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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders and the Board of Directors of Caesarstone Ltd.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Caesarstone Ltd. (and subsidiaries) (the Company) as of December 31, 2021 and 2020, the related consolidated statements of income, comprehensive income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 2021, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, based on our audits and the report of other auditors, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021, in conformity with U.S. generally accepted accounting principles.

We did not audit the financial statements of Caesarstone Australia Pty Ltd., a wholly-owned subsidiary, which reflect total assets of constituting 11% at December 31, 2021 and 2020, and total revenues constituting 18% in 2021, 21% in 2020 and 20% in 2019 of the related consolidated totals. Those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for Caesarstone Australia Pty Ltd., is based solely on the report of the other auditors.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated March 15, 2022 expressed an unqualified opinion thereon.

Basis for Opinion

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits and the report of other auditors provide a reasonable basis for our opinion.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

F - 2

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		Provision for bodily injury claims related to exposure to silica dust
Description of the matter		As described in note 11 to the consolidated financial statements, the Company is subject to numerous claims mainly by fabricators, their employees or the National Insurance Institute ("NII"), alleging that fabricators contracted illnesses, including silicosis, through exposure to silica particles during cutting, polishing, sawing, grinding, breaking, crushing, drilling, sanding or sculpting Company's products. The Company recognized a provision in relation to Silicosis claims when an unfavorable outcome was probable and the amount of the loss could be reasonably estimated. In order to determine the liability amount, the Company consults with legal counsels.   Auditing the Company’s accounting for the Silicosis provision was complex due to the significant estimation required in determining the Company’s liability amount of $43 million. The estimate of the provision involved significant estimation uncertainty primarily due to the different stages of legal claims and the probability of loss, which in turn led to a high degree of auditor judgment and effort in performing procedures and evaluating management's conclusions related to these legal claims.
How we addressed the matter in our audit		We obtained an understanding, evaluated the design and tested the operating effectiveness of internal controls over the accounting of Silicosis claims provision, including management's assessment of the assumptions and data underlying the provision valuation.   To evaluate the Company's assessment of the probability of incurrence of a loss and whether the loss was reasonably estimated, among other procedures, we read the minutes of the meeting of the committees of the board of directors and gained an understanding of the claims by inquiring of the external and internal legal counsels regarding the allegations. We also obtained external and internal legal counsels confirmation letters as well as a management representation letter.   Our substantive procedures also included testing the accuracy, completeness and reasonableness of the underlying data used in management's provision assessment and attending meetings between management and legal counsels to determine a range of reasonably possible loss. We tested management’s assumptions by comparing prior period's estimates versus actual prior period's results and evaluating events occurring up to date of the auditor's report. We also inquired the legal counsels regarding the likelihood of the outcome of the claims, and evaluated the Company’s legal contingency disclosures included in Note 11 to the consolidated financial statements.

F - 3

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		Valuation of Goodwill
Description of the matter		As reflected in the Company’s consolidated financial statements, at December 31, 2021, the Company’s goodwill was $45.8 million. As disclosed in Note 7 to the consolidated financial statements, goodwill is tested for impairment at least annually or more frequently if indicators of impairment require the performance of an interim impairment assessment. The Company operates as one reporting unit. As of December 31, 2021 the Company identified an indicator for goodwill impairment as the market capitalization of the Company was lower than the equity book value. Auditing the Company's impairment test for goodwill was complex and highly judgmental due to the significant estimation uncertainty in determining the fair value of its reporting unit. In particular, the fair value estimates were sensitive to changes in significant assumptions such as discount rate, revenue growth rate, operating margins, working capital, weighted average cost of capital, estimated spend on capital expenditures and the projected cash flow growth rates. All of these assumptions are sensitive to and affected by the expected future market or economic conditions, and industry and company-specific qualitative factors.
How we addressed the matter in our audit		We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s goodwill impairment assessment process. For example, we tested controls over the review of the significant assumptions in estimating the fair value of the Company. To test the estimated fair value of the Company, our audit procedures included, among others, assessing methodologies and testing the significant assumptions and underlying data used by the Company. We evaluated the Company’s valuation process by comparing the significant assumptions to current industry and economic trends, we analyzed management’s forecasted revenue including the revenue growth rate, profitability margins, working capital, discount rate and estimated spend on capital expenditures to identify, understand and evaluate the changes as compared to the historical results and to selected guideline companies in the industry. In addition, we performed a sensitivity analysis of significant assumptions to evaluate the changes in the fair value of the Company resulting from changes in the assumptions. We involved our valuation specialists to assist with our evaluation of the methodology used by the Company and significant assumptions included in the fair value estimates. In addition, our valuation specialists performed independent comparative calculations to estimate the acquired entity’s weighted average cost of capital.   We also evaluated the related disclosures included in Notes 21 and 7 to the consolidated financial statements.

 

/s/KOST FORER GABBAY & KASIERER
A Member of Ernst & Young Global
We have served as the Company's auditor since 2004
Tel-Aviv, Israel
March 15, 2022

 

F - 4

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Report of Independent Registered Public Accounting Firm

 

To the Shareholders and the Board of Directors of Caesarstone Ltd.

 

Opinion on Internal Control over Financial Reporting

We have audited Caesarstone Ltd. and subsidiaries’ internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission 2013 framework (the COSO criteria). In our opinion, Caesarstone Ltd. and subsidiaries (the Company) based on our audit and the report of other auditors maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on the COSO criteria.

 

We did not examine the effectiveness of internal control over financial reporting of Caesarstone Australia Pty Ltd. a wholly owned subsidiary, whose financial statements reflect total assets and revenues constituting 11% and 21%, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2021. The effectiveness of Caesarstone Australia Pty Ltd.’s internal control over financial reporting was audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the effectiveness of Caesarstone Australia Pty Ltd.’s internal control over financial reporting, is based solely on the report of the other auditors.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2021 and 2020, the related consolidated statements of income, comprehensive income, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2021, and the related notes and our report dated March 15, 2022 expressed an unqualified opinion thereon, based on our audit and the report of the other auditors.

 

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit and the report of other auditors provide a reasonable basis for our opinion.

 

Definition and Limitations of Internal Control Over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

/s/KOST FORER GABBAY & KASIERER A Member of Ernst & Young Global

Tel-Aviv, Israel

March 15, 2022

 

F - 5

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CAESARSTONE LTD. AND ITS SUBSIDIARIES

 

CONSOLIDATED BALANCE SHEETS

---

U.S. dollars in thousands (except share data)

 

					December 31,
		Note			2021				2020
LIABILITIES AND EQUITY
CURRENT LIABILITIES:
Short-term bank credit and current maturities of long- term bank loan		8			$	12,523			$	13,122
Trade payables						81,369				55,063
Related party and other loan		14				2,276				2,221
Short term legal settlements and loss contingencies		11				22,592				31,039
Accrued expenses and other liabilities		9				64,534				55,570
Total current liabilities						183,294				157,015
LONG-TERM LIABILITIES:
Long-term other loans and financing liability of land from related parties		14				6,240				11,163
Long-term bank loan		15				-				9,543
Accrued severance pay						5,500				5,303
Deferred tax liabilities, net		12				4,992				6,943
Long-term warranty provision						1,280				1,274
Long term legal settlements and loss contingencies		11				20,859				21,910
Long-term operating lease liabilities		10				143,324				112,719
Total long-term liabilities						182,195				168,855
COMMITMENTS AND CONTINGENT LIABILITIES		11
REDEEMABLE NON-CONTROLLING INTEREST		1,2				7,869				7,701
EQUITY:		13
Share capital-
Ordinary shares of NIS 0.04 par value - 200,000,000 shares authorized at December 31, 2021 and 2020; 35,756,166 and 35,540,392 issued at December 31, 2021 and 2020, respectively; 34,473,070 and 34,437,296 shares outstanding at December 31, 2021 and 2020, respectively						371				371
Additional paid-in capital						161,929				160,083
Capital fund related to non-controlling interest						(5,587	)			(5,587	)
Accumulated other comprehensive income (loss), net						(704	)			1,083
Retained earnings						377,716				370,830
Treasury shares at cost – 1,103,096 ordinary shares at December 31, 2021 and 2020						(39,430	)			(39,430	)
Total equity						494,295				487,350
Total liabilities and equity						867,653				820,921

 

The accompanying notes are an integral part of the consolidated financial statements

F - 7

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CAESARSTONE LTD. AND ITS SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

---

U.S. dollars in thousands (except per share data)

 

		Year ended December 31,
		2021				2020				2019
Revenues		$	643,892			$	486,412			$	545,974
Cost of revenues			472,394				352,470				397,335
Gross profit			171,498				133,942				148,639
Operating expenses:
Research and development			4,216				3,974				4,146
Selling and marketing			85,725				62,047				66,770
General and administrative			50,845				39,081				40,681
Legal settlements and loss contingencies, net			3,283				6,319				12,359
Total operating expenses			144,069				111,421				123,956
Operating income			27,429				22,521				24,683
Finance expenses, net			7,590				10,199				5,578
Income before taxes on income			19,839				12,322				19,105
Taxes on income			1,950				4,700				6,243
Net income		$	17,889			$	7,622			$	12,862
Net income (loss) attributable to non-controlling interest			(1,077	)			404				-
Net income attributable to controlling interest		$	18,966			$	7,218			$	12,862
Basic and diluted net income per share of Ordinary shares		$	0.51			$	0.21			$	0.37
Weighted average number of Ordinary shares used in computing basic income per share (in thousands)			34,462				34,419				34,384
Weighted average number of Ordinary shares used in computing diluted income per share (in thousands)			34,570				34,474				34,460

The accompanying notes are an integral part of the consolidated financial statements.

F - 8

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CAESARSTONE LTD. AND ITS SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

---

U.S. dollars in thousands

 

		Year ended December 31,
		2021				2020				2019
Net income		$	17,889			$	7,622			$	12,862
Other comprehensive income (loss) before tax:
Foreign currency translation adjustments			(2,186	)			4,386				(608	)
Unrealized income on foreign currency cash flow hedge			329				-				738
Unrealized income (loss) on available for sale marketable securities			(59	)			21				-
Income tax expense related to components of other comprehensive income (loss)			(26	)			(8	)			(241	)
Total other comprehensive income (loss), net of tax			(1,942	)			4,399				(111	)
Comprehensive income			15,947				12,021				12,751
Less - comprehensive income (loss) attributable to non-controlling interest			(1,232	)			432				-
Comprehensive income attributable to controlling interest		$	17,179			$	11,589			$	12,751

The accompanying notes are an integral part of the consolidated financial statements

F - 9

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CAESARSTONE LTD. AND ITS SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

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U.S. dollars in thousands (except share data)

 

																						Capital
																		Accumulated				fund
																		other				related to
										Additional								comprehensive				non-
		Common stock								paid-in				Retained				income (loss),				controlling				Treasury				Total
		Shares				Amount				capital				earnings				net (1)				interest				shares				equity
Balance as of January 1, 2019			34,363,211				371				153,593				360,731				(3,177	)			(5,587	)			(39,430	)			466,501
Other comprehensive loss			-				-				-				-				(111	)			-				-				(111	)
Net income attributable to controlling interest			-				-				-				12,862				-				-				-				12,862
Equity-based compensation expense related to employees (2)			-				-				3,632				-				-				-				-				3,632
Dividend paid			-				-				-				(5,160	)			-				-				-				(5,160	)
Cashless exercise of options and RSUs			34,565				(*	)			(*	)			-				-				-				-				-
Balance as of December 31, 2019			34,397,776				371				157,225				368,433				(3,288	)			(5,587	)			(39,430	)			477,724
Other comprehensive loss			-				-				-				-				4,371				-				-				4,371
Net income			-				-				-				7,218				-				-				-				7,218
Equity-based compensation expense related to employees (2)			-				-				2,858				-				-				-				-				2,858
Dividend paid			-				-				-				(4,821	)			-				-				-				(4,821	)
Cashless exercise of options and RSUs			39,520				(*	)			(*	)			-				-				-				-				-
Balance as of December 31, 2020			34,437,296				371				160,083				370,830				1,083				(5,587	)			(39,430	)			487,350
Other comprehensive loss			-				-				-				-				(1,787	)			-				-				(1,787	)
Net income attributable to controlling interest			-				-				-				18,966				-				-				-				18,966
Equity-based compensation expense related to employees (2)			-				-				1,846				-				-				-				-				1,846
Adjustment to redemption value of the non-controlling interest			-				-				-				(1,399	)			-				-				-				(1,399	)
Dividend paid			-				-				-				(10,681	)			-				-				-				(10,681	)
Cashless exercise of options and RSUs			35,774				(*	)			(*	)			-				-				-				-				-
Balance as of December 31, 2021			34,473,070				371				161,929				377,716				(704	)			(5,587	)			(39,430	)			494,295

 

(1)	Accumulated other comprehensive income (loss), net, comprised of foreign currency translation, hedging transactions and marketable securities.
(2)	See also Note 13.
(*)	Less than $1.

The accompanying notes are an integral part of the consolidated financial statements.

 

F - 10

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CAESARSTONE LTD. AND ITS SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

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U.S. dollars in thousands

 

		Year ended December 31,
		2021				2020				2019
Cash flows from operating activities:
Net income		$	17,889			$	7,622			$	12,862
Adjustments required to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			35,407				29,460				28,587
Share-based compensation expense			1,846				2,858				3,632
Accrued severance pay, net			121				(14	)			(246	)
Changes in deferred tax, net			(4,473	)			(895	)			(1,509	)
Capital loss (gain) from sale of property, plant and equipment			(3	)			340				326
Decrease (increase) in trade receivables			815				6,070				(5,032	)
Decrease (increase) in other accounts receivable and prepaid expenses			(9,036	)			9,318				(6,346	)
Decrease (increase) in inventories			(54,189	)			313				35,303
Decrease in trade payables			28,277				(17,938	)			(6,663	)
Increase (decrease) in warranty provision			112				(371	)			69
Legal settlements and loss contingencies, net			3,283				6,319				12,359
Decrease (increase) in right of use assets			25,906				(12,154	)			1,319
Changes in lease liabilities			(22,085	)			16,126				2,602
Contingent consideration related to acquisition			(288	)			-				-
Amortization of premium and accretion of discount on marketable securities, net			412				161				-
Changes in accrued interest related to marketable securities			42				(1	)			-
Increase (decrease) in accrued expenses and other liabilities including related party			(3,352	)			404				5,786
Net cash provided by operating activities			20,684				47,618				83,049
Cash flows from investing activities:
Net cash paid for acquisitions			-				(28,962	)			-
Purchase of property, plant and equipment			(31,477	)			(19,824	)			(23,590	)
Proceeds from sale of property, plant and equipment			9				13				66
Repayment of assumed shareholders loan related to acquisition			(1,966	)			-				-
Investment in marketable securities			(11,738	)			(24,456	)			-
Sales and maturity of marketable securities			10,395				5,271				-
Increase in long-term deposits			(108	)			(347	)			(63	)
Net cash used in investing activities			(34,885	)			(68,305	)			(23,587	)

The accompanying notes are an integral part of the consolidated financial statements

 

F - 11

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CAESARSTONE LTD. AND ITS SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

---

U.S. dollars in thousands

 

		Year ended December 31,
		2021				2020				2019
Cash flows from financing activities:
Dividend paid		$	(10,681	)		$	(4,821	)		$	(5,160	)
Repayment of short-term bank credit and loans, net			(11,761	)			(18	)			(7,771	)
Contingent consideration related to acquisition			(1,492	)			-				-
Repayment of a financing liability of land			(1,320	)			(1,245	)			(1,196	)
Net cash used in financing activities			(25,254	)			(6,084	)			(14,127	)
Effect of exchange rate differences on cash and cash equivalents			(478	)			1,647				475
Increase (decrease) in cash and cash equivalents			(39,933	)			(25,124	)			45,810
Cash and cash equivalents at beginning of year			114,248				139,372				93,562
Cash and cash equivalents at end of year		$	74,315			$	114,248			$	139,372
Cash received (paid) during the year for:
Interest paid		$	(1,915	)		$	-			$	-
Interest received		$	465			$	460			$	976
Tax paid		$	(7,377	)		$	(3,676	)		$	(10,155	)
Non cash activity during the year for:
Changes in trade payables balances related to purchase of property, plant and equipment		$	(56	)		$	(356	)		$	(3,235	)
Operating lease liabilities and right-of-use assets		$	57,343			$	60,750			$	73,366

 

The accompanying notes are an integral part of the consolidated financial statements

 

F - 12

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CAESARSTONE LTD. AND ITS SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

U.S. dollars in thousands (except share data)

 

NOTE 1:-GENERAL

 

a.

General:

 

Caesarstone Ltd. (formerly: Caesarstone Sdot-Yam Ltd.), incorporated under the laws of the State of Israel, was founded in 1987.

 

Caesarstone Ltd. and its subsidiaries (collectively, the "Company" or "Caesarstone") develop, manufacture and market, high quality engineered quartz and other surfaces sold under the Company's premium Caesarstone brand. The Company's products are sold in over 50 countries through a combination of direct sales in certain markets and indirectly through a network of independent distributors in other markets. The Company's products are primarily used as kitchen countertops in the renovation and remodeling markets and in the new buildings’ construction market. Other applications include vanity tops, wall panels, back splashes, floor tiles, stairs and other interior surfaces that are used in a variety of residential and non-residential applications.

 

The Company has subsidiaries in Australia, Singapore, Canada, United Kingdom, India and the United States which are engaged in the manufacturing, marketing and selling of the Company's products in different geographic areas.

 

The Company manufactures its quartz products in three manufacturing facilities located in Kibbutz Sdot-Yam in central Israel, Bar-Lev Industrial Park in northern Israel and Richmond-Hill, Georgia in the U.S. which operates under the Company’s subsidiary in the United States, Caesarstone Technologies USA, Inc. Following the acquisition of Lioli (see also b below) the Company also manufacturing porcelain in its plant in India.

 

b.

Acquisition of Lioli Ceramica Pvt Ltd:

 

On October 5, 2020, the Company completed the acquisition of 55% of the shares of Lioli Ceramica Pvt Ltd ("Lioli"), a producer of porcelain countertop slabs in the total net consideration of $13,574.

 

The consideration included a contingent consideration arrangement that requires the Company to pay up to approximately $10,000 of additional consideration to Lioli’s minority shareholders subject to reaching certain EBITDA achievement. The fair value of the contingent consideration arrangement at the acquisition date was $1,492. During 2021 the criteria was partially met, and an additional related consideration amount of approximately $1,780 paid during 2021.

 

As of October 5, 2020, the fair value of the 45% non-controlling interests in Lioli amounted to $7,269. The fair value of the non-controlling interests was valued based on the transaction price and a Put Option criterion that the minority awarded in accordance with the share purchase agreement.

 

As part of the agreement, the Company granted Lioli’s minority shareholders a put option and Lioli’s minority shareholders granted the Company a call option for its interest, each exercisable any time after April 1, 2024 and before the 20th anniversary of the acquisition date based on a mechanism as set forth in the agreement between the parties As of December 31, 2021, the Company revaluated its Put Option, in accordance with ASC 820 "Fair Value Measurements and Disclosures", at level 3, and based on it the non-controling interest fair value in Lioli amounted to $7,869.

 

F - 13

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CAESARSTONE LTD. AND ITS SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

U.S. dollars in thousands (except share data)

NOTE 1:-GENERAL (Cont.)

The Lioli acquisition was accounted for as a business combination in accordance with ASC 805 "Business Combinations”.

The preliminary fair value estimates for the assets acquired and liabilities assumed for Lioli’s acquisition were based upon preliminary calculations and valuations, and the estimates and assumptions for this acquisition were subject to change as the Company obtains additional information during the respective measurement period to the information that was existed as of the acquisition date (up to one year from the respective acquisition dates). As of December 2021 the acquisition purchase price allocation was finalized. The following table summarizes the purchase price allocation of Lioli Acquisition at the acquisition date:

 

Components of Purchase Price:
Cash		$	10,197
Lioli's minority shareholders loan assumed			1,950
Contingent consideration			1,492
Total purchase price			13,639
Less: Cash acquired			65
Net for allocation			13,574
Allocation of Purchase Price:
Net tangible assets (liabilities):
Trade receivables, net			4,729
Prepaid expenses and other current assets			1,133
Inventories, net (1)			7,488
Property, plant and equipment, net (2)			26,937
Other non-current assets			20
Trade payables			(5,007	)
Loans (net of Lioli's minority shareholders loan assumed) (3)			(14,083	)
Accrued expenses and other current liabilities			(2,969	)
Other non-current liabilities			(4,295	)
Total net tangible assets			13,953
Identifiable intangible assets:
Customer relationships (4)			2,049
Deferred tax liabilities			(597	)
Total identifiable intangible assets acquired			1,452
Goodwill (5)			5,438
Non-controlling interests			(7,269	)
Total purchase price allocation		$	13,574

 

F - 14

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CAESARSTONE LTD. AND ITS SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

U.S. dollars in thousands (except share data)

 

NOTE 1:-GENERAL (Cont.)

(1) Including additional $1,063 fair value to bring the inventory in process to its finished good stage value. Amortization period is through two quarters in accordance with the average inventory turnovers using the straight-line method.

(2) Including additional $10,750 land and buildings fair value in accordance with a third-party appraiser.

(3) As of October 5, 2020 Lioli had a loan from its minority shareholders (the "shareholders loan"), which included in the acquired net tangible assets. According to term of the transaction the Company will 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. During 2021, the Company assumed and paid the 55% of the sharehlders loan in the amount of approximately $1,966.

(4) Customer relationships represent the underlying relationships and agreements with Lioli's customer base. In assessing the value of the Customer Relationships, the Company used an income approach method. The Customer Relationships’ economic useful life is estimated at approximately 5 years, amortized using the straight-line method.

(5) The goodwill is primarily attributable to expected synergies resulting from the acquisition.

In 2020, the Company recognized $545 of aggregate acquisition-related costs that were expensed in the consolidated statement of income in general and administrative expenses.

Pro forma results of operations related to this acquisition have not been prepared because they are not material to the Company’s consolidated statements of income.

 

c.

Acquisition of Omicron Supplies, LLC:

 

On December 31, 2020, the Company, through its fully owned U.S. subsidiary, completed the acquisition of 100% of the shares of Omicron Supplies, LLC ("Omicron"), a stone supplier in the U.S., for a total net cash consideration of $18,830.

 

The Omicron acquisition was accounted for as a business combination in accordance with ASC 805 "Business Combinations”.

 

F - 15

---

CAESARSTONE LTD. AND ITS SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

U.S. dollars in thousands (except share data)

NOTE 1:-GENERAL (Cont.)

The preliminary fair value estimates for the assets acquired and liabilities assumed for Omicron acquisition were based upon preliminary calculations and valuations, and the estimates and assumptions for this acquisition were subject to change as the Company obtains additional information during the respective measurement period to the information that was existed as of the acquisition date (up to one year from the respective acquisition dates). The following table summarizes the purchase price allocation of Omicron Acquisition:

 

Components of Purchase Price:
Cash		$	18,862
Less: Cash acquired			32
Net for allocation			18,830
Allocation of Purchase Price:
Net tangible assets (liabilities):
Trade receivables, net			6,178
Prepaid expenses and other current assets			787
Inventories, net			19,462
Property, plant and equipment, net			75
ROU assets and others			22,978
Trade payables			(9,722	)
Short-term lease liability			(3,567	)
Short-term loan, accrued expenses and other current liabilities			(10,430	)
Long-term lease and other non-current liabilities			(19,369	)
Total net tangible assets			6,392
Identifiable intangible assets:
Customer relationships (1)			10,144
Deferred tax liabilities			(2,637	)
Total identifiable intangible assets acquired			7,507
Goodwill (2)			4,931
Total purchase price allocation		$	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.
 

In 2020, the Company recognized $376 of aggregate acquisition-related costs that were expensed in the consolidated statement of income in general and administrative expenses.

 

F - 16

---

CAESARSTONE LTD. AND ITS SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

U.S. dollars in thousands (except share data)

NOTE 1:-GENERAL (Cont.)

 

Pro forma results of operations related to this acquisition have not been prepared because they are not material to the Company’s consolidated statements of income.

 

d.

Major suppliers:

 

In 2021, the Company acquired approximately 62% of its quartz consumption from Turkey, of which approximately 40% was supplied by Mikroman Madencilik San ve TIC.LTD.STI ("Mikroman"), constituting approximately 25% of Company's total quartz, and approximately 33% was supplied by Polat Maden Sanayi ve Ticaret A.Ş. (“Polat”), constituting approximately 20% of Company’s total quartz. If Mikroman or Polat cease supplying the Company with quartz or if the Company's supply of quartz generally from Turkey is adversely impacted, the Company's other suppliers may be unable to meet the Company's quartz requirements. In that case, the Company would need to locate and qualify alternate suppliers, which could take time, increase costs and require adjustments to the appearance of the Company's products. As a result, the Company may experience a delay in manufacturing, which could materially and adversely impact the Company's results of operations.

 

e.

The COVID-19 Pandemic:

 

During 2020 and partially also during 2021, the Company experienced disruptions to its business impacting revenues and its financial results. In order to mitigate the impact of the decline in business as a result of the pandemic, the Company implemented cost savings measures and in addition reduced its production capacity for these periods.

 

While the Company expects that this public health threat will continue to be eased by global vaccination and lifted restrictions on traveling, the current macro-economic environment and current uncertainties regarding the potential impact of COVID-19 may have on the Company’s business, there can be no assurance that the Company’s estimates and assumptions used in the measurement of various assets and liabilities in the financial statements will prove to be accurate predictions of the future. If the Company’s assumptions regarding forecasted cash flows are not achieved, it is possible that an impairment review may be triggered and certain assets and liabilities in the financial statements may be impaired.

 

Accordingly, the COVID-19 pandemic and the related global reaction could have a material adverse effect on the Company’s business, results of operations and financial condition.

 

F - 17

---

CAESARSTONE LTD. AND ITS SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

U.S. dollars in thousands (except share data)

NOTE 2:-SIGNIFICANT ACCOUNTING POLICIES

The consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles ("U.S. GAAP").

 

a.

Use of estimates:

 

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates, judgments and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. The Company's management believes that the estimates, judgment and assumptions used are reasonable based upon information available at the time they were made.

 

b.

Financial statements in U.S. dollars:

 

The Company's revenues are generated in various currencies including in U.S. dollars (USD), Australian dollars (AUD), Canadian dollars (CAD), Euros (EUR), Singapore dollars (SGD), British pounds (GBP), Indian Rupee (INR) and New Israeli Shekels (NIS). In addition, most of the Company's costs are incurred in USD, NIS and EUR.

 

The Company’s management believes that the USD is the primary currency of the economic environment in which the Company operates. Thus, the functional and reporting currency of the Company is the USD.

 

The functional currency of the Company's foreign subsidiaries is the local currency in which the relevant subsidiary operates.

 

F - 18

---

CAESARSTONE LTD. AND ITS SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

U.S. dollars in thousands (except share data)

 

NOTE 2:-SIGNIFICANT ACCOUNTING POLICIES (Cont.)

Accordingly, monetary accounts maintained in currencies other than the USD are re-measured into dollars in accordance with Accounting Standards Codification ("ASC") 830, "Foreign Currency Matters" (“ASC 830”). All transaction gains and losses resulting from the re-measurement of monetary balance sheet items denominated in non-USD currencies are reflected in the statements of operations as financial income or expenses as appropriate.

The financial statements of the Company’s subsidiaries of which the functional currency is not the USD have been translated into the USD. All amounts on the balance sheets have been translated into the USD using the exchange rates in effect on the relevant balance sheet dates. All amounts in the statements of income have been translated into the USD using the monthly average exchange rate in accordance with ASC 830. The resulting translation adjustments are reported as a component of accumulated other comprehensive income (loss), net in shareholders' equity.

 

c.

Principles of consolidation:

 

The consolidated financial statements include the accounts of the Company and its wholly and majority-owned subsidiaries (see also Note 1). Inter-company transactions and balances, including profit from inter-company sales not yet realized outside of the Company, have been eliminated upon consolidation.

 

d.

Cash equivalents:

 

Cash equivalents are short-term highly liquid investments that are readily convertible to cash with original maturities of three months or less at the date acquired.

 

e.

Short-term bank deposits:

 

Short-term bank deposits are deposits with original maturities of more than three months but less than one year. Short-term bank deposits are presented at their cost, which approximates their fair value.

 

f.

Marketable securities:

 

Marketable securities consist of corporate and governmental bonds. The Company determines the appropriate classification of marketable securities at the time of purchase and re-evaluates such designation at each balance sheet date. In accordance with FASB ASC No. 320 “Investments - Debt and Equity Securities”, the Company classifies marketable securities as available-for-sale ("AFS").

 

Available-for-sale securities are stated at fair value, with unrealized gains and losses reported in accumulated other comprehensive income (loss), a separate component of stockholders’ equity, net of taxes.

 

Realized gains and losses on sales of marketable securities, as determined on a specific identification basis, are included in financial income (expenses), net. The amortized cost of marketable securities is adjusted for amortization of premium and accretion of discount to maturity, both of which, together with interest, are included in financial income (expenses), net.

 

F - 19

---

CAESARSTONE LTD. AND ITS SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

U.S. dollars in thousands (except share data)

 

NOTE 2:-SIGNIFICANT ACCOUNTING POLICIES (Cont.)

The Company classifies its marketable securities as either short-term or long-term based on each instrument’s underlying contractual maturity date. Marketable securities with maturities of 12 months or less are classified as short-term and marketable securities with maturities greater than 12 months are classified as long-term.

The Company assessed AFS debt securities with an amortized cost basis in excess of estimated fair value to determine what amount of that difference, if any, is caused by expected credit losses in accordance with ASC 326. Allowance for credit losses on AFS debt securities are recognized as a charge of credit loss expenses (income), net, on the consolidated statements of comprehensive income, and any remaining unrealized losses, net of taxes, are included in accumulated other comprehensive income (loss) in stockholders' equity. The Company did not record credit loss allowance on its marketable securities during the year ended December 31, 2021.

 

g.

Derivatives:

 

ASC 815, “Derivative and Hedging” ("ASC 815"), requires companies to recognize all of their derivative instruments as either assets or liabilities in the statement of financial position at fair value.

 

For those derivative instruments that are designated and qualify as hedging instruments, a company must designate the hedging instrument, based upon the exposure being hedged, as a fair value hedge, cash flow hedge or a hedge of a net investment in a foreign operation.

 

F - 20

---

CAESARSTONE LTD. AND ITS SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

U.S. dollars in thousands (except share data)

 

NOTE 2:-SIGNIFICANT ACCOUNTING POLICIES (Cont.)

 

Derivative instruments designated as hedging instruments:

 

For derivative instruments that are designated and qualify as a cash flow hedge (i.e., hedging the exposure to variability in expected future cash flows that is attributable to a particular risk), the effective portion of the gain or loss on the derivative instrument is reported as a component of other comprehensive income (loss) and reclassified into earnings in the same period during which the hedged transaction affects earnings.

 

The remaining gain or loss on the derivative instrument in excess of the cumulative change in the present value of future cash flows of the hedged item, if any, is recognized in current earnings during the period of change. For derivative instruments not designated as hedging instruments, the gain or loss is recognized in current earnings during the period of change.

 

To hedge against the risk of overall changes in cash flows resulting from foreign currency salary and other recurring payments during the periods, the Company has instituted a foreign currency cash flow hedging program. The Company hedges portions of its forecasted salary and other expenses denominated in NIS.

 

These forward contracts are designated as cash flow hedges, as defined by ASC 815, and are all effective, as their critical terms match the underlying transactions being hedged.

 

As of December 31, 2021 and 2020, the notional amount of these forward contracts into which the Company entered was $17,089, and $0, respectively, and the unrealized income recorded in accumulated other comprehensive income, net, from the Company's currency forward NIS transactions was $297 and $0, respectively.

 

Derivative instruments not designated as hedging instruments:

 

In addition to the derivatives that are designated as hedges as discussed above, the Company enters into certain foreign exchange forward and options contracts to limit its exposure to foreign currencies. In addition, the Company entered into derivative instruments to partially manage its exposure to movements associated with the Styrene prices.

 

Gains and losses related to such derivative instruments are recorded in financial expenses, net. At December 31, 2021 and 2020, the notional amount of foreign exchange and styrene forward and option contracts into which the Company entered was $59,068 and $100,981, respectively. The foreign exchange and styrene forward and options contracts will expire at various times through 2022.

 

F - 21

---

CAESARSTONE LTD. AND ITS SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

U.S. dollars in thousands (except share data)

 

NOTE 2:-SIGNIFICANT ACCOUNTING POLICIES (Cont.)

The following tables present fair value amounts of, and gains and losses recorded in relation to, the Company's derivative instruments and related hedged items:

		Balance sheet		Fair value of derivative instruments
				Year ended December 31,
				2021				2020
Derivative assets:
Derivatives designated as hedging instruments:
Foreign exchange option and forward contracts		Other accounts receivable and prepaid expenses			1,400				-
Derivatives not designated as hedging instruments:
Foreign exchange option and forward contracts		Other accounts receivable and prepaid expenses			297				-
Styrene forward contract		Other accounts receivable and prepaid expenses			204				-
Total					1,901				-
Derivative liabilities:
Derivatives not designated as hedging instruments:
Foreign exchange option and forward contracts		Accrued expenses and other liabilities			(329	)			(3,582	)
Styrene forward contract		Accrued expenses and other liabilities			-				(209	)
Total					(329	)			(3,791	)

 

F - 22

---

CAESARSTONE LTD. AND ITS SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

U.S. dollars in thousands (except share data)

 

NOTE 2:-SIGNIFICANT ACCOUNTING POLICIES (Cont.)

 

The following tables present fair value amounts of, and gains and losses recorded in relation to, the Company's derivative instruments and related hedged items:

 

		Gain recognized in other comprehensive income, net									Gain (loss) recognized in statements of income
		Year ended December 31,									Statements of income			Year ended December 31,
		2021				2020					Item			2021				2020
Derivatives designated as hedging instruments:
Foreign exchange forward contract			297				-				Cost of revenues and Operating expenses				(68	)			2,406
Derivatives not designated as hedging instruments:
Foreign exchange forward and options contracts			-				-				Financial expenses, net				2,135				(750	)
Styrene forward contracts			-				-				Financial expenses, net				2,192				(2,120	)
Total			297				-								4,259				(464	)

 

h.

Inventories:

 

Inventories are stated at the lower of cost and net realizable value. The Company periodically evaluates the quantities on hand relative to historical and projected sales volumes, aging, current and historical selling prices and contractual obligations to maintain certain levels of raw material quantities. Based on these evaluations, inventory provision is provided to cover risks arising from slow-moving items, discontinued products, excess inventories, net realizable value lower than cost and adjusted revenue forecasts.

 

Cost is determined as follows:

 

Raw Materials - cost is determined on a standard cost basis which approximates actual costs on a weighted average basis.

 

Work-in progress and finished products - are based on standard cost (which approximates actual cost on a weighted average basis) which includes raw materials cost, labor and manufacturing overhead.

 

Finished goods are stated at the lower of cost and net realizable value.

 

F - 23

---

CAESARSTONE LTD. AND ITS SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

U.S. dollars in thousands (except share data)

 

NOTE 2:-SIGNIFICANT ACCOUNTING POLICIES (Cont.)

 

The following table provides the details of the change in the Company's provision for inventory write-downs:

 

		December 31,
		2021				2020
Inventory provision, beginning of year		$	16,607			$	18,226
Assumed from business combination			-				1,405
Increase in inventory provision			7,671				4,305
Write off			(7,489	)			(7,329	)
Inventory provision, end of year		$	16,789			$	16,607

 

i.

Property, plant and equipment, net:

 

1.

Property, plant and equipment are stated at cost, net of accumulated depreciation and investment grants.

 

2.

Costs recorded prior to a production line completion are reflected as construction in progress, which are recorded building and machinery assets at the date of purchase. Construction in progress includes direct expenditures for the construction of the production line and is stated at cost. Capitalized costs include costs incurred under the construction contract: advisory, consulting and direct internal costs (including labor) and operating costs incurred during the construction and installation phase.

 

3.

Depreciation is calculated using the straight-line method over the estimated useful life of the assets at the following annual rates:

	%
Machinery and manufacturing equipment	4 - 33 (mainly 10)
Office equipment and furniture	7 - 33 (mainly 7)
Motor vehicles	10 - 30 (mainly 20)
Buildings	4 - 5
Prepaid expenses related to operating lease	1
Leasehold improvements	Over the shorter of the term of

 

F - 24

---

CAESARSTONE LTD. AND ITS SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

U.S. dollars in thousands (except share data)

 

NOTE 2:-SIGNIFICANT ACCOUNTING POLICIES (Cont.)

 

j.

Leases:

 

The Company determines if an arrangement is a lease at inception and recognize in accordance with ASC 842 “Leases”. Operating leases are included in operating lease right-of-use (“ROU”) assets, other current liabilities and operating lease liabilities in the Company’s consolidated balance sheets.

 

ROU assets represent the right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term.

 

The Company uses incremental borrowing rates based on the Company's implied credit rating which was based on Moody's Investors Service Rating Methodology for the Building Materials Industry (such credit rating was notched up due to collateralization) at commencement date. The operating lease ROU asset also includes any lease payments made and excludes lease incentives, if any. Lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Lease expenses for lease payments are recognized on a straight-line basis over the lease term. See also Note 10.

 

k.

Impairment of long-lived assets:

 

The Company's long-lived assets (assets group) to be held or used, including right of use assets, tangible and finite-lived intangible assets (other than goodwill), are reviewed for impairment in accordance with ASC 360 "Property, Plant and Equipment" ("ASC 360") whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the future undiscounted cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. No impairment losses were identified during any period presented. In addition to the recoverability assessment, the Company routinely reviews the remaining estimated useful lives of property and equipment and finite-lived intangible assets. If the Company reduces the estimated useful life assumption for any asset, the remaining unamortized balance would be amortized or depreciated over the revised estimated useful life.

 

F - 25

---

CAESARSTONE LTD. AND ITS SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

U.S. dollars in thousands (except share data)

 

NOTE 2:-SIGNIFICANT ACCOUNTING POLICIES (Cont.)

 

l.

Goodwill:

 

Goodwill represents the excess of the cost of businesses acquired over the fair value of the net assets acquired in the acquisition. Under ASC 350, "Intangibles-Goodwill and Other" ("ASC 350") goodwill is not amortized but instead is tested for impairment at least annually (or more frequently if impairment indicators arise). The carrying amount of the reporting unit over its fair value is recognized as an impairment loss, and the carrying value of goodwill is written down to fair value.

 

The goodwill impairment test is performed according to the following principles:

 

(1)

An initial qualitative assessment may be performed to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount.

 

(2)

If the Company concludes it is more likely than not that the fair value of the reporting unit is less than its carrying amount, a quantitative fair value test is performed. An impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value is recognized.

 

The Company performs an annual goodwill impairment test during the fourth quarter of each fiscal year, or more frequently, if impairment indicators are present. The Company operates in one operating segment. The Company concluded that all of the Company's reporting units should be aggregated and deemed as a single reporting unit for the purpose of performing the goodwill impairment test in accordance with ASC 350-20-35-35, since they have similar economic characteristics.

 

Goodwill was tested for impairment by comparing Company’s fair value with its carrying value. As required by ASC 820, "Fair Value Measurements", the Company applies assumptions that marketplace participants would consider in determining the fair value of reporting unit.

 

The process of evaluating the potential impairment of goodwill is subjective and requires significant judgment at many points during the analysis. Significant estimates used in the fair value methodologies include estimates of future cash flows, future short-term and long-term growth rates and weighted average cost of capital. If these estimates or their related assumptions change in the future, the Company may be required to record impairment charges for its goodwill and intangible assets with an indefinite life. No impairment of goodwill was identified during any period presented.

 

F - 26

---

CAESARSTONE LTD. AND ITS SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

U.S. dollars in thousands (except share data)

 

NOTE 2:-SIGNIFICANT ACCOUNTING POLICIES (Cont.)

 

m.

Warranty:

 

The Company generally provides a standard (i.e. assurance type) warranty for its products, for various periods, depending on the type of product and the country in which the Company does business. The Company records a provision for the estimated cost to repair or replace products under warranty at the time of sale. Factors that affect the Company's warranty reserve include the number of units sold, historical and anticipated rates of warranty repairs and the cost per repair.

 

The following table provides the details of the change in the Company's warranty accrual:

		2021				2020
January 1,		$	2,579			$	2,916
Charged to costs and expenses relating to new sales			1,559				1,281
Costs of product warranty claims			(1,538	)			(1,459	)
Foreign currency translation adjustments			80				(159	)
December 31,		$	2,680			$	2,579

 

n.

Revenue recognition:

 

Revenues are recognized in accordance with ASC 606, revenue from contracts with customers when control of the promised goods or services is transferred to the customers, in an amount that the Company expects in exchange for those goods or services.

 

The Company applies the following five steps in accordance to ASC 606: (1) identify the contract with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract, and (5) recognize revenue when a performance obligation is satisfied.

 

1.        Identify the contract with a customer:

 

A contract is an agreement between two or more parties that creates enforceable rights and obligations. In evaluating the contract, the Company analyzes the customer’s intent and ability to pay the amount of promised consideration (credit risk) and considers the probability of collecting substantially all of the consideration. The Company determines whether collectability is reasonably assured on a customer-by-customer basis pursuant to various criteria including Company’s historical experience, credit insurance and other inputs.

 

2.        Identify the performance obligations in the contract:

 

At a contract’s inception, the Company assesses the goods or services promised in a contract with a customer and identifies the performance obligations. The main performance obligation is a delivery of the Company’s products.

 

F - 27

---

CAESARSTONE LTD. AND ITS SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

U.S. dollars in thousands (except share data)

 

NOTE 2:-SIGNIFICANT ACCOUNTING POLICIES (Cont.)

 

3.        Determine the transaction price:

 

The Company’s products that are sold through agreements with distributors are non-exchangeable, non-refundable, non-returnable and without any rights of price protection or stock rotation. Accordingly, the Company considers all the distributors to be end-consumers.

 

For certain revenue transactions with specific customers, the Company is responsible also for the fabrication and installation of its products. The Company recognizes such revenues upon receipt of acceptance evidence from the end consumer which occurs upon completion of the installation.

 

Although, in general, the Company does not grant rights of return, there are certain instances where such rights are granted. The Company maintains a provision for returns in accordance with ASC 606, which is estimated, based primarily on historical experience as well as management judgment, and is recorded through a reduction of revenue.

 

4.        Allocate the transaction price to the performance obligations in the contract:

 

The majority of the Company’s revenues are sales of goods, therefore there is one main performance obligation that absorbs the transaction price.

 

5.        Recognize revenue when a performance obligation is satisfied:

 

Revenue is recognized when or as performance obligations are satisfied by transferring control of a promised good or service to a customer. Control transfers at a point in time, which affects when revenue is recorded. The majority of Company’s revenues deriving from sales of products which are recognized when control is transferred based on the agreed International Commercial terms, or “INCOTERMS”.

 

o.

Research and development costs:

 

Research and development costs are charged to the statement of income as incurred.

 

p.

Income taxes:

 

The Company and its subsidiaries account for income taxes in accordance with ASC 740, "Income Taxes" (“ASC 740”). This statement prescribes the use of the liability method whereby deferred tax asset and liability account balances are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.

 

F - 28

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CAESARSTONE LTD. AND ITS SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

U.S. dollars in thousands (except share data)

 

NOTE 2:-SIGNIFICANT ACCOUNTING POLICIES (Cont.)

The Company accounts for its uncertain tax positions in accordance with ASC 740-10. ASC 740-10 contains a two-step approach to recognizing and measuring uncertain tax positions accounted for in accordance with ASC 740. The first step is to evaluate the tax position taken or expected to be taken in a tax return by determining if the weight of available evidence indicates that it is more likely than not that, on an evaluation of the technical merits, the tax position will be sustained on audit, including resolution of any related appeals or litigation processes. The second step is to measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement. The Company classifies interest and penalties on income taxes as taxes on income.

 

q.

Advertising expenses:

 

Advertising costs are expensed as incurred. Advertising expenses for the years ended December 31, 2021, 2020 and 2019 were $15,307, $14,457 and $16,233, respectively.

 

r.

Concentrations of credit risk:

 

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents, marketable securities and trade receivables. The Company's cash and cash equivalents are invested primarily in USD, mainly with major banks in Israel.

 

The Company's debt marketable securities include investments in highly-rated corporate debentures (located mainly in U.S.) and governmental bonds. The financial institution that holds the Company's debt marketable securities is a major financial institution located in the United States. The Company believes that its marketable securities portfolio is a diverse portfolio of highly-rated securities and the Company's investment policy limits the amount the Company may invest in an issuer (see Note 2f).

 

The Company's trade receivables are derived from sales to customers located mainly in the United States, Australia, Canada, Israel and Europe. The Company performs ongoing credit evaluations of its customers and to date has not experienced any substantial losses. In certain circumstances, the Company requires letters of credit or prepayments. An allowance for credit losses (i.e. doubtful accounts) is provided with respect to specific receivables that the Company has determined to be doubtful of collection. For those receivables not specifically reviewed, provisions are recorded at a specific rate, based upon the age of the receivable, the collection history, current economic trends and management estimates of future economic conditions.

 

No customer represented 10% or more of the Company’s total accounts receivables, net as of December 31, 2021 and 2020.

 

F - 29

---

CAESARSTONE LTD. AND ITS SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

U.S. dollars in thousands (except share data)

 

NOTE 2:-SIGNIFICANT ACCOUNTING POLICIES (Cont.)

The following table provides the detail of the change in the Company's allowance for credit loss:

		2021				2020
January 1,		$	6,783			$	2,497
Charges to expenses			2,437				3,142
Write offs			(121	)			(984	)
Assumed from business combinations			-				2,066
Foreign currency translation adjustments			(63	)			62
December 31,		$	9,036			$	6,783

 

s.

Severance pay:

 

The Company's liability for severance pay, with respect to its Israeli employees, is calculated pursuant to Israeli severance pay law and employee agreements based on the most recent salary of the employees. The Company's liability for all of its Israeli employees is provided for by monthly deposits with insurance policies and by an accrual. The value of these policies is recorded as an asset on the Company's balance sheet.

 

The deposited funds include profits or losses accumulated up to the balance sheet date. The deposited funds may be withdrawn only upon the fulfillment of the obligations pursuant to Israeli severance pay law or labor agreements.

 

Majority of the agreements with employees specifically state, in accordance with section 14 of the Severance Pay Law, 1963 ("Section 14"), that the Company's contributions for severance pay shall be instead of severance compensation and that upon release of the policy to the employee, no additional calculations shall be conducted between the parties regarding the matter of severance pay and no additional payments shall be made by the Company to the employee.

 

Further, since the Company has signed agreements with its employees under Section 14, the related obligation and amounts deposited on behalf of such obligation are not stated on the balance sheet, as they are legally released from obligation to employees once the deposit amounts have been paid.

 

Severance pay expenses for the years ended December 31, 2021, 2020 and 2019 amounted to approximately $2,539, $2,292 and $2,189, respectively.

 

F - 30

---

CAESARSTONE LTD. AND ITS SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

U.S. dollars in thousands (except share data)

 

NOTE 2:-SIGNIFICANT ACCOUNTING POLICIES (Cont.)

 

t.

Fair value of financial instruments:

 

In accordance with ASC 820, the Company measures its cash equivalents, marketable securities, and derivatives at fair value using the market approach valuation technique. Cash equivalents and marketable securities are classified within Level 1 and Level 2, respectively, because these assets are valued using quoted market prices or alternative pricing sources and models utilizing market observable inputs.

 

The following table sets forth the Company’s assets and liabilities that were measured at fair value as of December 31, 2021 and 2020 by level within the fair value hierarchy:

 

		Fair Value		Fair value measurements as of December 31,
Description		Hierarchy		2021				2020
Measured at fair value on a recurring basis:
Assets:
Cash equivalents:
Money market mutual funds		Level 1		$	175			$	1,011
Short-term marketable securities:
Corporate bonds		Level 2		$	10,751			$	7,607
Governmental bonds		Level 2		$	477			$	505
Derivatives:
Derivative assets		Level 2		$	1,901			$	-
Long-term marketable securities:
Corporate bonds		Level 2		$	8,647			$	10,434
Governmental bonds		Level 2		$	-			$	492
Liabilities:
Derivatives:
Contingent Consideration		Level 3		$	-			$	1,492
Derivative liabilities		Level 2		$	(329	)		$	(3,791	)
Redeemable Non-Controlling Interest		Level 3		$	7,869			$	7,701

 

The carrying amounts of financial instruments not measured at fair value, including cash and cash equivalents, trade receivables, other accounts receivables, trade payables, accrued expenses and other liabilities, short term loans and short term bank credit, approximate their fair value due to the short-term maturities of such instruments. The carrying amount of long-term loan approximates its fair value.

 

F - 31

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CAESARSTONE LTD. AND ITS SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

U.S. dollars in thousands (except share data)

 

NOTE 2:-SIGNIFICANT ACCOUNTING POLICIES (Cont.)

 

u.

Basic and diluted net income per share:

 

Basic net income per share ("Basic EPS") is computed by dividing net income attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding during the period.

 

Diluted net income per share ("Diluted EPS") gives effect to all dilutive potential ordinary shares outstanding during the period. The computation of Diluted EPS does not assume conversion, exercise or contingent exercise of securities that would have an anti-dilutive effect on earnings. The dilutive effect of outstanding stock options is computed using the treasury stock method. For the years ended December 31, 2021, 2020 and 2019 there were 1,344,673, 1,414,812 and 1,244,500 outstanding stock options, respectively, that were excluded from the computation of Diluted EPS, that would have had an anti dilutive effect if included.

 

v.

Comprehensive income and accumulated other comprehensive income (loss):

 

Comprehensive income consists of two components, net income and other comprehensive income ("OCI"). OCI refers to revenue, expenses, and gains and losses that under U.S. GAAP are recorded as an element of shareholders’ equity but are excluded from net income. Company’s OCI consists of foreign currency translation adjustments from those subsidiaries not using the USD as their functional currency and net deferred gains and losses on certain derivative instruments accounted for as cash flow hedges and marketable securities.

 

The total accumulated other comprehensive income ("AOCI"), net of tax was comprised as follows:

 

		December 31,
		2021				2020
Accumulated gain (loss) on marketable securities		$	(40	)		$	13
Accumulated losses on derivative instruments			297				-
Accumulated foreign currency translation differences differences and other			(961	)			1,070
Total accumulated other comprehensive income loss, net		$	(704	)		$	1,083

 

F - 32

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CAESARSTONE LTD. AND ITS SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

U.S. dollars in thousands (except share data)

 

NOTE 2:-SIGNIFICANT ACCOUNTING POLICIES (Cont.)

The following table summarizes the changes in AOCI, net of taxes for the year ended:

		Unrealized gains (losses) on derivative instruments				Unrealized gains (losses) on marketable securities				Accumulated foreign currency translation differences and other				Total
Balance at January 1, 2020			-				-				(3,288	)			(3,288	)
Other comprehensive income (loss) before reclassifications			2,406				13				4,358				6,777
Amounts reclassified from AOCI			(2,406	)			-				-				(2,406	)
Net current period OCI			-				13				4,358				4,371
Balance at December 31, 2020			-				13				1,070				1,083
Other comprehensive income (loss) before reclassifications			229				(53	)			(2,031	)			(1,855	)
Amounts reclassified from AOCI			68				-				-				68
Net current period OCI			297				(53	)			(2,031	)			(1,787	)
Balance at December 31, 2021			297				(40	)			(961	)			(704	)

 

The following table shows the amounts reclassified from AOCI into the Consolidated Statements of Income, and the associated financial statement line item, for 2021 and 2020:

 

		December 31,
		2021				2020
Affected line item in the consolidated statements of income
Cost of revenues		$	(52	)		$	1,857
Research and development			(2	)			61
Marketing and selling			(6	)			217
General and administrative			(8	)			271
Total gain (loss)		$	(68	)		$	2,406

 

F - 33

---

CAESARSTONE LTD. AND ITS SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

U.S. dollars in thousands (except share data)

 

NOTE 2:-SIGNIFICANT ACCOUNTING POLICIES (Cont.):

 

w.

Accounting for stock-based compensation:

 

Equity share based payment:

 

The Company accounts for stock-based compensation in accordance with ASC 718, "Compensation-Stock Compensation" ("ASC 718"). ASC 718 requires companies to estimate the fair value of equity-based payment awards on the date of grant using an option-pricing model.

 

The Company accounts for employees and directors’ share-based payment awards classified as equity awards using the grant-date fair value method. The fair value of share-based payment transactions is recognized as an expense over the requisite service period. The Company elected to recognize compensation expense for an award that has a graded vesting schedule using the accelerated method and the Company’s accounting policy is to account for forfeitures as they occur.

 

The exercise price of each option is generally Company's stock price on the date of the grant. Options generally become exercisable over approximately 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 2021 and 2020, the Company estimated the fair value of stock options granted using the Black-Scholes option pricing model with the following weighted average assumptions:

 

		December 31,
		2021			2020
Dividend yield		0 - 3	%		0 - 3	%
Expected volatility		45-48.0	%		46.0	%
Risk-free interest rate		1-1.5	%		0.7	%
Expected life (in years)		4-5.5			5.1

The Company used volatility data in accordance with ASC 718 and based on Company's historical data.

The computation of risk free interest rate is based on the rate available on the date of grant of a zero-coupon U.S. government bond with a remaining term equal to the expected term of the option.

 

F - 34

---

CAESARSTONE LTD. AND ITS SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

U.S. dollars in thousands (except share data)

 

NOTE 2:-SIGNIFICANT ACCOUNTING POLICIES (Cont.)

The expected term of options granted is calculated using the simplified method (being the average between the vesting periods and the contractual life of the options).

For the vast majority of the options granted in 2021 and 2020, the dividend yield is zero, due to adjustment mechanism with respect to the exercise price upon payment of a dividend. For those options granted without adjustment mechanism, the dividend yield applied is 3%.

 

x.

Redeemable non-controlling interest:

 

Following the acquisition of Lioli during 2020, the Company is party to a put and call arrangement with respect to the remaining 45% non-controlling interest in Lioli. Due to the existing put and call arrangements, the non-controlling interest is considered to be redeemable and is recorded on the balance sheet as a redeemable non-controlling interest outside of permanent equity.

 

The redeemable non-controlling interest is recognized at the higher of: i) the accumulated earnings associated with the non-controlling interest, or ii) the redemption value as of the balance sheet date (see also Note 1b).

 

The following table provides a reconciliation of the redeemable non-controlling interest:

 

		Year ended December 31,
		2021				2020				2019
Beginning of the year		$	7,701			$	-			$	-
Assuming the non controlling interest due to acquisition			-				7,269				-
Net income attributable to non-controlling interest			(1,077	)			404				-
Adjustment to Put option value (*)			1,399				-				-
Foreign currency translation adjustments			(154	)			28				-
Redeemable non-controlling interest - end of the year		$	7,869			$	7,701			$	-

 

(*)	See also Note 1b.

 

F - 35

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CAESARSTONE LTD. AND ITS SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

U.S. dollars in thousands (except share data)

 

NOTE 2:-SIGNIFICANT ACCOUNTING POLICIES (Cont.)

 

y.

Contingencies:

 

The Company is involved in various product liability, commercial, government investigations, environmental claims and other legal proceedings that arise from time to time in the course of business. The Company records accruals for these types of contingencies to the extent that the Company concludes their occurrence is probable and that the related liabilities are estimable. When accruing these costs, the Company will recognize an accrual in the amount within a range of loss that is the best estimate within the range. When no amount within the range is a better estimate than any other amount, the Company accrues for the minimum amount within the range. The Company records anticipated recoveries under existing insurance contracts that are probable of occurring at the amount that is expected to be collected. Legal costs are expensed as incurred. For unasserted claims or assessments, the Company followed the accounting guidance in ASC 450-20-50-6, 450-20-25-2 and 450-20-55-2 in which the Company must first determine that the probability that an assertion will be made is likely, then, a determination as to the likelihood of an unfavorable outcome and the ability to reasonably estimate the potential loss is made.

 

z.

Business combination:

 

The Company accounts for business combinations by applying the provisions of ASC 805, Business Combination, and allocates the fair value of purchase consideration to the tangible assets acquired, liabilities assumed, and intangible assets acquired based on their estimated fair values. The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill. When determining the fair values of assets acquired and liabilities assumed, management makes significant estimates and assumptions, especially with respect to intangible assets.

 

Significant estimates in valuing certain intangible assets include, but are not limited to future expected cash flows from acquired customer relationship and acquired trademarks from a market participant perspective, useful lives and discount rates. Management’s estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates. During the measurement period, which does not exceed one year from the acquisition date, the Company may record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill. Upon the finalization of the measurement period, any subsequent adjustments are recorded to earnings.

 

Acquisition-related costs are recognized separately from the acquisition and are expensed as incurred. See also Note 1.

 

F - 36

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CAESARSTONE LTD. AND ITS SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

U.S. dollars in thousands (except share data)

 

NOTE 2:-SIGNIFICANT ACCOUNTING POLICIES (Cont.)

 

aa.

Impact of recently issued accounting standards:

 

Recently issued and adopted accounting standards:

 

1.

In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes. ASU 2019-12 eliminates certain exceptions related to the approach for intra-period tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. It also clarifies and simplifies other aspects of the accounting for income taxes. This guidance is effective for public business entities for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. Early adoption is permitted, including in interim periods. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.

 

Recently issued accounting standards and not yet adopted by the Company:

 

2.

In August 2020, the FASB issued Accounting Standards Update No. 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity's Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (ASU 2020-06), which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own equity. This guidance also eliminates the treasury stock method to calculate diluted earnings per share for convertible instruments and requires the use of the if-converted method. This guidance will be effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Early adoption is not permitted before fiscal years beginning after December 15, 2020. The Company do not expect the adoption of this guidance to have a material impact on its consolidated financial statements.

 

3.

In October 2021, the FASB issued ASU No. 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers (ASU 2021-08), which clarifies that an acquirer of a business should recognize and measure contract assets and contract liabilities in a business combination in accordance with Accounting Standards Codification (ASC) Topic 606, Revenue from Contracts with Customers (Topic 606). This guidance is effective for fiscal years beginning after 15 December 2022 and interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the impact of the new guidance on its consolidated financial statements

 

F - 37

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CAESARSTONE LTD. AND ITS SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

U.S. dollars in thousands (except share data)

 

NOTE 3:       MARKETABLE SECURITIES

The following is a summary of available-for-sale marketable securities at December 31, 2021:

		Amortized cost				Gross unrealized gains				Gross unrealized losses				Accrued Interest				Fair value
Available-for-sale – matures within one year:
Corporate bonds		$	10,688			$	2			$	4			$	65			$	10,751
Governmental bonds			472				-				-				5				477
Total		$	11,160			$	2			$	4			$	70			$	11,228
Available for-sale – matures after one year:
Corporate bonds		$	8,642			$	-			$	38			$	43			$	8,647
Governmental bonds			-				-				-				-				-
Total		$	8,642			$	-			$	38			$	43			$	8,647
Total		$	19,802			$	2			$	42			$	113			$	19,875

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		$	7,570			$	2			$	2			$	37			$	7,607
Governmental bonds			504				-				-				1				505
Total		$	8,074			$	2			$	2			$	38			$	8,112
Available for-sale – matures after one year:
Corporate bonds		$	10,353			$	13			$	2			$	70			$	10,434
Governmental bonds			483				2				-				7				492
Total		$	10,836			$	15			$	2			$	77			$	10,926
Total		$	18,910			$	17			$	4			$	115			$	19,038

As of December 31, 2021 and 2020 the Company didn’t record an allowance for credit losses for its AFS marketable debt securities.

 

F - 38

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CAESARSTONE LTD. AND ITS SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

U.S. dollars in thousands (except share data)

 

NOTE 4:-

OTHER ACCOUNTS RECEIVABLE AND PREPAID EXPENSES

 

		December 31,
		2021				2020
Prepaid expenses		$	5,882			$	5,567
Government authorities			14,289				8,176
Advances to suppliers			5,541				4,843
Derivatives			1,901				-
Other receivables (*)			7,830				7,895
		$	35,443			$	26,481

 

(*) Including mainly insurance receivables, see also note 11.

 

NOTE 5:-

INVENTORIES

 

		December 31,
		2021				2020
Raw materials		$	35,896			$	23,023
Work-in-progress			2,948				1,534
Finished goods			165,881				127,516
		$	204,725			$	152,073

 

F - 39

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CAESARSTONE LTD. AND ITS SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

U.S. dollars in thousands (except share data)

 

NOTE 6:-

PROPERTY, PLANT AND EQUIPMENT, NET

 

		December 31,
		2021				2020
Cost:
Machinery and manufacturing equipment, net (1)		$	325,188			$	304,679
Office equipment and furniture			32,362				26,807
Motor vehicles			5,150				4,533
Buildings and leasehold improvements			142,868				139,361
Prepaid expenses related to operating lease (2)			939				939
			506,507				476,319
Accumulated depreciation:
Machinery and manufacturing equipment, net			207,365				185,133
Office equipment and furniture			21,278				18,571
Motor vehicles			3,664				3,362
Buildings and leasehold improvements			52,896				46,226
Prepaid expenses related to operating lease			154				144
			285,357				253,436
Depreciated cost		$	221,150			$	222,883

 

(1)

Presented net of investment grants received in the total amount of $8,704.

 

(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.

 

Depreciation expense were $32,394, $28,829 and $28,587 for the years ended December 31, 2021, 2020 and 2019, respectively.

 

F - 40

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CAESARSTONE LTD. AND ITS SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

U.S. dollars in thousands (except share data)

 

NOTE 7:-      GOODWILL AND INTANGIBLES

 

a.

Goodwill:

 

The changes in the carrying amount of goodwill for the years ended December 31, 2021 and 2020 are as follows:

 

Balance as of January 1, 2020		$	35,218
Acquired through business combination (*)			10,619
Foreign currency translation adjustments			1,635
Balance as of December 31, 2020			47,472
Foreign currency translation adjustments			(1,672	)
Balance as of December 31, 2021		$	45,800

 

(*) See also Notes 1(b) and 1(c)
 

b.

Intangible assets:

 

		December 31,
		2021				2020
Original amounts:
Customer relationships		$	12,193			$	12,193
Accumulated amortization:
Customer relationships			(2,537	)			(102	)
Foreign currency translation adjustment			(29	)			7
Total intangibles assets		$	9,627			$	12,098

 

(1)

Amortization expense amounted to $2,435 for the years ended December 31, 2021.

 

(2)

Estimated amortization expenses for the following years as of December 31, 2021:

 

2022		$	2,407
2023			2,407
2024			2,407
2025			2,406
		$	9,627

 

F - 41

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CAESARSTONE LTD. AND ITS SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

U.S. dollars in thousands (except share data)

 

NOTE 8:-

SHORT-TERM BANK CREDIT AND CURRENT MATURITIES OF LONG-TERM LOAN

 

a.

Short-term bank credit and loans are classified as follows:

 

				Weighted average interest
	Currency			December 31,								December 31,
				2021				2020				2021				2020
				%
Short-term bank credit (c)	USD				-				3.3			$	-			$	8,326
Short-term bank credit	INR				11.4				12.6			$	3,034			$	2,816
Current maturities of Long-term bank loan and other (d)	INR				11.4				12.6			$	9,489			$	1,980
Total												$	12,523			$	13,122

 

b.

As of December 31, 2021 and 2020, the Company had short-term and revolving credit lines of approximately $18,860 and $18,187 (out of which $12,523 and $11,142, respectively, were utilized as presented in the table above), respectively, from various banks. As of December 31, 2021, the credit lines deriving from the acquisition of Lioli (see also Note 1).

 

The Company's current credit lines, if not extended, will expire through 2022.

 

c.

Short term bank credit assumed as part of the Omicron acquisitions and was fully repaid during 2021.

 

d.

As of December 2020, including mainly current maturities of long-term bank loan. As of December 31, 2021 the Company is not in compliance with the covenants under the loan agreement in Lioli and therefore presented as a short term loan.

 

The loan agreement with the bank in Lioli contains customary covenants. The financial covenants under the agreement prohibit Lioli from exceeding a ratio of net total debt to local EBITDA of 3.05:1 until its debt to the bank is repaid in full, while also requiring that Lioli maintains, at the end of each period (i) an interest coverage ratio of at least 2.77:1, (ii) ratio of principal plus interest compared to local EBITDA of at least 1.89:1 (iii) and fixed assets ratio out of the principal amount of the loan of at least 1.51:1. In addition the bank did not approve the change in controls took place upon acquisition of Lioli.

 

The Loan Agreement also contains certain customary negative covenants that require Lioli to refrain from certain actions unless bank’s consent obtained. Lioli debt is also secured by a floating charge on all of Lioli’s assets. See also Note 15.

 

During January 2022, the Company engaged with another bank and signed a new loan agreement.

 

F - 42

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CAESARSTONE LTD. AND ITS SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

U.S. dollars in thousands (except share data)

 

NOTE 9:-

ACCRUED EXPENSES AND OTHER LIABILITIES

 

		December 31,
		2021				2020
Employees and payroll accruals		$	17,676			$	13,414
Accrued expenses			10,508				7,855
Advances from customers			2,690				959
Taxes payable			6,013				6,291
Warranty provision			1,400				1,305
Derivatives			329				3,791
Sales return provision			2,315				567
Operating lease liability short-term			22,772				18,854
Contingent consideration liability and other			831				2,534
		$	64,534			$	55,570

 

NOTE 10:-

LEASES

 

a.

As of December 31, 2021, the Company had operating lease agreements for facilities and vehicles in the United States, Canada, Australia, United Kingdom, Israel, India and Singapore. The Company’s leases have remaining lease terms of up to 15 years, some of which include options to extend the leases for up to five years. Such options are included in the lease term when it is reasonably certain that the option will be exercised. Leases with an initial term of 12 months or less are not recorded on the balance sheet, the Company recognizes lease expense for these leases on a straight-line basis over the lease term. The Company does not separate non-lease components from the lease components to which they relate, and instead accounts for each separate lease and non-lease component associated with that lease component as a single lease component for all underlying asset classes. The Company uses its estimated incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments.

 

During 2021, the Company's lease fees related to the Land Use Agreement with the Kibbutz were amended. The amendment included an increase in the lease fees and was not accounted for as a new lease. As a result of the amendment, the operating lease right of use asset and liability increased by approximately $35.6 million. See also note 14c.

 

F - 43

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CAESARSTONE LTD. AND ITS SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

U.S. dollars in thousands (except share data)

 

NOTE 10:-   LEASES (CONT.)

 

b.

The following table summarizes the Company’s lease-related assets and liabilities recorded on the consolidated balance sheet:

 

	Classification		December 31, 2021				December 31, 2020
Assets:
Operating lease assets	Operating lease right-of-use assets		$	154,652			$	123,928
Total lease assets			$	154,652			$	123,928
Liabilities:
Current lease liabilities	Accrued expenses and other liabilities			22,772				18,854
Long-term lease liabilities	Long-term lease liabilities			143,324				112,719
Total lease liabilities			$	166,096			$	131,573

 

Lease term and discount rate:	December 31, 2021		December 31, 2020
Weighted-average remaining lease term — operating leases	8.82 years		8.99 years
Weighted-average discount rate — operating leases	2.12%		4.03%

 

F - 44

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CAESARSTONE LTD. AND ITS SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

U.S. dollars in thousands (except share data)

 

NOTE 10:-   LEASES (CONT.)

 

c.

The components of operating lease cost for the year ended December 31, 2021 were as follows:

 

		December 31, 2021				December 31, 2020
Operating lease cost:
Operating lease expense		$	25,083			$	16,388
Variable lease expense			2,985				4,126
Short-term lease expense			20				158
Sublease income			(819	)			(776	)
Total operating lease cost		$	27,269			$	19,896

 

d.

The maturity of the Company’s operating lease liabilities for contracts with lease term greater than one year as of December 31, 2021 are as follows:

 

		December 31,
2022		$	25,995
2023			23,781
2024			20,769
2025			18,798
2026			17,729
2027 and thereafter			75,135
Total future lease payments (1, 2)			182,207
Less imputed interest			(16,111	)
Total		$	166,096

 

(1)	Total lease payments have not been reduced by sublease rental payments of approximately $1,476 due in the future under non-cancelable subleases.
(2)	As of December 31, 2021, the Company has additional operating lease payments, not included in the table above, that have not yet commenced of approximately $3,000. These operating leases will commence during 2022 with lease terms of 5 to 7 years.

 

e.

For additional information regarding lease transactions between related parties, refer to Note 14.

 

F - 45

---

CAESARSTONE LTD. AND ITS SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

U.S. dollars in thousands (except share data)

 

NOTE 10:-   LEASES (CONT.)

 

f.

The following table presents supplemental cash flow information related to the lease costs for operating leases:

 

		December 31, 2021				December 31, 2020
Cash paid for amounts included in measurement of lease liabilities:
Operating cash flows for operating leases		$	24,051			$	16,100
Right-of-use assets obtained in exchange for new operating lease liabilities:
Operating leases		$	57,342			$	64,901

 

NOTE 11:-

COMMITMENTS AND CONTINGENT LIABILITIES

 

a.

Legal proceedings and contingencies:

 

Claim by former South African distributor

 

In December 2007, the Company terminated its agency agreement with its former South African agent, World of Marble and Granite (“WOMAG”), on the basis that WOMAG had breached the agreement. In the same month, the Company filed a claim for NIS 1.0 million (approximately $257) in the Israeli District Court in Haifa based on such breach. WOMAG has contested jurisdiction of the Israeli District Court, but subsequent appellate courts have dismissed WOMAG’s claims. In January 2008, WOMAG filed suit in South Africa seeking Euro 15.7 million (approximately $17,060). In September 2013, the South African Court determined that since a proceeding on the same facts was pending before another court (lis alibis pendens), the South African Court will stay the matter until the conclusion of the Israeli action.

 

In December 2013, the magistrate’s court in Israel held that the Company was not entitled to terminate the agreement with WOMAG as it was not breached by WOMAG. In October 2015, WOMAG amended its claim, seeking a reduced amount of approximately Euro 7.1 million (approximately $7,727) and approximately South Africa RAND 43.7 million (approximately $2,808). In June 2016, WOMAG further amended its claim, seeking a reduced amount of Euro 6.2 million (approximately $6,520) and South Africa RAND 51.2 million (approximately $3,700) plus interest on any capital sum awarded. As the district court dismissed the Company’s appeal of the decision of the magistrate’s court, the Company has agreed with WOMAG to submit the matter to arbitration, for which hearings commenced in South Africa in September 2016.

 

F - 46

---

CAESARSTONE LTD. AND ITS SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

U.S. dollars in thousands (except share data)

 

NOTE 11:-

COMMITMENTS AND CONTINGENT LIABILITIES (Cont.)

 

During 2018, WOMAG once again amended its claim, seeking a reduced amount of approximately EUR 5.8 million (approximately $6,640) plus interest on any capital sum awarded.

 

In February 2019 the arbitrator has rendered an award on the merits (non-quantum), accepting the claims made by WOMAG and imposing on the Company also the legal costs of the arbitration.

 

In July 2019, the Company appealed the award and in August 2019 hearings were held. In November 2019, the appeal panel delivered its award on the merits (the quantum is still to be decided), partially accepting the appeal and imposing 80% of the cost of arbitration and appeal on the Company.

 

Following negotiations held during 2020 between the parties, on January 15, 2021, the Company paid WOMAG an amount of approximately EUR 7.2 million ($8,900) as part of the settlement for the majority of WOMAG’s claim for breach of contract. The remaining disputed amounts relating to the said breach, as well as WOMAG's claim for loss of profits are subject of a further hearing.

 

The Company, also based on its legal advisors, believes it has provided an adequate reserve for the outstanding claims as of December 31, 2021.

 

Bodily injury claims related to exposure to silica dust:

 

Overview:

 

The Company is subject to numerous claims mainly by fabricators, their employees or National Insurance Institute (the Israeli insurance institute -"NII" or Australian states Workcover institutes), alleging that fabricators contracted illnesses, including silicosis, through exposure to silica particles during cutting, polishing, sawing, grinding, breaking, crushing, drilling, sanding or sculpting Company's products.

 

F - 47

---

CAESARSTONE LTD. AND ITS SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

U.S. dollars in thousands (except share data)

 

NOTE 11:-

COMMITMENTS AND CONTINGENT LIABILITIES (Cont.)

 

Individual claims in Israel

 

As of December 31, 2021, the Company is subject to 165 pending bodily injury claims (out of which 164 are individual claims and NII subrogation or related future probable claims, and one claim recognized as a class action) that have been submitted in Israel since 2008 against the Company directly, or that have named the Company as third-party defendant by fabricators or their employees in Israel, by the injurer's successors, by the NII or by others.

 

As of December 31, 2021, the Company has 18 pending pre-litigation demand letters on behalf of certain fabricators in Israel.

 

Most of the claims in Israel do not specify a total amount of damages sought, as the plaintiff’s future damages are intended to be determined at trial.

 

In November 2015 and in May 2017, the Company entered into agreements with the State of Israel and with its main distributors in Israel, respectively, with the consent of its insurance carriers, under which the Company agreed with the State and each of its main distributors to cooperate, subject to certain terms, with respect to the management of the individual claims that have been filed and claims that may be submitted during a certain time period (NII claims are excluded from the Company’s agreement with the State) and on the apportionments of the total liability between the Company , the State, and the distributors, if found, in such claims. During January 2020, the State of Israel approved an additional 5 years extension to its agreement with the company.

 

Class action in Israel:

 

In April 27, 2014, a lawsuit by a single plaintiff and a motion for the recognition of this lawsuit as a class action was filed against the Company in the Central District Court in Israel. The plaintiff alleges that, if the lawsuit is recognized as a class action, the claim against the Company is estimated to be NIS 216 million (approximately $56,180). In addition, the claim includes an unstated sum in compensation for special and general damages.

 

On January 4, 2018, the Company and the plaintiff submitted to the Israeli District Court a settlement agreement, which was approved in July 2021. The claim was dismissed and the Company is liable to make payments on a one time basis, without any admission of liability, in an aggregate amount of NIS 9.0 million (approximately $2,894) to fund certain safety related expenses at fabrication facilities in Israel, as well as plaintiff’s compensation and legal expenses.

 

During 2021 the Company received refund of NIS 7.0 million (approximately $2,100) from its insurence carrier which was recorded as a reduction of legal settlements expenses.

 

F - 48

---

CAESARSTONE LTD. AND ITS SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

U.S. dollars in thousands (except share data)

 

NOTE 11:-

COMMITMENTS AND CONTINGENT LIABILITIES (Cont.)

 

Individual claims in Australia:

 

As of December 31, 2021, Company’s subsidiary in Australia is subject to 38 pending bodily injury claims that have been submitted in Australia since 2018 against it directly, or that have named the Company as third-party defendant by fabricators in Australia.

 

Commencing 2021, the Company reassessed the expected outcome of the individual product liability claims in Australia following Company's and its insurance carrier consent for several settlements. Based on this development and also based on its legal advisors’ and insurer's opinions, contingent losses related to the product liability individual claims are probable, and pursuant to ASC 450, an accrual has been recorded for the loss contingencies related to such claims.

 

In order to reasonably estimate the losses for bodily injury claims in Israel and Australia reflected in the table below, the Company performed a case-by-case analysis with its legal advisors of the relevant facts that were reasonably available to it, related to the claims filed, including, among other things, the specific known or estimated health condition of the claimants, their ages, salaries, related probable future subrogation claims from the NII, and other factors that might have an impact on the final outcome of such claims. The Company will continue to regularly monitor changes in facts for each claim and will update its best estimate if required.

 

Accordingly, the reserve for all the above mentioned bodily injury claims (including class action) as of December 31, 2021 and 2020 totaled to $42,940 and $42,345 respectively, of which $22,081 and $20,435 is reported in short term legal settlements and loss contingencies and $20,859 and $21,910 is reported in long-term liabilities. The Company currently cannot estimate the number of claimants that may file claims in the future or the nature of their claims in order to conclude probability or the range of loss. The Company does not expect to incur additional material losses with respect to the outstanding bodily injury claims, that might have a material impact on its financial position, results of operations and cash flows.

 

The Company updated its provision in 2021, 2020 and 2019 to reflect the outstanding claims in the below table, and provided a provision also for related NII unasserted claims, based on its legal advisors’ and insurer's opinions and according to ASC 450, taking into consideration new claims filed, settlements reached and other new information available.

 

F - 49

---

CAESARSTONE LTD. AND ITS SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

U.S. dollars in thousands (except share data)

 

NOTE 11:-

COMMITMENTS AND CONTINGENT LIABILITIES (Cont.)

A summary of bodily injury claims for which the Company provided provision is as follows:

		Year ended December 31,
		2021				2020				2019
Outstanding claims, January 1,			173				156				131
New claims			73				38				45
Settled and dismissed claims			(43	)			(21	)			(20	)
Outstanding claims, December 31 (*)			203				173				156

 

*)	In 2021, representing 152 injured persons.

 

Insurance

 

The Company maintains insurance for product liability claims, including for bodily injury claims related to exposure to silica dust. The Company has purchased insurance policies for the period from 2008 and to date from several insurance carriers that provide coverage for product liability losses, subject to certain terms and conditions, and the related defense costs up to a certain limit per case and per policy year.

 

As of December 31, 2021, the Company has regional product liability insurance policies, other than in Israel and Australia. Specifically, in the United States and Canada, local policy covers up to $20 mililion and CAD 20 million respectively, per claim or per year, subject to certain terms and limitations, with relatively low deductibles.

 

The Company currently has also a global product liability insurance (the “global policy”), which applies, subject to certain terms and limitations, to claims that may be submitted against the Company worldwide during the insurance policy term.

 

The global insurance is a second layer insurance which becomes effective only after a certain amount was paid by the local insurance carrier or by the Company if a local insurance doesn’t exist.

 

This policy covers claims received during the policy term from October 1, 2020 to April 1, 2022, up to an amount of $35 million per year or up to $25 million for any claim. The policy covers only illnesses diagnosed after February 2010. Global policy will become effective once paid for claims in Israel an amount of $20 million or in Australia AUD50 million during the term of the global policy.

 

Although the Company will seek to renew its product liability insurance to cover silicosis related claims, there is no assurance that the Company will be successful in its renewal.

 

The Company records insurance receivables for the amounts that are covered by insurance. During 2021, as in prior years, the Company's insurance carriers made payments to all settled product liability claims that were under the policies. The Company paid the deductible amounts for the settled claims per policy.

 

F - 50

---

CAESARSTONE LTD. AND ITS SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

U.S. dollars in thousands (except share data)

 

NOTE 11:-

COMMITMENTS AND CONTINGENT LIABILITIES (Cont.)

 

The collectability of the Company's insurance receivables is regularly evaluated and the amounts recorded are probable of collection. This conclusion is based on analysis of the terms of the underlying insurance policies, experience in successfully recovering individual product liability claims from Company's insurers, the insurance carrier was party to the agreement with the State of Israel and the financial ability of the insurance carriers to pay the claims and the relevant facts and applicable law.

 

As of December 31, 2021 and 2020, the insurance receivable totaled to $6,748 and $7,958, respectively, of which $6,299 and $6,283 is reported in the other accounts receivable and prepaid expenses and $449 and $1,675 is in other long-term receivables.

 

In 2021 and 2020, the legal settlements and loss contingencies expenses related to the bodily injury claims related to exposure to silica dust totaled to $3,417 and $5,299, respectively, which reflects the deductible amounts for claims covered by insurance policies, claims not covered and the impact of settlements including the related legal costs.

 

General:

 

From time to time, the Company is involved in other legal proceedings and claims in the ordinary course of business related to a range of matters. While the outcome of these other claims cannot be predicted with certainty, the Company monitors and estimates the possible loss deriving from these claims based on new information available and based on its legal advisors, and believes that it recorded an adequate reserve for these claims in accordance with ASC 450.

 

b.

Purchase obligation:

 

The Company's significant contractual obligations and commitments as of December 31, 2021 are for purchase obligations to certain suppliers and amounted to $36,210 for the fiscal year 2022.

 

c.

Pledges and guarantees:

 

1.

As of December 31, 2021, the Company had outstanding guarantees and letters of credit with various expiration dates in a principal amount of approximately $6,604 related to facilities, vehicle leases and other miscellaneous guarantees.

 

2.

Lioli’s credit facilities provided by banks in India are secured with a “Negative floating pledge”, whereby the Company committed not to pledge or charge and not to undertake to pledge or charge its general floating assets.

 

3.

See also note 15.

 

F - 51

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CAESARSTONE LTD. AND ITS SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

U.S. dollars in thousands (except share data)

 

NOTE 12:-

TAXES ON INCOME

 

a.

Israeli taxation:

 

1.

Corporate tax rate:

 

The corporate tax rate in Israel was 23% in 2021 and 2020, and 2019.

 

2.

Foreign Exchange Regulations:

 

Under the Foreign Exchange Regulations, Caesarstone Ltd. calculates its tax liability in U.S. Dollars according to certain orders. The tax liability, as calculated in U.S. Dollars is translated into New Israeli Shekels according to the exchange rate as of December 31st of each year.

 

3.

Tax benefits under Israel's Law for the Encouragement of Industry (Taxes), 1969:

 

The Company is an "Industrial Company," as defined by the Law for the Encouragement of Industry (Taxes), 1969, and as such, the Company is entitled to certain tax benefits, primarily amortization of costs relating to know-how and patents over eight years, accelerated depreciation and the right to deduct public issuance expenses for tax purposes.

 

4.

Tax benefits under the Law for the Encouragement of Capital Investments, 1959:

 

According to the Law for the Encouragement of Capital Investments, 1959 (the "Encouragement Law"), the Company is entitled to various tax benefits by virtue of the "Preferred Enterprise" status granted to its enterprises, in accordance with the Encouragement Law.

 

The Company chose to be taxed according to the "Preferred Enterprise" track under Amendment No. 68 to the Encouragement Law (the "Amendment No. 68"). In order to implement Amendment No. 68 and to be taxed under the "Preferred Enterprise" track, the Company waived the tax benefits of the previous tracks -"Approved Enterprise" and "Beneficiary Enterprise" - under the Encouragement Law, starting from the 2011 tax year.

 

The principal benefits by virtue of the Encouragement Law are the following:

 

Tax benefits and reduced tax rates under the Preferred Enterprise track:

 

The tax rate on preferred income from a Preferred Enterprise commencing 2017 is 16% and in development area A – 7.5% (relates to Company's manufacturing plant in Bar-Lev industrial zone).

 

In order to receive benefits as a "Preferred Enterprise," Amendment No. 68 states certain conditions must be met. The basic condition for receiving the benefits under Amendment No. 68 is that the enterprise contributes to the country's economic growth and is a competitive factor for the gross domestic product (a "competitive enterprise"). In order to comply with this condition, the Encouragement Law prescribes various requirements.

 

F - 52

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CAESARSTONE LTD. AND ITS SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

U.S. dollars in thousands (except share data)

 

NOTE 12:-

TAXES ON INCOME (Cont.)

 

As for industrial enterprises, in each tax year, one of the following conditions must be met:

 

1.

Its main field of activity is biotechnology or nanotechnology as approved by the Head of the Administration of Industrial Research and Development.

 

2.

The industrial enterprise's sales revenues in a specific market during the tax year do not exceed 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).

 

Since the Company chose to apply the provisions of Amendment No. 68, by submitting the waiver form before June 30, 2015, the Company is eligible to distribute taxed earnings derived from a Beneficiary Enterprise and/or Approved Enterprise to an Israeli company without being subject to withholding tax.

 

In development area A, in addition to the tax benefits, as mentioned above, some of the Company's facilities are eligible for grants at rate of 20% and/or loans, subject to an approval of the Israeli Investment Center.

 

Accelerated depreciation:

 

The Company is eligible for a deduction of accelerated depreciation on machinery and equipment used by the Approved Enterprise or the Beneficiary Enterprise or the Preferred Enterprise at a rate of 200% (or 400% for buildings) from the first year of the asset's operation.

 

F - 53

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CAESARSTONE LTD. AND ITS SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

U.S. dollars in thousands (except share data)

 

NOTE 12:-

TAXES ON INCOME (Cont.)

 

Conditions for entitlement to benefits:

 

The above mentioned benefits are contingent upon the fulfillment of the conditions stipulated by the Encouragement Law, regulations published thereunder and the letters of approval for the investments in the Preferred Enterprises, as discussed above. Non-compliance with the conditions may cancel all or part of the benefits and require a refund of the amount of the benefits, including interest. The Company's management believes that the Company meets the aforementioned conditions.

 

The tax-exempt income attributable to the Approved Enterprise cannot be distributed to shareholders without subjecting the Company to taxes. If dividends are distributed out of tax-exempt profits, the Company will then become liable for tax at the rate applicable to its profits from the Approved Enterprise in the year in which the income was earned, as if it was not under the "Alternative benefits track" (taxed at the rate of no more than 25% as of December 31, 2021). Under the Encouragement Law, tax-exempt income generated under the Approved Enterprise status will be taxed, among other things, upon a dividend distribution or complete liquidation in accordance with the Encouragement Law.

 

In November 2021, amendment No. 74 to the Investment Law (the “Trapped Earnings Law”) came into effect. Amendment 74 to the Encouragement Law:

 

On November 15, 2021, the Economic Efficiency Law (Legislative Amendments for Achieving Budget Targets for the 2021 and 2022 Budget Years), 2021 ("the Economic Efficiency Law"), was enacted. This Law establishes a temporary order allowing Israeli companies to release tax-exempt earnings ("trapped earnings" or "accumulated earnings") accumulated until December 31, 2020, through a mechanism established for a reduced corporate income tax rate applicable to those earnings ("the Temporary Order"). In addition to the reduced corporate income tax (CIT) rate, Article 74 to the Encouragement Law was amended whereby effective from August 15, 2021, for any dividend distribution (including a dividend as per Article 51B to the Encouragement Law) by a company which has trapped earnings, there will be a requirement to allocate a portion of that distribution to the trapped earnings.

 

The Company distributed a dividend during November 2021 which was partially attributed to the above amendment.

 

Of the Company's retained earnings as of December 31, 2021, approximately $24,631 is tax-exempt earnings attributable to its Approved Enterprise.

 

As of December 31, 2021, if the income attributed to the Approved Enterprise would have been distributed as a dividend, the Company would have incurred a tax liability of approximately $6,158.

 

According to the Temporary Order, the reduction of CIT will apply to earnings that are released (with no requirement for an actual distribution) within a period of one year from the date of enactment of the Temporary Order. The reduction in the CIT is dependent on the proportion of the trapped earnings that are released in relation to the total trapped earnings, and on the foreign investment percentage in the years the earnings were generated. Consequently, the larger the proportion of the trapped earnings that are released, the lower the tax in respect of the distribution. The minimum tax rate applied to the company is 10%. Further, a company that elects to pay a reduced CIT is required to invest in its industrial enterprise a designated amount in accordance with the Economic Efficiency Law within a period of five years commencing from the tax year in which the election is made. The designated investment should be utilized for the acquisition of production assets, and/or investments in research and development and/or compensation to additional new employees.

 

The Company's current policy is not to apply to such order.

 

F - 54

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CAESARSTONE LTD. AND ITS SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

U.S. dollars in thousands (except share data)

 

NOTE 12:-

TAXES ON INCOME (Cont.)

	b.	Non-Israeli subsidiaries taxation:

 

Non-Israeli subsidiaries are taxed based on tax laws in their countries of residence.

 

Statutory tax rates for Non-Israeli subsidiaries are as follows:

 

Company incorporated in United States – 25.8% tax rate (federal and state).

Company incorporated in Australia - 30% tax rate.

Company incorporated in Singapore - 17% tax rate.

Company incorporated in Canada – 26.6% tax rate (federal and state).

Company incorporated in England – 19% tax rate.

Company incorporated in India – 28% tax rate.

 

Israeli income taxes and foreign withholding taxes were not provided for undistributed earnings of the Company's foreign subsidiaries. The Company intends to reinvest these earnings indefinitely in the foreign subsidiaries. Accordingly, no deferred income taxes have been provided. If these earnings were distributed to Israel in the form of dividends or otherwise, the Company would be subject to additional Israeli income taxes (subject to an adjustment for foreign tax credits) and foreign withholding taxes.

 

c.

Deferred income taxes:

 

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets and liabilities are as follows:

 

		December 31,
		2021				2020
Deferred tax assets:
Goodwill and Intangible assets		$	291			$	327
Other temporary differences (1)			13,307				14,300
Temporary differences related to inventory (2)			6,909				6,083
Carryforward losses, deductions and credits (3)			1,584				1,102
Less-valuation allowance			(717	)			(1,102	)
Total deferred tax assets			21,374				20,710
Deferred tax liabilities:
Property and equipment			(10,507	)			(9,143	)
Intangible Assets			(2,006	)			(6,504	)
Other temporary differences			(2,973	)			(3,648	)
Total deferred tax liabilities			(15,486	)			(19,295	)
Deferred tax assets, net		$	5,888			$	1,415

F - 55

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CAESARSTONE LTD. AND ITS SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

U.S. dollars in thousands (except share data)

 

NOTE 12:-

TAXES ON INCOME (Cont.)

  

(1)	Deriving mainly from provision for labor related, provision for loss contingencies and lease accounting in accordance with ASC842.
(2)	Deriving mainly from the provision for slow moving inventory and IRS section 263(a).
(3)	Certain subsidiaries have tax loss carry-forwards totaling approximately $12,685 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.

 

F - 56

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CAESARSTONE LTD. AND ITS SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

U.S. dollars in thousands (except share data)

 

NOTE 12:-

TAXES ON INCOME (Cont.)

 

d.

A reconciliation of the Company's effective tax rate to the statutory tax rate in Israel is as follows:

 

		Year ended December 31,
		2021				2020				2019
Income before taxes on income		$	19,839			$	12,322			$	19,105
Statutory tax rate in Israel			23	%			23	%			23	%
Income taxes at statutory rate		$	4,563			$	2,834			$	4,394
Increase (decrease) in tax expenses resulting from:
Tax benefit arising from reduced rate as an "Preferred Enterprise"			(1,245	)			(120	)			(2,646	)
Non-deductible expenses, net			1,039				1,764				2,025
Increase (decrease) in taxes from prior years, also related to settlement with tax authorities			(1,502	)			(868	)			707
Tax adjustment in respect of foreign subsidiaries' different tax rates			(650	)			(251	)			772
Uncertain tax position			110				1,659				1,037
Changes in valuation allowance			(385	)			(280	)			112
Others			20				(38	)			(158	)
Income tax expense		$	1,950			$	4,700			$	6,243
Effective tax rate			10	%			38	%			33	%
Per share amounts (basic and diluted) of the tax benefit resulting from an "Preferred Enterprise"		$	(0.04	)		$	(0.00	)		$	(0.08	)

 

F - 57

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CAESARSTONE LTD. AND ITS SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

U.S. dollars in thousands (except share data)

 

NOTE 12:-

TAXES ON INCOME (Cont.)

  

e.

Income (loss) before taxes on income is comprised as follows:

 

		Year ended December 31,
		2021				2020				2019
Domestic		$	19,539			$	12,859			$	5,329
Foreign			300				(537	)			13,776
		$	19,839			$	12,322			$	19,105

 

f.

Tax expenses on income are comprised as follows:

 

		Year ended December 31,
		2021				2020				2019
Current taxes		$	6,423			$	5,597			$	7,752
Deferred taxes			(4,473	)			(897	)			(1,509	)
		$	1,950			$	4,700			$	6,243
Domestic		$	1,190			$	3,886			$	2,874
Foreign			760				814				3,369
		$	1,950			$	4,700			$	6,243

 

g.

Tax assessments:

 

The Company operates in multiple jurisdictions throughout the world, and its tax returns are periodically audited or subject to review by both domestic and foreign authorities. The associated tax filings remain subject to examination by applicable tax authorities for a certain length of time following the tax year to which those filings relate. The following describes the open tax years, by major tax jurisdiction, as of December 31, 2021:

 

Israel 2019 – present

Australia 2017 - present

Canada 2016 - present

United States 2017 - present

Singapore 2017 - present

England 2016 – present

India 2018 - present

 

F - 58

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CAESARSTONE LTD. AND ITS SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

U.S. dollars in thousands (except share data)

 

NOTE 12:-

TAXES ON INCOME (Cont.)

 

h.

Uncertain tax positions:

 

The balances at December 31, 2021 and 2020 include a liability for unrecognized tax benefits of $3,773 and $3,663, respectively, for tax positions which are uncertain of being sustained.

 

A reconciliation of the beginning and ending balances of unrecognized tax benefits is as follows:

 

Gross tax liabilities at January 1, 2019		$	3,876
Increase in tax positions for current year			1,037
Gross tax liabilities at December 31, 2019			4,913
Increase in tax positions for current year			1,659
Addition of tax position of prior years			118
Decrease in tax position resulting from settlement			(3,027	)
Gross tax liabilities at December 31, 2020			3,663
Increase in tax positions for current year			110
Addition of tax position of prior years			-
Decrease in tax position resulting from settlement			-
Gross tax liabilities at December 31, 2021		$	3,773

 

The Company believes that an adequate provision has been made for any adjustments that may result from tax examinations. However, the outcome of tax audits cannot be predicted with certainty. If any issues addressed in the Company's tax audits are resolved in a manner not consistent with management's expectations, the Company could be required to adjust the provision for income taxes in the period such resolution occurs. The Company does not expect uncertain tax positions to change significantly over the next 12 months, except in the case of settlements with tax authorities, the likelihood and timing of which is difficult to estimate.

 

F - 59

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CAESARSTONE LTD. AND ITS SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

U.S. dollars in thousands (except share data)

 

NOTE 13:-

SHAREHOLDERS' EQUITY

 

a.

The Company's share capital consisted of the following as of December 31, 2020 and 2019:

 

		Authorized								Outstanding
		December 31,								December 31,
		2021				2020				2021				2020
		Number of shares
Ordinary shares of NIS 0.04 par value each			200,000,000				200,000,000				34,473,070				34,437,296

 

b.

Ordinary shares:

 

Ordinary shares confer on their holders voting rights and the right to receive dividends.

 

c.

Dividends:

 

In February 2020 the Company revised its dividend policy so that cash dividend will be distributed up to 50% of the year to date reported net income attributable to controlling interest less any amounts already paid as dividend for the respective period, provided that such calculated dividend is not less than $0.10. Any dividend payment is subject to approval by the Company’s board of directors.

 

Pursuant to the above policy the Company paid a total amount of $10,681 and $4,821 in 2021 and 2020, respectively, of dividend mostly out of its non-tax exempt profit under the beneficiary enterprise (see also note 12).

 

d.

Repurchase of shares:

 

On February 9, 2016, the Company’s Board of Directors approved a share repurchase plan authorizing the repurchase of up to $40,000 of the Company’s outstanding ordinary shares which was complete on August 3, 2016. Following the authorization, the Company repurchased 1,103,096 ordinary shares at an average price of $35.74 per share (excluding broker and transaction fees). The Company recorded shares repurchased at cost as part of its equity statement. During 2019 the Israeli tax authorities examined Company’s withholding tax filings and asserted that the Company’s buyback should be defined as dividend payment and as such is subject to 20% withholding tax. The Company concluded this matter as part of the tax assessment during 2021.

 

F - 60

---

CAESARSTONE LTD. AND ITS SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

U.S. dollars in thousands (except share data)

NOTE 13:-	SHAREHOLDERS' EQUITY (Cont.)

 

e.

Compensation plan:

 

On January 1, 2011, the Board of Directors adopted the Caesarstone Ltd 2011 Incentive Compensation Plan (the “2011 Plan”) pursuant to which non-employee directors, officers, employees and consultants may receive stock options and RSUs exercisable for ordinary shares, if certain conditions are met. Under the plan the Company can grant up to 3,275,000 ordinary shares. On September 17, 2020 the Board of Directors adopted Caesarstone Ltd 2020 Share incentive plan (the “2020 Plan”). Under the 2020 Plan up to 2,500,000 ordinary shares may be granted. In addition, any shares that remain available for issuance under the 2011 Plan, as of the Effective Date, which shall not exceed 1,000,000 Shares, may also be granted under the 2020 Plan.

 

As of December 31, 2021, there were 1,683,803 options and restricted stock units (RSUs) outstanding under the Plans and 2,273,070 shares available or reserved for future issuance under the plan.

 

As of December 31, 2021, there was $2,722 of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted to employees and directors under the Plan. That cost is expected to be recognized over a weighted-average period of 3.1 years.

 

The following is a summary of activities relating to the Company’s stock options granted to employees under the Company’s plan during the year ended December 31, 2021:

 

		Number of options				Weighted average exercise price				Aggregate intrinsic value
Outstanding - beginning of the year			1,414,500				18.11				257
Granted			339,450				13.35
Exercised			(14,750	)			13.45
Forfeited			(138,625	)			18.25
Outstanding - end of the year			1,600,575				16.87				47
Options exercisable at the end of the year			843,875				19.87				12
Vested and expected to vest			1,600,575				16.87				47

 

The weighted average fair value of options granted during 2021, 2020 and 2019 was $5.2, $4.9 and $6.2 per option. The weighted average fair value of options vested during 2021, 2020 and 2019 was $14.07 $8.32 and $14.18 per option. The intrinsic value of options exercised during 2021, 2020 and 2019 was $0, $0 and $35.

 

F - 61

---

CAESARSTONE LTD. AND ITS SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

U.S. dollars in thousands (except share data)

NOTE 13:-	SHAREHOLDERS' EQUITY (Cont.)

 

The intrinsic value of exercisable options (the difference between the Company’s closing share price on the last trading day in fiscal year 2021 and the average exercise price of in-the-money options, multiplied by the number of in-the-money options) included above represents the amount that would have been received by the option holders had all option holders exercised their options on December 31, 2021. This amount changes based on the fair market value of the Company’s ordinary shares.

 

The following is a summary of activities relating to the Company’s RSUs granted to employees under the Plan during the year ended December 31, 2021:

 

		Number of RSUs				Weighted average fair value				Aggregate intrinsic value
Outstanding - beginning of the year			84,724				15.30				1,091
Granted			40,968				13.45
Exercised			(35,390	)			15.86
Forfeited			(7,074	)			8.34
Outstanding - end of the year			83,228				13.92				940
RSUs exercisable at the end of the year			-				-				-
Vested and expected to vest			83,228				13.92				940

 

The awards outstanding as of December 31, 2021 have been separated into ranges of exercise price, as follows:

 

				Awards outstanding												Awards exercisable
Exercise price				Number of options				Weighted average remaining contractual life (years)				Weighted average exercise price per share				Number of options				Weighted average remaining contractual life (years)				Weighted average exercise price
$	0.01 (RSUs)				83,228				5.48			$	0.01				-				-				-
$	9.7-14.8				916,575				5.23			$	13.03				297,875				4.25				13.13
$	15.0-20.0				400,000				4.60			$	15.47				267,500				3.97				15.38
$	20.5-29.8				128,000				2.61			$	27.21				122,500				2.56				27.51
$	30.5-41.8				156,000				0.93			$	34.45				156,000				0.93				34.45
					1,683,803												843,875

 

F - 62

---

CAESARSTONE LTD. AND ITS SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

U.S. dollars in thousands (except share data)

NOTE 13:-	SHAREHOLDERS' EQUITY (Cont.)

 

Compensation expenses related to options and RSUs granted were recorded in the consolidated statements of operations, as follows:

 

		December 31,
		2021				2020
Cost of revenues		$	321			$	416
Research and development expenses			89				176
Marketing and selling expenses			269				465
General and administrative expenses			1,167				1,801
Total		$	1,846			$	2,858

 

NOTE 14:-

TRANSACTIONS WITH RELATED PARTIES AND OTHER LOAN

 

The Company's controlling shareholder, Kibbutz Sdot-Yam (the “Kibbutz"), has an ownership interest in the Company of approximately 30.3%, as of December 31, 2021.

 

On September 5, 2016, Kibbutz Sdot-Yam entered into a term sheet with Tene Investment in Projects 2016 Limited Partnership (“Tene”), pursuant to which both the Kibbutz and Tene are deemed the Company’s controlling shareholders under the Israeli Companies Law. Pursuant to the agreement, the parties agreed, among other things, to vote at general meetings of the shareholders of the Company in the same manner, following discussions intended to reach an agreement on any matters proposed to be voted upon, with Tene determining the manner in which both parties shall vote if no agreement is reached, except with respect to certain carved-out matters, with respect to which, Mifalei Sdot-Yam will determine the manner in which both parties shall vote if no agreement is reached. The term sheet provides for the sale of 1,000,000 ordinary shares by Kibbutz Sdot-Yam to Tene as well as a call option conferring upon Tene for a period of five years the right to purchase from Mifalei Sdot-Yam up to 2,000,000 ordinary shares. On February 20, 2018, the term of the call option was extended by an additional two-year period.

 

As of December 31, 2021 the Kibbutz and Tene beneficially own 14,029,494 ordinary shares (or approximately 40.7% of the outstanding).

 

The Company is party to a series of agreements with the Kibbutz that govern different aspects of the Company's relationship and are described below.

 

a.

Manpower agreement with the Kibbutz:

 

On July 2011, the Company entered into a manpower agreement with Kibbutz Sdot-Yam such was automatically renewed during 2021 for additional one year term, and will be automatically renewed again, unless one of the parties gives six months’ prior notice, for additional one-year periods.

 

F - 63

---

CAESARSTONE LTD. AND ITS SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

U.S. dollars in thousands (except share data)

 

NOTE 14:-

TRANSACTIONS WITH RELATED PARTIES AND OTHER LOAN (Cont.)

 

On July 30, 2015, and on October 14, 2018, following the approval of Company's audit committee, compensation committee and board of directors, Company's shareholders approved an addendum to the Manpower Agreement by and between Kibbutz Sdot-Yam and the Company, with respect to the engagement of office holders affiliated with Kibbutz Sdot-Yam, for an additional three-year term as of the date of the shareholders’ approval.

 

During 2021, following the approval of Company’s audit committee and the board of directors, the manpower agreement is valid through 2030.

 

Under the manpower agreement and its addendum, Kibbutz Sdot-Yam will provide the Company with labor services staffed by Kibbutz members, candidates for Kibbutz membership and Kibbutz residents (“Kibbutz Appointees”). The consideration to be paid for each Kibbutz Appointee will be based on the Company's total cost of employment for a non-Kibbutz Appointee employee performing a similar role. The number of Kibbutz Appointees may change in accordance with the Company's needs. Under the manpower agreement, the Company will notify Kibbutz Sdot-Yam of any roles that require staffing, and if the Kibbutz offers candidates with skills similar to other candidates, the Company will give preference to hiring of the relevant Kibbutz members. Kibbutz Sdot-Yam is entitled under this agreement, at its sole discretion, to discontinue the engagement of any Kibbutz Appointee of manpower services through his or her employment by Kibbutz Sdot-Yam and require such appointee to become employed directly by the Company.

 

The manpower agreement and addendum also includes Kibbutz Sdot-Yam’s obligation to customary liability, insurance, indemnification and confidentiality and intellectual property provisions. Office holders who are Kibbutz Appointees shall have all benefits applicable to Company's other office holders, including without limitation, directors’ and officers’ liability insurance, and Company's indemnification and exemption undertaking.

 

Manpower service fees paid were $1,803, $2,106 and $2,408 for the years ended December 31, 2021, 2020 and 2019, respectively.

 

F - 64

---

CAESARSTONE LTD. AND ITS SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

U.S. dollars in thousands (except share data)

 

NOTE 14:-

TRANSACTIONS WITH RELATED PARTIES AND OTHER LOAN (Cont.)

 

b.

Services from the Kibbutz:

 

On July 20, 2011 the Company entered into a services agreement with the Kibbutz that was further amended on February 13, 2012 (the “Original Services Agreement”). Pursuant to the Original Services Agreement, the Kibbutz provided various services related to Company’s operational needs. The Original Services Agreement also outlined the distribution mechanism between the Company and Kibbutz Sdot-Yam, for certain expenses and payments due to local authorities, such as taxes and fees in connection with Company’s business facilities. The agreement expired on March 21, 2015.

 

On July 30, 2015, following the approval of the audit committee and the board, Company’s shareholders approved an amended services agreement pursuant to which, Kibbutz Sdot-Yam will continue to provide various services it provides in the ordinary course of Company's business, for a period of three years commencing as of the date of approval by the shareholders.

 

On October 14, 2021, following the approval of the audit committee and the board, Company’s shareholders approved a further amended services agreement (“Amended Services Agreement”) for an additional period of three years.

 

The amount that the Company pays to Kibbutz Sdot-Yam under the Amended Services Agreement depends on the scope of services the Company will receive and is based on rates specified in such agreement which were determined based on market terms, taking into account the added value of consuming services from Kibbutz Sdot-Yam, considering its physical proximity to Company’s manufacturing plant in Sdot-Yam and its expertise.

 

The amounts the Company pays for the services are subject to certain adjustments for increases in the Israeli consumer price index. In addition, the Amended Services Agreement grants Kibbutz Sdot-Yam right of first proposal in special projects with respect to the metal workshop services. The amended services agreement also outlines the distribution mechanism between the Company and the Kibbutz for certain expenses and payments due to local authorities, such as certain taxes and fees in connection with the Company’s business facilities. Each party may terminate such agreement upon a material breach, following a 30-day prior notice, or upon liquidation of the other party, following a 45-days’ prior notice.

 

The Company's net service fees paid to the Kibbutz pursuant to the Original and Amended Services Agreements were $1,468, $1,315 and $1,451 for the years ended December 31, 2021, 2020 and 2019, respectively.

 

F - 65

---

CAESARSTONE LTD. AND ITS SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

U.S. dollars in thousands (except share data)

 

NOTE 14:-

TRANSACTIONS WITH RELATED PARTIES AND OTHER LOAN (Cont.)

 

c.

Land Use Agreement with the Kibbutz:

 

Land leased to Kibbutz Sdot-Yam by the ILA and the Caesarea Development Corporation

 

The Company's principal offices and research and development facilities, as well as one of its two manufacturing facilities, are located on the grounds of the Kibbutz and include buildings spaces of approximately 30,744 square meters and unbuilt areas of approximately 60,870 square meters.

 

The Company signed a land use agreement with the Kibbutz, which has a term of 20 years commencing on April 1, 2012. Under the land use agreement, Kibbutz Sdot-Yam permits the Company to use approximately 100,000 square meters of land, consisting of facilities and unbuilt areas, in consideration for an annual fee of NIS 12.9 million (approximately $4,000) in 2013 and thereafter, (this amount does not include approximately NIS 62,000 (approximately $19) for an additional area that the Company has leased on the grounds of Kibbutz Sdot-Yam due to the Company's needs and Kibbutz Sdot-Yam's consent under the same terms as the land use agreement), plus VAT, adjusted every six months based on any increase of the Israeli consumer price index compared to the index as of January 2011.

 

During January 2018, the Kibbutz requested to increase the fees due to it, pursuant to the land lease agreement. Following the assessment of an appointed appraiser and negotiations between the Company and the Kibbutz, it was agreed to increase the fees under such agreement, such that for the year 2018 the Company paid additional amount of NIS 950,000 (approximately $250), and commencing 2019 and on the Company was paying an additional annual amount of NIS 1,100,000 (approximately $342).

 

As per the agreement, the annual fee may be adjusted after January 1, 2021 and every three years thereafter, at the election of Kibbutz Sdot-Yam by obtaining an updated appraisal. The appraiser will be mutually agreed upon or, in the absence of agreement, will be chosen by Kibbutz Sdot-Yam out of the list of appraisers recommended at that time by Bank Leumi Le-Israel ("Bank Leumi"). During 2021, The Kibbutz elected this option and the parties mutually agreed upon a land appraiser, and based on its study the fees were adjusted for 2021 onwards for annual amount of approximately NIS 18,600,000 (approximately $5,980), linked to the Israeli consumer price index.

 

Under the land use agreement, the Company may not terminate the operation of either of its two production lines at its plant in Kibbutz Sdot-Yam as long as the Company continues to operate production lines elsewhere in Israel, and its headquarters must remain at Kibbutz Sdot-Yam. The Company may also not decrease or return to Kibbutz Sdot-Yam any part of the land underlying the land use agreement; however, it may submit a written request to Kibbutz Sdot-Yam to return certain lands. Kibbutz Sdot-Yam will have three months to accept or reject such request, in its sole discretion, provided that if it does not respond within such three-month period, the Company will be entitled to sublease such lands to a person approved in advance by Kibbutz Sdot-Yam. In such event, the Company will continue to be liable to Kibbutz Sdot-Yam with respect to such lands.

 

F - 66

---

CAESARSTONE LTD. AND ITS SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

U.S. dollars in thousands (except share data)

 

NOTE 14:-

TRANSACTIONS WITH RELATED PARTIES AND OTHER LOAN (Cont.)

 

Pursuant to the land use agreement, if the Company needs additional facilities on the land that the Company is permitted to use in Kibbutz Sdot-Yam, subject to obtaining the permits required by law, Kibbutz Sdot-Yam will build such facilities for the Company, by using the proceeds of a loan that the Company will make to Kibbutz Sdot-Yam, which loan shall be repaid to the Company by off-setting the monthly additional payment that the Company will pay for such new facilities and, if not fully repaid during the land use agreement term, upon termination thereof.

 

In addition, the Company has committed to fund the cost of construction, up to a maximum of NIS 3.3 million (approximately $1,100) plus VAT, required to change the access road leading to Kibbutz Sdot-Yam and its facilities, such that the entrance of the Company's facilities will be separated from the entrance into Kibbutz Sdot-Yam. In addition, the Company has committed to pay NIS 200,000 (approximately $64) plus VAT to cover the cost of paving an area of land leased from Kibbutz Sdot-Yam with such payment to be deducted in monthly installments over a four-year period beginning in the year that the construction completed, from the lease payments to be made to Kibbutz Sdot-Yam under the land use agreement related to the Company's Sdot-Yam facility.

 

F - 67

---

CAESARSTONE LTD. AND ITS SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

U.S. dollars in thousands (except share data)

 

NOTE 14:-

TRANSACTIONS WITH RELATED PARTIES AND OTHER LOAN (Cont.)

 

d.

Financing liability of land:

 

Pursuant to the Land Use Agreement, the Company has entered into an agreement with Kibbutz Sdot-Yam dated August 6, 2013, under which Kibbutz Sdot-Yam acquired additional land of approximately 12,800 square meters on the grounds near the Company's Bar-Lev facility, which the Company required in connection with the construction of the fifth production line at the Company's Bar-Lev manufacturing facility, leased it to the Company for a monthly fee of approximately NIS 70,000 (approximately $22).

 

Under the agreement, Kibbutz Sdot-Yam committed to (i) acquire the long-term leasing rights of the Additional Bar-Lev Land from the ILA, (ii) perform preparation work and construction, in conjunction with the administrative body of Bar-Lev industrial park and other contractors according to Company’s plans, (iii) build a warehouse according Company’s plans, and (iv) obtain all permits and approvals required for performing the preparation work of the Additional Bar-Lev Land and for the building of the warehouse. The warehouse in Bar-Lev will be situated both on the current and new land. The finance of the building of the warehouse will be made through a loan that will be granted by the Company to Kibbutz Sdot-Yam, in the amount of the total cost related to the building of the warehouse and such loan, including principle and interest, shall be repaid by setoff of the lease due to Kibbutz Sdot Yam by the Company for its use of the warehouse. The principle amount of such loan will bear an interest at a rate of 1.4% a year. On November 30, 2015 the land preparation work had been completed and the holding of the Additional Bar-Lev Land was delivered to the Company. As of December 31, 2021, the construction of the warehouse has not started yet.

 

The Company's payments pursuant to the land use agreement totaled $5,305, $4,690 and $4,459 for the years ended December 31, 2021, 2020 and 2019, respectively.

 

F - 68

---

CAESARSTONE LTD. AND ITS SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

U.S. dollars in thousands (except share data)

 

NOTE 14:-

TRANSACTIONS WITH RELATED PARTIES AND OTHER LOAN (Cont.)

d.

Financing liability of land (cont.):

 

Pursuant to a land purchase and leaseback agreement, dated as of March 31, 2011, which became effective upon the Company’s IPO, between the Company and Kibbutz Sdot-Yam, the Company completed the selling of the rights in the lands and facilities of the Bar-Lev Industrial Center (the "Bar-Lev Grounds") to Kibbutz Sdot-Yam in consideration for NIS 43.7 million (approximately $10,900). The land purchase agreement was executed simultaneously with the execution of a land use agreement. Pursuant to the land use agreement, Kibbutz Sdot-Yam permits the Company to use the Bar-Lev Grounds for a period of 10 years commencing on September 2012 that will be automatically renewed, unless the Company gives two years prior notice, for a ten-year term in consideration for an annual fee of NIS 4.1 million (approximately $1,200) to be linked to increases in the Israeli consumer price index. As per the agreement, the fee is subject to adjustment following January 1, 2021 and every three years thereafter at the option of Kibbutz Sdot-Yam if Kibbutz Sdot-Yam chooses to obtain an appraisal that supports such an increase. The appraiser would be mutually agreed upon or, in the absence of agreement, will be chosen by Kibbutz Sdot-Yam from a list of assessors recommended at that time by Bank Leumi. During 2021, The Kibbutz elected this option and the parties mutually agreed upon a land appraiser, and based on its study the fees were adjusted for 2021 onwards for total annual amount of approximately NIS 8,100,000 (approximately $2,600), linked to the Israeli consumer price index.

 

The transaction was not qualified as "sale lease-back" accounting under both ASC 840 and ASC 842 and the Company recorded the entire amount received as consideration as a liability.

 

The financing liability of land from a related party is in amount of $7,138 of December 31, 2021. This liability will mature through 2022 year.

 

The balance at December 31, 2021 and 2020, includes $102 and $247 of deferred tax assets on the Company liability and a $680 and $725 deferred tax liability on the buildings depreciation during the next years due to temporary differences between the carrying amounts of the property and the liability for financial reporting purposes and the amounts used for income tax purposes.

 

The Company's payments pursuant to the land purchase agreement and leaseback totaled $2,360, $1,244 and $1,189 for the years ended December 31, 2021, 2020 and 2019, respectively.

 

F - 69

---

CAESARSTONE LTD. AND ITS SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

U.S. dollars in thousands (except share data)

 

NOTE 14:-

TRANSACTIONS WITH RELATED PARTIES AND OTHER LOAN (Cont.)

 

e.

Details on transactions and balances with related parties and other loan:

 

1.

The Company has, from time to time, entered into transactions with its shareholders (the Kibbutz). The following table summarizes such transactions:

 

		Year ended December 31,
		2021				2020				2019
Cost of revenues		$	8,157			$	7,200			$	6,890
Research and development		$	547			$	406			$	301
Selling and marketing		$	723			$	638			$	708
General and administrative		$	873			$	913			$	1,283
Finance expenses, net		$	106			$	491			$	511

 

2.

Balances with related party and other loan:

 

		December 31,
		2021				2020
Financing liability of land from related party- current maturities, and other related party balances (1)		$	2,276			$	1,746
Long-term financing liability of land from a related party (1)		$	5,693			$	6,723
Other loans (2)		$	547			$	4,440

 

1.

Mainly reflects a financing leaseback of $10,900 related to Bar-Lev transaction from September 2012, that was granted to the Company by Kibbutz Sdot-Yam. The financing leaseback bears interest until repayment at a per annum rate equal to 1.41% and is subject to adjustment for increases in the Israeli consumer price index.

 

F - 70

---

CAESARSTONE LTD. AND ITS SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

U.S. dollars in thousands (except share data)

 

NOTE 14:-

TRANSACTIONS WITH RELATED PARTIES AND OTHER LOAN (Cont.)

	2.	Balances with related party and other loan (Cont.):

 

2.

Other loans:

 

a.

On January 17, 2011 a loan of 4 million Canadian dollars was made to Caesarstone Canada Inc. by its shareholders at that time CIOT and the Company, on a pro rata basis. Although the Company acquired CIOT ownership interest in Caesarstone Canada Inc. during December, 2018, the loan continues to bear interest until repayment at a per annum rate equal to Bank of Canada's prime business rate plus 0.25%. The interest accrued on the loan is payable on a quarterly basis. Such loan is repaid in three equal annual installments starting 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 was in the amount of approximately $3,969. During 2021, subject to certain conditions and regulatory approvals met by Lioli, the Company assumed 55% of the shareholders loan in the amount of approximately $1,966. 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 was $9,543. As of December 31, 2021, the loan is presented under Short-term bank credit due to certain unmet covenents with the bank of India. The loan is denominated in Indian rupee and it bears interest rate of India labor plus 4.5%.

b.     The loan is secured by substantially all the Lioli’s assets. Lioli is committed not to pledge or charge and not to undertake to pledge or charge its general floating assets and in addition not to enter into new loan arrangements without the prior written consent of the bank.

NOTE 16:-

MAJOR CUSTOMER AND GEOGRAPHIC INFORMATION

 

a.

The Company manages its business on the basis of one reportable segment. The data is presented in accordance with Accounting Standard Codification 280, "Segments Reporting" ("ASC 280"). The following is a summary of revenue and long-lived assets (including Property, plant and equipment, intangible assets and operating lease right-of-use assets) by geographic area. Revenues are attributed to geographic areas based on the location of end customers.

 

F - 71

---

CAESARSTONE LTD. AND ITS SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

U.S. dollars in thousands (except share data)

NOTE 16:-MAJOR CUSTOMER AND GEOGRAPHIC INFORMATION (Cont.)

 

The following table presents total revenues for the years ended December 31, 2021, 2020 and 2019, respectively:

 

		Year ended December 31,
		2021				2020				2019
USA		$	305,353			$	207,496			$	250,471
Canada			84,467				72,492				85,979
Latin America			4,702				2,149				4,115
Australia			118,714				103,587				108,149
Asia			30,390				14,566				15,514
EMEA			60,836				45,201				43,054
Israel			39,430				40,921				38,692
		$	643,892			$	486,412			$	545,974

 

No customer represented 10% or more of the Company’s revenues for the years ended December 31, 2021, 2020 and 2019.

 

b.

The following table presents total long-lived assets as of December 31, 2021 and 2020:

 

		December 31,
		2021				2020
USA		$	156,998			$	167,370
Canada			4,413				5,384
Australia			13,143				14,947
Asia			28,453				29,955
EMEA			7,626				8,398
Israel			174,796				132,855
		$	385,429			$	358,909

 

F - 72

---

CAESARSTONE LTD. AND ITS SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

U.S. dollars in thousands (except share data)

 

NOTE 17:-

SELECTED SUPPLEMENTARY STATEMENTS OF INCOME DATA

 

a.

Finance expense, net:

 

		Year ended December 31,
		2021				2020				2019
Finance expenses:
Interest in respect credit cards and bank fees		$	4,702			$	3,254			$	3,342
Interest in respect of loans			2,035				1,053				568
Amortization/accretion of premium/discount on marketable securities			200				161				-
Realized gain/loss from marketable securities			134				11				-
Changes in derivatives fair value			-				3,427				-
Foreign exchange transactions losses			6,023				7,128				6,578
			13,094				15,034				10,488
Finance income:
Interest in respect of cash and cash equivalent and short-term bank deposits			147				657				1,018
Changes in derivatives fair value			4,950				-				33
Interest income from marketable securities			407				213				-
Foreign exchange transactions gains			-				3,965				3,859
			5,504				4,835				4,910
Finance expenses, net		$	7,590			$	10,199			$	5,578

 

b.

Net earnings per share:

 

The following table sets forth the computation of basic and diluted net earnings per share:

 

Numerator:

 

		Year ended December 31,
		2021				2020				2019
Net income attributable to controlling interest, as reported		$	18,966			$	7,218			$	12,862
Adjustment to redemption value of non-controlling interest			(1,399	)			-				-
Numerator for basic and diluted net income per share		$	17,567			$	7,218			$	12,862

 

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CAESARSTONE LTD. AND ITS SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

U.S. dollars in thousands (except share data)

NOTE 17:-

SELECTED SUPPLEMENTARY STATEMENTS OF INCOME DATA (Cont.)

 

Denominator:

 

		Year ended December 31,
		2021				2020				2019
Denominator for basic income per share			34,462				34,419				34,384
Effect of dilutive stock based awards			108				55				76
Denominator for diluted income per share			34,570				34,474				34,460

 

Earnings per share:

Basic and diluted earnings per share		$	0.51			$	0.21			$	0.37

 

NOTE 18:-SUBSEQUENT EVENTS

 

1.

The current conflict in Ukrain may make it difficult in the short and long term to purchase certain raw materials used in production of certain Company's products. It could also delay Company's output or supply of products, harm the relationships with customers, damage the brand and reputation, increase the raw materials and shipments costs, particularly energy related costs, and have a material adverse effect on Company's results of operations.

 

2.

During March 2022, the Company participated in rights offering in Lioli, and purchased additional 9,870,000 shares in amount of approximately $2.5 million. Following this oferring, the Company holds 60.4% of Lioli's shares on a fully diluted basis.

 

- - - - - - - - - - -

 

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Collins Square, Tower 5 727 Collins Street Melbourne Victoria 3008   Correspondence to: GPO Box 4736 Melbourne Victoria 3001   T +61 3 8320 2222 F +61 3 8320 2200 E info.vic@au.gt.com W www.grantthornton.com.au

Report of Independent Registered Public Accounting Firm

 

To the Board of Directors and Shareholders of Caesarstone Australia Pty Ltd

Opinion on the financial statements We have audited the accompanying balance sheets of Caesarstone Australia Pty Ltd (the “Company”) as of December 31, 2021 and 2020, the related statements of operations, comprehensive income, equity, and cash flows for each of the three years in the period ended December 31, 2021, and the related notes (collectively referred to as the “financial statements”) (not presented herein). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America.   We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2021, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated March 15, 2022 expressed an unqualified opinion.

 

Basis for opinion

 

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

Grant Thornton Audit Pty Ltd ACN 130 913 594 a subsidiary or related entity of Grant Thornton Australia Ltd ABN 41 127 556 389   ‘Grant Thornton’ refers to the brand under which the Grant Thornton member firms provide assurance, tax and advisory services to their clients and/or refers to one or more member firms, as the context requires. Grant Thornton Australia Ltd is a member firm of Grant Thornton International Ltd (GTIL). GTIL and the member firms are not a worldwide partnership. GTIL and each member firm is a separate legal entity. Services are delivered by the member firms. GTIL does not provide services to clients. GTIL and its member firms are not agents of, and do not obligate one another and are not liable for one another’s acts or omissions. In the Australian context only, the use of the term ‘Grant Thornton’ may refer to Grant Thornton Australia Limited ABN 41 127 556 389 and its Australian subsidiaries and related entities. GTIL is not an Australian related entity to Grant Thornton Australia Limited.   Liability limited by a scheme approved under Professional Standards Legislation.		www.grantthornton.com.au

 

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Critical audit matters

 

The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved out especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

 

Impairment of Goodwill

In accordance with ASC 350 Intangibles – Goodwill and Other, goodwill is allocated to the Company’s reporting units. For each reporting unit to which goodwill has been allocated, the Company is required to evaluate the potential impairment of goodwill annually and whenever events or circumstances indicate the carrying value of goodwill may not be recoverable. This evaluation is performed by comparing the fair value of the reporting unit with its carrying value. If the carrying value exceeds

the fair value of the reporting unit, the Company recognizes an impairment charge.

 

The principal considerations for our determination that the evaluation of goodwill for impairment is a critical audit matter are that the determination of the fair value of the goodwill relies on the use of management estimates related to forecasted future cash flows and discount rates. This requires management to evaluate historical results and expectations of future operating performance based on relevant information available to them regarding expectations of industry performance, as well as, expectations for company-specific performance. Determining the discount rate requires management to evaluate the appropriate risk premium based on their judgment of industry and company-specific risks. Significant management judgments and estimates utilized to determine the fair value are subject to estimation uncertainty and require significant auditor

subjectivity in evaluating the reasonableness of those judgments and estimates.

 

Our procedures included, amongst others:

 

•

We tested the design and operating effectiveness of internal controls relating to management’s determination of the fair value of goodwill, including controls over the determination of key inputs and assumptions relating to forecasting of future cash flows and determination of the discount rate;

 

•

We assessed management’s identification of each of the reporting units based on our understanding of the nature of the Company’s business and cash flows;

 

•

We challenged management’s assumptions behind the cash flow projections by comparing to market-related assumptions and historical operating results;

 

•

We evaluated management’s historical ability to achieve forecasted revenue and operating units; and

 

•

We utilized a valuation specialist to assist in testing the Company’s discounted cash flow model and in evaluating the reasonableness of significant assumptions to the mode, including the discount rate.

 

/s/ Grant Thornton Audit Pty Ltd

Grant Thornton Audit Pty Ltd

 

We have served as the Company’s auditor since 2008.

 

Melbourne, Australia
March 15, 2022

 

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Collins Square, Tower 5 727 Collins Street Melbourne Victoria 3008   Correspondence to: GPO Box 4736 Melbourne Victoria 3001   T +61 3 8320 2222 F +61 3 8320 2200 E info.vic@au.gt.com W www.grantthornton.com.au

Report of Independent Registered Public Accounting Firm

 

To the Board of Directors and Shareholders of Caesarstone Australia Pty Ltd

Opinion on internal control over financial reporting We have audited the internal control over financial reporting of Caesarstone Australia Pty Ltd (the “Company”) as of December 31, 2021, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on criteria established in the 2013 Internal Control—Integrated Framework issued by COSO.   We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the financial statements of the Company as of and for the year ended December 31, 2021, and our report dated March 15, 2022 expressed an unqualified opinion on those financial statements.

 

Basis for opinion

 

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

 

Grant Thornton Audit Pty Ltd ACN 130 913 594 a subsidiary or related entity of Grant Thornton Australia Ltd ABN 41 127 556 389   ‘Grant Thornton’ refers to the brand under which the Grant Thornton member firms provide assurance, tax and advisory services to their clients and/or refers to one or more member firms, as the context requires. Grant Thornton Australia Ltd is a member firm of Grant Thornton International Ltd (GTIL). GTIL and the member firms are not a worldwide partnership. GTIL and each member firm is a separate legal entity. Services are delivered by the member firms. GTIL does not provide services to clients. GTIL and its member firms are not agents of, and do not obligate one another and are not liable for one another’s acts or omissions. In the Australian context only, the use of the term ‘Grant Thornton’ may refer to Grant Thornton Australia Limited ABN 41 127 556 389 and its Australian subsidiaries and related entities. GTIL is not an Australian related entity to Grant Thornton Australia Limited.   Liability limited by a scheme approved under Professional Standards Legislation.		www.grantthornton.com.au

 

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Definition and limitations of internal control over financial reporting

 

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

/s/ Grant Thornton Audit Pty Ltd

Grant Thornton Audit Pty Ltd

 

Melbourne, Australia
March 15, 2022

 

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