to
controlling interest
Legal settlements and loss
contingencies,
net (a)
Amortization of assets related to
acquisitions, net of tax
Share-based compensation
expense (b)
Non-cash revaluation of lease
liabilities (c)
Non-recurring import related
expense (income) (d)
Acquisition-related expenses
Other non-recurring items (e)
Total adjustments before tax
Less tax on above adjustments
Total adjustments after tax
Adjusted net income attributable
Dec. 31,
2020
Sept. 30,
2020
June 30,
2020
Three months ended
Mar. 31,
2020
Dec. 31,
2019
(in thousands of U.S. dollars)
Sept. 30,
2019
June 30,
2019
Mar. 31,
2019
$
(2,385)
$
12,807
$
(5,882)
$
2,678
$
(275) $
7,128
$
6,414
$
(405)
1,637
2,838
7,201
1,853
1,729
1,576
452
—
628
227
—
477
—
1,784
481
1,303
—
801
1,256
—
—
—
3,694
1,310
2,384
1,392
446
523
3,177
—
444
—
5,982
1,955
4,027
1,642
0.05
—
906
(1,471)
—
—
—
2,273
344
1,929
4,607
0.13
$
—
779
266
—
—
294
8,540
2,791
5,749
5,474
0.16
—
968
1,123
—
—
—
3,944
1,063
2,881
—
832
799
(2,611)
—
1,704
2,453
871
1,582
10,009
0.29
$
$
7,996
0.23
$
—
1,052
1,427
1,110
—
489
5,654
2,004
3,650
3,245
0.09
to controlling interest
Adjusted diluted EPS
$
14,110
0.41
$
(3,498)
(0.10)
$
$
(a)
(b)
(c)
(d)
(e)
Consists of legal settlements expenses and loss contingencies, net, related primarily to product liability claims and other adjustments to ongoing legal claims.
Share-based compensation includes expenses related to stock options and restricted stock units granted to our employees and directors. In addition, includes
expenses for phantom awards granted and the related payroll expenses as a result of exercises.
Exchange rate differences deriving from revaluation of lease contracts in accordance with FASB ASC 842.
Relates mainly to non-recurring import related expenses and relocation expenses of Caesarstone USA headquarters, the Company’s subsidiary.
Relates to non-recurring expenses related to North American region establishment, one-time charge related to reduction in headcount and certain activities
including discontinuation of certain product group manufacturing, one-time amortization of machinery equipment with no future alternative use.
Our results of operations are impacted by seasonal factors, including construction and renovation cycles. We believe that the second and third quarters of the year
exhibits higher sales volumes than other quarters because demand for quartz surface products is generally higher during the summer months in the northern
hemisphere, when the weather is more favorable for new construction and renovation projects, as well as the impact of efforts to complete such projects before the
beginning of the new school year. Conversely, the first quarter is impacted by a slowdown in new construction and renovation projects during the winter months as
a result of adverse weather conditions in the northern hemisphere and, depending on the date of the spring and winter holiday in Israel in a particular year, sales in
Israel might be impacted due to such holiday. Similarly, sales in Australia during the first quarter are negatively impacted due to fewer construction and renovation
projects.
62
We expect that seasonal factors will have a greater impact on our revenue, adjusted EBITDA and adjusted net income attributable to controlling interest in the
future as we continue to increase direct distribution as a percentage of our total revenues in the future. This is because we generate higher average selling prices in
the markets in which we have direct distribution channels and, therefore, our revenues are more significantly impacted by changes in demand in these markets. At
the same time, our fixed costs have also increased as a result of our larger portion of direct distribution and, therefore, the impact of seasonal fluctuations on our
revenues, profit margins, adjusted EBITDA and adjusted net income attributable to controlling interest will likely be magnified in future periods.
Application of critical accounting policies and estimates
Our accounting policies affecting our financial condition and results of operations are more fully described in our consolidated financial statements for the years
ended December 31, 2020, 2019 and 2018, included in this annual report. The preparation of our financial statements requires management to make judgments,
estimates and assumptions that affect the amounts reflected in the consolidated financial statements and accompanying notes, and related disclosure of contingent
assets and liabilities. We base our estimates upon various factors, including past experience, where applicable, external sources and on other assumptions that we
believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions and could have a materially
adverse effect on our reported results.
In many cases, the accounting treatment of a particular transaction, event or activity is specifically dictated by accounting principles and does not require
management’s judgment in its application, while in other cases, management’s judgment is required in the selection of the most appropriate alternative among the
available accounting principles, that allow different accounting treatment for similar transactions.
We believe that the accounting policies discussed below are critical to our financial results and to the understanding of our past and future performance as these
policies relate to the more significant areas involving management’s estimates and assumptions. We consider an accounting estimate to be critical if: (1) it requires
us to make assumptions because information was not available at the time or it included matters that were highly uncertain at the time we were making our
estimate; and (2) changes in the estimate or different estimates that we could have selected may have had a material impact on our financial condition or results of
operations.
Revenue recognition
We derive our revenues from sales of quartz surfaces mostly through a combination of direct sales in certain markets and indirectly through a network of
distributors in other markets.
Starting January 1, 2018, we adopted Accounting Standards Codification 606, Revenue from Contracts with Customers (ASC 606).
Under ASC 606, revenue is recognized when a customer obtains control of promised goods or services in an amount that reflects the consideration the entity
expects to receive in exchange for those goods or services. In addition, ASC 606 requires disclosure of the nature, amount, timing, and uncertainty of revenue and
cash flows arising from contracts with customers.
We apply the following five steps in accordance with ASC 606:
(1) identify the contract with a customer: A contract is an agreement between two or more parties that creates enforceable rights and obligations. In evaluating the
contract, we analyze the customer’s intent and ability to pay the amount of promised consideration (credit risk) and considers the probability of collecting
substantially all the consideration. We determine whether collectability is reasonably assured on a customer-by-customer basis pursuant to various criteria
including our historical experience, credit insurance results and other inputs.
63
(2) identify the performance obligations in the contract: At a contract’s inception, we assess the goods or services promised in a contract with a customer and
identify the performance obligations. The main performance obligation is a delivery of our products.
(3) determine the transaction price: Our products that are sold through agreements with distributors are non-exchangeable, non-refundable, non-returnable and
without any rights of price protection or stock rotation. Accordingly, we consider all the distributors to be end-consumers. For certain revenue transactions with
specific customers, we are responsible also for the fabrication and installation of our products. We recognize such revenues upon receipt of acceptance evidence
from the end consumer which occurs upon completion of the installation. Although, in general, we do not grant rights of return, there are certain instances where
such rights are granted. We maintain a provision for returns in accordance with ASC 606, which is estimated, based primarily on historical experience as well as
management judgment, and is recorded through a reduction of revenue.
(4) allocate the transaction price to the performance obligations in the contract: The majority of our revenues are sales of goods, therefore there is one main
performance obligation that absorbs the transaction price.
(5) recognize revenue when a performance obligation is satisfied: Revenue is recognized when or as performance obligations are satisfied by transferring control
of a promised good or service to a customer. Control transfers at a point in time, which affects when revenue is recorded. The majority of our revenues deriving
from sales of products which are recognized when control is transferred based on the agreed International Commercial terms, or “INCOTERMS”.
We adopted ASC 606 in the first quarter of 2018 using the modified retrospective method, no cumulative effect adjustment as of the date of the adoption was
required.
Prior years information has not been restated and continues to be reported under the old accounting standard 605, “Revenue Recognition” (ASC 605).
Lease accounting
On January 1, 2019, we adopted Accounting Standards Update (“ASU”) No. 2016-02, Leases (“Topic 842”), as amended, which supersedes the lease accounting
guidance under Topic 840, and generally requires lessees to recognize operating and financing lease liabilities and corresponding Right-Of-Use (“ROU”) assets on
the balance sheet and to provide enhanced disclosures surrounding the amount, timing and uncertainty of cash flows arising from leasing arrangements. We
adopted the new guidance using the modified retrospective transition approach by applying the new standard to all leases existing on the date of initial application
and not restating comparative periods. The most significant impact was the recognition of ROU assets and lease liabilities for operating leases. See Note 2 and Note
10 to our Consolidated Financial Statements for the year ended December 31, 2020 for further information regarding leases.
Allowance for credit loss
Our trade receivables are derived from sales to customers located mainly in the United States, Australia, Canada, Israel and Europe. We perform ongoing credit
evaluations of our customers and to date have not experienced any substantial losses. In certain circumstances, we may require letters of credit or prepayments. We
maintain an allowance for credit loss for estimated losses from the inability of our customers to make required payments that we have determined to be doubtful of
collection. We determine the adequacy of this allowance by regularly reviewing our accounts receivable and evaluating individual customers’ receivables,
considering customers’ financial condition, credit history and other current economic conditions. If a customer’s financial condition were to deteriorate which
might impact its ability to make payment, then additional allowances may be required. Provisions for credit loss are recorded in general and administrative
expenses. Our allowance for credit loss was $6.8 million, $2.5 million and $1.2 million as of December 31, 2020, 2019 and 2018, respectively.
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Inventory valuation
The majority of our inventory consists of finished goods and of raw materials. Inventories are valued at the lower of cost or net realizable value, with cost of
finished goods determined on the basis of direct manufacturing costs plus allocable indirect costs representing allocable operating overhead expenses and
manufacturing costs and cost of raw materials determined using the “standard cost” method which approximates actual cost on a weighted average basis. We assess
the valuation of our inventory on a quarterly basis and periodically write down the value for different finished goods and raw material categories based on their
quality classes and aging. If we consider specific inventory to be obsolete, we write such inventory down to zero. Inventory provisions are provided to cover risks
arising from slow-moving items, discontinued products, excess inventories and net realizable value lower than cost. The process for evaluating these write-offs
often requires us to make subjective judgments and estimates concerning prices at which such inventory will be able to be sold in the normal course of business.
Accelerating the disposal process or incorrect estimates of future sales potential may cause actual results to differ from the estimates at the time such inventory is
disposed of or sold. Inventory provision was $16.6 million, $18.2 million and $15.6 million as of December 31, 2020, 2019 and 2018, respectively.
Goodwill and other long-lived assets
The purchase price of an acquired business is allocated between intangible assets and the net tangible assets of the acquired business with the residual of the
purchase price recorded as goodwill. The determination of the value of the intangible assets acquired involves certain judgments and estimates. These judgments
can include, but are not limited to, the cash flows that an asset is expected to generate in the future and the appropriate weighted average cost of capital.
As of December 31, 2020, our goodwill and identifiable intangible assets totaled $47.5 million and $12.1 million, respectively. The increase in goodwill and
intangible assets was mainly attributable to the Lioli Acquisition and Omicron Acquisition. We assess the impairment of goodwill of our reporting unit annually
during the fourth quarter of each fiscal year, or more often if events or changes in circumstances indicate that the carrying value may not be recoverable. Goodwill
is tested for impairment at the reporting unit level by first performing a qualitative assessment to determine whether it is more likely than not that, the fair value of
the reporting unit is less than is carrying value. If the reporting unit does not pass the qualitative assessment, then the reporting unit’s carrying value is compared to
its fair value. We have only one reporting unit because all our components have similar economic characteristic, and we determine its fair value based on fair value
methodologies include estimates of future cash flows, future short-term and long-term growth rates and weighted average cost of capital, see also Note 2l in our
financial statements.
As of December 31, 2020, 2019 and 2018, no impairment losses had been identified.
We also evaluate the carrying value of all long-lived assets, such as property, plant and equipment and right of use assets, for impairment whenever events or
changes in circumstances indicate that the carrying value of an asset may not be recoverable. We will record an impairment loss when the carrying value of the
underlying asset group exceeds its estimated fair value. In determining whether long-lived assets are recoverable, our estimate of undiscounted future cash flows
over the estimated life of an asset is based upon our experience, historical operations of the asset, an estimate of future asset profitability and economic conditions.
The future estimates of asset profitability and economic conditions require estimating such factors as sales growth, inflation and the overall economics of the
countertop industry. Our estimates are subject to variability as future results can be difficult to predict. If a long-lived asset is found to be non-recoverable, we
record an impairment charge equal to the difference between the asset’s carrying value and fair value.
Fair value measurements
The performance of fair value measurements is an integral part of the preparation of financial statements in accordance with generally accepted accounting
principles. Fair value is defined as the price that would be received to sell the asset or paid to transfer the liability in an orderly transaction between market
participants to sell or transfer such an asset or liability. Selection of the appropriate valuation techniques, as well as determination of assumptions, risks and
estimates used by market participants in pricing the asset or liability requires significant judgment. Although we believe that the inputs used in our evaluation
techniques are reasonable, a change in one or more of the inputs could result in an increase or decrease in the fair value for example, of certain assets and certain
liabilities and could have an impact on both our consolidated balance sheets and consolidated statements of income.
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Business Combination
We allocate the fair value of purchase consideration to the tangible assets acquired, liabilities assumed, and intangible assets acquired based on their estimated fair
value. The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill. Such valuations
require our management to make significant estimates and assumptions, especially with respect to intangible assets. Significant estimates in valuing certain
intangible assets include, but are not limited to, future expected cash flows from acquired operations and other intangible assets, their useful lives and discount
rates. Our management’s estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as
a result, actual results may differ from estimates. During the measurement period, which is not to exceed one year from the acquisition date, we may record
adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill. Upon the conclusion of the measurement period, any
subsequent adjustments are recorded to earnings.
Marketable Securities
We account for investments in debt securities in accordance with ASC 320, "Investments - Debt and Equity Securities." Management determines the appropriate
classification of its investments in debt securities at the time of purchase and re-evaluates such determinations at each balance sheet date.
Marketable securities classified as "available-for-sale" (“AFS”) are carried at fair value, based on quoted market prices. Unrealized gains and losses are reported in
a separate component of shareholders' equity in accumulated other comprehensive income (loss). Gains and losses are recognized when realized, on a specific
identification basis, in our consolidated statements of income.
We asses AFS debt securities with an amortized cost basis in excess of estimated fair value to determine what amount of that difference, if any, is caused by
expected credit losses in accordance with ASC 326. Factors considered in making such a determination include the duration and severity of the impairment, the
reason for the decline in value, the potential recovery period and our intent to sell, including whether it is more likely than not that we will be required to sell the
investment before recovery of cost basis. For securities with an unrealized loss that we intend to sell, or it is more likely than not that we will be required to sell
before recovery of their amortized cost basis, the entire difference between amortized cost and fair value is recognized in earnings. For securities that do not meet
these criteria, the amount of impairment recognized in earnings is limited to the amount related to credit losses, while declines in fair value related to other factors
are recognized in accumulated other comprehensive income (loss). We did not record credit loss allowance on our marketable securities during the year ended
December 31, 2020.
Accounting for contingencies
We are involved in various product liability, commercial, environmental claims and other legal proceedings that arise from time to time in the course of business.
We record accruals for these types of contingencies to the extent that we conclude their occurrence is probable and that the related liabilities are estimable. When
accruing these costs, we will recognize an accrual in the amount within a range of loss that is the best estimate within the range. When no amount within the range
is a better estimate than any other amount, we accrue for the minimum amount within the range. We record anticipated recoveries under the applicable insurance
policies, in the amounts that are covered, and we believe their collectability is probable. Legal costs are expensed as incurred.
For unasserted claims or assessments, we followed the accounting guidance in ASC 450-20-50-6, 450-20-25-2 and 450-20-55-2 in which we must first determine
that the probability that an assertion will be made is likely, then, a determination as to the likelihood of an unfavorable outcome and the ability to reasonably
estimate the potential loss is made.
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We review the adequacy of the accruals on a periodic basis and may determine to alter our reserves at any time in the future if we believe it would be appropriate to
do so. As such, accruals are based on management’s judgment as to the probability of losses and, where applicable, accruals may materially differ from settlements
or other agreements made with regards to such contingencies.
See Note 10 to our financial statements included elsewhere in this annual report and “ITEM 8.A: Financial Information—Consolidated Financial Statements and
Other Financial Information—Legal Proceedings” for further information regarding legal matters.
Income taxes
We account for income taxes in accordance with ASC 740, “Income Taxes”, which requires that deferred tax assets and liabilities be recognized using enacted tax
rates for the effect of temporary differences between the financial reporting and tax basis of recorded assets and liabilities. ASC 740 also requires that deferred tax
assets be reduced by a valuation allowance if it is more likely than not that some portion or all the deferred tax asset will not be realized. We have recorded a
valuation allowance to reduce our subsidiaries’ deferred tax assets to the amount that we believe is more likely than not to be realized. Our assumptions regarding
future realization may change due to future operating performance and other factors.
ASC 740 requires that companies recognize in their consolidated financial statements the impact of a tax position if that position is not more likely than not of
being sustained on audit based on the technical merits of the position. ASC 740 also provides guidance on de-recognition, classification, interest and penalties,
accounting in interim periods and disclosure. We accrue interest and penalties related to unrecognized tax benefits in our tax expenses.
We establish reserves for tax-related uncertainties based on estimates of whether, and the extent to which, additional taxes will be due. These reserves are
established when we believe that certain positions might be challenged despite our belief that our tax return positions are in accordance with applicable tax laws. As
part of the determination of our tax liability, management exercises considerable judgment in evaluating tax positions taken by us in determining the income tax
provision and establishes reserves for tax contingencies in accordance with ASC 740 guidelines. We adjust these reserves in light of changing facts and
circumstances, such as the closing of a tax audit, new tax legislation, or the change of an estimate based on new information. To the extent that the final tax
outcome of these matters is different from the amounts recorded, such differences will affect the provision for income taxes in the period in which such
determination is made. The provision for income taxes includes the effect of reserve provisions and changes to reserves that are considered appropriate, as well as
the related net interest and penalties.
We file income tax returns in Australia, Canada, Israel, Singapore, England and the United States. The Israeli tax authorities audited our income tax returns for the
fiscal years leading up to and including 2014 and we were examined by the IRS in the United States for our income tax return filed for the fiscal year 2015. We
may be further subject to examination in the other countries in which we file tax returns and for any subsequent years. Management’s judgment is required in
determining our provision for income taxes in each of the jurisdictions in which we operate. The provision for income tax is calculated based on our assumptions as
to our entitlement to various benefits under the applicable tax laws in the jurisdictions in which we operate. The entitlement to such benefits depends upon our
compliance with the terms and conditions set out in these laws. Although we believe that our estimates are reasonable and that we have considered future taxable
income and ongoing prudent and feasible tax strategies in estimating our tax outcome, there is no assurance that the final tax outcome will not be different than
those which are reflected in our historical income tax provisions and accruals. Such differences could have a material effect on our income tax provision, net
income and cash balances in the period in which such determination is made.
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Share-based compensation
We measure and recognize stock-based compensation expense based on the fair value measurement for all share-based payment awards made to our employees,
including employee stock options and restricted stock awards (RSUs), over the service period for awards expected to vest. Stock-based compensation expense
associated with employee stock options in 2020, 2019 and 2018 was $2.9 million, $3.6 million and $1.7, respectively.
Under ASC 718, we estimate the value of employee stock options as of date of grant using a Black & Scholes-based option valuation model. The determination of
fair value of stock option awards on the date of grant is affected by several factors including our stock price, our stock price volatility, the risk-free interest rate,
expected dividends and employee stock option exercise behaviors. If such factors change and we employ different assumptions for future grants, our compensation
expense may differ significantly from the amounts that we have recorded in the past. In addition, our compensation expense is affected by our estimate of the
number of awards that will ultimately vest. The RSUs are measured at the grant date based on the market value of our ordinary shares. See Note 2w to the financial
statements included elsewhere in this report.
B.
Liquidity and Capital Resources
Our primary capital requirements have been to fund production capacity expansions, as well as investments in and acquisitions of third-party distributors, such as
the purchase of the minority interest in Caesarstone Canada Inc., our acquisition of the business of our former Australian distributor, our investment in and
acquisition of Caesarstone USA, formerly known as U.S. Quartz Products, Inc. and the construction of our new manufacturing facility in the United States, as well
as the recent Lioli Acquisition and Omicron Acquisition. Our other capital requirements have been to fund our working capital needs, operating costs, meet
required debt payments, finance a repurchase of our shares and to pay dividends on our capital stock.
Capital resources have primarily consisted of cash flows from operations, cash generated from the March 2012 Initial Public Offering (the “IPO”), proceeds from
the land purchase agreement and leaseback in connection with our Bar-Lev facility and borrowings under our credit facilities. Our working capital requirements are
affected by several factors, including demand for our products, raw material costs and shipping costs.
Our inventory strategy is to maintain sufficient inventory levels to meet anticipated customer demand for our products. Our inventory is significantly impacted by
sales in the United States, Australia and Canada, our largest markets, due to the 40-90 days required to ship our products to these locations from Israel. We continue
to focus on meeting market demand for our products while improving our inventory efficiency over the long term by implementing procedures to improve our
production planning process.
We minimize working capital requirements through our distribution network that allows sales and marketing activities to be provided by third-party distributors.
We believe that, based on our current business plan, our cash, cash equivalents and short-term bank deposits on hand, cash from operations and borrowings
available to us under our revolving credit line and short-term facilities, we will be able to meet our capital expenditure and working capital requirements, and
liquidity needs for at least the next twelve months. We may require additional capital to meet our longer-term liquidity and future growth requirements. Continued
instability in the capital markets could adversely affect our ability to obtain additional capital to grow our business and would affect the cost and terms of such
capital.
Cash flows
The following table presents the major components of net cash flows used in and provided by operating, investing and financing activities for the periods presented:
Net cash provided by operating activities
Net cash used in investing activities
Net cash used in financing activities
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2020
Year ended December 31,
2019
(in thousands of U.S. dollars)
2018
$
$
47,618
(68,305)
(6,084)
$
83,049
(23,587)
(14,127)
14,692
(21,153)
(38,363)
Cash provided by operating activities
Operating activities consist primarily of net income adjusted for certain non-cash items. Adjustments to net income for non-cash items include depreciation and
amortization, share-based compensation and deferred taxes. In addition, operating cash flows are impacted by changes in operating assets and liabilities, principally
inventories, accounts receivable, prepaid expenses and other assets, accounts payable and accrued expenses.
Cash provided by operating activities in 2020 decreased by $35.4 million from $83 million in 2019 to $47.6 million in 2020, mainly to a decrease in inventories by
$0.3 million during 2020 compared to a decrease by $35.3 million during 2019, increase in accrued expenses and other liabilities by $0.4 million during 2020
compared to an increase by $5.8 million during 2019, a decrease in trade payables by $17.9 million during 2020 compared to a decrease by $6.7 million during
2019, and a decrease in other accounts receivable and prepaid expenses by $9.3 million during 2020 compared to an increase by $6.3 million during 2019.
Cash provided by operating activities in 2019 increased by $68.3 million from $14.7 million in 2018, mainly due to a decrease in inventories by $35.3 million
during 2019 compared to an increase by $30.6 million during 2018, increase in accrued expenses and other liabilities by $5.8 million during 2019 compared to a
decrease by $5.1 million during 2018, a decrease in trade payables by $6.7 million during 2019 compared to a decrease by $16.2 million during 2018, and an
increase in other accounts receivable and prepaid expenses by $6.3 million during 2019 compared to a decrease by $7.7 million during 2018.
Cash used in investing activities
Net cash used in investing activities for the years ended December 31, 2020, 2019 and 2018 were $68.3 million, $23.6 million and $21.2 million, respectively. In
2020, investing activities included $19.8 million of capital expenditures, $19.2 million of investment in marketable securities and $29.0 million of cash
consideration paid for the Lioli Acquisition and Omicron Acquisition. In each of 2019 and 2018, cash used in investing activities consisted principally of capital
expenditures that amounted to $23.6 million and $21.0 million, respectively.
Cash used in financing activities
Net cash used in financing activities for 2020 was $6.1 million, which included $4.8 million of dividend paid, and $1.2 million of repayment of a financial
leaseback arrangement related to our Bar-Lev facility. Net cash used in financing activities for 2019 was $14.1 million, which included $7.8 million of bank credit
repayment and $5.2 million of dividend paid and $1.2 million of repayment of a financing liability of land from a related party arrangement related to our Bar-Lev
facility. Net cash used in financing activities for 2018 was $38.4 million, which included a $20.1 million call option exercised related to non-controlling interest,
$20.3 million of dividends paid and $1.2 million of repayment of a financing liability of land from a related party arrangement related to our Bar-Lev facility,
partially offset by $4.2 million of bank credit increase.
Credit facilities
As of December 31, 2020, we had a long-term bank debt from commercial banks in India, as a result of the Lioli Acquisition, in the amount of $9.5 million and
current maturities of long-term bank loan of $2.0 million bearing interest at the rate per annum equal to the India Libor rate plus 4.5%. Such are to be repaid on a
monthly basis through 2025. While the loan is outstanding, Lioli is subject to certain covenants including, among others, limiting its ability to divest assets, pay
dividends, borrow additional funds and place other encumbrances on its assets.
In addition, Lioli was provided a shareholder’s loan by all its shareholders (including its minority shareholders). Such loan is denominated in INR and amounts to
$4.0 million, including the approximately $2 million that the Company extended during March 2021 in accordance with the terms of the Lioli Acquisition, and
which was used to repay certain selling shareholders. The loan bears an interest rate per annum equal to Libor rate plus 4.5% and is to be repaid during the third
quarter of 2025.
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In connection with the Omicron Acquisition, we assumed an outstanding credit facility of $14 million, approximately $8.3 million of which, as of December 31,
2020, was drawn and subsequently repaid during February 2021. Such credit line remains available to Omicron.
In addition, we have long-term and short-term debt related to the Bar-Lev sale and lease-back transaction with the Kibbutz.
We also received a loan on January 17, 2011, in the amount of CAD 4.0 million ($4.1 million) to Caesarstone Canada Inc. by its shareholders, Ciot and us, on a pro
rata basis. The loan bears an interest rate until repayment at a per annum rate equal to the Bank of Canada’s prime business rate plus 0.25%, with the interest
accrued on the loan paid on a quarterly basis. The loan balance as of December 31, 2020 was $0.9 million (reflects the portion of the loan received from Ciot),
which was included in related party and other loan line item.
As of December 31, 2020, we had short-term credit lines with total availability of $18.2 million, consisting of $3.4 million from banks in India (as a result of the
Lioli Acquisition), $14.5 million from an American bank (as a result of the Omicron Acquisition) and $0.2 million from Israeli banks, of which $10.3 million were
utilized. Our credit lines from Israeli banks are subject to annual renewal.
Our credit facilities and services provided by banks in Israel are secured with a “Negative floating pledge,” whereby we committed not to pledge or charge and not
to undertake to pledge or charge our general floating assets.
Capital expenditures
Our capital expenditures mainly included the expansion, improvement and maintenance of our manufacturing capacity and capabilities, expansion on our north
America distribution network and investment and improvements in our information technology systems. In 2020, 2019 and 2018 our capital expenditures were
$19.8 million, $23.6 million and $21.0 million, respectively. We plan to increase our capital expenditures in the coming years in order to support our business plan
in the next few years.
Land purchase agreement and leaseback
Pursuant to a land purchase agreement entered on March 31, 2011, which became effective upon our IPO, Kibbutz Sdot-Yam acquired from us our rights in the
lands and facilities of the Bar-Lev Industrial Park in consideration for NIS 43.7 million (approximately $10.9 million). The carrying value of the Bar-Lev land at
the time of closing this transaction was NIS 39.0 million (approximately $10.4 million). The land purchase agreement was executed simultaneously with the
execution of a land use agreement.
Pursuant to the land use agreement, Kibbutz Sdot-Yam permits us to use the Bar-Lev land for a period of ten years commencing on September 2012, that will be
automatically renewed, unless we give two years’ prior notice, for a ten-year term in consideration for an annual fee of NIS 4.1 million (approximately $1.1
million) to be linked to increases in the Israeli consumer price index. The fee is subject to adjustment following January 1, 2021 and every three years thereafter at
the option of Kibbutz Sdot-Yam if Kibbutz Sdot-Yam chooses to obtain an appraisal that supports such an increase. The appraiser would be mutually agreed upon
or, in the absence of agreement, will be chosen by Kibbutz Sdot-Yam from a list of assessors recommended at that time by Bank Leumi.
The transaction was not qualified as “sale lease-back” accounting under both ASC 840 and ASC 842 and the Company recorded the entire amount received as
consideration as a liability.
C.
Research and Development, Patents and Licenses
Our R&D department is located in Israel. As of December 31, 2020, our R&D department was comprised of 17 employees, all of whom have extensive experience
in engineered quartz surface manufacturing, polymer science, engineering, product design and engineered quartz surface applications. In addition, our R&D for
porcelain manufacturing is conducted by one dedicated employee located in India, whose activities are supported by the R&D department in Israel. In 2020,
research and development costs accounted for approximately 0.8% of our revenues. In 2019 and 2018, research and development costs accounted for approximately
0.8% and 0.6% of our revenues, respectively.
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We pursue a strategy of identifying certain innovative proprietary technologies and seeking patent protection when applicable. We have obtained patents for certain
of our technologies and have pending patent applications which relate to our manufacturing technology and certain products. We act to protect other innovative
proprietary technologies developed by us by implementing confidentiality protection measures without pursuing patent registration. No patent application is
material to the overall conduct of our business.
Research and development expenses were $4.0 million, $4.1 million and $3.6 million in 2020, 2019 and 2018, respectively.
For a description of our research and development policies, see “ITEM 4.B: Information on the Company—Business Overview—Research and development.”
D.
Trend Information
Impacts from COVID-19
The COVID-19 pandemic has increased market uncertainty and volatility and led to travel and other restrictions including individual quarantines imposed globally,
significantly affecting consumer and businesses behaviors. The volatility in stock markets around the world has already and may continue to materially and
adversely impact stock prices and trading volumes for us and other corporations. The culmination of these dramatic large-scale events could result in a global
economic recession and significantly decrease home renovation and remodeling activity and new residential construction, and in turn reduce the demand for our
products, thus materially and adversely affecting our business and results of operations.
We have attempted and continue to attempt to comply with rapidly changing restrictions, such as travel restrictions, curfews and others. Following
recommendations from the Israeli Ministry of Health and the Ministry of Finance, in April 2020, September 2020 and January 2021, the Israeli government
imposed full nationwide lockdowns, shuttering schools and nonessential businesses, restricting gatherings and people’s movement. In addition, starting in March
2020, in periods other than the full lockdowns, the government has systematically limited operations of the private sector, including reductions of onsite workforce,
imposed travel and gathering restrictions and reduced workforce in the public sector. Currently travel to and from work is still permitted, however the authorities
may place additional, more restrictive measures on businesses and individuals.
The widespread outbreak of certain diseases, such as the recent COVID-19 pandemic, may adversely affect our business, disrupt our ability to manufacture
products and impact the operations of our customers and modes of shipping, any of which could lead to reduction in customer orders and sales to certain regions
and end-markets. See also “—The COVID-19 pandemic could further impact end-consumers and the global economy in general, lower demand for our products,
disrupt our operations and materially and adversely affect our business and results of operations” and “—Disturbances to our operations or the operations of our
suppliers, distributors, customers, consumers or other third parties could materially adversely affect our business”.
Employee health and safety is our priority. Deemed part of essential infrastructure industry, we continue to produce our products, while coordinating with and
implementing guidance from the relevant governmental health guidelines. In an effort to keep our employees safe and healthy, we have implemented several
measures including, but not limited to: increasing physical distancing of our employees; separating between shifts and roles; changing our travel and shuttles;
separating spaced during meal times; adding temperature and symptom screening stations for employees prior to entering our facilities; increasing personal hygiene
practices and providing our employees additional personal protective equipment and sanitation stations; and increasing sanitation of our facilities. In addition, we
implemented global travel restrictions and work-from-home policies for employees who have the ability to work remotely.
We have received governmental support for our operations mainly in Canada, the United Kingdom and Singapore an aggregate amount of $1.7 million.
In addition, after halting recruitment, and furloughing employees, primarily due to reduction of our production capacity, we are facing challenges to recruit plant
workers, particularly at our Sdot-Yam facility. Such challenges are partially due to the Israel social security scheme, which provides unemployment payments to
workers laid off due to COVID-19 until mid-2021.
71
Currently, the trajectory of the COVID-19 outbreak remains highly uncertain. The extent to which COVID-19 will continue to impact our business and results of
operations will depend on evolving factors, such as the duration and severity of the outbreak, containment measures, the availability and efficiency of providing
vaccines to the worldwide population; and governmental, business and individual actions in response to the pandemic. However, we will continue to assess our
operations for any impacts, trends and uncertainties involving the pandemic’s effects on economic activity and the particular effects on our industry and business,
including the construction and renovation markets, our sales, availability and price of our raw materials, and the extent to which our business may be materially and
adversely affected. For a discussion of certain risks associated with the COVID-19 pandemic, see “ITEM 1. A. Risk Factor—The COVID-19 pandemic could
further impact end-consumers and the global economy in general, lower demand for our products, disrupt our operations and materially and adversely affect our
business and financial results.”
E.
Off-Balance Sheet Arrangements
We do not currently engage in off-balance sheet financing arrangements. In addition, we do not have any interest in entities referred to as variable interest entities,
which includes special purpose entities and other structured finance entities.
F.
Contractual Obligations
Our significant contractual obligations and commitments as of December 31, 2020 are summarized in the following table:
2021
2022
2023
2024
(in thousands of U.S. dollars)
2025
2026 and
thereafter
Other
Total
(unaudited)
Sale-leaseback (1)
Operating leases (2)
Purchase obligations (3)
Long term bank loans (4)
Accrued severance pay, net (5)
Uncertain tax positions (6)
Total
$
$
$
$
1,233
22,277
27,732
1,639
—
—
52,881
$
$
$
$
822
20,610
—
1,788
—
—
23,220
$
$
$
—
17,316
—
1,994
—
—
19,310
$
$
$
—
15,245
—
2,175
—
—
17,420
$
$
$
—
13,874
—
2,352
—
—
16,226
$
$
$
—
65,983
—
1,234
— $
— $
$
67,217
— $
— $
— $
$
$
$
$
1,296
3,664
4,960
2,055
155,305
27,732
11,182
1,296
3,664
201,234
(1)
(2)
(3)
(4)
(5)
(6)
See Note 14 to the consolidated financial statements for further details regarding the financing liability of land.
As of December 31, 2020, the Company has additional operating leases that have not yet commenced of $3.7 million and sublease rental payments of $1.8
million under non-cancelable subleases which has been included above.
Consists of enforceable and legally binding purchase obligations to suppliers.
Primarily related to the Lioli Acquisition.
Severance pay relates mainly to accrued severance obligations to our Israeli employees as required under Israeli labor law. These obligations are payable
only upon termination, retirement or death of the relevant employee and there is no obligation if the employee voluntarily resigns. See also Note 2s to our
consolidated financial statements included elsewhere in this annual report for further information regarding accrued severance pay.
Uncertain income tax positions under ASC 740 guidelines for accounting for uncertain tax positions are due upon settlement and we are unable to
reasonably estimate the ultimate amounts or timing of settlement. See also Note 11 to our consolidated financial statements included elsewhere in this
annual report for further information regarding our liability under ASC 740.
72
ITEM 6: Directors, Senior Management and Employees
A. Directors and Senior Management
Our directors and executive officers, their ages and positions as of March 18, 2021, are as follows:
Date of Birth
Position
December 13, 1962
May 29, 1973
April 10, 1959
April 4, 1961
October 13, 1973
June 5, 1977
March 31, 1977
November 29, 1967
July 14, 1967
December 15, 1979
November 23, 1972
September 8, 1971
March 18,1955
October 27, 1966
June 17, 1965
July 27, 1946
September 2,1971
August 15, 1951
September 15, 1959
July 17,1975
June 3, 1983
Chief Executive Officer
Chief Financial Officer
Managing Director, APAC
Managing Director, North America
Managing Director, EMEA
Vice President, Chief Marketing Officer and
Managing Director Israel
Vice President, Global Supply Chain and
Commercial
Vice President, Global Production
Vice President, Global Research and
Development
Vice President, General Counsel and Corporate
Secretary
Vice President, Global Human Resources
Vice President, Chief Information Officer
Chairman
Director
Director
Director
Director
Director
Director
Director
Director
Name
Officers
Yuval Dagim
Ophir Yakovian
David Cullen
Ken Williams
Amir Reske
Rinat Efrima
Efrat Rimmer
Amihai Seider
Erez Margalit
Ron Mosberg
Efrat Yitzhaki
Suzie Roth
Directors
Dr. Ariel Halperin (4)
Nurit Benjamini (1)(2)(3)(5)(6)
Lily Ayalon (1)(2)(3)(5)(6)
Roger Abravanel (4)(5)
Dori Brown (4)
Ronald Kaplan (3)(5)
Ofer Tsimchi (1)(2)(5)
Shai Bober
Tom Pardo Itzhaki
____________________________
(1) Member of our audit committee.
(2) Member of our compensation committee.
(3) Member of our nominating committee.
(4) Member of our strategy committee.
Independent under the Nasdaq rules.
(5)
External director under the Israeli Companies Law.
(6)
Executive Officers
Yuval Dagim has served as our Chief Executive Officer since August 2018. Prior to joining us, during 2017, Mr. Dagim served as the CEO of Shikun & Binui Ltd.
(TASE: SKBN.TA), a global construction and infrastructure company. Prior to that, from 2011 to 2016, Mr. Dagim held several managerial positions at Kimberly
Clark (NYSE: KMB), a multinational personal care corporation. including as VP and Managing Director at Kimberly Clark Australia & New Zealand, and as
Managing Director and Chief Executive Officer at Kimberly Clark Israel (Hogla Kimberly). From 2008 to 2011, he served as Managing Director of Quarry
Products at Hanson UK, a leading supplier of heavy building materials to the construction industry and from 2002 to 2008 as Regional Director & Deputy
Managing Director at Hanson Israel. Mr. Dagim holds a B.Sc. degree in Mechanical Engineering from the Israeli Technological Institute, the Technion, and an
executive M.B.A. from Bar Ilan University, Israel.
Ophir Yakovian has served as our Chief Financial Officer since April 2018. Prior to joining us, from 2017 to 2018, Mr. Yakovian served as the Chief Financial
Officer of Perion Network Ltd. a global technology company that delivers data-driven online advertising and search solutions to brands and publishers and prior to
that, from 2015 to 2017, as the Chief Financial Officer of Tnuva Group, Israel’s largest food manufacturer. From 2012 to 2015, Mr. Yakovian served as the Chief
Financial Officer of Lumenis Ltd., a global leader in the field of minimally invasive clinical solutions. Prior to that, from 2006 to 2012, he served as VP Finance of
Verint Systems, (NASDAQ: VRNT), a global leader in Actionable Intelligence® solutions with a focus on customer engagement optimization and cyber
intelligence. Mr. Yakovian holds a bachelor’s degree in economics and accounting and a master’s degree in business economics from Bar Ilan University, Israel.
He is a Certified Public Accountant.
73
David Cullen has served as our Managing Director, APAC, since May 2019. Previously, from April 2010 to May 2019, Mr. Cullen served as Chief Executive
Officer for Caesarstone Australia. Prior to joining us, from January 2009 to March 2010, Mr. Cullen served as General Manager in Australia of Komatsu Ltd., a
Japanese manufacturer of industrial and mining equipment. From January 2006 to November 2008, he served as Chief Executive Officer of Global Food
Equipment Pty Ltd., an Australian importer and distributor of commercial food equipment. From 2004 to 2006, he served as Chief Executive Officer of White
International Pty Ltd., an Australian supplier of industrial and residential pump products. From 2003 to 2004, Mr. Cullen served as Chief Executive Officer of
Daisytek Australia Pty Ltd, a subsidiary of Daisytek International Corporation. From 1996 to 2002, he served as Chief Executive Officer of Tech Pacific Australia
Pty Ltd., the largest distributor of IT equipment in the Asia-Pacific region. Mr. Cullen has held various other management positions in other companies since 1985.
Mr. Cullen holds a Bachelor of Commerce degree from the University of New South Wales.
Ken Williams has served as our President of North America since January 2019. Previously, from March 2016 to January 2019, he has served as our President of
Caesarstone Canada. Prior to joining us, from February 1999 to March 2016, Mr. Williams held various senior executive level leadership positions, including
Executive Vice President of Sales and Marketing, in a number of Masco Corporation divisions, a global company involved in the design, manufacture and
distribution of branded home improvement and building products. Previously, Mr. Williams held general management positions and leadership roles at Fortune
Brands, the Redhill Company Ltd. and Thorne Stevenson Kellogg Management Consultants. Mr. Williams holds a Bachelor of Business Administration Degree
from Trent University in Ontario, Canada.
Amir Reske has served as our Managing Director, EMEA since May 2019. Previously, from 2016 to May 2019, he has served as Managing Director, Caesarstone
(UK). Prior to joining us, from 2013 to 2016, Mr. Reske served as the CEO of Tadiran Energy Ltd. in Israel, a corporation focusing on the development,
manufacturing, import, distribution, service and marketing of air conditioning systems for residential & commercial applications. Previously, from 2012 to 2013,
Mr. Reske served as the Director of Subsidiaries at Meuhedet National Health Services, a major health service organization in Israel and, from 2005 to 2012, as the
Chief Investment Director / Director of Business Development, at CP Holdings Ltd, a trading firm in the United Kingdom. He is a member of the Israeli bar and
holds a post graduate diploma in legal practice from the University of Oxford and a business law degree from Coventry University.
Rinat Efrima has served as our Global Chief Marketing Officer and Managing Director for Caesarstone Israel since July 2019. Prior to joining us, from 2010 to
2019, Ms. Efrima held various managerial positions at Kimberly-Clark Corporation, a multinational personal care corporation (NYSE: KMB), serving most
recently as Business Sector Leader for Europe, Middle East, and Africa (EMEA). Previously, from 2005 to 2009, she served as Marketing Director at Kimberly-
Clark Israel and prior to that in various marketing positions at the Strauss Group, an international food and beverage corporation. Ms. Efrima holds an M.B.A. with
a focus on marketing and advertising from Ono Academic College and a B.A. in economics and social sciences from Bar-Ilan University, Israel.
Efrat Rimmer has served as our Vice President, Global Supply Chain and Commercial, since February 2021. Prior to joining us, from July 2019 until January
2021. Ms. Rimer served as CEO and Co-founder of TreatMee Ltd., a company developing technological solutions and visual communication systems. Prior to that,
from July 2001 to January 2019, Ms. Rimer served in various managerial positions at HP Ltd., including as VP Operations, from 2016 to 2019; Supply Chain
strategy manager, from 2012 to 2016; Europe Strategic account manager, from 2009 to 2012; Global procurement manager, from 2005 to 2009; and as Production
logistics manager & Lean manager, from 2001 to 2005. Ms. Rimer holds a B.Sc. in Industrial Engineering form Ben Gurion University, and an MBA from Ben
Gurion University.
Amihai Seider has served as our Vice President, Global Production, since March 2019. Prior to joining us, from August 2003, Mr. Seider held various managerial
positions at Haifa Chemicals, Israel-based specialty fertilizer manufacturer including VP Operations from May 2012 and Plant Manager from September 2006 to
May 2012. Previously, from 1994 to 2003, Mr. Seider held managerial roles at Electrochemical Industries (1952) Ltd., a manufacturer and distributer of chemical
products including as Plant Manager from 2000 to 2003. Mr. Seider holds a B.Sc. in Chemical Engineering from Technion University, and an M.B.A. from Haifa
University, Israel.
Erez Margalit has served as our Vice President Research and Development since August 2013 and joined us in December 2010 as our R&D Engineering Manager.
Prior to joining us, from 2008 to October 2010, Mr. Margalit served as Director of Equipment, Reliability and Services of Fab1 and Fab2 of Tower Semiconductor
Ltd., a manufacturer of microelectronic devices. From 2001 to 2008, Mr. Margalit served as Technical Manager for several departments in Tower Semiconductor
Ltd. Mr. Margalit has specialized in designing, developing and implementing unique industry machinery for unique applications. Mr. Margalit holds a degree in
Electronics (Practical Engineer) from Emek Izrael College.
74
Ron Mosberg has served as our General Counsel & Corporate Secretary since September 2018. Prior to joining us, from 2015, Mr. Mosberg served as the General
Counsel and Corporate Secretary at Enzymotec Ltd., an Israeli based global nutraceutical company. Previously, from 2007 to 2015, Mr. Mosberg worked as a
lawyer at leading Israeli law firms. Mr. Mosberg holds an LL.B. in Law and Psychology from Tel Aviv University, Israel.
Efrat Yitzhaki has served as our Vice President, Human Resources since November 2019. Prior to joining us, from 2018 to 2019, Ms. Yitzhaki held the role of VP
Human Resources at Shikun and Binui, a global construction and infrastructure company. Previously, from 2013 to 2018, she served as HR Director at Kimberly
Clark Israel, a multinational personal care corporation. From 2008 to 2013, Ms. Yitzhaki served as Group Training OD & MD Manager at Osem Group/Nestle
Israel and HR Manager at Nestle Ice Cream. She holds a double B.A. in psychology and business, and an M.A. in psychology and business from the Hebrew
University, Israel.
Suzie Roth has served as our Chief Information Officer since June 2019. Prior to joining us, from 2014 to 2019, Ms. Roth served as Head of Global Business
Application at Netafim Israel, a global leader in precision irrigation solutions for sustainable agriculture. Previously, from 2009 to 2013, she served in various
managerial positions at Amdocs, a leading software and services provider to communications and media companies, most recently as Development and
Implementation Director. From 1998 to 2009, Ms. Roth served in several positions at Kodak Canada, including IT Manager Vancouver Site. Ms. Roth holds a
B.Sc. in information technologies from the Technion, the Israel Institute of Technology.
Directors
Dr. Ariel Halperin has served as our Chairman of the board of directors since December 2016. Dr. Halperin previously served as our director from December 2006
to May 2013. He has served as the senior managing partner of Tene Investment Funds, an Israeli private equity fund focusing on established growth companies
with leading global market positions, since 2004 and as a founding partner in Tenram Investments Ltd. a private investment company engaged in domestic and
foreign real estate investments since 2000. From 1992 to 2000, Dr. Halperin led negotiations related to the Kibbutzim Creditors Agreement serving as trustee for
the Israeli government, Israeli banks and the Kibbutzim. Dr. Halperin currently serves as a director of several Tene Investment Funds' portfolio companies,
including Hanita Coatings Ltd., Ricor Cryogenic & Vacuum Systems L.P., Qnergy Ltd., Gadot Chemical Terminals (1985) Ltd. and Merhav Agro Ltd. Dr.
Halperin holds a B.A. in Mathematics and Economics and Ph.D. in Economics from The Hebrew University of Jerusalem in Israel and a Post-Doctorate in
Economics from the Massachusetts Institute of Technology in Cambridge, Massachusetts.
Nurit Benjamini has served as our external director under the Companies Law since December 2020. Since December 2013, Ms. Benjamini currently serves as the
Chief Financial Officer of Crazy Labs Ltd., a company that creates fresh mobile content. From 2011 to 2013, Ms. Benjamini served as the Chief Financial Officer
ofWix.com (NASDAQ: WIX); from 2007 to 2011, she served as the Chief Financial Officer of CopperGate Communications Ltd., now Sigma Designs Israel Ltd.,
a subsidiary of Sigma Designs Inc. (NASDAQ: SIGM) and from 2000 to 2007, she served as the Chief Financial Officer of Compugen Ltd. (NASDAQ: CGEN).
Ms.Benjamini currently serves as an external director and the chairperson of the audit committee of Gamida Cell (NASDAQ: GMDA), as an external director and
the chairperson of the audit and compensation committees of BiolineRx Ltd. (NASDAQ: BLRX), and as an external director and the chairperson of the audit
committee of Allot Communications Ltd. (NASDAQ: ALLT). Ms. Benjamini earned both a B.A. degree in economics and business and an M.B.A. in finance from
Bar Ilan University, Israel.
Lily Ayalon has served as our external director under the Companies Law since December 2020. Ms. Ayalon currently is a business consultant and serves on the
board of directors for numerous public companies. Since 2015. From 2010 to 2015, Ms. Ayalon served as the Senior Deputy Director General of the Government
Companies Authority; from 2006 to 2009, she served as the Deputy Chief Executive Officer and Executive Directory of a subsidiary of the New Hamashbir Group
Ltd. and from 2004 to 2006, she served as the Chief Financial Officer of Amot Investments. Ms. Ayalon is a certified public accountant and earned both a B.A.
degree in accounting and economics and an M.B.A in finance from the Hebrew University of Jerusalem, Israel.
75
Roger Abravanel has served as our director since December 2016. During 2006, Mr. Abravanel retired from McKinsey & Company, a global management
consulting firm, which he joined in 1972 and where he had become a principal in 1979 and a director in 1984. Mr. Abravanel has provided consulting services to
Israeli and Italian private and venture capital funds throughout his career. Mr. Abravanel served as a director of Teva Pharmaceutical Industries Ltd. (TASE:
TEVA), a multinational pharmaceutical company, from 2007 to 2017, as a director of COFIDE—Gruppo De Benedetti SpA., an Italian holding company active in
the healthcare and automotive industries, from 2008 until 2013, as a director of Luxottica Group SpA., an Italian premium, luxury and sports eyewear
conglomerate, from 2006 to 2014, and as a director of Admiral Group plc, a car insurance provider in the U.K., from 2012 until 2015. Mr. Abravanel currently
serves as a director of Banca Nazionale del Lavoro (a subsidiary of BNP Paribas), and as a director at the Phoenix Holdings Ltd. Mr. Abravanel received a B.Sc.
degree in chemical engineering from the Polytechnic University in Milan in 1968 and an M.B.A. from INSEAD (with distinction) in 1972.
Dori Brown has served as our director since December 2016. Mr. Brown previously served as our director from December 2006 to March 2012. Mr. Brown joined
Tenram Investment Ltd. as an associate in 2001 and became a partner in 2003. Mr. Brown is one of the founding partners of Tene Investment Funds and has acted
as managing partner since 2004. Mr. Brown currently serves as a director of several Tene Investment Funds' portfolio companies, including Hanita Coatings Ltd,
Chromagen Agricultural Cooperative Ltd. and Field Produce Ltd. Mr. Brown holds an LL.B. degree from Bar Ilan University, Israel.
Ronald Kaplan has served as our director since December 2015. Mr. Kaplan has served as chairman of the board of directors of Trex Company, Inc. (NYSE:
TREX), a major manufacturer of wood-alternative decking, railings and other outdoor items made from recycled materials, since August 2015. From May 2010 to
August 2015, Mr. Kaplan served as Chairman, President and Chief Executive Officer of Trex Company, Inc. From January 2008 to May 2010, Mr. Kaplan served
as a director and President and Chief Executive Officer of Trex Company, Inc. From February 2006 through December 2007, Mr. Kaplan served as Chief
Executive Officer of Continental Global Group, Inc., a manufacturer of bulk material handling systems. For 26 years prior to this, Mr. Kaplan was employed by
Harsco Corporation (NYSE: HSC), an international industrial services and products company, at which he served in a number of capacities, including as senior vice
president, operations, and, from 1994 through 2005, as President of Harsco Corporation’s Gas Technologies Group, which manufactures containment and control
equipment for the global gas industry. Mr. Kaplan received a B.A. in economics from Alfred University and a M.B.A. from the Wharton School of Business,
University of Pennsylvania.
Ofer Tsimchi has served as our director since December 2014. He is a managing partner of Danbar Group Ltd., a management services firm, which he co-founded
in 2006. Mr. Tsimchi served as the Executive Chairman of the Board of Polysack Plastic Industries Ltd., which develops and manufactures film products for high-
shrink labels, candy wrappers and agro-textiles, from 2008 to 2011. Mr. Tismchi has been a director of Redhill Biopharma (NASDAQ: RDHL), a specialty
biopharmaceutical company focused on gastrointestinal diseases, since 2011, Maabarot Products Ltd., Israel’s leading developer, manufacturer, and marketer of a
wide range of advanced nutrition and health products for people and pets, since 2014, and Kidron Industrial Materials Ltd., a manufacturer of chemical
preparations, since 2003. From 2003 until 2005, he served as director and Chief Executive Officer of Kidron Industrial Holdings Ltd. Group, a manufacturer of
precision molded plastic products and components. From 2002 until 2003, Mr. Tismchi was a Business Development Manager of ProSeed Capital Fund, a venture
capital firm. From 2000 until 2001, Mr. Tismchi acted as the Chief Executive Officer of Insider Financial Services Ltd. From 1997 until 2000, Mr. Tsimchi served
as the Chief Executive Officer of Inbar Moulded Fiberglass and from 1993 until 1997 as its Vice President of Marketing and Sales. He was the Community
Director and Secretary of Kibbutz Hamadia from 1990 until 1993. Mr. Tsimchi holds a B.Sc. in Economics and Agriculture from the Hebrew University, Israel.
76
Shai Bober has served as the business manager of Kibbutz Sdot-Yam since June 2019. From 2014 to 2019, Mr. Bober served as Caesarstone’s maintenance
manager. From 2008 to 2003, Mr. Bober served as an electrical and control system engineer in our plants in Israel and in the U.S. Mr. Bober serves as a director on
the financial committee of Kibbutz Sdot-Yam and as Chief Executive Officer of Kibbutz Sdot-Yam Energy Company Ltd. Mr. Bober holds a Bachelor of
Technology degree, in Electrical and Electronics Engineering, from the Afeka Academic College of Engineering, Israel.
Tom Pardo Izhaki has served as the Chief Financial Officer of Kibbutz Sdot-Yam since 2017. From 2013 to 2017, Ms. Pardo Izhaki served as the Chief Financial
Officer of the A.T. Group. From 2008 to 2013, she served as a supervisor of the department of assurance services at PWC Israel and, from 2002 to 2008, in a senior
bookkeeping role at Sdot-Yam Marble & Tiles Ltd. Ms. Pardo Izhaki holds a B.A. in Economics and Accounting from Haifa University, and an M.A. in
Accounting from Bar-Ilan University, Israel. Ms. Pardo Izhaki is qualified as a Certified Public Accountant in Israel.
B.
Compensation of Officers and Directors
The aggregate compensation paid by us and our subsidiaries to our current executive officers, including stock-based compensation, for the year ended December
31, 2020, was $8.3 million. This amount includes $0.7 million set aside or accrued to provide pension, severance, retirement or similar benefits or expenses.
CEO Compensation
Pursuant to a services agreement we entered into with our Chief Executive Officer, Yuval Dagim, in consideration for services provided by Mr. Dagim, we pay Mr.
Dagim monthly compensation of NIS 205,000 (approximately $64,000), as well as provide benefits that are customary for senior executives in Israel, such as
reimbursement for the costs of a cellular phone and car fuel used in the course of performing his obligations.
Mr. Dagim is also entitled to an annual cash bonus of up to $840,000 based on quantitative performance goals of which $210 can be paid as a discretionary bonus
subject to the Board’s evaluation of Mr. Dagim’s performance; provided, however, that such discretionary bonus will not be granted to the CEO in the event the
Company does not have a positive EBITDA for the given fiscal year.
In addition, in August 2019, Mr. Dagim received a signing bonus in the amount of NIS 400,000 upon the completion of his first year with us (12 months).
In November 2018, Mr. Dagim received 300,000 options to purchase ordinary shares of the Company (the “Options”) and 40,000 restricted share units each
representing a right to receive one ordinary share of the Company (the “RSUs”). The exercise price of the Options is $15.65, which is the closing price of our
ordinary shares as traded on Nasdaq at the date of approval of the grant by our board of directors. The Options and RSU’s were granted in accordance with, and
subject to, all terms and conditions of the Company’s 2011 Incentive Compensation Plan and our customary option agreement, including, among other things,
provisions for the adjustment of the exercise price of the options in case of distribution of dividends. The Options and RSUs are subject to a vesting schedule over a
period of four years, as follows: 25% of the Options and RSUs will vest upon the lapse of each 12 months following the date Mr. Dagim joined Caesarstone,
provided, however, that upon the lapse of the notice period, the amount of Options and RSUs which is equal to 75,000 and 10,000, respectively, multiplied by a
fraction, the numerator of which will be the period elapsed as of the last date a portion of the Options and RSUs has vested and the denominator of which will be a
12 months period, will be accelerated and automatically be vested. The Options and RSUs will fully accelerate and vest in the event of a Change of Control (as
such term is defined in the Company’s 2011 Incentive Compensation Plan). Mr. Dagim may be entitled to exercise the vested Options and RSUs, subject to his
option agreement and applicable law, until the earlier of (i) 120 days following his adjustment period, or (ii) the expiration of the Options.
In addition, in the event that within 12 months following the date on which through an event or a transaction or a series of events or transactions, a person, other
than the Kibbutz, beneficially owns more ordinary shares of the Company than the ordinary shares then beneficially owned by Tene, but in no event not less than
25% of our outstanding ordinary shares, we terminate Mr. Dagim’s engagement with us other than for cause or material non-performance, all outstanding options
and other equity awards then held by Mr. Dagim shall become fully vested and exercisable.
77
We and Mr. Dagim may each terminate the agreement (other than for cause) with three (3) months prior written notice. Upon termination by us (not for cause), he
shall be entitled, in addition to the prior notice period, to an adjustment period of six (6) months. Upon termination by Mr. Dagim, subject to him completing a
twelve (12) month engagement period with us, he shall be entitled in addition to the prior notice period, to an adjustment period of three (3) months.
Director Compensation
Each of our directors (not including the Chairman of the board of directors, Mr. Roger Abravanel and Mr. Ronald Kaplan) is entitled to the payment of annual fee
of NIS 120,000 (approximately $37,000) and payment of NIS 3,350 (approximately $1,000) per meeting for participating in meetings of the board and committees
of the board. The annual fee shall not exceed the maximum annual fee of an expert external director set forth in the Companies Regulations (Rules regarding
Compensation and Expenses of External Directors) 5760-2000 as adjusted by the Companies Regulations (Relief for Public Companies with Shares Listed for
Trading on a Stock Market Outside of Israel), 5760-2000. The compensation awarded for participating in resolutions adopted without an actual convening
(meaning, unanimous written resolutions) and for participating through media communication will be reduced as follows: (1) for resolutions that will be adopted
without an actual convening, the participation compensation will be reduced to 50%; and (2) for participation through media communication, the participation
compensation will be reduced to 60%.
Mr. Roger Abravanel is entitled to an annual fee of $100,000 and a per-meeting fee $2,500 for participation in meetings of the board and committees of the board.
Our shareholders further approved that Mr. Ronald Kaplan is entitled to an annual fee of $75,000 and a per-meeting fee of $2,500 for participation in meetings of
the board and committees of the board. The participating fees of Mr. Abravanel and Mr. Kaplan for meetings held through media communication shall be reduced
by 50% and for meetings by written consent shall be reduced by 75%.
Dr. Ariel Halperin, our chairman of the board of directors, is entitled to an annual fee in the amount of NIS 750,000 (approximately $233,000), payable in equal
quarterly installments.
The participation compensation and the annual fee is inclusive of all expenses incurred by our directors in connection with their participation in a meeting held at
our offices or at the director’s residence area, or with regard to resolutions resolved by written consent or teleconference, provided that with respect to independent
directors residing outside of Israel (other than chairman of the board and external directors), their travel and lodging expenses related to their participation and
physical attendance at any board or board committee meeting will be borne by us. In addition, our directors are entitled to reimbursement for travelling expenses
when traveling abroad on our behalf and other expenses incurred in the performance of their duties and services to us.
Individual Covered Executive Compensation
The table below reflects the compensation granted to our five most highly compensated office holders (as defined in the Companies Law) during or with respect to
the year ended December 31, 2020. We refer to the five individuals for whom disclosure is provided herein as our “Covered Executives.” For purposes of the table
below, “compensation” includes amounts accrued or paid in connection with salary cost, consultancy fees, bonuses, equity-based compensation, retirement or
termination payments, benefits and perquisites such as car, phone and social benefits and any undertaking to provide such compensation. All amounts reported in
the table are in terms of cost to the Company, as recognized in our financial statements for the year ended December 31, 2020, plus compensation paid to such
Covered Executives following the end of the year in respect of services provided during the year. Each of the Covered Executives was covered by our D&O
liability insurance policy and was entitled to indemnification and exculpation in accordance with applicable law and our articles of association.
78
Name and Principal Position (1)
Salary (2)
Bonus (3)
Equity-Based
Compensation (4)
(in U.S. dollars)
All
other
compensation (5)
Yuval Dagim
Ophir Yakovian
Rinat Efrima
Ken Williams
David Cullen
672,833
455,443
412,141
457,027
382,951
171,464
107,496
72,084
56,826
98,558
772,911
133,496
138,839
97,130
96,149
52,582
17,105
13,721
2,353
7,231
(1)
All Covered Executives are employed by us on a full time (100%) basis.
Total
1,669,790
713,540
636,785
613,336
584,889
(2)
(3)
(4)
Salary includes the Covered Executive’s gross salary plus payment of social benefits made by us on behalf of such Covered Executive. Such benefits
may include, to the extent applicable to the Covered Executive, payments, contributions and/or allocations for savings funds (such as managers’ life
insurance policy), education funds (referred to in Hebrew as “keren hishtalmut”), pension, severance, risk insurances (such as life, or work disability
insurance), payments for social security and tax gross-up payments, vacation, medical insurance and benefits, convalescence or recreation pay and other
benefits and perquisites consistent with our policies.
Represents annual bonuses granted to the Covered Executive based on formulas set forth in the bonus plans and approvals set forth in the respective
resolutions of our compensation committee and the board of directors.
Represents the equity-based compensation expenses recorded in our consolidated financial statements for the year ended December 31, 2020, based on
the option's and RSU’s award’s fair value, calculated in accordance with accounting guidance for equity-based compensation. For a discussion of the
assumptions used in reaching this valuation, see Note 2w to our consolidated financial statements.
(5)
Includes mainly leased car and mobile phone expenses.
Employment and consulting agreements with executive officers
We have entered into written employment or service agreements with each of our executive officers.
Employment agreements
We have entered into written employment or services agreements with each of our office holders who is not a director. These agreements each contain customary
provisions regarding non-competition, confidentiality of information and assignment of inventions. The non-competition provision generally applies for a period of
six months following termination of employment. The enforceability of covenants not to compete in Israel and the United States is subject to limitations. In
addition, we are required to provide notice of between two and six months prior to terminating the employment of certain of our senior executive officers other than
in the case of a termination for cause. The terms of engagement of our chief executive officer are described above.
Indemnification agreements
Our articles of association permit us to exculpate, indemnify and ensure our directors and office holders to the fullest extent permitted by law, subject to limited
exceptions. We have entered into agreements with each of our current directors and office holders exculpating them from a breach of their duty of care to us to the
fullest extent permitted by law, subject to limited exceptions, and undertaking to indemnify them to the fullest extent permitted by law, including with respect to
liabilities resulting from our IPO to the extent that these liabilities are not covered by insurance. See “ITEM 6.C: Directors, Senior Management and Employees—
Board Practices—Exculpation, insurance and indemnification of office holders.”
Directors’ service contracts
There are no arrangements or understandings between us and any of our subsidiaries, on the one hand, and any of our directors, on the other hand, providing for
benefits upon termination of their employment or service as directors of our Company or any of our subsidiaries.
Equity incentive plan
In November 2020, we adopted the 2020 Caesarstone Share Incentive Plan (the “2020 Plan”) that replaced our 2011 Incentive Compensation Plan (the “2011
Plan”). Awards previously issued under the 2011 Plan will continue to be governed by the terms of the 2011 Plan.
The maximum aggregate number of our shares available for issuance as awards under the 2020 Plan is (i) 2,500,000 authorized but unissued shares, plus (ii) up to
1,000,000 shares carried over from the 2011 Plan, and shares underlying outstanding awards granted pursuant to the 2011 Plan if expired, cancelled, terminated,
forfeited or settled in cash in lieu of issuance of shares, which will be available for grant of awards pursuant to the 2020 Plan. However, except subject to certain
adjustments, in no event will more than 3,500,000 shares be available for issuance pursuant to the exercise of incentive stock options. As of March 18, 2021, the
number of ordinary shares allocated under the 2020 Plan was 59,000 ordinary shares. Considering the number of options and RSUs already granted, as of March
18, 2021, 3,033,556 ordinary shares remained available for future option or RSU grants under the 2020 Plan. As of March 18, 2021, the number of ordinary shares
underlying outstanding equity awards allocated under the 2011 and 2020 equity incentive plans was 1,552,203 ordinary shares.
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Under the 2020 Plan, we provide stock-based compensation to our directors, executive officers, employees and consultants, and those of our affiliates. The 2020
Plan is intended to further our success by increasing the ownership interest of certain of our and our subsidiaries employees, directors and consultants and to
enhance our and our subsidiaries ability to attract and retain employees, directors and consultants. See also Note 13 to our financial statements included elsewhere
in this report for additional information about grants of options and RSUs in recent years.
The 2020 Plan provides for granting awards under various tax regimes, including, without limitation, in compliance with Section 102 of the Israeli Income Tax
Ordinance (New Version), 5721 1961 (the “Ordinance”), and Section 3(i) of the Ordinance and for awards granted to our United States employees or service
providers, including those who are deemed to be residents of the United States for tax purposes, Section 422 of the Code and Section 409A of the Code.
Section 102 of the Ordinance allows employees, directors and officers who are not controlling shareholders and are considered Israeli residents to receive favorable
tax treatment for compensation in the form of shares or options. Our non-employee service providers and controlling shareholders may only be granted options
under section 3(i) of the Ordinance, which does not provide for similar tax benefits.
The 2020 Plan provides for the grant of stock options (including incentive stock options and nonqualified stock options), ordinary shares, restricted shares,
restricted share units and other share-based awards.
Options granted under the 2020 Plan to our employees who are U.S. residents may qualify as “incentive stock options” within the meaning of Section 422 of the
Code or may be non-qualified stock options.
In the event of termination of a grantee’s employment or service with the company or any of its affiliates, all vested and exercisable awards held by such grantee as
of the date of termination may be exercised within one hundred and twenty (120)days after such date of termination, unless otherwise determined by the
administrator, but in any event no later than the date of expiration of the award’s term. After such one hundred and twenty (120) day period, all unexercised awards
will terminate, and the shares covered by such awards shall again be available for issuance under the 2020 Plan.
In the event of termination of a grantee’s employment or service with the company or any of its affiliates due to such grantee’s death, permanent disability or
retirement, all vested and exercisable awards held by such grantee as of the date of termination may be exercised by the grantee or the grantee's legal guardian,
estate, or by a person who acquired the right to exercise the award by bequest or inheritance, as applicable, within twelve months after such date of termination,
unless otherwise provided by the administrator, but in any event no later than the date of expiration of the award’s term. Any awards which are unvested as of the
date of such termination or which are vested but not then exercised within the twelve month period following such date, will terminate and the shares covered by
such awards shall again be available for issuance under the 2020 Plan.
In the event of termination of a grantee’s employment or service on due to such grantee’s retirement, all exercisable awards held by such grantee as of the date of
retirement may be exercised at any time within the three (3) month period after the date of such retirement, unless otherwise determined by the administrator.
Notwithstanding any of the foregoing, if a grantee’s employment or services with the company or any of its affiliates is terminated for “cause” (as defined in the
2020 Plan), all outstanding awards held by such grantee (whether vested or unvested) will terminate on the date of such termination and the shares covered by such
awards shall again be available for issuance under the 2020 Plan, unless otherwise determined by the administrator.
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Grant of stock options to Chief Executive Officer
See “ITEM 6.B: Directors, Senior Management and Employees—Compensation—CEO Compensation.”
C.
Board Practices
Corporate governance practices
As a foreign private issuer, we are permitted to follow Israeli corporate governance practices instead of Nasdaq corporate governance rules, provided that we
disclose which requirements we are not following and the equivalent Israeli requirement. We rely on this “foreign private issuer exemption” as follows: As
permitted under the Companies Law, pursuant to our articles of association, the quorum required for any meeting of shareholders consists of at least two
shareholders present in person, by proxy or by other voting instrument in accordance with the Companies Law, who hold at least 25% of the voting power of our
shares, instead of 33.33% of the issued share capital required under the Nasdaq requirements. At an adjourned meeting, any number of shareholders constitutes a
quorum for the business for which the original meeting was called.
Otherwise, we comply with Nasdaq corporate governance rules generally applicable to U.S. domestic companies listed on Nasdaq. We may in the future decide to
use the foreign private issuer exemption with respect to some or all the other Nasdaq Global Select Market corporate governance rules. We also comply with Israeli
corporate governance requirements under the Companies Law applicable to public companies.
Board of directors and officers
As of the date of this report, our board of directors consists of ten directors, six of whom are independent under the Nasdaq rules, including Ms. Nurit Benjamini
and Ms. Lily Ayalon, who serve as our external directors and whose appointment fulfills the requirements of the Companies Law for the company to have two
external directors (see “—External directors”). Specifically, our board of directors has determined that Ofer Tsimchi, Nurit Benjamini, Lily Ayalon, Ronald Kaplan
and Roger Abravanel, meet the independence standards under the rules of Nasdaq. In reaching this conclusion, the board of directors determined, following the
recommendation of our nomination committee, that none of these directors has a relationship that would preclude a finding of independence and any relationships
that these directors have with us do not impair their independence.
Under our articles of association, the number of directors on our board of directors must be no less than seven and no more than 11 and must include at least two
external directors. The minimum and maximum number of directors may be changed, at any time and from time to time, by a simple majority vote of our
shareholders at a shareholders’ meeting.
Each director holds office until the annual general meeting of our shareholders in the subsequent year unless the tenure of such director expires earlier pursuant to
the Companies Law or unless he or she is removed from office as described below, except our external directors, who have a term of office of three years under
Israeli law (see “—External directors—Election and dismissal of external directors”).
The directors who are serving in office shall be entitled to act even if a vacancy occurs on the board of directors. However, should the number of directors, at the
time in question, become less than the minimum set forth in our articles of association, the remaining director(s) would be entitled to act for the purpose of filling
the vacancies or to convene a general meeting, but not for any other purpose.
Any director who retires from his or her office would be qualified to be re-elected subject to any limitation affecting such director’s appointment as a director under
the Companies Law. See “—External directors” for a description of the provisions relating to the reelection of external directors.
A general meeting of our shareholders may remove a director from office prior to the expiry of his or her term in office (“Removed Director”) by a simple
majority vote (except for external directors, who may be dismissed only as set forth under the Companies Law), provided that the Removed Director is given a
reasonable opportunity to state his or her case before the general meeting. If a director is removed from office as set forth above, the general meeting shall be
entitled, in the same session, to elect another director in his or her stead in accordance with the maximum number of directors permitted by our articles of
association as stated above. Should it fail to do so, the board of directors shall be entitled to do so. Any director who is appointed in this manner shall serve in
office for the period remaining of the term in office of the director who was removed and shall be qualified to be re-elected.
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Any amendment of our articles of association regarding the election of directors, as described above, require a simple majority vote. See “—External directors” for
a description of the procedure for the election of external directors.
In addition, under the Companies Law, our board of directors must determine the minimum number of directors who are required to have financial and accounting
expertise. Under applicable regulations, a “director with financial and accounting expertise” is a director who, by reason of his or her education, professional
experience and skill, has a high level of proficiency in and understanding of business accounting matters and financial statements so that he or she is able to fully
understand our financial statements and initiate debate regarding the manner in which the financial information is presented. The determination of whether a
director possesses financial and accounting expertise is made by the board of directors. In determining the number of directors required to have such expertise, the
board of directors must consider, among other things, the type and size of the company and the scope and complexity of its operations. Our board of directors has
determined that we require at least one director with the requisite financial and accounting expertise and that each of Ms. Nurit Benjamini and Ms. Lily Ayalon has
such expertise.
There are no family relationships among any of our office holders (including directors).
Alternate directors
Our articles of association provide, subject to the limitations under the Companies Law, that any director may, by written notice to us, appoint another person who
is qualified to serve as a director to serve as an alternate director. The appointment of an alternate director shall be subject to the consent of the board of directors.
The alternate director will be regarded as a director. Under the Companies Law, a person who is not qualified to be appointed as a director, a person who is already
serving as a director or a person who is already serving as an alternate director for another director, may not be appointed as an alternate director. Nevertheless, a
director who is already serving as a director may be appointed as an alternate director for a member of a committee of the board of directors so long as he or she is
not already serving as a member of such committee, and if the alternate director is to replace an external director, he or she is required to be an external director and
to have either “financial and accounting expertise” or “professional expertise,” depending on the qualifications of the external director he or she is replacing. A
person who does not have the requisite “financial and accounting experience” or the “professional expertise,” depending on the qualifications of the external
director he or she is replacing, may not be appointed as an alternate director for an external director. A person who is not qualified to be appointed as an
independent director, pursuant to the Companies Law, may not be appointed as an alternate director of an independent director.
External directors
Qualifications of external directors
Under the Companies Law, companies incorporated under the laws of the State of Israel that are “public companies,” including companies with shares listed on the
Nasdaq Global Select Market, are required to appoint at least two external directors who meet the qualification requirements under the Companies Law. Such
external directors are not required to be Israeli residents in case the company is listed on a foreign stock exchange (such as us). Appointment of external directors is
made by a special majority resolution of the general meeting of our shareholders. At a shareholders’ meeting held on November 10, 2020, each of Ms. Nurit
Benjamini and Ms. Lily Ayalon were elected to serve as external directors of the Company for a three-year term commencing on December 1, 2020 and expiring on
November 30, 2023.
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A person may not be appointed as an external director if the person is a relative of a controlling shareholder or if on the date of the person’s appointment or within
the preceding two years the person or his or her relatives, partners, employers or anyone to whom that person is subordinate, whether directly or indirectly, or
entities under the person’s control have or had any affiliation with any of (each an “Affiliated Party”): (1) us; (2) any person or entity controlling us on the date of
such appointment; (3) any relative of a controlling shareholder; or (4) any entity controlled, on the date of such appointment or within the preceding two years, by
us or by our controlling shareholder. If there is no controlling shareholder or any shareholder holding 25% or more of voting rights in the company, a person may
not serve as an external director if the person has any affiliation to the chairperson of the board of directors, the general manager (chief executive officer), any
shareholder holding 5% or more of the company’s shares or voting rights or the senior financial officer as of the date of the person’s appointment.
The term “controlling shareholder” means a shareholder with the ability to direct the activities of the company, other than by virtue of being an office holder. A
shareholder is presumed to have “control” of the company and thus to be a controlling shareholder of the company if the shareholder holds 50% or more of the
“means of control” of the company. “Means of control” is defined as (1) the right to vote at a general meeting of a company or a corresponding body of another
corporation; or (2) the right to appoint directors of the corporation or its general manager.
The term “affiliation” includes:
•
•
•
•
an employment relationship;
a business or professional relationship maintained on a regular basis;
control; and
service as an office holder, excluding service as a director in a private company prior to the first offering of its shares to the public if such director was
appointed as a director of the private company in order to serve as an external director following the initial public offering.
The term “relative” is defined as a spouse, sibling, parent, grandparent, descendant, spouse’s descendant, sibling and parent and the spouse of each of the foregoing.
The term “office holder” is defined as a general manager, chief business manager, deputy general manager, vice general manager, or any other person assuming the
responsibilities of any of the foregoing positions, without regard to such person’s title, and a director or manager directly subordinate to the general manager.
A person may not serve as an external director if that person or that person’s relative, partner, employer, a person to whom such person is subordinate (directly or
indirectly) or any entity under such person’s control has a business or professional relationship with any entity that has an affiliation with any Affiliated Party, even
if such relationship is intermittent (excluding insignificant relationships). Additionally, any person who has received compensation intermittently (excluding
insignificant relationships) other than compensation permitted under the Companies Law may not continue to serve as an external director.
No person can serve as an external director if the person’s position or other affairs create, or may create, a conflict of interest with the person’s responsibilities as a
director or may otherwise interfere with the person’s ability to serve as a director or if such a person is an employee of the Israel Securities Authority or of an
Israeli stock exchange. If at the time an external director is appointed all current members of the board of directors, who are not controlling shareholders or
relatives of controlling shareholders, are of the same gender, then the external director to be appointed must be of the other gender. In addition, a person who is a
director of a company may not be elected as an external director of another company if, at that time, a director of the other company is acting as an external director
of the first company.
The Companies Law provides that an external director must either meet certain professional qualifications or have financial and accounting expertise, and that at
least one external director must have financial and accounting expertise. However, if at least one of our other directors (1) meets the independence requirements of
the Exchange Act, (2) meets the Nasdaq requirements for membership on the audit committee and (3) has financial and accounting expertise as defined in the
Companies Law and applicable regulations, then neither of our external directors is required to possess financial and accounting expertise as long as both possess
other requisite professional qualifications as required under the Companies Law and regulations promulgated thereunder.
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The regulations promulgated under the Companies Law define an external director with requisite professional qualifications as a director who satisfies one of the
following requirements: (1) the director holds an academic degree in either economics, business administration, accounting, law or public administration, (2) the
director either holds an academic degree in any other field or has completed another form of higher education in the company’s primary field of business or in an
area which is relevant to his or her office as an external director in the company, or (3) the director has at least five years of experience serving in any one of the
following, or at least five years of cumulative experience serving in two or more of the following capacities: (a) a senior business management position in a
company with a substantial scope of business, (b) a senior position in the company’s primary field of business or (c) a senior position in public administration.
Under the Companies Law, until the lapse of a two-year period from the date that an external director has ceased to act as an external director (and until the lapse of
a one-year period, with respect to such external director spouse or children) certain prohibitions apply to the ability of the company and its controlling shareholders,
including any corporations controlled by a controlling shareholder to grant such former external director or his or her spouse or children any benefits (directly or
indirectly).
Election and dismissal of external directors
Under Israeli law, external directors are elected by a majority vote at a shareholders’ meeting, provided that either:
•
•
the majority of the shares that are voted at the meeting in favor of the election of the external director, excluding abstentions, include at least a majority of
the votes of shareholders who are not controlling shareholders or have a personal interest in the appointment (excluding a personal interest that did not
result from the shareholder’s relationship with the controlling shareholder); or
the total number of shares held by the shareholders mentioned in the paragraph above that are voted against the election of the external director does not
exceed two percent of the aggregate voting rights in the company.
Under Israeli law, the initial term of an external director of an Israeli public company is three years. The external director may be reelected, subject to certain
circumstances and conditions, to two additional terms of three years, each if:
•
•
•
his/her service for each such additional term is recommended by one or more shareholders holding at least 1% of the company’s voting rights and is
approved at a shareholders’ meeting by a disinterested majority, where the total number of shares held by non-controlling, disinterested shareholders
voting for such reelection exceeds 2% of the aggregate voting rights in the company, subject to additional restrictions set forth in the Companies Law with
respect to the affiliation of the external director nominee, as described above;
the external director proposed his or her own nomination, and such nomination was approved in accordance with the requirements described in the
paragraph above; or
his/her service for each such additional term is recommended by the board of directors and is approved at a meeting of shareholders by the same majority
required for the initial election of an external director (as described above).
The term of office for external directors for Israeli companies traded on certain foreign stock exchanges, including the Nasdaq Global Select Market, may be
further extended, indefinitely, in increments of additional three-year terms, in each case provided that: (i) both the audit committee and the board of directors
confirm that, in light of the expertise and contribution of the external director, the extension of such external director’s term would be in the interest of the
company; (ii) the appointment to the additional term is subject to the reelection provision described above; and (iii) the term during which the nominee served as an
external director and the board of directors’ and audit committee’s reasoning for the extension of such term were presented before the general meeting of
shareholders prior to the approval of the extension.
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An external director may be removed by the same special majority of the shareholders required for his or her election, if he or she ceases to meet the statutory
qualifications for appointment or if he or she violates his or her fiduciary duty to the company. An external director may also be removed by order of an Israeli
court if the court finds that the external director is permanently unable to exercise his or her office, has ceased to meet the statutory qualifications for his or her
appointment, has violated his or her fiduciary duty to the company, or has been convicted by a court outside Israel of certain offenses detailed in the Companies
Law.
If the vacancy of an external directorship causes a company to have fewer than two external directors, the company’s board of directors is required under the
Companies Law to call a special general meeting of the company’s shareholders as soon as possible to appoint such number of new external directors so that the
company thereafter has two external directors.
Under the regulations pursuant to the Companies Law, a public company with securities listed on certain foreign exchanges, including the Nasdaq Global Select
Market, that satisfies the applicable domestic country laws and regulations that apply to companies organized in that country relating to the appointment of
independent directors and composition of audit and compensation committees and have no controlling shareholder may adopt an exemption from the requirement
to appoint external directors or comply with the audit committee and compensation committee composition requirements under the Companies Law. We may adopt
this exemption in the future if we will no longer have a controlling shareholder.
Additional provisions
Under the Companies Law, each committee authorized to exercise any of the powers of the board of directors must include only directors and is required to include
at least one external director and each of the audit and compensation committees are required to include all of the external directors.
An external director is entitled to compensation and reimbursement of expenses in accordance with regulations promulgated under the Companies Law and is
prohibited from receiving any other compensation, directly or indirectly, in connection with serving as an external director except for certain exculpation,
indemnification and insurance provided by the company, as specifically allowed by the Companies Law.
Audit committee
Our audit committee consists of Ms. Nurit Benjamini, Ms. Lily Ayalon and Mr. Ofer Tsimchi. Ms. Nurit Benjamini serves as the chairperson of the audit
committee.
Companies Law requirements
Under the Companies Law, the board of directors of any public company must appoint an audit committee comprised of at least three directors, including all the
external directors. The audit committee may not include:
•
•
•
the chairperson of the board of directors;
a controlling shareholder or a relative of a controlling shareholder; and
any director employed by, or providing services on an ongoing basis to, the company, a controlling shareholder of the company or an entity controlled by
a controlling shareholder of the company or any director who derives most of his or her income from the controlling shareholder.
According to the Companies Law, the majority of the members of the audit committee, as well as the majority of members present at audit committee meetings, are
required to be “independent” (as defined below) and the chairperson of the audit committee is required to be an external director. Any persons disqualified from
serving as a member of the audit committee may not be present at the audit committee meetings, unless the chairperson of the audit committee has determined that
such person is required to be present at the meeting or if such person qualifies under one of the exemptions of the Companies Law. Without derogating from the
aforementioned, under the Companies Law, a company’s general counsel and a company’s secretary, which are not a controlling shareholder or relative thereof,
may be present at an audit committee meeting if the committee has requested their presence.
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The term “independent director” is defined under the Companies Law as an external director or a director who meets the following conditions and who is appointed
or classified as such according to the Companies Law: (1) the conditions for his or her appointment as an external director (as described above) are satisfied and the
audit committee approves the director having met such conditions and (2) he or she has not served as a director of the company for over nine consecutive years
with any interruption of up to two years of his or her service not being deemed a disruption to the continuity of his or her service.
Under the regulations promulgated under the Companies Law, an audit committee of companies such as ours may deem a director which qualifies as an
independent director, among others, under the Nasdaq listing rules, to be an independent director within the meaning of the Companies Law, provided that such
director complies with the Companies Law requirements for external directors with respect to a lack of affiliation with a controlling shareholder, its relatives and
entities under its control or his or her relative’s control, excluding the company itself or any of its subsidiaries. In addition, companies such as ours may extend the
term of office of an independent director who has served for more than nine years for additional periods of three years each if such director continues to comply
with the Companies Law requirements for external director’s lack of affiliation as described above.
Nasdaq requirements
Under the Nasdaq rules, we are required to maintain an audit committee consisting of at least three independent directors, all of whom are financially literate and
one of whom has accounting or related financial management expertise.
All members of our audit committee meet the requirements for financial literacy under the applicable rules of the SEC and the Nasdaq rules. Our board of directors
has determined that each of Ms. Nurit Benjamini and Ms. Lily Ayalon qualifies as an “audit committee financial expert,” as defined by applicable rules of the SEC
and has the requisite financial experience as defined by Nasdaq rules.
Each of the members of the audit committee is “independent” under the relevant Nasdaq rules and as defined in Rule 10A-3(b)(1) under the Exchange Act, which is
different from the general test for independence of members of the board.
Approval of transactions with related parties
The approval of the audit committee is required to effect specified actions and transactions with office holders and controlling shareholders and their relatives, or in
which they have a personal interest. See “—Fiduciary duties and approval of specified related party transactions under Israeli law.” For the purpose of approving
transactions with controlling shareholders, the term “controlling shareholder” also includes any shareholder that holds 25% or more of the voting rights of the
company if the company has no shareholder that owns more than 50% of its voting rights. For purposes of determining the holding percentage stated above, two or
more shareholders who have a personal interest in a transaction that is brought for the company’s approval are deemed as joint holders. The audit committee may
not approve an action or a transaction with a controlling shareholder or with an office holder unless at the time of approval the audit committee meets the
composition requirements under the Companies Law and provided such transaction is in the interest of the Company.
Audit committee role
Our board of directors has adopted an audit committee charter setting forth the responsibilities of the audit committee consistent with the rules of the SEC and
Nasdaq rules, which include, among other responsibilities:
•
retaining and terminating our independent auditors, subject to board of directors and shareholder ratification;
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•
•
•
pre-approval of audit and non-audit services to be provided by the independent auditors;
reviewing with management and our independent directors our quarterly and annual financial reports prior to their submission to the SEC; and
approval of certain transactions with office holders and controlling shareholders and other related-party transactions.
Additionally, under the Companies Law, the role of the audit committee includes the identification of irregularities in our business management, among other
things, by consulting with the internal auditor or our independent auditors and suggesting an appropriate course of action to the board of directors. In addition, the
audit committee or the board of directors, as set forth in the articles of association of the company, is required to approve the yearly or periodic work plan proposed
by the internal auditor. The audit committee is required to assess the company’s internal audit system and the performance of its internal auditor. The Companies
Law also requires that the audit committee assess the scope of the work and compensation of the company’s external auditor. In addition, the audit committee is
required to determine whether certain related party actions and transactions are “material” or “extraordinary” for the purpose of the requisite approval procedures
under the Companies Law, whether certain transactions with a controlling shareholder will be subject to a competitive procedure (regardless of whether or not such
transactions are deemed extraordinary transactions) and to set forth the approval process for transactions that are “non-negligible” (meaning, transactions with a
controlling shareholder that are classified by the audit committee as non-negligible, even though they are not deemed extraordinary transactions), as well as
determining which types of transactions would require the approval of the audit committee, optionally based on criteria which may be determined annually in
advance by the audit committee. The audit committee charter states that in fulfilling its role the committee is entitled to demand from us any document, file, report
or any other information that is required for the fulfillment of its roles and duties and to interview any of our employees or any employees of our subsidiaries in
order to receive more details about his or her line of work or other issues that are connected to the roles and duties of the audit committee. In 2018, as part of
maintaining an appropriate IT infrastructure to support our daily operations, our IT team presented an overview of cyber risk in the Company to our audit
committee.
A company whose audit committee’s composition meets the requirements set for the composition of a compensation committee (as further detailed below) may
have one committee acting as both audit and compensation committee.
Nominating Committee
We have a nominating committee comprised of three of our directors, Ms. Nurit Benjamini, Ms. Lily Ayalon and Mr. Ronald Kaplan, each of whom has been
determined by our board of directors to be independent under the applicable Nasdaq rules. Our board of directors has adopted a nominating committee charter
setting forth the responsibilities of the committee which include, among other responsibilities:
•
•
•
•
conduct of the appropriate and necessary inquiries into the backgrounds and qualifications of possible candidates to serve as directors;
review and recommend to the board any nominees for election as directors, including nominees recommended by shareholders, and consideration of the
performance of incumbent directors whose terms are expiring in determining whether to nominate them to stand for re-election;
review and recommend to the board regarding board member qualifications, board composition and structure, and recommend if necessary, measures to be
taken so that the board reflects the appropriate balance of knowledge, experience, skills, expertise and diversity required for the board; and
perform such other activities and functions as are required by applicable law, stock exchange rules or provisions in our articles of association, or as are
otherwise necessary and advisable, in its or the board’s discretion, for the efficient discharge of its duties.
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Compensation Committee
We have a compensation committee consisting of three of our directors, Ms. Nurit Benjamini, Ms. Lily Ayalon and Mr. Ofer Tsimchi, each of whom has been
determined by our board of directors to be independent under the applicable Nasdaq rules. Ms. Lily Ayalon serves as the Chairperson of the compensation
committee. Our board has adopted a compensation committee charter setting forth the responsibilities of the committee which include, among other
responsibilities:
•
•
•
•
reviewing and recommending overall compensation policies with respect to our Chief Executive Officer and other office holders;
reviewing and approving corporate goals and objectives relevant to the compensation of our Chief Executive Officer and other office holders including
evaluating their performance in light of such goals and objectives and determining their compensation based on such evaluation;
reviewing and approving the granting of options and other incentive awards; and
reviewing, evaluating and making recommendations regarding the compensation and benefits for our non-employee directors.
The compensation committee is also authorized to retain and terminate compensation consultants, legal counsel or other advisors to the committee and to approve
the engagement of any such consultant, counsel or advisor, to the extent it deems necessary or appropriate.
Pursuant to the Companies Law, Israeli public companies are required to appoint a compensation committee comprised of at least three directors, including all the
external directors, who must also constitute a majority of its members. All other members of the compensation committee, who are not external directors, must be
directors who receive compensation that is in compliance with regulations promulgated under the Companies Law. In addition, the chairperson of the compensation
committee must be an external director. The Companies Law further stipulates that directors who are not qualified to serve on the audit committee, as described
above, may not serve on the compensation committee either and that, similar to the audit committee, generally, any person who is not entitled to be a member of
the compensation committee may not attend the compensation committee’s meetings.
The responsibilities of the compensation committee under the Companies Law include: (i) making recommendations to the board of directors with respect to the
approval of the compensation policy and any extensions thereto; (ii) periodically reviewing the implementation of the compensation policy and providing the board
of directors with recommendations with respect to any amendments or updates thereto; (iii) reviewing and resolving whether or not to approve arrangements with
respect to the terms of office and employment of office holders; and (iv) resolving whether or not to exempt a transaction with a candidate for chief executive
officer from shareholder approval.
Pursuant to the Companies Law, the compensation policy recommended by the compensation committee needs to be approved by the board of directors and the
company’s shareholders by a simple majority, provided that (i) such majority includes at least a majority of the shareholders who are not controlling shareholders
and who do not have a personal interest in the matter, present and voting (abstentions are disregarded), or (ii) the non-controlling shareholders or shareholders who
do not have a personal interest in the matter who were present and voted against the policy, holds two percent or less of the voting power of the company. However,
under the Companies Law, if shareholders of the company do not approve the compensation policy, the compensation committee and board of directors may
override the shareholders’ decision if each of the compensation committee and board of directors provide detailed reasons for their decision. In addition, pursuant
the Companies Law, the compensation policy must be approved, at least once every three years, by the shareholders of the company and the company’s board of
directors, after considering the recommendations of the compensation committee.
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On September 24, 2019, following the recommendation and approval of our compensation committee and approval by our board of directors, our shareholders
approved a Compensation Policy (the “Compensation Policy”) for a period of three years as of the date of its approval.
Our Compensation Policy includes, among other things, provisions relating to the grant of a base salary, benefits and perquisites, cash bonuses, equity-based
compensation and retirement and termination of service arrangements for our executive officers. The Compensation Policy provides, among other things, that: (i)
such equity-based compensation is intended to be in a form of share options and/or other equity based awards, such as RSUs and share-based compensation, in
accordance with the Company’s equity incentive plan in place as may be updated from time to time; (ii) all equity-based incentives granted to executive officers
shall be subject to vesting periods in order to promote long-term retention of the awarded executive officers. Unless determined otherwise in a specific award
agreement approved by the compensation committee and the board of directors, grants to executive officers will vest gradually over a period of between three to
four years; and (iii) all other terms of the equity awards shall be in accordance with our incentive plans and other related practices and policies. The board of
directors may, following approval by the compensation committee, extend the period of time for which an award is to remain exercisable and make provisions with
respect to the acceleration of the vesting period of any executive officer’s awards, including, without limitation, in connection with a corporate transaction
involving a change of control, subject to any additional approval as may be required by the Companies Law. The Compensation Policy also provides that the
equity-based compensation shall be granted from time to time and be individually determined and awarded according to the performance, educational background,
prior business experience, qualifications, role and the personal responsibilities of the executive officer. The fair market value of the equity-based compensation for
the executive officers will be determined according to acceptable valuation practices at the time of grant.
In addition, pursuant to our articles of association, resolutions of the board of directors will be passed by a special majority of the directors if specifically required
so by the Compensation Policy. Our Compensation Policy currently does not contain such a requirement.
On November 10, 2020, following the recommendation of our board of directors, our shareholders approved an amended and restated compensation policy (the
“A&R Compensation Policy”). In addition to the terms discussed in the description of the Compensation Policy above, the A&R Compensation Policy adopted
the following amendments:
•
•
•
•
established pre-determined caps, which are lower than in the Compensation Policy, for the amount of equity-based compensation that can be granted to
each of our directors and Chief Executive Officer (such that, with respect to the Chief Executive Officer, the fair value of the equity-based compensation
that may be granted shall not exceed his or her base salary);
annual performance-based cash bonuses for executive officers (other than the Chief Executive Officer), based on, inter alia, a discretionary evaluation of
such executive officer’s overall performance by the Chief Executive Officer, limited to 25% of the respective executive officer’s annual base salary;
annual performance-based cash bonuses for the Chief Executive Officer based mainly (at least 75%) on measurable objectives, and, with respect to its less
significant part (up to 25%), based on a discretionary evaluation of the Chief Executive Officer’s overall performance, using both quantitative and
qualitative criteria, by the compensation committee and the board of the directors; and
the removal of certain limitations on the maximum premiums for directors’ and officers’ liability insurance that we may purchase.
Strategy Committee
In February 2017, we have established a strategy committee comprised of three of our directors, Mr. Roger Abravanel, Dr. Ariel Halperin and Mr. Dori Brown. Mr.
Roger Abravanel serves as the chairperson of the strategy committee. The strategy committee maintains an ongoing, cooperative, interactive strategic planning
process with our management, including the identification, setting and maintenance of strategic goals and expectations as well as the review of potential
acquisitions, joint ventures, and strategic alliances. References to our strategy and strategic planning are intended to focus on our medium- and long-term initiatives
versus day to day operations.
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Compensation of Directors and Executive Officers
Directors. Under the Companies Law, the compensation of our directors requires the approval of our compensation committee, the subsequent approval of the
board of directors and, unless exempted under the regulations promulgated under the Companies Law, the approval of the shareholders at a general meeting. If the
compensation of our directors is inconsistent with our compensation policy, then, provided that those provisions that must be included in the compensation policy
according to the Companies Law have been considered by the compensation committee and board of directors, shareholder approval will also be required, as
follows:
•
•
at least a majority of the shares held by all shareholders who are not controlling shareholders and do not have a personal interest in such matter, present
and voting at such meeting, are voted in favor of the compensation package, excluding abstentions; or
the total number of shares of non-controlling shareholders and shareholders who do not have a personal interest in such matter voting against the
compensation package does not exceed 2% of the aggregate voting rights in the company.
Executive Officers other than the Chief Executive Officer. The Companies Law requires the compensation of a public company’s executive officers (other than the
chief executive officer) to be approved by, first, the compensation committee; second by the company’s board of directors and third, if such compensation
arrangement is inconsistent with the company’s stated compensation policy, the company’s shareholders (by a special majority vote as discussed above with
respect to the approval of director compensation). However, if the shareholders of the company do not approve a compensation arrangement with an executive
officer (other than the chief executive officer) that is inconsistent with the company’s stated compensation policy, the compensation committee and board of
directors may override the shareholders’ decision if each of the compensation committee and the board of directors provide detailed reasons for their decision after
reconsidering the compensation arrangement, while taking into consideration that the shareholders of the company did not approve the compensation arrangement.
Chief Executive Officer. The compensation of a public company’s chief executive officer requires the approval of first, the company’s compensation committee;
second, the company’s board of directors; and third, the company’s shareholders (by a special majority vote as discussed above with respect to the approval of
director compensation). However, if the shareholders of the company do not approve the compensation arrangement with the chief executive officer, the
compensation committee and board of directors may override the shareholders’ decision if each of the compensation committee and the board of directors provide a
detailed report for their decision after reconsidering the compensation arrangement, while taking into consideration that the shareholders of the company did not
approve the compensation arrangement.
The compensation committee and board of directors approval should be in accordance with the company’s stated compensation policy; however, in special
circumstances, they may approve compensation terms of a chief executive officer that are inconsistent with such policy provided that they have considered those
provisions that must be included in the compensation policy according to the Companies Law and that shareholder approval was obtained (by a special majority
vote as discussed above with respect to the approval of director compensation). The compensation committee may waive the shareholder approval requirement with
regards to the approval of the engagement terms of a candidate for the chief executive officer position, if they determine that the compensation arrangement is
consistent with the company’s stated compensation policy, the chief executive officer did not have a business relationship with the company or a controlling
shareholder of the company and that having the engagement transaction subject to a shareholder vote would impede the company’s ability to employ the chief
executive officer candidate.
Notwithstanding the above, the amendment of existing compensation terms of executive officers (including the chief executive officer and excluding officers who
are also directors), requires only the approval of the compensation committee, provided that the committee determines that the amendment is not material in
relation to the existing terms.
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Internal auditor
Under the Companies Law, the board of directors of a public company must appoint an internal auditor based on the recommendation of the audit committee. The
role of the internal auditor is, among other things, to examine whether a company’s actions comply with applicable law and orderly business procedure. Under the
Companies Law, the internal auditor may not be an interested party or an office holder or a relative of an interested party or of an office holder, nor may the
internal auditor be the company’s independent auditor or the representative of the same.
An “interested party” is defined in the Companies Law as (i) a holder of 5% or more of the issued share capital or voting power in a company, (ii) any person or
entity who has the right to designate one or more directors or to designate the chief executive officer of the company, or (iii) any person who serves as a director or
as a chief executive officer of the company. Our internal auditor is Mr. Ofer Orlitzky of Leon, Orlitzky and Co.
Fiduciary duties and approval of specified related party transactions under Israeli law
Fiduciary duties of office holders
The Companies Law imposes a duty of care and a duty of loyalty on all office holders of a company.
The duty of care of an office holder is based on the duty of care set forth in connection with the tort of negligence under the Israeli Torts Ordinance (New Version)
5728-1968. The duty of care requires an office holder to act with the degree of proficiency with which a reasonable office holder in the same position would have
acted under the same circumstances. The duty of care includes, among other things, a duty to use reasonable means, in light of the circumstances, to obtain:
•
•
information on the business advisability of a given action brought for his or her approval or performed by virtue of his or her position; and
all other important information pertaining to such action.
The duty of loyalty incumbent on an office holder requires him or her to act in good faith and for the benefit of the company, and includes, among other things, the
duty to:
•
•
•
•
refrain from any act involving a conflict of interest between the performance of his or her duties in the company and his or her other duties or personal
affairs;
refrain from any activity that is competitive with the business of the company;
refrain from exploiting any business opportunity of the company for the purpose of gaining a personal advantage for himself or herself or others; and
disclose to the company any information or documents relating to the company’s affairs which the office holder received as a result of his or her position
as an office holder.
We may approve an act specified above which would otherwise constitute a breach of the office holder’s duty of loyalty, provided that the office holder acted in
good faith, the act or its approval does not harm the company, and the office holder discloses his or her personal interest, including any related material information
or document, a sufficient time before the approval of such act. Any such approval is subject to the terms of the Companies Law, setting forth, among other things,
the organs of the company entitled to provide such approval, and the methods of obtaining such approval.
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Disclosure of personal interest of an office holder and approval of related party transactions
The Companies Law requires that an office holder promptly disclose to the company any personal interest that he or she may have and all related material
information or documents relating to any existing or proposed transaction by the company. An interested office holder’s disclosure must be made promptly and, in
any event, no later than the first meeting of the board of directors at which the transaction is considered. An office holder is not obliged to disclose such
information if the personal interest of the office holder derives solely from the personal interest of his or her relative in a transaction that is not considered as an
extraordinary transaction.
Under the Companies Law, once an office holder has complied with the above disclosure requirement, a company may approve a transaction between the company
and the office holder or a third party in which the office holder has a personal interest, pursuant to the certain procedures as set forth in the Companies Law.
However, a company may not approve a transaction or action that is not to the company’s benefit.
Under the Companies Law, unless the articles of association of a company provide otherwise, a transaction with an office holder or with a third party in which the
office holder has a personal interest, which is not an extraordinary transaction, requires the approval by the board of directors. Our articles of association provide
that such a transaction, which is not an extraordinary transaction, shall be approved by the board of directors or a committee of the board of directors or any other
entity (which has no personal interest in the transaction) authorized by the board of directors. If the transaction considered is an extraordinary transaction with an
office holder or a third party in which the office holder has a personal interest, then audit committee approval is required prior to approval by the board of directors.
For the approval of compensation arrangements with directors and executive officers, see “— Compensation of Directors and Executive Officers.”
Any person who has a personal interest in the approval of a transaction that is brought before a meeting of the board of directors or the audit committee may not be
present at the meeting or vote on the matter. However, if the chairman of the board of directors or the chairman of the audit committee, as applicable, has
determined that the presence of an office holder with a personal interest is required, such office holder may be present at the meeting for the purpose of presenting
the matter. Notwithstanding the foregoing, a director who has a personal interest may be present at the meeting of the audit committee or the board of directors and
vote on the matter if a majority of the directors or members of the audit committee, as applicable, have a personal interest in the approval of such transaction. If a
majority of the directors at a board of directors meeting have a personal interest in the transaction, such transaction also requires approval of the shareholders of the
company.
A “personal interest” is defined under the Companies Law as the personal interest of a person in an action or in a transaction of the company, including the personal
interest of such person’s relative or the interest of any other corporate body in which the person and/or such person’s relative is a director or general manager, a
holder of 5% or more of the issued and outstanding share capital of the company or its voting rights, or has the right to appoint at least one director or the general
manager, but excluding a personal interest stemming solely from the fact of holding shares in the company. A personal interest also includes (1) a personal interest
of a person who votes according to a proxy of another person, including in the event that the other person has no personal interest, and (2) a personal interest of a
person who gave a proxy to another person to vote on his or her behalf regardless of whether the discretion of how to vote lies with the person voting or not.
An “extraordinary transaction” is defined under the Companies Law as any of the following:
•
•
•
a transaction other than in the ordinary course of business;
a transaction that is not on market terms; or
a transaction that may have a material impact on the company’s profitability, assets or liabilities.
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Disclosure of personal interests of a controlling shareholder and approval of transactions
The Companies Law also requires that a controlling shareholder promptly disclose to the company any personal interest that he or she may have and all related
material information or documents relating to any existing or proposed transaction by the company. A controlling shareholder’s disclosure must be made promptly
and, in any event, no later than the first meeting of the board of directors at which the transaction is considered. See “—Audit committee—Approval of transactions
with related parties” for the definition of a controlling shareholder. Extraordinary transactions with a controlling shareholder or in which a controlling shareholder
has a personal interest, including a private placement in which a controlling shareholder has a personal interest, and the terms of engagement of the company,
directly or indirectly, with a controlling shareholder or a controlling shareholder’s relative (including through a corporation controlled by a controlling
shareholder), regarding the company’s receipt of services from the controlling shareholder, and if such controlling shareholder is also an office holder or an
employee of the company, regarding his or her terms of service or employment, require the approval of each of (i) the audit committee or the compensation
committee with respect to the terms of the engagement of the company, (ii) the board of directors and (iii) the shareholders, in that order. In addition, the
shareholder approval must fulfill one of the following requirements:
•
•
a majority of the shares held by shareholders who have no personal interest in the transaction and are voting at the meeting must be voted in favor of
approving the transaction, excluding abstentions; or
the shares voted by shareholders who have no personal interest in the transaction who vote against the transaction represent no more than 2% of the voting
rights in the company.
In addition, any extraordinary transaction with a controlling shareholder or in which a controlling shareholder has a personal interest with a term of more than three
years requires the approval described above, every three years; however, transactions not involving the receipt of services or compensation can be approved for a
longer term, provided that the audit committee determines that such longer term is reasonable under the circumstances.
The Companies Law requires that every shareholder that participates, in person, by proxy or by voting instrument in a vote regarding a transaction with a
controlling shareholder, must indicate in advance or in the ballot whether or not that shareholder has a personal interest in the vote in question. Failure to so
indicate will result in the invalidation of that shareholder’s vote.
Duties of shareholders
Under the Companies Law, a shareholder has a duty to refrain from abusing its power in the company and to act in good faith and in an acceptable manner in
exercising its rights and performing its obligations to the company and to other shareholders, including, among other things, when voting at meetings of
shareholders on the following matters:
•
•
•
•
an amendment to the articles of association;
an increase in the company’s authorized share capital;
a merger; and
the approval of related party transactions and acts of office holders that require shareholder approval.
A shareholder also has a general duty to refrain from discriminating against other shareholders.
The remedies generally available upon a breach of contract will also apply to a breach of the shareholder duties mentioned above, and in the event of discrimination
against other shareholders, additional remedies are available to the injured shareholder.
In addition, any controlling shareholder, any shareholder that knows that its vote can determine the outcome of a shareholder vote and any shareholder that, under a
company’s articles of association, has the power to appoint or prevent the appointment of an office holder, or any other power with respect to a company, is under a
duty to act with fairness towards the company. The Companies Law does not describe the substance of this duty except to state that the remedies generally
available upon a breach of contract will also apply in the event of a breach of the duty to act with fairness, taking the shareholder’s position in the company into
account.
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Approval of private placements
Under the Companies Law and the regulations promulgated thereunder, a private placement of securities does not require approval at a general meeting of the
shareholders of a company; provided however, that in special circumstances, such as a private placement completed in lieu of a special tender offer (see “ITEM
10.B: Additional Information—Memorandum and Articles of Association—Acquisitions under Israeli law”) or a private placement which qualifies as a related
party transaction (see “—Fiduciary duties and approval of specified related party transactions under Israeli law”), approval at a general meeting of the shareholders
of a company is required.
Exculpation, insurance and indemnification of office holders
Under the Companies Law, a company may not exculpate an office holder from liability for a breach of the duty of loyalty. An Israeli company may exculpate an
office holder in advance from liability to the company, in whole or in part, for damages caused to the company as a result of a breach of duty of care but only if a
provision authorizing such exculpation is included in its articles of association. Our articles of association include such a provision. The company may not
exculpate in advance a director from liability arising out of a prohibited dividend or distribution to shareholders.
Under the Companies Law and the Securities Law, 5738—1968 (“Securities Law”) a company may indemnify an office holder in respect of the following
liabilities, payments and expenses incurred for acts performed by him as an office holder, either in advance of an event or following an event, provided its articles
of association include a provision authorizing such indemnification:
•
•
•
•
•
a monetary liability incurred by or imposed on him or her in favor of another person pursuant to a judgment, including a settlement or arbitrator’s award
approved by a court. However, if an undertaking to indemnify an office holder with respect to such liability is provided in advance, then such undertaking
must be limited to certain events, which, in the opinion of the board of directors, can be foreseen based on the company’s activities when the undertaking
to indemnify is given, and to an amount or according to criteria determined by the board of directors as reasonable under the circumstances, and such
undertaking shall detail the foreseen events described above and amount or criteria;
reasonable litigation expenses, including reasonable attorneys’ fees, incurred by the office holder as a result of an investigation or proceeding instituted
against him or her by an authority authorized to conduct such investigation or proceeding, provided that (i) no indictment was filed against such office
holder as a result of such investigation or proceeding; and (ii) no financial liability, was imposed upon him or her as a substitute for the criminal
proceeding as a result of such investigation or proceeding or, if such financial liability was imposed, it was imposed with respect to an offense that does
not require proof of criminal intent or in connection with a monetary sanction;
a monetary liability imposed on him or her in favor of an injured party at an Administrative Procedure (as defined below) pursuant to Section 52(54)(a)(1)
(a) of the Securities Law;
expenses incurred by an office holder or certain compensation payments made to an injured party that were instituted against an office holder in
connection with an Administrative Procedure under the Securities Law, including reasonable litigation expenses and reasonable attorneys’ fees; and
reasonable litigation expenses, including attorneys’ fees, incurred by the office holder or imposed by a court in proceedings instituted against him or her
by the company, on its behalf, or by a third party, or in connection with criminal proceedings in which the office holder was acquitted, or as a result of a
conviction for an offense that does not require proof of criminal intent.
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An “Administrative Procedure” is defined as a procedure pursuant to chapters H3 (Monetary Sanction by the Israeli Securities Authority), H4 (Administrative
Enforcement Procedures of the Administrative Enforcement Committee) or I1 (Arrangement to prevent Procedures or Interruption of procedures subject to
conditions) to the Securities Law.
Under the Companies Law and the Securities Law, a company may insure an office holder against the following liabilities incurred for acts performed by him or
her as an office holder if and to the extent provided in the company’s articles of association:
•
•
•
•
•
a breach of duty of loyalty to the company, provided that the office holder acted in good faith and had a reasonable basis to believe that the act would not
harm the company;
a breach of duty of care to the company or to a third party, to the extent such a breach arises out of the negligent conduct of the office holder;
a monetary liability imposed on the office holder in favor of a third party;
a monetary liability imposed on the office holder in favor of an injured party at an Administrative Procedure pursuant to Section 52(54)(a)(1)(a) of the
Securities Law; and
expenses incurred by an office holder in connection with an Administrative Procedure instituted against him or her, including reasonable litigation
expenses and reasonable attorneys’ fees.
Under the Companies Law, a company may not indemnify, exculpate or insure an office holder against any of the following:
•
•
•
•
a breach of a duty of loyalty, except for indemnification and insurance for a breach of the duty of loyalty to the company to the extent that the office
holder acted in good faith and had a reasonable basis to believe that the act would not prejudice the company;
a breach of duty of care committed intentionally or recklessly, excluding a breach arising out of the negligent conduct of the office holder;
an act or omission committed with intent to derive illegal personal benefit; or
a fine, monetary sanction or forfeit levied against the office holder.
Under the Companies Law, exculpation, indemnification and insurance of office holders must be approved by the compensation committee and the board of
directors and, with respect to directors or controlling shareholders, their relatives and third parties in which such controlling shareholders have a personal interest,
also by the shareholders.
Our articles of association permit us to exculpate, indemnify and ensure our office holders to the fullest extent permitted or to be permitted by law. Our office
holders are currently covered by a directors and officers’ liability insurance policy. We have agreements with each of our current office holders exculpating them
from a breach of their duty of care to us to the fullest extent permitted by law, subject to limited exceptions, and undertaking to indemnify them to the fullest extent
permitted by law, subject to limited exceptions. This indemnification is limited to events determined as foreseeable by the board of directors based on our activities,
and to an amount or according to criteria determined by the board of directors as reasonable under the circumstances. The maximum aggregate amount of
indemnification that we may pay to our office holders based on such indemnification agreement is the greater of (1) with respect to indemnification in connection
with a public offering of our securities, the gross proceeds raised by us and any selling shareholder in such public offering, and (2) with respect to all permitted
indemnification, including in connection with a public offering of our securities, an amount equal to the greater of 50% of our shareholders’ equity on a
consolidated basis, based on our most recent financial statements made publicly available before the date on which the indemnification payment was made, and $30
million. Such indemnification amounts are in addition to any insurance amounts. Each office holder who previously received an indemnification letter from us and
agreed to receive this new letter of indemnification, gave his approval to the termination of all previous letters of indemnification that we have provided to him or
her in the past, if any; however, in the opinion of the SEC, indemnification of office holders for liabilities arising under the Securities Act is against public policy
and therefore unenforceable.
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We previously entered into letters of indemnification with some former office holders that currently remain in effect, and pursuant to which we undertook to
indemnify them with respect to certain liabilities and expenses then permitted under the Companies Law, which are similar to those described above. These letters
of indemnification are limited to foreseeable events that were determined by the board of directors and indemnity payments are limited to a maximum amount of
$2.0 million for one series of related events for each office holder.
D. Employees
As of December 31, 2020, we had 1,999 employees, of whom 683 were based in Israel, including 33 individuals who provide services to us through our manpower
agreement with Kibbutz Sdot-Yam, discussed below, and with whom we do not have employment relationships, 645 employees in the United States (including 186
employees in our Richmond Hill facility and 165 in Omicron), 114 employees in Australia, 126 in Canada, 359 in India, 49 in the United Kingdom and 23 in Asia.
The following table shows the breakdown of our global workforce by category of activity as of December 31 for the past three fiscal years:
Department
Manufacturing and operations
Research and development
Sales, marketing, service and support
Management and administration
Total
2020
As of December 31,
2019
2018
1,222
26
580
171
1,999
911
15
424
151
1,501
950
17
410
157
1,534
Excluding the effects of the Lioli Acquisition and the Omicron Acquisition, the size of our global workforce declined by 26 employees in 2020. Such decline was
primarily attributed to the temporarily reduction in capacity of our plants, reflecting the COVID-19 demand slowdown and a temporary halt in our recruitment and
hiring. Currently we aim at increasing production for 2021 and have begun recruiting employees as of December 2020.
Israeli labor laws (applicable to our Israeli employees) govern the length of the workday, minimum wages for employees, procedures for hiring and dismissing
employees, determination of severance pay, annual leave, sick days, advance notice of termination of employment, equal opportunity and anti-discrimination laws
and other conditions of employment. Subject to certain exceptions, Israeli law generally requires severance pay upon the retirement, death or dismissal of an
employee, and requires us and our employees to make payments to the NII, which is similar to the U.S. Social Security Administration. Our employees have
pension plans in accordance with the applicable Israeli legal requirements.
None of our employees work under any collective bargaining agreements. Extension orders issued by the IMEI apply to us and affect matters such as cost of living
adjustments to salaries, length of working hours and week, recuperation pay, travel expenses, and pension rights. We have never experienced labor-related work
stoppages or strikes and, while there can be no assurance that we will not experience any, we believe that our relations with our employees are satisfactory.
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E. Share Ownership
Beneficial Ownership of Executive Officers and Directors
The following table sets forth certain information regarding the beneficial ownership of our ordinary shares as of March 18, 2021, of each of our directors and
executive officers.
Name of Beneficial Owner
Executive Officers
Yuval Dagim
Ophir Yakovian
David Cullen
Ken Williams
Amir Reske
Rinat Efrima
Hezi Eini
Amihai Seider
Erez Margalit
Ron Mosberg
Efrat Yitzhaki
Suzie Roth
Directors
Dr. Ariel Halperin(2)
Nurit Benjamini
Lily Ayalon
Roger Abravanel
Dori Brown
Ronald Kaplan
Ofer Tsimchi
Shai Bober
Tom Pardo Itzhaki
Number of Shares Beneficially
Held(1)
Percent of Class
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
All current directors and executive officers as a group (21 persons)(2)
_______________________
* Less than one percent of the outstanding ordinary shares.
(1) As used in this table, “beneficial ownership” means the sole or shared power to vote or direct the voting or to dispose or direct the disposition of any security.
For purposes of this table, a person is deemed to be the beneficial owner of securities that can be acquired within 60 days from March 18, 2021, through the
exercise of any option or warrant. Ordinary shares subject to options that are currently exercisable or exercisable within 60 days, or other awards that are
convertible into our ordinary shares within 60 days, are deemed outstanding for computing the ownership percentage of the person holding such options or other
agreements, but are not deemed outstanding for computing the ownership percentage of any other person. The amounts and percentages are based upon
34,441,321 ordinary shares outstanding as March 18, 2021.
All our shareholders, including the shareholders listed above, have the same voting rights attached to their ordinary shares. See “ITEM 10.B: Additional
Information—Memorandum and Articles of Association—Voting.”
Our directors and executive officers hold, in the aggregate, options and RSUs exercisable for 1,004,187 ordinary shares (including 48,187 RSUs), as of March
18, 2021. The options have a weighted average exercise price of $17.0 per share and the RSUs have a weighted average fair value of $15.05 and have expiration
dates generally seven years after the grant date of the option.
(2) Includes 14,029,494 ordinary shares beneficially owned by Tene Investment in Projects 2016, L.P. (“Tene”). As further described in footnote (2) under “ITEM
7.A: Major Shareholders and Related Party Transactions—Major Shareholders,” Each of Dr. Halperin, Tene Growth Capital III (G.P.) Company Ltd. (“Tene
III”), and Tene Growth Capital 3 (Fund 3 G.P.) Projects, L.P (“Tene III Projects”) may be deemed to share voting power over the 14,029,494 ordinary shares
and dispositive power over the 5,589,494 ordinary shares, in each case, beneficially owned by Tene. See “ITEM 7.A: Major Shareholders and Related Party
Transactions—Major Shareholders.”
ITEM 7: Major Shareholders and Related Party Transactions
A. Major Shareholders
The following table sets forth certain information regarding the beneficial ownership of our outstanding ordinary shares as of the date indicated below, by each
person who we know beneficially owns 5.0% or more of the outstanding ordinary shares. For information on the beneficial ownership of each of our directors and
executive officers individually and as a group, see “ITEM 6.E: Directors, Senior Management and Employees—Share Ownership.”
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Beneficial ownership of ordinary shares is determined in accordance with the rules of the SEC and generally includes any ordinary shares over which a person
exercises sole or shared voting or investment power, or the right to receive the economic benefit of ownership. For purposes of the table below, we deem shares
subject to options or other agreements that are currently exercisable or exercisable within 60 days of March 18, 2021, to be outstanding and to be beneficially
owned by the person holding the options for the purposes of computing the percentage ownership of that person but we do not treat them as outstanding for the
purpose of computing the percentage ownership of any other person. The amounts and percentages are based upon 34,441,321 ordinary shares outstanding as of
March 18, 2021.
All our shareholders, including the shareholders listed below, have the same voting rights attached to their ordinary shares. See “ITEM 10.B: Additional
Information—Memorandum and Articles of Association —Voting.”
A description of any material relationship that our principal shareholders have had with us or any of our predecessors or affiliates within the past three years is
included below under “—Related Party Transactions.”
Name of Beneficial Owner
Mifalei Sdot-Yam Agricultural Cooperative Society Ltd. (1)(3)
Tene Investment in Projects 2016, L.P. (2)(3)
The Phoenix Holdings Ltd. (4)
BlackRock, Inc. (5)
Global Alpha Capital Management Ltd.
Number of
Shares
Beneficially
Owned
Percentage of
Shares
Beneficially
Held
14,029,494
14,029,494
2,239,850
1,825,862
1,868,181
40.7%
40.7%
6.5%
5.3%
5.4%
(1) Based on a Schedule 13D/A filed on October 28, 2019 by Mifalei Sdot-Yam Agricultural Cooperative Society Ltd. (“Mifalei Sdot-Yam”). Mifalei Sdot-Yam is
controlled by Sdot-Yam Business, Holding and Management – Agricultural Cooperative Society Ltd., which is in turn controlled by Kibbutz Sdot-Yam. Mifalei
Sdot-Yam holds shared voting power, over 14,029,494 ordinary shares and sole dispositive power over 10,440,000 ordinary shares. No individual member of
Mifalei Sdot-Yam has dispositive power or casting vote over the ordinary shares. The Economic Council elected by the members of Kibbutz Sdot-Yam manages
the economic activities and strategy of Kibbutz Sdot-Yam. The Economic Council takes its decisions by majority vote and currently has eleven members, including
Shai Bober and Tom Pardo, which are directors on our board. The address of Kibbutz Sdot-Yam is MP Menashe 3780400, Israel. Our board of directors operates
independently from the Economic Council.
Kibbutz Sdot-Yam is a communal society, referred to in Hebrew as a “kibbutz” (plural “kibbutzim”) with approximately 460 members and an additional 350
residents located in Israel on the Mediterranean coast between Tel Aviv and Haifa. Established in 1940, Kibbutz Sdot-Yam is a largely self-governed community of
members who share certain social ideals and professional interests on a communal basis. Initially, the social idea behind the formation of the kibbutzim in Israel
was to create a communal society in which all members share equally in all the society’s resources and which provides for the needs of the community. Over the
years, the structure of the kibbutzim has evolved, and today there are a number of different economic and social arrangements adopted by various kibbutzim.
Today, each member of Kibbutz Sdot-Yam continues to own an equal part of the assets of the Kibbutz. The members of Kibbutz Sdot-Yam are engaged in a
number of economic activities, including agriculture, industrial operations and outdoor venue operations. A number of Kibbutz members are engaged in professions
outside the Kibbutz. The Kibbutz is the owner and operator of several private companies. The Kibbutz community holds in common all land, buildings and
production assets of these companies.
Some of the members of Kibbutz Sdot-Yam work in one of the production activities of Kibbutz Sdot-Yam, according to the requirements of Kibbutz Sdot-Yam and
the career objectives of the individual concerned. Other members work outside of Kibbutz Sdot-Yam in businesses owned by other entities. Each member receives
income based on the position the member holds and his or her economic contribution to the community, as well as on the size and composition of his or her family.
Each member’s income depends on the income of Kibbutz Sdot-Yam from its economic activities. Each member has a personal pension fund that is funded by
Kibbutz Sdot-Yam, and all accommodation, educational, health and old age care services, as well as social and municipal services, are provided either by or
through Kibbutz Sdot-Yam and are subsidized by Kibbutz Sdot-Yam.
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The elected Economic Council is the key economic decision-making body of Kibbutz Sdot-Yam. Kibbutz Sdot-Yam also has a General Secretary (chairman) and
other senior officers, all of whom are elected by the members of Kibbutz Sdot-Yam at its General Meeting for terms of seven years. A meeting of the members of
the Kibbutz may remove a member of the Economic Council by simple majority vote.
As of December 31, 2020, 33 of our employees, or 1.6% of our total workforce, were also members of Kibbutz Sdot-Yam.
(2) Based on a Schedule 13D/A filed on October 28, 2020 and on information provided to the Company by the beneficial owner, Tene Investment in Projects 2016,
L.P. (“Tene”) has shared voting power over 14,029,494 ordinary shares and shared dispositive power over 5,589,494, consisting of (i) 3,589,494 ordinary shares,
which it directly owns, and (ii) 2,000,000 ordinary shares underlying an immediately exercisable call option (“Call Option”) from Mifalei Sdot-Yam, which it
directly owns pursuant to the Shareholders’ Agreement (as defined below) with Mifalei Sdot-Yam. Pursuant to the Shareholders’ Agreement, Tene also shares
voting power over 10,440,000 Ordinary Shares beneficially owned by Mifalei Sdot-Yam. Dr. Ariel Halperin is the sole director of Tene Growth Capital III (G.P.)
Company Ltd. (“Tene III”), which is the general partner of Tene Growth Capital 3 (Fund 3 G.P.) Projects, L.P (“Tene III Projects”), which is the general partner
of Tene. Dr. Halperin is also a member of our board of directors. Each of Dr. Halperin, Tene III and Tene III Projects may thus be deemed to share voting power
over the 14,029,494 ordinary shares and dispositive power over the 5,589,494 ordinary shares, in each case, beneficially owned by Tene.
(3) On October 13, 2016, based on approval from the Israeli Antitrust Commission, Mifalei Sdot-Yam and Tene entered into the shareholders’ agreement
(“Shareholders’ Agreement”), memorialized in a term sheet signed by Mifalei Sdot-Yam and Tene on September 5, 2016 and further amended on February 20,
2018. Pursuant to the Shareholders’ Agreement:
•
•
•
•
The parties agreed to vote at general meetings of our shareholders in the same manner, following discussions intended to reach an agreement on any
matters proposed to be voted upon, with Tene determining the manner in which both parties will vote if no agreement is reached, except with respect to
certain carved-out matters, with respect to which Mifalei Sdot-Yam will determine the manner in which both parties will vote if no agreement is reached.
The parties agreed to use their best efforts to prevent any dilutive transactions that would reduce Mifalei Sdot-Yam’s holdings in us below 26% on a fully
diluted basis, provided that such agreement will not apply as of the date on which the percentage of Mifalei Sdot-Yam’s holdings decreases below 26% of
our outstanding shares on a fully diluted basis, for any reason whatsoever, or if Mifalei Sdot-Yam receives a satisfactory written certification from the
Israel Land Authority permitting Mifalei Sdot-Yam’s holdings in us to decrease below 26%. Subject to certain exceptions, Mifalei Sdot-Yam will also
continue to hold at least 6,850,000 of our ordinary shares for the seven-year term of the Shareholders’ Agreement, and in no case fewer than the number of
ordinary shares that would permit Tene to exercise the Call Option in full.
The parties agreed to use their best efforts to cause that at least four directors be elected to our board (one identified by Mifalei Sdot-Yam, two identified
by Tene and another identified by Mifalei Sdot-Yam with Tene’s consent), provided that the parties will not propose a resolution at a general meeting of
our shareholders that will contradict a recommendation of our board on elections.
The parties granted each other certain tag-along rights with respect to their dispositions of ordinary shares.
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(4) Based on Schedule 13G/A filed with the SEC on February 13, 2021 by the Phoenix Holdings Ltd., as of December 31, 2020, the Phoenix Holdings Ltd. held
shared voting and dispositive power over 2,239,850 ordinary shares. These ordinary shares are beneficially owned by various direct or indirect, majority or wholly
owned subsidiaries of the Phoenix Holding Ltd. (the “Subsidiaries”). The Subsidiaries manage their own funds and/or the funds of others, including for holders of
exchange-traded notes or various insurance policies, members of pension or provident funds, unit holders of mutual funds, and portfolio management clients. Each
of the Subsidiaries operates under independent management and makes its own independent voting and investment decisions. The address of the Phoenix Holding
Ltd. is Derech Hashalom 53, Givataim, 53454, Israel.
(5) As of December 31, 2020, and as reported Schedule 13G filed by BlackRock Inc. with the SEC on February 2, 2021 BlackRock Inc. held sole voting power
over 1,782,214 ordinary shares, and sole dispositive power over1,825,862 ordinary shares.
(6) As of December 31, 2020, and as reported Schedule 13G filed by Global Alpha Capital Management Ltd. with the SEC on February 10, 2021 Global Alpha
Capital Management Ltd held sole voting power over 1,622,939 ordinary shares, and sole dispositive power over1,868,181 ordinary shares.
Changes in Ownership
Prior to our IPO in March 2012, Kibbutz Sdot-Yam owned 18,715,000, or 70.1% of our ordinary shares. Immediately after the IPO, due to our issuance of ordinary
shares, the Kibbutz’s ownership in our ordinary shares decreased to 56.1%. As a result of two subsequent public offerings of ordinary shares completed in 2013 and
2014, the Kibbutz sold 6,325,000 of the 17,765,000 ordinary shares it owned, decreasing its ownership percentage to 32.8% immediately after those offerings.
Pursuant to the Shareholders’ Agreement, effective October 13, 2016, the Kibbutz sold to Tene 1,000,000 of its 11,440,000 ordinary shares and granted to Tene the
Call Option to purchase 2,000,000 ordinary shares. During 2018, Tene purchased additional 2,589,494 ordinary shares in the open market. The parties also agreed
to vote at general meetings of our shareholders together, such that they share voting power over 14,029,424 ordinary shares. As a result, as of March 18, 2021, the
Kibbutz and Tene each beneficially owned 40.7% of our ordinary shares.
Beneficial ownership by holders of more than 5% of our ordinary shares is shown in the table above.
Registered Holders
Based on a review of the information provided to us by our transfer agent, as of March 18, 2021, there were three registered holders of our ordinary shares, one of
which (Cede & Co., the nominee of the Depositary Trust Company) is a United States registered holder, holding approximately 59.3% of our outstanding ordinary
shares.
B. Related Party Transactions
Related Party Transactions Policy
Our audit committee adopted and annually reapproves a policy, which lays out the procedures for approving transactions with our controlling shareholders,
currently Kibbutz Sdot-Yam and Tene, and certain of our office holders and other related persons. Pursuant to this policy, as required by the Companies Law, for
each transaction with our controlling shareholder or transactions in which our controlling shareholder has a personal interest as well as transactions with our office
holders or transactions in which our office holders have a personal interest, our audit committee is required to determine whether such transaction is an
extraordinary transaction and, with respect to controlling shareholder transactions only, whether it is a negligible transaction. Subject to our audit committee’s
determination, negligible transactions and non-extraordinary transactions are subject to a competitive procedure comprised of obtaining two third-party quotes for
such transaction and additional requirements as required by the Companies Law. An extraordinary transaction, which is not negligible, is subject, generally, to a
tender in addition to the approvals required by the Companies Law. In addition, this policy determines certain transactions with our controlling shareholder as
negligible and non-extraordinary transactions which are ongoing transactions but are required to be approved on an annual basis. Pursuant to this policy, we have,
and may in the future, engage in transactions with our controlling shareholder and officeholders including with respect to services consumed by us for our
operational needs as well as contribute donations to associations in which our controlling shareholder or shareholders has or have a personal interest.
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Relationship and agreements with Kibbutz Sdot-Yam
We have entered into certain agreements with Kibbutz Sdot-Yam pursuant to which Kibbutz Sdot-Yam provides us with, among other things, a portion of our labor
force, electricity, maintenance, and other services.
Pursuant to certain of these agreements, in consideration for using facilities licensed to us or for services provided by Kibbutz Sdot-Yam, we paid the Kibbutz an
aggregate of $9.4 million in 2020, $9.5 million in 2019 and $9.3 million in 2018 (excluding VAT), as set forth in more detail below. We believe that these services
are rendered to us in the ordinary course of our business and that they represent terms no less favorable than those that would have been obtained from an
unaffiliated third party. Nevertheless, a determination with respect to such matters requires subjective judgments regarding valuations, and regulators and other
third parties may question whether our agreements with Kibbutz Sdot-Yam are no less favorable to us than if they had been negotiated with unaffiliated third
parties.
Under the Companies Law, our audit committee, board of directors and shareholders are required to approve every three years any extraordinary transaction in
which a controlling shareholder has a personal interest and that has a term of more than three years, unless the company’s audit committee, constituted in
accordance with the Companies Law, determines, solely with respect to agreements that do not involve compensation to a controlling shareholder or his or her
relatives, in connection with services rendered by any of them to the company or their employment with the company, that a longer term is reasonable under the
circumstances. Our audit committee has determined that the term of all the agreements entered into between us and Kibbutz Sdot-Yam are reasonable under the
relevant circumstances, except for part of our manpower agreement entered into between Kibbutz Sdot-Yam and us on January 1, 2011, as amended on July 30,
2015 and November 27, 2018, as it relates to office holders, and the services agreement entered into between Kibbutz Sdot-Yam and us on July 20, 2011, as
amended on February 13, 2012, July 30, 2015 and November 27, 2018.
VAT references above and below are to the Israeli value added tax, the rate for which as of the date of this filing is 17%.
Land use agreement
Land leased to Kibbutz Sdot-Yam by the ILA and the Caesarea Development Corporation
Our headquarters and research and development facilities, as well as one of our two manufacturing facilities, are located on the grounds at Kibbutz Sdot-Yam and
include 30,744 square meter of facility and 60,870 square meters of un-covered yard. The headquarters and facilities are located on lands title to which is held by
the ILA, and which are leased or subleased to Kibbutz Sdot-Yam pursuant to the following agreements: (i) a 49-year lease from the ILA signed in July 1978 that
commenced in 1962 and expired in 2011 and has been extended pursuant to an option in the agreement for an additional 49 years, and (ii) a new agreement entered
into in April 2014 between Kibbutz Sdot-Yam and the Caesarea Development Corporation pursuant to which Kibbutz Sdot-Yam leases the relevant premises
(including such premises which are leased by the Kibbutz to us) from the Caesarea Development Corporation until year 2037. Additionally, Kibbutz Sdot-Yam has
been negotiating the renewal of a long-term lease agreement with the ILA which expired in 2009. After a series of discussions with the ILA to renew this expired
agreement, on February 21, 2017, the District Court approved a settlement between the parties, pursuant to which the Kibbutz is entitled to a new lease agreement
for a period of 49 years, with an option to renew for additional 49 years. As of the date of this report, a definitive lease agreement between the parties has not been
signed yet. To date, the expiration of this lease agreement has not had any impact on our ability to use the facilities located on the property subject to the leases.
The ILA may terminate its leases with Kibbutz Sdot-Yam in certain circumstances, including if Kibbutz Sdot-Yam breaches its agreements therewith, commences
proceedings to disband or liquidate or in the event that Kibbutz Sdot-Yam ceases to be a “kibbutz” as defined in the lease (meaning, a registered cooperative
society classified as a kibbutz). The ILA may, from time to time, change its regulations governing the lease agreements, and these changes could affect the terms of
the land use agreement, as amended, including the provisions governing its termination.
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Kibbutz Sdot-Yam currently permits us to use the land and facilities pursuant to a land use agreement which became effective in March 2012 and expires 20 years
thereafter. Under the land use agreement, Kibbutz Sdot-Yam agreed to permit us to use approximately 100,000 square meters of land leased to the Kibbutz,
consisting both of facilities and unbuilt areas, in consideration for an annual fee of NIS12.9 million ($4.0 million) in 2013 and thereafter, plus VAT, and beginning
in 2013, adjusted every six months based on any increase of the Israeli consumer price index compared to the index as of January 2011. The annual fee may be
adjusted after January 1, 2021 or after January 1, 2018 if the Kibbutz is required to pay significantly higher lease fees to the ILA or Caesarea Development
Corporation, and every three years thereafter if Kibbutz Sdot-Yam chooses to obtain an appraisal. The appraiser will be mutually agreed upon or, in the absence of
agreement, will be chosen by Kibbutz Sdot-Yam out of the list of appraisers recommended at that time by Bank Leumi Le-Israel B.M. (“Bank Leumi”). Every
addition or deletion of space is accounted for based on the original rates mentioned above.
In addition, in the land use agreement, we have waived any claims for payment of NIS 18.0 million ($4.6 million) from Kibbutz Sdot-Yam with respect to prior
investments in infrastructure on Kibbutz Sdot-Yam’s lands used by us under the prior land use agreement.
Following a request by the Kibbutz, in accordance with its rights under the land lease agreements for Sdot-Yam and Bar-Lev facilities the terms of the land lease
agreement, a market assessment of an appointed independent appraiser was obtained, including the measurements of properties we use and the parties are in the
process of obtaining such appraisal.
Under the land use agreement, we may not terminate the operation of either of our two production lines at our plant in Kibbutz Sdot-Yam as long as we continue to
operate production lines elsewhere in Israel, and our headquarters must remain at Kibbutz Sdot-Yam. Furthermore, we may not decrease or return to Kibbutz Sdot-
Yam any part of the land underlying the land use agreement, except upon one year’s advance written notice with regards to a certain unbuilt area, subject to certain
conditions. In addition, subject to limitations, we may be able to sublease lands. Kibbutz Sdot-Yam will have three months to accept or reject a request for sublease,
in its sole discretion, provided that if it does not respond within such three-month period, then we will be entitled to sublease such lands to a person approved in
advance by Kibbutz Sdot-Yam. In such event, we will continue to be liable to Kibbutz Sdot-Yam with respect to such lands. Pursuant to the land use agreement,
subject to certain exceptions, if we need additional facilities on the land that we are permitted to use in Kibbutz Sdot-Yam, subject to obtaining the permits required
by law, Kibbutz Sdot-Yam may build such facilities for us by using the proceeds of a loan that we will make to Kibbutz Sdot-Yam, which loan shall be repaid to us
by off-setting the monthly additional payment that we would pay for such new facilities and, if not fully repaid during the lease term, upon termination thereof.
We have committed to fund the cost of the construction, up to a maximum of NIS 3.3 million ($1.0 million) plus VAT, required to change the access road leading
to Kibbutz Sdot-Yam and our facilities, such that the entrance to our facilities will be separated from the entrance into Kibbutz Sdot-Yam. In addition, we
committed to pay NIS 200,000 (approximately $62,000) plus VAT to cover the cost of paving an area of land leased from Kibbutz Sdot-Yam with such payment
deducted in monthly installments over a four-year period beginning the year the construction completed from the lease payments to be made to Kibbutz Sdot-Yam
under the land use agreement related to our Sdot-Yam facility.
In connection with this agreement we reached non-monetary agreements with Kibbutz Sdot-Yam allowing them access to certain infrastructures located in the
leased premises such as electrical, water and sewage.
While Kibbutz Sdot-Yam is responsible under the agreement for obtaining various licenses, permits, approvals and authorizations necessary for use of the property,
we have waived any monetary recourse against Kibbutz Sdot-Yam for failure to receive such licenses, permits, approvals and authorizations.
Pursuant to these land use agreements, we paid to Kibbutz Sdot-Yam an aggregate of $4.7 million in 2020, $4.5 million in 2019 and $4.3 million in 2018.
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Land purchase and leaseback agreement
On June 6, 2007, we entered into a long-term lease agreement with the ILA in the lands and facilities of the Bar-Lev Industrial Center for an initial period of 49
years as of February 6, 2005, with an option to renew for an additional term of 49 years as of the end of the initial period. On March 31, 2011, we entered into a
land purchase and leaseback agreement with Kibbutz Sdot-Yam, pursuant to which, effective as of September 1, 2012, Kibbutz Sdot-Yam acquired from us our
rights in the lands and facilities of the Bar-Lev Industrial Park in consideration for NIS 43.7 million ($10.9 million). Pursuant to the land purchase and leaseback
agreement, we were required to obtain certain third-party consents from, among others, the Israeli Tax Authorities and from the Israeli Investment Center. All such
consents have been obtained. The land purchase and leaseback agreement were executed simultaneously with the execution of a land use agreement. Pursuant to the
land use agreement, Kibbutz Sdot-Yam permits us to use the Bar-Lev land for a period of 10 years commencing in September 2012 that will be automatically
renewed unless we give two years prior notice, for an additional 10-year term in consideration for an annual fee of NIS 4.1 million ($1.2 million) to be linked to the
increase of the Israeli consumer price index.
Following a request by the Kibbutz, , in accordance with its rights under the land lease agreements for Sdot-Yam and Bar-Lev facilities the terms of the land lease
agreement, a market assessment of an appointed independent appraiser was obtained, including the measurements of properties we use and the parties are in the
process of obtaining such appraisal.
Under the land use agreement, we may not decrease or return to Kibbutz Sdot-Yam any part of the land underlying the land use agreement; however, subject to
several limitations, we may be able to sublease such lands to a person approved in advance by Kibbutz Sdot-Yam. We may assign our right under the land use
agreement pursuant to a merger with a third party and to any corporation under our control. In such event, we will continue to be liable to Kibbutz Sdot-Yam with
respect to such lands. In addition, subject to certain exceptions, if we need additional facilities on the land that we are permitted to use by Kibbutz Sdot-Yam,
subject to obtaining the permits required by law, Kibbutz Sdot-Yam may build such facilities for us by using the proceeds of a loan that we will make to Kibbutz
Sdot-Yam, which loan shall be repaid to us by off-setting the monthly additional payment that we would pay for such new facilities and, if not fully repaid during
the lease term, upon termination thereof.
Agreement for Additional Land on the Grounds Near Our Bar-Lev Manufacturing Facility
In August 2013, we entered into the Agreement For Additional Land, pursuant to which Kibbutz Sdot-Yam acquired additional land of approximately 12,800
square meters on the grounds near our Bar-Lev manufacturing facility, which we required in connection with the construction of the fifth production line at our
Bar-Lev manufacturing facility and leased it to us for a monthly fee of approximately NIS 70,000 (approximately $20,000). Under the agreement, Kibbutz Sdot-
Yam committed to (i) acquire the long-term leasing rights of the Additional Bar-Lev Land from the ILA, (ii) perform preparation work and construction, in
conjunction with the administrative body of Bar-Lev industrial park and other contractors according to our plans, (iii) build a warehouse according to our plans, and
(iv) obtain all permits and approvals required for performing the preparation work of the Additional Bar-Lev Land and for the building of the warehouse. The
warehouse in Bar-Lev will be situated both on the current and new land. The financing of the building of the warehouse is to be made through a loan that will be
granted by us to Kibbutz Sdot-Yam, in the amount of the total cost related to the building of the warehouse, and such loan, including principle and interest, shall be
repaid by setoff of the lease due to Kibbutz Sdot-Yam by us for our use of the warehouse. The principal amount of the loan will bear interest at a rate of 5.3% a
year. On November 30, 2015, the land preparation work had been completed and the holding of the Additional Bar-Lev Land was delivered to us. To date, the
warehouse has not been constructed.
Pursuant to the land purchase and leaseback agreement and agreement for additional land in connection with our Bar-Lev facility, we paid to Kibbutz Sdot-Yam an
aggregate of $1.2 million in each of 2020, 2019 and 2018.
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Manpower agreement
In March 2001, we entered into a manpower agreement with Kibbutz Sdot-Yam, which was amended in December 2006. Pursuant to the agreement, Kibbutz Sdot-
Yam agreed to provide us with labor services staffed by Kibbutz members, candidates for Kibbutz membership and Kibbutz residents (each a “Kibbutz
Appointee”). This agreement was replaced by a new manpower agreement, signed on July 20, 2011, with a term of 10 years from January 1, 2011 that was
automatically renewed on December 31, 2020 and will be further automatically renewed, unless one of the parties gives six months’ prior notice, for additional
one-year periods. Our audit committee has determined that the term of the manpower agreement with Kibbutz Sdot-Yam is reasonable under the relevant
circumstances except as it relates to office holders. Accordingly, under the Companies Law, the manpower agreement, with respect to office holders, is subject to
re-approval by our audit committee, board of directors and general meeting every three years. On July 30, 2015, following the approval of our audit committee,
compensation committee and board of directors, our shareholders approved an addendum to the Manpower Agreement between us and Kibbutz Sdot-Yam, with
respect to the engagement of office holders affiliated with Kibbutz Sdot-Yam, for an additional three-year term as of the date of approval by the shareholders. On
November 27, 2018, following the approval of our audit committee, compensation committee and board of directors, our shareholders approved a second
addendum to such agreement for an additional three-year term as of the date of approval by the shareholders.
Under the manpower agreement and addendums thereto (“manpower agreement”), Kibbutz Sdot-Yam provides us with labor services staffed by Kibbutz
Appointees. The consideration to be paid for each Kibbutz Appointee is based on our total cost of employment for a non-Kibbutz Appointee employee performing
a similar role. The number of Kibbutz Appointees may change in accordance with our needs. Under the manpower agreement, we will notify Kibbutz Sdot-Yam of
any roles that require staffing, and if the Kibbutz offers candidates with skills similar to other candidates, we will give preference to the hiring of the relevant
Kibbutz members. Kibbutz Sdot-Yam is entitled under the manpower agreement, at its sole discretion, to discontinue the engagement of any Kibbutz Appointee of
manpower services through his or her employment by Kibbutz Sdot-Yam and require such appointee to become employed directly by us.
Under the manpower agreement, we will contribute monetarily to assist with the implementation of a professional reserve plan to encourage young Kibbutz
members to obtain the necessary education for future employment with us. We will provide up to NIS 250,000 (approximately $77 thousands) per annum for this
plan linked to changes in the Israeli consumer price index plus VAT. We will also implement a policy that prioritizes the hiring of such young Kibbutz members as
our employees upon their graduation. Office holders who are Kibbutz Appointees have all benefits then provided to our other office holders, including without
limitation, directors’ and officers’ liability insurance, and Company’s indemnification and exemption undertaking. Pursuant to the manpower agreement, we paid to
Kibbutz Sdot-Yam an aggregate of $2.1 million in 2020, $2.4 million in 2019 and $2.5 million in 2018. As of December 31, 2020, we engaged 33 Kibbutz
Appointees on a permanent basis.
Services agreement
On July 20, 2011, we entered into a services agreement with Kibbutz Sdot-Yam, as amended on February 13, 2012 (“Original Services Agreement”). Pursuant to
the Original Services Agreement, the Kibbutz provided us with various services related to our operational needs. The Original Services Agreement also outlined the
distribution mechanism between us and Kibbutz Sdot-Yam for certain expenses and payments due to local authorities, such as taxes and fees in connection with our
business facilities. The agreement expired on March 21, 2015.
On July 30, 2015, following the approval of our audit committee and the board, our shareholders approved an amended services agreement for a period of three
years. On November 27, 2018, following the approval of our audit committee and the board, our shareholders approved a further amended services agreement
(“Amended Services Agreement”) for an additional period of three years. Under the Amended Services Agreement, Kibbutz Sdot-Yam will continue to provide
us with various services it provides in the ordinary course of our business, for a period of three years commencing as of the date of approval by the shareholders.
The amount that we pay Kibbutz Sdot-Yam under the Amended Services Agreement depends on the scope of services we will receive and is based on rates
specified in such agreement which were determined based on market terms, taking into account the added value of consuming services from Kibbutz Sdot-Yam,
considering its physical proximity to our manufacturing plant in Sdot-Yam and its expertise. The amounts we pay for the services are subject to certain adjustments
for increases in the Israeli consumer price index. In addition, the Amended Services Agreement grants Kibbutz Sdot-Yam a right of first proposal in special
projects with respect to the metal workshop services. The Amended Services Agreement also outlines the distribution mechanism between us and the Kibbutz for
certain expenses and payments due to local authorities, such as certain taxes and fees in connection with our business facilities. Each party may terminate such
agreement upon a material breach, following a 30-day prior notice, or upon liquidation of the other party, following a 45-days’ prior notice. In connection with such
agreements, we paid to Kibbutz Sdot-Yam an aggregate of $1.3 million in 2020, $1.5 million in 2019 and $1.3 million in 2018.
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From time to time, we enter into additional arrangements in the ordinary course of business, at market prices and on market terms, with Kibbutz Sdot-Yam, which
are not material in accordance with related party transaction procedures adopted by our audit committee and our board of directors.
Registration Rights Agreement
Pursuant to a registration rights agreement (“Registration Rights Agreement”), entered into on July 21, 2011, as amended on February 13, 2012 and September
19, 2017, Kibbutz Sdot-Yam has the right to request that we file a registration statement registering its shares, provided that the value of the shares to be registered
is not less than $5.0 million, net of any underwriting discount or commission and provided further that we are not required to file more than two registration
statements in any 12-month period. Kibbutz Sdot-Yam may also request that we file a registration statement on a Form F-3, if we are eligible to use such form,
provided that the net value of the shares to be registered is not less than $1.0 million and provided further that we are not required to file more than two registration
statements on a Form F-3 in any 12-month period. Kibbutz Sdot-Yam also has piggyback registration rights, which provide it with the right to register its shares in
the event of an offering of securities by us. To the extent that the underwriters limit the number of shares that can be included in a registration statement, we have
discretion to register those shares we choose first, followed by the shares of Kibbutz Sdot-Yam.
Pursuant to the Shareholders’ Agreement between Kibbutz Sdot-Yam and Tene effective October 13, 2016, Kibbutz Sdot-Yam agreed to assign Tene its rights
under the Registration Rights Agreement to demand that we file a registration statement on a Form F-3, per the terms detailed above, and its piggyback registration
rights. Such assignment is subject to the terms of the registration rights agreement. Under the terms of the Shareholders’ Agreement, Kibbutz Sdot-Yam did not
agree to assign to Tene its right to demand registration of shares on Form F-1 or Form S-1 under the Registration Rights Agreement.
On September 19, 2017, our shareholders approved an amendment to the Registration Rights Agreement, such that the registration rights transferred to Tene by the
Kibbutz shall inure to Tene’s benefit in the event that the Kibbutz chooses to exercise its registration rights under the Registration Rights Agreement.
Pursuant to the Registration Rights Agreement, we registered 2,300,000 of our ordinary shares held by Kibbutz Sdot-Yam. These registration rights terminate upon
the earlier of seven years following the date of our IPO or the date that a holder of registration rights can sell its shares freely under Rule 144 without restrictions on
volume. In April 2013, Tene and Kibbutz Sdot-Yam sold 8,422,859 of our ordinary shares. In June 2014, Kibbutz Sdot-Yam sold 6,325,000 of the then-17,765,000
ordinary Company shares it owned.
Agreements with directors and officers
Employment agreements
See “ITEM 6.B: Directors, Senior Management and Employees—Compensation—Employment and consulting agreements with executive officers”.
Indemnification agreements
See “ITEM 6.C: Directors, Senior Management and Employees—Board Practices—Exculpation, insurance and indemnification of office holders.”
C.
Interests of Experts and Counsel
Not applicable.
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ITEM 8: Financial Information
A. Consolidated Financial Statements and Other Financial Information
Consolidated Financial Statements
For our audited consolidated financial statements for the year ended December 31, 2020, please see pages F-4 to F-5 of this report.
Legal Proceedings
Claim by former South African distributor
In December 2007, we terminated our agency agreement with our former South African agent, WOMAG, on the basis that it had breached the agreement. In the
same month, we filed a claim for NIS 1.0 million ($0.3 million) in the Israeli District Court in Haifa based on such breach. WOMAG contested jurisdiction of the
Israeli District Court, but subsequent appellate courts have dismissed WOMAG’s contest. In January 2008, WOMAG filed suit in South Africa seeking €15.7
million ($17.1 million).
Following certain proceedings is Israel, the parties commenced an arbitration in South Africa. In February 2019 the arbitrator delivered his award on the merits (the
quantum is still to be decided). The arbitrator’s award was in WOMAG’s favor as it relates to the claim that remained outstanding (WOMAG has conceded,
abandoned and seemingly withdrawn all their claims save for the one mentioned above) and imposed the costs relating to the arbitration on us.
In July 2019, we appealed the award and in August 2019 hearings were held. In November 2019, the appeal panel delivered its award on the merits (the quantum is
still to be decided), partially accepting the appeal and imposing 80% of the cost of arbitration and appeal on us.
Following negotiations held during 2020 between the parties, on January 15, 2021, we paid WOMAG an amount of €7.2 million ($8.9 million) as part of the
settlement for the majority of WOMAG’s claim for breach of contract. The remaining disputed amounts relating to the said breach, as well as WOMAG's claim for
loss of profits shall be the subject of a further hearing scheduled for August 2021.
Claims related to alleged silicosis and other injuries
Overview
We are subject to numerous claims by former employees, fabricators, their employees or the National Insurance Institute (“NII”) in Israel, alleging that workers
contracted illnesses, including silicosis, through exposure to silica particles during cutting, polishing, sawing, grinding, breaking, crushing, drilling, sanding or
sculpting our products. Engineered stones, including our products, are typically comprised of approximately (on average) 85% silica, and smaller concentrations of
silica are present in natural stones. Therefore, in some of the lawsuits it is claimed that fabrication of engineered stones creates higher exposure to crystalline silica
dust, and, accordingly, creates a higher risk of silicosis.
Since 2008, we have been named, either directly or as a third party defendant, in numerous lawsuits alleging damages caused by exposure to RCS related to our
products filed by individuals (including fabricators and their employees, and our former employees), their successors, employers and the State of Israel, and in
subrogation claims by the NII, WorkerCover Queensland, Australia, and others.
As of December 31, 2020, we were subject to pending lawsuits with respect to 169 injured persons globally (of which 138 were in Israel, 30 in Australia and one in
the United States) and had received pre-litigation demand letters with respect to additional 13 persons, in each case relating to silicosis claims.
Since 2008 and through December 31, 2020, lawsuits with respect to 109 injured persons that were filed against us were settled or dismissed.
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With respect to claims filed in Israel, a judgment was entered by the District Court during 2013, pursuant to which we were found to be comparatively liable for
33% of the plaintiff’s total damages. The remaining liability was imposed on the plaintiff at 40%, as contributory negligence, and on the State of Israel at 27%.
Following an appeal to the Israeli Supreme Court, the parties entered into a settlement agreement and the District Court’s ruling was cancelled, although it remains
a non-binding guideline.
In November 2015 and in May 2017, we entered into agreements with the State of Israel and with our main distributors in Israel, respectively, with the consent of
our insurance carriers, under which we agreed with the State and each of our main distributors to cooperate, subject to certain terms, with respect to the
management of the individual claims that have been filed and claims that may be submitted during a certain time period (NII claims are excluded from our
agreement with the State) and on the apportionments between us of the total liability of us, the State, and the distributors, if found, in such claims. During January
2020, the State of Israel approved an additional 5 years extension to this agreement.
With respect to claims filed in Australia, which we intend to vigorously defend, the probability of a ruling against the Company is estimated as “remote” or “only
reasonable possible”. However, as there is still no precedent in Australia as to the liability of manufacturers and suppliers in silicosis claims, if we fail to defend
ourselves in such claims, a negative precedent may be set, which may adversely affect our position in other claims.
Class Action Claim in Israel
A lawsuit by a single plaintiff and a motion for its class certification were filed against us in April 2014 in the Central District Court in Israel mainly claiming we
did not provide adequate warnings with respect to our products and that by our conduct we violated the plaintiff’s autonomy.
The plaintiff alleged that, if the lawsuit is recognized as a class action, the claim against us is estimated to be NIS 216 million (approximately $56 million),
calculated by claiming damages of NIS 18,000 ($4,668) for each individual who worked in fabrication workshops in Israel in fabrication or administrative roles and
who have been exposed to dust generated by the fabrication of our products. The plaintiff claimed that there are 12,000 such individuals who worked at 400
fabrication workshops in Israel, each of which employed 10 fabricators and five administrative persons, with one rotation during the relevant period. In addition,
such claim includes an unstated sum in compensation for special and general damages, such as medical disability, functional disability, pain and suffering, medical
expenses, medical and nursing assistance, which will require proof and quantification for each injured person in the purported class action. The plaintiff was
seeking, among other things, to compel us to notify the alleged group (and potential members of the group) and each individual about the risks, recommending that
they undertake a medical examination and assert their rights.
On January 4, 2018, we and the plaintiff submitted to the Israeli District Court a settlement agreement. If the settlement agreement is approved by the Court, the
claim will be dismissed and we will make payments on a one-time basis, without any admission of liability, in an aggregate amount of approximately NIS 9.0
million (approximately $2.8 million) to fund certain safety related expenses at fabrication facilities in Israel, as well as plaintiff’s compensation and legal expenses.
As of the date of this report, the settlement agreement remains subject to the approval of the Court. The Israeli State Attorney General had notified the Court of its
objection to the proposed settlement. We expect the Court will issue its ruling during the first half of 2021.
Our Probable Risks Related to Outstanding Claims
We intend to contest the pending claims against us, although there can be no assurance that we will succeed in these claims and it is probable that we will be liable
for damages in connection with such lawsuits. As of December 31, 2020, we estimated that our total exposure with respect to all then-pending lawsuits in Israel
related to 138 injured persons and the un-asserted NII claims was approximately $42.3 million, although the actual outcome of such lawsuits may vary significantly
from such estimate. The number of injured persons takes into account the claim filed with a motion for its recognition as a class action and does not include pre-
litigation demand letters and settled claims for which the settled amount has not been paid yet. It is too early to estimate the probability of the actual exposure in the
claims filed against us in Australia, which we intend to vigorously defend. However, as there is still no precedent in Australia as to the liability of manufacturers
and suppliers in silicosis claims, if we fail to defend ourselves in such claims, a negative precedent may be set, which may adversely affect our position in other
claims.
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Insurance
We currently have global product liability insurance, which applies, subject to certain terms and limitations, to claims that may be submitted against us worldwide
during the insurance policy term. This policy covers claims that are beyond $20 million per claim and per aggregate during the policy term from October 1, 2020 to
April 1, 2022, up to an amount of $35 million per claim and per year. Our global product liability insurance policy is effective until April 2022. The policy covers
only illnesses diagnosed after February 2010. Although we will seek to renew our product liability insurance to cover silicosis related claims, there is no assurance
that we will be successful in its renewal, specifically as currently Israeli and Australian policies do not cover newly diagnosed silicosis related claims. In addition to
the global product liability policy, we have regional product liability insurance policies in the United States and Canada, each with a coverage of up to $20 million
per claim or per year, each in its relevant local currency, subject to certain terms and limitations, with relatively low deductibles. In India, we have a regional
product liability policy in the amount of INR 40 million ($0.6 million) effective until April 23, 2021.
We believe that our current insurance covers the pending individual product liability claims. In October 2019, we signed a settlement agreement with our insurer at
the time the class action claim was filed for a certain coverage of the damages sought with respect to the putative class action claim. The amount claimed in the
class action exceeds our insurance coverage by a material amount. There is no certainty whether the amount the insurer agreed to pay will cover any payment we
will be forced to pay under the class action. Our employer liability insurance excludes silicosis damages and, therefore, in case that we are found liable for any of
our employees’ illness with silicosis, we will have to bear compensation for such damages, after the deduction of payments made by the NII to an employee of
ours, which might have an adverse effect on our business and results of operations. We are not subject to subrogation claims by the NII with regard to our
employees.
General
From time to time, we are involved in other legal proceedings and claims in the ordinary course of business related to a range of matters, including environmental,
contract, employment claims, product liability and warranty claims, and claims related to modification and adjustment or replacement of product surfaces sold.
While the outcome of these other claims cannot be predicted with certainty, we do not believe that any such claims will have a materially adverse effect on us,
either individually or in the aggregate. See Note 11 of the notes to the financial statements included elsewhere in this annual report.
Dividends
In February 2018, we declared the distribution of special cash dividend in the amount of $0.29 per share, paid on March 14, 2018, subject to withholding tax of
20%. We also adopted a dividend policy pursuant to which we intend to pay a quarterly cash dividend in the range of $0.10-$0.15 per share up to the lesser of 50%
of the reported net income attributable to controlling interest (i) on a quarterly basis or (ii) on a year-to-date basis, subject in each case to the approval of our board
of directors. In the third quarter of 2019, we distributed a cash dividend in the amount of $0.15 per share subject to withholding tax of 20%. In February 2020, we
revised our dividend policy to provide for a quarterly cash dividend of up to 50% of reported net income attributable to controlling interest on a year-to-date basis,
less any amount already paid as dividend for the respective period (the “calculated dividend”), subject in each case to approval by the Company’s board of
directors. In the event that the calculated dividend is less than $0.10 per share, no dividend shall be paid. We expect that payments of dividends pursuant to the
dividend policy will be paid subject to our board of directors’ approval, after taking into account legal limitations, the benefit of the Company and its obligations,
growth plans and other factors that our board of directors may deem relevant. Since January 1, 2020 and until March 18, 2021, we distributed dividends in the total
amount of $0.14 (or 14 cents) per share (subject to 20% withholding tax).
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Under Israeli law, we may declare and pay dividends only if, upon the determination of our board of directors, there is no reasonable concern that the distribution
will prevent us from meeting the terms of our existing and foreseeable obligations as they become due. The distribution of dividends is further limited by Israeli
law to the greater of retained earnings and earnings generated over the two most recent years. In the event that we do not have retained earnings or earnings
generated over the two most recent years legally available for distribution, we may seek the approval of the court to distribute a dividend. The court may approve
our request if it is convinced that there is no reasonable concern that a payment of a dividend will prevent us from satisfying our existing and foreseeable
obligations as they become due.
To the extent we declare a dividend, we do not intend to distribute dividends from earnings related to our Approved/Beneficiary Enterprise programs. The taxable
income exemption provided under the Approved/Beneficiary Enterprise program is valid exclusively for undistributed earnings, and as a result, a distribution of
earnings related to our Approved/Beneficiary Enterprise programs would subject us to additional tax payments upon a distribution of these earnings as dividends.
The payment of dividends may be subject to Israeli withholding taxes. See “ITEM 10.E: Additional Information—Taxation—Israeli tax considerations and
government programs—Taxation of our shareholders—Dividends”.
B. Significant Changes
Since the date of our audited financial statements included elsewhere in this annual report, there have not been any significant changes in our financial position.
ITEM 9: The Offer and Listing
Not applicable, except for Items 9.A.4 and 9.C, which are detailed below.
A. Offer and Listing Details
Our ordinary shares have been trading on the Nasdaq Global Select Market under the symbol “CSTE” since March 2012.
B. Plan of Distribution
Not applicable.
C. Markets
See “—Offer and Listing Details” above.
D. Selling Shareholders
Not applicable.
E. Dilution
Not applicable.
F. Expenses of the Issue
Not applicable.
ITEM 10: Additional Information
A. Share Capital
Not applicable.
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B. Memorandum of Association and Articles of Association
Our authorized share capital consists of 200,000,000 ordinary shares, par value NIS 0.04 per share, of which 35,544,417 are issued and 34,441,321 are outstanding
as of March 18, 2021.
A copy of our amended and restated articles of association is attached as Exhibit 1.1.
Voting
Holders of our ordinary shares have one vote for each ordinary share held on all matters submitted to a vote of shareholders at a shareholder meeting. Shareholders
may vote at shareholder meetings either in person, by proxy or, with respect to certain resolutions, by a voting instrument.
Israeli law does not allow public companies to adopt shareholder resolutions by means of written consent in lieu of a shareholder meeting. Shareholder 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 may be authorized in the future.
Transfer of shares
Fully paid ordinary shares are issued in registered form and may be freely transferred under our articles of association unless the transfer is restricted or prohibited
by another instrument, Israeli law or the rules of a stock exchange on which the shares are traded.
Election of directors
Our ordinary shares do not have cumulative voting rights for the election of directors. Rather, under our articles of association our directors are elected by the
holders of a simple majority of our ordinary shares at a general shareholder meeting (excluding abstentions). See “ITEM 6.C: Directors, Senior Management and
Employees—Board Practices—Board of directors and officers.” As a result, the holders of our ordinary shares that represent more than 50% of the voting power
represented at a shareholder meeting and voting thereon (excluding abstentions) have the power to elect any or all of our directors whose positions are being filled
at that meeting, subject to the special approval requirements for external directors described under “ITEM 6.C: Directors, Senior Management and Employees—
Board Practices—External Directors.”
Dividend and liquidation rights
Under Israeli law, we may declare and pay dividends only if, upon the determination of our board of directors, there is no reasonable concern that the distribution
will not prevent us from being able to meet the terms of our existing and foreseeable obligations as they become due. Under the Companies Law, the distribution
amount is further limited to the greater of retained earnings or earnings generated over the two most recent years legally available for distribution. In the event that
we do not have retained earnings or earnings generated over the two most recent years legally available for distribution, we may seek the approval of the court in
order to distribute a dividend. The court may approve our request if it is convinced that there is no reasonable concern that the payment of a dividend will prevent
us from satisfying our existing and foreseeable obligations as they become due.
In the event of our liquidation, after satisfaction of liabilities to creditors, our assets will be distributed to the holders of ordinary shares on a pro-rata basis.
Dividend and liquidation rights 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.
Shareholder meetings
We are required to convene an annual general meeting of our shareholders once every calendar year within a period of not more than 15 months following the
preceding annual general meeting. Our board of directors may convene a special general meeting of our shareholders and is required to do so at the request of two
directors or one quarter of the members of our board of directors, or at the request of one or more holders of 5% or more of our share capital and 1% of our voting
power, or the holder or holders of 5% or more of our voting power. All shareholder meetings require prior notice of at least 14 days and, in certain cases, 35 days.
The chairman of our board of directors presides over our general meetings. However, if there is no such chairman or if at any meeting the chairman is not present
within 15 minutes after the appointed time, or is unwilling to act as chairman, then the board members present at the meeting shall choose one of the board
members as chairman of the meeting and if they shall not do so then the shareholders present shall choose a board member, or if no board member is present or if
all the board members present decline to take the chair, they shall choose any other person present to be chairman of the meeting. Subject to the provisions of the
Companies Law and the regulations promulgated thereunder, shareholders entitled to participate and vote at general meetings are the shareholders of record on a
date to be decided by the board of directors, which may be between four and 40 days prior to the date of the meeting, depending on the type of meeting and whether
written proxies are being used.
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Quorum
Pursuant to our articles of association, the quorum required for a meeting of shareholders consists of at least two shareholders present in person, by proxy or by a
voting instrument, who hold at least 25% of our voting power. A meeting adjourned for lack of a quorum generally is adjourned one week thereafter at the same
time and place, or to such other day, time and place, as our board of directors may indicate in the invitation to the meeting or in the notice of the meeting to the
shareholders. Pursuant to the Companies Law, at the reconvened meeting, the meeting will take place with whatever number of participants are present, unless the
meeting was called pursuant to a request by our shareholders, in which case the quorum required is the number of shareholders required to call the meeting as
described under “—Shareholder meetings.”
Resolutions
Under the Companies Law, unless otherwise provided in the articles of association or applicable law, all resolutions of the shareholders require a simple majority of
the voting rights represented at the meeting, in person, by proxy or, with respect to certain resolutions, by a voting instrument, and voting on the resolution
(excluding abstentions). A resolution for the voluntary winding up of the company requires the approval by the holders of 75% of the voting rights represented at
the meeting, in person, by proxy and voting on the resolution (excluding abstentions).
Access to corporate records
Under the Companies Law, all shareholders generally have the right to review minutes of our general meetings, our shareholder register and register of significant
shareholders (as defined in the Companies Law), our articles of association, our financial statements, other documents as provided in the Companies Law, and any
document we are required by law to file publicly with the Israeli Companies Registrar or with the Israel Securities Authority. Any shareholder who specifies the
purpose of its request may request to review any document in our possession that relates to: (i) any action or transaction with a related party which requires
shareholder approval under the Companies Law; or (ii) the approval, by the board of directors, of an action in which an office holder has a personal interest. We
may deny a request to review a document if we determine that the request was not made in good faith, that the document contains a commercial secret or a patent or
that the document’s disclosure may otherwise impair our interests.
Acquisitions under Israeli law
Full tender offer
A person wishing to acquire shares of an Israeli public company and who would as a result hold over 90% of the target company’s issued and outstanding share
capital or that of a certain class of shares is required by the Companies Law to make a tender offer to all of the company’s shareholders or the shareholders who
holds shares of the same class for the purchase of all of the issued and outstanding shares of the company or of the same class, as applicable.
If the shareholders who do not respond to or accept the offer hold less than 5% of the issued and outstanding share capital of the company or of the applicable class
of the shares, and more than half of the shareholders who do not have a personal interest in the offer accept the offer, all of the shares that the acquirer offered to
purchase will be transferred to the acquirer by operation of law. However, a tender offer will be accepted if the shareholders who do not accept it hold less than 2%
of the issued and outstanding share capital of the company or of the applicable class of the shares.
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Upon a successful completion of such a full tender offer, any shareholder that was an offeree in such tender offer, whether such shareholder accepted the tender
offer or not, may, within six months from the date of acceptance of the tender offer, petition the Israeli court to determine whether the tender offer was for less than
fair value and that the fair value should be paid as determined by the court. However, under certain conditions, the offeror may determine in the terms of the tender
offer that an offeree who accepted the offer will not be entitled to petition the Israeli court as described above.
If a tender offer is not accepted in accordance with the requirements set forth above, the acquirer may not acquire shares from shareholders who accepted the tender
offer that will increase its holdings to more than 90% of the company’s issued and outstanding share capital or of the applicable class.
Special tender offer
The Companies Law provides that an acquisition of shares of an Israeli public company must be made by means of a special tender offer if as a result of the
acquisition the purchaser would become a holder of at least 25% of the voting rights in the company. This rule does not apply if there is already another holder of at
least 25% of the voting rights in the company. Similarly, the Companies Law provides that an acquisition of shares in a public company must be made by means of
a special tender offer if as a result of the acquisition the purchaser would become a holder of more than 45% of the voting rights in the company, if there is no other
shareholder of the company who holds more than 45% of the voting rights in the company.
These requirements do not apply if the acquisition (i) occurs in the context of a private offering, on the condition that the shareholders’ meeting approved the
acquisition as a private offering whose purpose is to give the acquirer at least 25% of the voting rights in the company if there is no person who holds at least 25%
of the voting rights in the company, or as a private offering whose purpose is to give the acquirer 45% of the voting rights in the company, if there is no person who
holds 45% of the voting rights in the company; (ii) was from a shareholder holding at least 25% of the voting rights in the company and resulted in the acquirer
becoming a holder of at least 25% of the voting rights in the company; or (iii) was from a holder of more than 45% of the voting rights in the company and resulted
in the acquirer becoming a holder of more than 45% of the voting rights in the company.
The special tender offer may be consummated only if (i) at least 5% of the voting power attached to the company’s outstanding shares will be acquired by the
offeror and (ii) the special tender offer is accepted by a majority of the votes of those offerees who gave notice of their position in respect of the offer; in counting
the votes of offerees, the votes of a holder of control in the offeror, a person who has personal interest in acceptance of the special tender offer, a holder of at least
25% of the voting rights in the company, or any person acting on their or on the offeror’s behalf, including their relatives or companies under their control, are not
taken into account.
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. In addition, the board of directors must disclose any personal
interest each of member of the board of directors have in the offer or stems therefrom.
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 resulting from his
acts, 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.
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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 respond to the
special offer or had objected to the special tender 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, then the purchaser or any person or entity controlling it and any corporation controlled by them shall refrain from
making a subsequent tender offer for the purchase of shares of the target company and may not 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.
Merger
The Companies Law permits merger transactions if approved by each party’s board of directors and, unless certain requirements described under the Companies
Law are met, a majority of each party’s shareholders, by a majority of each party’s shares that are voted on the proposed merger at a shareholders’ meeting.
The board of directors of a merging company is required pursuant to the Companies Law to discuss and determine whether in its opinion there exists a reasonable
concern that as a result of a proposed merger, the surviving company will not be able to satisfy its obligations towards its creditors, taking into account the financial
condition of the merging companies. If the board of directors has determined that such a concern exists, it may not approve a proposed merger. Following the
approval of the board of directors of each of the merging companies, the boards of directors must jointly prepare a merger proposal for submission to the Israeli
Registrar of Companies.
For purposes of the shareholder vote, unless a court rules otherwise, the merger will not be deemed approved if a majority of the shares voting at the shareholders
meeting (excluding abstentions) that are held by parties other than the other party to the merger, any person who holds 25% or more of the means of control (See
“ITEM 6.C: Directors, Senior Management and Employees—Board Practices—Audit committee—Approval of transactions with related parties” for a definition of
means of control) of the other party to the merger or any one on their behalf including their relatives (See “ITEM 6.C: Directors, Senior Management and
Employees—Board Practices—External directors—Qualifications of external directors” for a definition of relatives) or corporations controlled by any of them,
vote against the merger.
In addition, if the non-surviving entity of the merger has more than one class of shares, the merger must be approved by each class of shareholders.
If the transaction would have been approved but for the separate approval of each class of shares or the exclusion of the votes of certain shareholders as provided
above, a court may still rule that the company has approved 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 appraisal of the merging companies’ value and the consideration offered to the shareholders.
Under the Companies Law, each merging company must send a copy of the proposed merger plan to its secured creditors. Unsecured creditors are entitled to
receive notice of the merger, as provided by the regulations promulgated under the Companies Law. 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 the target company. The court may also give instructions in order to secure the rights of creditors.
In addition, a merger may not be completed unless at least 50 days have passed from the date that a proposal for approval of the merger was filed with the Israeli
Registrar of Companies and 30 days from the date that shareholder approval of both merging companies was obtained.
Anti-takeover measures
The 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. We do not have any authorized or issued shares other
than ordinary shares. In the future, if we do create and issue a class of shares other than 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 which requires the prior approval of a majority
of our shares represented and voting at a general meeting. Shareholders voting at such a meeting will be subject to the restrictions under the Companies Law
described in “—Voting.”
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Tax law
Israeli tax law treats some acquisitions, such as stock-for-stock swaps between an Israeli company and a foreign company, less favorably than U.S. tax law. For
example, Israeli tax law may subject a shareholder who exchanges ordinary shares in an Israeli company for shares in a non-Israeli corporation to immediate
taxation unless such shareholder receives an advanced ruling from the Israeli Tax Authority for different tax treatment. See “ITEM 10.E: Additional Information—
Taxation—Israeli tax considerations and government programs—Taxation of our shareholders—Capital gains”.
Changes 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 Companies Law and must be
approved by a resolution duly passed by our shareholders at a general or special meeting by voting on such change.
Establishment
We were incorporated under the laws of the State of Israel on December 31, 1989. Our predecessor commenced operations in 1987. We are registered with the
Israeli Registrar of Companies in Jerusalem. Our registration number is 51-143950-7. Our purpose as set forth in Article 5 of our articles of association is to engage
in any lawful business.
Transfer agent and registrar
The transfer agent and registrar for our ordinary shares is American Stock Transfer & Trust Company. Its address is 6201 15th Avenue, Brooklyn, New York
11219, and its telephone number are (800) 937-5449.
Listing
Our ordinary shares are listed on the Nasdaq Global Select Market under the symbol “CSTE.”
C. Material Contracts
Summaries of the following material contracts and amendments to these contracts are included in this annual report in the places indicated:
Material Contract
Agreements with Kibbutz Sdot-Yam
Agreements with Breton S.p.A. (Italy)
Form of Indemnification Agreement
Registration Rights Agreement, as extended by the Extension
of Registration Rights Agreement and as amended
Location in This Annual Report
“ITEM 7: Major Shareholders and Related Party Transactions—Related Party Transactions—
Relationship and agreements with Kibbutz Sdot-Yam.”
“ITEM 3: Key Information—Risk Factors—If we are unable to manufacture and/or ship our
existing products globally as planned, our results of operations and future prospects will suffer.”
“ITEM 6: Directors, Senior Management and Employees—Board Practices—Exculpation,
insurance and indemnification of officer holders.”
“ITEM 7: Major Shareholders and Related Party Transactions—Related Party Transactions—
Registration Rights Agreement.”
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D. Exchange Controls
In 1998, Israeli currency control regulations were liberalized significantly, so that Israeli residents generally may freely deal in foreign currency and foreign assets,
and non-residents may freely deal in Israeli currency and Israeli assets. There are currently no Israeli currency control restrictions on remittances of dividends on
the ordinary shares or the proceeds from the sale of the shares provided that all taxes were paid or withheld; however, legislation remains in effect pursuant to
which currency controls can be imposed by administrative action at any time.
Non-residents of Israel may freely hold and trade our securities. Neither our memorandum of association nor our articles of association nor the laws of the State of
Israel restrict in any way the ownership or voting of ordinary shares by non-residents, except that such restrictions may exist with respect to citizens of countries
which are in a state of war with Israel. Israeli residents are allowed to purchase our ordinary shares.
E. Taxation
The following description is not intended to constitute a complete analysis of all tax consequences relating to the acquisition, ownership and disposition of our
ordinary shares. You should consult your own tax advisor concerning the tax consequences of your particular situation, as well as any tax consequences that may
arise under the laws of any state, local, foreign or other taxing jurisdiction.
Israeli tax considerations and government programs
The following is a brief summary of the material Israeli tax laws applicable to us, and certain Israeli Government programs benefiting us. This section also contains
a discussion of material Israeli tax consequences concerning the ownership of and disposition of our ordinary shares. This summary does not discuss all aspects of
Israeli tax law that may be relevant to a particular investor in light of his or her personal investment circumstances or to some types of investors, such as traders in
securities, who are subject to special treatment under Israeli law. Because some parts of this discussion are based on new tax legislation that has not yet been
subject to judicial or administrative interpretation, we cannot assure you that the Israeli governmental and tax authorities or the Israeli courts will accept the views
expressed below. The discussion below is subject to amendment under Israeli law or changes to the applicable judicial or administrative interpretations of Israeli
law, which could affect the tax consequences described below.
The discussion below does not cover all possible tax considerations. Potential investors are urged to consult their own tax advisors as to the Israeli or other
tax consequences of the purchase, ownership and disposition of our ordinary shares, including, the effect of any foreign, state or local taxes.
General corporate tax structure in Israel
Israeli resident companies are generally subject to corporate tax, which rate has been fluctuating during the last few years. The corporate tax rate is 23% as of 2018
and thereafter. However, the effective corporate tax rate payable by a company that derives income from a Preferred Enterprise, a Special Preferred Enterprise, a
Preferred Technology Enterprise or Special Preferred Technology Enterprise (as discussed below) may be considerably less.
Capital gains generated by an Israeli resident company are subject to tax at the prevailing corporate tax rate. Under Israeli tax legislation, a corporation will be
considered as an “Israeli resident company” if (i) it was incorporated in Israel or (ii) the control and management of its business are exercised in Israel.
Foreign Exchange Regulations:
Commencing in taxable year 2014, we had elected and were permitted by the ITA to measure our taxable income and file our tax return under the Israeli Income
Foreign Exchange Regulations. Under the Foreign Exchange Regulations, an Israeli company may calculate its tax liability in U.S. dollars according to certain
orders. The tax liability, as calculated in U.S. dollars, is translated into NIS based on the exchange rate as of December 31 of each year.
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Law for the Encouragement of Industry (Taxes), 5729- 1969
The Law for the Encouragement of Industry (Taxes), 5729-1969, generally referred to as the “Encouragement of Industry Law”, provides several tax benefits for
“Industrial Companies”. Pursuant to the Encouragement of Industry Law, a company qualifies as an Industrial Company if it is a resident of Israel which was
incorporated in Israel and at least 90% of its gross income in any tax year (exclusive of income from certain government loans) is generated from an “Industrial
Enterprise” that it owns and located in Israel or in the “Area”, in accordance with the definition under Section 3A of the Israeli Income Tax Ordinance. An
Industrial Enterprise is defined as an enterprise whose principal activity, in a given tax year, is industrial manufacturing.
An Industrial Company is entitled to certain tax benefits, including: (i) an amortization of the cost of a purchased patent, the right to use a patent or know-how that
were purchased in good faith and are used for the development or promotion of the Industrial Enterprise over an eight-year period, beginning from the year in
which such rights were first used, (ii) the right to elect to file consolidated tax returns, under certain conditions, with additional Israeli Industrial Companies
controlled by it, and (iii) the right to deduct expenses related to public offerings in equal amounts over a period of three years beginning from the year of the
offering.
Eligibility for benefits under the Encouragement of Industry Law is not contingent upon the approval of any governmental authority.
There is no assurance that we qualify or will continue to qualify as an Industrial Company or that the benefits described above will be available in the future.
Law for the Encouragement of Capital Investments, 1959
The Investment Law provides certain incentives for capital investment in a production facility (or other eligible assets). Generally, an investment program that is
implemented in accordance with the provisions of the Investment Law, is entitled to benefits. These benefits may include cash grants from the Israeli government
and tax benefits, based upon, among other things, the geographic location in Israel of the facility in which the investment is made. In order to qualify for these
incentives, an Approved Enterprise, a Beneficiary Enterprise, a Preferred Enterprise, a Special Preferred Enterprise, a Preferred Technology Enterprise and a
Special Preferred Technology Enterprise is required to comply with the requirements of the Investment Law.
The Investment Law has been amended several times over the recent years, with the three most significant changes effective as of April 1, 2005, as of January 1,
2011 (the “2011 Amendment”) and as of January 1, 2017 (the “2017 Amendment”). The 2011 Amendment introduced new benefits instead of the benefits
granted in accordance with the provisions of the Investment Law prior to the 2011 Amendment. However, companies entitled to benefits under the Investment Law
as in effect up to January 1, 2011 were entitled to choose to continue to enjoy such benefits, provided that certain conditions are met, or elect instead, irrevocably,
to forego such benefits and elect the benefits of the 2011 Amendment. The 2017 Amendment introduces new benefits for Technological Enterprises, alongside the
existing tax benefits.
The following discussion is a summary of the Investment Law following its most recent amendments:
The Preferred Enterprise Regime—the 2011 Amendment
Eligible companies under the 2011 Amendment can receive benefits as a “Preferred Enterprise.” In order to receive benefits as a Preferred Enterprise, the 2011
Amendment states, among other requirements, that a company must meet certain conditions including owning an industrial enterprise that meets the “Competitive
Enterprise” conditions as described by the Investment Law. The benefits granted to a Preferred Enterprise are determined depending on the location of the
Preferred Enterprise within Israel.
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Qualified enterprises located in specific locations within Israel are eligible for grants and/or loans simultaneously with tax benefits. Grants and/or loans are
approved by the Investment Center.
The 2011 Amendment imposes a reduced flat corporate tax rate which is not program-dependent and applies to the industrial enterprise’s entire preferred income.
Pursuant to the 2011 Amendment, a Preferred Company is entitled to a reduced corporate tax rate of 15% with respect to its income derived by its Preferred
Enterprise in 2011 and 2012, unless the Preferred Enterprise is located in a specified development zone, in which case the rate will be 10%. Under the 2011
Amendment, such corporate tax rate was reduced to 12.5% and 7%, respectively, in 2013, 16% and 9%, respectively, in 2014, 2015 and 2016. Pursuant to the 2017
Amendment, in 2017 and thereafter, the corporate tax rate for Preferred Enterprise which is located in a specified development zone was decreased to 7.5%, while
the reduced corporate tax rate for other development zones remains 16%. Income derived by a Preferred Company from a ‘Special Preferred Enterprise’ (as such
term is defined in the Investment Law) would be entitled, during a benefits period of 10 years, to further reduced tax rates of 8%, or to 5% if the Special Preferred
Enterprise is located in a certain development zone. As of January 1, 2017, the definition for ‘Special Preferred Enterprise’ includes less stringent conditions.
The tax benefits under the 2011 Amendment also include accelerated depreciation and amortization for tax purposes.
A company that pays a dividend to Israeli shareholders out of income generated from the Preferred Enterprise is required to withhold tax on such distribution at a
rate of 20% (in the case of non-Israeli shareholders – subject to the receipt in advance of a valid certificate from the ITA allowing for a reduced tax rate, 20% or a
reduced rate under an applicable double tax treaty). However, if such dividends are paid to an Israeli company, no tax is required to be withheld (although, if such
dividends are subsequently distributed to individuals or a non-Israeli company, withholding tax at a rate of 20% or such lower rate as may be provided in an
applicable tax treaty, will apply).
Under the 2011 Amendment and from January 1, 2011, our facilities have “Preferred Enterprise” status, which entitles us to tax benefits at a flat reduced corporate
tax rate that will apply to the industrial enterprise’s entire preferred income. Those tax rates between 2014 and 2016 were 16% for the income portion related to the
Kibbutz Sdot-Yam facility and 9% for the income portion related to the Bar-Lev manufacturing facility. From 2017 onwards, tax rate for the income portion related
to Bar-Lev is reduced to 7.5% and Sdot-Yam tax rate remains unchanged.
There can be no assurance that we will comply with the conditions required to remain eligible for benefits under the Investment Law in the future or that we will be
entitled to any additional benefits thereunder. The benefits available to Preferred Enterprises are conditioned upon terms stipulated in the Investment Law and
regulations. If we do not fulfill these conditions in whole or in part, the benefits can be reduced or canceled and we may be required to refund the amount of the
benefits, linked to the Israeli consumer price index, with interest or other monetary penalties.
The New Technological Enterprise Incentives Regime—the 2017 Amendment
The 2017 Amendment provides new tax benefits for two types of “Technology Enterprises”, as described below, and is in addition to the other existing tax
beneficial programs under the Investment Law.
The new incentives regime will apply to “Preferred Technology Enterprises” that meet certain conditions, including: (1) the R&D expenses in the three years
preceding the tax year were at least 7% on average of one year out of the company's turnover or exceeded NIS 75 million (approximately $20 million) for a year;
and (2) one of the following: (a) at least 20% of the workforce (or at least 200 employees) are employees whose full salary has been paid and reported in the
company’s financial statements as R&D; (b) a venture capital investment approximately equivalent to at least NIS 8 million (approximately $2.1 million) was
previously made in the company and the company did not change its line of business; (c) growth in sales by an average of 25% or more over the three years
preceding the tax year, provided that the turnover was at least NIS 10 million (approximately $2.7 million), in the tax year and in each of the preceding three years;
or (d) growth in workforce by an average of 25% or more over the three years preceding the tax year, provided that the company employed at least 50 employees,
in the tax year and in each of the preceding three years.
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A “Special Preferred Technology Enterprise” is an enterprise that meets conditions 1 and 2 above, and in addition has total annual consolidated revenues above NIS
10 billion (approximately $2.7 billion).
Preferred Technology Enterprises will be subject to a reduced corporate tax rate of 12% on their income that qualifies as “Preferred Technology Income”, as
defined in the Investment Law. The tax rate is further reduced to 7.5% for a Preferred Technology Enterprise located in development zone A. These corporate tax
rates shall apply only with respect to the portion of intellectual property developed in Israel. In addition, a Preferred Technology Company will enjoy a reduced
corporate tax rate of 12% on capital gain derived from the sale of certain “Benefitted Intangible Assets” (as defined in the Investment Law) to a related foreign
company if the Benefitted Intangible Assets were acquired from a foreign company on or after January 1, 2017 for at least NIS 200 million (approximately $53
million), and the sale receives prior approval from the Israel Innovation Authority (previously known as the Israeli Office of the Chief Scientist) (“IIA”). Special
Preferred Technology Enterprises will be subject to 6% on “Preferred Technology Income” regardless of the company’s geographic location within Israel. In
addition, a Special Preferred Technology Enterprise will enjoy a reduced corporate tax rate of 6% on capital gain derived from the sale of certain “Benefitted
Intangible Assets” to a related foreign company if the Benefitted Intangible Assets were either developed by the Special Preferred Enterprise or acquired from a
foreign company on or after January 1, 2017, and the sale received prior approval from IIA. A Special Preferred Technology Enterprise that acquires Benefitted
Intangible Assets from a foreign company for more than NIS 500 million (approximately $133 million), will be eligible for these benefits for at least ten years,
subject to certain approvals as specified in the Investment Law.
Dividends distributed to Israeli shareholders by a Preferred Technology Enterprise or a Special Preferred Technology Enterprise, paid out of Preferred Technology
Income, are generally subject to withholding tax at source at the rate of 20% (in the case of non-Israeli shareholders – subject to the receipt in advance of a valid
certificate from the ITA allowing for a reduced tax rate, 20% or such lower rate as may be provided in an applicable tax treaty). However, if such dividends are
paid to an Israeli company, no tax is required to be withheld (although, if such dividends are subsequently distributed to individuals or a non-Israeli company,
withholding tax at a rate of 20% or such lower rate as may be provided in an applicable tax treaty, will apply). If such dividends are distributed to a parent foreign
company holding, solely or together with other foreign companies, at least 90% of the shares of the distributing company and other conditions are met, the
withholding tax rate will be 4% (or a lower rate under a tax treaty, if applicable, subject to the receipt in advance of a valid certificate from the ITA allowing for a
reduced tax rate). Currently, we do not meet the above conditions to be eligible for the tax benefits pursuant to the New Technology Enterprise Incentives Regime
—the 2017 Amendment.
The Encouragement of Industrial Research and Development Law, 5744-1984
IIA’s grants may limit our ability to manufacture products, or transfer technologies developed using these grants outside of Israel. If we were to seek approval to
manufacture products, to consummate a merger or acquisition transaction with a non-Israeli party or to transfer technologies developed using these grants outside
of Israel, we could be subject to additional royalty requirements or be required to pay certain redemption fees. If we were to violate these restrictions, we could be
required to refund any grants previously received, together with interest and penalties, and may be subject to criminal charges.
Taxation of our shareholders
Capital gains
Capital gains tax is imposed on the disposal of capital assets by an Israeli resident and on the disposal of such assets by a non-Israeli resident if those assets are
either (i) located in Israel; (ii) shares or rights to shares in an Israeli resident company, or (iii) represent, directly or indirectly, rights to assets located in Israel
unless a tax treaty between Israel and the seller’s country of residence provides otherwise. The Israeli Income Tax Ordinance distinguishes between “Real Capital
Gain” and “Inflationary Surplus.” The Real Capital Gain on the disposition of a capital asset is the amount of total capital gain in excess of Inflationary Surplus.
Inflationary Surplus is computed, generally, on the basis of the increase in the Israeli Consumer Price Index or, in certain circumstances, according to the change in
the foreign currency exchange rate, between the date of purchase and the date of disposal of the capital asset.
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Real Capital Gain generated by a company is generally subject to tax at the corporate tax rate (23% in 2020). As of January 1, 2012, the Real Capital Gain accrued
by individuals on the sale of our securities is taxed at the rate of 25%. However, if the individual shareholder is a “Controlling Shareholder” (meaning, a person
who holds, directly or indirectly, alone or together with another person who collaborates with such person on a permanent basis, 10% or more of one of the Israeli
resident company’s “means of control” (including, among other rights, the right to company profits, voting rights, the right to the company’s liquidation proceeds
and the right to appoint a company director) at the time of sale or at any time during the preceding 12 month period, such gain will be taxed at the rate of 30%.
Individual and corporate shareholders dealing in securities in Israel are taxed at the tax rates applicable to business income – 23% for corporations in 2020 and a
marginal tax rate of up to 47% for an individual in 2020 unless the benefiting provisions of an applicable treaty applies.
Notwithstanding the foregoing, capital gains generated from the sale of securities publicly traded on the Tel Aviv Stock Exchange or on a recognized stock
exchange outside of Israel, by a non-Israeli shareholder (individual and corporation) may be exempt under the Israeli Income Tax Ordinance from Israeli taxes
provided that all the following conditions are met: (i) the securities were purchased upon or after the registration of the securities on a recognized stock exchange
(this requirement generally does not apply to shares purchased on or after January 1, 2009), (ii) the seller of the securities does not have a permanent establishment
in Israel to which the generated capital gain is attributed and (iii) with respect to securities listed on a recognized stock exchange outside of Israel, such
shareholders are not subject to the Israeli Income Tax Law (Inflationary Adjustments) 5745-1985. However, non-Israeli corporation will not be entitled to the
foregoing exemptions if Israeli residents (a) have a controlling interest of more than 25% in such non-Israeli corporation, or (b) are the beneficiaries of or are
entitled to 25% or more of the revenues or profits of such non-Israeli corporation, whether directly or indirectly.
In addition, the sale of the securities may be exempt from Israeli capital gain tax under the provisions of an applicable tax treaty. For example, the Convention
between the Government of the United States of America and the Government of Israel with respect to Taxes on Income (“Israel-U.S.A. Double Tax Treaty”)
exempts U.S. residents (for purposes of the Israel-U.S.A. Double Tax Treaty) from Israeli capital gains tax in connection with such sale, exchange or disposition
provided, among others, that (i) the U.S. resident owned, directly or indirectly, less than 10% of the Israeli resident company’s voting power at any time within the
12-month period preceding such sale; (ii) the seller, if an individual, has been present in Israel for less than 183 days (in the aggregate) during the taxable year; (iii)
the capital gain from the sale was not generated through a permanent establishment of the U.S. resident which is maintained in Israel; the capital gain arising from
such sale, exchange or disposition is not attributed to real estate located in Israel; (v) the capital gains arising from such sale, exchange or disposition is not
attributed to royalties; and (vi) the shareholder is a U.S. resident (for purposes of the Israel-U.S.A. Double Tax Treaty) is holding the shares as a capital asset.
The purchaser of the securities, the stockbrokers who effected the transaction or the financial institution holding the traded securities through which payment to the
seller is made are obligated to withhold Israeli tax at source from such payment. Shareholders may be required to demonstrate that they are exempt from tax on
their capital gains in order to avoid withholding at source at the time of sale. Specifically, in transactions involving a sale of all of the shares of an Israeli resident
company, in the form of a merger or otherwise, the ITA may require from shareholders who are not liable for Israeli tax to sign declarations in forms specified by
this authority or obtain a specific exemption from the ITA to confirm their status as non-Israeli resident, and in the absence of such declarations or exemptions, may
require the purchaser of the shares to withhold taxes at source.
A detailed return, including a computation of the tax due, must be filed and an advance payment must be paid on January 31 and July 30 of each tax year for sales
of securities traded on a stock exchange made within the previous six months. However, if all tax due was withheld at the source according to applicable provisions
of the Israeli Income Tax Ordinance and the regulations promulgated thereunder, the return does not need to be filed provided that (i) such income was not
generated from business conducted in Israel by the taxpayer, (ii) the taxpayer has no other taxable sources of income in Israel with respect to which a tax return is
required to be filed and an advance payment does not need to be made, and (iii) the taxpayer is not obligated to pay excess tax (as further explained below). Capital
gains are also reportable on an annual income tax return.
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Dividends
Israeli residents who are individuals are generally subject to Israeli income tax for dividends paid on shares (other than bonus shares or share dividends) at the rate
of 25%, or 30% if the recipient of such dividend is a Controlling Shareholder at the time of distribution or at any time during the preceding 12-month period.
However, dividends distributed from taxable income accrued from Preferred Enterprise or Preferred Technology Enterprise to Israeli individuals are subject to
withholding tax at the rate of 20%. However, if such dividends are distributed to an Israeli company, no withholding tax is imposed (although, if such dividends are
subsequently distributed to individuals or a non-Israeli company, withholding tax at a rate of 20% or such lower rate as may be provided in an applicable tax treaty,
subject to the receipt in advance of a valid certificate from the ITA allowing for a reduced tax rate, will apply). An average rate will be set in case the dividend is
distributed from mixed types of income (regular and preferred income).
Israeli resident corporations are generally exempt from Israeli corporate tax for dividends paid on shares of Israeli resident corporations.
Non-Israeli resident (either an individual or a corporation) is generally subject to an Israeli income tax on the receipt of dividends at the rate of 25% or 30% (if the
dividend recipient is a Controlling Shareholder at the time of distribution or at any time during the preceding 12-month period) or 20% or such lower rate as may be
provided in an applicable tax treaty, subject to the receipt in advance of a valid certificate from the ITA allowing for a reduced tax rate, if the dividend is distributed
from income attributed to Preferred Enterprise or Preferred Technology Enterprise. Such dividends are generally subject to Israeli withholding tax at a rate of 25%
so long as the shares are registered with a Nominee Company (whether the recipient is a Controlling Shareholder or not), and 20% if the dividend is distributed
from income attributed to a Preferred Enterprise or Preferred Technology Enterprise. Under the Israel-U.S.A. Double Tax Treaty the following rate will apply to
dividends distributed by an Israeli resident company to a U.S. resident (for purposes of the Israel-U.S.A. Double Tax Treaty): if (A) the U.S. resident is a
corporation which held during the portion of the taxable year preceding the date of payment of the dividend and during the whole of its prior taxable year (if any),
at least 10% of the outstanding shares of the voting stock of the Israeli resident paying company and (B) not more than 25% of the gross income of the Israeli
resident paying company for such prior taxable year (if any) consists of certain type of interest or dividends then the maximum tax rate is 12.5% on dividends. The
aforementioned rates will not apply if the dividend income was generated through a permanent establishment of the U.S. resident which is maintained in Israel. If
the dividend is attributable partly to income derived from a Preferred Enterprise, and partly to other sources of income, the withholding rate will be a blended rate
reflecting the relative portions of the two types of income.
Our company is obligated to withhold tax, upon the distribution of a dividend attributed to a Preferred Enterprise’s income from the amount distributed at the
following rates: (i) Israeli resident corporations – 0%, (ii) Israeli resident individuals –20% and (iii) non-Israeli residents – 25% or 30%, and subject to the receipt
in advance of a valid certificate from the ITA allowing for a reduced tax rate – 20% or a reduced tax rate provided under the provisions of an applicable double tax
treaty. If the dividend is distributed from income not attributed to the Preferred Enterprise, the following withholding tax rates will apply: (a) for securities
registered and held by a Nominee Company: (i) Israeli resident corporations – 0%, (ii) Israeli resident individuals – 25% and (iii) non-Israeli residents – 25%,
unless a reduced tax rate is provided under the provisions of an applicable double tax treaty (subject to the receipt in advance of a valid certificate from the ITA
allowing for a reduced tax rate); (b) in all other cases: (i) Israeli resident corporations – 0%, (ii) Israeli resident individuals – 25% or 30% (if the dividend recipient
is a Controlling Shareholder at the time of the distribution or at any time during the preceding 12 month period), and (iii) non-Israeli residents – 25% or 30% as
referred to above with respect to Israeli resident individuals, unless a reduced tax rate is provided under the provisions of an applicable double tax treaty (subject to
the receipt in advance of a valid certificate from the ITA allowing for a reduced tax rate). A non-Israeli resident who receives dividends from which tax was
withheld is generally exempt from the obligation to file tax returns in Israel with respect to such income, provided that (i) such income was not generated from
business conducted in Israel by the taxpayer, (ii) the taxpayer has no other taxable sources of income in Israel with respect to which a tax return is required to be
filed, and (iii) the taxpayer is not obligated to pay excess tax (as further explained below).
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Estate and gift tax
Israeli law presently does not impose estate or gift taxes.
Excess Tax
Individual holders who are subject to tax in Israel (whether any such individual is an Israeli resident or non-Israeli resident) and who have taxable income that
exceeds a certain threshold in a tax year (NIS 651,600 for 2020, which amount is linked to the annual changes to the Israeli Consumer Price Index), will be subject
to an additional tax at the rate of 3% on his or her taxable income for such tax year that is in excess of such amount. For this purpose, taxable income includes, but
is not limited to, taxable capital gains from the sale of securities and taxable income from interest and dividends.
United States federal income taxation
The following is a description of the material United States federal income tax consequences to a U.S. Holder (as defined below) of the acquisition, ownership and
disposition of our ordinary shares. This description addresses only the United States federal income tax consequences to holders that hold such ordinary shares as
capital assets for United States federal income tax purposes. This description does not address tax considerations applicable to holders that may be subject to
special tax rules, including, without limitation:
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banks, financial institutions or insurance companies;
real estate investment trusts, regulated investment companies or grantor trusts;
dealers or traders in securities, commodities or currencies;
tax-exempt entities;
certain former citizens or long-term residents of the United States;
persons that received our shares as compensation for the performance of services;
persons that will hold our shares as part of a “hedging,” “integrated” or “conversion” transaction or as a position in a “straddle” for United States federal
income tax purposes;
partnerships (including entities classified as partnerships for United States federal income tax purposes) or other pass-through entities, or holders that will
hold our shares through such an entity;
S-corporations;
holders that acquire ordinary shares as a result of holding or owning our preferred shares;
U.S. Holders (as defined below) whose “functional currency” is not the U.S. Dollar;
persons subject to special tax accounting rules as a result of any item of gross income with respect to our common stock being taken into account in an
applicable financial statement; or
holders that own directly, indirectly or through attribution 10% or more of the voting power or value of our shares.
Moreover, this description does not address the United States federal estate, gift or alternative minimum tax consequences, or any state, local or foreign tax
consequences, of the acquisition, ownership and disposition of our ordinary shares.
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This description is based on the United States Internal Revenue Code of 1986, as amended (the “Code”), existing, proposed and temporary United States Treasury
Regulations and judicial and administrative interpretations thereof, in each case as in effect and available on the date hereof. All the foregoing is subject to change,
which change could apply retroactively and could affect the tax consequences described below. There can be no assurances that the U.S. Internal Revenue Service
will not take a different position concerning the tax consequences of the acquisition, ownership and disposition of our ordinary shares or that such a position could
not be sustained.
For purposes of this description, a “U.S. Holder” is a beneficial owner of our ordinary shares that, for United States federal income tax purposes, is:
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an individual holder that is a citizen or resident of the United States;
a corporation (or other entity treated as a corporation for United States federal income tax purposes) created or organized in or under the laws of the
United States or any state thereof, including the District of Columbia;
an estate the income of which is subject to United States federal income taxation regardless of its source; or
a trust if such trust has validly elected to be treated as a United States person for United States federal income tax purposes or if (1) a court within the
United States is able to exercise primary supervision over its administration and (2) one or more United States persons have the authority to control all of
the substantial decisions of such trust.
If a partnership (or any other entity treated as a partnership for United States federal income tax purposes) holds our ordinary shares, the tax treatment of a partner
in such partnership will generally depend on the status of the partner and the activities of the partnership. Such a partner or partnership should consult its tax
advisor as to its tax consequences.
You should consult your tax advisor with respect to the United States federal, state, local and foreign tax consequences of acquiring, owning and disposing
of our ordinary shares.
Distributions
Subject to the discussion below under “Passive foreign investment company considerations,” if you are a U.S. Holder, the gross amount of any distribution made to
you with respect to our ordinary shares before reduction for any Israeli taxes withheld therefrom, other than pro rata distributions of our ordinary shares to all our
shareholders, generally will be includible in your income as dividend income to the extent such distribution is paid out of our current or accumulated earnings and
profits as determined under United States federal income tax principles. Subject to the discussion below under “Passive foreign investment company
considerations,” non-corporate U.S. Holders may qualify for the lower rates of taxation with respect to dividends on ordinary shares applicable to long-term capital
gains (meaning, gains from the sale of capital assets held for more than one year) provided that certain conditions are met, including certain holding period
requirements and the absence of certain risk reduction transactions. However, such dividends will not be eligible for the dividends received deduction generally
allowed to corporate U.S. Holders. Subject to the discussion below under “Passive foreign investment company considerations,” to the extent that the amount of
any distribution by us exceeds our current and accumulated earnings and profits as determined under United States federal income tax principles, it will be treated
first as a tax-free return of your adjusted tax basis in our ordinary shares and thereafter as capital gain. We do not expect to maintain calculations of our earnings
and profits under United States federal income tax principles and, therefore, U.S. Holders should expect that the entire amount of any distribution generally will be
reported as dividend income.
122
Dividends paid to U.S. Holders with respect to our ordinary shares will be treated as foreign source income, which may be relevant in calculating your foreign tax
credit limitation. Subject to certain conditions and limitations, Israeli tax withheld on dividends may be deducted from your taxable income or credited against your
United States federal income tax liability. The limitation on foreign taxes eligible for credit is calculated separately with respect to specific classes of income. For
this purpose, dividends that we distribute generally should constitute “passive category income,” or, in the case of certain U.S. Holders, “general category income.”
A foreign tax credit for foreign taxes imposed on distributions may be denied if you do not satisfy certain minimum holding period requirements. In addition, for
periods in which we are a “United Stated-owned foreign corporation”, a portion of dividends paid by us may be treated as U.S. source solely for purposes of the
foreign tax credit. We would be treated as a United States-owned foreign corporation if 50% or more of the total value or total voting power of our stock is owned,
directly, indirectly or by attribution, by United States persons. To the extent any portion of our dividends is treated as U.S. source income pursuant to this rule, the
ability of a U.S. Holder to claim a foreign tax credit for any Israeli withholding taxes payable in respect of our dividends may be limited. A U.S. Holder entitled to
benefits under the United States-Israel Tax Treaty may, however, elect to treat any dividends as foreign source income for foreign tax credit purposes if the
dividend income is separated from other income items for purposes of calculating the U.S. Holder’s foreign tax credit. The rules relating to the determination of the
foreign tax credit are complex, and you should consult your tax advisor to determine whether and to what extent you will be entitled to this credit.
Future distributions with respect to our ordinary shares may be paid in U.S. dollars or NIS. If a distribution is denominated in NIS, the amount of such distribution
will equal the U.S. dollar value of the NIS received, calculated by reference to the exchange rate in effect on the date that distribution is received, whether or not
the U.S. Holder in fact converts any NIS received into U.S. dollars at that time. If the distribution is converted into U.S. dollars on the date of receipt, a U.S. Holder
generally will not be required to recognize foreign currency gain or loss in respect of the distribution. A U.S. Holder may have foreign currency gain or loss if the
distribution is converted into U.S. dollars after the date of receipt. Any gains or losses resulting from the conversion of NIS into U.S. dollars will be treated as
ordinary income or loss, as the case may be, of the U.S. Holder and will be U.S.-source.
Sale, exchange or other disposition of ordinary shares
Subject to the discussion below under “Passive foreign investment company considerations,” U.S. Holders generally will recognize gain or loss on the sale,
exchange or other disposition of our ordinary shares equal to the difference between the amount realized on such sale, exchange or other disposition and such
holder’s adjusted tax basis in our ordinary shares, and such gain or loss will be capital gain or loss. The adjusted tax basis in an ordinary share generally will be
equal to the cost of such ordinary share. If you are a non-corporate U.S. Holder, capital gain from the sale, exchange or other disposition of ordinary shares is
generally eligible for a preferential rate of taxation applicable to capital gains, if your holding period for such ordinary shares exceeds one year (meaning, such gain
is long-term capital gain). The deductibility of capital losses for United States federal income tax purposes is subject to limitations under the Code. Any such gain
or loss that a U.S. Holder recognizes generally will be treated as U.S. source income or loss for foreign tax credit limitation purposes.
Passive foreign investment company considerations
If we were to be classified as a “passive foreign investment company,” or PFIC, in any taxable year, a U.S. Holder would be subject to special rules generally
intended to reduce or eliminate any benefits from the deferral of United States federal income tax that a U.S. Holder could derive from investing in a non-U.S.
company that does not distribute all of its earnings on a current basis.
A non-U.S. corporation will be classified as a PFIC for United States federal income tax purposes in any taxable year in which, after applying certain look-through
rules, either:
•
•
at least 75% of its gross income is “passive income”; or
at least 50% of the average value of its gross assets is attributable to assets that produce “passive income” or are held for the production of passive income.
Passive income for this purpose generally includes dividends, interest, royalties, rents, gains from commodities and securities transactions, the excess of gains over
losses from the disposition of assets, which produce passive income, and includes amounts derived by reason of the temporary investment of funds raised in
offerings of our ordinary shares. If a non-U.S. corporation owns at least 25% by value of the stock of another corporation, the non-U.S. corporation is treated for
purposes of the PFIC tests as owning its proportionate share of the assets of the other corporation and as receiving directly its proportionate share of the other
corporation’s income. If we are classified as a PFIC in any year with respect to which a U.S. Holder owns our ordinary shares, we will continue to be treated as a
PFIC with respect to such U.S. Holder in all succeeding years during which the U.S. Holder owns our ordinary shares, regardless of whether we continue to meet
the tests described above.
123
Based on the composition of our income, the composition and estimated fair market value of our assets and the nature of our business, we do not believe we were a
PFIC for the taxable year ended December 31, 2020 and do not expect that we will be classified as a PFIC for the taxable year ending December 31, 2021.
However, no official determination as to our PFIC status has been made for the year ended December 31, 2020. Additionally, because PFIC status is based on our
income, assets and activities for the entire taxable year, it is not possible to determine whether we will be characterized as a PFIC for a particular taxable year until
after the close of the taxable year. Moreover, the determination of our PFIC status annually is based on tests which are factual in nature, and our status in future
years will depend on our income, assets and activities in those years. Furthermore, because the value of our gross assets is likely to be determined in large part by
reference to our market capitalization, a decline in the value of our ordinary shares may result in our becoming a PFIC. There can be no assurance that we will not
be considered a PFIC for any taxable year. If we were a PFIC then unless you make one of the elections described below, a special tax regime will apply to both (a)
any “excess distribution” by us to you (generally, your ratable portion of distributions in any year which are greater than 125% of the average annual distribution
received by you in the shorter of the three preceding years or your holding period for our ordinary shares) and (b) any gain realized on the sale or other disposition
of the ordinary shares.
Under this regime, any excess distribution and realized gain will be treated as ordinary income and will be subject to tax as if (a) the excess distribution or gain had
been realized ratably over your holding period, (b) the amount deemed realized in each year had been subject to tax in each year of that holding period at the
highest marginal rate for such year (other than income allocated to the current period or any taxable period before we became a PFIC, which will be subject to tax
at the U.S. Holder’s regular ordinary income rate for the current year and will not be subject to the interest charge discussed below), and (c) the interest charge
generally applicable to underpayments of tax had been imposed on the taxes deemed to have been payable in those years. In addition, dividend distributions made
to you will not qualify for the lower rates of taxation applicable to long-term capital gains discussed above under “Distributions.” Certain elections may be
available that would result in an alternative treatment (such as mark-to-market treatment) of our ordinary shares. We do not intend to provide the information
necessary for U.S. Holders to make qualified electing fund elections if we are classified as a PFIC. U.S. Holders should consult their tax advisors to determine
whether any of these elections would be available and if so, what the consequences of the alternative treatments would be in their particular circumstances.
If we are determined to be a PFIC, the general tax treatment for U.S. Holders described in this paragraph would apply to indirect distributions and gains deemed to
be realized by U.S. Holders in respect of any of our subsidiaries that also may be determined to be PFICs.
If a U.S. Holder owns ordinary shares during any year in which we are classified as a PFIC and the U.S. Holder recognizes gain on a disposition of our ordinary
shares or receives distributions with respect to our ordinary shares, the U.S. Holder generally will be required to file an IRS Form 8621 with respect to the
company, generally with the U.S. Holder’s federal income tax return for that year. If our company were a PFIC for a given taxable year, then you should consult
your tax advisor concerning your annual filing requirements.
U.S. Holders should consult their tax advisors regarding whether we are a PFIC and the potential application of the PFIC rules.
Backup withholding tax and information reporting requirements
United States backup withholding tax and information reporting requirements may apply to certain payments to certain holders of stock. Information reporting
generally will apply to payments of dividends on, and to proceeds from the sale or redemption of, our ordinary shares made within the United States, or by a U.S.
payor or U.S. middleman, to a holder of our ordinary shares, other than an exempt recipient (including a payee that is not a United States person that provides an
appropriate certification and certain other persons). A payor will be required to withhold backup withholding tax from any payments of dividends on, or the
proceeds from the sale or redemption of, ordinary shares within the United States, or by a U.S. payor or U.S. middleman, to a holder, other than an exempt
recipient, if such holder fails to furnish its correct taxpayer identification number or otherwise fails to comply with, or establish an exemption from, such backup
withholding tax requirements. Any amounts withheld under the backup withholding rules will be allowed as a credit against the beneficial owner’s United States
federal income tax liability, if any, and any excess amounts withheld under the backup withholding rules may be refunded, provided that the required information is
timely furnished to the U.S. Internal Revenue Service.
124
3.8% Medicare Tax on “Net Investment Income”
Certain U.S. Holders who are individuals, estates or trusts are required to pay an additional 3.8% tax on, among other things, dividends and capital gains from the
sale or other disposition of ordinary shares.
Foreign asset reporting
Certain U.S. Holders, who are individuals, are required to report information relating to an interest in our ordinary shares, subject to certain exceptions (including
an exception for shares held in accounts maintained by U.S. financial institutions). U.S. Holders are urged to consult their tax advisors regarding their information
reporting obligations, if any, with respect to their ownership and disposition of our ordinary shares.
The above description is not intended to constitute a complete analysis of all tax consequences relating to the acquisition, ownership and disposition of our
ordinary shares. You should consult your tax advisor concerning the tax consequences of your particular situation.
F. Dividends and Paying Agents
Not applicable.
G. Statements by Experts
Not applicable.
H. Documents on Display
You may read and copy this annual report on Form 20-F, including the related exhibits and schedules, and any document we file with the SEC through the SEC’s
website at http://www.sec.gov.
As a foreign private issuer, we are exempt from the rules under the Exchange Act related to the furnishing and content of proxy statements, and our officers,
directors and principal shareholders are exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the Exchange Act.
Furthermore, as a foreign private issuer, we are also not subject to the requirements of Regulation Fair Disclosure (“FD”) promulgated under the Exchange Act. In
addition, we are not required under the Exchange Act to file annual or other reports and consolidated financial statements with the SEC as frequently or as promptly
as U.S. companies whose securities are registered under the Exchange Act. Instead, we must file with the SEC, within 120 days after the end of each fiscal year, or
such other applicable time as required by the SEC, an annual report on Form 20-F containing consolidated financial statements audited by an independent
registered public accounting firm. We also intend to furnish certain other material information to the SEC under cover of Form 6-K.
We maintain a corporate website at http://www.caesarstone.com. Information contained on, or that can be accessed through, our website does not constitute a part
of this annual report on Form 20-F. We have included our website address in this annual report on Form 20-F solely as an inactive textual reference.
I.
Subsidiary Information
Not applicable.
125
ITEM 11: Quantitative and Qualitative Disclosures About Market Risk
Since July 1, 2012, our functional currency has been the U.S. dollar. We conduct business in a large number of countries and, as a result, we are exposed to foreign
currency fluctuations. The majority of our revenues are denominated in U.S. dollars, Australian dollars and Canadian dollars. Sales in Australian dollars accounted
for 21.3%, 19.8% and 22.8% of our revenues in 2020, 2019 and 2018, respectively. Sales in Canadian dollars accounted for 14.9%,15.7% and 17.3% of our
revenues in 2020, 2019 and 2018, respectively. As a result, devaluation of the Australian dollar, and to a lesser extent, the Canadian dollar, relative to the U.S.
dollar could reduce our profitability significantly. Our expenses are largely denominated in U.S. dollars, NIS and Euros, and a smaller proportion in Canadian
dollars, Australian dollars British pound and Singaporean dollars. As a result, a revaluation of the NIS, or to a lesser extent, the Euro, relative to the U.S. dollar
could reduce our profitability significantly.
The following table presents information about the year over year percentage changes in the average exchange rates of the principal currencies that impact our
results of operations:
2018
2019
2020
Australian
dollar against
U.S. dollar
Canadian
dollar against
U.S. dollar
NIS against
U.S. dollar
Euro against
U.S. dollar
(6.3)%
(3.1)%
(0.6)%
(3.4)%
1.2%
(0.9)%
(4.1)%
5.3%
3.7%
0.9%
(1.6)%
2.0%
Assuming a 10% decrease in the Australian dollar relative to the U.S. dollar and assuming no other changes, our operating income would have decreased by $8.0
million in 2020.
Assuming a 10% decrease in the Canadian dollar relative to the U.S. dollar and assuming no other changes, our operating income would have decreased by $4.7
million in 2020.
Devaluation of NIS relative to the U.S. dollar would decrease our revenues generated in Israel. However, our NIS operating costs when reported in U.S. dollars
would decrease to a greater extent, resulting in higher operating income. As a result, assuming a 10% decrease in NIS relative to the U.S. dollar and assuming no
other changes, our operating income, as reported in U.S. dollars, would increase by $7.2 million in 2020.
An appreciation of the Euro relative to the U.S. dollar would increase our revenues generated in Europe and certain other countries. However, our Euro operating
costs when reported in U.S. dollars would increase to a greater extent, resulting in lower operating income. Assuming a 10% increase in the Euro relative to the
U.S. dollar and assuming no other changes, our operating income would have decreased by $1.0 million in 2020.
Our exposure related to exchange rate changes on our net asset position denominated in currencies other than the U.S. dollar varies with changes in our net asset
position. Net asset position refers to financial assets, such as trade receivables and cash, less financial liabilities, such as loans and accounts payable. The impact of
any such transaction gains or losses is reflected in finance expenses, net. Our most significant exposure as of December 31, 2020, relates to a potential change in
the exchange rate of the Canadian dollar and Australian dollar and to a lesser extent to the British pound, the Euro, the NIS, the Singaporean dollar, and the Indian
Rupee relative to the U.S. dollar. Assuming a 10% decrease in the NIS and the Australian dollar relative to the U.S. dollar, and assuming no other changes, finance
expenses, net would have increased by $0.2 million and $0.1 million, respectively. Assuming a 10% decrease in the Canadian dollar, GBP, Euro and, Singaporean
dollar relative to the U.S. dollar, and assuming no other changes, finance expenses, net would have decreased by $2.7 million, $1.5 million, $0.7 million and $0.3
million in 2020, respectively.
We use forward contracts to manage currency risk with respect to those currencies in which we generate revenues or incur expenses. Our functional currency is the
U.S. dollar, and we use Australian/U.S. dollar, Euro/U.S. dollar and U.S. dollar/Canadian dollar and GBP/ U.S. dollar forward contracts. The derivatives
instruments partially offset the impact of foreign currency fluctuations. We may in the future use derivative instruments to a greater extent or engage in other
transactions or invest in market risk sensitive instruments if we determine that it is necessary to offset these risks. Currency instruments other than our U.S.
dollar/NIS forward contracts are not designated as hedging accounting instruments under ASC 815, Derivatives and Hedging. Therefore, we have been incurring
financial loss or income as a result of these derivatives.
126
As of December 31, 2020, we had the following foreign currency hedge portfolio (U.S. dollar in thousands):
Buy forward contracts
Sell forward contracts
Buy put options
Sell call options
Total notional value
Total fair value
USD/NIS
EUR/USD
GBP/USD
USD/CAD
AUD/USD
TOTAL
Notional
Fair value
Average rate
Notional
Fair value
Average rate
Notional
Fair value
Average rate
Notional
Fair value
Average rate
$
—
—
—
—
—
—
—
—
—
—
—
—
—
— $
—
—
—
—
—
—
—
—
—
—
—
—
—
— $
—
—
—
3,485
(102)
1.32
—
—
—
—
—
—
3,485
(102) $
—
—
—
41,636
(180)
1.28
—
—
—
—
—
—
41,636
(180) $
—
—
—
51,597
(3,300)
0.73
—
—
—
—
—
—
51,597
(3,300) $
—
—
—
96,719
(3,582)
—
—
—
—
—
—
—
96,719
(3,582)
As of December 31, 2020, net embedded losses on our foreign currency open derivatives transactions were $3.6 million. As of December 31, 2019, net embedded
losses on our foreign currency open derivatives transactions were $0.4 million. As of December 31, 2018, net embedded losses on our foreign currency open
derivatives transactions were $0.4 million.
For the year ended December 31, 2020, our finance expenses resulted from derivatives including the impact of the foreign exchange rate derivatives fair value
measurement were $0.8 million. For the year ended December 31, 2019, our finance income generated from derivatives including the impact of the foreign
exchange rate derivatives fair value measurement were $2.1 million. For the year ended December 31, 2018, our finance expenses generated from derivatives
including the impact of the foreign exchange rate revaluation were $2.4 million.
Interest rates
We had cash and short-term bank deposits totaling $114.2 million at December 31, 2020. Our cash, cash equivalents and short-term bank deposits are held for
working capital and other purposes. We do not enter into investments for trading or speculative purposes. Due to the short-term nature of the investments in cash
equivalents and our relatively low debt balances, we do not believe that changes in interest rates will have a material impact on our financial position and results of
operations and, therefore, we believe that a sensitivity analysis would not be material to investors. However, declines in interest rates will reduce future investment
income.
Inflation
Inflationary factors such as increases in the cost of our labor may adversely affect our operating results. Although we do not believe that inflation has had a material
impact on our financial position or results of operations to date, a high rate of inflation in the future may have an adverse effect on our ability to maintain current
levels of gross profit margins and operating expenses as a percentage of revenues if the selling prices of our products do not increase in line with increases in costs.
ITEM 12: Description of Securities Other Than Equity Securities
Not applicable.
127
ITEM 13: Defaults, Dividend Arrearages and Delinquencies
None.
ITEM 14: Material Modifications to the Rights of Security Holders and Use of Proceeds
PART II
None.
ITEM 15: Controls and Procedures
(a)
Disclosure Controls and Procedures. Our management, including our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness
of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of December 31, 2020. Based on
such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of December 31, 2020, our disclosure controls and procedures
were effective such that the information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized
and reported within the time periods specified in SEC rules and forms, and is accumulated and communicated to our management, including our Chief Executive
Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
(b)
Management’s Annual Report on Internal Control Over Financial Reporting. Our management, under the supervision of our Chief Executive Officer and
Chief Financial Officer, is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-
15(f) under the Exchange Act. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements in accordance with generally accepted accounting principles. Our internal control over financial
reporting includes those policies and procedures that:
•
•
•
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted
accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material
effect on the financial statements.
Our management, including our Chief Executive Officer and Chief Financial Officer, assessed the effectiveness of our internal control over financial reporting as of
December 31, 2020. In making this assessment, our management used the criteria established in Internal Control—Integrated Framework (2013) issued by the
Committee of Sponsoring Organizations of the Treadway Commission. Our management has concluded, based on its assessment, that our internal control over
financial reporting was effective as of December 31, 2020 to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
consolidated financial statements for external reporting purposes in accordance with generally accepted accounting principles.
Attestation Report of the Registered Public Accounting Firm. Our independent registered public accounting firm has audited the consolidated financial
(c)
statements included in this annual report on Form 20-F, and as part of its audit, has issued an unqualified audit report on the effectiveness of our internal control
over financial reporting as of December 31, 2020. This report is included in pages F-2 and F-3 of this annual report on Form 20-F and is incorporated herein by
reference.
Changes in Internal Control Over Financial Reporting. During the period covered by this report, no changes in our internal control over financial reporting
(d)
(as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) have occurred that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
128
ITEM 16: Reserved
ITEM 16A: Audit Committee Financial Expert
Our board of directors has determined that each of Ms. Nurit Benjamini and Ms. Lily Ayalon qualifies as an “audit committee financial expert,” as defined by the
rules of the SEC, and has the requisite financial experience required by the Nasdaq rules. In addition, Ms. Nurit Benjamini and Ms. Lily Ayalon are independent as
such term is defined in Rule 10A-3(b)(1) under the Exchange Act and under Nasdaq rules.
ITEM 16B: Code of Ethics
The Company has adopted a code of ethics (“Code of Ethics”) that applies to the Company’s chief executive officer and all senior financial officers, including the
Company’s chief financial officer, the controller and persons performing similar functions. The Company has also adopted a separate code of conduct that applies
to the Company’s directors, officers and employees. We have posted these codes on our corporate website at https://ir.caesarstone.com/governance/governance-
documents/default.aspx. Information contained on, or that can be accessed through, our website does not constitute a part of this annual report and is not
incorporated by reference herein.
Waivers of our Code of Ethics may only be granted by the board of directors. Any amendments to this Code of Ethics or any waiver that is granted, and the basis
for granting the waiver, will be publicly communicated as appropriate. Under Item 16B of Form 20-F, if a waiver or amendment of the Code of Ethics applies to
our principal executive officer, principal financial officer, principal accounting officer, controller and other persons performing similar functions and relates to
standards promoting any of the values described in Item 16B(b) of Form 20-F, we will disclose such waiver or amendment (i) on our website within five business
days following the date of amendment or waiver in accordance with the requirements of Instruction 4 to Item 16B or (ii) through the filing of a Form 6-K. We
granted no waivers under our Code of Ethics in 2020.
ITEM 16C: Principal Accountant Fees and Services
Fees Paid to the Auditors
The following table sets forth, for each of the years indicated, the fees billed by our independent registered public accounting firm.
Audit fees(1)
Audit-related fees(2)
Tax fees(3)
All other fees(4)
Total
2020
2019
(in thousands of U.S. dollars)
$
$
619
87
119
528
1,353
$
$
472
48
49
249
818
(1)
(2)
(3)
(4)
“Audit fees” include fees for services performed by our independent public accounting firm in connection with the integrated audit of our annual audit
consolidated financial statements for 2020 and 2019, and its internal control over financial reporting as of December 31, 2020 and 2019, certain procedures
regarding our quarterly financial results submitted on Form 6-K, and consultation concerning financial accounting and reporting standards.
“Audit-related fees relate to assurance and associated services that are traditionally performed by the independent auditor.
“Tax fees” include fees for professional services rendered by our independent registered public accounting firm for tax compliance and tax advice and tax
planning services on actual or contemplated transactions.
“Other fees” include fees for services rendered by our independent registered public accounting firm with respect to supply chain consulting, governmental
incentives, due diligence investigations and other matters.
Audit Committee’s Pre-Approval Policies and Procedures
Our audit committee has adopted a pre-approval policy for the engagement of our independent accountant to perform certain audit and non-audit services. Pursuant
to this policy, which is designed to assure that such engagements do not impair the independence of our auditors, the audit committee pre-approves annually a
catalog of specific audit and non-audit services in the categories of audit service, audit-related service and tax services that may be performed by our independent
accountants.
129
ITEM 16D: Exemptions from the Listing Standards for Audit Committees
Not applicable.
ITEM 16E: Purchases of Equity Securities by the Company and Affiliated Purchasers
None.
ITEM 16F: Change in Registrant’s Certifying Accountant
None.
ITEM 16G: Corporate Governance
As a foreign private issuer, we are permitted under Nasdaq Rule 5615(a)(3) to follow Israeli corporate governance practices instead of the Nasdaq corporate
governance rules, provided we disclose which requirements we are not following and the equivalent Israeli requirement. We must also provide the Nasdaq Global
Select Market with a letter from outside counsel in our home country, Israel, certifying that our corporate governance practices are not prohibited by Israeli law.
We rely on this “foreign private issuer exemption” and follow the requirements of Israeli law with respect to the quorum requirement for meetings of our
shareholders, which are different from the requirements of Rule 5620(c). Under our articles of association, the quorum required for an ordinary meeting of
shareholders consists of at least two shareholders present in person, by proxy or by written ballot, who hold or represent between them at least 25% of the voting
power of our shares, instead of 33 1/3% of the issued share capital provided by under the Nasdaq rules. At an adjourned meeting, any number of shareholders
constitutes a quorum. This quorum requirement is based on the default requirement set forth in the Companies Law. We submitted a letter to the Nasdaq Global
Select Market from our outside counsel in connection with this item prior to our IPO in March 2012.
Otherwise, we comply with the Nasdaq corporate governance rules requiring that listed companies have a majority of independent directors and maintain a
compensation and nominating committee composed entirely of independent directors. We are also subject to Israeli corporate governance requirements applicable
to companies incorporated in Israel whose securities are listed for trading on a stock exchange outside of Israel.
We may in the future provide the Nasdaq Global Select Market with an additional letter or letters notifying the organization that we are following our home country
practices, consistent with the Companies Law and practices, in lieu of other requirements of Nasdaq Rule 5600.
ITEM 16H: Mine Safety Disclosures
Not applicable.
130
ITEM 17: Financial Statements
Not applicable.
ITEM 18: Financial Statements
See Financial Statements included at the end of this report.
ITEM 19: Exhibits
PART III
INDEX OF EXHIBITS
Number
1.1
1.2
2.1
4.1
4.2
4.3
4.4
4.5
4.7
4.8
4.9
4.10
4.11
4.12
4.13
4.14
4.15
4.16
4.17
4.18
8.1
12.1
Description
Articles of Association of the Registrant, as amended on September 24, 2019 (1) ∞
Memorandum of Association of the Registrant (2) ∞
Description of the Registrant’s Securities. (1)
Land Purchase Agreement and Leaseback, by and between Kibbutz Sdot-Yam and the Registrant, dated March 31, 2011 (3) ∞
Addendum, dated February 13, 2012 to the Land Purchase Agreement and Leaseback, by and between Kibbutz Sdot-Yam and the Registrant, dated
March 31, 2011 (3) ∞
Letter Agreement between the Registrant and Mikroman Madencilik San ve TIC.LTD.STI for 2019 **
2011 Incentive Compensation Plan, as Amended (4)
2020 Share Incentive Plan (7)
Land Use Agreement, by and between Kibbutz Sdot-Yam and the Registrant, dated July 20, 2011 (3) ∞
Addendum, dated February 13, 2012, to the Land Use Agreement, by and between Kibbutz Sdot-Yam and the Registrant, dated July 20, 2011 (3) ∞
Manpower Agreement, by and between Kibbutz Sdot-Yam and the Registrant, dated July 20, 2011 (3) ∞
Addendum, dated July 2015, to the Manpower Agreement, by and between Kibbutz Sdot-Yam and the Registrant, dated July 20, 2011 (4) ∞
Addendum No. 2, dated November 2018, to the Manpower Agreement, by and between Kibbutz Sdot-Yam and the Registrant, dated July 20,
2011(6)
Services Agreement, by and between Kibbutz Sdot-Yam and the Registrant, dated July 2015 (4)∞
Services Agreement, by and between Kibbutz Sdot-Yam and the Registrant, dated November 2018 (6)
Form of Registration Rights Agreement, by and among the Registrant, Kibbutz Sdot-Yam, Tene Quartz Surfaces Investments Limited Partnership
and Tene Quartz Surfaces Investments (Parallel) Limited Partnership, dated July 21, 2011, as amended on September 19, 2017 (5)
Extension of Registration Rights Agreement, by and among the Registrant, Kibbutz Sdot-Yam, Tene Quartz Surfaces Investments Limited
Partnership and Tene Quartz Surfaces Investments (Parallel) Limited Partnership, dated February 13, 2012 (3)
Reimbursement Agreement, dated January 4, 2012, by and between the Registrant and Kibbutz Sdot-Yam (3) ∞
Amended and Restated Compensation Policy of Caesarstone Ltd. (1) ∞
Letter Agreement between the Registrant and Polat Maden Sanayi ve Ticaret A.S. for 2021**
List of Subsidiaries of the Registrant
Certification of Principal Executive Officer required by Rule 13a-14(a) and Rule 15d-14(a) (Section 302 Certifications)
131
12.2
13.1
15.1
15.2
15.3
101.INS
101.SCH
101.PRE
101.CAL
101.LAB
101.DEF
104
Certification of Principal Financial Officer required by Rule 13a-14(a) and Rule 15d-14(a) (Section 302 Certifications)
Certification of Principal Executive Officer and Principal Financial Officer required by Rule 13a-14(b) and Rule 15d-14(b) (Section 906
Certifications), furnished herewith
Consent of Kost Forer Gabbay & Kasierer (a member of Ernst & Young Global)
Consent of Grant Thornton Audit Pty Ltd.
Consent of Freedonia Custom Research, a division of Marketresearch.com INC.
Inline XBRL Instance Document
Inline XBRL Taxonomy Extension Schema Document
Inline XBRL Taxonomy Presentation Linkbase Document
Inline XBRL Taxonomy Calculation Linkbase Document
Inline XBRL Taxonomy Label Linkbase Document
Inline XBRL Taxonomy Extension Definition Linkbase Document
Cover Page Interactive Data File (embedded within the Inline XBRL document)
________________________
(1)
Previously filed with the Securities and Exchange Commission on March 23, 2020 pursuant to an annual report on Form 20-F and incorporated by
reference herein.
(2)
(3)
(4)
(5)
(6)
(7)
*
**
∞
Previously filed with the Securities and Exchange Commission on March 6, 2012 pursuant to a registration statement on Form F-1/A (File No. 333-
179556) and incorporated by reference herein.
Previously filed with the Securities and Exchange Commission on February 16, 2012 pursuant to a registration statement on Form F-1 (File No. 333-
179556) and incorporated by reference herein.
Previously filed with the Securities and Exchange Commission on March 7, 2016 pursuant to an annual report on Form 20-F and incorporated by
reference herein.
Previously filed with the Securities and Exchange Commission on March 12, 2018 pursuant to an annual report on Form 20-F and incorporated by
reference herein.
Previously filed with the Securities and Exchange Commission on October 25, 2018, pursuant to Exhibit 99.1 to a current report on Form 6-K and
incorporated by reference herein.
Previously filed with the Securities and Exchange Commission on December 23, 2020 pursuant to Exhibit 99.1 to Registration Statement on Form S-8 and
incorporated by reference herein.
Portions of this exhibit were omitted, and a complete copy of each agreement was provided separately to the Securities and Exchange Commission
pursuant to the Company’s application requesting confidential treatment under Rule 24b-2 under the Exchange Act, which was subsequently approved by
the SEC.
Certain confidential information contained in this document, marked by brackets, was omitted because it is both (i) not material and (ii) would likely
cause competitive harm to the Company if publicly disclosed. “(***)” indicates where the information has been omitted from this exhibit
English translation of original Hebrew document
132
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.
SIGNATURES
Date: March 22, 2021
Caesarstone Ltd.
By: /s/ Yuval Dagim
Yuval Dagim
Chief Executive Officer
133
CAESARSTONE LTD. AND ITS SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2020
INDEX
Reports of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2020 and 2019
Consolidated Statements of Income for the Years Ended December 31, 2020, 2019 and 2018
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2020, 2019 and 2018
Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 2020, 2019 and 2018
Consolidated Statements of Cash Flows for the Years Ended December 31, 2020, 2019 and 2018
Notes to Consolidated Financial Statements
Reports of Grant Thornton Audit Pty Ltd.
Page
F-2 - F-6
F-7 - F-8
F-9
F-10
F-11
F-12 - F-13
F-14
F-76 - F-78
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors of Caesarstone Ltd.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Caesarstone Ltd. (and subsidiaries) (the Company) as of December 31, 2020 and 2019, the
related consolidated statements of income, comprehensive income, shareholders' equity and cash flows for each of the three years in the period ended December 31,
2020, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, based on our audits and the report of other auditors,
the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2020 and 2019, and the results
of its operations and its cash flows for the years then ended in conformity with U.S. generally accepted accounting principles.
We did not audit the financial statements of Caesarstone Australia Pty Ltd., a wholly-owned subsidiary, which reflect total assets of constituting 11% and 10% at
December 31, 2020 and 2019, respectively, and total revenues constituting 21% in 2020, 20% in 2019 and 23% 2018 of the related consolidated totals. Those
statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for Caesarstone
Australia Pty Ltd., is based solely on the report of the other auditors.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal
control over financial reporting as of December 31, 2020, based on criteria established in Internal Control-Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated March 22, 2021 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements
based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance
with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to
assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such
procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the
accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe
that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to
be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially
challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial
statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the
accounts or disclosures to which they relate.
F - 2
Provision for bodily injury claims related to exposure to silica dust
Description
of the matter
As described in note 11 to the consolidated financial statements, the Company is subject to numerous claims mainly by fabricators, their employees
or the National Insurance Institute ("NII"), alleging that fabricators contracted illnesses, including silicosis, through exposure to silica particles
during cutting, polishing, sawing, grinding, breaking, crushing, drilling, sanding or sculpting Company's products. The Company recognized a
provision in relation to Silicosis claims when an unfavorable outcome was probable and the amount of the loss could be reasonably estimated. In
order to determine the liability amount, the Company consults with legal counsels.
Auditing the Company’s accounting for the Silicosis provision was complex due to the significant estimation required in determining the
Company’s liability amount of $42 million. The estimate of the provision involved significant estimation uncertainty primarily due to the different
stages of legal claims and the probability of loss, which in turn led to a high degree of auditor judgment and effort in performing procedures and
evaluating management's conclusions related to these legal claims.
How we
addressed
the matter in
our audit
We obtained an understanding, evaluated the design and tested the operating effectiveness of internal controls over the accounting of Silicosis
claims provision, including management's assessment of the assumptions and data underlying the provision valuation.
To evaluate the Company's assessment of the probability of incurrence of a loss and whether the loss was reasonably estimated, among other
procedures, we read the minutes of the meeting of the committees of the board of directors and gained an understanding of the claims by inquiring
of the external and internal legal counsels regarding the allegations. We also obtained external and internal legal counsels confirmation letters as
well as a management representation letter.
Our substantive procedures also included testing the accuracy, completeness and reasonableness of the underlying data used in management's
provision assessment and attending meetings between management and legal counsels to determine a range of reasonably possible loss. We tested
management’s assumptions by comparing prior period's estimates versus actual prior period's results and evaluating events occurring up to date of
the auditor's report. We also inquired the legal counsels regarding the likelihood of the outcome of the claims, and evaluated the Company’s legal
contingency disclosures included in Note 11 to the consolidated financial statements.
F - 3
Acquisition accounting for business combination
Description
of the matter
As described in Note 1b to the consolidated financial statements, on October 5, 2020, the Company acquired 55% of the outstanding common
shares and voting rights of Lioli Ceramica Limited for a net consideration of $13.6 million (the “Lioli Acquisition”). The Lioli acquisition was
accounted for as a business combination in accordance with ASC 805.
Auditing the Company’s accounting for the Business combination was complex and required subjective auditor judgment due to significant
estimation required in determining the fair value of the customer relationship and the redeemable non controlling interest ("redeemable NCI")
(derived from the fair value of the put option) in the amounts of $2 million and $7.3 million respectively.
The significant estimation was primarily due to the complexity of the valuation model used to measure the fair value of the asset and the
redeemable NCI, as well as the sensitivity of the respective fair value to the underlying significant assumptions. The Company used a discounted
cash flow model to measure the intangible assets and Monte Carlo simulation to determine the value of the redeemable NCI. The significant
assumptions used to estimate the fair value of the intangible assets included discount rates and certain assumptions that form the basis of the
forecasted results, such as revenue growth rates, working capital, weighted average cost of capital and profitability margins. The significant
assumptions used to estimate the fair value of the redeemable NCI are future equity value, risk free rates, projected revenues, expected asset and
equity volatility, cost of debt and expected term.
How we
addressed
the matter in
our audit
We obtained an understanding, evaluated the design and tested the operating effectiveness of internal controls over the accounting for acquisitions,
such as controls over the measurement of customer relationship intangible assets, including the valuation models and underlying assumptions and
data used to develop such estimates.
To test the estimated fair value of the intangible asset and the redeemable NCI, we performed audit procedures that included, evaluated the
Company’s valuation process by comparing the significant assumptions to current industry and economic trends, evaluating the Company’s
selection of the valuation model, significant assumptions used by the Company’s valuation specialist, and evaluating the completeness and
accuracy of the underlying data supporting the significant assumptions and estimates. For both customer relationship intangible asset and
redeemable NCI, we involved our valuation specialists to assist with our evaluation of the methodology used by the Company and significant
assumptions included in the fair value estimates.
When assessing the key assumptions affecting the customer relationship intangible assets, we evaluated the discount rate, forecasted revenue,
profitability margins, working capital, market benchmarks assumptions and long-term revenue growth rates. We compared the Company’s
discount rate, revenue growth rates, profitability margins and working capital to historical actuals and selected guideline companies in the industry.
In addition, our valuation specialists performed independent comparative calculations to estimate the acquired entity’s weighted average cost of
capital. In addition, we performed a sensitivity analysis of significant assumptions to evaluate the changes in the fair value of the customer
relationship intangible asset from changes in the assumptions.
When assessing the key assumptions affecting the redeemable NCI we performed inquiries of the management and evaluated the forecasted
revenue. We compared the Company’s revenue growth rate to historical actuals and to selected guideline companies in the industry. We used our
specialist to perform comparative calculations for the value of the future equity value, risk free rates, expected asset and equity volatility, cost of
debt and expected term.
We also evaluated the related disclosures included in Note 1b to the consolidated financial statements in relation to Lioli Acquisition.
F - 4
Valuation of Goodwill
Description
of the matter
As reflected in the Company’s consolidated financial statements, at December 31, 2020, the Company’s goodwill was $47 million. As disclosed in
Note 2l and Note 7 to the consolidated financial statements, goodwill is tested for impairment at least annually or more frequently if indicators of
impairment require the performance of an interim impairment assessment. The Company operates as one reporting unit. As of December 31, 2020
the Company identified an indicator for goodwill impairment as the market capitalization of the Company was lower than the equity book value.
Auditing the Company's impairment test for goodwill was complex and highly judgmental due to the significant estimation uncertainty in
determining the fair value of its reporting unit. In particular, the fair value estimates were sensitive to changes in significant assumptions such as
discount rate, revenue growth rate, operating margins, working capital, weighted average cost of capital, estimated spend on capital expenditures
and the projected cash flow growth rates. All of these assumptions are sensitive to and affected by the expected future market or economic
conditions, and industry and company-specific qualitative factors.
How we
addressed
the matter in
our audit
We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s goodwill impairment
assessment process. For example, we tested controls over the review of the significant assumptions in estimating the fair value of the Company.
To test the estimated fair value of the Company, our audit procedures included, among others, assessing methodologies and testing the significant
assumptions and underlying data used by the Company. We evaluated the Company’s valuation process by comparing the significant assumptions
to current industry and economic trends, we analyzed management’s forecasted revenue including the revenue growth rate, profitability margins,
working capital, discount rate and estimated spend on capital expenditures to identify, understand and evaluate the changes as compared to the
historical results and to selected guideline companies in the industry. In addition, we performed a sensitivity analysis of significant assumptions to
evaluate the changes in the fair value of the Company resulting from changes in the assumptions. We involved our valuation specialists to assist
with our evaluation of the methodology used by the Company and significant assumptions included in the fair value estimates. In addition, our
valuation specialists performed independent comparative calculations to estimate the acquired entity’s weighted average cost of capital.
We also evaluated the related disclosures included in Notes 2l and 7 to the consolidated financial statements.
/s/KOST FORER GABBAY & KASIERER
A Member of Ernst & Young Global
We have served as the Company's auditor since 2004
Tel-Aviv, Israel
March 22, 2021
F - 5
To the Shareholders and the Board of Directors of Caesarstone Ltd.
Report of Independent Registered Public Accounting Firm
Opinion on Internal Control over Financial Reporting
We have audited Caesarstone Ltd. and subsidiaries’ internal control over financial reporting as of December 31, 2020, based on criteria established in Internal
Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission 2013 framework (the COSO criteria). In our
opinion, Caesarstone Ltd. and subsidiaries (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31,
2020, based on the COSO criteria.
We did not examine the effectiveness of internal control over financial reporting of Caesarstone Australia Pty Ltd. a wholly owned subsidiary, whose financial
statements reflect total assets and revenues constituting 11% and 21%, respectively, of the related consolidated financial statement amounts as of and for the year
ended December 31, 2020. The effectiveness of Caesarstone Australia Pty Ltd.’s internal control over financial reporting was audited by other auditors whose
report has been furnished to us, and our opinion, insofar as it relates to the effectiveness of Caesarstone Australia Pty Ltd.’s internal control over financial
reporting, is based solely on the report of the other auditors.
As indicated in the accompanying Management's Report on Internal Control Over Financial Reporting, management’s assessment of and conclusion on the
effectiveness of internal control over financial reporting did not include the internal controls of the businesses of Lioli Ceramica Pvt. Ltd. ("Lioli") and Omicron
Granite and Tile ("Omicron") that were acquired during 2020 and included in the 2020 consolidated financial statements of the Company and constituted 9% and
1% of total and net assets, respectively, as of December 31, 2020 and 1% of revenues, for the year then ended. Our audit of internal control over financial reporting
of the Company also did not include an evaluation of the internal control over financial reporting of the business of Lioli and Omicron.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance
sheets of the Company as of December 31, 2020 and 2019, the related consolidated statements of income, comprehensive income, shareholders’ equity and cash
flows for each of the three years in the period ended December 31, 2020, and the related notes and our report dated March 22, 2021 expressed an unqualified
opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal
control over financial reporting included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to
express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and
are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the
Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance
about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating
the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the
circumstances. We believe that our audit 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/KOST FORER GABBAY & KASIERER
A Member of Ernst & Young Global
Tel-Aviv, Israel
March 22, 2021
F - 6
CONSOLIDATED BALANCE SHEETS
U.S. dollars in thousands
ASSETS
CURRENT ASSETS:
Cash and cash equivalents
Short-term available for sale marketable securities
Trade receivables (net of allowance for credit loss of $6,783 and $2,497 at December 31, 2020 and 2019,
respectively)
Other accounts receivable and prepaid expenses
Inventories
Total current assets
LONG-TERM ASSETS:
Severance pay fund
Other long-term receivables
Deferred tax assets, net
Long-term deposits and prepaid expenses
Long-term available for sale marketable securities
Property, plant and equipment, net
Operating lease right-of-use assets
Intangible assets, net
Goodwill
Total long-term assets
Total assets
The accompanying notes are an integral part of the consolidated financial statements.
F - 7
CAESARSTONE LTD. AND ITS SUBSIDIARIES
December 31,
Note
2020
2019
3
4
5
11
12
3
6
10
7
7
$
114,248
8,112
$
139,372
-
84,822
26,481
152,073
78,282
34,066
122,686
385,736
374,406
4,007
3,837
8,359
1,675
10,926
222,883
123,928
12,098
47,472
3,475
3,176
7,881
2,887
-
204,776
72,047
-
35,218
435,185
329,460
$
820,921
$
703,866
CONSOLIDATED BALANCE SHEETS
U.S. dollars in thousands (except share data)
LIABILITIES AND EQUITY
CURRENT LIABILITIES:
Short-term bank credit and current maturities of long- term bank loan
Trade payables
Related party and other loan
Short term legal settlements and loss contingencies
Accrued expenses and other liabilities
Total current liabilities
LONG-TERM LIABILITIES:
Long-term other loans and financing liability of land from related parties
Long-term bank loan
Accrued severance pay
Deferred tax liabilities, net
Long-term warranty provision
Long term legal settlements and loss contingencies
Long-term operating lease liabilities
Total long-term liabilities
COMMITMENTS AND CONTINGENT LIABILITIES
REDEEMABLE NON-CONTROLLING INTEREST
EQUITY:
Share capital-
Ordinary shares of NIS 0.04 par value - 200,000,000 shares authorized at December 31, 2020 and 2019;
35,540,392 and 35,500,872 issued at December 31, 2020 and 2019, respectively; 34,437,296 and
34,397,776 shares outstanding at December 31, 2020 and 2019, respectively
Additional paid-in capital
Capital fund related to non-controlling interest
Accumulated other comprehensive income (loss), net
Retained earnings
Treasury shares at cost – 1,103,096 ordinary shares at December 31, 2020 and 2019
Total equity
Total liabilities and equity
The accompanying notes are an integral part of the consolidated financial statements.
F - 8
CAESARSTONE LTD. AND ITS SUBSIDIARIES
December 31,
Note
2020
2019
8
14
11
9
14
15
12
11
10
11
1,2
13
1e
$
$
13,122
55,063
2,221
31,039
55,570
-
53,072
2,212
28,300
42,782
157,015
126,366
11,163
9,543
5,303
6,943
1,274
21,910
112,719
7,915
-
4,333
-
1,385
21,505
64,638
168,855
99,776
7,701
-
371
160,083
(5,587)
1,083
370,830
(39,430)
371
157,225
(5,587)
(3,288)
368,433
(39,430)
487,350
477,724
$
820,921
$
703,866
CONSOLIDATED STATEMENTS OF INCOME
U.S. dollars in thousands (except per share data)
Revenues
Cost of revenues
Gross profit
Operating expenses:
Research and development
Marketing and selling
General and administrative
Legal settlements and loss contingencies, net
Total operating expenses
Operating income
Finance expenses, net
Income before taxes on income
Taxes on income
Net income
Net income attributable to non-controlling interest
Net income attributable to controlling interest
Basic and diluted net income per share of Ordinary shares
CAESARSTONE LTD. AND ITS SUBSIDIARIES
Year ended December 31,
2019
2020
2018
$
486,412
352,470
$
545,974
397,335
$
575,871
412,457
133,942
148,639
163,414
3,974
62,047
39,081
6,319
4,146
66,770
40,681
12,359
3,635
74,786
43,323
8,903
111,421
123,956
130,647
22,521
10,199
12,322
4,700
24,683
5,578
19,105
6,243
32,767
3,639
29,128
4,560
$
$
$
7,622
$
12,862
$
24,568
404
7,218
0.21
$
$
-
12,862
0.37
$
$
163
24,405
0.72
Weighted average number of Ordinary shares used in computing basic income per share (in
thousands)
34,419
34,384
34,358
Weighted average number of Ordinary shares used in computing diluted income per share (in
thousands)
34,474
34,460
34,409
The accompanying notes are an integral part of the consolidated financial statements.
F - 9
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
U.S. dollars in thousands
Net income
Other comprehensive income (loss) before tax:
CAESARSTONE LTD. AND ITS SUBSIDIARIES
Year ended December 31,
2019
2020
2018
$
7,622
$
12,862
$
24,568
Foreign currency translation adjustments
Unrealized income (loss) on foreign currency cash flow hedge
Unrealized income (loss) on available for sale marketable securities
Income tax benefit (expense) related to components of other comprehensive income (loss)
Total other comprehensive income (loss), net of tax
Comprehensive income
Less - comprehensive income (loss) attributable to non-controlling interest
4,386
-
21
(8)
4,399
12,021
432
(608)
738
-
(241)
(111)
12,751
-
(4,294)
(589)
-
92
(4,791)
19,777
(768)
Comprehensive income attributable to controlling interest
$
11,589
$
12,751
$
20,545
The accompanying notes are an integral part of the consolidated financial statements.
F - 10
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
U.S. dollars in thousands (except share data)
CAESARSTONE LTD. AND ITS SUBSIDIARIES
Common stock
Additional
paid-in
Retained
Accumulated
other
comprehensive
income (loss),
Capital
fund
related to
non-
controlling
Treasury
Shares
Amount
capital
earnings
net (1)
interest
shares
Total
equity
34,338,960
$
371
$
151,880 $
356,391
$
683
$
-
-
-
-
-
-
-
-
-
-
-
-
24,251
(*)
-
-
1,713
-
-
-
(*)
-
(3,860)
24,405
-
203
-
(20,268)
-
-
-
-
-
-
-
-
-
-
-
-
(5,587)
-
-
$
(39,430) $ 469,895
-
-
-
-
-
-
-
(3,860)
24,405
1,713
203
(5,587)
(20,268)
-
34,363,211
371
153,593
360,731
(3,177)
(5,587)
(39,430)
466,501
-
-
-
-
-
-
-
-
34,565
(*)
-
-
-
12,862
(111)
-
3,632
-
(*)
-
(5,160)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(111)
12,862
3,632
(5,160)
-
34,397,776
371
157,225
368,433
(3,288)
(5,587)
(39,430)
477,724
-
-
-
-
-
-
-
-
39,520
(*)
-
-
2,858
-
(*)
-
7,218
-
(4,821)
-
4,371
-
-
-
-
-
-
-
-
-
-
-
-
-
-
4,371
7,218
2,858
(4,821)
-
34,437,296
$
371
$
160,083 $
370,830
$
1,083
$
(5,587) $
(39,430)
$487,350
Balance as of January 1,
2018
Other comprehensive loss
Net income attributable to
controlling interest
Equity-based
compensation expense
related to employees (2)
Adjustment to redemption
value of the non-
controlling interest
Capital fund related to
non-controlling interest
Dividend paid
Cashless exercise of
options and RSUs
Balance as of December
31, 2018
Other comprehensive loss
Net income
Equity-based
compensation expense
related to employees (2)
Dividend paid
Cashless exercise of
options and RSUs
Balance as of December
31, 2019
Other comprehensive loss
Net income attributable to
controlling interest
Equity-based
compensation expense
related to employees (2)
Dividend paid
Cashless exercise of
options and RSUs
Balance as of December
31, 2020
(1)
(2)
(*)
Accumulated other comprehensive income (loss), net, comprised of foreign currency translation, hedging transactions and marketable securities.
See also Note 13.
Less than $1.
The accompanying notes are an integral part of the consolidated financial statements.
F - 11
CONSOLIDATED STATEMENTS OF CASH FLOWS
U.S. dollars in thousands
Cash flows from operating activities:
Net income
Adjustments required to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
Share-based compensation expense
Accrued severance pay, net
Changes in deferred tax, net
Capital loss (gain) from sale of property, plant and equipment
Decrease (increase) in trade receivables
Decrease (increase) in other accounts receivable and prepaid expenses
Decrease (increase) in inventories
Decrease in trade payables
Increase (decrease) in warranty provision
Legal settlements and loss contingencies, net
Decrease (increase) in right of use assets
Changes in lease liabilities
Amortization of premium and accretion of discount on marketable securities, net
Changes in accrued interest related to marketable securities
Increase (decrease) in accrued expenses and other liabilities including related party
Net cash provided by operating activities
Cash flows from investing activities:
Net cash paid for acquisitions
Purchase of property, plant and equipment
Proceeds from sale of property, plant and equipment
Investment in marketable securities
Sales and maturity of marketable securities
Increase in long-term deposits
Net cash used in investing activities
The accompanying notes are an integral part of the consolidated financial statements.
F - 12
CAESARSTONE LTD. AND ITS SUBSIDIARIES
Year ended December 31,
2019
2020
2018
$
7,622
$
12,862
$
24,568
29,460
2,858
(14)
(895)
340
6,070
9,318
313
(17,938)
(371)
6,319
(26,738)
30,710
161
(1)
404
47,618
(28,962)
(19,824)
13
(24,456)
5,271
(347)
28,587
3,632
(246)
(1,509)
326
(5,032)
(6,346)
35,303
(6,663)
69
12,359
1,319
2,602
-
-
5,786
83,049
-
(23,590)
66
-
-
(63)
28,591
1,684
(543)
(3,064)
225
(2,637)
7,673
(30,607)
(16,223)
367
9,765
-
-
-
-
(5,107)
14,692
-
(20,962)
28
-
-
(219)
(68,305)
(23,587)
(21,153)
CONSOLIDATED STATEMENTS OF CASH FLOWS
U.S. dollars in thousands
Cash flows from financing activities:
Dividend paid
Dividend paid by subsidiary to non-controlling interest (*)
Changes in short-term bank credit and loans, net
Call option exercised related to non-controlling interest
Repayment of a financing liability of land
Net cash used in financing activities
Effect of exchange rate differences on cash and cash equivalents
Increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Cash received (paid) during the year for:
Interest paid
Interest received
Tax paid
Non cash activity during the year for:
Changes in trade payables balances related to purchase of property, plant and equipment
CAESARSTONE LTD. AND ITS SUBSIDIARIES
Year ended December 31,
2019
2020
2018
$
(4,821)
-
(18)
-
(1,245)
(6,084)
1,647
(25,124)
139,372
(5,160) $
-
(7,771)
-
(1,196)
(14,127)
475
45,810
93,562
(20,268)
(978)
4,171
(20,119)
(1,169)
(38,363)
(321)
(45,145)
138,707
114,248
$
139,372
$
93,562
-
460
(3,676)
$
$
$
-
976
$
$
(361)
1,455
(10,155) $
(13,906)
(356)
$
(3,235) $
2,688
$
$
$
$
$
$
(*) In 2018, dividend payment made by Company’s subsidiary Caesarstone Canada Inc. and reflects the amount paid to the non-controlling interest holders.
The accompanying notes are an integral part of the consolidated financial statements.
F - 13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share data)
NOTE 1:-
GENERAL
a. General:
CAESARSTONE LTD. AND ITS SUBSIDIARIES
Caesarstone Ltd. (formerly: Caesarstone Sdot-Yam Ltd.), incorporated under the laws of the State of Israel, was founded in 1987.
Caesarstone Ltd. and its subsidiaries (collectively, the "Company" or "Caesarstone") develop, manufacture and market, high quality engineered
quartz surfaces sold under the Company's premium Caesarstone brand. The Company's products are sold in over 50 countries through a
combination of direct sales in certain markets and indirectly through a network of independent distributors in other markets. The Company's
products are primarily used as kitchen countertops in the renovation and remodeling markets and in the new buildings’ construction market.
Other applications include vanity tops, wall panels, back splashes, floor tiles, stairs and other interior surfaces that are used in a variety of
residential and non-residential applications.
The Company has subsidiaries in Australia, Singapore, Canada, United Kingdom, India and the United States which are engaged in the
marketing and selling of the Company's products in different geographic areas.
The Company manufacture its quartz products in three manufacturing facilities located in Kibbutz Sdot-Yam in central Israel, Bar-Lev
Industrial Park in northern Israel and Richmond-Hill, Georgia in the U.S. which operates under the Company’s subsidiary in the United States,
Caesarstone Technologies USA, Inc. Following the acquisition of Lioli (see also b below) the Company has a porcelain slabs manufacturing
plant in India.
b. Acquisition of Lioli Ceramica Pvt Ltd:
On October 05, 2020, the Company completed the acquisition of 55% of the shares of Lioli Ceramica Pvt Ltd ("Lioli"), a producer of porcelain
countertop slabs in the total net consideration of $13,574.
The consideration includes a contingent consideration arrangement that requires the Company to pay up to approximately $10,000 of additional
consideration to Lioli’s minority shareholders subject to reaching certain EBITDA achievement. If Lioli will meet the criteria, the addition
consideration amount will be paid during 2021.
The fair value of the contingent consideration arrangement at the acquisition date was $1,492. As of December 31, 2020, there were no
significant changes to the fair value assigned to the contingent consideration.
As of October 05, 2020, the fair value of the 45% non-controlling interests in Lioli amounted to $7,269. The fair value of the non-controlling
interests was valued based on the transaction price and a Put Option criterion that the minority awarded in accordance with the share purchase
agreement.
As part of the agreement, the Company granted Lioli’s minority shareholders a put option and Lioli’s minority shareholders granted the
Company a call option for its interest, each exercisable any time after April 1, 2024 and before the 20th anniversary of the acquisition date
based on a mechanism as set forth in the agreement between the parties
F - 14
CAESARSTONE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share data)
NOTE 1:-
GENERAL (Cont.)
The Lioli acquisition was accounted for as a business combination in accordance with ASC 805 "Business Combinations”.
The preliminary fair value estimates for the assets acquired and liabilities assumed for Lioli’s acquisition were based upon preliminary
calculations and valuations, and the estimates and assumptions for these acquisition are subject to change as the Company obtains additional
information during the respective measurement period to the information that was existed as of the acquisition date (up to one year from the
respective acquisition dates). The following table summarizes the purchase price allocation of Lioli Acquisition:
Components of Purchase Price:
Cash
Lioli's minority shareholders loan assumed
Contingent consideration
Total purchase price
Less: Cash acquired
Net for allocation
Allocation of Purchase Price:
Net tangible assets (liabilities):
Trade receivables, net
Prepaid expenses and other current assets
Inventories, net (1)
Property, plant and equipment, net (2)
Other non-current assets
Trade payables
Loans (net of Lioli's minority shareholders loan assumed) (3)
Accrued expenses and other current liabilities
Other non-current liabilities
Total net tangible assets
Identifiable intangible assets:
Customer relationships (4)
Deferred tax liabilities
Total identifiable intangible assets acquired
Goodwill (5)
Non-controlling interests
Total purchase price allocation
$
10,197
1,950
1,492
13,639
65
13,574
4,729
1,133
7,488
26,937
20
(5,007)
(14,083)
(2,969)
(4,295)
13,953
2,049
(597)
1,452
5,438
(7,269)
F - 15
$
13,574
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share data)
NOTE 1:-
GENERAL (Cont.)
CAESARSTONE LTD. AND ITS SUBSIDIARIES
(1) Including additional $1,063 fair value to bring the inventory in process to its finished good stage value. Amortization period is through two
quarters in accordance with the average inventory turnovers using the straight-line method.
(2) Including additional $10,750 land and buildings fair value in accordance with a third-party appraiser.
(3) As of October 5, 2020 Lioli had a loan from its minority shareholders (the "shareholders loan"), which included in the acquired net tangible
assets. According to term of the transaction the Company will assume 55% of the shareholders loan. The assumed shareholders loan is included
in the total purchase price and excluded from the loan balance in accordance to ASC 805 requirements.
(4) Customer relationships represent the underlying relationships and agreements with Lioli's customer base. In assessing the value of the
Customer Relationships, the Company used an income approach method. The Customer Relationships’ economic useful life is estimated at
approximately 5 years, amortized using the straight-line method.
(5) The goodwill is primarily attributable to expected synergies resulting from the acquisition.
The Company recognized $545 of aggregate acquisition-related costs that were expensed in the consolidated statement of income in general
and administrative expenses.
Pro forma results of operations related to this acquisition have not been prepared because they are not material to the Company’s consolidated
statements of income.
c. Acquisition of Omicron Supplies, LLC:
On December 31, 2020, the Company, through its fully owned U.S. subsidiary, completed the acquisition of 100% of the shares of Omicron
Supplies, LLC ("Omicron"), a stone supplier in the U.S., for a total net cash consideration of $18,830.
The Omicron acquisition was accounted for as a business combination in accordance with ASC 805 "Business Combinations”.
F - 16
CAESARSTONE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share data)
NOTE 1:-
GENERAL (Cont.)
The preliminary fair value estimates for the assets acquired and liabilities assumed for Omicron acquisition were based upon preliminary
calculations and valuations, and the estimates and assumptions for these acquisition are subject to change as the Company obtains additional
information during the respective measurement period to the information that was existed as of the acquisition date (up to one year from the
respective acquisition dates).The following table summarizes the purchase price allocation of Omicron Acquisition:
Components of Purchase Price:
Cash
Less: Cash acquired
Net for allocation
Allocation of Purchase Price:
Net tangible assets (liabilities):
Trade receivables, net
Prepaid expenses and other current assets
Inventories, net
Property, plant and equipment, net
ROU assets and others
Trade payables
Short-term lease liability
Short-term loan, accrued expenses and other current liabilities
Long-term lease and other non-current liabilities
Total net tangible assets
Identifiable intangible assets:
Customer relationships (1)
Deferred tax liabilities
Total identifiable intangible assets acquired
Goodwill (2)
Total purchase price allocation
$
18,862
32
18,830
6,178
787
19,462
75
22,978
(9,722)
(3,567)
(10,430)
(19,369)
6,392
10,144
(2,637)
7,507
4,931
$
18,830
(1) Customer relationships represent the underlying relationships and agreements with Omicron's customer base. In assessing the value of the
Customer Relationships, the Company used an income approach method. The Customer Relationships’ economic useful life is estimated
at approximately 5 years, amortized using the straight-line method.
(2) The goodwill is primarily attributable to expected synergies resulting from the acquisition.
The Company recognized $376 of aggregate acquisition-related costs that were expensed in the consolidated statement of income in general
and administrative expenses.
Pro forma results of operations related to this acquisition have not been prepared because they are not material to the Company’s consolidated
statements of income.
F - 17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share data)
NOTE 1:-
GENERAL (Cont.)
d. Major suppliers:
CAESARSTONE LTD. AND ITS SUBSIDIARIES
In 2020, the Company acquired approximately 67% of its quartz consumption from Turkey, of which approximately 35% was supplied by
Mikroman Madencilik San ve TIC.LTD.STI ("Mikroman"), constituting approximately 23% of Company's total quartz, and approximately
35% was supplied by Polat Maden Sanayi ve Ticaret A.Ş. (“Polat”), constituting approximately 23% of Company’s total quartz. If Mikroman
or Polat cease supplying the Company with quartz or if the Company's supply of quartz generally from Turkey is adversely impacted, the
Company's other suppliers may be unable to meet the Company's quartz requirements. In that case, the Company would need to locate and
qualify alternate suppliers, which could take time, increase costs and require adjustments to the appearance of the Company's products. As a
result, the Company may experience a delay in manufacturing, which could materially and adversely impact the Company's results of
operations.
e. Caesarstone Canada, Inc.:
In connection with the formation of Caesarstone Canada Inc. in 2010 with the Company’s former distributor, Canadian Quartz Holdings Inc.
(“Ciot”), the Company granted Ciot a put option and Ciot granted the Company a call option for its interest, each exercisable any time between
July 1, 2012 and July 1, 2023 based on a mechanism as set forth in the agreement between the parties. In December 2018, the Company
exercised its call option and purchased Ciot’s 45% ownership interest in Caesarstone Canada for the purchase price of $20,119 (CAD $27,300)
and increased its ownership interest to 100%. The Company recorded the purchase price against the non-controlling interest balance and the
access of the amounts paid over the non-controlling balance to a capital fund in its shareholders’ equity.
f.
The COVID-19 Pandemic:
During 2020, the Company experienced disruptions to its business impacting revenues and its financial results. In order to mitigate the impact
of the decline in business as a result of the pandemic, the Company implemented cost savings measures through 2020 and in addition reduced
its production capacity.
While the Company expect that this public health threat will be eased by global vaccination and lifted restrictions on traveling, current macro-
economic environment and current uncertainties regarding the potential impact of COVID-19 may have on the Company’s business, there can
be no assurance that the Company’s estimates and assumptions used in the measurement of various assets and liabilities in the financial
statements will prove to be accurate predictions of the future. If the Company’s assumptions regarding forecasted cash flows are not achieved,
it is possible that an impairment review may be triggered and certain assets and liabilities in the financial statements may be impaired.
Accordingly, the COVID-19 pandemic and the related global reaction could have a material adverse effect on the Company’s business, results
of operations and financial condition.
F - 18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share data)
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES
CAESARSTONE LTD. AND ITS SUBSIDIARIES
The consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles ("U.S. GAAP").
a. Use of estimates:
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates, judgments and assumptions
that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. The
Company's management believes that the estimates, judgment and assumptions used are reasonable based upon information available at the
time they were made.
b.
Financial statements in U.S. dollars:
The Company's revenues are generated in various currencies including in U.S. dollars (USD), Australian dollars (AUD), Canadian dollars
(CAD), Euros (EUR), Singapore dollars (SGD), British pounds (GBP), Indian Rupee (INR) and New Israeli Shekels (NIS). In addition, most of
the Company's costs are incurred in USD, NIS and EUR.
The Company’s management believes that the USD is the primary currency of the economic environment in which the Company operates.
Thus, the functional and reporting currency of the Company is the USD.
The functional currency of the Company's foreign subsidiaries is the local currency in which the relevant subsidiary operates.
F - 19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share data)
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
b.
Financial statements in U.S. dollars (Cont.):
CAESARSTONE LTD. AND ITS SUBSIDIARIES
Accordingly, monetary accounts maintained in currencies other than the USD are re-measured into dollars in accordance with Accounting
Standards Codification ("ASC") 830, "Foreign Currency Matters" (“ASC 830”). All transaction gains and losses resulting from the re-
measurement of monetary balance sheet items denominated in non-USD currencies are reflected in the statements of operations as financial
income or expenses as appropriate.
The financial statements of the Company’s subsidiaries of which the functional currency is not the USD have been translated into the USD. All
amounts on the balance sheets have been translated into the USD using the exchange rates in effect on the relevant balance sheet dates. All
amounts in the statements of income have been translated into the USD using the monthly average exchange rate in accordance with ASC 830.
The resulting translation adjustments are reported as a component of accumulated other comprehensive income (loss), net in shareholders'
equity.
c.
Principles of consolidation:
The consolidated financial statements include the accounts of the Company and its wholly and majority-owned subsidiaries (see also Note 1).
Inter-company transactions and balances, including profit from inter-company sales not yet realized outside of the Company, have been
eliminated upon consolidation.
d. Cash equivalents:
Cash equivalents are short-term highly liquid investments that are readily convertible to cash with original maturities of three months or less at
the date acquired.
e.
Short-term bank deposits:
Short-term bank deposits are deposits with original maturities of more than three months but less than one year.
Short-term bank deposits are presented at their cost, which approximates their fair value.
f. Marketable securities:
Marketable securities consist of corporate and governmental bonds. The Company determines the appropriate classification of marketable
securities at the time of purchase and re-evaluates such designation at each balance sheet date. In accordance with FASB ASC No. 320
“Investments - Debt and Equity Securities”, the Company classifies marketable securities as available-for-sale.
Available-for-sale securities are stated at fair value, with unrealized gains and losses reported in accumulated other comprehensive income
(loss), a separate component of stockholders’ equity, net of taxes.
Realized gains and losses on sales of marketable securities, as determined on a specific identification basis, are included in financial income
(expenses), net. The amortized cost of marketable securities is adjusted for amortization of premium and accretion of discount to maturity, both
of which, together with interest, are included in financial income (expenses), net.
F - 20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share data)
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
f. Marketable securities (Cont.):
CAESARSTONE LTD. AND ITS SUBSIDIARIES
The Company classifies its marketable securities as either short-term or long-term based on each instrument’s underlying contractual maturity
date. Marketable securities with maturities of 12 months or less are classified as short-term and marketable securities with maturities greater
than 12 months are classified as long-term.
The Company assessed AFS debt securities with an amortized cost basis in excess of estimated fair value to determine what amount of that
difference, if any, is caused by expected credit losses in accordance with ASC 326. Allowance for credit losses on AFS debt securities are
recognized as a charge of credit loss expenses (income), net, on the consolidated statements of comprehensive income, and any remaining
unrealized losses, net of taxes, are included in accumulated other comprehensive income (loss) in stockholders' equity. The Company did not
record credit loss allowance on its marketable securities during the year ended December 31, 2020.
g. Derivatives:
ASC 815, “Derivative and Hedging” ("ASC 815"), requires companies to recognize all of their derivative instruments as either assets or
liabilities in the statement of financial position at fair value.
For those derivative instruments that are designated and qualify as hedging instruments, a company must designate the hedging instrument,
based upon the exposure being hedged, as a fair value hedge, cash flow hedge or a hedge of a net investment in a foreign operation.
F - 21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share data)
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
g. Derivatives (Cont.):
Derivative instruments designated as hedging instruments:
CAESARSTONE LTD. AND ITS SUBSIDIARIES
For derivative instruments that are designated and qualify as a cash flow hedge (i.e., hedging the exposure to variability in expected future cash
flows that is attributable to a particular risk), the effective portion of the gain or loss on the derivative instrument is reported as a component of
other comprehensive income (loss) and reclassified into earnings in the same period during which the hedged transaction affects earnings.
The remaining gain or loss on the derivative instrument in excess of the cumulative change in the present value of future cash flows of the
hedged item, if any, is recognized in current earnings during the period of change. For derivative instruments not designated as hedging
instruments, the gain or loss is recognized in current earnings during the period of change.
To hedge against the risk of overall changes in cash flows resulting from foreign currency salary and other recurring payments during the
periods, the Company has instituted a foreign currency cash flow hedging program. The Company hedges portions of its forecasted salary and
other expenses denominated in NIS.
These forward contracts are designated as cash flow hedges, as defined by ASC 815, and are all effective, as their critical terms match the
underlying transactions being hedged.
As of December 31, 2020 and 2019 the Company did not have any outstanding forward NIS transactions. As of December 31, 2018 the
unrealized loss recorded in accumulated other comprehensive income (loss), net of tax from the Company's currency forward NIS transactions
was $497.
Derivative instruments not designated as hedging instruments:
In addition to the derivatives that are designated as hedges as discussed above, the Company enters into certain foreign exchange forward and
options contracts to limit its exposure to foreign currencies. In addition, the Company entered into derivative instruments to partially manage
its exposure to movements associated with the Styrene prices.
Gains and losses related to such derivative instruments are recorded in financial expenses, net. At December 31, 2020 and 2019, the notional
amount of foreign exchange and styrene forward and option contracts into which the Company entered was $100,981 and $36,608,
respectively. The foreign exchange and styrene forward and options contracts will expire at various times through December, 2021.
F - 22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share data)
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
g. Derivatives (Cont.):
CAESARSTONE LTD. AND ITS SUBSIDIARIES
The following tables present fair value amounts of, and gains and losses recorded in relation to, the Company's derivative instruments and
related hedged items:
Balance sheet
Fair value of derivative instruments
Year ended December 31,
2019
2020
Derivative assets:
Derivatives not designated as hedging
instruments:
Foreign exchange option
and forward contracts
Total
Derivative liabilities:
Derivatives not designated as hedging
instruments:
Foreign exchange option
and forward contracts
Styrene forward contract
Total
Other accounts receivable and prepaid
expenses
Accrued expenses and other liabilities
Accrued expenses and other liabilities
F - 23
-
-
(3,582)
(209)
(3,791)
62
62
(425)
-
(425)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share data)
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
g.
Derivatives (Cont.):
CAESARSTONE LTD. AND ITS SUBSIDIARIES
The following tables present fair value amounts of, and gains and losses recorded in relation to, the Company's derivative instruments and
related hedged items:
Gain (loss) recognized in
other comprehensive
income (loss), net
Year ended
December 31,
2020
2019
Gain (loss) recognized in statements of income
Statements of income
Item
Year ended
December 31,
2020
2019
Derivatives designated as hedging
instruments:
Foreign exchange forward contract
Derivatives not designated as
hedging instruments:
Foreign exchange forward and
options contracts
Styrene forward contracts
Total
h.
Inventories:
-
-
-
-
Cost of revenues and
Operating expenses
497
2,406
1,716
Financial expenses, net
-
- Financial expenses, net
497
(750)
(2,120)
(464)
2,121
-
3,837
Inventories are stated at the lower of cost and net realizable value. The Company periodically evaluates the quantities on hand relative to
historical and projected sales volumes, aging, current and historical selling prices and contractual obligations to maintain certain levels of raw
material quantities. Based on these evaluations, inventory provision is provided to cover risks arising from slow-moving items, discontinued
products, excess inventories, net realizable value lower than cost and adjusted revenue forecasts.
Cost is determined as follows:
Raw Materials - cost is determined on a standard cost basis which approximates actual costs on a weighted average basis.
Work-in progress and finished products - are based on standard cost (which approximates actual cost on a weighted average basis) which
includes raw materials cost, labor and manufacturing overhead.
Finished goods are stated at the lower of cost and net realizable value.
F - 24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share data)
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
h.
Inventories (Cont.):
The following table provides the details of the change in the Company's provision for inventory write-downs:
CAESARSTONE LTD. AND ITS SUBSIDIARIES
Inventory provision, beginning of year
Assumed from business combination
Increase in inventory provision
Write off
Inventory provision, end of year
i.
Property, plant and equipment, net:
December 31,
2020
2019
$
$
$
18,226
1,405
4,305
(7,329)
15,551
-
9,983
(7,308)
16,607
$
18,226
1.
Property, plant and equipment are stated at cost, net of accumulated depreciation and investment grants.
2. Costs recorded prior to a production line completion are reflected as construction in progress, which are recorded building and machinery
assets at the date of purchase. Construction in progress includes direct expenditures for the construction of the production line and is
stated at cost. Capitalized costs include costs incurred under the construction contract: advisory, consulting and direct internal costs
(including labor) and operating costs incurred during the construction and installation phase.
3. Depreciation is calculated using the straight-line method over the estimated useful life of the assets at the following annual rates:
Machinery and manufacturing equipment
Office equipment and furniture
Motor vehicles
Buildings
Prepaid expenses related to operating lease
Leasehold improvements
F - 25
%
4-33 (mainly 10)
7-33 (mainly 7)
10-30 (mainly 20)
4-5
1
Over the shorter of the term of
the lease or the life of the asset
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share data)
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
j.
Leases:
CAESARSTONE LTD. AND ITS SUBSIDIARIES
The Company determines if an arrangement is a lease at inception and recognize in accordance with ASC 842 “Leases”. Operating leases are
included in operating lease right-of-use (“ROU”) assets, other current liabilities and operating lease liabilities in the Company’s consolidated
balance sheets.
ROU assets represent the right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make
lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present
value of lease payments over the lease term.
The Company uses incremental borrowing rates based on the Company's implied credit rating which was based on Moody's Investors Service
Rating Methodology for the Building Materials Industry (such credit rating was notched up due to collateralization) at commencement date.
The operating lease ROU asset also includes any lease payments made and excludes lease incentives, if any. Lease terms may include options
to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Lease expenses for lease payments are
recognized on a straight-line basis over the lease term.
Upon adoption as of January 1, 2019, the Company recorded right-of-use leased assets and corresponding liabilities of $73,366. See also Note
10.
k.
Impairment of long-lived assets:
The Company's long-lived assets (assets group) to be held or used, including right of use assets, tangible and finite-lived intangible assets
(other than goodwill), are reviewed for impairment in accordance with ASC 360 "Property, Plant and Equipment" ("ASC 360") whenever
events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and
used is measured by a comparison of the carrying amount of an asset to the future undiscounted cash flows expected to be generated by the
asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount
of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less
costs to sell. No impairment losses were identified during any period presented. In addition to the recoverability assessment, the Company
routinely reviews the remaining estimated useful lives of property and equipment and finite-lived intangible assets. If the Company reduces the
estimated useful life assumption for any asset, the remaining unamortized balance would be amortized or depreciated over the revised
estimated useful life.
F - 26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share data)
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
l.
Goodwill:
CAESARSTONE LTD. AND ITS SUBSIDIARIES
Goodwill represents the excess of the cost of businesses acquired over the fair value of the net assets acquired in the acquisition. Under ASC
350, "Intangibles-Goodwill and Other" ("ASC 350") goodwill is not amortized but instead is tested for impairment at least annually (or more
frequently if impairment indicators arise).
Following the adoption of ASU 2017-04, "Simplifying the Test for Goodwill Impairment" by the Company in January 2017, any excess of the
carrying amount of the reporting unit over its fair value is recognized as an impairment loss, and the carrying value of goodwill is written down
to fair value.
The goodwill impairment test is performed according to the following principles:
(1) An initial qualitative assessment may be performed to determine whether it is more likely than not that the fair value of the reporting unit
is less than its carrying amount.
(2)
If the Company concludes it is more likely than not that the fair value of the reporting unit is less than its carrying amount, a quantitative
fair value test is performed. An impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value is
recognized.
The Company performs an annual goodwill impairment test during the fourth quarter of each fiscal year, or more frequently, if impairment
indicators are present. The Company operates in one operating segment. The Company concluded that all of the Company's reporting units
should be aggregated and deemed as a single reporting unit for the purpose of performing the goodwill impairment test in accordance with
ASC 350-20-35-35, since they have similar economic characteristics.
Goodwill was tested for impairment by comparing Company’s fair value with its carrying value. As required by ASC 820, "Fair Value
Measurements", the Company applies assumptions that marketplace participants would consider in determining the fair value of reporting unit.
The process of evaluating the potential impairment of goodwill is subjective and requires significant judgment at many points during the
analysis. Significant estimates used in the fair value methodologies include estimates of future cash flows, future short-term and long-term
growth rates and weighted average cost of capital. If these estimates or their related assumptions change in the future, the Company may be
required to record impairment charges for its goodwill and intangible assets with an indefinite life. No impairment of goodwill was identified
during any period presented.
F - 27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share data)
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
m. Warranty:
CAESARSTONE LTD. AND ITS SUBSIDIARIES
The Company generally provides a standard (i.e. assurance type) warranty for its products, for various periods, depending on the type of
product and the country in which the Company does business. The Company records a provision for the estimated cost to repair or replace
products under warranty at the time of sale. Factors that affect the Company's warranty reserve include the number of units sold, historical and
anticipated rates of warranty repairs and the cost per repair.
The following table provides the details of the change in the Company's warranty accrual:
January 1,
Charged to costs and expenses relating to new sales
Costs of product warranty claims
Foreign currency translation adjustments
December 31,
n. Revenue recognition:
2020
2019
$
$
2,916
$
2,820
1,281
(1,459)
(159)
1,879
(1,734)
(49)
2,579
$
2,916
Revenues are recognized in accordance with ASC 606, revenue from contracts with customers when control of the promised goods or services
is transferred to the customers, in an amount that the Company expects in exchange for those goods or services.
The Company applies the following five steps in accordance to ASC 606: (1) identify the contract with a customer, (2) identify the
performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in
the contract, and (5) recognize revenue when a performance obligation is satisfied.
1.
Identify the contract with a customer:
A contract is an agreement between two or more parties that creates enforceable rights and obligations. In evaluating the contract, the
Company analyzes the customer’s intent and ability to pay the amount of promised consideration (credit risk) and considers the
probability of collecting substantially all of the consideration. The Company determines whether collectability is reasonably assured on a
customer-by-customer basis pursuant to various criteria including Company’s historical experience, credit insurance and other inputs.
2.
Identify the performance obligations in the contract:
At a contract’s inception, the Company assesses the goods or services promised in a contract with a customer and identifies the
performance obligations. The main performance obligation is a delivery of the Company’s products.
F - 28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share data)
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
n. Revenue recognition (Cont.):
3.
Determine the transaction price:
CAESARSTONE LTD. AND ITS SUBSIDIARIES
The Company’s products that are sold through agreements with distributors are non-exchangeable, non-refundable, non-returnable and
without any rights of price protection or stock rotation. Accordingly, the Company considers all the distributors to be end-consumers.
For certain revenue transactions with specific customers, the Company is responsible also for the fabrication and installation of its
products. The Company recognizes such revenues upon receipt of acceptance evidence from the end consumer which occurs upon
completion of the installation.
Although, in general, the Company does not grant rights of return, there are certain instances where such rights are granted. The
Company maintains a provision for returns in accordance with ASC 606, which is estimated, based primarily on historical experience as
well as management judgment, and is recorded through a reduction of revenue.
4.
Allocate the transaction price to the performance obligations in the contract:
The majority of the Company’s revenues are sales of goods, therefore there is one main performance obligation that absorbs the
transaction price.
5.
Recognize revenue when a performance obligation is satisfied:
Revenue is recognized when or as performance obligations are satisfied by transferring control of a promised good or service to a
customer. Control transfers at a point in time, which affects when revenue is recorded. The majority of Company’s revenues deriving
from sales of products which are recognized when control is transferred based on the agreed International Commercial terms, or
“INCOTERMS”.
o. Research and development costs:
Research and development costs are charged to the statement of income as incurred.
p.
Income taxes:
The Company and its subsidiaries account for income taxes in accordance with ASC 740, "Income Taxes" (“ASC 740”). This statement
prescribes the use of the liability method whereby deferred tax asset and liability account balances are determined based on differences
between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse.
F - 29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share data)
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
p.
Income taxes (Cont.):
CAESARSTONE LTD. AND ITS SUBSIDIARIES
The Company accounts for its uncertain tax positions in accordance with ASC 740-10. ASC 740-10 contains a two-step approach to
recognizing and measuring uncertain tax positions accounted for in accordance with ASC 740. The first step is to evaluate the tax position
taken or expected to be taken in a tax return by determining if the weight of available evidence indicates that it is more likely than not that, on
an evaluation of the technical merits, the tax position will be sustained on audit, including resolution of any related appeals or litigation
processes. The second step is to measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate
settlement. The Company classifies interest and penalties on income taxes as taxes on income.
q. Advertising expenses:
Advertising costs are expensed as incurred. Advertising expenses for the years ended December 31, 2020, 2019 and 2018 were $14,457,
$16,233 and $20,848, respectively.
r.
Concentrations of credit risk:
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents,
marketable securities and trade receivables. The Company's cash and cash equivalents are invested primarily in USD, mainly with major banks
in Israel.
The Company's debt marketable securities include investments in highly-rated corporate debentures (located mainly in U.S.) and governmental
bonds. The financial institution that holds the Company's debt marketable securities is a major financial institution located in the United States.
The Company believes that the its debt marketable securities portfolio is a diverse portfolio of highly-rated securities and the Company's
investment policy limits the amount the Company may invest in an issuer (see Note 2f).
The Company's trade receivables are derived from sales to customers located mainly in the United States, Australia, Canada, Israel and Europe.
The Company performs ongoing credit evaluations of its customers and to date has not experienced any substantial losses. In certain
circumstances, the Company requires letters of credit or prepayments. An allowance for credit losses (i.e. doubtful accounts) is provided with
respect to specific receivables that the Company has determined to be doubtful of collection. For those receivables not specifically reviewed,
provisions are recorded at a specific rate, based upon the age of the receivable, the collection history, current economic trends and management
estimates of future economic conditions.
No customer represented 10% or more of the Company’s total accounts receivables, net as of December 31, 2020 and 2019.
F - 30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share data)
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
r.
Concentrations of credit risk (Cont.):
The following table provides the detail of the change in the Company's allowance for credit loss:
CAESARSTONE LTD. AND ITS SUBSIDIARIES
January 1,
Charges to expenses
Write offs
Assumed from business combinations
Foreign currency translation adjustments
December 31,
s.
Severance pay:
2020
2019
$
2,497
$
1,247
3,142
(984)
2,066
62
2,100
(864)
-
14
$
6,783
$
2,497
The Company's liability for severance pay, with respect to its Israeli employees, is calculated pursuant to Israeli severance pay law and
employee agreements based on the most recent salary of the employees. The Company's liability for all of its Israeli employees is provided for
by monthly deposits with insurance policies and by an accrual. The value of these policies is recorded as an asset on the Company's balance
sheet.
The deposited funds include profits or losses accumulated up to the balance sheet date. The deposited funds may be withdrawn only upon the
fulfillment of the obligations pursuant to Israeli severance pay law or labor agreements.
Majority of the agreements with employees specifically state, in accordance with section 14 of the Severance Pay Law, 1963 ("Section 14"),
that the Company's contributions for severance pay shall be instead of severance compensation and that upon release of the policy to the
employee, no additional calculations shall be conducted between the parties regarding the matter of severance pay and no additional payments
shall be made by the Company to the employee.
Further, since the Company has signed agreements with its employees under Section 14, the related obligation and amounts deposited on behalf
of such obligation are not stated on the balance sheet, as they are legally released from obligation to employees once the deposit amounts have
been paid.
Severance pay expenses for the years ended December 31, 2020, 2019 and 2018 amounted to approximately $2,292, $2,189 and $2,048,
respectively.
F - 31
CAESARSTONE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share data)
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
t.
Fair value of financial instruments:
In accordance with ASC 820, the Company measures its cash equivalents, marketable securities, and derivatives at fair value using the market
approach valuation technique. Cash equivalents and marketable securities are classified within Level 1 and Level 2, respectively, because these
assets are valued using quoted market prices or alternative pricing sources and models utilizing market observable inputs.
The following table sets forth the Company’s assets and liabilities that were measured at fair value as of December 31, 2020 and 2019 by level
within the fair value hierarchy:
Description
Measured at fair value on a recurring basis:
Assets:
Cash equivalents:
Money market mutual funds
Short-term marketable securities:
Corporate bonds
Governmental bonds
Derivatives:
Derivative assets
Long-term marketable securities:
Corporate bonds
Governmental bonds
Liabilities:
Derivatives:
Contingent Consideration
Derivative liabilities
Fair Value
Hierarchy
Fair value measurements
as of December 31,
2020
2019
Level 1
Level 2
Level 2
Level 2
Level 2
Level 2
Level 3
Level 2
$
$
$
$
$
$
$
$
1,011
$
7,607
505
$
$
-
$
10,434
492
$
$
-
-
-
62
-
-
1,492
$
(3,791) $
-
(425)
The carrying amounts of financial instruments not measured at fair value, including cash and cash equivalents, trade receivables, other accounts
receivables, trade payables, accrued expenses and other liabilities, short term loans and short term bank credit, approximate their fair value due
to the short-term maturities of such instruments. The carrying amount of long-term loan approximates its fair value.
F - 32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share data)
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
u. Basic and diluted net income per share:
CAESARSTONE LTD. AND ITS SUBSIDIARIES
Basic net income per share ("Basic EPS") is computed by dividing net income attributable to ordinary shareholders by the weighted average
number of ordinary shares outstanding during the period.
Diluted net income per share ("Diluted EPS") gives effect to all dilutive potential ordinary shares outstanding during the period. The
computation of Diluted EPS does not assume conversion, exercise or contingent exercise of securities that would have an anti-dilutive effect on
earnings. The dilutive effect of outstanding stock options is computed using the treasury stock method. For the years ended December 31,
2020, 2019 and 2018 there were 1,414,812, 1,244,500 and 1,272,781 outstanding stock options, respectively, that were excluded from the
computation of Diluted EPS, that would have had an anti dilutive effect if included.
v. Comprehensive income and accumulated other comprehensive income (loss):
Comprehensive income consists of two components, net income and other comprehensive income ("OCI"). OCI refers to revenue, expenses,
and gains and losses that under U.S. GAAP are recorded as an element of shareholders’ equity but are excluded from net income. Company’s
OCI consists of foreign currency translation adjustments from those subsidiaries not using the USD as their functional currency and net
deferred gains and losses on certain derivative instruments accounted for as cash flow hedges and marketable securities.
The total accumulated other comprehensive income ("AOCI"), net of tax was comprised as follows:
Accumulated gain on marketable securities
Accumulated foreign currency translation differences
Total accumulated other comprehensive income loss, net
F - 33
December 31,
2020
2019
$
$
$
13
1,070
-
(3,288)
1,083
$
(3,288)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share data)
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
v. Comprehensive income and accumulated other comprehensive income (loss) (Cont.):
The following table summarizes the changes in AOCI, net of taxes for the year ended:
CAESARSTONE LTD. AND ITS SUBSIDIARIES
Balance at January 1, 2019
Other comprehensive income (loss) before reclassifications
Amounts reclassified from AOCI
Net current period OCI
Balance at December 31, 2019
Other comprehensive income (loss) before reclassifications
Amounts reclassified from AOCI
Net current period OCI
Balance at December 31, 2020
Unrealized
gains
(losses) on
derivative
instruments
Unrealized
gains (losses)
on marketable
securities
Accumulated
foreign
currency
translation
differences
Total
(497)
2,213
(1,716)
497
-
2,406
(2,406)
-
-
-
-
-
-
-
13
-
13
13
(2,680)
(608)
-
(608)
(3,288)
4,358
-
4,358
1,070
(3,177)
1,605
(1,716)
(111)
(3,288)
6,777
(2,406)
4,371
1,083
The following table shows the amounts reclassified from AOCI into the Consolidated Statements of Income, and the associated financial
statement line item, for 2020 and 2019:
Affected line item in the consolidated statements of income
Cost of revenues
Research and development
Marketing and selling
General and administrative
Total gain
F - 34
December 31,
2020
2019
$
$
$
1,857
61
217
271
1,328
40
161
187
2,406
$
1,716
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share data)
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
w. Accounting for stock-based compensation:
Equity share based payment:
CAESARSTONE LTD. AND ITS SUBSIDIARIES
The Company accounts for stock-based compensation in accordance with ASC 718, "Compensation-Stock Compensation" ("ASC 718"). ASC
718 requires companies to estimate the fair value of equity-based payment awards on the date of grant using an option-pricing model.
The Company accounts for employees and directors’ share-based payment awards classified as equity awards using the grant-date fair value
method. The fair value of share-based payment transactions is recognized as an expense over the requisite service period. The Company elected
to recognize compensation expense for an award that has a graded vesting schedule using the accelerated method and the Company’s
accounting policy is to account for forfeitures as they occur.
The exercise price of each option is generally Company's stock price on the date of the grant. Options generally become exercisable over
approximately three to four-year period, subject to the continued employment. All options expire after 7 years from the date of grant. In
addition, commencing in 2015 the Company granted certain of its employees and officers with restricted stock units ("RSUs"), vesting over
approximately a four-year period from the grant date. RSUs fair value is measured at the grant date based on the market value of Company's
common stock. RSUs that are cancelled or forfeited become available for future grants.
In 2020 and 2019, the Company estimated the fair value of stock options granted using the Black-Scholes option pricing model with the
following weighted average assumptions:
Dividend yield
Expected volatility
Risk-free interest rate
Expected life (in years)
December 31,
2020
0-3%
46.0%
0.7%
5.1
2019
0-3%
47.4%
1.9%
4.3
The Company used volatility data in accordance with ASC 718 and based on Company's historical data.
The computation of risk free interest rate is based on the rate available on the date of grant of a zero-coupon U.S. government bond with a
remaining term equal to the expected term of the option.
F - 35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share data)
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
w. Accounting for stock-based compensation (Cont.):
CAESARSTONE LTD. AND ITS SUBSIDIARIES
The expected term of options granted is calculated using the simplified method (being the average between the vesting periods and the
contractual life of the options).
For the vast majority of the options granted in 2020 and 2019, the dividend yield is zero, due to adjustment mechanism with respect to the
exercise price upon payment of a dividend. For those options granted without adjustment mechanism, the dividend yield applied is 3%.
x. Redeemable non-controlling interest:
(1) The Company was party to a put and call arrangement with respect to the remaining 45% non-controlling interest in Caesarstone Canada,
Inc. Due to the existing put and call arrangements, the non-controlling interest is considered to be redeemable and is recorded on the
balance sheet as a redeemable non-controlling interest outside of permanent equity. The redeemable non-controlling interest is recognized
at the higher of: i) the accumulated earnings associated with the non-controlling interest, or ii) the redemption value as of the balance
sheet date.
On December 27, 2018, the Company acquired the remaining 45% ownership interest in its Canadian subsidiary for a purchase price of
approximately $20,119.
(2) Following the acquisition of Lioli during 2020, the Company is party to a put and call arrangement with respect to the remaining 45%
non-controlling interest in Lioli. Due to the existing put and call arrangements, the non-controlling interest is considered to be redeemable
and is recorded on the balance sheet as a redeemable non-controlling interest outside of permanent equity.
The redeemable non-controlling interest is recognized at the higher of: i) the accumulated earnings associated with the non-controlling
interest, or ii) the redemption value as of the balance sheet date (see also Note 1b).
F - 36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share data)
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
x. Redeemable non-controlling interest (Cont.):
CAESARSTONE LTD. AND ITS SUBSIDIARIES
The following table provides a reconciliation of the redeemable non-controlling interest:
Year ended December 31,
2019
2020
2018
Beginning of the year
$
-
$
Assuming the non controlling interest due to acquisition
Net income attributable to non-controlling interest
Dividend paid (*)
Adjustment to redemption value
Foreign currency translation adjustments
Adjustment to Call option value (**)
Call option exercise (**)
7,269
404
-
-
28
-
-
Redeemable non-controlling interest - end of the year
$
7,701
$
-
-
-
-
-
-
-
-
-
$
16,481
-
163
(978)
(203)
(931)
5,587
(20,119)
$
-
*)
In 2018 dividend payment was made by Company’s subsidiary Caesarstone Canada Inc. and reflects the amount paid to the non-
controlling interest holders.
**) See also Note 1e.
F - 37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share data)
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
y. Contingencies:
CAESARSTONE LTD. AND ITS SUBSIDIARIES
The Company is involved in various product liability, commercial, government investigations, environmental claims and other legal
proceedings that arise from time to time in the course of business. The Company records accruals for these types of contingencies to the extent
that the Company concludes their occurrence is probable and that the related liabilities are estimable. When accruing these costs, the Company
will recognize an accrual in the amount within a range of loss that is the best estimate within the range. When no amount within the range is a
better estimate than any other amount, the Company accrues for the minimum amount within the range. The Company records anticipated
recoveries under existing insurance contracts that are probable of occurring at the amount that is expected to be collected. Legal costs are
expensed as incurred. For unasserted claims or assessments, the Company followed the accounting guidance in ASC 450-20-50-6, 450-20-25-2
and 450-20-55-2 in which the Company must first determine that the probability that an assertion will be made is likely, then, a determination
as to the likelihood of an unfavorable outcome and the ability to reasonably estimate the potential loss is made.
z. Business combination:
The Company accounts for business combinations by applying the provisions of ASC 805, Business Combination, and allocates the fair value
of purchase consideration to the tangible assets acquired, liabilities assumed, and intangible assets acquired based on their estimated fair values.
The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill.
When determining the fair values of assets acquired and liabilities assumed, management makes significant estimates and assumptions,
especially with respect to intangible assets.
Significant estimates in valuing certain intangible assets include, but are not limited to future expected cash flows from acquired customer
relationship and acquired trademarks from a market participant perspective, useful lives and discount rates. Management’s estimates of fair
value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results
may differ from estimates. During the measurement period, which does not exceed one year from the acquisition date, the Company may
record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill. Upon the finalization of the
measurement period, any subsequent adjustments are recorded to earnings.
Acquisition-related costs are recognized separately from the acquisition and are expensed as incurred.
F - 38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share data)
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
aa.
Impact of recently issued accounting standards:
Recently issued and adopted accounting standards:
CAESARSTONE LTD. AND ITS SUBSIDIARIES
1.
2.
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (ASU) No. 2016-13, Financial
Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The FASB subsequently issued
amendments to ASU 2016-13, which have the same effective date and transition date of January 1, 2020. This standard requires entities to
estimate an expected lifetime credit loss on financial assets ranging from short-term trade accounts receivable to long-term financings and
report credit losses using an expected losses model rather than the incurred losses model that was previously used, and establishes
additional disclosures related to credit risks. For available-for-sale (“AFS”) debt securities with unrealized losses, the standard eliminates
the concept of other-than-temporary impairments and requires allowances to be recorded instead of reducing the amortized cost of the
investment.
This standard limits the amount of credit losses to be recognized for AFS debt securities to the amount by which carrying value exceeds
fair value and requires the reversal of previously recognized credit losses if fair value increases.
The Company adopted Topic 326 effective January 1, 2020, based on the composition of the Company’s trade receivables, investment
portfolio and other financial assets, current economic conditions and historical credit loss activity. The adoption of this standard did not
have a material impact on the Company’s consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04, Intangibles-Goodwill and Other (Topic 350), simplifying the Test for Goodwill
Impairment. With ASU 2017-04, an entity will no longer determine goodwill impairment by calculating the implied fair value of goodwill
by assigning the fair value of a reporting unit to all of its assets and liabilities as if that reporting unit had been acquired in a business
combination. Instead, an entity will compare the fair value of a reporting unit with its carrying amount and recognize an impairment
charge for the amount by which the carrying amount exceeds the reporting unit's fair value. ASU 2017-04 is effective for annual or any
interim goodwill impairment tests in fiscal years beginning after December 15, 2019. The Company adopted this standard prospectively
effective January 1, 2020, the adoption of this standard did not have a material impact on the Company's consolidated financial
statements.
F - 39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share data)
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
aa.
Impact of recently issued accounting standards (Cont.)
Recently issued and adopted accounting standards (Cont.)
CAESARSTONE LTD. AND ITS SUBSIDIARIES
3.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the
Disclosure Requirements for Fair Value Measurement. This guidance adds, modifies and removes several disclosure requirements relative
to the three levels of inputs used to measure fair value in accordance with Topic 820, Fair Value Measurement. This guidance is effective
for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. As such, the Company adopted
this standard effective January 1, 2020. The adoption of this standard did not have a significant impact on the Company’s consolidated
financial statements.
Recently issued accounting standards and not yet adopted by the Company:
1.
2.
In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes. ASU 2019-12 eliminates certain
exceptions related to the approach for intra-period tax allocation, the methodology for calculating income taxes in an interim period and
the recognition of deferred tax liabilities for outside basis differences. It also clarifies and simplifies other aspects of the accounting for
income taxes. This guidance is effective for public business entities for fiscal years beginning after December 15, 2020, and interim
periods within those fiscal years. Early adoption is permitted, including in interim periods. The adoption of this standard does not expect
to have a material impact on the Company’s consolidated financial statements.
In August 2020, the FASB issued Accounting Standards Update No. 2020-06, Debt—Debt with Conversion and Other Options (Subtopic
470-20) and Derivatives and Hedging—Contracts in Entity's Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and
Contracts in an Entity’s Own Equity (ASU 2020-06), which simplifies the accounting for certain financial instruments with characteristics
of liabilities and equity, including convertible instruments and contracts on an entity’s own equity. This guidance also eliminates the
treasury stock method to calculate diluted earnings per share for convertible instruments and requires the use of the if-converted method.
This guidance will be effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years.
Early adoption is not permitted before fiscal years beginning after December 15, 2020. The Company do not expect the adoption of this
guidance to have a material impact on its consolidated financial statements.
F - 40
CAESARSTONE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share data)
NOTE 3:- MARKETABLE SECURITIES
The following is a summary of available-for-sale marketable securities at December 31, 2020:
Amortized
cost
Gross
unrealized
gains
Gross unrealized
losses
Accrued
Interest
Fair
value
Available-for-sale – matures within one year:
Corporate bonds
Governmental bonds
Total
Available for-sale – matures after one year:
Corporate bonds
Governmental bonds
Total
Total
$
$
$
$
$
7,570
504
8,074
10,353
483
10,836
18,910
$
$
$
$
$
2
-
2
13
2
15
17
$
$
$
$
$
2
-
2
2
-
2
4
$
$
$
$
$
37
1
38
70
7
77
115
$
$
$
$
$
7,607
505
8,112
10,434
492
10,926
19,038
As of December 31, 2020, the Company didn’t record an allowance for credit losses for its AFS marketable debt securities.
NOTE 4:-
OTHER ACCOUNTS RECEIVABLE AND PREPAID EXPENSES
Prepaid expenses
Government authorities
Advances to suppliers
Derivatives
Other receivables (*)
(*)
Including mainly insurance receivables, see also note 11.
NOTE 5:-
INVENTORIES
Raw materials
Work-in-progress
Finished goods
F - 41
December 31,
2020
2019
$
5,567
8,176
4,843
-
7,895
3,876
15,850
4,315
62
9,963
26,481
$
34,066
December 31,
2020
2019
$
23,023
1,534
127,516
21,410
1,726
99,550
152,073
$
122,686
$
$
$
$
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share data)
NOTE 6:-
PROPERTY, PLANT AND EQUIPMENT, NET
Cost:
Machinery and manufacturing equipment, net (1)
Office equipment and furniture
Motor vehicles
Buildings and leasehold improvements
Prepaid expenses related to operating lease (2)
Accumulated depreciation:
Machinery and manufacturing equipment, net
Office equipment and furniture
Motor vehicles
Buildings and leasehold improvements
Prepaid expenses related to operating lease
CAESARSTONE LTD. AND ITS SUBSIDIARIES
December 31,
2020
2019
$
$
304,679
26,807
4,533
139,361
939
276,222
21,933
2,263
119,552
939
476,319
420,909
185,133
18,571
3,362
46,226
144
159,351
16,087
1,356
39,205
134
253,436
216,133
Depreciated cost
$
222,883
$
204,776
(1)
Presented net of investment grants received in the total amount of $8,420.
(2) Until 2012, the Company leased land from the Israel Lands Administration ("ILA") for its Bar-Lev manufacturing facility. The lease term
started on February 6, 2005. The lease is for an initial non-cancellable term of 49 years, with a renewal option of an additional 49 years. All
payments on account of the initial term were paid in advance (based on discounted values) at the beginning of the lease, and included in the
minimum lease payments to be amortized. The prepaid expenses are amortized through the term of the lease, based on the straight-line method
(including the bargain renewal option term). See also Note 14d.
During 2019 the Company recorded an amortization in the amount of approximately $1,200 of machinery and equipment with no future
alternative use.
Depreciation expense were $28,829, $28,587 and $26,350 for the years ended December 31, 2020, 2019 and 2018, respectively.
F - 42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share data)
NOTE 7:-
GOODWILL AND INTANGIBLES
a. Goodwill:
The changes in the carrying amount of goodwill for the years ended December 31, 2020 and 2019 are as follows:
CAESARSTONE LTD. AND ITS SUBSIDIARIES
$
35,283
(65)
35,218
10,619
1,635
$
47,472
December 31,
2020
2019
$
12,193
$
(102)
7
$
12,098
$
-
-
-
-
Balance as of January 1, 2019
Foreign currency translation adjustments
Balance as of December 31, 2019
Acquired through business combination (*)
Foreign currency translation adjustments
Balance as of December 31, 2020
(*) Deriving from Lioli and Omicron acquisitions (see also Note 1(b) and 1(c))
b.
Intangible assets:
Original amounts:
Customer relationships
Accumulated amortization:
Customer relationships
Foreign currency translation adjustment
Total intangibles assets
(1)
(2)
Amortization expense amounted to $102 for the years ended December 31, 2020.
Estimated amortization expenses for the following years as of December 31, 2020:
2021
2022
2023
2024
2025
$
2,439
2,439
2,439
2,439
2,342
$
12,098
F - 43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share data)
NOTE 8:-
SHORT-TERM BANK CREDIT AND CURRENT MATURITIES OF LONG-TERM LOAN
a.
Short-term bank credit and loans are classified as follows:
CAESARSTONE LTD. AND ITS SUBSIDIARIES
Currency
Weighted average interest
December 31,
December 31,
2020
2019
2020
2019
Short-term bank credit
Short-term bank credit
Current maturities of Long-term bank loan
and other (c)
USD
INR
INR
%
3.3
12.6
12.6
-
-
-
$
$
$
8,326
2,816
1,980
$
$
$
-
-
-
b. As of December 31, 2020 and 2019, the Company had short-term and revolving credit lines of approximately $18,187 and $207 (out of which
$11,142 and $0, respectively, were utilized as presented in the table above), respectively, from various banks (from banks in the U.S., Canada
and India). As of December 31,2020, the credit lines deriving from the acquisitions of Lioli and Omicron (see also Note 1).
The Company's current credit lines, if not extended, will expire through 2021.
c.
Including mainly current maturities of long-term bank loan, See also Note 15.
NOTE 9:-
ACCRUED EXPENSES AND OTHER LIABILITIES
Employees and payroll accruals
Accrued expenses
Advances from customers
Taxes payable
Warranty provision
Derivatives
Sales return provision
Operating lease liability short-term
Contingent consideration liability and other
F - 44
December 31,
2020
2019
$
$
13,414
7,855
959
6,291
1,305
3,791
567
18,854
2,534
15,690
5,871
377
6,753
1,531
425
797
11,330
8
$
55,570
$
42,782
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share data)
NOTE 10:- LEASES
CAESARSTONE LTD. AND ITS SUBSIDIARIES
a. As of December 31, 2020, the Company had operating lease agreements for facilities and vehicles in the United States, Canada, Australia,
United Kingdom, Israel, India and Singapore. Company’s leases have remaining lease terms of up to 16 years, some of which include options
to extend the leases for up to five years. Such options are included in the lease term when it is reasonably certain that the option will be
exercised. Leases with an initial term of 12 months or less are not recorded on the balance sheet, the Company recognizes lease expense for
these leases on a straight-line basis over the lease term. The Company does not separate non-lease components from the lease components to
which they relate, and instead accounts for each separate lease and non-lease component associated with that lease component as a single lease
component for all underlying asset classes. The Company uses its estimated incremental borrowing rate based on the information available at
commencement date in determining the present value of lease payments.
b.
The following table summarizes the Company’s lease-related assets and liabilities recorded on the consolidated balance sheet:
Classification
December 31,
2020
December 31,
2019
Assets:
Operating lease assets
Operating lease right-of-use assets
Total lease assets
Liabilities:
Current lease liabilities
Long-term lease liabilities
Total lease liabilities
Accrued expenses and other liabilities
Long-term lease liabilities
Lease term and discount rate:
Weighted-average remaining lease term — operating leases
Weighted-average discount rate — operating leases
F - 45
123,928
123,928
18,854
112,719
131,573
72,047
72,047
11,330
64,638
75,968
December 31,
2020
December 31,
2019
8.99 years
4.03%
9.21 years
3.51%
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share data)
NOTE 10:- LEASES (Cont.)
c.
The components of operating lease cost for the year ended December 31, 2020 were as follows:
CAESARSTONE LTD. AND ITS SUBSIDIARIES
Operating lease cost:
Operating lease expense
Variable lease expense
Short-term lease expense
Sublease income
Total operating lease cost
December 31,
2020
December 31,
2019
$
$
$
16,388
4,126
158
(776)
14,540
2,774
2,787
(673)
19,896
$
19,428
d.
The maturity of the Company’s operating lease liabilities for contracts with lease term greater than one year as of December 31, 2020 are as
follows:
$
December
31,
22,791
20,864
17,103
14,781
13,399
64,496
153,434
(21,861)
$
131,573
2021
2022
2023
2024
2025
2026 and thereafter
Total future lease payments (1, 2)
Less imputed interest
Total
(1)
(2)
Total lease payments have not been reduced by sublease rental payments of approximately $1,850 due in the future under non-
cancelable subleases.
As of December 31, 2020, the Company has additional operating lease payments, not included in the table above, that have not yet
commenced of approximately $3,700. These operating leases will commence during 2021 with lease terms of 5 to 15 years.
e.
For additional information regarding lease transactions between related parties, refer to Note 14.
F - 46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share data)
NOTE 10:- LEASES (Cont.)
f.
The following table presents supplemental cash flow information related to the lease costs for operating leases:
CAESARSTONE LTD. AND ITS SUBSIDIARIES
Cash paid for amounts included in measurement of lease liabilities:
Operating cash flows for operating leases
Right-of-use assets obtained in exchange for new operating lease liabilities:
Operating leases
NOTE 11:-
COMMITMENTS AND CONTINGENT LIABILITIES
a.
Legal proceedings and contingencies:
Claim by former South African distributor
December 31,
2020
December 31,
2019
$
$
16,100
$
14,432
64,901
$
82,185
In December 2007, the Company terminated its agency agreement with its former South African agent, World of Marble and Granite
(“WOMAG”), on the basis that WOMAG had breached the agreement. In the same month, the Company filed a claim for NIS 1.0 million
(approximately $257) in the Israeli District Court in Haifa based on such breach. WOMAG has contested jurisdiction of the Israeli District
Court, but subsequent appellate courts have dismissed WOMAG’s claims. In January 2008, WOMAG filed suit in South Africa seeking Euro
15.7 million (approximately $17,060). In September 2013, the South African Court determined that since a proceeding on the same facts was
pending before another court (lis alibis pendens), the South African Court will stay the matter until the conclusion of the Israeli action.
In December 2013, the magistrate’s court in Israel held that the Company was not entitled to terminate the agreement with WOMAG as it was
not breached by WOMAG. In October 2015, WOMAG amended its claim, seeking a reduced amount of approximately Euro 7.1 million
(approximately $7,727) and approximately South Africa RAND 43.7 million (approximately $2,808). In June 2016, WOMAG further amended
its claim, seeking a reduced amount of Euro 6.2 million (approximately $6,520) and South Africa RAND 51.2 million (approximately $3,700)
plus interest on any capital sum awarded. As the district court dismissed the Company’s appeal of the decision of the magistrate’s court, the
Company has agreed with WOMAG to submit the matter to arbitration, for which hearings commenced in South Africa in September 2016.
The arbitration is divided into two stages. Both stages relate to the quantum of damages payable by the Company; the first stage in respect of
the merits and the second in respect of the quantum of claim if WOMAG succeeds with its disputed claim on the merits.
F - 47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share data)
NOTE 11:-
COMMITMENTS AND CONTINGENT LIABILITIES (Cont.)
CAESARSTONE LTD. AND ITS SUBSIDIARIES
At the conclusion of each stage, if any of the parties is not satisfied with the arbitrator’s decision, that party may lodge an appeal to a panel of
three arbitrators to be appointed by the parties. During 2018, WOMAG once again amended its claim, seeking a reduced amount of
approximately Euro 5.8 million (approximately $6,640) plus interest on any capital sum awarded.
In February 2019 the arbitrator has rendered an award on the merits (non-quantum), accepting the claims made by WOMAG and imposing on
the Company also the legal costs of the arbitration.
In July 2019, the Company appealed the award and in August 2019 hearings were held. In November 2019, the appeal panel delivered its
award on the merits (the quantum is still to be decided), partially accepting the appeal and imposing 80% of the cost of arbitration and appeal
on the Company.
Following negotiations held during 2020 between the parties, on January 15, 2021, the Company paid WOMAG an amount of approximately
Euro 7.2 million ($8,900) as part of the settlement for the majority of WOMAG’s claim for breach of contract. The remaining disputed
amounts relating to the said breach, as well as WOMAG's claim for loss of profits shall be the subject of a further hearing scheduled for August
2021.
The Company, also based on its legal advisors, believes it has provided an adequate reserve for this claim as of December 31, 2020.
Bodily injury claims related to exposure to silica dust:
Overview:
The Company is subject to numerous claims mainly by fabricators, their employees or the National Insurance Institute ("NII"), alleging that
fabricators contracted illnesses, including silicosis, through exposure to silica particles during cutting, polishing, sawing, grinding, breaking,
crushing, drilling, sanding or sculpting Company's products.
F - 48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share data)
NOTE 11:-
COMMITMENTS AND CONTINGENT LIABILITIES (Cont.)
Silicosis and other bodily:
Injury claims:
CAESARSTONE LTD. AND ITS SUBSIDIARIES
As of December 31, 2020, the Company is subject to 173 pending bodily injury claims (out of which 172 are individual claims and NII
subrogation or related future probable claims, and one claim with a motion to be recognized as a class action) that have been submitted in Israel
since 2008 against the Company directly, or that have named the Company as third-party defendant by fabricators or their employees in Israel,
by the injurer's successors, by the NII or by others (see also table below). In addition, 30 claims are pending in Australia against the Company
and other defendants.
As of December 31, 2020, the Company has 13 pending pre-litigation demand letters on behalf of certain fabricators in Israel.
Most of the claims in Israel do not specify a total amount of damages sought, as the plaintiff’s future damages are intended to be determined at
trial.
Class action in Israel:
In April 27, 2014, a lawsuit by a single plaintiff and a motion for the recognition of this lawsuit as a class action was filed against the
Company in the Central District Court in Israel. The plaintiff alleges that, if the lawsuit is recognized as a class action, the claim against
the Company is estimated to be NIS 216 million (approximately $56,180). In addition, the claim includes an unstated sum in
compensation for special and general damages.
On January 4, 2018, the Company and the plaintiff submitted to the Israeli District Court a settlement agreement. If the settlement
agreement is approved by the Court, the claim will be dismissed and the Company will make payments on a one time basis, without any
admission of liability, in an aggregate amount of approximately NIS 9.0 million (approximately $2,799) to fund certain safety related
expenses at fabrication facilities in Israel, as well as plaintiff’s compensation and legal expenses. As of December 31, 2020, the
settlement agreement remains subject to the approval of the Court. The Israeli State Attorney General had notified the Court of its
objection to the proposed settlement. The Company expects the Court will issue its ruling during 2021.
F - 49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share data)
NOTE 11:-
COMMITMENTS AND CONTINGENT LIABILITIES (Cont.)
CAESARSTONE LTD. AND ITS SUBSIDIARIES
In November 2015 and in May 2017, the Company entered into agreements with the State of Israel and with its main distributors in Israel,
respectively, with the consent of its insurance carriers, under which the Company agreed with the State and each of its main distributors to
cooperate, subject to certain terms, with respect to the management of the individual claims that have been filed and claims that may be
submitted during a certain time period (NII claims are excluded from the Company’s agreement with the State) and on the apportionments of
the total liability between the Company, the State, and the distributors, if found, in such claims. During January 2020, the State of Israel
approved an additional 5 years extension to this agreement.
With respect to claims filed in Australia, which the Company intends to vigorously defend, it is too early to estimate the probability of a ruling
against the Company as there is still no precedent in Australia as to the liability of manufacturers and suppliers in silicosis claims.
The Company updated its provision in 2020, 2019 and 2018 to reflect the outstanding claims in the below table, and provided a provision for
related NII unasserted claims, taking into consideration new claims filed, settlements reached and other new information available.
In order to reasonably estimate the losses for bodily injury claims reflected in the table below, the Company performed a case-by-case analysis
with its legal advisors of the relevant facts that were reasonably available to it, related to the claims filed, including, among other things, the
specific known or estimated health condition of the claimants, their ages, salaries, related probable future subrogation claims from the NII, and
other factors that might have an impact on the final outcome of such claims. The Company will continue to regularly monitor changes in facts
for each claim and will update its best estimate if required.
F - 50
CAESARSTONE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share data)
NOTE 11:-
COMMITMENTS AND CONTINGENT LIABILITIES (Cont.)
Accordingly, the reserve for the bodily injury claims (including the above mentioned class action in Israel) as of December 31, 2020 and 2019
totaled to $42,345 and $39,172 respectively, of which $20,435 and $17,667 is reported in short term legal settlements and loss contingencies
and $21,910 and $21,505 is reported in long-term liabilities. The Company cannot estimate the number of claimants that may file claims in the
future or the nature of their claims in order to conclude probability or the range of loss. The Company currently does not expect to incur
additional material losses with respect to the outstanding bodily injury claims, that might have a material impact on its financial position,
results of operations and cash flows.
A summary of bodily injury claims activity follows:
Outstanding claims, January 1,
New claims
Settled and dismissed claims
Outstanding claims, December 31 (*), (**)
*)
Not including the legal proceedings in Australia.
**)
In 2020, representing 138 injured persons.
Year ended December 31,
2019
2020
2018
156
38
(21)
173
131
45
(20)
156
105
54
(28)
131
The Company maintains insurance for product liability claims, including for bodily injury claims related to exposure to silica dust. The
Company has purchased insurance policies for the period from 2008 and to date from several insurance carriers that provide coverage for
product liability losses, subject to certain terms and conditions, and the related defense costs up to a certain limit per case and per policy year.
The available limits of these policies as it relates to the claims reflected in the table above, exceed the recorded insurance receivable balance.
The Company currently have global product liability insurance, which applies, subject to certain terms and limitations, to claims that may be
submitted against the Company worldwide during the insurance policy term. This policy covers claims that are beyond $20 million per claim
and per aggregate during the policy term from October 1, 2020 to April 1, 2022, up to an amount of $35 million per claim and per year.
Company’s global product liability insurance policy is effective until April 2022. The policy covers only illnesses diagnosed after February
2010. Although the Company will seek to renew its product liability insurance to cover silicosis related claims, there is no assurance that the
Company will be successful in its renewal. In addition to the global product liability policy, the Company has regional product liability
insurance policies in the United States, Canada and Australia, with a coverage of up to $20, $20 and $50 million respectively, per claim or per
year, each in its relevant local currency, subject to certain terms and limitations, with relatively low deductibles. Commencing October 2020,
the coverage in Australia excluded the bodily injury claims related to exposure to silica dust. In India, the Company has a regional product
liability policy in the amount of INR 40 million ($0.6 million) effective until April 23, 2021.
F - 51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share data)
NOTE 11:-
COMMITMENTS AND CONTINGENT LIABILITIES (Cont.)
CAESARSTONE LTD. AND ITS SUBSIDIARIES
The Company records insurance receivables for the amounts that are covered by insurance. During 2020, as in prior years, the Company's
insurance carriers made payments to all settled product liability claims that were under the policies. The Company paid the deductible amounts
for the settled claims per policy.
The collectability of the Company's insurance receivables is regularly evaluated and the amounts recorded are probable of collection. This
conclusion is based on analysis of the terms of the underlying insurance policies, experience in successfully recovering individual product
liability claims from Company's insurers, the insurance carrier was party to the agreement with the State of Israel and the financial ability of
the insurance carriers to pay the claims and the relevant facts and applicable law.
As of December 31, 2020 and 2019, the insurance receivable totaled to $7,958 and $9,517, respectively, of which $6,283 and $6,340 is
reported in the other accounts receivable and prepaid expenses and $1,675 and $3,176 is in other long-term receivables.
In 2020 and 2019, the legal settlements and loss contingencies expenses related to the bodily injury claims related to exposure to silica dust
totaled to $5,299 and $7,258, respectively, which reflects the deductible amounts for claims covered by insurance policies, claims not covered
and the impact of settlements including the related legal costs.
Arbitration proceeding with Microgil Agricultural Cooperative Society Ltd.
In November 2011, Kfar Giladi and Microgil (the “claimants”), initiated arbitration proceedings against the Company that commenced in April
2012. The claimants filed a claim against the Company in arbitration for NIS 232.8 million ($60,500) for alleged damages and losses incurred
by them in connection with a breach of Processing Agreement by the Company. In August 2012, the Company filed a claim against the
claimants in arbitration for NIS 76.6 million ($19,900) for damages incurred by the Company in connection with claimants malfunctioning
operations, breach of the agreement and the understanding between the parties regarding the agreement after it was terminated, inventory
which was not returned to the Company and was unaccounted for and an unpaid loan, which was granted by the Company to the claimants, and
the adverse impact on the valuation in Company’s IPO caused by their actions.
On January 17, 2018, the arbitrator provided its judgment, pursuant to which the Company is required to pay the claimants approximately NIS
48.2 million (approximately $13,900), including damages, interest, linkage to the Israeli Consumer Price index and legal fees. The Company
recorded this amount in 2017 as part of the legal settlements and loss contingencies, net line item in its Consolidated Statement of Income and
paid such amount during March 2018.
F - 52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share data)
NOTE 11:-
COMMITMENTS AND CONTINGENT LIABILITIES (Cont.)
General:
CAESARSTONE LTD. AND ITS SUBSIDIARIES
From time to time, the Company is involved in other legal proceedings and claims in the ordinary course of business related to a range of
matters. While the outcome of these other claims cannot be predicted with certainty, the Company monitors and estimates the possible loss
deriving from these claims based on new information available and based on its legal advisors, and believes that it recorded an adequate
reserve for these claims in accordance with ASC 450.
b.
Purchase obligation:
The Company's significant contractual obligations and commitments as of December 31, 2020 are for purchase obligations to certain suppliers
and amounted to $27,732 for the fiscal year 2021.
c.
Pledges and guarantees:
1. As of December 31, 2020, the Company had outstanding guarantees and letters of credit with various expiration dates in a principal
amount of approximately $3,550 related to facilities, vehicle leases and other miscellaneous guarantees.
2. Company's credit facilities provided by banks in Israel are secured with a “Negative floating pledge”, whereby the Company committed
not to pledge or charge and not to undertake to pledge or charge its general floating assets.
3.
See also note 15 for long-term debt.
NOTE 12:- TAXES ON INCOME
a.
Israeli taxation:
1.
Corporate tax rate:
The corporate tax rate in Israel was 23% in 2020 and 2019, and 2018.
F - 53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share data)
NOTE 12:- TAXES ON INCOME (Cont.)
2.
Foreign Exchange Regulations:
CAESARSTONE LTD. AND ITS SUBSIDIARIES
Under the Foreign Exchange Regulations, Caesarstone Ltd. calculates its tax liability in U.S. Dollars according to certain orders. The tax
liability, as calculated in U.S. Dollars is translated into New Israeli Shekels according to the exchange rate as of December 31st of each
year.
3.
Tax benefits under Israel's Law for the Encouragement of Industry (Taxes), 1969:
The Company is an "Industrial Company," as defined by the Law for the Encouragement of Industry (Taxes), 1969, and as such, the
Company is entitled to certain tax benefits, primarily amortization of costs relating to know-how and patents over eight years, accelerated
depreciation and the right to deduct public issuance expenses for tax purposes.
4.
Tax benefits under the Law for the Encouragement of Capital Investments, 1959:
According to the Law for the Encouragement of Capital Investments, 1959 (the "Encouragement Law"), the Company is entitled to
various tax benefits by virtue of the "Preferred Enterprise" status granted to its enterprises, in accordance with the Encouragement Law.
The Company chose to be taxed according to the "Preferred Enterprise" track under Amendment No. 68 to the Encouragement Law (the
"Amendment No. 68"). In order to implement Amendment No. 68 and to be taxed under the "Preferred Enterprise" track, the Company
waived the tax benefits of the previous tracks -"Approved Enterprise" and "Beneficiary Enterprise" - under the Encouragement Law,
starting from the 2011 tax year.
The principal benefits by virtue of the Encouragement Law are the following:
Tax benefits and reduced tax rates under the Preferred Enterprise track:
The tax rate on preferred income from a Preferred Enterprise in 2014 and onwards was 16% (relates to Company's manufacturing plant in
Sdot-Yam) and in development area A - 9%. Commencing 2017, the tax rate on preferred income from a Preferred Enterprise is 16% and
in development area A – 7.5% (relates to Company's manufacturing plant in Bar-Lev industrial zone).
In order to receive benefits as a "Preferred Enterprise," Amendment No. 68 states certain conditions must be met. The basic condition for
receiving the benefits under Amendment No. 68 is that the enterprise contributes to the country's economic growth and is a competitive
factor for the gross domestic product (a "competitive enterprise"). In order to comply with this condition, the Encouragement Law
prescribes various requirements.
F - 54
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share data)
NOTE 12:- TAXES ON INCOME (Cont.)
CAESARSTONE LTD. AND ITS SUBSIDIARIES
As for industrial enterprises, in each tax year, one of the following conditions must be met:
1.
2.
Its main field of activity is biotechnology or nanotechnology as approved by the Head of the Administration of Industrial Research
and Development.
The industrial enterprise's sales revenues in a specific market during the tax year do not exceed 75% of its total sales for that tax
year. A "market" is defined as a separate country or customs territory.
3. At least 25% of the industrial enterprise's overall revenues during the tax year were generated from the enterprise's sales in a
specific market with a population of at least 14 million starting from 2012 tax year.
Amendment No. 68 also prescribes that any dividends distributed to individuals or foreign residents from the preferred enterprise's
earnings as discussed above will be subject to tax at a rate of 20% from 2014 and onwards (or a reduced rate under an applicable double
tax treaty). Upon a distribution of a dividend to an Israeli company, no withholding tax is remitted.
Since the Company chose to apply the provisions of Amendment No. 68, by submitting the waiver form before June 30, 2015, the
Company is eligible to distribute taxed earnings derived from a Beneficiary Enterprise and/or Approved Enterprise to an Israeli company
without being subject to withholding tax.
In development area A, in addition to the tax benefits, as mentioned above, some of the Company's facilities are eligible for grants at rate
of 20% and/or loans, subject to an approval of the Israeli Investment Center.
Accelerated depreciation:
The Company is eligible for a deduction of accelerated depreciation on machinery and equipment used by the Approved Enterprise or the
Beneficiary Enterprise or the Preferred Enterprise at a rate of 200% (or 400% for buildings) from the first year of the asset's operation.
F - 55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share data)
NOTE 12:- TAXES ON INCOME (Cont.)
Conditions for entitlement to benefits:
CAESARSTONE LTD. AND ITS SUBSIDIARIES
The above mentioned benefits are contingent upon the fulfillment of the conditions stipulated by the Encouragement Law, regulations
published thereunder and the letters of approval for the investments in the Preferred Enterprises, as discussed above. Non-compliance
with the conditions may cancel all or part of the benefits and require a refund of the amount of the benefits, including interest. The
Company's management believes that the Company meets the aforementioned conditions.
Of the Company's retained earnings as of December 31, 2020, approximately $24,065 is tax-exempt earnings attributable to its Approved
Enterprise programs and $18,805 is tax-exempt earnings attributable to its Beneficiary Enterprise program. The tax-exempt income
attributable to the Approved and Beneficiary Enterprises cannot be distributed to shareholders without subjecting the Company to taxes.
If dividends are distributed out of tax-exempt profits, the Company will then become liable for tax at the rate applicable to its profits
from the Approved Enterprise in the year in which the income was earned, as if it was not under the "Alternative benefits track" (taxed at
the rate of no more than 23% as of December 31, 2020). Under the Encouragement Law, tax-exempt income generated under the
Beneficiary Enterprise status or the Approved Enterprise status will be taxed, among other things, upon a dividend distribution or
complete liquidation in accordance with the Encouragement Law. The Company's policy is not to distribute such dividends from tax-
exempt income derived from Approved/Beneficiary Enterprises (see also Note 13c).
As of December 31, 2020, if the income attributed to the Approved Enterprise would have been distributed as a dividend, the Company
would have incurred a tax liability of approximately $5,535. If income attributed to the Beneficiary Enterprise would have been
distributed as a dividend, including upon liquidation, the Company would have incurred a tax liability of approximately $4,325. These
amounts would be recorded as an income tax expense in the period in which the Company decides to declare the dividend.
b. Non-Israeli subsidiaries taxation:
Non-Israeli subsidiaries are taxed based on tax laws in their countries of residence.
Statutory tax rates for Non-Israeli subsidiaries are as follows:
Company incorporated in United States – 26.1% tax rate (federal and state).
Company incorporated in Australia - 30% tax rate.
Company incorporated in Singapore - 17% tax rate.
Company incorporated in Canada – 26.6% tax rate (federal and state).
Company incorporated in England – 19% tax rate.
Company incorporated in India – 28% tax rate.
F - 56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share data)
NOTE 12:- TAXES ON INCOME (Cont.)
CAESARSTONE LTD. AND ITS SUBSIDIARIES
Israeli income taxes and foreign withholding taxes were not provided for undistributed earnings of the Company's foreign subsidiaries
(excluding the Company's subsidiary in Canada). For 2020 and 2019 the Company intends to reinvest these earnings indefinitely in the foreign
subsidiaries. Accordingly, no deferred income taxes have been provided. If these earnings were distributed to Israel in the form of dividends or
otherwise, the Company would be subject to additional Israeli income taxes (subject to an adjustment for foreign tax credits) and foreign
withholding taxes.
c. Deferred income taxes:
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets and liabilities
are as follows:
Deferred tax assets:
Goodwill and Intangible assets
Other temporary differences (1)
Temporary differences related to inventory (2)
Carryforward losses, deductions and credits (3)
Less-valuation allowance
Total deferred tax assets
Deferred tax liabilities:
Property and equipment
Intangible liabilities
Other temporary differences
Total deferred tax liabilities
Deferred tax assets, net
$
December 31,
2020
2019
$
327
14,300
6,083
1,102
(1,102)
20,710
(9,143)
(6,504)
(3,648)
(19,295)
358
8,664
6,962
868
(822)
16,030
(8,149)
-
-
(8,149)
$
1,415
$
7,881
(1)
Deriving mainly from provision for labor related and warranty provision. The increase mainly related to provision for loss contingencies
and lease accounting in accordance with ASC842
F - 57
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share data)
NOTE 12:- TAXES ON INCOME (Cont.)
CAESARSTONE LTD. AND ITS SUBSIDIARIES
(2)
Deriving mainly from the provision for slow moving inventory and IRS section 263(a).
Certain subsidiaries have tax loss carry-forwards totaling approximately $2,881 which can be carried forward and offset against taxable
income, these carry-forward tax losses have no expiration date. In addition to the above, the Company carried back its 2020 U.S. subsidiaries
losses in accordance with the CARES act.
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the
deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable
income during the periods in which those temporary differences become deductible. Management considers the schedule of reversal of deferred
tax liabilities, projected future taxable income and tax planning strategies in making this assessment.
d. A reconciliation of the Company's effective tax rate to the statutory tax rate in Israel is as follows:
Income before taxes on income
Statutory tax rate in Israel
Income taxes at statutory rate
Increase (decrease) in tax expenses resulting from:
Tax benefit arising from reduced rate as an "Preferred Enterprise"
Non-deductible expenses, net
Increase (decrease) in taxes from prior years, also related to settlement with
tax authorities
Tax adjustment in respect of foreign subsidiaries' different tax rates
Uncertain tax position
Changes in valuation allowance
Others
Income tax expense
Effective tax rate
Per share amounts (basic and diluted) of the tax benefit resulting from an
"Preferred Enterprise"
F - 58
Year ended December 31,
2019
2020
2018
12,322
23%
2,834
$
$
19,105
23%
4,394
(120)
1,764
(868)
(251)
1,659
(280)
(38)
(2,646)
2,025
707
772
1,037
112
(158)
4,700
$
6,243
38%
33%
(0.00)
$
(0.08)
$
$
$
$
29,128
23%
6,699
(2,527)
701
(670)
(453)
482
184
144
4,560
16%
(0.07)
$
$
$
$
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share data)
NOTE 12:- TAXES ON INCOME (Cont.)
e.
Income before taxes on income is comprised as follows:
Domestic
Foreign
f.
Tax expenses on income are comprised as follows:
Current taxes
Deferred taxes
Domestic
Foreign
g.
Tax assessments:
CAESARSTONE LTD. AND ITS SUBSIDIARIES
Year ended December 31,
2019
2020
2018
12,859
(537)
$
5,329
13,776
$
18,424
10,704
12,322
$
19,105
$
29,128
Year ended December 31,
2019
2020
2018
$
$
$
5,597
(897)
4,700
3,886
814
$
$
$
7,752
(1,509)
6,243
2,874
3,369
7,624
(3,064)
4,560
2,726
1,834
4,700
$
6,243
$
4,560
$
$
$
$
$
$
The Company operates in multiple jurisdictions throughout the world, and its tax returns are periodically audited or subject to review by both
domestic and foreign authorities. The associated tax filings remain subject to examination by applicable tax authorities for a certain length of
time following the tax year to which those filings relate. The following describes the open tax years, by major tax jurisdiction, as of December
31, 2020:
Israel 2019 – present (*)
Australia 2015 - present
Canada 2016 - present
United States 2017 - present
Singapore 2016 - present
England 2016 – present
India 2018 - present
(*) During 2020 the Company’s Israeli tax return for the years 2015-2018 were examined and the examination’s results are reflected in its tax
expenses.
F - 59
CAESARSTONE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share data)
NOTE 12:- TAXES ON INCOME (Cont.)
h. Uncertain tax positions:
The balances at December 31, 2020 and 2019 include a liability for unrecognized tax benefits of $3,663 and $4,913, respectively, for tax
positions which are uncertain of being sustained.
A reconciliation of the beginning and ending balances of unrecognized tax benefits is as follows:
Gross tax liabilities at January 1, 2018
Increase in tax positions for current year
Increase in tax position of prior years
Gross tax liabilities at December 31, 2018
Increase in tax positions for current year
Gross tax liabilities at December 31, 2019
Increase in tax positions for current year
Addition of tax position of prior years
Decrease in tax position resulting from settlement
Gross tax liabilities at December 31, 2020
$
2,737
482
657
3,876
1,037
4,913
1,659
118
(3,027)
$
3,663
The Company believes that an adequate provision has been made for any adjustments that may result from tax examinations. However, the
outcome of tax audits cannot be predicted with certainty. If any issues addressed in the Company's tax audits are resolved in a manner not
consistent with management's expectations, the Company could be required to adjust the provision for income taxes in the period such
resolution occurs. The Company does not expect uncertain tax positions to change significantly over the next 12 months, except in the case of
settlements with tax authorities, the likelihood and timing of which is difficult to estimate.
F - 60
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share data)
NOTE 13:-
SHAREHOLDERS' EQUITY
a.
The Company's share capital consisted of the following as of December 31, 2020 and 2019:
CAESARSTONE LTD. AND ITS SUBSIDIARIES
Authorized
December 31,
Outstanding
December 31,
2020
2019
2020
2019
Number of shares
Ordinary shares of NIS 0.04 par value each
200,000,000
200,000,000
34,437,296
34,397,776
b. Ordinary shares:
Ordinary shares confer on their holders voting rights and the right to receive dividends.
c. Dividends:
In February 2018, the Company adopted a dividend policy pursuant to which it intends to pay a quarterly cash dividend in the range of $0.10-
$0.15 per share up to the lesser of 50% of the reported net income attributable to controlling interest (i) on a quarterly basis or (ii) on a year-to-
date basis, subject in each case to approval by its board of directors.
In February 2020 the Company revised its dividend policy so that cash dividend will be distributed up to 50% of the year to date reported net
income attributable to controlling interest less any amounts already paid as dividend for the respective period, provided that such calculated
dividend is not less than $0.10. Any dividend payment is subject to approval by the Company’s board of directors.
Pursuant to the above policy the Company paid a total amount of $4,821 and $5,160 in 2020 and 2019, respectively, of dividend out of its non-
tax exempt profit under the beneficiary enterprise.
d. Repurchase of shares:
On February 9, 2016, the Company’s Board of Directors approved a share repurchase plan authorizing the repurchase of up to $40,000 of the
Company’s outstanding ordinary shares which was complete on August 3, 2016. Following the authorization, the Company repurchased
1,103,096 ordinary shares at an average price of $35.74 per share (excluding broker and transaction fees). The Company recorded shares
repurchased at cost as part of its equity statement. During 2019 the Israeli tax authorities examined Company’s withholding tax filings and
asserted that the Company’s buyback should be defined as dividend payment and as such is subject to 20% withholding tax. The Company
denied such claim and during January 2020 the tax authorities issued a request for payment of approximately $11 million (approximately NIS
38 million) plus interest and fines. The Company submitted its response and intends to vigorously defend its position that the share repurchase
should not be defined as dividend. The Company believes that the loss probability in this case is remote.
F - 61
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share data)
NOTE 13:-
SHAREHOLDERS' EQUITY (Cont.)
e. Compensation plan:
CAESARSTONE LTD. AND ITS SUBSIDIARIES
On January 1, 2011, the Board of Directors adopted the Caesarstone Ltd 2011 Incentive Compensation Plan (the “2011 Plan”) pursuant to
which non-employee directors, officers, employees and consultants may receive stock options and RSUs exercisable for ordinary shares, if
certain conditions are met. Under the plan the Company can grant up to 3,275,000 ordinary shares. On September 17, 2020 the Board of
Directors adopted Caesarstone Ltd 2020 Share incentive plan (the “2020 Plan”). Under the 2020 Plan up to 2,500,000 ordinary shares may be
granted. In addition, any shares that remain available for issuance under the 2011 Plan, as of the Effective Date, which shall not exceed
1,000,000 Shares, may also be granted under the 2020 Plan.
As of December 31, 2020, there were 1,499,224 options and restricted stock units (RSUs) outstanding under the Plan and 601,593 shares
available or reserved for future issuance under the plan.
As of December 31, 2020, there was $2,744 of total unrecognized compensation cost related to non-vested share-based compensation
arrangements granted to employees and directors under the Plan. That cost is expected to be recognized over a weighted-average period of 1.5
years.
The following is a summary of activities relating to the Company’s stock options granted to employees under the Company’s plan during the
year ended December 31, 2020:
Outstanding - beginning of the year
Granted
Exercised
Forfeited
Outstanding - end of the year
Options exercisable at the end of the year
Vested and expected to vest
Number
of options
Weighted
average
exercise
price
Aggregate
intrinsic
value
1,410,750
141,500
-
137,750
1,414,500
645,750
1,414,500
19.16
11.42
-
19.21
18.11
22.32
18.11
776
257
24
257
The weighted average fair value of options granted during 2020, 2019 and 2018 was $4.9, $6.2 and $7.2 per option. The weighted average fair
value of options vested during 2020, 2019 and 2018 was $8.32, $14.18 and $12.95 per option. The intrinsic value of options exercised during
2020, 2019 and 2018 was $0, $35 and $0.
F - 62
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share data)
NOTE 13:-
SHAREHOLDERS' EQUITY (Cont.)
CAESARSTONE LTD. AND ITS SUBSIDIARIES
The intrinsic value of exercisable options (the difference between the Company’s closing share price on the last trading day in fiscal year 2020
and the average exercise price of in-the-money options, multiplied by the number of in-the-money options) included above represents the
amount that would have been received by the option holders had all option holders exercised their options on December 31, 2020. This amount
changes based on the fair market value of the Company’s ordinary shares.
The following is a summary of activities relating to the Company’s RSUs granted to employees under the Plan during the year ended
December 31, 2020:
Outstanding - beginning of the year
Granted
Exercised
Forfeited
Outstanding - end of the year
RSUs exercisable at the end of the year
Vested and expected to vest
Number
of RSUs
Weighted
average
fair value
Aggregate
intrinsic value
120,786
11,100
(39,520)
(7,642)
84,724
-
16.90
11.21
19.23
14.55
15.30
-
1,556
1,091
-
84,724
15.30
1,091
The awards outstanding as of December 31, 2020 have been separated into ranges of exercise price, as follows:
Exercise price
$
$
$
$
$
0.01 (RSUs)
10.4-14.5
15.3-17.7
20.2-30.0
30.1-42.2
Awards outstanding
Weighted
average
remaining
contractual
life (years)
Weighted
average
exercise
price
per share
Number
of
options
Awards exercisable
Weighted
average
remaining
contractual
life (years)
Number
of
options
Weighted
average
exercise price
84,724
566,500
520,500
165,500
162,000
1,499,224
5.28
5.48
5.16
3.59
1.93
$
$
$
$
$
F - 63
0.01
13.02
15.60
27.24
34.69
-
140,625
213,625
129,500
162,000
645,750
-
4.91
5.05
3.55
1.93
-
13.33
15.59
27.73
34.69
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share data)
NOTE 13:-
SHAREHOLDERS' EQUITY (Cont.)
Compensation expenses related to options and RSUs granted were recorded in the consolidated statements of operations, as follows:
CAESARSTONE LTD. AND ITS SUBSIDIARIES
Cost of revenues
Research and development expenses
Marketing and selling expenses
General and administrative expenses
Total
NOTE 14:- TRANSACTIONS WITH RELATED PARTIES AND OTHER LOAN
December 31,
2020
2019
$
$
$
416
176
465
1,801
284
173
315
2,860
2,858
$
3,632
The Company's controlling shareholder, Kibbutz Sdot-Yam (the “Kibbutz"), has an ownership interest in the Company of approximately 30.3%, as
of December 31, 2020.
On September 5, 2016, Kibbutz Sdot-Yam entered into a term sheet with Tene Investment in Projects 2016 Limited Partnership (“Tene”), pursuant
to which both the Kibbutz and Tene are deemed the Company’s controlling shareholders under the Israeli Companies Law. Pursuant to the
agreement, the parties agreed, among other things, to vote at general meetings of the shareholders of the Company in the same manner, following
discussions intended to reach an agreement on any matters proposed to be voted upon, with Tene determining the manner in which both parties shall
vote if no agreement is reached, except with respect to certain carved-out matters, with respect to which, Mifalei Sdot-Yam will determine the
manner in which both parties shall vote if no agreement is reached. The term sheet provides for the sale of 1,000,000 ordinary shares by Kibbutz
Sdot-Yam to Tene as well as a call option conferring upon Tene for a period of five years the right to purchase from Mifalei Sdot-Yam up to
2,000,000 ordinary shares. On February 20, 2018, the term of the call option was extended by an additional two-year period.
As of December 31, 2020 the Kibbutz and Tene beneficially own 14,029,494 ordinary shares.
The Company is party to a series of agreements with the Kibbutz that govern different aspects of the Company's relationship and are described
below.
a. Manpower agreement with the Kibbutz:
On July 2011, the Company entered into a manpower agreement with Kibbutz Sdot-Yam such was automatically renewed during 2020 for
additional one year term, and will be automatically renewed again, unless one of the parties gives six months’ prior notice, for additional one-
year periods.
F - 64
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share data)
NOTE 14:- TRANSACTIONS WITH RELATED PARTIES AND OTHER LOAN (Cont.)
CAESARSTONE LTD. AND ITS SUBSIDIARIES
On July 30, 2015, following the approval of Company's audit committee, compensation committee and board of directors, Company's
shareholders approved an addendum to the Manpower Agreement by and between Kibbutz Sdot-Yam and the Company, with respect to the
engagement of office holders affiliated with Kibbutz Sdot-Yam, for an additional three-year term as of the date of the shareholders’ approval.
On November 27, 2018, following the approval of Company’s audit committee, compensation committee and board of directors, Company’s
shareholders approved a second addendum to such agreement for an additional three-year term as of the date of the shareholders’ approval.
Under the manpower agreement and its addendum, Kibbutz Sdot-Yam will provide the Company with labor services staffed by Kibbutz
members, candidates for Kibbutz membership and Kibbutz residents (“Kibbutz Appointees”). The consideration to be paid for each Kibbutz
Appointee will be based on the Company's total cost of employment for a non-Kibbutz Appointee employee performing a similar role. The
number of Kibbutz Appointees may change in accordance with the Company's needs. Under the manpower agreement, the Company will
notify Kibbutz Sdot-Yam of any roles that require staffing, and if the Kibbutz offers candidates with skills similar to other candidates, the
Company will give preference to hiring of the relevant Kibbutz members. Kibbutz Sdot-Yam is entitled under this agreement, at its sole
discretion, to discontinue the engagement of any Kibbutz Appointee of manpower services through his or her employment by Kibbutz Sdot-
Yam and require such appointee to become employed directly by the Company.
The Company will contribute monetarily to assist with the implementation of a professional reserve plan to encourage young Kibbutz members
to obtain the necessary education for future employment with the Company. The Company will provide up to NIS 250,000 ($77) per annum for
this plan linked to changes in the Israeli consumer price index plus VAT. The Company will also implement a policy that prioritizes the hiring
of such young Kibbutz members as the Company's employees upon their graduation. The manpower agreement and addendum also includes
Kibbutz Sdot-Yam’s obligation to customary liability, insurance, indemnification and confidentiality and intellectual property provisions.
Office holders who are Kibbutz Appointees shall have all benefits applicable to Company's other office holders, including without limitation,
directors’ and officers’ liability insurance, and Company's indemnification and exemption undertaking.
Manpower service fees paid were $2,106, $2,408 and $2,548 for the years ended December 31, 2020, 2019 and 2018, respectively.
F - 65
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share data)
NOTE 14:- TRANSACTIONS WITH RELATED PARTIES AND OTHER LOAN (Cont.)
b.
Services from the Kibbutz:
CAESARSTONE LTD. AND ITS SUBSIDIARIES
On July 20, 2011 the Company entered into a services agreement with the Kibbutz that was further amended on February 13, 2012 (the
“Original Services Agreement”). Pursuant to the Original Services Agreement, the Kibbutz provided various services related to Company’s
operational needs. The Original Services Agreement also outlined the distribution mechanism between the Company and Kibbutz Sdot-Yam,
for certain expenses and payments due to local authorities, such as taxes and fees in connection with Company’s business facilities. The
agreement expired on March 21, 2015.
On July 30, 2015, following the approval of the audit committee and the board, Company’s shareholders approved an amended services
agreement pursuant to which, Kibbutz Sdot-Yam will continue to provide various services it provides in the ordinary course of Company's
business, for a period of three years commencing as of the date of approval by the shareholders.
On November 27, 2018, following the approval of the audit committee and the board, Company’s shareholders approved a further amended
services agreement (“Amended Services Agreement”) for an additional period of three years.
The amount that the Company pays to Kibbutz Sdot-Yam under the Amended Services Agreement depends on the scope of services the
Company will receive and is based on rates specified in such agreement which were determined based on market terms, taking into account the
added value of consuming services from Kibbutz Sdot-Yam, considering its physical proximity to Company’s manufacturing plant in Sdot-
Yam and its expertise.
The amounts the Company pays for the services are subject to certain adjustments for increases in the Israeli consumer price index. In addition,
the Amended Services Agreement grants Kibbutz Sdot-Yam right of first proposal in special projects with respect to the metal workshop
services. The amended services agreement also outlines the distribution mechanism between the Company and the Kibbutz for certain expenses
and payments due to local authorities, such as certain taxes and fees in connection with the Company’s business facilities. Each party may
terminate such agreement upon a material breach, following a 30-day prior notice, or upon liquidation of the other party, following a 45-days’
prior notice.
The Company's net service fees paid to the Kibbutz pursuant to the Original and Amended Services Agreements were $1,315, $ 1,451 and $
1,285 for the years ended December 31, 2020, 2019 and 2018, respectively.
F - 66
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share data)
NOTE 14:- TRANSACTIONS WITH RELATED PARTIES AND OTHER LOAN (Cont.)
c.
Land Use Agreement with the Kibbutz:
Land leased to Kibbutz Sdot-Yam by the ILA and the Caesarea Development Corporation
CAESARSTONE LTD. AND ITS SUBSIDIARIES
The Company's principal offices and research and development facilities, as well as one of its two manufacturing facilities, are located on the
grounds of the Kibbutz and include buildings spaces of approximately 30,744 square meters and unbuilt areas of approximately 60,870 square
meters.
The Company signed a land use agreement with the Kibbutz, which has a term of 20 years commencing on April 1, 2012. Under the land use
agreement, Kibbutz Sdot-Yam permits the Company to use approximately 100,000 square meters of land, consisting of facilities and unbuilt
areas, in consideration for an annual fee of NIS 12.9 million (approximately $4,000) in 2013 and thereafter, (this amount does not include
approximately NIS 62,000 (approximately $19) for an additional area that the Company has leased on the grounds of Kibbutz Sdot-Yam due to
the Company's needs and Kibbutz Sdot-Yam's consent under the same terms as the land use agreement), plus VAT, adjusted every six months
based on any increase of the Israeli consumer price index compared to the index as of January 2011.
The annual fee may be adjusted after January 1, 2021 (or after January 1, 2018 if the Kibbutz is required to pay significantly higher lease fees
to the Israeli land authorities or Caesarea Development Corporation Ltd.) and every three years thereafter, at the election of Kibbutz Sdot-Yam
by obtaining an updated appraisal. The appraiser will be mutually agreed upon or, in the absence of agreement, will be chosen by Kibbutz
Sdot-Yam out of the list of appraisers recommended at that time by Bank Leumi Le-Israel ("Bank Leumi"). The parties are in the process of
obtaining such land appraisal to assess and adjust the fees for 2021 onwards.
During January 2018, the Kibbutz requested to increase the fees due to it, pursuant to the land lease agreement. Following the assessment of an
appointed appraiser and negotiations between the Company and the Kibbutz, it was agreed to increase the fees under such agreement, such that
for the year 2018 the Company paid additional amount of NIS 950,000 (approximately $250), and commencing 2019 and on the Company is
paying an additional annual amount of NIS 1,100,000 (approximately $342).
Under the land use agreement, the Company may not terminate the operation of either of its two production lines at its plant in Kibbutz Sdot-
Yam as long as the Company continues to operate production lines elsewhere in Israel, and its headquarters must remain at Kibbutz Sdot-Yam.
The Company may also not decrease or return to Kibbutz Sdot-Yam any part of the land underlying the land use agreement; however, it may
submit a written request to Kibbutz Sdot-Yam to return certain lands. Kibbutz Sdot-Yam will have three months to accept or reject such
request, in its sole discretion, provided that if it does not respond within such three-month period, the Company will be entitled to sublease
such lands to a person approved in advance by Kibbutz Sdot-Yam. In such event, the Company will continue to be liable to Kibbutz Sdot-Yam
with respect to such lands.
F - 67
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share data)
NOTE 14:- TRANSACTIONS WITH RELATED PARTIES AND OTHER LOAN (Cont.)
CAESARSTONE LTD. AND ITS SUBSIDIARIES
Pursuant to the land use agreement, if the Company needs additional facilities on the land that the Company is permitted to use in Kibbutz
Sdot-Yam, subject to obtaining the permits required by law, Kibbutz Sdot-Yam will build such facilities for the Company, by using the
proceeds of a loan that the Company will make to Kibbutz Sdot-Yam, which loan shall be repaid to the Company by off-setting the monthly
additional payment that the Company will pay for such new facilities and, if not fully repaid during the land use agreement term, upon
termination thereof.
In addition, the Company has committed to fund the cost of construction, up to a maximum of NIS 3.3 million (approximately $1,000) plus
VAT, required to change the access road leading to Kibbutz Sdot-Yam and its facilities, such that the entrance of the Company's facilities will
be separated from the entrance into Kibbutz Sdot-Yam. In addition, the Company has committed to pay NIS 200,000 (approximately $62) plus
VAT to cover the cost of paving an area of land leased from Kibbutz Sdot-Yam with such payment to be deducted in monthly installments over
a four-year period beginning in the year that the construction completed, from the lease payments to be made to Kibbutz Sdot-Yam under the
land use agreement related to the Company's Sdot-Yam facility.
Pursuant to an agreement dated January 4, 2012, for the settlement of reimbursement for building expenses incurred by the Company from
January 2012, NIS 82,900 (approximately $22) was deducted from the land use fees until end of 2020.
F - 68
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share data)
NOTE 14:- TRANSACTIONS WITH RELATED PARTIES AND OTHER LOAN (Cont.)
d.
Financing liability of land:
CAESARSTONE LTD. AND ITS SUBSIDIARIES
Pursuant to the Land Use Agreement, the Company has entered into an agreement with Kibbutz Sdot-Yam dated August 6, 2013, under which
Kibbutz Sdot-Yam acquired additional land of approximately 12,800 square meters on the grounds near the Company's Bar-Lev facility, which
the Company required in connection with the construction of the fifth production line at the Company's Bar-Lev manufacturing facility, leased
it to the Company for a monthly fee of approximately NIS 70,000 (approximately $22).
Under the agreement, Kibbutz Sdot-Yam committed to (i) acquire the long-term leasing rights of the Additional Bar-Lev Land from the ILA,
(ii) perform preparation work and construction, in conjunction with the administrative body of Bar-Lev industrial park and other contractors
according to Company’s plans, (iii) build a warehouse according Company’s plans, and (iv) obtain all permits and approvals required for
performing the preparation work of the Additional Bar-Lev Land and for the building of the warehouse. The warehouse in Bar-Lev will be
situated both on the current and new land. The finance of the building of the warehouse will be made through a loan that will be granted by the
Company to Kibbutz Sdot-Yam, in the amount of the total cost related to the building of the warehouse and such loan, including principle and
interest, shall be repaid by setoff of the lease due to Kibbutz Sdot Yam by the Company for its use of the warehouse. The principle amount of
such loan will bear an interest at a rate of 5.3% a year. On November 30, 2015 the land preparation work had been completed and the holding
of the Additional Bar-Lev Land was delivered to the Company. As of December 31, 2020, the construction of the warehouse has not started
yet.
The Company's payments pursuant to the land use agreement totaled $4,690, $4,459 and $4,286 for the years ended December 31, 2020, 2019
and 2018, respectively.
F - 69
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share data)
NOTE 14:- TRANSACTIONS WITH RELATED PARTIES AND OTHER LOAN (Cont.)
CAESARSTONE LTD. AND ITS SUBSIDIARIES
Pursuant to a land purchase and leaseback agreement, dated as of March 31, 2011, which became effective upon the Company’s IPO, between
the Company and Kibbutz Sdot-Yam, the Company completed the selling of the rights in the lands and facilities of the Bar-Lev Industrial
Center (the "Bar-Lev Grounds") to Kibbutz Sdot-Yam in consideration for NIS 43.7 million (approximately $10,900). The land purchase
agreement was executed simultaneously with the execution of a land use agreement. Pursuant to the land use agreement, Kibbutz Sdot-Yam
permits the Company to use the Bar-Lev Grounds for a period of 10 years commencing on September 2012 that will be automatically renewed,
unless the Company gives two years prior notice, for a ten-year term in consideration for an annual fee of NIS 4.1 million (approximately
$1,200) to be linked to increases in the Israeli consumer price index. The fee is subject to adjustment following January 1, 2021 and every three
years thereafter at the option of Kibbutz Sdot-Yam if Kibbutz Sdot-Yam chooses to obtain an appraisal that supports such an increase. The
appraiser would be mutually agreed upon or, in the absence of agreement, will be chosen by Kibbutz Sdot-Yam from a list of assessors
recommended at that time by Bank Leumi. The parties are in the process of obtaining such land appraisal to assess and adjust the fees for 2021
onwards.
The transaction was not qualified as "sale lease-back" accounting under both ASC 840 and ASC 842 and the Company recorded the entire
amount received as consideration as a liability.
The financing liability of land from a related party mature as follows, as of December 31, 2020:
2021
2022
853
7,272
8,125
The balance at December 31, 2020 and 2019, includes $247 and $367 of deferred tax assets on the Company liability and a $725 and $760
deferred tax liability on the buildings depreciation during the next years due to temporary differences between the carrying amounts of the
property and the liability for financial reporting purposes and the amounts used for income tax purposes.
The Company's payments pursuant to the land purchase agreement and leaseback totaled $1,244, $1,189 and $1,174 for the years ended
December 31, 2020, 2019 and 2018, respectively.
F - 70
CAESARSTONE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share data)
NOTE 14:- TRANSACTIONS WITH RELATED PARTIES AND OTHER LOAN (Cont.)
e. Details on transactions and balances with related parties and other loan:
1.
The Company has, from time to time, entered into transactions with its shareholders (the Kibbutz). The following table summarizes such
transactions:
Cost of revenues
Research and development
Selling and marketing
General and administrative
Finance expenses, net
2. Balances with related party and other loan:
Financing liability of land from related party- current maturities (1)
Long-term financing liability of land from a related party (1)
Other loans (2)
Year ended December 31,
2019
2020
2018
$
$
$
$
$
7,200
406
638
913
491
$
$
$
$
$
$
$
$
6,890
301
708
1,283
511
$
$
$
$
$
6,607
185
779
1,341
531
December 31,
2020
2019
1,746
6,723
4,440
$
$
$
1,736
6,994
921
(1)
In September 2012, a financing leaseback of $10,900 related to Bar-Lev transaction was granted to the Company by Kibbutz Sdot-
Yam. The financing leaseback bears interest until repayment at a per annum rate equal to 6.28% and is subject to adjustment for
increases in the Israeli consumer price index.
F - 71
CAESARSTONE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share data)
NOTE 14:- TRANSACTIONS WITH RELATED PARTIES AND OTHER LOAN (Cont.)
2. Balances with related party and other loan (Cont.):
(2) Other loans:
a.
On January 17, 2011 a loan of 4 million Canadian dollars was made to Caesarstone Canada Inc. by its shareholders at that time
CIOT and the Company, on a pro rata basis. Although the Company acquired CIOT ownership interest in Caesarstone Canada
Inc. during December, 2018, the loan continues to bear interest until repayment at a per annum rate equal to Bank of Canada's
prime business rate plus 0.25% (See also note 1e). The interest accrued on the loan is payable on a quarterly basis. Such loan is
repaid in three equal annual installments commencing 2020.
b. As part of the liabilities assumed in the acquisition of Lioli’s majority holdings the Company also assumed a shareholders loan
and as of December 31, 2020 such loan is in the amount of approximately $3,969. Subject to certain conditions and regulatory
approvals to be met by Lioli, the Company will have to transfer a loan in accordance with its holdings to replace current loan.
Such loan will be repaid after 5 years from closing or extended period based on mutual agreement. The interest on such loan is
Libor plus 4.5%
NOTE 15:- LONG-TERM BANK LOAN
a. As part of the Lioli’s acquisition the Company assumed also a bank loan from commercial banks in India. The long-term loan outstanding
balance as of December 31, 2020 is $9,543 (the current maturity of $1,639 is presented under Short-term loans). The loan is denominated in
Indian rupee and it bears interest rate of India labor plus 4.5%.
b. Repayment schedule in the table below are the future scheduled dates for repayment of the long-term loan:
2021
2022
2023
2024
2025 and thereafter
Total
December 31,
$
$
1,639
1,788
1,994
2,175
3,586
11,182
c.
The long-term loan is secured by substantially all of the Lioli’s assets. Lioli is committed not to pledge or charge and not to undertake to pledge
or charge its general floating assets and in addition not to enter into new loan arrangements without the prior written consent of the bank.
F - 72
CAESARSTONE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share data)
NOTE 16:- MAJOR CUSTOMER AND GEOGRAPHIC INFORMATION
a.
The Company manages its business on the basis of one reportable segment. The data is presented in accordance with Accounting Standard
Codification 280, "Segments Reporting" ("ASC 280"). The following is a summary of revenue and long-lived assets (including Property, plant
and equipment, intangible assets and operating lease right-of-use assets) by geographic area. Revenues are attributed to geographic areas based
on the location of end customers.
The following table presents total revenues for the years ended December 31, 2020, 2019 and 2018, respectively:
USA
Canada
Latin America
Australia
Asia
EMEA
Israel
Year ended December 31,
2019
2020
2018
$
$
207,496
72,492
2,149
103,587
14,566
45,201
40,921
$
250,471
85,979
4,115
108,149
15,514
43,054
38,692
239,241
99,679
5,397
131,085
17,715
42,861
39,893
$
486,412
$
545,974
$
575,871
No customer represented 10% or more of the Company’s revenues for the years ended December 31, 2020, 2019 and 2018.
b.
The following table presents total long-lived assets as of December 31, 2020 and 2019:
USA
Canada
Australia
Asia
EMEA
Israel
F - 73
December 31,
2020
2019
$
$
167,370
5,384
14,947
29,955
8,398
132,855
118,458
5,676
7,669
400
8,583
136,037
$
358,909
$
276,823
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share data)
NOTE 17:-
SELECTED SUPPLEMENTARY STATEMENTS OF INCOME DATA
a.
Finance expense, net:
Finance expenses:
Interest in respect of short-term loans, credit cards and bank fees
Interest in respect of loans to related parties
Amortization/accretion of premium/discount on marketable securities
Realized gain/loss from marketable securities
Changes in derivatives fair value
Foreign exchange transactions losses
Finance income:
Interest in respect of cash and cash equivalent and short-term bank
deposits
Changes in derivatives fair value
Interest income from marketable securities
Foreign exchange transactions gains
Finance expenses, net
b. Net earnings per share:
CAESARSTONE LTD. AND ITS SUBSIDIARIES
Year ended December 31,
2019
2020
2018
$
$
3,254
1,053
161
11
3,427
7,128
$
3,342
568
-
-
-
6,578
3,591
585
-
-
193
6,259
15,034
10,488
10,628
657
-
213
3,965
4,835
1,018
33
-
3,859
4,910
1,472
-
-
5,517
6,989
$
10,199
$
5,578
$
3,639
The following table sets forth the computation of basic and diluted net earnings per share:
Numerator:
Net income attributable to controlling interest, as reported
Adjustment to redemption value of non-controlling interest
Numerator for basic and diluted net income per share
F - 74
Year ended December 31,
2019
2020
2018
$
$
7,218
-
7,218
$
$
12,862
-
12,862
$
$
24,405
203
24,608
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share data)
NOTE 17:-
SELECTED SUPPLEMENTARY STATEMENTS OF INCOME DATA (Cont.)
Denominator:
Denominator for basic income per share
Effect of dilutive stock based awards
Denominator for diluted income per share
Earnings per share:
Basic and diluted earnings per share
F - 75
CAESARSTONE LTD. AND ITS SUBSIDIARIES
Year ended December 31,
2019
2020
2018
34,419
55
34,384
76
34,358
51
34,474
34,460
34,409
$
0.21 $
0.37 $
0.72
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Caesarstone Australia Pty Ltd
Opinion on the financial statements
We have audited the accompanying balance sheets of Caesarstone Australia Pty Ltd (the “Company”) as of December 31, 2020 and 2019, the related
statements of operations, comprehensive income, equity, and cash flows for each of the three years in the period ended December 31, 2020, and the related
notes (collectively referred to as the “financial statements”) (not presented herein). In our opinion, the financial statements present fairly, in all material respects,
the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the
period ended December 31, 2020, 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, 2020, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated March 22, 2021 expressed an unqualified opinion.
Basis for opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial
statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in
accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to
assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such
procedures included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our audits also included
evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial
statements. We believe that our audits provide a reasonable basis for our opinion.
Critical audit matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required
to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our
especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial
statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on
the accounts or disclosures to which they relate.
Impairment of Goodwill
In accordance with ASC 350 Intangibles – Goodwill and Other, goodwill is allocated to the Company’s reporting units. For each reporting unit to which goodwill
has been allocated, the Company is required to evaluate the potential impairment of goodwill annually and whenever events or circumstances indicate the
carrying value of goodwill may not be recoverable. This evaluation is performed by comparing the fair value of the reporting unit with its carrying value. If the
carrying value exceeds the fair value of the reporting unit, the Company recognizes an impairment charge.
The principal considerations for our determination that the evaluation of goodwill for impairment is a critical audit matter are that the determination of the fair
value of the goodwill relies on the use of management estimates related to forecasted future cash flows and discount rates. This requires management to
evaluate historical results and expectations of future operating performance based on relevant information available to them regarding expectations of industry
performance, as well as, expectations for company-specific performance. Determining the discount rate requires management to evaluate the appropriate risk
premium based on their judgment of industry and company-specific risks. Significant management judgments and estimates utilized to determine the fair value
are subject to estimation uncertainty and require significant auditor subjectivity in evaluating the reasonableness of those judgments and estimates.
F - 76
Our procedures included, amongst others:
• We tested the design and operating effectiveness of internal controls relating to management’s determination of the fair value of goodwill, including
controls over the determination of key inputs and assumptions relating to forecasting of future cash flows and determination of the discount rate.
• We assessed management's identification of each of the reporting units based on our understanding of the nature of the Company's business and cash
flows.
• We challenged management’s assumptions behind the cash flow projections by comparing to market-related assumptions and historical operating
results.
• We evaluated management’s historical ability to achieve forecasted revenue and operating results.
• We utilized a valuation specialist to assist in testing the Company’s discounted cash flow model and in evaluating the reasonableness of significant
assumptions to the model, including the discount rate.
/s/ GRANT THORNTON AUDIT PTY LTD
We have served as the Company’s auditor since 2008.
Melbourne, Australia
March 22, 2021
F - 77
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Caesarstone Australia Pty Ltd
Opinion on internal control over financial reporting
We have audited the internal control over financial reporting of Caesarstone Australia Pty Ltd (the “Company”) as of December 31, 2020, based on criteria
established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on criteria
established in the 2013 Internal Control—Integrated Framework issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the financial statements
of the Company as of and for the year ended December 31, 2020, and our report dated March 22, 2021 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 pr ocedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation
of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
/s/ GRANT THORNTON AUDIT PTY LTD
We have served as the Company’s auditor since 2008.
Melbourne, Australia
March 22, 2021
F - 78
Exhibit 4.3
2021
To
Mikroman Madencilik Mining
Hisarardi Koyo
Yatagan Mugla
Turkey
Dear Serhat,
Following our discussions, here are the terms agreed between us with respect to quartz supply on a nonexclusive basis by Mikroman to Caesarstone Ltd. and its
subsidiaries and affiliates (collectively, "Caesarstone") for its utilization in Caesarstone's manufacturing facilities worldwide, starting Jan 1, 2021 and until
December 31, 2021. Upon both parties' signing on at the bottom of this agreement (this " Agreement"), it will constitute a binding framework agreement between
Mikroman and Caesarstone, under which Caesarstone will be entitled (but not obligated) to submit purchase orders ("Purchase Orders"). Mikroman undertakes to
comply with any and all laws, regulations, rules and standards and any Caesarstone policies relating the Products and services provided herein.
1.
Estimated Quantities and binding orders and supply
Caesarstone's working plan for year 2021is as follows:
Product
1
2
3
4
5
6
7
8
9
10
*
*
*
*
*
*
*
*
*
*
Quantity 2020
*
*
*
*
*
*
*
*
*
*
The above is Caesarstone's working plan with a non-binding purchases projection from Mikroman for year 2020 (the "Estimated Quantities") for the
abovementioned products (the "Products"). Caesarstone's actual orders may significantly differ from the Estimated Quantities. Caesarstone may deliver to
Mikroman a binding Purchase Order on a monthly basis, and Mikroman shall be committed to supply to Caesarstone all such Purchase Orders (in accordance with
the timeframe and Products' quality standards and specifications set in writing by Caesarstone at its sole discretion) up to the Estimated Quantities. Nothing
contained herein shall be construed as an obligation of Caesarstone to purchase any or all of the above quantities.
2.
Prices – For actual quantities of the Products that shall be ordered by Caesarstone during year 2019, Mikroman will charge from Caesarstone the
following:
For all Fractions and POWDER – US$* (*) per ton.
For POWDER snow white – US$* (*) per ton.
For 0.2-0.5 's'(special) and 0.1-0.3 "S"- US$* (*) per ton.
('s' (special) means Product that is defined by Caesarstone as non-grade A Product)
3.
Payment terms – – for Products that shall be purchased by Caesarstone during year 2021 payment terms shall be *.
4.
5.
6.
7.
8.
9.
10.
11.
The products will be supplied by Mikroman in a timely manner, time being of the essence and in accordance with Caesarstone's quality standards, packing
and delivery instructions and specifications as will be updated by Caesarstone in writing from time to time as Caesarstone's sole discretion, in accordance
with each Caesarstone's Purchase Order. Any Purchase Order not delivered on time at its destination (Izmir Port FOB incoterms 2010) shall entitle
Caesarstone, at its own election, to cancel such Purchase Order (in addition to any other rights it may be entitled to) without any liability, unless such
Purchase Order was delivered prior to the issuance by Caesarstone of a notice of cancellation, and Mikroman shall not have any claim with respect to such
cancellation. Mikroman shall be fully responsible for any incompatibility or defects of the Products. Notwithstanding the aforementioned, Mikroman shall
not be responsible only to such defects which were caused during and directly from the negligence or malfunctioning of the Product's forwarder. Upon
indication of incompatibility in a Product identified by Caesarstone and notifies such incompatibility notification to Mikroman (an "Incompatibility
Notification"), Mikroman shall be entitled to examine such Products at the applicable Facility within 30 days of receipt of the Incompatibility
Notification; provided however, that it has notified Caesarstone in writing of its intention to conduct such examination within 10 days of receipt of the
Incompatibility Notification. Thereafter, Mikroman shall be obliged to immediately, at Caesarstone's sole discretion, either: (1) replace such Product in the
next shipment, or (2) issue a full refund/credit therefor. In addition, Mikroman shall either collect the defected Products from the Caesarstone facility
within 45 days of Caesarstone's requirement or pay Caesarstone's all costs and expenses incurred by it in relation to the disposal of such Products. Title to
the Product will transfer to Caesarstone upon delivery. Mikroman also warrants that all Products will be supplied unencumbered by rights of third parties,
and that all Products will be suitable for the purpose for which the order or for which the Agreement was concluded and fit to the intended use,
characteristics and/or reliability of the Products.
The parties will maintain in confidence the terms of this agreement as well as any other information delivered to each of them by the other party without
time limitation. Notwithstanding the aforementioned, as Caesarstone is a public company traded on NASDAQ, Mikroman acknowledges and agrees that
Caesarstone may be required to disclose certain information related to this agreement under any applicable law as shall be interpreted by Caesarstone at its
sole discretion; accordingly, any confidentiality undertaking by Caesarstone set forth herein shall be subject to such Caesarstone's disclosure obligations
and it is agreed herein that the aforementioned actions will not be deemed in any way a breach of Caesarstone's confidentially undertaking set forth above.
11.1 The Supplier undertakes that it will indemnify and keep Caesarstone and/or anyone on its behalf indemnified, immediately upon demand,
against all proceedings, costs, liabilities, injury, loss or damage arising out of a breach or negligent performance or failure of performance of
the terms of this Agreement, or any defect in the Products or the documentation supplied in respect of this Agreement or any other matter
relating to the subject matter of this Agreement.
This agreement and its performance will be governed by the English law and subject to the jurisdiction of the competent courts in England. Without
derogating from the generality and validity of the foregoing, Caesarstone shall be entitled, at its sole discretion, to initiate legal proceedings related to this
Agreement in Turkey, and in such case only same proceeding will be subject to the jurisdiction of the competent courts in Turkey.
This Agreement constitutes the entire agreement between Mikroman and Caesarstone, and all prior agreements, understandings and/or commitments of
any of the parties, whether in writing or verbal, with respect to the matters covered herein are superseded and null.
As Caesarstone is a public company traded on NASDAQ, Mikroman is aware (and that its representatives who are apprised of this matter have been or
will be advised) that U.S. securities laws restrict persons with material non-public information about a company obtained directly or indirectly from that
company from purchasing or selling securities of such company and from communicating such information to any other person under circumstances in
which it is reasonably foreseeable that such person is likely to purchase or sell such securities. Mikroman agrees to comply with such laws and recognizes
that Caesarstone will be damaged by his non-compliance. In addition, Mikroman hereby acknowledges that unauthorized disclosure of confidential
information may be in violation of the securities laws.
Each party may not assign, delegate or transfer this Agreement or any of its obligations hereunder, without the prior written consent of the other party.
Any amendment or modification of this Agreement shall be effective if mutually agreed upon by the parties, made in writing and constituted an appendix
as an integral part of the Agreement.
Please indicate your agreement with the above terms by signing both counterparts of this Letter Agreement as provided below and return one fully executed copy to
us.
________________________
Caesarstone Ltd.
By: /s/ Ophir Yakovian
Title: CFO
Date: January 7, 2021
We hereby approve our consent to all of the above.
_____________________
Mikroman Madencilik Mining
By: /s/ Siamak Jalili
Title: Sales and Marketing Manager
Exhibit 4.18
2021
To
Polat Maden
Polat Maden Sanayi ve Ticaret A.S. (Collectively, "Polat Maden")
Istanbul, Turkey
Dear Enver Sever, Siamak Jalili, Didem Polat
Following our discussions, here are the terms agreed between us with respect to quartz supply on a nonexclusive basis by Polat Maden to Caesarstone Ltd. and its
subsidiaries and affiliates (collectively, "Caesarstone") for its utilization in Caesarstone's manufacturing facilities worldwide, starting Jan 1, 2021 and until
December 31, 2021. Upon both parties' signing on at the bottom of this agreement (this " Agreement"), it will constitute a binding framework agreement between
Polat Maden and Caesarstone, under which Caesarstone will be entitled (but not obligated) to submit purchase orders ("Purchase Orders"). Polat Maden
undertakes to comply with any and all laws, regulations, rules and standards and any Caesarstone policies relating the Products and services provided herein.
1.
Estimated Quantities and binding orders and supply
Caesarstone's working plan for year 2021 is as follows:
Product
1
2
3
4
5
6
*
*
*
*
*
*
Quantity 2021
*
*
*
*
*
*
The above is Caesarstone's working plan is a non-binding purchases projection from Polat Maden for year 2021 (the "Estimated Quantities") for the
abovementioned products (the "Products"); however, such Estimated Quantities will be binding upon Polat Maden with respect to their availability during 2021.
Caesarstone's actual orders may significantly differ from the Estimated Quantities. Caesarstone will be entitled to deliver to Polat Maden a binding Purchase Order
on a monthly basis, and Polat Maden shall be committed to supply to Caesarstone all such Purchase Orders (in accordance with the timeframe and Products' quality
standards and specifications set in writing by Caesarstone at its sole discretion) up to the Estimated Quantities. Nothing contained herein shall be construed as an
obligation of Caesarstone to purchase any or all of the above quantities.
2.
Prices – For actual quantities of the Products :* that shall be ordered by Caesarstone during year 2021, Polat Maden will charge from Caesarstone US$* (*
US Dollars) per ton, FOB Izmir.
For actual quantities of * MESH that shall be ordered by Caesarstone during year 2021, Polat Maden will charge from Caesarstone US$* (* US Dollars) per ton,
FOB Izmir.
For 500 TONS/month of G material that shall be ordered by Caesarstone during year 2021, Polat Maden will charge from Caesarstone US$* (* US Dollars) per
ton, FOB Izmir, and if the quantity is less than * TONS Polat Maden will charge from Caesarstone US$*(* US Dollars) per ton, FOB Izmir.
For actual quantities of * "S" that shall be ordered by Caesarstone during year 2021, Polat Maden will charge from Caesarstone US$* (* US Dollars) per ton,
FOB Izmir.
3.
4.
5.
6.
7.
8.
9.
10.
11.
Payment terms – – for Products that shall be purchased by Caesarstone during year 2021 payment terms shall be*.
The Products will be supplied by Polat Maden in a timely manner, time being of the essence and in accordance with Caesarstone's quality standards,
packing and delivery instructions and specifications as will be updated by Caesarstone in writing from time to time as Caesarstone's sole discretion, in
accordance with each Caesarstone's purchase order. Any Purchase Order not delivered on time at its destination (Izmir Port FOB) shall entitle
Caesarstone, at its own election, to cancel such Purchase Order (in addition to any right it may be entitled to) without any liability, unless such Purchase
Order was delivered prior to the issuance by Caesarstone of a notice of cancellation, and Polat Maden shall not have any claim with respect to such
cancellation. Polat Maden shall be fully responsible for any incompatibility or defects of the Products. Notwithstanding the aforementioned, Polat Maden
shall not be responsible only to such defects which were caused during and directly from the negligence or malfunctioning of the Product's forwarder.
Upon indication of incompatibility in a Product identified by Caesarstone and notifies such incompatibility notification to Polat Maden (an
"Incompatibility Notification"), Polat Maden shall be entitled to examine such Products at the applicable Facility within 30 days of receipt of the
Incompatibility Notification; provided however, that it has notified Caesarstone in writing of its intention to conduct such examination within 10 days of
receipt of the Incompatibility Notification. Thereafter, Polat Maden shall be obliged to immediately, at Caesarstone's sole discretion, either: (1) replace
such Product in the next shipment, or (2) issue a full refund/credit therefor. In addition Polat Maden shall either collect the defected Products from
Caesarstone’s facility within 45 days of Caesarstone's requirement, or pay Caesarstone's all costs and expenses incurred by it in relation to the disposal of
such Products. Title to the Products will transfer to Caesarstone upon delivery. Polat Maden also warrants that all Products will be supplied unencumbered
by rights of third parties, and that all Products will be suitable for the purpose for which the order or for which the Agreement was concluded and fit to the
intended use, characteristics and/or reliability of the Products.
Polat Maden will maintain in confidence the terms of this Agreement as well as any other information delivered to Polat Maden by Caesarstone without
time limitation.
Polat Maden undertakes that it will indemnify and keep Caesarstone and/or anyone on its behalf indemnified, immediately upon demand, against all
proceedings, costs, liabilities, injury, loss or damage arising out of a breach or negligent performance or failure of performance of the terms of this
Agreement, or any defect in the Products or the documentation supplied in respect of this Agreement or any other matter relating to the subject matter of
this Agreement.
This Agreement and its performance will be governed by the English law and subject to the jurisdiction of the competent courts in England. Without
derogating from the generality and validity of the foregoing, Caesarstone shall be entitled, at its sole discretion, to initiate legal proceedings related to this
Agreement in Turkey, and in such case only same proceeding will be subject to the jurisdiction of the competent courts in Turkey.
This Agreement constitutes the entire agreement between Polat Maden and Caesarstone, and all prior agreements, understandings and/or commitments of
any of the parties, whether in writing or verbal, with respect to the matters covered herein are superseded and null.
Polat Maden hereby acknowledges that Caesarstone is a public company traded on NASDAQ and it is aware (and that its representatives who are apprised
of this matter have been or will be advised) that U.S. securities laws restrict persons with material non-public information about a company obtained
directly or indirectly from that company from purchasing or selling securities of such company and from communicating such information to any other
person under circumstances in which it is reasonably foreseeable that such person is likely to purchase or sell such securities. Polat Maden agrees to
comply with such laws and recognizes that Caesarstone will be damaged by his non-compliance. In addition, Polat Maden hereby acknowledges that
unauthorized disclosure of confidential information may be in violation of the securities laws.
Polat Maden may not assign, delegate or transfer this Agreement or any of its obligations hereunder, without the prior written consent of Caesarstone.
Any amendment or modification of this Agreement shall be effective if mutually agreed upon by the parties, made in writing and constituted an appendix
as an integral part of the Agreement.
Please indicate your agreement with the above terms by signing both counterparts of this Agreement as provided below and return one fully executed copy to us.
________________________
Caesarstone Ltd.
By: /s/ Ophir Yakovian
Title: CFO
Date: March 16,2021
We hereby approve our consent to all of the above.
_____________________
Polat Maden
By: /s/ Siamak Jalili
Title: Sales and Marketing Manager
Name
Caesarstone Australia PTY Limited
Caesarstone South East Asia PTE LTD
Caesarstone Canada Inc.
Caesarstone USA, Inc.
Caesarstone Technologies USA, Inc.
Caesarstone (UK) Ltd.
Lioli Ceramica Pvt. Ltd
Omicron Granite and Tile
Lio
Subsidiaries of Caesarstone Ltd.
Jurisdiction of Incorporation/Organization
Exhibit 8.1
Australia
Singapore
Canada
United States
United States
United Kingdom
India
United States
Exhibit 12.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO
EXCHANGE ACT RULE 13A-14(A)/15D-14(A)
AS ADOPTED PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, Yuval Dagim, certify that:
1. I have reviewed this annual report on Form 20-F of Caesarstone Ltd.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the company as of, and for, the periods presented in this report;
4. The company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the company and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that
material information relating to the company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the
period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;
(c) Evaluated the effectiveness of the company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the company’s internal control over financial reporting that occurred during the period covered by the annual report that
has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting; and
5. The company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the company’s
auditors and the audit committee of the company’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to
adversely affect the company’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the company’s internal control over financial
reporting.
Date: March 22, 2021
/s/ Yuval Dagim
Yuval Dagim
Chief Executive Officer
(Principal Executive Officer)
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO
EXCHANGE ACT RULE 13A-14(A)/15D-14(A)
AS ADOPTED PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 12.2
I, Ophir Yakovian, certify that:
1. I have reviewed this annual report on Form 20-F of Caesarstone Ltd.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the company as of, and for, the periods presented in this report;
4. The company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the company and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that
material information relating to the company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the
period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;
(c) Evaluated the effectiveness of the company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the company’s internal control over financial reporting that occurred during the period covered by the annual report that
has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting; and
5. The company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the company’s
auditors and the audit committee of the company’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to
adversely affect the company’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the company’s internal control over financial
reporting.
Date: March 22, 2021
/s/ Ophir Yakovian
Ophir Yakovian
Chief Financial Officer
(Principal Financial Officer)
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER AND PRINCIPAL FINANCIAL
OFFICER PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 13.1
In connection with the Annual Report of Caesarstone Ltd. (the “Company”) on Form 20-F for the fiscal year ended December 31, 2020 (the “Report”), I, Yuval
Dagim, and I, Ophir Yakovian, do hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that,
to my knowledge: (i) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and (ii) the
information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/ Yuval Dagim
Yuval Dagim
Chief Executive Officer
(Principal Executive Officer)
Date: March 22, 2021
/s/ Ophir Yakovian
Ophir Yakovian
Chief Financial Officer
(Principal Financial Officer)
Date: March 22, 2021
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in the Registration Statements (Form S-8 No. 333-180313, 333-210444 and 333-251642) pertaining either to the 2011
Incentive Compensation Plan and 2020 Share Incentive Plan, and to the incorporation by reference in the Registration Statement (Form F-3 ASR No. 333-196335)
and related Prospectus of our reports dated March 22, 2021, with respect to the consolidated financial statements of Caesarstone Ltd., and the effectiveness of
internal control over financial reporting of Caesarstone Ltd., included in this Annual Report (Form 20-F) for the year ended December 31, 2020.
Exhibit 15.1
/s/ KOST FORER GABBAY & KASIERER
Kost Forer Gabbay & Kasierer
A Member of Ernst & Young Global
Tel-Aviv, Israel
March 22, 2021
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We have issued our report dated March 22, 2021, with respect to the financial statements and internal control over financial reporting of Caesarstone Australia Pty
Ltd included in the Annual Report of Caesarstone Ltd. on Form 20-F for the year ended December 31, 2020. We consent to the incorporation by reference of said
reports in the Registration Statements of Caesarstone Ltd. on Forms S-8 (File No. 333-180313, 333-210444 and 333-251642).
Exhibit 15.2
/s/ Grant Thornton Audit Pty Ltd
Grant Thornton Audit Pty Ltd
Melbourne, Australia
March 22, 2021
CONSENT OF FREEDONIA CUSTOM RESEARCH, INC.
We hereby consent to the references to Freedonia Custom Research, a division of MarketResearch.com Inc. and to our global residential and commercial
countertops report, dated March 12, 2021 (the “Report”) prepared on behalf of Caesarstone Ltd. (the “Company”), including the use of information contained
within our Report in the Company's Annual Report on Form 20-F (as may be amended) to be filed with the U.S. Securities and Exchange Commission for the year
ended December 31, 2020 (the “Annual Report”) and to the incorporation by reference of such information from the Company's Annual Report in the registration
statements on Form S-8 (File No. 333-180313, 333-210444 and 333-251642). We also hereby consent to the filing of this letter as an exhibit to the Annual Report.
Exhibit 15.3
FREEDONIA CUSTOM RESEARCH, A DIVISION OF MARKETRESEARCH.COM INC.
Freedonia Custom Research, a division of MarketResearch.com Inc.
By: /s/ Andrew Banyas
______________
March 22, 2021