UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 20-F
(Mark One)
| ☐ |
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
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OR
| ☒ |
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2023
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OR
| ☐ |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ______
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OR
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☐ |
SHELL COMPANY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of event requiring this shell company report.
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Commission File Number 001-35464
CAESARSTONE LTD.
(Exact name of Registrant as specified in its charter)
(Exact name of Registrant as specified in its charter)
(Jurisdiction of incorporation or organization)
Kibbutz Sdot-Yam
MP Menashe, 3780400
Israel
(Address of principal executive offices)
MP Menashe, 3780400
Israel
(Address of principal executive offices)
Yosef (Yos) Shiran
Chief Executive Officer
Caesarstone Ltd.
MP Menashe, 3780400
Israel
Telephone: +972 (4) 636-4555
Facsimile: +972 (4) 636-4400
(Name, telephone, email and/or facsimile number and address of company contact person)
Chief Executive Officer
Caesarstone Ltd.
MP Menashe, 3780400
Israel
Telephone: +972 (4) 636-4555
Facsimile: +972 (4) 636-4400
(Name, telephone, email and/or facsimile number and address of company contact person)
Securities registered or to be registered pursuant to Section 12(b) of the Securities Act of 1933:
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Title of each class
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Trading Symbol
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Name of each exchange on which registered
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Ordinary shares, par value NIS 0.04 per share
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CSTE
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The Nasdaq Stock Market LLC
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Securities registered or to be registered pursuant to Section 12(g) of the Act: None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of December 31, 2023: 34,532,452 ordinary shares
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act:
Yes ☐ No ☒
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934:
Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days:
Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files):
Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer” and “emerging growth company” in Rule 12b-2 of the Exchange Act (Check one):
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Large accelerated filer ☐
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Accelerated filer ☒
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Non-accelerated filer ☐
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Emerging growth company ☐
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If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act. ☐
† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
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U.S. GAAP ☒
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International Financial Reporting Standards as issued by
the International Accounting Standards Board ☐
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Other ☐
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If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow:
Item 17 ☐ Item 18 ☐
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):
Yes ☐ No ☒
PRELIMINARY NOTES
Introduction
As used herein, and
unless the context suggests otherwise, the terms “Caesarstone,” “Company,” “we,” “us”
or “ours” refer to Caesarstone Ltd. and its consolidated subsidiaries. In this document, references to “NIS” or
“shekels” are to New Israeli Shekels, and references to “dollars,” “USD” or “$” refer
to U.S. dollars.
Our reporting currency
is the United States (“U.S.”) dollar. The functional currency of each of our non-U.S.
subsidiaries is the local currency in which it operates. These subsidiaries’ financial statements are translated into the U.S. dollar,
the parent company’s functional currency, using the current rate method.
Other financial data
appearing in this annual report that is not included in our consolidated financial statements and that relate to transactions that occurred
prior to December 31, 2023 are reflected using the exchange rate on the relevant transaction date. With respect to all future transactions,
U.S. dollar translations of NIS amounts presented in this annual report are translated at the rate of $1.00 = NIS 3.627, the representative
exchange rate published by the Bank of Israel as of December 29, 2023.
Market and Industry Data and Forecasts
This annual report
includes data, forecasts and information obtained from industry publications and surveys and other information available to us. Some data
is also based on our good faith estimates, which are derived from management’s knowledge of the industry and independent sources.
Forecasts and other metrics included in this annual report to describe the countertop industry are inherently uncertain and speculative
in nature and actual results for any period may materially differ. We have not independently verified any of the data from third-party
sources, nor have we ascertained the underlying assumptions relied upon therein. While we are not aware of any misstatements regarding
the industry data presented herein, estimates and forecasts involve uncertainties and risks and are subject to change based on various
factors, including those discussed under the headings “—Forward-Looking Statements” and “ITEM 3: Key Information—Risk
Factors” in this annual report.
Unless otherwise noted
in this annual report, Freedonia Custom Research, a division of MarketResearch.com, Inc. (“Freedonia”)
is the source for third-party industry data and forecasts. The Freedonia report, dated March 8, 2023 (“Freedonia
Report”), represents data, research opinion or viewpoints developed independently by Freedonia and does not constitute a
specific guide to action. In preparing the report, Freedonia used various sources, including publicly available third-party financial
statements; government statistical reports; press releases; industry magazines; and interviews with manufacturers of related products
(including us), manufacturers of competitive products, distributors of related products, and government and trade associations. Growth
rates in the Freedonia Report are based on many variables, such as currency exchange rates, raw material costs and pricing of competitive
products, and such variables are subject to wide fluctuations over time. The Freedonia Report speaks as of its final publication date
(and not as of the date of this filing), and the opinions and forecasts expressed in the Freedonia Report are subject to change by Freedonia
without notice. Management believes this third-party report to be reputable, but has not independently verified the underlying data sources,
methodologies, or assumptions. The report and other publications referenced are generally available to the public and were not commissioned
by the Company.
Special Note Regarding Forward-Looking Statements and Risk Factor
Summary
This annual report
contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (“Securities
Act”), Section 21E of the Securities Exchange Act of 1934, as amended (“Exchange Act”),
and the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995, that are based on our management’s
beliefs and assumptions and on information currently available to our management. Forward-looking statements include information concerning
our possible or assumed future results of operations, business strategies, financing plans, competitive position, industry environment,
potential growth opportunities, potential market opportunities and the effects of competition. Forward-looking statements include all
statements that are not historical facts and can be identified by terms such as “anticipates,” “believes,” “could,”
“seeks,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,”
“predicts,” “projects,” “should,” “will,” “would” or similar expressions that
convey uncertainty of future events or outcomes and the negatives of those terms. These statements may be found in several sections of
this annual report, including, but not limited to “ITEM 3: Key Information—Risk Factors,” “ITEM 4: Information
on the Company,” “ITEM 5: Operating and Financial Review and Prospects,” “ITEM 10: Additional Information—Taxation—United
States Federal Income Taxation—Passive foreign investment company considerations.” Forward-looking statements reflect our
current views with respect to future events and are based on assumptions and are subject to risks and uncertainties, including those described
in “ITEM 3.D. Key Information—Risk Factors.” Important factors that could affect our actual results and cause them to
differ materially from those expressed in forward-looking statements include, but are not limited to, the items in the following list,
which also summarizes some of our principal risks.
| • |
Downturns in the home renovation, remodeling and residential construction sectors or the economy generally; |
| • |
Adverse global conditions, including macroeconomic and geopolitical uncertainty, may negatively impact our financial results;
|
| • |
The outcome of litigations including those regarding silicosis, other bodily injury claims or other legal proceedings in which we
are involved, and our ability to use our insurance policy to cover damages; |
| • |
Laws and regulations relating to our production operations, or to hazards associated with crystalline silica containing surfaces,
changes to such laws and regulations and their impact on us or on our value chain may adversely and materially affect our business;
|
| • |
Our ability to effectively manage changes to our production and supply chain and effectively collaborate with production business
partners (“PBP”) suppliers; |
| • |
Changes in the availability, prices, or suppliers of our raw materials, as well as constraints in the global supply, prices, and
availability of transportation for raw materials, finished goods, and other essential products, can significantly impact our operations;
|
| • |
Our success in further expanding our product offering includes the introduction of new products and materials, along with exploring
new applications; |
| • |
Disruptions to our information technology systems globally, including by deliberate cyber-attacks; |
| • |
Fluctuations in currency exchange rates, and we may not have adequately hedged against them; |
| • |
Competitive pressures from other manufacturers of engineered stone and other surface materials as well as increased competition from
lower-priced alternatives; |
| • |
Our ability to maintain our relationships with our large retailers in North America;
|
| • |
Risks associated with changes in global trade policies or the imposition of tariffs; |
| • |
Our ability to successfully consummate business combinations or acquisitions and our success in integrating previously consummated
acquisitions, such as Lioli Ceramica private limited (“Lioli”) and omicron granite
and tile (“omicron”), into our operations; |
| • |
Our ability to protect our brand, technology and intellectual property; |
| • |
The impacts of conditions in Israel, such as military conflict (including Israel’s current war with Hamas in the Gaza strip),
political developments, negative economic conditions or labor unrest; |
| • |
Disturbances to our operations, the operations of our equipment and raw material suppliers, distributors, customers, consumers or
other third parties; |
| • |
Impacts on revenue from sales disruptions in our geographic concentrations or key markets; |
| • |
Our tax position, including meeting certain conditions required to receive certain tax
benefits, our exposure to U.S. Tax liabilities and related consequences under the U.S. Internal Revenue Code, and the continued availability
of certain tax benefits granted by the Israeli government; |
| • |
Our ability to execute our strategy to expand sales in certain markets; |
| • |
Our reliance on third-party distributors, re-sellers, and a limited number of large retailers; |
| • |
Our ability to effectively manage our inventory and successfully pursue a wider product offering; |
| • |
Quarterly fluctuations in our results of operations as a result of seasonal factors and building construction cycles; |
| • |
The failure to meet or achieve our ESG goals, expectations or standards that could adversely affect our business, results of operations,
financial condition, or stock price; |
| • |
Our ability to retain our senior management team and other skilled and experienced personnel; |
| • |
Our ability to manage or resolve conflicts of interest arising from employee affiliations with kibbutz Sdot-Yam (the “Kibbutz”)
and with Tene investment in projects 2016 limited partnership (“Tene”); |
| • |
The effect of the share ownership by the Kibbutz and
Tene; |
| • |
The effects of enforcements against us, our officers and directors in the U.S.; |
| • |
Coverage by equity research analysts, publicly announced financial guidance, investor perceptions and our ability to meet other expectations
(such as environmental social and governance); |
| • |
Differences in the governance of shareholders’ rights under Israeli law; |
| • |
The amount and timing of our dividend payments; |
| • |
Price volatility of, and effects of future sales on, our ordinary shares; |
| • |
Our ability to raise funds to finance our current and future capital needs; |
| • |
Our ability to pass rising costs to our customers; |
| • |
The impact of global pandemics, such as covid-19 on global economy and our business and results of operations; |
| • |
Our status as a foreign private issuer and related exemptions with respect thereto; and |
| • |
Our expectations regarding regulatory matters applicable to us. |
The preceding list
is not intended to be an exhaustive list of all our forward-looking statements. Forward-looking statements reflect our current views with
respect to future events and are based on assumptions and are subject to risks and uncertainties, including those described in “ITEM
3.D. Key Information—Risk Factors.”
You should not put
undue reliance on any forward-looking statements. Actual results could differ materially from those anticipated in these forward-looking
statements because of various factors described in this annual report, including factors beyond our ability to control or predict. Although
we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that future results,
levels of activity, performance and events and circumstances reflected in the forward-looking statements will be achieved or will occur.
Any forward-looking statement made in this annual report speaks only as of the date hereof. Except as required by law, we undertake no
obligation to update publicly any forward-looking statements for any reason after the date of this annual report, to confirm these statements
to actual results or to changes in our expectations.
TABLE OF CONTENTS
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PART I |
1 |
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1 |
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1 |
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1 |
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A. |
[Reserved] |
1 |
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B. |
Capitalization and Indebtedness |
1 |
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C. |
Reasons for the Offer and Use of Proceeds |
1 |
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D. |
Risk Factors |
1 |
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| 32 |
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A. |
History and Development of the Company |
33 |
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B. |
Business Overview |
44 |
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C. |
Organizational Structure |
44 |
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D. |
Property, Plants and Equipment |
45 | |
| 46 | |||
| 47 |
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A. |
Operating Results |
47 | |
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B. |
Liquidity and Capital Resources |
55 |
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C. |
Research and Development, Patents and Licenses |
57 |
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D. |
Trend Information |
58 |
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E. |
Critical Accounting Estimates |
58 |
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| 63 |
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A. |
Directors and Senior Management |
63 |
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B. |
Compensation |
67 |
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C. |
Board Practices |
71 |
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| 85 | |||
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A. |
Major Shareholders |
85 |
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B. |
Related Party Transactions |
87 |
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C. |
Interests of Experts and Counsel |
92 |
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| 93 |
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A. |
Consolidated Financial Statements and Other Financial Information |
93 |
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B. |
Significant Changes |
94 |
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| 95 |
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A. |
Offer and Listing Details |
95 |
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B. |
Plan of Distribution |
95 |
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C. |
Markets |
95 |
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D. |
Selling Shareholders |
95 |
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E. |
Dilution |
95 |
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F. |
Expenses of the Issue |
95 |
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| 95 |
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A. |
Share Capital |
95 |
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B. |
Memorandum and Articles of Association |
95 |
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C. |
Material Contracts |
95 |
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D. |
Exchange Controls |
96 |
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E. |
Taxation |
96 |
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F. |
Dividends and Paying Agents |
105 |
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G. |
Statements by Experts |
105 | |
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H. |
Documents on Display |
105 | |
|
I. |
Subsidiary Information |
105 | |
|
J. |
Annual Report to Security Holders |
105 |
PART I
ITEM
1: Identity of Directors, Senior Management and Advisers
Not applicable.
ITEM
2: Offer Statistics and Expected Timetable
Not applicable.
ITEM
3: Key Information
| A. |
[Reserved] |
| B. |
Capitalization and Indebtedness |
Not applicable.
| C. |
Reasons for the Offer and Use of Proceeds |
Not applicable.
| D. |
Risk Factors |
Our business faces significant risks and uncertainties. You should
carefully consider all the information set forth in this annual report and in our other filings with the United States Securities and
Exchange Commission (the “SEC”). Our business, financial condition and results of operations
could be materially and adversely affected by any of these risks. In that event, the trading price of our ordinary shares would likely
decline, and you might lose all or part of your investment. This report also contains forward-looking statements that involve risks and
uncertainties. Our results could materially differ from those anticipated in these forward-looking statements, as a result of certain
factors including the risks described below and elsewhere in this report and our other SEC filings. See also “Special Note Regarding
Forward-Looking Statements and Risk Factor Summary”.
Risk Factors Summary
The following is a summary of the principal risks that could materially
adversely affect our business, results of operations, and financial condition, all of which are more fully described below. This summary
should be read in conjunction with the other information discussed in this Item 3.D, and should not be relied upon as an exhaustive
summary of the material risks facing our business. Please carefully consider all of the information discussed in this Item 3.D. “Risk
Factors” and elsewhere in this annual report for a more thorough description of these and other risks. Such risks include, but are
not limited to:
| • |
Downturns in the home renovation, remodeling and residential construction sectors or the economy generally; |
| • |
Adverse global conditions, including macroeconomic and geopolitical uncertainty, may negatively impact our financial results;
|
| • |
The outcome of litigations including those regarding silicosis, other bodily injury claims or other legal proceedings in which we
are involved, and our ability to use our insurance policy to cover damages; |
| • |
Laws and regulations relating to our production operations, or to hazards associated with crystalline silica containing surfaces,
changes to such laws and regulations and their impact on us or on our value chain may adversely and materially affect our business;
|
| • |
Our ability to effectively manage changes to our production and supply chain and effectively collaborate with PBP suppliers;
|
| • |
Changes in the availability, prices, or suppliers of our raw materials, as well as constraints in the global supply, prices, and
availability of transportation for raw materials, finished goods, and other essential products, can significantly impact our operations;
|
| • |
Our success in further expanding our product offering includes the introduction of new products and materials, along with exploring
new applications; |
| • |
Disruptions to our information technology systems globally, including by deliberate cyber-attacks; |
| • |
Fluctuations in currency exchange rates, and we may not have adequately hedged against them; |
| • |
Competitive pressures from other manufacturers of engineered stone and other surface materials as well as increased competition from
lower-priced alternatives; |
| • |
Our ability to maintain our relationships with our large retailers in North America;
|
| • |
Risks associated with changes in global trade policies or the imposition of tariffs; |
| • |
Our ability to successfully consummate business combinations or acquisitions and our success in integrating previously consummated
acquisitions, such as Lioli and omicron, into our operations; |
| • |
Our ability to protect our brand, technology and intellectual property; |
| • |
The impacts of conditions in Israel, such as military conflict (including Israel’s current war with Hamas in the Gaza strip),
political developments, negative economic conditions or labor unrest; |
| • |
Disturbances to our operations, the operations of our equipment and raw material suppliers, distributors, customers, consumers or
other third parties; |
| • |
Impacts on revenue from sales disruptions in our geographic concentrations or key markets; |
| • |
Our tax position, including meeting certain conditions required to receive certain tax benefits, our exposure to U.S. Tax liabilities
and related consequences under the U.S. Internal revenue code, and the continued availability of certain tax benefits granted by the Israeli
government; |
| • |
Our ability to execute our strategy to expand sales in certain markets; |
| • |
Our reliance on third-party distributors, re-sellers, and a limited number of large retailers; |
| • |
Our ability to effectively manage our inventory and successfully pursue a wider product offering; |
| • |
Quarterly fluctuations in our results of operations as a result of seasonal factors and building construction cycles; |
| • |
The failure to meet or achieve our ESG goals, expectations or standards that could adversely affect our business, results of operations,
financial condition, or stock price; |
| • |
Our ability to retain our senior management team and other skilled and experienced personnel; |
| • |
Our ability to manage or resolve conflicts of interest arising from employee affiliations with The Kibbutz and with Tene; |
| • |
The effect of the share ownership by the Kibbutz and Tene; |
| • |
The effects of enforcements against us, our officers and directors in the U.S.; |
| • |
Coverage by equity research analysts, publicly announced financial guidance, investor perceptions and our ability to meet other expectations
(such as environmental social and governance); |
| • |
Differences in the governance of shareholders’ rights under Israeli law; |
| • |
The amount and timing of our dividend payments; |
| • |
Price volatility of, and effects of future sales on, our ordinary shares; |
| • |
Our ability to raise funds to finance our current and future capital needs; |
| • |
Our ability to pass rising costs to our customers; |
| • |
The impact of global pandemics, such as Covid-19 on global economy and our business and
results of operations; |
| • |
Our status as a foreign private issuer and related exemptions with respect thereto; and
|
| • |
Our expectations regarding regulatory matters applicable to us. |
Risks Related to our Business
Economic and External
Risks
Downturns in the home renovation and remodeling
and new residential construction sectors or the economy generally and a lack of availability of consumer credit could materially and adversely
impact end-consumers and lower demand for our products, which could cause our revenues and net income to decrease.
Our products are primarily used as countertops in residential kitchens. As a result,
our sales depend significantly on home renovation and remodeling spending, as well as new residential construction spending, primarily
in the United States, Australia (unless stated otherwise, reference to Australia in this report includes Australia and New Zealand), Canada
and Israel. We estimate (supported also by the Freedonia Report), that approximately 60%-70% of our revenue in our principal markets (U.S.,
Australia, Canada) is related to residential renovations and remodeling activities, while 30%-40% is related to new construction.
Recent economic downturns, high inflation and increased interest rates
have had a major effect on the housing markets that, during 2023, lead to oversupply of both new and resale home inventory, an increase
in foreclosures, and reduced levels of consumer demand for new homes as well as levels of construction, and renovation. Such a period
may continue longer than expected or return in the future. During such periods, consumer confidence is eroded, and people and business
choose to reduce their discretionary spending and, as a result, delay or cancel their home renovation or remodeling projects and therefore
could decrease demand and adversely impact our businesses.
As many of our customers are homebuyers or homeowners depending on
financing for their purchases (construction and renovation), lack of availability of consumer credit or increased interest rates may hinder
their ability to continue their purchases. Recent interest hikes in the U.S. and around the world, have and may further increase the cost
of financing for consumers who in turn limit their renovation and remodeling expenditures or home purchases. The current slowdown in the
housing market has impacted on the demand for our product, and in combination with increases in prices of raw materials these factors
have eroded our margins. If these trends persist, they may materially and adversely affect our ability to grow or sustain our business,
our revenues and net income. See also “—Global health risks and future pandemics could further impact end-consumers and the
global economy in general, lower demand for our products, disrupt our operations and materially and adversely affect our business and
financial results” and “—Disturbances to our operations or the operations of our suppliers, distributors, customers,
consumers or other third parties could materially adversely affect our business.”
Adverse global conditions, including macroeconomic
slowdowns and recessions, and geopolitical instability, may negatively impact our financial results.
Global conditions, dislocations in the financial markets, inflation and increasing
interest rates could adversely impact our business. The global macroeconomic environment has been and may continue to be negatively affected
by, among other things, instability in global economic markets, increased trade tariffs and trade disputes, instability in the global
credit markets, interest rates or even availability of credit, supply chain weaknesses, instability in the geopolitical environment as
a result of the Russian Ukraine conflict, the withdrawal of the United Kingdom from the European Union, and other political tensions,
and foreign governmental debt concerns. Such challenges have caused, and may continue to cause, uncertainty and instability in local economies
and in global financial markets, which may adversely affect our business. For example, higher interest rates and inflation during 2023,
negatively impacted consumer spend by avoiding or down-grading purchases, and we believe adversely affected our business.
Additionally, economic downturns and geopolitical challenges in regions of the world
that are critical to our operations have in the past and could in the future cause supply chain and other disruptions that impact our
business. For example, Russia’s and Ukraine’s conflict, and the possibility of retaliatory measures taken by the U.S. and
NATO and the Houthi’s disruption to the movement of goods in the Red Sea have created global security concerns that could have a
lasting adverse impact on regional and global economies.
Our results of operations may be materially
and adversely affected by fluctuations in currency exchange rates, and we may not have adequately hedged against them.
We conduct business in multiple countries, which exposes us to risks associated with fluctuations in currency
exchange rates between the U.S. dollar (our functional currency) and other currencies in which we conduct business. In 2023, 49.3% of
our revenues were denominated in U.S. dollars, 18.8% in Australian dollars, 13.4% in Canadian dollars, 6.4% in Euros and 3.9% in NIS and
a smaller portion in other currencies. In 2023, the majority of our expenses were denominated in U.S. dollars, NIS and Euros, and a smaller
proportion in Canadian and Australian dollars and other currencies. As a result, devaluations of the Australian dollars, and to a lesser
extent, the Canadian dollar relative to the U.S. dollar may unfavorably impact our profitability. Our expenses are largely denominated
in U.S. dollars, NIS and Euro, with a smaller portion in Australian dollars and Canadian dollars. As a result, appreciation of the NIS,
and to a lesser extent, the Euro relative to the U.S. dollar may unfavorably affect our profitability. We attempt to limit our exposure
to foreign currency fluctuations through forward contracts, which, except for U.S. dollar/NIS forward contracts, are not designated as
hedging accounting instruments under ASC 815, Derivatives and Hedging. We currently engage in derivatives transactions, such as forward
contracts, to hedge against the risks associated with our foreign currency exposure. Our strategy to hedge our cash flow exposures involves
consistent hedging of exchange rate risk in variable ratios up to 100% of the exposure over rolling 12 months. As of December 31, 2023,
our average hedging ratio was approximately 9% out of our expected currencies exposure for 2023. As of December 31, 2023, we had total
outstanding forward contracts with a notional amount of $21.2 million. These forward contracts were for a period of up to 12 months. The
fair value of these foreign currency derivative contracts was positive $0.5 million, which is included in our current assets and current
liabilities, as of December 31, 2023. Hedging results are charged to finance expenses, net, and therefore, do not offset the impact of
currency fluctuations on our operating income. Our U.S. dollar/NIS forward contracts are charged to operating expenses as designated hedge
instruments, partially offsetting the impact of the U.S. dollar/NIS currency fluctuations on our operating income (loss). While we may
decide to enter into additional hedging transactions in the future, the availability and effectiveness of these transactions may be limited
and we may not be able to successfully hedge our exposure, which could adversely affect our financial condition and results of operations.
For further discussion of our foreign currency derivative contracts, see “ITEM 11: Quantitative and Qualitative Disclosures About
Market Risk.”
We face intense competitive pressures
from manufacturers of other surface materials, which could materially and adversely affect our results of operations and financial condition.
We have invested considerable resources to position our engineered stone surface products
as premium branded products. Our surface products compete with several surface materials such as granite, laminate, marble, manufactured
solid surface, concrete, stainless steel, wood, porcelain and other engineered stone surfaces. We compete with manufacturers of these
surface materials with respect to a range of factors. These factors include, among other things, brand awareness and brand position, product
quality, product differentiation, design and breadth of product offerings, slab dimensions, new product development and time to market,
availability and supply time, technological innovation, popular home interior design trends, pricing, availability of inventory on demand,
distribution coverage, customer service and versatility in products portfolio.
Due to our products’ high quality and positioning, we generally set our prices—especially
for our differentiated products—at a higher level than alternate surfaces and engineered stone surfaces provided by other manufacturers.
Some competitors can produce similar surface products at a lower cost, which imitate our products and designs. Further penetration of
these products into our active markets may further reduce our market share, limit our ability to increase prices and have a material adverse
effect on our financial condition and results of operations.
Should our competitors be able to produce products more efficiently,
due to various factors, such as raw material location and availability, and offer products at lower prices, while adapting more quickly
to changes in consumer preferences and demands, we may lose market share and our financial results may suffer.
Global trade is affected by governmental involvement
including through antidumping and countervailing duties and these may cause unforeseeable market changes that could adversely impact our
financial results.
Antidumping and countervailing duty orders are designed to provide relief from imports
sold at unfairly low or subsidized prices by imposing special duties on such imports. Such orders normally benefit domestic suppliers
in the country in which the duty orders are in place and foreign suppliers not covered by the orders. During 2018 and 2019, antidumping
and countervailing duty (“AD/CVD”) petitions were filed with the U.S. Department of
Commerce (“DOC”) and the International Trade Commission (“ITC”).
The petitions, which were filed by a U.S. quartz manufacturer, alleged that Chinese, and subsequently Indian and Turkish, manufacturers
injured the U.S. domestic quartz industry and therefore duties were required to offset such unfair trade practices. Ultimately, the DOC
and ITC imposed AD/CVD duties ranging approximately between 265% and 340% for Chinese produced quartz engineered stone, and between 3.81%
and 80.79% for Indian and Turkish quartz engineered stone.
The imposition of AD/CVD orders have driven some of the affected manufacturers to
direct their products into other markets in which we operate (including markets in which we hold a higher market share than in the U.S.,
such as Australia) thereby adversely impacting our operations and financial results. Finally, any duties and tariffs imposed by
the U.S. or other regulators may not succeed in remediation of any impact caused by the relevant imports. Chinese, Indian and Turkish
exporters may shift their focus to other, competing materials, to circumvent the duties. As a result, our non-U.S. markets have faced
increased competitive pressures. Changes in the AD/CVD tariffs may increase uncertainty and our financial results may be adversely and
materially impacted.
On October 29, 2021, the European Ceramic Tile Manufacturers’ Federation, filed
a complaint with the European Commission (“Commission”) in which it requested that
the Commission initiate an anti-dumping investigation concerning imports to the EU of ceramic tiles originating in India and Turkey between
July 2020 and June 2021. The Commission eventually decided to introduce a tariff of 7.9% applicable to on Indian and Turkish producers
including the products we produce at our Indian facility.
We may need to raise funds to finance our current
and future capital needs, which may dilute the value of our outstanding ordinary shares, increase our financial expenses or limit our
business activities.
We may need to raise funds to finance our existing and future capital needs, including
to fund ongoing working capital requirements. If we raise funds through the sale of equity securities, these transactions may dilute the
value of our outstanding ordinary shares. Any debt financing would increase our level of indebtedness and could negatively affect our
liquidity and restrict our operations and may also prove expensive in light of the increasing interest rates. We may be unable to raise
additional funds on terms favorable to us or at all. If financing is not available or is not available on acceptable terms, we may be
unable to fund our future needs. This may prevent us from increasing our market share, capitalizing on new business opportunities or remaining
competitive in our industry, which could materially and adversely affect our business, prospects, financial condition and results of operations.
If we are unable to pass rising costs to our
customers, it could have a material adverse effect on our business.
The prices of our raw materials, shipping and energy-related costs have in the past
and may in the future experience volatility that could materially impact our business and financial results. We also rely on shipping
raw materials and finished goods. While we attempt to pass on such increased costs to our customers, our ability to do so depends on many
factors including competition in our markets, availability of credit and the housing market. If we are unable to mitigate the increase
in these costs, particularly raw material and shipping, our financial condition and results of operations could be materially and adversely
affected. A slowdown in our markets may result in decreased demand for our products and limit our ability to raise prices.
Global health risks and future pandemics could
further impact end-consumers and the global economy in general, lower demand for our products, disrupt our operations and materially and
adversely affect our business and financial results.
In the past, the COVID-19 pandemic resulted in a widespread public
health crisis, governmental authorities implemented numerous measures in an attempt to contain and mitigate its effects. The combined
effect adversely impacted global economies, market uncertainty and volatility, and significantly affected consumer and businesses behaviors.
Future pandemics may further challenge our ability to conduct our operations and, as a result, may materially and adversely affect our
financial results.
Operational Risks
Problems inherent in the use of PBP suppliers,
such as a failure to effectively collaborate or diversify our relationships with various PBPs, could materially adversely affect our competitive
position or profitability.
The recent closure of our production facilities in Sdot-Yam, Israel and Richmond-Hill, Georgia, have increased
the portion of our products produced by our third-party production partners. Since 2021, we have accelerated our strategy to acquire certain
product models from third-party engineered stone and Porcelain PBP producers, and this trend continued since we transitioned to more elaborate
models and to our PBP resulting in a higher portions of our goods sold produced by them. Our PBP producers are located in Asia and Europe.
We expect this trend to continue during 2024 and further increase our reliance on third party manufacturers. Our ability to serve our
markets with the right product offering at competitive prices depends on our ability to successfully manage these sourcing partnerships.
Failure to meet challenges such as IP retention, maintaining quality in raw-materials and finished goods, coordinating logistics, inventory
and supply chain challenges and maintaining compliance not only with applicable laws but with market expectations in fields such as ESG
as well as our ability to keep favorable commercial terms, may have an adverse effect on our business and results of operations.
Moreover, our failure to effectively manage our PBP supplier-partnerships could require
us to locate alternative manufacturers or invest further in our facilities, which could cause substantial delays in manufacturing, increase
our costs, negatively impact our brand, reputation, and the quality of our products in case we rely on new vendors, and require us to
adjust our products and our manufacturing processes. Even if we do effectively manage such relationships, they may not help us to successfully
optimize our operations and reduce costs.
If we fail to effectively manage the required
changes in our production and supply chain, we may be unable to serve the market or suffer additional inefficiencies.
Our production and supply chain processes are complex, and they rely on our estimates
and forecasts in terms of volume, product mix, and delivery times. These processes involve independent and interdependent suppliers, owned
and leased locations, external manufacturing partners, distribution networks, delivery centers and information systems, each of which
supports our ability to provide our products to our customers. A failure to accurately forecast consumer preference and market trends
or manage necessary inventories, disruptions to our production and supply chain processes, including managing our PBP product production
and deliveries, all may hinder the availability of our products in the market, result in loss of sales, increase shipping costs and harm
our relationships with our suppliers and customers, damage our brand and reputation and have a material adverse effect on our results
of operations.
Changes in the prices of our raw materials
may increase our costs and decrease our margins and net income (loss).
The principal raw materials used for our products are polyester and
various combinations of minerals (such as quartz and pigments). In 2023, raw materials used in our manufacturing processes accounted for
approximately 30% of our cost of goods sold. The cost of raw materials consists of the purchase prices of such materials and costs related
to the logistics of delivering the materials to our manufacturing facilities. The raw materials we use for our products are subject to
price volatility caused by weather, supply conditions, government regulations, economic and political climate, labor costs, and other
unpredictable factors. During 2023, our raw materials costs were also impacted by changes in foreign currency exchange rates, mainly the
Euro as it relates to polyester and other raw materials purchased from Europe. Any increase in raw material prices increases our cost
of sales and can decrease our margins and net income (loss). Furthermore, we may face market conditions that will make it impossible to
pass all or some of the increased costs to our customers. If we are unable to recover these costs it may have a material adverse effect
on our financial results. For cost of our raw materials in 2023 and prior years, see “ITEM 5.A: Operating Results and Financial
Review and Prospects—Operating Results—Cost of revenues and gross profit margin.”
Dry minerals used in the production of our products, such as quartz, quartzite and other minerals are the
main raw material component used in our engineered stone products. These minerals accounted for approximately 38.2% of our raw materials
cost in 2023. Our cost of sales and overall results of operations may be impacted significantly by fluctuations in their prices. For example,
if their cost rose by 10% in 2023, we would have experienced a decrease of approximately 0.7% in our gross profit margin for our manufactured
products in such a year. In 2023, our average cost of such minerals decreased by 7.7%, following an increase of 17.9% during 2022, mainly
due to decrease in maritime shipping and freight handling, partially offset by the mix of minerals purchased. Any future increases in
quartz or other mineral prices could also materially and adversely impact our margins and net income.
Polyester, which acts as a binding agent in our products, accounted for approximately 31.6% of our raw
materials costs in 2023. Accordingly, our cost of sales and overall results of operations may be impacted significantly by fluctuations
in polyester prices. For example, if the cost of polyester rose 10% in 2023, we would have experienced a decrease of approximately 0.6%
in our gross profit margin of our manufactured products for such a year. The cost of polyester we incur is a function of, among other
things, manufacturing capacity, demand and the price of crude oil and more specifically benzene. Our cost of polyester fluctuated significantly
over the years. In 2023, our average polyester cost decreased by approximately 31% following an increase of approximately 23% during 2022.
We acquire polyester on an annual framework basis, or a purchase order basis based on our projected needs for the subsequent one to three
months. Going forward, we may face price pressures from our polyester suppliers as our overall quantities will decrease with the closure
of our Sdot-Yam and Richmond-Hill facilities.
Pigments are also used to manufacture our products. Although pigments account for
a significantly lower percentage of our raw material costs than polyester, we encountered in the past and may experience in the future
fluctuations in pigment prices. For example, the cost of titanium dioxide, our principal white pigmentation agent, decreased by approximately
27.8% in 2023 following an increase by approximately 10.5% in 2022, respectively. Such prices fluctuations may also have a materially
adverse impact on our margins and net income (loss).
As a result of recent global economic conditions (as discussed in the risk factor entitled “Adverse
global conditions, including macroeconomic and geopolitical uncertainty, may negatively impact our financial results”), the prices
of raw materials used for our products has been particularly volatile and decreased during 2023, and hedging mechanisms and strategies
used to mitigate this price volatility have been limited. If we are unable to increase the price of our products to cover increased
costs, to offset operating cost increases, then commodity and raw material price volatility or increases could materially and adversely
affect our profitability, financial condition and results of operations. If we are unable to source raw materials, that could limit our
ability to utilize our manufacturing facilities, in addition, increases in the prices of these raw materials may have a material adverse
effect on our financial results.
For cost of our raw materials in 2022 and prior years, see “ITEM 5.A: Operating
Results and Financial Review and Prospects—Operating Results—Cost of revenues and gross profit margin.”
We rely on our suppliers to deliver parts,
components, manufacturing equipment, and raw materials to our facilities, and our ability to manufacture efficiently and without disruption
depends on the availability, transportability and prices of such goods.
We currently manufacture our products at our facilities in Israel, and India. In addition, we source a
growing portion of our products from PBPs which are also subject to similar risks. We actively manage our global supply chain and production
facilities in Israel and India.
We rely on the producers of our production lines, primarily Breton, for the availability
of certain spare parts and for their support and know-how required to resolve specific technical problems in their manufacturing equipment.
If such producers were to become insolvent or cease their business, or otherwise experienced an inability or delay in providing specialty
machine components and spare parts, know-how or technical support to us, we would be unable to obtain such components or expertise for
an indeterminate amount of time. As a result, the output of our products to our distributors and customers could be prevented or delayed.
Other supply chain risks include but are not limited to disruptions in shipping logistics;
shutdowns or reduced operations at our suppliers’ facilities; changes in the market prices for minerals, clay, and styrene and other
parts and materials used in our production processes, including those performed by our PBP. Shortages of raw materials or parts, or the
increase in their cost or the cost of their transportation would have a material adverse effect on our business and consolidated results
of operations.
For example, since 2021, we experienced disruptions and volatility in our supply chain
that we expect to continue through 2024. Supply chain issues have occurred on a global scale, which have been triggered by various factors,
including among other reasons, the COVID-19 pandemic that effected many factors such as transportation prices, weather conditions and
other geopolitical events, such as Russia-Ukraine war (effecting the availability of Ukrainian clay and energy prices) and the war in
southern Israel, and have caused delays in the arrival of or otherwise constrained our supply of raw materials, particularly minerals
and porcelain, which are essential and non-fungible components in the manufacture of our countertops and surface products.
There can be no assurance that we will be able to effectively manage our global supply
chain and manufacturing operations in the future. Price increases imposed by our suppliers for raw materials and goods and transportation
price increases may all have a material adverse effect on our business and consolidated results of operations.
In addition to our traditional engineered quartz
offering, we are expanding our offering to include other mineral based engineered stones, engineered porcelain large slabs, natural stone
and other ancillary materials. We may pursue a further expansion of our product offering, including introducing new products and materials
as well as new applications, which may be unsuccessful, and may divert management’s attention and negatively affect our margins
and results of operations.
Our competitive advantage is due, in part, to our ability to design, develop and introduce
innovative new and improved products and to strengthen our brand. To maintain such an advantage, we may produce or procure the production
of such products from manufacturers that are also competing with ours. Such new products may include new designs, new and alternative
materials (including replacing the composition of traditional quartz-based slabs) and complementary products. Introducing new products
involves uncertainties, such as predicting changing consumer preferences, developing, manufacturing challenges, marketing and selling
new technologies, products and materials, and entering new market segments. Despite our efforts to expand our offering, we may not be
successful due to such uncertainties and challenges which may result in higher-than-expected expenses, lower than expected dales and have
a material adverse effect on our margins and results of operation.
For example, as a result of the Lioli Acquisition in 2020, we commenced
manufacturing and sales of porcelain slabs for different applications, including countertops as well as facades, flooring and cladding.
As a result of the Omicron Acquisition (as defined below), we added natural stone and ancillary products for kitchen installation and
fabrication to our list of products. In addition, during the second quarter of 2023, we incurred significant costs associated with the
necessary R&D activities for the introduction of a new offering based on alternative materials. Although we believe that the expansion
into new products, materials and, in some cases, other business models such as the Omicron business may pose an opportunity to leverage
our existing business, no guarantee can be given as to customer demand for the new products. Moreover, in the future we may decide to
introduce additional new products and enter new markets, whether through cooperation with third-party manufacturers or manufacturing at
our own facilities.
Addressing these markets entails additional risks and liabilities that should they
materialize may have a material adverse effect on our financial results.
A sizable proportion of our sales in North
America is attributable to a limited number of large retailers; any deterioration of our relationships with such retailers or deterioration
in their business performance (in fields relevant to the sale of our products) could adversely impact our results of operations.
We supply our products to retailers or directly to their customers in a manner that may include fabrication
and installation services of the countertops, primarily from our engineered stone surfaces. Such services are performed by select third
party contractors (engaged by either us or by the retailer). While we expect that these retailers will continue to offer our products,
there is no assurance that such current agreements will be renewed at all or on similar terms. In case these collaborations are terminated
or not renewed, our revenue could significantly decrease.
Our sales via retailers may be affected, among other things, by their
focus, material preferences, reaction to the occupational safety issues, sales and promotional events: their timing, scope and other terms
that are determined exclusively by such retailers, all of which may impact our sales volume. Accordingly, we may not be able to maintain
or increase such sales or its current profitability level. See also “—Disturbances to our operations or the operations of
our suppliers, distributors, customers, consumers or other third parties could materially adversely affect our business”. See also
“—Results of bodily injury claims may have a material adverse effect on our business, operating results, and financial condition”.
In addition, we have entered into arrangements with third parties
that fabricate and install finished countertops. Their performance may impact our relationships with retailers or other business partners,
our quality and service level, ESG performance, and ability to manage the installation and fabrication of countertops to meet the end
consumers’ demands at reasonable prices. If we are unable to successfully manage the installation and fabrication services performed
for us by these third-party fabricators and installers, we may experience relatively high waste of our products used by fabricators for
such works, and complaints from end-consumers with respect to supply time, quality and service level of the fabrication and installation,
including defects and damages. Such risks could expose us to warranty-related damages, which, if not covered back-to-back by the fabricators
engaged by us, could have a materially adverse effect on our financial results, reputation and brand position, and could lead to the termination
of our agreements with retailers and end customers.
Our ability to fully integrate acquisitions,
joint ventures and/or investments, including our previously announced acquisitions of Lioli, Omicron and Caesarstone Scandinavia, could
be more difficult, costly and time-consuming than we expect and therefore disrupt our business and adversely affect our financial results.
Our success will depend, in part, on our ability to expand our product offerings and
grow our business in response to customer demands, competitive pressures and industry trends in the home renovation and construction sectors.
We pursue our growth strategy by acquiring complementary businesses across the globe, including our previously announced acquisitions
of Lioli, an India-based porcelain countertop slab producer, in October 2020 (the “Lioli Acquisition”),
Omicron, a stone supplier based in Pompano Beach, Florida, in December 2020 (the “Omicron Acquisition”)
and Caesarstone Scandinavia (formerly named Magrab), a leading distributor in Sweden in July 2022 (the “Magrab
Acquisition”).
The combination of independent businesses is a complex, costly and time-consuming
process. While our management continues to make progress in integrating Lioli’s and Omicron’s businesses with ours, such efforts
are still underway and are expected to continue through 2024. During this time, we and our management have encountered, and are likely
to continue to encounter, ongoing challenges with respect to achieving anticipated synergies. For example, high turnover rates of key
employees at Lioli, which we attribute to challenges assimilating Lioli employees into our workplace culture and maintaining consistent
operational standards and processes. We seek to manage these transitions carefully, such as by establishing employee training and development
programs. However, any continued retention issues at our acquired companies will result in a loss of institutional knowledge about those
businesses. Failure to address integration risks may strain our relationship with out Lioli joint-venture partners and negatively impact
our financial results.
In addition, we may be exposed to unforeseen or undisclosed claims and liabilities
arising from the operations of Lioli, Omicron and Magrab from periods prior to the dates we acquired them. For example, although we believe
that we have a good and marketable title to the Lioli manufacturing facility in Morbi, Gujarat, India, there are certain historic discrepancies
between records of different local and regional authorities in Gujarat, India, including records of titles to physically non-existing
plots, that might result in our ownership to the facility or its parts being challenged, including by title holders of existing and non-existing
adjacent plots. Our ability to seek indemnification from the former owners for these and any other claims or liabilities could be significant
and limited by various factors, including the specific limitations contained in the respective acquisition agreements and the financial
ability of the former owners. If we are unable to enforce any indemnification rights we may have, or if we do not have any right to indemnification,
we could be held liable for the costs or obligations associated with such claims or liabilities, which could adversely affect our operating
performance.
In addition, as a result of the Lioli, Omicron and Magrab Acquisitions we carried a significant amount
of intangible assets (including goodwill) on our balance sheet. As of December 31, 2022, and 2023, our goodwill and other intangible assets
(including Lioli and Omicron acquisitions), amounted to $8.8 million and $6.3 million, respectively.
We rely on select suppliers in specific regions
for the raw materials used in the production of our products, and we may encounter significant manufacturing delays if we experience disruptions
in these supply arrangements and/or are required to change suppliers.
Our principal raw materials for engineered stone products are minerals (such as quartz),
polyester and pigments. We acquire minerals from Turkey, India, U.S., Israel and several European countries. We typically transact business
with our raw-material suppliers on a periodical framework basis, under which we execute purchase orders from time to time. In 2023, approximately
69% of our minerals used were imported from several suppliers in Turkey.
We acquire polyester from several suppliers, mainly from Europe, on a periodic basis,
or on a purchase order basis based on our projected needs. The supply of pigments required for the production of our engineered stone
products is also limited and we currently rely on a mainly single supplier for the processing of such pigments. We cannot be certain
that any of our current suppliers will continue to provide us with the quantities of raw materials that we require or will be able to
satisfy our anticipated specifications and quality requirements. We may also experience a shortage of such materials if, for example,
demand for our products increases.
In addition, we may lose our supply contracts or arrangements, or the ability to effectively
enforce our rights thereunder, if our supplier relationships are disrupted as a result of factors beyond our control, including, for example,
effects of political and geo-political factors in the regions where our supplies are located. For instance, in previous years, rising
tensions between Turkey and Israel have increased the risk that our commercial arrangements with Turkish suppliers may be adversely and
materially impacted. If political tensions between Turkey and Israel worsen again, and our Turkish suppliers fail to perform in accordance
with our arrangements, we may not be able to successfully enforce them.
If our supply of raw materials is adversely impacted to a material extent or if, for
any reason, any of our suppliers does not perform in accordance with our expectations, for any reason, we would need to locate alternate
suppliers. Securing replacement suppliers could result in substantial delays in manufacturing, increase our costs, negatively impact the
quality of our products, or require us to adjust our products and our manufacturing processes. Any such delays in or disruptions to the
manufacturing process could materially and adversely impact our reputation, revenues and results of operations as well as other business
aspects, such as our ability to serve our customers and meet their order requests.
For more information with regards to suppliers of raw materials used in our products,
see “ITEM 4.B: Information on the Company—Business Overview—Raw materials and Service Provider Relationships.”
Our revenues are subject to significant geographic
concentration and any disruption to sales within one of our key existing markets, or to sales to a major customer therein, could materially
and adversely impact our results of operations and prospects.
Our sales are subject to significant geographic concentration, with the four largest
markets accounting for 84.2% of revenues. In 2023, sales in the United States, Australia (including New Zealand), Canada and Israel accounted
for 48.1%, 18.8%, 13.4% and 4% of our revenues, respectively. Our results of operations could be materially and adversely impacted by
a range of factors, including spending on home renovation and remodeling and new residential construction in the region (as discussed
above), local competitive changes, changes in consumers’ preference regarding engineered stone surfaces, particularly quartz-based
surfaces or countertop preferences in general, and regulatory changes that specifically impact these markets. For example, as recently
published Australian regulators have resolved to ban crystalline silica containing engineered stones during 2024, and while we offer alternative
products, the introduction of such alternative products in our active markets remains subject to uncertainties and challenges. Since the
Australian market is our second largest, loss of any such market share and corresponding revenues would materially and adversely affect
our results of operations. In addition, other states and jurisdiction may follow suit and adopt similar legislation adversely impacting
our business, and if such occurs in one of our principal markets, the impact may be major. Likewise, our principal markets may also be
impacted by other general economic conditions, including in a global or local recession, depression, high inflation or other sustained
adverse market events and increases in imports of cheaper engineered stone surfaces from low-cost countries manufacturers into such markets,
especially the United States, Australia and Canada. Stronger local currencies could make lower-priced imported goods more competitive
than our products. Although we face different challenges and risks in each of the markets in which we operate, due to the existence of
a high level of geographic concentration, should an adverse event occur in any of these jurisdictions, our results of operations and prospects
could be impacted disproportionately.
A key element of our strategy is to expand
our sales in certain markets, such as the United States and segments, such as services. Failure to expand such sales would have a material
adverse effect on our future growth and prospects
A key element of our strategy is to expand sales of our products in certain of our
key existing markets, as well as additional new markets and offerings that we believe have high growth potential. In line with our strategic
restructuring plan, we are making efforts to optimize our distribution network in the United States, including through the expansion of
our brand into the South, Southeast and Ohio Valley markets via the Omicron Acquisition. In addition, a growing portion of our revenues
is attributable to installation and fabrication services.
We estimate we can continue to expand our brand and the sales of our engineered stone
and porcelain products in the United States where, according to Freedonia, engineered surfaces represented 21% of the total countertops
by volume installed in 2022.
We face several challenges in generating demand for our products in the United States or other markets
for various reasons. If the market for our products in these regions does not develop as we expect, our future growth, business, prospects,
financial condition, and operating results will be adversely affected. In addition, changes to trade environments, including imposition
of import tariffs or withdrawal from or revisions to international trade policies or agreements, may affect our growth potential globally,
and further impact other markets in which we operate. See “—We face intense competitive pressures from manufacturers of other
surface materials, which could materially and adversely affect our results of operations and financial condition.”
Even if we are able to increase our brand awareness and the demand
for our products in these and other regions, which we consider to be viable markets, we may face certain challenges in supplying materials
to large retailers in these regions. For more information, see “—A sizable proportion of our sales in North America is attributable
to a limited number of large retailers; any deterioration of our relationships with such retailers or deterioration in their business
performance (in fields relevant to the sale of our products) could adversely impact our results of operations” Additionally, our
reliance on third-party suppliers to provide installation and fabrication services to large retailers could impair our relationship with
our customers, which could also materially harm our business and results of operations. Our success will depend, in large part, upon consumer
acceptance and adoption of our products and brand in these markets, on the level of our execution, our go-to market strategy and its implementation
and the timely availability of our products across regions, and if we do not effectively expand into these markets, there could be an
adverse impact on our sales and financial condition.
Our distributors’ actions may have a
materially adverse effect on our business and the results of operations. Our results of operations may be further impacted by the actions
of our re-sellers.
Sales to third-party distributors accounted for approximately 11% of our revenues
in 2023. In our indirect markets, we depend on the success of the selling and marketing efforts of our third-party distributors, and any
disruption in our distribution network could materially impair our ability to sell our products or market our brand, which could materially
and adversely affect our business and results of operations. As we have limited control over these distributors, their actions could also
materially harm our brand and company reputation in the marketplace.
In the majority of our distribution arrangements, we operate based on an initial agreement
or general terms of sale or, in certain cases, without any agreement, in writing or at all. The lack of a written agreement with many
of our distributors may lead to ambiguities, costs and challenges in enforcing the terms of such arrangements, including where we wish
to terminate early due to the distributor’s failure to meet annual sales targets. We have experienced difficulties, including litigation,
in connection with the termination of certain of our distributors due to disputes regarding their terms of engagement. See “ITEM
8.A: Financial Information—Consolidated Financial Statements and Other Financial Information—Legal proceedings.” Additionally,
we may be unable to distribute our products through another distributor within the territory during the period in which we must give prior
termination notice, or to identify and retain new distributors upon termination, which may materially and adversely impact our market
share, results of operations, relationships with our customers and end-consumers and brand reputation. Because some of our distributors
operate on nonexclusive terms, distributors may also distribute competitors’ countertop surfaces or other surface materials, which
may cause us to lose market share. If we opt to distribute our products directly upon termination of existing arrangements with our distributors,
ramping up our logistics and shipping capabilities could require significant time and financial commitments, which could materially and
adversely impact our market share and results of operations. We cannot assure you that we will be able to successfully transition to direct
distribution in a timely or profitable manner.
In the United States, we supply our products in part to sellers who in turn re-sell them to fabricators,
contractors, developers and builders. Certain actions by such third parties may also materially harm our brand and reputation. The failure
of one or more of our re-sellers or retailers to effectively promote our products, or changes in the financial or business condition of
these re-sellers or retailers could adversely affect results of our operations.
The termination of arrangements with distributors and re-sellers may lead to litigation,
resulting in significant legal fees for us and detracting from our management’s effort, time and resources. In addition, our distributors
and re-sellers generally disclose to us sales volumes and other information on a monthly or quarterly basis. Inaccurate sales forecasts,
on which we have already relied on in our production planning or our failure to understand correctly the information in a sales report
could cause significant, unexpected volatility in our sales and may impact our ability to make plans regarding our supply chain. Any of
these events could materially and adversely affect or cause unexpected fluctuations in the results of operations.
Our business is subject to disruptions and quarterly fluctuations
in revenues and net income (loss) as a result of seasonal factors, weather-related conditions, natural disasters, building construction
cycles and actions by third parties over which we have no control, which are hard to predict with certainty.
Our results of operations have in the past and may in the future be impacted by seasonal factors, weather-related
conditions, and construction and renovation cycles. The levels of manufacturing, fabrication, distribution, and installation of our products
generally follow activity in the construction and renovation industries. Severe weather conditions, such as unusually prolonged cold conditions,
hurricanes, severe storms, earthquakes, floods, fires, droughts, other natural disasters or similar events could reduce, delay or halt
the construction and renovation industries in the markets in which we operate, and our businesses may be adversely affected. Markets in
which we operate that are impacted by winter weather, such as snowstorms and extended periods of rain, may experience a slowdown in construction
activity during the beginning and the end of each calendar year, and this winter slowdown contributes to lower sales in our first and
fourth quarters. Natural disasters including tornados, hurricanes, floods and earthquakes may damage our facilities, the launch facilities
we use or those of our suppliers, which could have a material adverse effect on our business, financial condition and results of operations.
Traditionally, the second and third quarters of the year exhibit higher sales than the first and fourth quarters. For more information,
see “ITEM 5.A: Operating and Financial Review and Prospects—Operating Results—Factors impacting our results of operations”.
Adverse weather in a particular quarter or a prolonged winter period can also impact our quarterly results. Our future results of operations
may experience substantial fluctuations from period to period as a consequence of such adverse weather. Increased or unexpected quarterly
fluctuations in our results of operations may increase the volatility of our share price and cause declines in our share price even if
they do not reflect a change in the overall performance of our business.
Furthermore, our ability, and that of our suppliers, PBP suppliers, distributors,
customers and other third parties, to develop, manufacture, transport, distribute, sell, install, and use our products is critical to
our success. Damage or disruption to our or their operations could occur due to various factors, some of which cannot be foreseen, including,
among others, telecommunications failures; power, fuel, or water shortages; strikes, labor disputes or lack of availability of qualified
personnel; or other reasons beyond our control or the control of such third parties. Failure to take adequate steps to mitigate the likelihood
or potential impact of such events, or to effectively manage such events if they occur, could continue to result in adverse effects on
our business, financial condition or results of operations.
Legal, Regulatory, Safety
and Security Risks
Results of bodily injury claims may have a
material adverse effect on our business, operating results, and financial condition.
Since 2008, we have been named, either directly or as a third party defendant, in
numerous lawsuits alleging damages caused by exposure to respirable crystalline silica, or RCS related to our products filed primarily
by individuals (including fabricators and their employees, and our former employees), their successors, dependents, employers, and in
subrogation claims by workers compensation or insurance bodies, such as the Israeli National Insurance Institute (the “NII”)
and Australian’s state workover bodies.
Inhalation of dust containing fine particles (including respirable crystalline silica,
or RCS) may occur if safety measures are not implemented while performing certain tasks, including among others, cutting polishing and
otherwise fabricating materials, including crystalline silica. Such exposure may in turn cause silicosis and other health issues. Silicosis
is a potentially fatal progressive occupational lung disease and is characterized by scarring of the lungs and damage to the breathing
function.
As of December 31, 2023, we were subject to such lawsuits with respect to 172 injured
persons globally (of which 74 were in Israel, 76 in Australia and 22 in the United States) and had received pre-litigation demand letters
with respect to an additional nine persons. Traditionally, claims asserted against us do not specify the total damages sought, and the
plaintiffs’ damages, if any, are determined at trial or settlement discussions.
While we may settle some of these claims, we intend to vigorously defend others, and believe our arguments
have strong merit, however we cannot provide any assurance that we will be successful. We estimated that our total exposure with respect
to claims pending as of December 31, 2023, in Israel and Australia was approximately $ 25.7 million (which we made a provision for, based
on the current legal conditions and estimates), however, the actual outcome of such lawsuits may vary greatly from our estimate. We have
past product liability insurance that partially covers said exposure. We believe that with respect to such cases we have $8.4 million
of coverage under existing & past product liability insurance and, accordingly, our net exposure with respect to such pending claims
is estimated to be $17.3 million. Given the early stages of litigation in the U.S., we are unable to estimate their outcome.
Results of any pending or future litigation are subject to significant uncertainty.
Our estimated total net exposure with respect to pending claims is subject to change for a variety of reasons, including an unpredictable
adverse developments or rulings, such as the Australian ban on silica containing engineered stone products. We cannot estimate the number
of potential claimants that may file claims against us, the jurisdiction in which such claims may be filed, who the claimants are or the
nature of the claims. Consistent with the experience of other companies, there may be an increase in the number of asserted claims against
us. In addition, punitive damages may be awarded in certain jurisdictions. We may be also subject to class action lawsuits, and we cannot
be certain whether such claims will succeed in being certified or on their merits. An actual outcome which is higher than our estimate
could have a material adverse effect on our financial results and cash flow.
Any uninsured damages to which we are subject in existing or future potential litigation, the cost of defending
any uninsured claims, compliance costs, and the loss of business from fabricators who no longer find it practical to fabricate our products,
may have a material adverse impact on our revenues and profits. Moreover, even if we are found only partially liable to a plaintiff’s
damages, in some jurisdictions the plaintiff may seek to collect all their damages from us, requiring us to collect separately from our
co-defendants their allocated portion of the damages and there can be no assurance that we will succeed in such collection.
If we cannot obtain insurance on as favorable terms as previously, or if our insurance
is terminated early, decreased, provides inadequate coverage or if we are subject to hazardous dust-related claims excluded by our product
liability insurance policy or by our employer liability insurance policy we may incur significant legal expenses and become liable for
damages, in each case, that are not covered by insurance. For example, as of September 2020 our Australian product liability insurance
ceased coverage of newly diagnosed silicosis related claims. Such events might have a material adverse effect on our business and the
results of operations. As of December 31, 2023, our insurance receivables for silicosis-related claims totaled $8.4 million. Although
we believe that it is probable that such receivables will be paid to us when such payments are due, if our insurers become insolvent in
the future or for other reason do not pay such amounts in full or on a timely basis, such failure could have a material adverse effect
on our financial results and cash flow.
Media coverage regarding these claims, governmental actions and the hazards associated
with exposure to RCS in the engineered stone (primarily quartz surfaces), may adversely affect consumer perception of our products, damage
our brand and reputation, and in turn lead to loss of sales and a material adverse effect to our revenues and financial results.
Any of the risks described above relating to claims regarding silicosis and other
bodily injury claims may have a material adverse effect on our business, operating results and financial condition. For more information,
see “ITEM 8.A: Financial Information—Legal Proceedings—Claims related to alleged silicosis and other injuries.”
See also Note 11 to the financial statements included elsewhere in this report.
Changes in laws and regulations relating to
hazards associated with engineered stone surfaces or with the crystalline silica in stone surfaces may adversely and materially affect
our business.
Our global markets are subject to evolving legislation and regulation aimed at protecting
workers from exposure to RCS. While we certainly support initiatives aimed at improving health and safety, some of these may have an adverse
effect on our business and financial performance.
For example: in Australia, federal governments’ group of work safe ministers
resolved to ban the use, supply and manufacture of engineered stone slabs containing crystalline silica (including quartz-based products,
that constituted a major part of our Australian offering). Subject to the formal adoption of the relevant legislation and/or regulation
the ban is expected to enter effect July 1, 2024. Our efforts to comply with the Australian proposed laws and regulations, and to address
the expected turmoil in the Australian market, may not be optimal or even successful and that may have a materially adversely impact the
company’s financial results. With this precedent in place, other jurisdictions may follow the path of imposing new laws and regulations
that may limit our ability to effectively compete in markets we currently operate in thus having a material adverse effect on our performance
and financial results.
By way of further example: in California, the state’s occupational safety and
health standards board has approved an emergency temporary standard aimed to protect workers in the stone fabrication industry from exposure
to RCS and committed to continue and develop permanent rules to that end.
Prior to that, during February 2020, the U.S. Occupational Safety and Health Administration
published a National Emphasis Program addressing the hazards of silica, supplemented recently during September 2023, announcing a new
initiative to conduct enhanced enforcement and compliance efforts (RCS focused inspection initiative in the engineered stone fabrication
and installation industries). Further regulatory changes regarding the ability to use, process or sell stone countertops, particularly
engineered stone, the safety measures required in such activities may materially adversely affect our business.
We may be required to incur additional expenses associated with exposure to RCS in
the silica containing surfaces industry to enhance our compliance with current and future laws, regulations, or standards. Failure to
comply regulatory requirements may expose us to regulatory actions (as detailed below in “—The extent of our liability for
environmental, health and safety, product liability and other matters may be difficult or impossible to estimate and could negatively
impact our financial condition and results of operations”) as well as to lawsuits. Greater regulatory scrutiny and action may also
lead to greater propensity for litigation against us or ultimately result in a government ban of our products.
Disruptions to or our failure to upgrade and
adjust our information technology systems globally may materially impair our operations, hinder our growth, and materially and adversely
affect our business and results of operations.
We believe that an appropriate information technology (“IT”)
infrastructure is important to support our daily operations and the growth of our business. To this end, we are implementing a digital
transformation within the Company to better streamline processes and support our business strategy. Our technological and digital investments
are geared towards operational enhancements in supply chain management and production, along with improvement of our go-to-market tools.
If we experience difficulties in implementing new or upgraded information systems
or experience significant system failures, or if we are unable to successfully modify our management information systems or respond to
changes in our business needs, we may not be able to effectively manage and grow our business, and we may fail to meet our reporting obligations.
Additionally, if our current back-up storage arrangements and our disaster recovery plan are not operated as planned, we may not be able
to effectively recover our information system in the event of a crisis, which may materially and adversely affect our business and results
of operations.
In the current environment, there are numerous and evolving risks to cybersecurity
and privacy, including criminal hackers, hacktivists, state-sponsored intrusions, industrial espionage, employee malfeasance and human
or technological error. High-profile security breaches at other companies and in government agencies have increased in frequency and sophistication
in recent years. Although we take steps designed to secure our IT infrastructure and sensitive data and enhance our business continuity
and disaster recovery capabilities, we can provide no assurance that our current IT system or any updates or upgrades thereto, the current
or future IT systems of our distributors or re-sellers or the IT systems of online paying agents that we use or may use in the future,
are fully protected against third-party intrusions, viruses, hacker attacks, information or data theft or other similar risks. We carry
data protection liability insurance against cyber-attacks, however the potential magnitude of cyber events and the exception to these
policies means that we may not be able to recover our damages from such an event.
We have experienced and expect to continue to experience actual and attempted cyber-attacks
of our IT networks, such as through phishing scams and ransomware. Although none of these actual or attempted cyber-attacks has had a
material adverse impact on our operations or financial condition, we cannot guarantee that any such incidents will not have such an impact
in the future. Furthermore, a cyber-attack that bypasses our IT security systems or those of our distributors, re-sellers, online paying
agents or other third party contractors, causing an IT security breach, could lead to a material disruption of our information systems,
the loss of business information and loss of service to our customers, which could, among other things, disrupt our business, force
us to incur costs or cause reputational damage. There is no assurance that we will be insulated from claims relating to cyber-attacks
or withstand legal challenges in relation to our agreements with third parties. Additionally, we have access to sensitive information
relating to our employees as well as business partners and customers in the ordinary course of business. Any failure or perceived failure
by us, or our third-party contractors on our behalf, to comply with local and foreign laws regarding privacy and data security, as well
as contractual commitments in this respect, may result in governmental enforcement actions, fines, or litigation, which could have an
adverse effect on our reputation and business. If a significant data breach occurred, our reputation could be materially and adversely
affected, confidence among our customers may be diminished, or we may be subject to legal claims, any of which may contribute to the loss
of customers and have a material adverse effect on us. To the extent that such disruptions or uncertainties result in delays or cancellations
of customer orders or the manufacture or shipment of our products, or in theft, destruction, loss, misappropriation or release of our
confidential data or our intellectual property, our business and results of operations could be materially and adversely affected.
These risks will increase as we increase our cooperation with and reliance on third
party contractors that provide cloud solutions and store increasingly large amounts of data, as part of our digital focus and enhancement
of go to market tools.
Legislative or regulatory action in these areas is also evolving, and we may be unable
to adapt our IT systems or to manage the IT systems of third parties to accommodate these changes. Increasing regulatory focus on information
security and data privacy issues and expanding laws in these areas may result in increased compliance costs and expose us to increased
liability. Globally, new, and emerging laws, such as the General Data Protection Regulation (“GDPR”)
in Europe and state laws in the U.S. on privacy, data and related technologies, such as the California Consumer Privacy Act (“CCPA”)
and California Privacy Rights Act ("CPRA"), create new compliance obligations, create new private
rights of action and expand the scope of potential liability, either jointly or severally with our customers and suppliers. The GDPR,
which became effective on May 25, 2018, imposed new compliance obligations for the collection, use, retention, security, processing, transfer
and deletion of personally identifiable information of individuals and created enhanced rights for individuals. The CCPA, which grants
expanded rights to access and delete personal information, and the right to opt out of the sale of personal information, among other things,
became effective on January 1, 2020. The CPRA significantly amended and expanded the CCPA and grants consumers more control over personal
data, enabling rights like access, deletion, and correction. Businesses must establish processes for effective handling of requests and
compliance with these rights, became effective on December 16, 2020. These and any other new and emerging laws and regulations may force
us to bear the burden of more onerous obligations in our contracts or otherwise increase our potential liability to customers, regulators,
or other third parties.
Cybersecurity and complying with personal data rights pose economic, operational,
and reputational risks. If we are unable to implement the technological and digital projects required to support our future growth and
profitability in compliance with applicable rules and regulations, our business and results of operations will be materially adversely
affected. In addition, the devotion of additional resources to the security of our information technology systems in the future
could significantly increase the cost of doing business or otherwise adversely impact our financial results.
Since the COVID-19 pandemic, a greater number of our employees are working remotely
and accessing our IT systems and networks remotely, which may further increase our vulnerability to cybercrimes and cyberattacks and increase
the stress on our technology infrastructure and systems. Although we maintain data protection liability insurance, exclusions from coverage
are added into these policies and coverage may not be sufficient to cover all our losses from any future breaches or failures of our IT
systems, networks and services.
The steps that we have taken to protect our
brand, technology and other intellectual property may not be adequate, and we may not succeed in preventing others from appropriating
our intellectual property.
We believe that our trademarks (registered and unregistered) are important to our
brand, success, and competitive position. We anticipate that, as the countertop market becomes increasingly competitive, maintaining and
enhancing our brand, proprietary technology and other intellectual property may become more important, difficult, and expensive. In the
past, some of our trademark applications for certain classes of applications, our products, have been rejected or opposed in certain markets.
We have in the past, are currently, and may in the future be, subject to opposition proceedings with respect to applications for registration
of our intellectual property, such as our trademarks. As with all intellectual property rights, such application may be rejected entirely
or awarded subject to certain limitations such as territories, any current or future markets or applications. These limitations to registering
our brand names and trademarks in various countries and applications may restrict our ability to promote and maintain a cohesive brand
throughout our key markets, which could materially harm our competitive position and materially and adversely impact our results of operations.
Additionally, if we are unsuccessful in challenging a third party’s products based on trademark infringement, continued sales of
such products could materially and adversely affect our sales and our brand and result in the shift of consumer preference away from our
products.
There can be no assurance that new or pending patent applications for our technologies
and products will be approved in a timely manner or at all, or that, if granted, such patents will effectively protect our intellectual
property. There can be no assurance that we will develop patentable intellectual property in the future, and we have chosen and may further
choose not to pursue patents for innovations that are material to our business.
While we continue to make significant investments in innovating the design of our
products and register design patents on selected models, it may not be adequate to prevent our competitors from imitating our designs
and copying our innovative ideas.
We also retain significant trade secrets & know how, that for various reasons
we are not pursuing their formal registration but rely on retaining their confidentiality through confidentiality agreements with our
consultants, suppliers, customers, employees and managers, our know-how and trade secrets could be disclosed to third parties, which could
cause us to lose any competitive advantage resulting from such know-how or trade secrets, as well as related intellectual property protections
in certain cases. The potential for know-how leakage has recently increased, with our increased sourcing of more advanced products from
our PBPs.
The actions we take to establish and protect our intellectual property may not be
adequate to prevent unlawful copy and use of our technology by third parties or the imitation of our products and the offering of them
under our trademarks by others. These actions may also not be adequate to prevent others, including our competitors, from obtaining intellectual
property rights overcoming ours, and limiting or blocking the production and sales of our existing or future products and applying certain
technologies. Our competitors may seek to limit our marketing and offering of products relying on their alleged intellectual property
rights.
We may face significant expenses and liability in connection with the protection of
our intellectual property rights in and outside the United States. The laws of certain foreign countries may not protect intellectual
property rights to the same extent as the laws of the United States.
Third parties have claimed, and may from time-to-time claim, that our current or future
products infringe their patent or other intellectual property rights. Under such circumstances, we may be required to expend significant
resources to contest such claims and, in the event that we do not prevail, we may be required to seek a license for certain technologies,
develop non-infringing technologies or discontinue some of our products. In addition, any future intellectual property litigation, regardless
of its outcome, may be expensive, divert the efforts of our personnel and disrupt or damage relationships with our customers.
For more information, see “ITEM 4.B: Information on the Company—Business
Overview—Intellectual Property.”
We may
have exposure to greater-than-anticipated tax liabilities.
The determination of our worldwide provision for income taxes and other tax liabilities
requires significant judgment, and there are many transactions and calculations where the ultimate tax determination is uncertain. We
have applied the guidance in ASC 740, “Income Taxes” in determining our accrued liability for unrecognized tax benefits, which
totaled approximately $2.9 million in 2022 and 2023. See also note 12 to our financial statements included elsewhere in this report. Although
we believe our estimates are reasonable, the ultimate outcome may differ from the amounts recorded in our financial statements and may
materially affect our financial results in the period or periods for which such determination is made.
We have entered into transfer pricing arrangements that establish transfer prices
for our inter-company operations. However, our transfer pricing procedures are not binding on the applicable taxing authorities. The amount
of income tax that we pay could be materially and adversely affected by earnings being lower than anticipated in jurisdictions where we
have lower statutory rates and higher than anticipated in jurisdictions where we have higher statutory rates. From 2015 onward, our U.S.
manufacturing operations also carry inter-company transactions at transfer prices and arrangements set by us. We cannot be certain that
tax authorities will not disfavor our inter-company arrangements and transfer prices in the relevant jurisdictions. Taxing authorities
outside of Israel could challenge our allocation of income between us and our subsidiaries and contend that a larger portion of our income
is subject to tax in their jurisdictions, which may have higher tax rates than the rates applicable to such income in Israel. Any adjustment
in one country while not followed by counter-adjustment in the other country, may lead naturally to double taxation for the group. Any
change to the allocation of our income as a result of review by such taxing authorities could have a negative effect on our operating
results and financial condition.
Our facility in Israel receives different tax benefits as “Preferred Enterprises”
under the Israeli Law for the Encouragement of Capital Investments, 1959 (“Investment Law”),
with our production lines qualifying to receive different grants and/or reduced company tax rates (7.5% for Bar Lev activity, 16% for
Sdot Yam activity, while 23% is the statutory tax rate in Israel). Therefore, some of our production lines also receive tax benefits based
on our revenues and the allocation of those revenues between our facilities in Israel. In addition, the portion of our products manufactured
by our PBPs is growing, and as a result of these factors, the Israeli taxing authorities could challenge our allocation of income and
contend that a larger portion of our income is subject to higher tax rates. In Israel, there are no tax benefits to production outside
of the country. As such, our portion of taxable income in Israel that relates to the growing portion produced by our PBPs might not have
tax benefits, based on certain interpretations. The Israel Tax Authority (“ITA”) could
challenge the allocation of income related to production in Israel and income related to production outside of Israel, which may result
in significantly higher taxes. There are currently no legal regulations governing this allocation and certain of the ITA’s internal
guidelines have ambiguities. Moreover, we may lose all our tax benefits in Israel in the event that our manufacturing operations outside
of Israel exceed certain production levels (currently set at 50% of the overall production and subject to future changes by the ITA).
In the United States, H.R. 1, originally known as the 2017 Tax Cuts and Jobs Act (the
“TCJA”) made significant changes to the U.S. Internal Revenue Code, including a reduction
in the federal income corporate tax rate from a top marginal rate of 35% to a flat rate of 21% and limitations on certain corporate deductions
and credits. In addition, the TCJA requires complex computations to be performed that were not previously required in U.S. tax law, significant
judgments to be made in interpretation of the provisions of the TCJA and significant estimates in calculations, and the preparation and
analysis of information not previously relevant or regularly produced. The U.S. Treasury Department, the IRS, and other standard-setting
bodies could interpret or issue guidance on how provisions of the TCJA will be applied or otherwise administered that is different from
our interpretation. Finally, foreign governments may enact tax laws in response to the TCJA that could result in further changes to global
taxation and materially affect our financial position and results of operations. While we have provided the effect of the TCJA in our
Consolidated Financial Statements as included in Note 12 to our financial statements included elsewhere in this report, the application
of accounting guidance for various items and the ultimate impact of the TCJA on our business are currently uncertain.
We are entitled to a property tax abatement (starting in the 2014 tax year) with respect
to our U.S manufacturing facility and the capital investment made in such facility for ten years at 100% and an additional five years
at 50% subject to our satisfaction of certain qualifying terms with respect to headcount, average salaries paid to our employees and total
capital investment amount in our U.S manufacturing facility. The tax abatement is granted pursuant to bond purchase loan agreements we
entered with the Development Authority of Bryan County. If we do not meet the qualifying terms of the bond, we will bear the applicable
property tax, which will be recognized in our operating costs, and which would materially and adversely impact our projected margins and
results of operations. See “ITEM 4.D: Information on the Company—Property, Plants and Equipment.”
Environmental, health and safety regulations,
industry standards and other similar matters may be costly, difficult or impossible to comply with under our existing operations and could
negatively impact our financial condition and results of operations.
Our manufacturing facilities are subject to numerous Israeli and Indian federal and
Gujarati laws and regulations which may cause us to incur significant costs and liabilities. We are also subject to industry standards
and policies imposed by our customers (such as large retailers), relating to environmental, health and safety, as well as other matters
such as dust exposure, acetone and styrene control, as further detailed in “ITEM 4.B: Information on the Company—Business
Overview—Environmental and Other Regulatory Matters.” Other aspects of our activities are subject to local laws wherever we
operate, including Canada, Australia, Singapore, the United Kingdom and Sweden. These laws, ordinances and regulations can be subject
to change and such changes could result in increased compliance costs or otherwise adversely affect us. For example, during February 2022,
Israel adopted a long-term goal for the reduction of environmental styrene emissions. Although such goal is not expected to impact our
current operations, the adoption of new regulations could create an additional burden for any future investment in our Israeli Bar-Lev
facility. Violations of environmental, health and safety laws and regulations may lead to civil and criminal sanctions against us,
our directors, officers or employees. Liability under these laws and regulations and compliance with various industry standards and policies
involves inherent uncertainties and, in some cases, may compel the installation of additional equipment and subject us to substantial
penalties, injunctive orders and facility shutdowns, as well as damages to our reputation and brand and may therefore lead to loss in
revenue. If our operations are enjoined because of failure to comply with such regulations, or if we are required to install expensive
equipment to meet regulatory requirements, it could materially adversely affect the results of operations. Any contemplated expansion
of our facilities will also need to meet standards imposed by laws, regulations, and other industry standards. Violations of environmental
laws could also result in obligations to investigate or remediate potential contamination, third-party property damage or personal injury
claims resulting from potential migration of contaminants off-site. Violations of such laws and regulations may also constitute a breach
of current or future commercial contracts we have with third parties and impact our cooperation with customers and suppliers. We have
identified in the past and may identify in the future compliance risks related to environmental and health and safety regulation standards.
Preparation and implementation of mitigation plans for such risks may take time during which we may not be in full compliance with applicable
laws and standards.
In addition, the operation of our manufacturing facilities in Israel, and India (Gujarat)
are subject to applicable permits, standards, licenses and approvals. Any expansions or improvements to our facilities will be subject
to obtaining appropriate permits, and we cannot be certain that such permits will be obtained in a timely matter, or at all. For detailed
information, see “ITEM 4.B: Information on the Company—Business Overview—Environmental and Other Regulatory Matters”.
We expect our business licenses to be extended by the relevant authorities for a specified term and we intend to seek subsequent extensions
on an ongoing basis. Generally, failure to obtain a permit or license required for the operation of our facilities, or failure to comply
with the requirements thereunder, may result in civil and criminal penalties, fines, court injunctions, imprisonment, and operations stoppages.
If we are unable to obtain, extend or maintain the business license for any of our plants, we would be required to cease operations there,
which would materially adversely affect the results of operations. Our ability to obtain necessary permits and approvals for our manufacturing
facilities may be subject to additional costs and possible delays beyond our initial projections. In addition, in order to demonstrate
compliance with underlying permits, licenses or approvals, we are required to perform a considerable amount of monitoring, record-keeping
and reporting and may incur material costs or liabilities in connection with any violations, or in connection with remediation at our
sites or certain third-party manufacturing sites if we are found liable in relation thereto.
From time to time, we face compliance issues related to our manufacturing facilities.
See “ITEM 4.B: Information on the Company—Business Overview—Environmental and Other Regulatory Matters” for additional
information on compliance with environmental, health and safety and other relevant regulations relating to our facilities, including with
respect to our compliance with styrene ambient air standards and dust emission occupational health standards.
New environmental laws and regulations, new interpretations of existing laws and regulations,
increased governmental enforcement or other developments in Israel, and India (Gujarat) could require us to make additional unforeseen
expenditures. These expenditures and other costs for environmental compliance could have a material adverse effect on our business’s
results of operations, financial condition and profitability. The range of reasonably possible losses from our exposure to environmental
liabilities in excess of amounts accrued to date cannot be reasonably estimated at this time. For example, recently the Israeli Ministry
of Environmental Protection added to the requirements involved in extending our ability to hold certain materials conditioned on cyber
security investments.
In addition, our manufacturing, distribution, and other facilities are subject to
health and safety regulations. Although we introduced safety rules and procedures at all our facilities and provide safety training to
our employees and contractors on a regular basis, breaches of such safety measures have occurred in the past and may occur in the future.
If our employees or contractors do not follow and we do not successfully enforce the safety procedures established in our facilities or
otherwise do not meet the relevant laws and standards, our employees or contractors may be subject to work-related injuries. As a result,
we and our officers and directors could be subject to claims, fines, orders and injunctions due to workplace accidents involving our employees
or contractors. Although we maintain workers’ compensation and liability insurance, it may not provide adequate coverage against
potential liabilities and can expose us, our directors and officers to administrative and criminal proceedings.
Other than as described above, we cannot predict whether we may become liable under
environmental, product liability and health and safety statutes, rules, regulations and case law of the countries in which we operate.
The amount of any such liability in the future or its impact on our business operation otherwise could be significant and may adversely
impact our financial condition and results of operations.
From time to time, we are subject to litigation,
disputes, or other proceedings, which could result in unexpected expenses and time and resources that could have a materially adverse
impact on our results of operation, profit margins, financial condition, and liquidity.
We are currently involved in several legal disputes, including against certain fabricators
(our customers) and their employees in Israel, Australia, and the United States, as well as against our former workers, as further detailed
in “ITEM 8.A: Financial Information—Consolidated Financial Statements and Other Financial Information—Legal Proceedings.”
In addition, from time to time, we are involved in other legal proceedings and claims in the ordinary course of business related to a
range of matters, including contract law, intellectual property rights, employment, product liability and warranty claims (including class
actions), and claims related to modification and adjustment, or replacement of product surfaces sold.
The outcome of litigation and other legal matters is always uncertain, and the actual
outcome of any such proceedings may materially differ from estimates. An adverse ruling in these proceedings could have a materially adverse
effect on us. If we are unsuccessful in defending such claims or elect to settle any of these claims, we could incur material costs and
could be required to pay varying amounts of monetary damages, some of which may be significant, and/or incur other penalties or sanctions,
some, or all of which may not be covered by insurance. Although we maintain product liability insurance, we cannot be certain that our
coverage, if applicable, will be adequate for liabilities actually incurred or that insurance will continue to be available to us on economically
reasonable terms, or at all. These material costs could have a materially adverse effect on our business, results of operations and financial
condition.
Failure to meet ESG expectations or standards
or a failure to effectively pursue our ESG goals could adversely affect our business, results of operations, financial condition, or stock
price.
Environmental Social and Governance (or “ESG”) matters, including greenhouse
gas emissions, diversity and inclusion, responsible sourcing, human rights, and corporate governance, have gained increased attention
from regulators, customers and other stakeholders. In line with our commitment to ESG, as demonstrated by latest ESG report in 2023, we
have established certain ESG goals; however, achieving these goals is not guaranteed and may be hindered by operational, regulatory, reputational,
financial, legal, and other factors. Additionally, accounting standards and regulations surrounding ESG are subject to change and may
result in additional costs for compliance. As the pathway towards achieving such evolving goals is uncertain, we may exert extensive efforts
that would not yield our desired results or become a high financial burden. If we fail to meet ESG expectations, it could harm our reputation,
negatively impact customer and talent retention, and lead to increased scrutiny from investors and authorities. Damage to our reputation
could also reduce demand for our products and services and negatively impact our financial results.
Our operating results may suffer due to our
failure to manage our international operations effectively or due to regulatory changes in foreign jurisdictions where we operate
Our products are sold in over 60 countries throughout the world, our raw materials,
equipment, and machinery are acquired in different countries, our products are manufactured by us in Israel and India, and by our PBP
across the world, while our global management operates from Israel. We are therefore subject to risks associated with having global operations,
including risks related to complying with the law and regulations of various foreign governments and regulatory authorities. These laws
and regulations may apply to us, our subsidiaries, individual directors, officers, employees, and agents, and may restrict our operations,
trade practices, investment or acquisition decisions or partnership opportunities. Accordingly, our sales, purchases and operations are
subject to risks and uncertainties, including, but not limited to:
| • |
fluctuations in exchange rates and currency exchange regulation; |
| • |
fluctuations in land and sea transportation costs, as well as delays or other changes in transportation and other time-to-market
delays, including as a result of strikes; |
| • |
compliance with unexpected changes in regulatory requirements; |
| • |
compliance with a variety of regulations and laws in each relevant jurisdiction; |
| • |
difficulties in collecting accounts receivable and longer collection periods; |
| • |
changes in tax laws and interpretation of those laws; |
| • |
taxes, tariffs, quotas, custom duties, trade barriers and other similar restrictions on our sales, purchases and exports which could
be imposed by certain jurisdictions; |
| • |
negative or unforeseen consequences resulting from the introduction, termination, modification, or renegotiation of international
trade agreements or treaties or the imposition of countervailing measures or antidumping duties or similar tariffs; |
| • |
difficulties enforcing intellectual property and contractual rights in certain jurisdictions; and |
| • |
economic changes, geopolitical regional conflicts, including military conflict in the Middle East and the invasion of Ukraine by
Russia, terrorist activity, political unrest, civil strife, acts of war, strikes and other economic or political uncertainties.
|
Significant political developments could also have a materially adverse effect on
us.
In the United States, due to our substantial sales, distribution, import and manufacturing
operations, potential or actual changes in fiscal, tax and labor policies could have uncertain and unexpected consequences that materially
impact our business, results of operations and financial condition.
Tariffs, taxes, or other trade barriers could require us to change manufacturing sources,
reduce prices, increase spending on marketing or product development, withdraw from or not enter certain markets or otherwise take actions
that could be adverse to us. The U.S. federal government may propose additional changes to international trade agreements, tariffs, taxes,
and other government rules and regulations. These regulatory changes could significantly impact on our business and financial performance.
For example, the expansive sanctions being imposed by the U.S., EU and other countries against Russia, and any proposed changes to the
prior imposition of tariffs on imports from China, Mexico, India and others. Given the unpredictable nature of the U.S.-China relationship
and its sizable impact on global economic stability, our business and operating success may be materially adversely affected if recent
normalization attempts by these two countries do not endure and additional tariffs or other restrictions on free trade are imposed by
either country. Any such changes may impact the level of free trade or tariff prices on goods imported into the United States. Moreover,
changes in U.S. political, regulatory, and economic conditions or in its policies governing international trade and foreign manufacturing
and investment in the U.S. could adversely affect our sales in the U.S.
The regulatory framework for privacy and data security issues worldwide is currently
in flux and is likely to remain so for the foreseeable future. A failure by us or a third-party contractor providing services to us to
comply with applicable privacy and data security laws and regulations may result in sanctions, statutory or contractual damages or litigation.
All these risks could also result in increased costs or decreased revenues, either
of which could have a materially adverse effect on our profitability. As we continue to expand our business globally, we may have difficulty
anticipating and effectively managing these and other risks that our global operations may face, which may materially and adversely affect
our business outside of Israel and our financial condition and results of operations.
Certain U.S. holders of our ordinary shares
may suffer adverse tax consequences if we or any of our non-U.S. subsidiaries are characterized as a “controlled foreign corporation”,
or a CFC, under Section 957(a) of the Internal Revenue Code of 1986, as amended.
A non-U.S. corporation is considered a CFC if more than 50% of (1) the total combined
voting power of all classes of stock of such corporation entitled to vote, or (2) the total value of the stock of such corporation, is
owned, or is considered as owned by applying certain constructive ownership rules, by United States shareholders who each own stock representing
10% or more of the vote or 10% or more of the value on any day during the taxable year of such non-U.S. corporation (“10%
U.S. Shareholder”). Because our group includes one or more U.S. subsidiaries, certain of our non-U.S. subsidiaries could
be treated as CFCs (regardless of whether we are treated as a CFC). Generally, 10% U.S. Shareholders of a CFC are required to report annually
and include currently in its U.S. taxable income such 10% U.S. Shareholder’s pro rata share of the CFC’s “Subpart F
income”, “global intangible low-taxed income”, and investments in U.S. property by CFCs, regardless of whether we make
an actual distribution to such shareholders. “Subpart F income” includes, among other things, certain passive income (such
as income from dividends, interests, royalties, rents and annuities or gain from the sale of property that produces such types of income)
and certain sales and services income arising in connection with transactions between the CFC and a person related to the CFC. An individual
that is a 10% U.S. Shareholder with respect to a CFC generally would not be allowed certain tax deductions or foreign tax credits that
would be allowed to a 10% U.S. Shareholder that is a U.S. corporation. Failure to comply with these reporting obligations may subject
a 10% U.S. Shareholder to significant monetary penalties and may prevent the statute of limitations with respect to such shareholder’s
U.S. federal income tax return for the year for which reporting was due from starting. We cannot provide any assurances that we will assist
investors in determining whether any of our non-U.S. subsidiaries is treated as a CFC or whether any investor is treated as a 10% U.S.
Shareholder with respect to any such CFC or furnish to any 10% U.S. Shareholders information that may be necessary to comply with the
aforementioned reporting and tax payment obligations. A United States investor should consult its tax advisors regarding the potential
application of these rules to an investment in our ordinary shares.
Risks Related to our Relationship
with Kibbutz Sdot-Yam
Our directors and employees who are members
of Kibbutz Sdot-Yam and Tene may have conflicts of interest with respect to matters involving the Company.
As of March 1, 2024, the Kibbutz, together with Tene, being parties to a Shareholders
Agreement, beneficially owned 14,029,494 constituting approximately 40.6% of our shares. Both the Kibbutz and Tene are deemed our controlling
shareholders under the Israeli Companies Law, 5759-1999 (the “Companies Law”). For
more information, see “ITEM 7.A. Major Shareholders and Related Party Transactions—Major Shareholders.” Three members
of our board of directors and a number of our employees are members of the Kibbutz, and we continue to have an operational and business
relationship with the Kibbutz. Certain of these individuals also serve in different positions in the Kibbutz, including Chairman of the
Kibbutz’s Economic Council and its Chief Financial Officer. Such individuals have fiduciary duties to both us and Kibbutz Sdot-Yam.
As a result, our directors who are members of the Kibbutz may have real or apparent conflicts of interest on matters affecting both us
and the Kibbutz and, in some circumstances, such individuals may have interests adverse to us. For example, in the annual general meeting
of our shareholders held in December 2015, the Kibbutz opposed the independent nominees our board of directors proposed to nominate to
the board and suggested two alternative nominees identified by the Kibbutz as independent. In addition, our chairman of the board of directors,
also serve as partner in Tene. Since these individuals have fiduciary duties to both us and Tene, there may be real or apparent conflicts
of interest in this respect as well. See “ITEM 6.A: Directors, Senior Management and Employees—Directors and Senior Management.”
Regulators and other third parties may question
whether our agreements with Kibbutz Sdot-Yam are no less favorable to us than if they had been negotiated with unaffiliated third parties.
Our headquarters, research and development facilities and our manufacturing facility
in Israel is located on lands owned or leased by the Kibbutz. We have entered into certain land use and other agreements with the Kibbutz
pursuant to which the Kibbutz provides us with, among other things, a portion of our labor force, electricity, maintenance, security,
and other services. We believe that such services are rendered to us in the normal course of business, and they represent at arm’s
length terms. Nevertheless, a determination with respect to such matters requires subjective judgments regarding valuations. Regulators
and other third parties may question whether our agreements with the Kibbutz are in the ordinary course of our business and are no less
favorable to us than if they had been negotiated with unaffiliated third parties. The tax treatment for these transactions may also be
called into question, which could have a materially adverse impact on our operating results and financial condition. See “ITEM 7.B:
Major Shareholders and Related Party Transactions—Related Party Transactions.”
Under Israeli law, our board, audit committee
and shareholders may be required to reapprove certain of our agreements with Kibbutz Sdot-Yam every three years, and absence of such approval
may expose us to liability and cause significant disruption to our business.
The Companies Law requires that the authorized corporate organs of a public company
approve every three years any extraordinary transaction in which a controlling shareholder has a personal interest and that has a term
of more than three years, unless a company’s audit committee determines, solely with respect to agreements that do not involve compensation
to a controlling shareholder or his or her relatives, in connection with services rendered by any of them to the company or their employment
with the company, that a longer term is reasonable under the circumstances. Our implementation of this requirement with respect to the
agreements entered between us and the Kibbutz may be challenged by regulators and other third parties.
Our audit committee has determined that the terms of all the agreements entered between
us and the Kibbutz are reasonable under the relevant circumstances. See “ITEM 7.B: Major Shareholders and Related Party Transactions—Related
Party Transactions.” The extension of our services agreement with the Kibbutz has been approved in 2021 under the Companies Law
requirements and is subject to re-approval in 2024.
If the relevant corporate organs do not re-approve the agreements in accordance with
the Companies Law, we will be required to terminate such agreements, which may expose us to damage claims and legal fees, and cause disruption
to our business. In addition, we would be required to find suitable replacements for the services provided to us by the Kibbutz under
the services agreement, which may take time, and we can provide no assurance that we can obtain the same or better terms with a third
party than those we have agreed to with the Kibbutz.
Pursuant to certain agreements between us and
Kibbutz Sdot-Yam, we depend on Kibbutz Sdot-Yam with respect to leasing the buildings and areas of our manufacturing facility in Israel.
Our Bar-Lev facility is leased from the Kibbutz pursuant to a land purchase and leaseback
agreement effective as of September 1, 2012. The land purchase and leaseback agreements were simultaneously executed with a land use agreement
pursuant to which the Kibbutz permits us to use the site for a period of ten years with an automatic renewal for an additional ten years
unless we provide the Kibbutz two years’ advance notice that we do not wish to renew the lease. In 2021, the agreement was automatically
extended for an additional ten-year period.
Our headquarters and R&D facilities remain in the Kibbutz, and are leased from the Kibbutz, pursuant
to a land use agreement effective as of March 2012 for a period of 20 years. Pursuant to this agreement our headquarters must remain in
the Kibbutz. As a result of these restrictions, our ability to move our Israeli headquarters elsewhere is limited. Our Sdot-Yam production
facility ceased operations during 2023 as part of our operational restructuring plan announced in May 2023. Since then, we have been restoring
the property, and begun marketing it in parcels for future sub-lease. Pursuant to our land use agreements, our ability to admit tenants
requires the Kibbutz’s consent, which may limit our ability to effectively sublease and offset in whole or in part or land-use payments.
In addition, we entered into agreements with the Kibbutz with respect to our Bar-Lev
and Sdot-Yam facilities, stating that in the event of a material change in the payments made by the Kibbutz to the Israeli lands administration
(the “ILA”) or the Caesarea Development Corporation or changes in the market conditions, every three years the Kibbutz may
appoint an independent appraiser to reassess the fees we agreed to pay to the Kibbutz in light of such changes. If an independent appraiser
concludes that the fees payable by us to the Kibbutz for the Bar-Lev and Sdot-Yam facilities are below market, the Kibbutz can, in its
sole discretion, adjust such fees to the market value with a binding effect on us. Such appraisal took place during 2021 and resulted
in an increase of the lease fees. See “—Other factors impacting our results of operations— Agreements with Kibbutz Sdot-Yam.”
For more information with respect to our agreements with the Kibbutz, see “ITEM
7.B: Major Shareholders and Related Party Transactions—Related Party Transactions.”
Risks Related to our Ordinary
Shares
The price of our ordinary shares may be volatile,
and may be effected by expectations on our dividend payments and future impairments to our goodwill or other Intangible assets or other
long-live.
The market price of our ordinary shares could be highly volatile and may fluctuate
substantially (as indeed occurred in recent years during which our share price declined) as a result of many factors, including but not
limited to (i) actual or anticipated fluctuations in our results of operations; (ii) our financial performance and the expectations of
market analysts; (iii) announcements by us or our competitors of significant business developments, changes in distributor relationships,
acquisitions or expansion plans; (iv) changes in the prices of our raw materials or the products we sell; (v) impact of regulatory changes
on our industry (vi) our involvement in litigation, specifically for example, any adverse precedent set in Australia in connection with
silica related claims; (vii) our sale of ordinary shares or other securities in the future; (viii) market conditions in our industry;
(ix) changes in key personnel; (x) the trading volume of our ordinary shares; (xi) changes in the estimation of the future size and growth
rate of our markets; (xii) changes in our board of directors, including director resignations; (xiii) actions of investors and shareholders,
including short seller reports and proxy contests; (xiv) general economic and market conditions unrelated to our business or performance,
such as increased shipping and handling markets, (xv) amount or timing of any dividend payments and may decide to pay dividends
in the future or lack thereof nor their applicable tax rate.
As per the U.S. GAAP (ASC 350), we are required to test our goodwill for impairment
an annual basis or whenever indicators for potential impairment exist. We are operating as one reporting unit for goodwill testing purposes.
Due to the Company’s market capitalization, higher interest rates and global slowdown in our markets, we conducted a goodwill impairment
testing for the period ended December 31, 2022. As a result of this testing, we recorded an aggregate $44.8 million non-cash impairment
charge related to goodwill in the fiscal year 2022. As of December 31, 2023, and 2022 our goodwill was fully impaired and the balance
of the other intangibles was $8.8 million and $6.3 million, respectively. See also Note 7 to the financial statements included elsewhere
in this annual report.
In addition, we tested our long-lived assets due to the same reasons mentioned above
and the closure of our Sdot-Yam and Richmond Hill facilities. Such impairment test was in accordance with U.S. GAAP rules (ASC 360) and
resulted in an impairment charge of $26.4 million and $28.5 million in 2022 and 2023, respectively. During 2023, we also recorded a right
of use asset of $16.6 million related to Sdot Yam facility. See also Note 6 to the financial statements included elsewhere in this annual
report. We are now taking steps to optimize Sdot-Yam “sub-leases” and realize the sale of our Richmond-Hill assets, including
Real-estate, however our efforts may not be as successful as we plan.
This testing involves estimates and significant judgments by management. We believe
our assumptions and estimates are reasonable and appropriate; however additional adverse changes in key assumptions, including a failure
to meet expected earnings or other financial plans, unanticipated events and circumstances such as changes in assumptions about the duration
and magnitude of increased supply chain and commodities costs and our planned efforts to mitigate such impacts, further disruptions in
the supply chain, increases in tax rates (including potential tax reform) or a significant change in industry or economic trends could
affect the accuracy or validity of such estimates and may result in an additional impairment. Any charge or charges could adversely affect
our results of operations. See “Critical Accounting Estimates” in Item 5 herein for more information regarding goodwill and
other long lived assets impairment testing. Therefore, although we have recorded said impairment charges this year, we cannot guarantee
that we will not experience goodwill, other intangible assets or long-lived assets impairments in the future.
Our share price is impacted by reports from
research analysts, publicly announced financial guidance, investor perceptions and our ability to meet other expectations about our business.
The trading market for our ordinary shares relies in part on the research and reports
that equity research analysts publish about us and our business. During 2021, two analysts discontinued research coverage of our business.
If additional analysts do not establish research coverage, or if the current research analyst ceases coverage of our company or fails
to publish reports on our Company regularly, we could lose visibility in the market and demand for our shares may decline, which might
cause our share price and trading volume to decline.
The price of our ordinary shares could also decline if one or more securities analysts
downgrade our ordinary shares or if one or more of those analysts issue other unfavorable commentaries. The market price for our ordinary
shares has been in the past, and may be in the future, materially and adversely affected by statements made in reports issued by short
sellers regarding our business model, our management and our financial accounting. In the past, we have also faced difficulty accurately
projecting our earnings and have missed certain of our publicly announced guidance. If our financial results for that period do not meet
our guidance or if we reduce our guidance for future periods, the market price of our ordinary shares may decline. We have experienced
in the past, and may experience in the future, a decline in the value of our shares as a result of the foregoing factors and the other
various factors reflected in the Item. For example, during the second quarter of 2023, our share price dropped to an all-time low of US$
3.53 per share.
ESG and sustainability reporting is becoming more broadly expected by investors, shareholders
and other third parties. We may face reputational damage in the event our corporate responsibility initiatives or objectives do not meet
the standards set by our investors, shareholders, lawmakers, listing exchanges or other constituencies, or if we are unable to achieve
an acceptable ESG score. A low ESG or sustainability rating by a third-party rating service could also result in the exclusion of our
ordinary shares from consideration by certain investors. The ongoing focus on corporate responsibility matters by investors and other
parties as described above may impose additional costs or expose us to new risks. See also “—Failure to meet ESG expectations
or standards or achieve our ESG goals could adversely affect our business, results of operations, financial condition, or stock price.”
The substantial share ownership position of
Kibbutz Sdot-Yam and Tene will limit your ability to influence corporate matters.
As of March 1, 2024, the Kibbutz and Tene beneficially owned 14,029,494 ordinary shares
constituting 40.6% of our outstanding ordinary shares. As a result of this concentration of share ownership and their voting agreement
described above, the Kibbutz and Tene are considered controlling shareholders under the Israeli Companies Law, and, acting on their own
or together, will continue to have significant voting power on all matters submitted to our shareholders for approval. These matters include:
| • |
the composition of our board of directors (other than external directors); |
| • |
approving or rejecting a merger, consolidation, or other business combination; and |
| • |
amending our articles of association, which govern the rights attached to our ordinary shares. |
This concentration of ownership of our ordinary shares could delay or prevent proxy
contests initiated by other shareholders, mergers, tender offers, open-market purchase programs or other purchases of our ordinary shares
that might otherwise give you the opportunity to realize a premium over then-prevailing market price of our ordinary shares. The interests
of the Kibbutz or Tene may not always coincide with the interests of our other shareholders. This concentration of ownership may also
lead to proxy contests. For example, prior to the voting arrangement between Tene and the Kibbutz, in connection with our annual general
meeting of shareholders held in December 2015, the Kibbutz issued a proxy to our shareholders, in which it opposed the independent nominees
our board of directors proposed to nominate to the board and suggested two alternative nominees. Such initiatives, which may not coincide
with the interests of our other shareholders, result in us incurring unexpected costs and could divert our management’s time and
attention. This concentration of ownership may also materially and adversely affect our share price.
In recent years, Israeli issuers listed on securities exchanges in the United States
have also been faced with governance-related demands from activist shareholders, unsolicited tender offers and proxy contests. Responding
to these types of actions by activist shareholders could be costly and time-consuming for management and our employees and could disrupt
our operations or business model in a way that would interfere with our ability to execute our strategic plan.
The market price of the Company’s ordinary
shares could be negatively affected by future sales of our ordinary shares.
As of March 1, 2024, we had 34,536,236 shares outstanding. This included approximately
14,029,494 ordinary shares, or 40.6% of our outstanding ordinary shares, beneficially owned by the Kibbutz and Tene, which can be resold
into the public markets in accordance with the restrictions of Rule 144, including volume limitations, applicable to resales by affiliates
or holders of restricted securities.
Sales by our major shareholders, the Kibbutz, Tene or other large shareholders of
a substantial number of our ordinary shares in the public market, or the perception that these sales might occur, could cause the market
price of our ordinary shares to decline or could materially impair our ability to raise capital through a future sale of, or pay for acquisitions
using, our equity securities.
As of March 1, 2024, 5,775,000 ordinary shares were reserved for issuance under our
2011 option plan and our 2020 Share Incentive Plan of which options to purchase 2,641,550 ordinary shares were outstanding, with a weighted
average exercise price of $7.49 per share, and 71,676 restricted stock units (“RSUs”)
were outstanding. To the extent they are covered by our registration statements on Form S-8, these shares may be freely sold in the public
market upon issuance, except for shares held by affiliates who have certain restrictions on their ability to sell.
Our articles of association designate the federal
district courts of the United States as the sole and exclusive forum for certain types of actions and proceedings that may be initiated
by our shareholders.
Our articles of association provide that, unless we consent in writing to the selection
of an alternative forum, the U.S. federal district courts shall be the sole and exclusive forum for any claim asserting a cause of action
arising under the Securities Act. Section 22 of the Securities Act creates concurrent jurisdiction for federal and state courts over all
such Securities Act actions. Accordingly, both state and federal courts have jurisdiction to entertain such claims. We note that investors
cannot waive compliance with U.S. federal securities laws and the rules and regulations thereunder. This choice of forum provision may
limit a shareholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors,
officers or other employees and may increase the costs associated with such lawsuits, which may discourage such lawsuits against us and
our directors, officers and employees. Alternatively, if a court were to find these provisions of our articles of association inapplicable
to, or unenforceable in respect of, one or more of the specified types of actions or proceedings, we may incur additional costs associated
with resolving such matters in other jurisdictions, which could adversely affect our business and financial condition. Any person or entity
purchasing or otherwise acquiring any interest in our share capital shall be deemed to have notice of and to have consented to the choice
of forum provisions of our articles of association described above. This provision would not apply to suits brought to enforce a duty
or liability created by the Exchange Act or any other claim for which the U.S. federal courts have exclusive jurisdiction.
As a foreign private issuer whose shares are
listed on the Nasdaq Global Select Market, we may follow certain home country corporate governance practices instead of certain Nasdaq
requirements.
As a foreign private issuer whose shares are listed on the Nasdaq Global Select Market,
we are permitted to follow certain home country corporate governance practices instead of certain requirements of the rules of Nasdaq.
We rely on this “home country practice exemption” with respect to the quorum requirement for shareholder meetings. Whereas
under the listing rules of the Nasdaq Stock Market, a quorum requires the presence, in person or by proxy, of holders of at least 331/3%
of the total issued outstanding voting power of our shares at each general meeting of shareholders, pursuant to our articles of association,
and as permitted under the Companies Law, the quorum required for a general meeting of shareholders consists of at least two shareholders
present in person or by proxy in accordance with the Companies Law, who hold or represent at least 33 1/3% of the total outstanding voting
power of our shares, except if (i) any such general meeting of shareholders was initiated by and convened pursuant to a resolution adopted
by the board of directors and (ii) at the time of such general meeting, we qualify to use the forms and rules of a “foreign private
issuer,” the requisite quorum will consist of two or more shareholders present in person or by proxy who hold or represent at least
25% of the total outstanding voting power of our shares (and if the meeting is adjourned for a lack of quorum, the quorum for such adjourned
meeting will be, subject to certain exceptions, any number of shareholders).
In the future, we may also choose to follow Israeli corporate governance practices
instead of Nasdaq requirements with regard to, among other things, the composition of our board of directors, compensation of officers
and director nomination procedures. In addition, we may choose to follow Israeli corporate governance practice instead of Nasdaq requirements
with respect to shareholder approval for certain dilutive events (such as for issuances that will result in a change of control of the
company, certain transactions other than a public offering involving issuances of a 20% or more interest in the company and certain acquisitions
of the stock or assets of another company) and for the adoption of, and material changes to, equity incentive plans. Accordingly, our
shareholders may not be afforded the same protection as provided under Nasdaq corporate governance rules. Following our home country governance
practices, as opposed to the requirements that would otherwise apply to a U.S. company listed on the Nasdaq Global Select Market, may
provide less protection than is accorded to investors of domestic issuers. See “ITEM 16G: Corporate Governance.”
As a foreign private issuer, we are not subject
to the provisions of Regulation FD or U.S. proxy rules and are exempt from filing certain Exchange Act reports.
As a foreign private issuer, we are exempt from the rules and regulations under the
Exchange Act related to the furnishing and content of proxy statements, and our officers, directors and principal shareholders are exempt
from the reporting and short-swing profit recovery provisions contained in Section 16 of the Exchange Act. In addition, we are not required
under the Exchange Act to file annual and current reports and financial statements with the SEC as frequently or as promptly as U.S. domestic
companies whose securities are registered under the Exchange Act, we are permitted to disclose limited compensation information for our
executive officers on an individual basis and we are generally exempt from filing quarterly reports with the SEC under the Exchange Act.
Moreover, we are not required to comply with Regulation FD, which restricts the selective disclosure of material nonpublic information
to, among others, broker-dealers and holders of a company’s securities under circumstances in which it is reasonably foreseeable
that the holder will trade in the company’s securities on the basis of the information. These exemptions and leniencies reduce the
frequency and scope of information and protections to which you may otherwise have been eligible in relation to a U.S. domestic issuer.
We would lose our foreign private issuer status if (a) a majority of our outstanding
voting securities were either directly or indirectly owned of record by residents of the United States and (b)(i) a majority of our executive
officers or directors were United States citizens or residents, (ii) more than 50% of our assets were located in the United States or
(iii) our business were administered principally in the United States. Our loss of foreign private issuer status would make U.S. regulatory
provisions mandatory. The regulatory and compliance costs to us under U.S. securities laws as a U.S. domestic issuer may be significantly
higher. If we are not a foreign private issuer, we will be required to file periodic reports and registration statements on U.S. domestic
issuer forms with the SEC, which are more detailed and extensive than the forms available to a foreign private issuer. We would also be
required to follow U.S. proxy disclosure requirements, including the requirement to disclose, under U.S. law, more detailed information
about the compensation of our senior executive officers on an individual basis. We may also be required to modify certain of our policies
to comply with accepted governance practices associated with U.S. domestic issuers. Such conversion and modifications will involve additional
costs. In addition, we would lose our ability to rely upon Nasdaq exemptions from certain corporate governance requirements that are available
to foreign private issuers.
Risks Relating to our
Incorporation and Location in Israel
Conditions in Israel, including the recent
attack by Hamas and other terrorist organizations from the Gaza Strip and elsewhere in the region, and Israel’s war against them,
may adversely affect our operations and limit our ability to market our products, which would lead to a decrease in revenues.
Important aspects of our operations are conducted in or managed from Israel, and a
majority of the members of our board of directors and management as well as a many of our employees and consultants and customers and
consumers, are directly affected by economic, political, geopolitical and military conditions in Israel. Since the establishment of the
State of Israel in 1948, a number of armed conflicts have occurred between Israel and its neighboring countries and terrorist organizations
active in the region. These conflicts have involved missile strikes, hostile infiltrations and terrorism against civilian targets in various
parts of Israel, which have negatively affected business conditions in Israel.
In October 2023, Hamas terrorists infiltrated Israel’s southern border from
the Gaza Strip and conducted a series of attacks on civilian and military targets. Hamas also launched extensive rocket attacks on Israeli
population and industrial centers located along Israel’s border with the Gaza Strip and in other areas within the State of Israel.
These attacks resulted in extensive deaths, injuries and kidnapping of civilians and soldiers. Following the attack, Israel’s security
cabinet declared war against Hamas and a military campaign against these terrorist organizations commenced in parallel to their continued
rocket and terror attacks.
The intensity and duration of Israel’s current war against Hamas is difficult
to predict, as are such war’s economic implications on the Company’s business and operations and on Israel’s economy
in general. These events may be intertwined with wider macroeconomic indications of a deterioration of Israel’s economic standing,
which may have a material adverse effect on the Company and its ability to effectively conduct its operations. In addition, since the
commencement of these events, there have been continued hostilities along Israel’s northern border with Lebanon (with the Hezbollah
terror organization) and southern border (with the Houthi movement in Yemen, as described below). It is possible that hostilities with
Hezbollah in Lebanon will escalate, and that other terrorist organizations, including Palestinian military organizations in the West Bank
as well as other hostile countries, such as Iran, will join the hostilities. Such clashes may escalate in the future into a greater
regional conflict.
The intensity and duration of Israel’s current war against Hamas is difficult
to predict, as are such war’s economic implications on the Company’s business and operations and on Israel’s economy
in general. These events may be intertwined with wider macroeconomic indications of a deterioration of Israel’s economic standing
that may involve a downgrade in Israel’s credit rating by rating agencies (such as the recent downgrade by Moody’s of its
credit rating of Israel from A1 to A2, as well as the downgrade of its outlook rating from “stable” to “negative”),
which may have a material adverse effect on the Company and its ability to effectively conduct its operations.
In connection with the Israeli security cabinet’s declaration of war against
Hamas and possible hostilities with other organizations, several hundred thousand Israeli military reservists were drafted to perform
immediate military service. Although many of such military reservists have since been released, they may be called up for additional reserve
duty, depending on developments in the war in Gaza and along Israel’s other borders. 42 of our employees and in Israel have been
called for reserve duties, and additional employees may be called, for service in the current or future wars or other armed conflicts
with Hamas, as well as the other pending or future armed conflicts in which Israel is or may become engaged, and such persons may be absent
for an extended period of time. As a result, our operations may be disrupted by such absences, which disruption may materially and adversely
affect our business and the results of operations. Additionally, the absence of employees of our Israeli suppliers and contract manufacturers
due to their military service in the current or future wars or other armed conflicts may disrupt their operations, which in turn may materially
and adversely affect our ability to deliver or provide products and services to customers.
The hostilities with Hamas, Hezbollah and other organizations and countries have included and may include
terror, missile and drone attacks. In the event that our facilities are damaged as a result of hostile actions, or hostilities otherwise
disrupt our ongoing operations, our ability to deliver or provide products and services in a timely manner to meet our contractual obligations
towards customers and vendors could be materially and adversely affected. Our commercial insurance does not cover losses that may occur
as a result of events associated with war and terrorism. Although the Israeli government currently covers the reinstatement value of direct
damages that are caused by terrorist attacks or acts of war, we cannot assure you that such government coverage will be maintained or
that it will sufficiently cover our potential damages. Any losses or damage incurred by us could have a material adverse effect on our
business. In addition, some countries around the world restrict doing business with Israel and Israeli companies, and additional countries
may impose restrictions on doing business with Israel and Israeli companies if hostilities in Israel or political instability in the region
continue or increase. These restrictions may limit materially our ability to obtain raw materials from these countries or sell our products
and provide our services to companies and customers in these countries. In addition, there have been increased efforts by activists and
organizations to cause companies and consumers to boycott Israeli goods and services. In addition, in January 2024 the International Court
of Justice, or ICJ, issued an interim ruling in a case filed by South Africa against Israel in December 2023, making allegations of genocide
amid and in connection with the war in Gaza, and ordered Israel, among other things, to take measures to prevent genocidal acts, prevent
and punish incitement to genocide, and take steps to provide basic services and humanitarian aid to civilians in Gaza. There are concerns
that companies and businesses will terminate, and may have already terminated, certain commercial relationships with Israeli companies
following the ICJ decision with the proceedings themselves may have a reputational adverse effect on Israeli brands, and so on our results.
The foregoing efforts by countries, activists and organizations, particularly if they become more widespread, as well as the ICJ rulings
and future rulings and orders of other tribunals against Israel (if handed), may materially and adversely impact our ability to sell and
provide our products and services outside of Israel.
Furthermore, following Hamas’ attack on Israel and Israel’s security cabinet
declaration of war against Hamas, the Houthi movement, which controls parts of Yemen, launched a number of attacks on marine vessels traversing
the Red Sea, which marine vessels were thought to either be in route towards Israel or to be partly owned by Israeli businessmen. The
Red Sea is a vital maritime route for international trade traveling to or from Israel. As a result of such disruptions, we have experienced
in the past and may experience in the future delays in obtaining raw materials and other products upon which we rely, extended lead times,
and increased cost of freight, increased insurance costs, purchased materials and manufacturing labor costs. The risk of ongoing
supply disruptions may further result in delayed deliveries of our products. See “Adverse global conditions, including macroeconomic
slowdowns or even recessions and the geopolitical instability, may negatively impact our financial results.”
Finally, political conditions within Israel may affect our operations. Israel has
held five general elections between 2019 and 2022, and prior to October 2023, the Israeli government pursued extensive changes to Israel’s
judicial system, which sparked extensive political debate and unrest. In response to such initiative, many individuals, organizations
and institutions, both within and outside of Israel, voiced concerns that the proposed changes may negatively impact the business environment
in Israel including due to reluctance of foreign investors to invest or transact business in Israel, as well as to increased currency
fluctuations, downgrades in credit rating, increased interest rates, increased volatility in security markets and other changes in macroeconomic
conditions. To date, these initiatives have been substantially put on hold. If such changes to Israel’s judicial system are again
pursued by the government and approved by the parliament, this may have an adverse effect on our business, our results of operations and
our ability to raise additional funds, if deemed necessary by our management and board of directors.
Our operations may be affected by negative
economic conditions or labor unrest in Israel.
General strikes or work stoppages, including at Israeli seaports, have occurred periodically
or have been threatened in the past by Israeli trade unions due to labor disputes. These general strikes or work stoppages may have a
materially adverse effect on the Israeli economy and on our business, including our ability to deliver products to our customers and to
receive raw materials from our suppliers in a timely manner. These general strikes or work stoppages, in Israel or in other countries
where we, our subsidiaries, suppliers and distributors operate, may prevent us from shipping raw materials and equipment required for
our production and shipping our products by sea or otherwise to our customers, which could have a materially adverse effect on our results
of operations. Specifically, our Israeli operations are highly dependent on the free exchanges of goods (whether raw material into Israel
or finished product export), a trade that is made possible through a limited number of seaports in Israel. Current pressures experienced
by Israeli ports, planned governmental reforms and dock workers unions responses could lead to strikes or other disruptions in the ports
operations could affect our ability to operate out Israeli facilities or our export our product, which could have a materially adverse
effect on our results of operations.
Since none of our employees work under any collective bargaining agreements, extension
orders issued by the IMEI apply to us and affect matters such as cost of living adjustments to salaries, length of working hours and work
week, recuperation pay, travel expenses, and pension rights. Any labor disputes over such matters could result in a work stoppage or strikes
by employees that could delay or interrupt our output of products. Any strike, work stoppages or interruption in manufacturing could result
in a failure to meet contractual obligations or in delays, including in our ability to manufacture and deliver products to our customers
in a timely manner, and could have a materially adverse effect on our relationships with our distributors and on our financial results.
If a union of our employees is formed in the future, we may enter into a collective
bargaining agreement with our employees, which may increase our costs and limit our managerial freedom, and if we are unable to reach
a collective bargaining agreement, we may become subject to strikes and work stoppages, all of which may materially and adversely affect
our business.
The tax benefits that are available to us require
us to continue to meet various conditions and may be terminated or reduced in the future, which could increase our costs and taxes.
Our Israeli facilities have been granted “Preferred Enterprise” status
by the Israeli Authority for Investment and Development of the Industry and Economy (“Investment
Center”), which provides us with investment grants (in respect of certain Approved Enterprise programs) and makes us eligible
for tax benefits under the Investment Law.
In order to remain eligible for the tax benefits of a “Preferred Enterprise”
we must continue to meet certain conditions stipulated in the Investment Law and its regulations, as amended, and in certificates of approval
issued by the Investment Center (in respect of Approved Enterprise programs), which may include, among other things, selling more than
25% of our products to markets of over 14 million residents in 2012 (such export criteria will further be increased in the future by 1.4%
per annum) in a specific tax year, making specified investments in fixed assets and equipment, financing a percentage of those investments
with our capital contributions, filing certain reports with the Investment Center, complying with provisions regarding intellectual property
and the criteria set forth in the specific certificate of approval issued by the Investment Center or the ITA. If we do not meet these
requirements, the tax benefits could be canceled and we could be required to refund any tax benefits and investment grants that we received
in the past adjusted to the Israeli consumer price index and interest, or other monetary penalties. Further, in the future, these tax
benefits may be reduced or discontinued. If these tax benefits are cancelled, our Israeli taxable income would be subject to regular Israeli
corporate tax rates. The standard corporate tax rate for Israeli companies has been 23% since 2018.
Effective as of January 1, 2011, the Investment Law was amended (“Amendment
No. 68” or the “2011 Amendment”). Under Amendment No. 68, the criteria
for receiving tax benefits were revised. In the future, we may not be eligible to receive additional tax benefits under this law. The
termination or reduction of these tax benefits would increase our tax liability, which would reduce our profits. Additionally, if we increase
our activities outside of Israel through acquisitions, for example, our expanded activities might not be eligible to be included in future
Israeli tax benefit programs. We may lose all our tax benefits in Israel in the event that our manufacturing operations outside of Israel
exceed certain production levels (currently set at 50% of the overall production and subject to future changes by the ITA). We do not
foresee such circumstances as probable in the coming years. From 2017 onward, our current Preferred, the tax rate for the portion of our
income related to the Bar-Lev manufacturing facility was reduced to 7.5% and Sdot-Yam tax rate 16%. During 2023 the company launched a
restructuring plan, closing Sdot-Yam manufacturing facility, resulting future tax benefits to be received only from income relates to
the Bar-Lev manufacturing facility.
Historically, some portions of income were tax exempt, but that is no longer the case.
In the event of a distribution of a dividend from the tax-exempt income described above, we will be subject to tax at the corporate tax
rate applicable to our Approved Enterprise’s and Beneficiary Enterprise’s income on the amount distributed (grossed-up to
reflect the pre-tax income that it would have had to earn in order to distribute the dividend) in accordance with the effective corporate
tax rate that would have been applied had we not relied on the exemption. In addition to the reduced tax rate, a distribution of income
attributed to an “Approved Enterprise” and a “Beneficiary Enterprise” will be subject to 15% withholding tax (or
a reduced rate under an applicable double tax treaty, subject to the receipt in advance of a valid certificate from the ITA allowing for
a reduced tax rate). As for a “Preferred Enterprise,” dividends are generally subject to 20% withholding tax from 2014 (or
a reduced rate under an applicable double tax treaty, subject to the receipt in advance of a valid certificate from the ITA allowing for
a reduced tax rate). However, because we announced our election to apply the provisions of Amendment No. 68 prior to June 30, 2015, we
will be entitled to distribute exempt income generated by any Approved/Beneficiary Enterprise to our Israeli corporate shareholders tax
free (See “ITEM 10.E: Additional Information—Taxation—Israeli tax considerations and government programs—Law for
the Encouragement of Capital Investments, 1959”).
The amendment to the Investment Law stipulated those investments in subsidiaries,
including in the form of acquisitions of subsidiaries from an unrelated party, may also be considered as a deemed dividend distribution
event, increasing the risk of triggering a deemed dividend distribution event and potential tax exposure. The ITA’s interpretation
is that this provision applies retroactively to investments and acquisitions made prior to the amendment.
It may be difficult to enforce a U.S. judgment
against us, our officers and directors in Israel or the United States, or to assert U.S. securities laws claims in Israel or serve process
on our officers and directors.
We are incorporated in Israel. Other than one director, none of our directors, or
our independent registered public accounting firm, is a resident of the United States. None of our executive officers is resident in the
United States. The majority of our assets and the assets of these persons are located outside the United States. Therefore, it may be
difficult for an investor, or any other person or entity, to enforce a U.S. court judgment based upon the civil liability provisions of
the U.S. federal securities laws against us or any of these persons in a U.S. or Israeli court, or to effect service of process upon these
persons in the United States. Additionally, it may be difficult for an investor, or any other person or entity, to assert U.S. securities
law claims in original actions instituted in Israel. Israeli courts may refuse to hear a claim based on a violation of U.S. securities
laws on the grounds that Israel is not the most appropriate forum in which to bring such a claim. Even if an Israeli court agrees to hear
a claim, it may determine that Israeli law and not U.S. law is applicable to the claim. If U.S. law is found to be applicable, the content
of applicable U.S. law must be proved as a fact, which can be a time-consuming and costly process. Certain matters of procedure will also
be governed by Israeli law. There is little binding case law in Israel addressing the matters described above.
Our articles of association provide that unless
we consent otherwise, the competent courts of Tel Aviv, Israel shall be the sole and exclusive forum for substantially all disputes between
us and our shareholders under the Companies Law and the Israeli Securities Law, which could limit our shareholders’ ability to bring
claims and proceedings against, as well as obtain a favorable judicial forum for disputes with, us and our directors, officers and other
employees.
Unless we consent in writing to the selection of an alternative forum, the competent
courts of Tel Aviv, Israel shall be the exclusive forum for (i) any derivative action or proceeding brought on our behalf, (ii) any action
asserting a claim of breach of fiduciary duty owed by any of our directors, officers or other employees to us or our shareholders, or
(iii) any action asserting a claim arising pursuant to any provision of the Companies Law or the Israeli Securities Law. This exclusive
forum provision is intended to apply to claims arising under Israeli Law and would not apply to claims brought pursuant to the Securities
Act or the Exchange Act or any other claim for which U.S. federal courts would have exclusive jurisdiction. Such exclusive forum provision
in our articles of association will not relieve us of our duties to comply with U.S. federal securities laws and the rules and regulations
thereunder, and shareholders will not be deemed to have waived our compliance with these laws, rules, and regulations. This exclusive
forum provision may limit a shareholder’s ability to bring a claim in a judicial forum of its choosing for disputes with us or our
directors, officers, or other employees, which may discourage lawsuits against us and our directors, officers and other employees.
Your rights and responsibilities as our shareholder
will be governed by Israeli law which may differ in some respects from the rights and responsibilities of shareholders of United States
corporations.
Since we are incorporated under Israeli law, the rights and responsibilities of our
shareholders are governed by our articles of association and Israeli law. These rights and responsibilities differ in some respects from
the rights and responsibilities of shareholders in U.S.-based corporations. In particular, a shareholder of an Israeli company has a duty
to act in good faith and in a customary manner in exercising its rights and performing its obligations towards the company and other shareholders
and to refrain from abusing its power in the company, including, among other things, in voting at the general meeting of shareholders
on certain matters, such as an amendment to the company’s articles of association, an increase of the company’s authorized
share capital, a merger of the company and approval of related party transactions that require shareholder approval. A shareholder also
has a general duty to refrain from discriminating against other shareholders. In addition, a controlling shareholder or a shareholder
who knows that it possesses the power to determine the outcome of a shareholders’ vote or to appoint or prevent the appointment
of an office holder in the company or has another power with respect to the company, has a duty to act in fairness towards the company.
However, Israeli law does not define the substance of this duty of fairness. See “ITEM 6.C: Directors, Senior Management and Employees—Board
Practices—Board Practices—Fiduciary duties and approval of specified related party transactions under Israeli law—Duties
of shareholders.” Additionally, the parameters and implications of the provisions that govern shareholder behavior have not been
clearly determined by the Israeli courts. These provisions may be interpreted to impose additional obligations and liabilities on our
shareholders that are not typically imposed on shareholders of United States corporations.
Provisions of Israeli law and our articles
of association may delay, prevent or make undesirable a merger transaction, or an acquisition of all or a significant portion of our shares.
Provisions of Israeli law, including the Companies Law and our articles of association could
have the effect of delaying or preventing a change in control and may make it more difficult for a third-party to acquire us or our shareholders
to elect different individuals to our board of directors, even if doing so would be considered to be beneficial by some of our shareholders,
and may limit the price that investors may be willing to pay in the future for our ordinary shares. Among other things:
|
• |
the Companies Law regulates mergers and requires that a tender offer be affected when
more than a specified percentage of shares in a company are purchased; |
|
• |
the Companies Law requires special approvals for certain transactions involving directors,
officers or certain significant shareholders and regulates other matters that may be relevant to these types of transactions;
|
|
• |
the Companies Law does not provide for shareholder action by written consent for public
companies, thereby requiring all shareholder actions to be taken at a general meeting of shareholders;
|
|
• |
an amendment to our articles of association will
generally require, in addition to the approval of our board of directors, a vote of the holders of a majority of our outstanding ordinary
shares entitled to vote and present and voting on the matter at a general meeting of shareholders (referred to as simple majority), and
the amendment of a limited number of provisions, such as increases to the size of the board of directors and the ability for the board
of directors to effect vacancy appointments, requires a vote of the holders of at least 65% of the total voting power of our shareholders;
and
|
|
• |
our articles of association provide that
director vacancies may be filled by our board of directors. |
Israeli tax considerations may also make potential transactions undesirable to us
or to some of our shareholders whose country of residence does not have a tax treaty with Israel granting tax relief to such shareholders
from Israeli tax. With respect to mergers, Israeli tax law allows for tax deferral in certain circumstances but makes the deferral contingent
on the fulfillment of numerous conditions, including a holding period of up to two years from the date of the transaction during which
certain sales and dispositions of shares of the participating companies are restricted. Moreover, with respect to certain share swap transactions,
the tax deferral is limited in time, and when such time expires, the tax becomes payable even if no disposition of the shares has occurred.
See “ITEM 10.B: Additional Information—Memorandum and Articles of Association—Acquisitions under Israeli law.”
Under Israeli law, our two external directors have terms of office of three years
and may serve up to three terms. Our current external directors have been elected by our shareholders to serve for a second term of a
three-year term commencing December 1, 2023.
These provisions of Israeli law could have the effect of delaying or preventing a
change in control and may make it more difficult for a third party to acquire us or our shareholders to elect different individuals to
our board of directors, even if doing so would be beneficial to our shareholders, and may limit the price that investors may be willing
to pay in the future for our ordinary shares.
If we are considered to have sizable market
power under Israeli law, we could be subject to certain restrictions that may limit our ability to freely conduct our business to which
our competitors may not be subject.
Under the Israeli Economic Competition law (formerly, the Restrictive Trade Practices
Law, 1988) (the “Israeli Competition Law”), a company that holds significant market
power in a relevant market, is subject to certain business practices, designed against its abuse of its market powers. If we are
indeed deemed to have major market share, a sizable market power and the relevant regulator believes we have abused our position in the
market by, it could serve as prima facie evidence in private actions or class actions against
us alleging that we have engaged in anti-competitive behavior. Furthermore, the Commissioner may order us to take or refrain from taking
certain actions, which could limit our ability to freely conduct our business.
Sales in Israel accounted for approximately 4% of our revenues in 2023. We have a
significant market position in certain jurisdictions outside of Israel and cannot assure you that we are not, or will not become, subject
to the laws relating to the use of dominant product positions in particular countries, which laws could limit our business practices and
our ability to consummate acquisitions.
If we fail to comply with Israeli law restrictions
concerning employment of Jewish employees on Saturdays and Jewish holidays, we and our office holders may be exposed to administrative
and criminal liabilities and our operational and financial results may be materially and adversely impacted.
We are subject to the Israeli Hours of Work and Rest Law, 1951 (“Rest
Law”), which imposes certain restriction on the employment terms and conditions of our employees. Among others, the Rest
Law prohibits the employment of Jewish employees on Saturdays and Jewish holidays, unless a permit is obtained from the IMEI. Employment
of Jewish employees on such days without a permit constitutes a violation of the Rest Law. We received a permit from the IMEI to employ
Jewish employees on Saturdays and Jewish holidays in connection with most of the production machinery in our Sdot-Yam facility, effective
until December 30, 2024. There is no assurance that we will be able to maintain such permit while we do not actually employ Jewish employees
on Saturdays, or, if cancelled by the IMEI, that we will be able to obtain such permit in the future. If we fail to obtain such permit
in the future or if we are deemed to be in any violation of the Rest Law, we may be required to halt operations of our manufacturing facilities
on Saturdays and Jewish holidays, we and our officers may be exposed to administrative and criminal liabilities, including fines, and
our ability to utilize our Sdot-Yam facility and therefore our operational and financial results could be materially and adversely impacted.
General Risk Factors
If we do not manage our inventory effectively,
our results of operations could be materially adversely affected.
We must manage our inventory effectively in order to meet the demand for our products.
If our forecasts for any Specific Stock Keeping Unit (“SKU”) exceed actual demand,
we could experience excess inventory, resulting in increased logistic costs. If we ultimately determine that we have excess inventory,
we may have to reduce our prices and write-down inventory which could have an adverse effect on our business, financial condition and
results of operations. If we have insufficient inventory levels, we may not be able to respond to the market demand for our products,
resulting in reduced sales and market share.
We depend on our senior management team and
other skilled and experienced personnel to operate our business effectively, and the loss of any of these individuals could materially
and adversely affect our business and our future financial condition or results of operations.
We are dependent on the skills and experience of our senior management team and other skilled and experienced
personnel. These individuals possess strategic, managerial, sales, marketing, operational, manufacturing, logistical, financial and administrative
skills that are important to the operation of our business. There have been, and from time to time, there may continue to be, changes
in our management team resulting from the hiring or departure of executives and key employees, or the transition of executives
within our business. For example, Mr. Shiran replaced Yuval Dagim as our Chief Executive Officer on March 16, 2023, and six of our current
14 members of the management team have joined since such date. Such changes and transitions in our executive management team may divert
resources and focus away from the operation of our business. Furthermore, in recent years we experienced a trend of relatively high turnover
in some sites and roles.
Retention of institutional knowledge and the ability to attract, motivate and retain
personnel, as well as the ability to successfully onboard our senior management as a team comprised of several new members, are crucial
for implementing our business strategy, without which our business and our future financial condition or results of operations could suffer
materially and adversely. We do not carry key man insurance with respect to any of our executive officers or other employees. We cannot
assure you that we will be able to retain all our existing senior management personnel and key personnel or to attract additional qualified
personnel when needed.
The market for qualified personnel is competitive in the geographies in which we operate.
Moreover, the COVID-19 pandemic has also caused a shift to virtual or hybrid recruiting and employment, which has increased the difficulty
in timely attracting new employees, integrating, and introducing them into our corporate culture and retaining them for the longer term.
Companies with whom we compete have expended and will likely continue to expend more resources than we do on employee recruitment and
are often better able to offer more favorable compensation and incentive packages than we can. We seek to retain and motivate existing
personnel through our compensation practices, company culture, and career development opportunities. If we are unable to attract
and retain qualified personnel when and where they are needed, our ability to operate and grow our business could be impaired. Moreover,
if we are not able to properly balance investment in personnel with sales, our profitability may be adversely affected.
In addition, factors beyond our control may damage or disrupt the ability of our senior
management or key employees to perform their critical roles in the Company.
ITEM
4: Information on the Company
| A. |
History and Development of the Company |
Our History
Caesarstone Ltd. was founded in 1987 and incorporated in 1989 in the State of Israel.
We began as a leading manufacturer of high-end quartz based engineered surfaces used primarily as countertops in residential and commercial
buildings, and we are now a global multi material, multi-application designer, producer, and reseller of surfaces. We design, develop
produce and source engineered stone, natural stone and porcelain products that offer aesthetic appeal and functionality through a distinct
variety of colors, styles, textures, and finishes used primarily as countertops surfaces, vanities, and other interior and exterior spaces.
Our products are currently sold in over 60 countries through a combination of direct
sales in certain markets performed by our subsidiaries and indirectly through a network of independent distributors in other markets.
We acquired the businesses of our former Australian, Canadian, U.S. and Singaporean distributors, and established such businesses within
our own subsidiaries in such countries. In March 2012, we listed our shares on the Nasdaq Global Select Market. In 2017, we started selling
our products in the U.K. directly through our U.K. subsidiary, Caesarstone (UK) Ltd. In October 2020, we acquired a majority stake in
Lioli, an India-based producer of porcelain slabs, which also sells its porcelain products in India and other markets. In December 2020,
we acquired Omicron, a premier stone supplier which operated several locations across Florida, Ohio, Michigan, and Louisiana. We now generate
a substantial portion of our revenues in the United States, Australia, and Canada from direct distribution of our products. In July 2022,
we also acquired our distributor in Sweden and established Caesarstone Scandinavia.
During 2023, our manufacturing network has been undergoing restructuring, with the
focus of optimizing our global production footprint. As part of this strategic plan, we shifted our focus from production activities and
discontinued production operations in our Sdot Yam, Israel, and Richmond Hill, GA, USA, production facilities.
We are a company limited by shares organized under the laws of the State of Israel.
We are registered with the Israeli Registrar of Companies in Jerusalem. Our registration number is 51-143950-7. Our principal executive
offices are located at Kibbutz Sdot-Yam, MP Menashe, 3780400, Israel, and our telephone number is +972 (4) 610-9368. We have irrevocably
appointed Caesarstone USA as our agent for service of process in any action against us in any United States federal or state court. The
address of Caesarstone USA is 1401 W. Morehead Street, Suite 100, Charlotte, NC, 28208. The SEC maintains an internet site at http:/www.sec.gov
that contains reports and other information regarding issues that file electronically with the SEC. Our securities filings, including
this annual report and the exhibits thereto, are available on the SEC’s website. For more information about us, our website is www.caesarstone.com.
The information contained in, or connected with, our SEC filings on the SEC internet site and our website shall not be deemed to be incorporated
by reference in this annual report.
Principal Capital Expenditures
Our capital expenditures for fiscal years 2023, 2022 and 2021 amounted to $11.2 million,
$17.8 million, and $31.5 million, respectively. The majority of our investment activities have historically been related to the purchase
of manufacturing equipment and components for our production lines. For additional information on our capital expenditures, see “ITEM
5.B: Liquidity and Capital Resources–Capital expenditures.”
| B. |
Business Overview |
We are a multi material designer, producer and reseller of countertops used in residential
and commercial buildings globally. Based on the Freedonia Report The global countertop industry generated approximately $160.6 billion
in sales to end consumers in 2022 based on average installed price, which includes fabrication, installation and other service-related
costs, as per the following charts:
The majority of our sales are at the wholesale level to fabricators and distributors
and exclude fabrication, installation and other service-related costs.
The engineered quartz countertop is a growing category in the countertop market and
continues to take market share from other materials, such as granite, manufactured solid surfaces and laminate. Between 1999 and 2022,
global engineered quartz sales to end-consumers grew at a compound annual growth rate of 16.2% compared to a 6.0% compound annual growth
rate in total global countertop sales to end-consumers during the same period. In 2022, we successfully launched the marketing and sales
of porcelain countertops under the Caesarstone brand following the Lioli Acquisition. Porcelain represents one of the fastest growing
categories in the global countertop market and between 2016 and 2022, the porcelain sales to end-consumers grew at a compound annual growth
rate of 36%.
In recent years, quartz penetration rate, by volume, other than in Israel, increased in our key markets,
as detailed in the following chart:
Quartz penetration in our key markets
|
|
For the year ended December 31, |
|||||||||||||||||||
|
2022 |
2020 |
2016 |
2014 |
2012 |
||||||||||||||||
|
Region |
||||||||||||||||||||
|
United States |
21 |
% |
20 |
% |
14 |
% |
8 |
% |
6 |
% | ||||||||||
|
Australia (not including New Zealand) |
48 |
% |
47 |
% |
45 |
% |
39 |
% |
35 |
% | ||||||||||
|
Canada |
27 |
% |
28 |
% |
24 |
% |
18 |
% |
12 |
% | ||||||||||
|
Israel (*) |
53 |
% |
67 |
% |
87 |
% |
86 |
% |
85 |
% | ||||||||||
(*) In Israel, quartz lost market share mainly to porcelain, which increased its market share from a de-minimis
rate in 2016 to over 34% in 2022.
Our products consist primarily of engineered stone fabrication and installation related services, natural
stone and porcelain slabs that are currently sold in over 60 countries through a combination of direct sales in certain markets and indirectly
through a network of independent distributors in other markets. Our products are primarily used as indoor & outdoor kitchen countertops
in the renovation and remodeling and residential construction end markets. Other applications for our products include vanity tops, back
splashes, furniture, and other interior and exterior surfaces that are used in a variety of residential and non-residential applications.
High quality engineered stone offers durability, non-porous characteristics, superior scratch, stains and heat resistance levels, making
it durable and ideal for kitchen and other applications relative to competing products such as granite, manufactured solid surfaces and
laminate. Porcelain is characterized by its hardness and its stain resistance, as well as extreme heat and UV resistance. Through our
design and manufacturing processes we can offer a wide variety of compositions, colors, styles, designs, and textures.
From 2010 to 2023, our revenue grew at a compound annual growth rate of 8.4%. From 2022 to 2023, our revenue
decreased at an annual rate of 18.2%. In 2023, we generated revenue of $565.2 million, net loss of $107.7 million attributable to controlling
interest, which included a one-time non-cash impairment charge of $47.9 million, an adjusted EBITDA loss of $9.4 million and adjusted
net loss attributable to controlling interest of $46.4 million. Adjusted EBITDA and adjusted net income attributable to controlling interest
are non-GAAP financial measures. See “ITEM 4.B: Information on the Company—Business Overview—Non-GAAP Financial Measures”
below for a description of how we define adjusted EBITDA and adjusted net income attributable to controlling interest and reconciliations
of net income to adjusted EBITDA and net income attributable to controlling interest to adjusted net income attributable to controlling
interest.
Not as projected by the Freedonia report, our primary markets, and potentially engineered
stone penetration have slowed down during 2023, which we believe is attributable to macroeconomics with higher global interest rates and
inflation, as well as uncertainties relating to the changes in the Australian market that may further affect the realization of such projections
during 2024.
Our Products
Our products are generally marketed under the Caesarstone brand. Currently, our porcelain
products manufactured in India are marketed either under the Caesarstone brand, mainly for counter-top applications in selected markets,
and under the existing Lioli brand mainly for flooring and cladding applications. Most of our engineered stone and Porcelain products
are installed as countertops in residential kitchens. Other applications of our products include vanity tops, back splashes, and exterior
surfaces for outdoor kitchens. In addition, we sell natural stone, sinks and various ancillary fabrication tools and materials. Our standard
size engineered stone slabs measure 120 inches long by 56 1/2 inches wide, with a thickness option of 1/2, 3/4, or 1 1/4 inches. Our jumbo
slabs, constituting the majority of our products, measure 131 1/2 inches long by 64 1/2 inches wide, with a thickness of 3/4 or 1 1/4
inches. On average engineered stone surfaces are comprised on average of 85% minerals blended with polyester, and pigments. Our engineered
stone products’ manufacturing processes and composition gives them superior strength and resistance levels to heat impact, scratches,
cracks and stains. Pigments act as a dyeing agent to vary our products’ colors and patterns. Our standard size porcelain countertop
slabs measure 126 inches long by 63 inches wide, 94.5 inches long by 47 inches wide and 47 inches by 47 inches mm, with a thickness of
1/2 inches, 1/3 inches and 1/4 inches, in a range of matt finishes. Porcelain surfaces are typically comprised of clay minerals,
natural minerals, and additives, and offer non-porous characteristics as well as scratch and heat resistance.
We design our products with a wide range of colors, finishes, textures, thicknesses,
and physical properties, which help us meet the different functional and aesthetic demands of end-consumers. Our designs range from fine-grained
patterns to coarse-grained color blends with a variegated visual texture. Through offering new designs, we capitalize on Caesarstone’s
brand name and foster our position as a leading innovator in the counter-top space.
Our product offerings consist of a few collections (Classico, Supernatural, Metropolitan, Outdoor and recently
Porcelain), each of which is designed to have a distinct aesthetic appeal. We use a multi-tiered pricing model across our products and
within each product collection ranging from lower price points to higher price points. Each product collection is designed, branded, and
marketed with the goal of reinforcing our products’ premium quality.
We introduced our original product collection, Classico, in 1987. Launched in 2012,
our Supernatural collection, which is marketed as specialty high-end, offers designs inspired by natural stone and which are manufactured
using proprietary technology. In 2018, we launched our new Metropolitan collection, inspired by the rough and unpolished textures found
in industrial architecture. In 2020, we introduced our Outdoor collection, an innovative product category, which comprises stain resistant
surfaces, made of a highly durable material, proven to withstand UV-rays and the most extreme environmental conditions over a long term,
intended for use in outdoor kitchens spaces. Following the Lioli Acquisition we began offering porcelain products as well for countertops
as well as flooring and cladding applications.
We regularly introduce new colors and designs to our product collections based on
consumer trends. We offer over 70 different colors of engineered stone products, with five textures and three thicknesses generally available
for each collection.
In addition, following the Omicron Acquisition, we now offer to our customers in the
United States resale of natural stone, as well as various ancillaries and fabrication and installation accessories.
A key focus of our product development is a commitment to substantiating our claim
of our products’ superior quality, strength, and durability. Our products undergo ongoing tests for durability and flexural strength
internally by our internal laboratory operations group and by external accreditation laboratories and organizations. Products in our portfolio
are accredited by organizations overseeing safety, Food contact and environment performance, such as the NSF International and GREENGUARD
Indoor Air Quality. Generally, our products support green building projects and allow contractors to receive Leadership in Energy and
Design (“LEED”) points for projects incorporating our products.
Distribution
Our four largest markets based on sales are currently the United States, Australia
(including New Zealand), Canada and Israel. In 2023, sales of our products in these markets accounted for 48.1%, 18.8%, 13.4% and 4.2%
of our revenues, respectively. Total sales in these markets accounted for 84.2% of our revenues in 2023. For a breakdown of revenues by
geographic market for the last three fiscal years, see “ITEM 5.A: Operating Results and Financial Review and Prospects—Operating
Results.”
Direct Markets
We currently have direct sales channels in the United States, Australia, Canada, Israel,
the United Kingdom (“U.K.”), Sweden (Scandinavia), India, and Singapore. Our direct
sales channels allow us to maintain greater control over the entire sales channel within a market. As a result, we gain greater insight
into market trends, receive feedback more readily from end-consumers, fabricators, architects and designers regarding new developments
in tastes and preferences, and have greater control over inventory management. Our subsidiaries’ warehouses in each of these countries
maintain inventories of our products and are connected to each subsidiary’s sales department. We supply our products primarily to
wholesalers, resellers and fabricators, who in turn resell them to contractors, developers, builders and consumers, who are generally
advised by architects and designers. In certain market channels in the U.S., Canada Israel and Australia, we also provide, together with
our products, fabrication and installation services, which we source from third party fabricators. We believe that our supply of a fabricated
and installed Caesarstone countertop is a competitive advantage in such channels, which enables us to better control our products’
prices as well as to promote a full solution to our customers, while in some of these cases our products are sold under different brands.
During the second half of 2022, we made changes to our distribution strategic in the
Israeli market, and began selling directly to major fabricators, in addition to selling through a handful of local distributers Although
we still sell our products to distributors in this market, we consider this a direct market due to the warranty we provide to end-consumers,
as well as our fabricator technical and health and safety instruction programs and our local sales and marketing activities. In the United
States, Australia, Canada, the United Kingdom, Sweden (Scandinavia) and Singapore we have established direct distribution channels with
distribution locations in major urban centers complemented by arrangements with various third parties, sub-distributors or stone suppliers
in certain areas of the United States.
Indirect Markets
We distribute our products in other territories in which we do not have a direct sales
channel through third-party distributors, who generally distribute our products to fabricators on an exclusive or non-exclusive basis
in a specific country or region. Fabricators sell our products to contractors, developers, builders and consumers. In some cases, our
distributors operate their own fabrication facilities. Additionally, our distributors may sell to sub-distributors located within the
territory who in turn sell to fabricators.
In most cases, we engage one or more distributors to serve a country or territory.
Today, we sell our products in over 50 countries through third-party distributors, and to over 60 countries in total. Sales to third-party
distributors in such indirect markets accounted for approximately 11% of our revenues in 2023. This strategy often allows us to accelerate
our penetration into multiple new markets. Our distributors typically have prior stone surface experience and close relationships with
fabricators, builders and contractors within their respective territory.
We work closely with our distributors to assist them in preparing and executing a
marketing strategy and comprehensive business plan. Ultimately, however, our distributors are responsible for the sales and marketing
of our products and providing technical support to their customers within their respective territories. To assist some of our distributors
in the promotion of our brand in these markets, we provide marketing materials and in certain cases, monetary participation in marketing
activities. Our distributors devote significant effort and resources to generating and maintaining demand for our products along all levels
of the product supply chain in their territory. To this end, distributors use our marketing products and strategies to develop relationships
with local builders, contractors, developers, kitchen and bath retailers, architects and designers. Certain distributors, as well as sub-distributors,
do not engage in brand promotion activities and their activities are limited to sales promotion, warehousing and distributing to fabricators
or other customers.
We do not control the pricing terms of our distributors or sub-distributors’
sales to customers, nor do we control their purchasing and inventory policy. As a result, prices for our products may vary and their inventory
policies may affect their purchases.
Sales and Marketing
Sales
We manufacture or source our products based upon our rolling projections of the demand
for our products.
From 2019 and through 2023, we operated under a regional structure which consists
of North America, APAC, EMEA and Israel. Commencing 2024 each of our subsidiaries is responsible for its direct revenues, with the responsibility
of the majority of third-party distribution partners handled by our Rest of World team.
We believe our products still have significant growth opportunities in the United
States, Canada and Europe. For information on sales trends in the markets in which we operate, see “ITEM 5: Operating and Financial
Review and Prospects—Components of statement of income”. In 2016, we established a direct sales channel in the United Kingdom
and starting in January 2017 we have been selling and distributing our products in the U.K. directly through our U.K. subsidiary. In December
2020, we acquired Omicron, a premier stone supplier servicing the Florida, Ohio, Michigan, and Louisiana markets in the U.S. In July 2022,
we acquired a leading distributor in Sweden, establishing first direct Go-To-Market presence in E.U. under Caesarstone Scandinavia AB.
We intend to continue to invest resources to further strengthen and increase our penetration in our existing markets. We are also exploring
alternative sales channels and methodologies to further enhance our presence in each market.
Marketing
We position our engineered stone, porcelain and natural stone surfaces as premium
branded products in terms of their designs, quality and pricing. Through our marketing, we seek to convey our products’ ability
to elevate the overall design and quality of an entire kitchen or other setting. Our marketing strategy is to deliver this message every
time our end-consumers, customers, fabricators, architects and designers meet our brand. We also aim to communicate our position as a
design-oriented global leader in engineered surfaces innovation and technology.
The goal of our marketing activities is to drive marketing and sales efforts across
the regions, while creating demand for our products from end-consumers, kitchen and bath retailers, fabricators, contractors, architects
and designers, which we refer to as a “push-and-pull demand strategy.” We combine both pushing our brand and products through
all levels of the product supply chain while generating demand from end-consumers as a complementary strategy.
We implement a multi-channel marketing strategy in each of our territories and market
not only to our direct customers, but to the entire product supply chain, including fabricators, developers, contractors, kitchen retailers,
builders, architects and designers. Such marketing channels include, among others: advertisements in home interior magazines and websites,
the placement of our display stands and sample books in kitchen retails stores and our company’s website and social media presence.
We share professional knowledge with fabricators about our products and their capabilities, installation methods and safety requirements
through manuals, seminars and webinars. In addition, our “Master of Stone” program operates as an online training platform,
with content aimed at educating fabricators on the topics of Health & Safety, professional know-how and added value content for fabrication
plant managers and making safety and professional working guidelines accessible to our fabricators worldwide.
Our marketing materials are developed by our global marketing department in Israel
and are used globally, in addition to local marketing initiatives in the regions. In 2023, we spent $15.7 million on direct marketing
and promotional activities.
Our digital platforms’ websites are a key part of our marketing strategy enabling
us to create data-driven personal relationships, on and off site, in order to increase engagement and conversion to sale. Our websites
enable our business partners, customers and end-consumers to view currently available designs, photo galleries of installations of our
products in a wide range of settings, instructions with respect to the correct usage of our products and offer an innovative cutting-edge
experience with rich content and interactive tools to empower and guide consumers at any stage of their renovation journey. We also conduct
marketing activity in the social media arena mainly to increase our brand awareness among end-consumers, architects and designers.
We also seek to increase awareness of our brand and products through a range of other
methods, such as trade shows, home design shows, design competitions, media campaigns and through our products’ use in high profile
projects and iconic buildings. In recent years, we have collaborated with renowned designers, who created exhibitions and particles from
our products. Our design initiatives attracted press coverage around the world.
Research and Development
Our research and development (“R&D”)
department is primarily located in Israel. As of December 31, 2023, our corporate R&D department was comprised of 19 employees, all
of whom have extensive experience in engineered stone and porcelain surface manufacturing, polymer science, engineering, product design
and engineered surfaces applications. In 2023, R&D costs accounted for approximately 0.9% of our revenues.
The strategic mission of our R&D team is to develop and maintain innovative and
leading technologies and top-quality designs, develop new and innovative products according to our marketing department’s roadmap,
increase the cost-effectiveness of our manufacturing processes and raw materials, and generate and protect company intellectual property
in order to enhance our position in the engineered stone surface industry. We also study and evaluate consumer trends by attending industry
exhibitions and hosting international design workshops with market and design specialists from various regions.
Customer Service
We believe that our ability to provide outstanding customer service is a strong competitive
differentiator. Our relationships with our customers are established and maintained through the coordinated efforts of our sales, marketing,
production and customer service personnel. In our direct markets, the warranty period varies. We provide end-consumers with various warranties
depending on the relevant markets ranging from a ten-year limited warranty to limited lifetime warranties in selected markets such as
the United States, Canada and Israel. In our indirect markets, end-consumers, warranty issues on our products are addressed by our local
distributor. We provide all our distributors with a limited direct manufacturing defect warranty and our distributors are responsible
for providing warranty coverage to end-customers. The warranties provided by our distributors vary in term. In our direct markets, following
an end-consumer call, our technicians are sent to the product site within a short time. We provide readily accessible resources and tools
regarding the fabrication, installation, care and maintenance of our products. We believe our comprehensive global customer service capabilities
and the sharing of our service-related know-how differentiate our company from our competitors.
Raw Materials and Service Provider Relationships
Minerals, clay, polyester and pigment are the primary raw materials used in the production
of our surfaces. We acquire raw materials from third-party suppliers. Suppliers ship raw materials for our engineered stone products and
porcelain to our manufacturing facilities in Israel and India primarily by sea. Our raw materials are generally inspected at the suppliers’
facilities and upon arrival at our manufacturing facilities in Israel and the U.S. The cost of our raw materials consists of the purchase
prices of such materials and costs related to the logistics of delivering the materials to our manufacturing facilities. Our raw materials
costs are also impacted by changes in foreign currency exchange rates.
Minerals are our main raw material component used in our engineered surface products.
Raw minerals must be processed into finer grades of sand and powder before we can use them in our manufacturing process. We purchase minerals
from our suppliers after some process. We acquire minerals from suppliers primarily in Turkey, Belgium, India, Portugal, the U.S. and
Israel. In 2023, approximately 69% of our minerals, including mainly quartzite, which is used across all of our engineered stone products,
was imported from several suppliers in Turkey. Approximately 63% of the imported minerals from Turkey (or 44% of our total direct mineral
consumption) were acquired from Mikroman Madencilik San ve TIC.LTD.STI (“Mikroman”)
and approximately 32% of the imported quartz from Turkey (or 22% of our total mineral consumption) were acquired from Ekom Eczacibasi
Dis Ticaret A.Ş. (“Ekom”). In light of market volatility and our changing raw
material needs, while we have long lasting mutually beneficial relationships with our suppliers, we do not currently have an annual framework
agreement in place and are purchasing materials from them based on spot purchase orders.
Similar to our arrangements with Mikroman and Ekom described above, we typically transact
business with other quartz suppliers and execute purchase orders from them from time to time.
In most cases, we acquire polyester from several suppliers, on an annual framework
basis or purchase order basis based on our projected needs for the subsequent one to three months. Typically, suppliers are unwilling
to agree to preset prices for periods longer than a quarter and suppliers’ prices may vary during a quarter as well.
Pigments for our engineered stone production in Israel are purchased from Israel and
suppliers abroad. Pigments for our U.S. engineered stone production are primarily purchased from U.S. vendors.
The principal raw materials for our porcelain products are minerals (such as clay
and feldspar) and chemical additives. We typically transact business with our suppliers of raw materials for porcelain products on an
annual framework basis, under which we execute purchase orders from time to time.
Our strategy is to maintain, whenever practicable, multiple sources for the purchase
of our raw materials to achieve competitive pricing, provide flexibility and protect against supply disruption.
See “ITEM 3.D. Key Information—Risk Factors—We may encounter significant
delays in manufacturing if we are required to change the suppliers for the raw materials used in the production of our products.”
For our cost of raw materials in 2023 and prior years, see “ITEM 5.A: Operating Results and Financial Review and Prospects—Operating
Results—Cost of revenues and gross profit margin.”
Manufacturing and Facilities
Following the closure of our Sdot-Yam and Richmond-Hill facilities during 2023, our
products are now manufactured at our two manufacturing facilities located in Bar-Lev Industrial Park in northern Israel, and in Morbi,
Gujarat in India and by our third party PBP partners. We completed our Bar-Lev manufacturing facility in 2005, which included our then
third production line, and we established our fourth production line at this facility in 2007 and our fifth production line at this facility
in 2013. As part of the Lioli Acquisition, in 2020 we acquired a porcelain slab manufacturing facility, which is comprised of one production
line currently in operation.
Finished slabs are shipped from our facilities in Israel and India, or from our PBP,
to our distribution centers worldwide, to third-party distributors or directly to customers worldwide. For further discussion of our facilities,
see “ITEM 4.D: Information on the Company—Property, plants, and equipment.”
The manufacturing process for our engineered products typically involves the blending
of minerals (85% on average) with polyester and pigments. Using machinery acquired primarily from Breton, the leading supplier of engineered
stone manufacturing equipment, together with our proprietary manufacturing enhancements, this mixture is compacted into slabs by a vacuum
and vibration process. The slabs are then moved to a curing kiln where the cross-linking of the polyester is completed. Lastly, the slabs
are gauged, calibrated and polished to enhance shine.
The manufacturing process for our porcelain products typically involves blending clay,
natural minerals (such as feldspar) and chemical additives required for the shaping process. The multi-ingredient mixture is fed to a
ball mill, together with water, to achieve fine grinding. The excess water is then removed, and the resulting powder is shaped into slabs.
Slabs are first moved to dryers and then passed through a glaze line, where they are decorated with different applicators. Decorated slabs
are passed through digital printing machines and then go into a curing kiln for the final firing process. Lastly, the slabs are gauged,
calibrated and polished to enhance shine.
We maintain strict quality control and safety standards for our products and manufacturing
processes both in our facilities as well as with our PBP. Our manufacturing facility in Israel holds ISO45001 safety certifications from
The Standards Institution of Israel, while our facility in India, is in the process of obtaining the same certification from TUV).
In addition, since 2018 we have increased our outsourcing capabilities and currently
purchase a portion of our product from our PBPs including natural stone, engineered stone, porcelain and ancillaries. We conduct quality
control and quality assurance processes with respect to such products. In 2023, products produced by third parties accounted for approximately
22.4% of revenues, and we are aiming to increase purchases from PBPs in 2024. For more information, see ITEM 3.D: Key Information - Operational
Risks.
Seasonality
For a discussion of seasonality, please refer to “ITEM 5.A: Operating and Financial Review and Prospects—Operating
Results—Factors impacting our results of operations” and “ITEM 5.A: Operating and Financial Review and Prospects—Operating
Results—Seasonality.”
Competition
We believe that we compete principally based upon product quality, breadth of colors
and designs offering and innovation, brand awareness and position, pricing and customer service. We believe that we differentiate ourselves
from competitors on the basis of our premium brand, our signature product designs, our products and designs innovation, our ability to
directly offer our products in major markets globally, our focus on the quality of our product offerings, our customer service-oriented
culture, our high involvement in the product supply chain and our leading distribution partners.
The dominant surface materials used by end-consumers in each market vary. Our products
compete with a number of other surface materials as well as similar materials offered by other producers and re-sellers. The manufacturers
of these products consist of a number of regional as well as global competitors. Some of our competitors may have greater resources than
we have and may adapt to changes in consumer preferences and demand more quickly, expand their materials offering, devote greater resources
to design innovation and establishing brand recognition, manufacture more versatile slab sizes and implement processes to lower costs.
The engineered stone and porcelain surface market is highly fragmented and is also served by a number of
regional and global competitors. We also face growing competition from low-cost manufacturers from Asia and Europe. Large multinational
companies have also invested in their engineered stone and porcelain surface production capabilities. For more information, see “ITEM
3.D. Key Information—Risk Factors—We face intense competitive pressures from manufacturers of other surface materials, which
could materially and adversely affect our results of operations and financial condition”
Information Technology Systems
We believe that an appropriate information technology infrastructure is important
in order to support our daily operations and the growth of our business.
We implemented various IT systems to support our business and operations. Our Enterprise
Resource Planning (“ERP”) software enables us to manage our day-to-day business activities
and provides us with accessible quality data that support our forecasting, planning and reporting. Accurate planning is important in order
to support sales and optimize working capital and cost as our products can be built in a number of combinations of sizes, colors, textures
and finishes. Given our global expansion, we implemented a global ERP based on an Oracle platform. Our MES systems manage work processes
on the production floor in our facilities and Salesforce enhances our Customer Relationship Management (“CRM”)
infrastructure.
We are implementing digitalization across our organization to better streamline processes
and support our business strategy. We are investing in digital transformation projects to enhance consumer engagement and customer experience.
Our technological and digital investments will be geared towards operational enhancements in inventory management and production, along
with transforming our go-to-market tools. We seek to update our IT infrastructure to enhance our ability to prevent and respond to cyber
threats and conduct trainings for our employees in this respect. For further details, see “ITEM 3.D. Key Information—Risk
Factors—Disruptions to or our failure to upgrade and adjust our information technology systems globally, may materially impair our
operations, hinder our growth and materially and adversely affect our business and results of operations.
Intellectual Property
Our Caesarstone brand is central to our business strategy, and we believe that maintaining
and enhancing the Caesarstone brand is critical to expanding our business.
We have obtained trademark registrations in certain jurisdictions that we consider
material to the marketing of our products, including CAESARSTONE® and our Caesarstone logo. We have obtained trademark registrations
for additional marks that we use to identify certain product collections, as well as other marks used for certain of our products. While
we expect our current and future applications to mature into registrations, we cannot be certain that we will obtain such registrations.
In many of our markets we also have trademarks, including registered and unregistered marks, on the colors and models of our products.
We believe that our trademarks are important to our brand, success and competitive position. In order to mitigate the risk of infringement,
we conduct an ongoing review process before applying for registration. However, we cannot be certain that third parties will not oppose
our application or that the application will not be rejected in whole or in part. In the past, some of our trademark applications for
certain classes of our products’ applications have been rejected or opposed in certain markets and may be rejected for certain classes
in the future, in all or parts of our markets, including without limitation, for flooring and wall cladding. We are currently subject
to various proceedings regarding our Caesarstone trademark applications in various jurisdictions.
To protect our know-how and trade secrets, we customarily require our employees and
managers to execute confidentiality agreements or otherwise agree to keep our proprietary information confidential. Typically, our employment
contracts also include clauses requiring these employees to assign to us all inventions and intellectual property rights they develop
in the course of their employment and agree not to disclose our confidential information. We limit access to our trade secrets and implement
certain protections to allow our know-how and trade secret to remain confidential.
In addition to confidentiality agreements, we seek patent protection for some of our
latest technologies. We have obtained patents for certain of our technologies and have pending patent applications that were filed in
various jurisdictions, including the United States, Europe, Australia, Canada, China and Israel, which relate to our manufacturing technology
and certain products. No patent application of ours is material to the overall conduct of our business. There can be no assurance that
pending applications will be approved in a timely manner or at all, or that such patents will effectively protect our intellectual property.
There can be no assurance that we will develop patentable intellectual property in the future, and we have chosen and may further choose
not to pursue patents for innovations that are material to our business.
Environmental and Other Regulatory Matters
Environmental and Health and Safety Regulations
Our manufacturing facility and operations in Israel, and our manufacturing facility in Gujarat, India are
subject to numerous Israeli and Indian environmental and workers’ health and safety laws and regulations, respectively, and our
supply chain operations are subject to applicable local laws and regulations. Laws and regulations govern, among other things, exposure
to pollutants, protection of the environment; setting standards for emissions; generation, treatment, import, purchase, use, storage,
handling, disposal and transport of hazardous wastes, chemicals and materials, including sludge; discharges or releases of hazardous materials
into the environment, soil or water; permissible exposure levels to hazardous materials; product specifications; nuisance prevention;
soil, water or other contamination from hazardous materials and remediation requirements arising therefrom; and protection of workers’
health and safety.
In addition to being subject to regulatory and legal requirements, our manufacturing
facilities in Israel and India operate under applicable permits, licenses and approvals with terms and conditions containing a significant
number of prescriptive limits and performance standards. Business licenses for our facility in Israel contain conditions related to a
number of requirements, including with respect to dust emissions, air quality, the disposal of effluents and process sludge, and the handling
of waste, chemicals and hazardous materials. The business license for our Bar-Lev plant is in effect until June 30, 2024, and the Company
is in the process of seeking an extension. Our site in India has a Factory License which is a basic license issued by the Inspectorate
of Factories, which is in effect until December 31, 2028. The site in India has also obtained a Consent to Operate (the “CTO”)
from the State Pollution Control Board, which is a permit issued to any factory in India with all the compliance requirements related
to environmental aspects, such as air emission, water and wastewater management, waste management. The CTO is valid until September 28,
2023, and following a renewal process we believe we are to receive an extended CTO in the coming weeks. We operate in Israel under poison
permits that regulate our use of poisons and hazardous materials. Our current poison permits are valid until January 26, 2025, for Bar-Lev
facility. Our site in India is required to comply with all applicable conditions, including with respect to water consumption, wastewater
discharge, air emission monitoring and pollution control devices, hazardous wastes storage and disposal, specified in the CTO. In all
our manufacturing facilities, we are implementing measures on an ongoing basis in order to achieve and maintain compliance with dust and
styrene environmental and occupational emissions standards and to reduce such emissions to minimum thresholds.
Each of these permits, licenses and standards require a significant amount of monitoring,
record-keeping and reporting in order for us to demonstrate compliance therewith.
Official representatives of the health and safety and environment authorities in Israel,
and Gujarat visit our facilities from time to time, to inspect issues such as workplace safety, industrial hygiene, monitoring lockout
tag out programs, exposure and emissions, water treatment, noise and others. Such inspections may result in citations, penalties, revocation
of our business license or limitation or shut down of our facilities’ operations. It may also require us to make further investments
in our facilities.
From time to time, we face environmental, health and safety compliance issues related
to our manufacturing facilities:
| • |
Emissions - Israel. On March 2018 and later on December 2019 the IMEP issued additional terms
for business license for the Bar-Lev facility, and the Company has implemented all the required terms, with certain implementing of cyber
related requirements underway. The IMEP closely monitors our Bar-Lev facility’s implementation of the additional terms and
emissions, specifically of styrene. During July 2021, the Company received a warning letter from the IMEP in which our Bar-Lev plant was
notified of violations of the Clean Air Act and the plant’s business license terms, following an unannounced styrene emission sampling
that revealed several cases of deviations from the styrene emission standard under the Clean Air Act in Israel. The IMEP has ordered the
Company to take corrective and preventive actions, including reducing the expected timeframe for installation of additional Regenerative
Thermal Oxidizer (“RTO”) system and to implement a continuous (online) monitoring device
on the Bar-Lev plant’s fence. We are cooperating with the IMEP and are currently in the process of implementing all its requirements
and remaining additional terms, such process is currently behind schedule, since the current geopolitical circumstances in Israel prevents
the arrival of experts needed to conclude the project. In February 2022, Israel adopted a long-term goal for the reduction of environmental
styrene emissions. Although such goal is not expected to impact our current operations, the adoption of new regulations could create an
additional burden for any future investment in our Israeli facilities. We are constantly in the process of taking the required corrective
actions in order to comply with the business license terms, the styrene emission standard and the IMEP instructions. |
| • |
Workers’ safety and health. The Israeli Ministry of Economics, Labor Division (“IMOE”)
in Israel and the Indian Ministry of Labor and Employment, conduct audits of our plants, in which, among other things, they examine if
there were any deviations from permitted ambient levels of RCS, styrene and acetone in the plants. We seek, on an ongoing basis, to continue
reducing the level of exposure of our employees to RCS, styrene and acetone, while enforcing our employees’ use of personal protection
equipment. A fatal accident occurred at the Company’s facility in Richmond Hill in February 2023. The accident was investigated
by local law enforcement and OSHA and the matter is now closed. |
| • |
Australian Market. On December 13, 2023, Australian federal, state and territory governments
announced a joint decision to ban the use, supply and manufacture of engineered stone slabs containing crystalline silica (including our
quartz-based products) in Australia. Subject to the formal adoption of the legislation and regulations, the ban will go into effect on
July 1, 2024, in most Australian states and territories. While we disagree with this decision, we believe that the focus should be aimed
at improving occupational health and safety, and has communicated its position to Australian governments, it is taking the necessary steps
to ensure supply of alternative materials to its Australian customers in line with its high standards. This process may negatively impact
our sales in the near-term in the Australian market, which accounted for approximately 18.8% of revenue during the fiscal year ended December
31, 2023. |
Other Regulations
We are subject to the Israeli Rest Law, which, among other things, prohibits the employment
of Jewish employees on Saturdays and Jewish holidays, unless a permit is obtained from the IMEI.
If we are deemed to be in violation of the Rest Law, we may be required to halt operations
of our manufacturing facilities on Saturdays and Jewish holidays, we and our officers may be exposed to administrative and criminal liabilities,
including fines, and our operational and financial results could be materially and adversely impacted. For more information, see “Item
3.D. Key Information—Risk Factors—Risks relating to our incorporation and location in Israel—If we fail to comply with
Israeli law restrictions concerning employment of Jewish employees on Saturdays and Jewish holidays, we and our office holders may be
exposed to administrative and criminal liabilities and our operational and financial results may be materially and adversely impacted.”
For information on other regulations applicable, or potentially applicable, to us,
see the following risks factors in “ITEM 3.D. Key Information—Risk Factors”:
| • |
“Risks related to our business and industry—We may have exposure to greater-than-anticipated tax liabilities.”
|
| • |
“Risks related to our incorporation and location in Israel— Conditions in Israel could materially and adversely affect
our business.” |
| • |
“Risks related to our incorporation and location in Israel—The tax benefits that are available to us require us to continue
to meet various conditions and may be terminated or reduced in the future, which could increase our costs and taxes.” |
| • |
“Risks related to our incorporation and location in Israel—If we are considered a ‘monopoly’ under Israeli
law, we could be subject to certain restrictions that may limit our ability to freely conduct our business to which our competitors may
not be subject. |
Legal Proceedings
See “ITEM 8.A: Financial Information—Consolidated Financial Statements
and Other Financial Information—Legal Proceedings.”
Non-GAAP Financial Measures
We use certain non-GAAP financial measures to evaluate our performance in conjunction
with other performance metrics. The following are examples of how we use such non-GAAP measures:
| • |
Our annual budget is based in part on these non-GAAP measures. |
| • |
Our management and board of directors use these non-GAAP measures to evaluate our operational performance and to compare it against
our work plan and budget. |
Our non-GAAP financial measures, adjusted gross profit, adjusted EBITDA and adjusted net income (loss)
attributable to controlling interest, have no standardized meaning and accordingly have limitations in their usefulness to investors.
We provide such non-GAAP data because management believes that such data provides useful information to investors. However, investors
are cautioned that, unlike financial measures prepared in accordance with U.S. GAAP, non-GAAP measures may not be comparable with similar
measures used by other companies. These non-GAAP financial measures are presented solely to permit investors to more fully understand
how management and our board assess our performance. The limitations of these non-GAAP financial measures as performance measures are
that they provide a view of our results of operations without reflecting all events during a period and may not provide a comparable view
of our performance to other companies in our industry.
Investors should consider non-GAAP financial measures in addition to, and not as replacements
for, or superior to, measures of financial performance prepared in accordance with GAAP.
In arriving at our presentation of non-GAAP financial measures, we exclude items that
either have a non-recurring impact on our income statement or which, in the judgment of our management, are items that, either as a result
of their nature or size, could, were they not singled out, potentially cause investors to extrapolate future performance from an improper
base. In addition, we also exclude share-based compensation expenses to facilitate a better understanding of our operating performance,
since these expenses are non-cash and accordingly, we believe do not affect our business operations. While not all inclusive, examples
of these items include:
| • |
amortization of purchased intangible assets; |
| • |
legal settlements (both gain or loss) and loss contingencies, due to the difficulty in predicting future events, their timing and
size; |
| • |
Impairment expenses |
| • |
material items related to business combination activities important to understanding our ongoing performance; |
| • |
excess cost of acquired inventory; |
| • |
expenses related to our share-based compensation; |
| • |
significant one-time offering costs; |
| • |
significant one-time non-recurring items (both gain or loss); |
| • |
material extraordinary tax and other awards or settlements, both amounts paid and received; and |
| • |
tax effects of the foregoing items. |
|
2023 |
2022 |
2021 |
2020 |
2019 |
||||||||||||||||
|
Reconciliation of Gross profit to Adjusted
Gross profit: |
||||||||||||||||||||
|
Gross profit |
$ |
91,939 |
$ |
163,245 |
$ |
171,498 |
$ |
133,942 |
$ |
148,639 |
||||||||||
|
Share-based compensation expense (a) |
95 |
315 |
321 |
416 |
285 |
|||||||||||||||
|
Non-recurring import related income |
— |
— |
— |
— |
(1,501 |
) | ||||||||||||||
|
Amortization of assets related to acquisitions |
285 |
306 |
852 |
529 |
— |
|||||||||||||||
|
Non recurring items related to restructuring (b) |
3,924 |
237 |
- |
- |
1,661 |
|||||||||||||||
|
Other non-recurring items |
(304 |
) |
- |
— |
— |
— |
||||||||||||||
|
Adjusted Gross profit |
$ |
95,939 |
$ |
164,103 |
$ |
172,671 |
$ |
134,887 |
$ |
149,084 |
||||||||||
| (a) |
Share-based compensation includes expenses related to stock options and restricted stock units granted to employees and directors
of the company. |
| (b) |
In 2023, reflects residual operating expenses related to Sdot-Yam after closing; In 2022, reflects workforce reduction and in 2019,
reflects mainly one-time amortization of machinery equipment with no future alternative use, and one-time inventory write down due to
discontinuation of certain product group manufacturing. |
|
2023 |
2022 |
2021 |
2020 |
2019 |
||||||||||||||||
|
Reconciliation of Net Income (loss) to Adjusted
EBITDA: |
||||||||||||||||||||
|
Net income (loss) |
$ |
(108,240 |
) |
$ |
(56,366 |
) |
$ |
17,889 |
$ |
7,622 |
$ |
12,862 |
||||||||
|
Finance expenses (income), net |
(1,069 |
) |
(3,079 |
) |
7,590 |
10,199 |
5,578 |
|||||||||||||
|
Taxes on income |
21,281 |
758 |
1,950 |
4,700 |
6,243 |
|||||||||||||||
|
Depreciation and amortization |
30,007 |
36,344 |
35,407 |
29,460 |
28,587 |
|||||||||||||||
|
Legal settlements and loss contingencies, net (a) |
(4,770 |
) |
568 |
3,283 |
6,319 |
12,359 |
||||||||||||||
|
Contingent consideration adjustment related to acquisition
|
264 |
120 |
284 |
— |
— |
|||||||||||||||
|
Share-based compensation expense (b) |
1,025 |
1,502 |
1,845 |
2,858 |
3,632 |
|||||||||||||||
|
Impairment expenses related to goodwill and long-lived assets
|
47,939 |
71,258 |
— |
— |
— |
|||||||||||||||
|
Non-recurring import related expense (income) |
— |
— |
— |
— |
(1,501 |
) | ||||||||||||||
|
Acquisition-related expenses |
- |
80 |
— |
921 |
— |
|||||||||||||||
|
Non recurring items related to restructuring (c) |
4,438 |
684 |
- |
- |
1,286 |
|||||||||||||||
|
Other non-recurring items |
(304 |
) |
- |
— |
— |
- |
||||||||||||||
|
Adjusted EBITDA |
$ |
(9,429 |
) |
$ |
51,869 |
$ |
68,248 |
$ |
62,079 |
$ |
69,046 |
|||||||||
| (a) |
Consists of legal settlements expenses and loss contingencies, net related to product liability claims and other adjustments to ongoing
legal claims, including related legal fees. |
| (b) |
Share-based compensation includes expenses related to stock options and restricted stock units granted to employees and directors
of the company. |
| (c) |
In 2023, related to long-lived assets impairment and restructuring expenses related to closure of Richmond plant, impairment and
restructuring expenses related to Sdot Yam plant closure. In 2022, related to workforce reduction, in 2019, relates to non-recurring expenses
related to North American region establishment, one-time charge related to reduction in headcount and certain activities including discontinuation
of certain product group manufacturing. |
|
2023 |
2022 |
2021 |
2020 |
2019 |
||||||||||||||||
|
Reconciliation of Net Income (loss) Attributable to Controlling Interest to Adjusted
Net Income Attributable to Controlling Interest: |
||||||||||||||||||||
|
Net income (loss) attributable to controlling interest |
$ |
(107,656 |
) |
$ |
(57,054 |
) |
$ |
18,966 |
$ |
7,218 |
$ |
12,862 |
||||||||
|
Legal settlements and loss contingencies, net (a) |
(4,770 |
) |
568 |
3,283 |
6,319 |
12,359 |
||||||||||||||
|
Contingent consideration adjustment related to acquisition |
264 |
120 |
284 |
— |
— |
|||||||||||||||
|
Amortization of assets related to acquisitions, net of tax |
2,142 |
2,084 |
2,391 |
446 |
— |
|||||||||||||||
|
Share-based compensation expense (b) |
1,025 |
1,502 |
1,845 |
2,858 |
3,632 |
|||||||||||||||
|
Non-cash revaluation of lease liabilities (c) |
(1,556 |
) |
(9,527 |
) |
2,918 |
3,189 |
3,615 |
|||||||||||||
|
Non-recurring import related expense (income) |
— |
— |
— |
— |
(1,501 |
) | ||||||||||||||
|
Impairment expenses related to goodwill and long-lived assets |
47,939 |
71,258 |
— |
— |
— |
|||||||||||||||
|
Acquisition-related expenses |
- |
80 |
— |
921 |
— |
|||||||||||||||
|
Non recurring items related to restructuring (d) |
4,438 |
684 |
— |
— |
2,486 |
|||||||||||||||
|
Other non-recurring items |
(304 |
) |
— |
— |
— |
— |
||||||||||||||
|
Total adjustments before tax |
49,178 |
66,769 |
10,721 |
13,733 |
20,591 |
|||||||||||||||
|
Less tax on above adjustments (e) |
(12,035 |
) |
(910 |
) |
1,054 |
4,488 |
6,729 |
|||||||||||||
|
Total adjustments after tax |
$ |
61,213 |
$ |
67,679 |
$ |
9,667 |
$ |
9,245 |
$ |
13,862 |
||||||||||
|
Adjusted net income (loss) attributable to controlling interest |
$ |
(46,443 |
) |
$ |
10,625 |
$ |
28,633 |
$ |
16,463 |
$ |
26,724 |
|||||||||
| (a) |
Consists of legal settlements expenses and loss contingencies, net related to product liability claims and other adjustments to ongoing
legal claims, including related legal fees. |
| (b) |
Share-based compensation includes expenses related to stock options and restricted stock units granted to employees and directors
of the company. |
| (c) |
Exchange rate differences deriving from revaluation of lease contracts in accordance with FASB ASC 842. |
| (d) |
In 2023, related to long-lived assets impairment and restructuring expenses related to closure of Richmond and Sdot Yam plants. In
2022, related to workforce reduction, in 2019, relates to non-recurring expenses related to North American region establishment, one time
charge related to reduction in headcount and certain activities including discontinuation of certain product group manufacturing, one
time amortization of machinery equipment with no future alternative use. |
| (e) |
Based on the effective tax rates of the relevant periods. |
| C. |
Organizational Structure |
The legal name of our company is Caesarstone Ltd.
Caesarstone was organized under the laws of the State of Israel. We have six direct
wholly-owned subsidiaries: Caesarstone Australia PTY Limited, which is incorporated in Australia, Caesarstone South East Asia PTE LTD,
which is incorporated in Singapore, Caesarstone (UK) Ltd., which is incorporated in the United Kingdom, Caesarstone Canada Inc., which
is incorporated in Canada, Caesarstone Scandinavia AB, which incorporated in Sweden, and Caesarstone USA, Inc., which, together with its
two wholly-owned subsidiaries, Caesarstone Technologies USA, Inc. and Omicron LLC, are incorporated in the United States. In addition,
following the Lioli Acquisition, Caesarstone Ltd. holds a majority interest of Lioli, incorporated in India, and therefore is consolidating
the results of its operations in our Consolidated Financial Statements.
We operate based on regional structure with teams in each of our mentioned subsidiaries.
| D. |
Property, Plants and Equipment |
Our manufacturing facilities are located in Israel and India. The following table
sets forth our most significant facilities as of December 31, 2023:
|
Properties |
Issuer’s Rights |
Location |
Purpose |
Size |
|
Kibbutz Sdot-Yam(1) |
Land Use Agreement |
Caesarea, Central Israel |
Headquarters, research and development center |
Approximately 30,000 square meters of facility and approximately 48,000 square meters of un-covered yard*
|
|
Bar-Lev Industrial Park manufacturing facility(2) |
Land Use Agreement & Ownership |
Carmiel, Northern Israel |
Manufacturing facility |
Approximately 23,000 square meters of facility and approximately 50,000 square meters of un-covered yard**
|
|
Belfast Industrial Center (3)(4)
|
Ownership |
Richmond Hill, Georgia, United States |
Manufacturing facility |
Approximately 26,000 square meters of facility and approximately 401,000 square meters of un-covered yard
(excluding 56,089 square meters of wetland) |
|
Bharat Nagar (5) |
Ownership |
Morbi, Gujarat, India |
Manufacturing facility |
Approximately 60,000 square meters of facility and approximately 55,000 square meters of open land, gas
yard, effluent treatment plant, labor colony and roads |
* Square-meter figures with respect to properties in Israel are based on data measured
by the relevant municipalities used for local tax purposes.
** Square-meter figures based on data used by Israeli municipalities for local tax
purpose is adjusted to reflect the property leased from Kibbutz Sdot-Yam as agreed between us and the Kibbutz during 2014. This does not
include an additional 5,000 square meters adjacent to the manufacturing facility, which we acquired in December 2019.
| (1) |
Leased pursuant to a land use agreement with Kibbutz Sdot-Yam entered in March 2012 with a term of 20 years, which replaced the
former land use agreement. Starting from September 2014 we use an additional 9,000 square meters pursuant to Kibbutz Sdot-Yam’s
consent under terms materially similar to the land use agreement. However, we have the right to return such additional office space and
premises to Kibbutz Sdot-Yam at any time upon 90 days’ prior written notice. In September 2016, we exercised our right to return
to the Kibbutz an additional office space of approximately 400 square meters which we used since January 2014 under terms materially similar
to the land use agreement. The lands on which these facilities are located are held by the ILA and leased or subleased by Kibbutz Sdot-Yam
pursuant to agreements described in “ITEM 7.B: Major Shareholders and Related Party Transactions—Related Party Transactions—Relationship
and agreements with Kibbutz Sdot-Yam—Land use agreement.” |
| (2) |
We own 2,673 square meters of facility and 2,550 square meters of uncovered yard, and the remainder is leased pursuant to a land
use agreement with Kibbutz Sdot-Yam entered into in March 2011, with a term of 10 years commencing in September 2012, which will be automatically
renewed, unless we give two years’ prior notice, for an additional 10-year term. In 2021, the agreement was extended for an additional
ten-year period. This agreement was executed simultaneously with the land purchase and leaseback agreement we entered into with Kibbutz
Sdot-Yam, according to which Kibbutz Sdot-Yam acquired from us our rights in the lands and facilities of the Bar-Lev industrial center,
under a long term lease agreement we entered into with the ILA on June 6, 2007 to use the premises for an initial period of 49 years as
of February 6, 2005, with an option to renew for an additional term of 49 years as of the end of the initial period. For more information,
see “ITEM 7.B: Major Shareholders and Related Party Transactions—Related Party Transactions—Relationship and agreements
with Kibbutz Sdot-Yam—Land purchase agreement and leaseback.” |
| (3) |
On September 17, 2013, we entered into a purchase agreement for the purchase of approximately 45 acres of land in Richmond Hill,
Georgia, United States, comprising approximately 36.6 acres of upland and approximately 9 acres of wetland for our new U.S. manufacturing
facility, the construction of which was completed in 2015. On June 22, 2015, we exercised a purchase option in the agreement and acquired
approximately 19.4 acres of land, comprising approximately 18.0 acres of upland. On November 25, 2015, we entered into a new purchase
agreement for the purchase of approximately 54.9 acres of additional land situated adjacent to the previously purchased land, comprising
approximately 51.1 acres of upland. Consistent with our restructuring plan initiated in mid-2023, in December 2023 we announced the
closure of its Richmond Hill manufacturing facility, effective mid-January 2024. This decision is expected to contribute savings of approximately
$20 million annually by optimizing its manufacturing footprint. |
| (4) |
In December 2014, we entered into a bond purchase loan agreement, were issued a taxable revenue bond on December 1, 2014, and executed
a corresponding lease agreement. Pursuant to these agreements, the Development Authority of Bryan County, an instrumentality of the State
of Georgia and a public corporation (“DABC”), has acquired legal title of our facility
in Richmond Hill, in the State of Georgia, U.S., and in consideration leased such facilities back to us. In addition, the facility was
pledged by DABC in favor of us and DABC has committed to re-convey title to the facility to us upon the maturity of the bond or at any
time at our request, upon our payment of $100 to DABC. Therefore, we consider such facilities to be owned by us. This arrangement was
structured to grant us property tax abatement for ten years at 100% and additional five years at 50%, subject to our satisfying certain
qualifying conditions with respect to headcount, average salaries paid to our employees and the total capital investment amount in our
U.S. plant. In December 2015, we entered into an additional bond purchase loan agreement with the Development Authority of Bryan County
and were issued a second taxable revenue bond on December 22, 2015, to cover additional funds and assets which were utilized in the framework
of constructing, acquiring and equipping our U.S. facility. If we were to expand our current U.S. facility, we would have been entitled
to an additional taxable revenue bond and a corresponding property tax abatement. In 2017, we notified DABC that we will not be utilizing
such additional bond at this time and, accordingly, it has expired. |
| (5) |
In October 2020, we acquired a majority stake, in Lioli, which owns the Bharat Nagar facility in Morbi, Gujarat, India. For more
information on our title to the property in Morbi, Gujarat, India, see “ITEM 3.D. Key Information—Risk Factors—Operational
Risks—Fully integrating Lioli’s and Omicron’s businesses may be more difficult, costly and time-consuming than expected,
which may adversely affect our results of operations and the value of our common shares.” |
For further discussion and details of the productive capacity of our facilities, see
“ITEM 4.B: Information on the Company—Business Overview—Manufacturing and Facilities.” Various environmental issues
may affect our utilization of the above-mentioned facilities. For further discussion, see “Item 4.B. Information on the Company—Business
Overview—Environmental and Other Regulatory Matters—Environmental and Health and Safety Regulations” above.
ITEM
4A: Unresolved Staff Comments
Not applicable.
ITEM 5: Operating and
Financial Review and Prospects
| A. |
Operating Results |
The following discussion and analysis of our financial
condition and results of operations should be read in conjunction with our financial information presented in “ITEM 3: Key Information,”
our audited consolidated balance sheets as of December 31, 2023 and 2022, the related consolidated income statements and cash flow
statements for each of the three years ended December 31, 2023, 2022 and 2021, and related notes and the information contained elsewhere
in this annual report. Our financial statements have been prepared in accordance with U.S. GAAP. See “ITEM 3.D: Key Information—Risk
Factors” and “Special Note Regarding Forward-Looking Statements.”
Company overview
We are a leading brand of high-end engineered surfaces used primarily as countertops
in residential and commercial buildings. We design, develop and produce engineered stone and porcelain products that offer aesthetic appeal
and functionality through a distinct variety of colors, styles, textures, and finishes used in countertops, vanities, and other interior
and exterior surfaces. Our high-quality engineered stone surfaces are marketed and sold under our premium Caesarstone brand. We have grown
to become one of the largest global providers of engineered stone surfaces. Our products accounted for approximately 4.4% of global engineered
stone by volume in 2022. Our sales in the United States, Australia (including New Zealand), Canada and Israel, our four largest markets,
accounted for 48.1%, 18.8%, 13.4% and 4% of our revenues in 2023. We believe that our revenues will continue to be highly concentrated
among a relatively small number of geographic regions for the foreseeable future. For further information with respect to our geographic
concentration, see “ITEM 3.D: Key Information—Risk Factors—Our revenues are subject to significant geographic concentration
and any disruption to sales within one of our key existing markets could materially and adversely impact our results of operations and
prospects.”
Between 2010 to 2023, our revenue grew at a compound annual growth rate of 8.4% driven
mainly by the continued quartz penetration and the Lioli and Omicron acquisitions, increased remodeling spending in all our top three
markets and growth in the residential segment in the United States, our largest market. In addition, the portion of innovative designs
within our offering increased over time. Our revenue trend reversed and revenues decreased by 18.2% during 2023. See “—Comparison
of period-to-period results of operations—Year ended December 31, 2023, compared to year ended December 31, 2022—Revenues”
for additional information.
During 2023, our gross margin decreased from 23.6% to 16.3% (our adjusted gross margin
decreased from 23.8% to 17%), and our margin of net loss attributable to controlling interest was 19.0% compared to 8.3% in 2022 (the
adjusted margin of net income (loss) attributable to controlling interest decreased from an adjusted net income of 1.5% in 2022 to an
adjusted net loss of 8.2% over the same period).
Adjusted EBITDA margin decreased from a positive 7.5% to a negative Adjusted EBITDA
of 1.7%. We define each of such margins by dividing adjusted gross profit, adjusted EBITDA, and adjusted net income (loss) attributable
to controlling interest, respectively, by revenues. Adjusted EBITDA, adjusted gross profit, and adjusted net income (loss) attributable
to controlling interest are non-GAAP financial measures, see “ITEM 4.B: Information on the Company—Business Overview—Non-GAAP
Financial Measures” for a description of how we define adjusted EBITDA and adjusted net income attributable to controlling interest
and reconciliations of net income to adjusted EBITDA and net income attributable to controlling interest to adjusted net income attributable
to controlling interest. We attribute the decrease in the adjusted EBITDA margin mainly due to increased manufacturing costs per unit
due to lower capacity utilization which resulted in lower fixed-costs absorption, increased logistics costs higher raw material prices,
lower revenues offset by decrease in shipping prices and higher selling price.
Our mission is to be the first brand of choice for surfaces all around the world.
We believe that a significant portion of our future growth will come from our U.S. market where we see the greatest growth opportunity.
We believe that transitioning to direct sales will contribute to our future growth in the long term. We believe that in order to remain
competitive in the long term, we will need to grow our business both organically and through acquisitions.
As part of the Company’s business growth strategy, strategic acquisitions are
considered opportunities to enhance our value proposition through differentiation and competitiveness. In recent years and as further
described below, we have successfully executed on this strategy, including our 2020 acquisitions of Lioli, an India-based developer and
producer of porcelain countertop slabs with manufacturing facilities in Asia; Omicron, a premier stone supplier operating in several locations
across the United States in Florida, Ohio, Michigan and Louisiana, which now operate as part of our United States operations; and Caesarstone
Scandinavia a Swedish distributor. For more information, see “2020 Acquisitions” below.
Factors impacting our results of operations
We consider the following factors to be important in analyzing our results of operations:
| • |
Our sales are impacted by home renovation and remodeling and new residential construction, and to a lesser extent, commercial construction.
We estimate (supported also by the Freedonia Report) that approximately 60%-70% of our revenue in our main markets (U.S., Australia, Canada)
is related to residential renovations and remodeling activities, while 30%-40% is related to new residential construction. |
| • |
Our revenues and results of operations traditionally exhibit some quarterly fluctuations as a result of seasonal influences which
impact construction and renovation cycles. Due to the fact that certain of our operating costs are fixed, the impact of such fluctuations
on our profitability could be material. We believe that the second and third quarters tend to exhibit higher sales volumes than the other
quarters because demand for our surfaces and other products is generally higher during the summer months in the northern hemisphere with
the effort to complete new construction and renovation projects before the new school year. Conversely, the first quarter is typically
impacted by the winter slowdown in the northern hemisphere in the construction industry and might impact sales in Israel depending on
the timing of the spring holiday a particular year. Similarly, sales in Australia during the first quarter are negatively impacted by
fewer construction and renovation projects. The fourth quarter is susceptible to being impacted by the onset of winter in the northern
hemisphere. These trends were not visible during 2023 which was affected by challenging macro-economic conditions impacting our revenues.
|
| • |
We conduct business in multiple countries in North America, South America, Europe, Asia-Pacific, Australia,
and the Middle East and as a result, we are exposed to risks associated with fluctuations in currency exchange rates between the U.S.
dollar and certain other currencies in which we conduct business. A significant portion of our revenues is generated in U.S dollar, and
to a lesser extent the Australian dollar, Canadian dollar, Euro and NIS. In 2023, 49.3% of our revenues were denominated in U.S. dollars,
18.8% in Australian dollars, 13.4% in Canadian dollars, 6.4% in Euros and 3.9% in NIS. As a result, devaluations of the Australian dollars,
and to a lesser extent, the Canadian dollar relative to the U.S. dollar may unfavorably impact our profitability. Our expenses are largely
denominated in U.S. dollars, NIS and Euro, with a smaller portion in Australian dollars and Canadian dollars. As a result, appreciation
of the NIS, and to a lesser extent, the Euro relative to the U.S. dollar may unfavorably affect our profitability. We attempt to limit
our exposure to foreign currency fluctuations through forward contracts, which, except for U.S. dollar/NIS forward contracts, are not
designated as hedging accounting instruments under ASC 815, Derivatives and Hedging. We currently engage in derivatives transactions,
such as forward contracts, to hedge against the risks associated with our foreign currency exposure. Our strategy to hedge our cash flow
exposures involves consistent hedging of exchange rate risk in variable ratios up to 100% of the exposure over rolling 12 months. As of
December 31, 2023, our average hedging ratio was approximately 9% out of our expected currencies exposure for 2023. As of December 31,
2023, we had total outstanding forward contracts with a notional amount of $21.2 million. These forward contracts were for a period of
up to 12 months. The fair value of these foreign currency derivative contracts was positive $0.5 million, which is included in our current
assets and current liabilities, as of December 31, 2023. Hedging results are charged to finance expenses, net, and therefore, do not offset
the impact of currency fluctuations on our operating income. Our U.S. dollar/NIS forward contracts are charged to operating expenses as
designated hedge instruments, partially offsetting the impact of the U.S. dollar/NIS currency fluctuations on our operating income (loss).
While we may decide to enter into additional hedging transactions in the future, the availability and effectiveness of these transactions
may be limited and we may not be able to successfully hedge our exposure, which could adversely affect our financial condition and results
of operations. For further discussion of our foreign currency derivative contracts, see “ITEM 11: Quantitative and Qualitative Disclosures
About Market Risk.”. |
Components of statements of income
Revenues
We derive our revenues from sales of engineered mineral surfaces their fabrication
and installation services, and, to a lesser extent, other surfaces and ancillaries, mostly to fabricators and resellers in our direct
markets and to third-party distributors in our indirect markets. The purchasers of our products in our non-direct markets are our third-party
distributors who, in turn, fabricate or sell to local fabricators and re-sellers. Our direct sales accounted for 89% of our revenues,
for the years ended December 31, 2023.
Revenue is recognized when a customer obtains control of promised goods or when services
have been rendered in an amount that reflects the consideration the entity expects to receive in exchange for those goods or services.
The warranties that we provide vary by market. In our indirect markets, we provide
all our distributors with a limited direct manufacturing defect warranty. In all our indirect markets, distributors are responsible for
providing warranty coverage to end-customers. In our direct markets we provide end-consumers with a limited warranty on our products for
varying applications and duration. Based on historical experience, warranty issues are generally identified within one and a half years
after the shipment of the product and a significant portion of defects are identified before installation. We record a reserve on account
of possible warranty claims, included in our cost of revenues. Historically, warranty claims expenses have been low, accounting for approximately
0.2% of our total cost of goods sold in 2023.
The following table sets forth the geographic breakdown of our revenues during the
periods indicated:
|
Year ended December 31, |
||||||||||||||||||||||||
|
2023 |
2022 |
2021 |
||||||||||||||||||||||
|
Geographical
Region |
% of total revenues |
Revenues in
thousands of USD |
% of total revenues |
Revenues in
thousands of USD |
% of total revenues |
Revenues in
thousands of USD |
||||||||||||||||||
|
United States |
48.1 |
% |
$ |
271,647 |
49.5 |
% |
$ |
342,293 |
47.4 |
% |
$ |
305,353 |
||||||||||||
|
Canada |
13.4 |
% |
75,462 |
13.5 |
% |
93,377 |
13.1 |
84,467 |
||||||||||||||||
|
Latin America |
0.6 |
% |
3,285 |
0.6 |
% |
4,481 |
0.7 |
4,702 |
||||||||||||||||
|
Australia (incl. New Zealand) |
18.8 |
% |
106,223 |
16.8 |
% |
116,284 |
18.4 |
118,714 |
||||||||||||||||
|
Asia |
4.6 |
% |
25,959 |
5.0 |
% |
34,607 |
4.7 |
30,390 |
||||||||||||||||
|
EMEA |
10.6 |
% |
59,908 |
9.2 |
% |
63,320 |
9.4 |
60,836 |
||||||||||||||||
|
Israel |
4.0 |
% |
22,747 |
5.3 |
% |
36,444 |
6.1 |
39,430 |
||||||||||||||||
|
Total |
100.0 |
% |
$ |
565,231 |
100.0 |
% |
$ |
690,806 |
100 |
% |
$ |
643,892 |
||||||||||||
Revenue in 2023 was $565.2 million compared
to $690.8 million in the prior year. On a constant currency basis, 2023 revenue was lower by 17% year-over-year, mainly due to lower volume
resulting from macroeconomic headwinds and competitive pressures. The increase in 2022 revenues compared to 2021 on a constant currency
basis was 10.8% and was mainly due to higher selling prices.
Revenues in the U.S. decreased by 20.6% in 2023 compared to an increase of 12.1% in
2022. The decrease in 2023 is mainly due to lower volume. The increase in 2022 was mainly due to higher prices.
Revenues in Canada decreased by 19.2% in 2023 mainly due to lower volume compared
to an increase of 10.5% in 2022, representing a 16.1% decrease and 14.6% increase on a constant-currency basis, respectively.
Revenues in Latin America decreased by 26.7% in 2023 compared to a decrease of 4.7%
in 2022.
Revenues in Australia decreased by 8.7% in 2023 compared to a decrease of 2% in 2022
mainly due to lower volume. On a constant currency basis, revenues in Australia decreased by 4.7% in 2023 and increased by 6.2% in 2022.
Revenues in Asia decreased by 25% in 2023 compared to an increase of 13.9% in 2022
mainly due to lower volume resulting from macroeconomic headwinds and competitive pressures. On a constant currency basis, revenues in
Asia decreased by 26% in 2023 and increased by 15.3% in 2022.
Revenues in EMEA decreased by 5.4% in 2023 and increased by 4.1% in 2022 mainly due
to lower volume resulting from macroeconomic headwinds and competitive pressures. On a constant-currency basis, revenue decreased in EMEA
by 7.6% in 2023 and increased by 16.7% in 2022.
Revenues in Israel decreased by 37.6% in 2023 compared to a decreased of 7.6% in 2022.
On a constant currency basis, revenues decreased by 31.4% in 2022 and by 4.5% in 2022. This decrease is attributable to the macroeconomic,
competitive environments as well as the recent attack by Hamas and other terrorist organizations from the Gaza Strip.
For additional information, see “—Comparison of period-to-period results
of operations—Year ended December 31, 2023 compared to year ended December 31, 2022—Revenues.” And “Conditions
in Israel, including the recent attack by Hamas and other terrorist organizations from the Gaza Strip and elsewhere in the region, and
Israel’s war against them, may adversely affect our operations and limit our ability to market our products, which would lead to
a decrease in revenues”
Cost of revenues and gross profit margin
Our cost of revenues includes the cost of manufactured products sold as well as the
cost of purchased products from third parties such as engineered stone, Porcelain, natural stone and other ancillary products. We experienced
a decrease in costs that are connected with the global supply chain environment after their increase during 2022. The price of our main
raw materials for engineered stone products, minerals and polyester, decreased during 2023. Approximately 30% of our cost of revenues
(related to our manufactured products) consists of raw material costs. The cost of our raw materials consists of the purchase prices of
such materials and costs related to the logistics of delivering the materials to our facilities but does not include the cost of raw materials
used in the production of products produced by our PBPs. In addition, approximately 15.8% of our cost of revenues relates to products
purchased from PBP. Our raw materials costs are also impacted by changes in foreign exchange rates. Our principal raw materials, minerals
and polyester jointly accounted for approximately 70% of our total raw material cost in 2023. The balance of our cost of revenues consists
primarily of manufacturing costs, related overhead and the cost of other products not manufactured by us. Cost of revenues in our direct
distribution channels also includes the cost of delivery from our manufacturing facilities to our warehouses, warehouse operational costs,
as well as additional delivery costs associated with the shipment of our products to customer sites in certain markets. In the U.S. and
Canada, we also incur fabrication and installation costs related to retail sales and other commercial building projects. In the case of
our indirect distribution channels, we bear the cost of delivery to the seaport closest to our production plants and our distributors
bear the cost of delivery from the seaport to their warehouses.
In 2023, approximately 69% of our total minerals including quartz were purchased from
suppliers in Turkey, with the major part from Mikroman and Ekom.
Minerals (primarily quartz) accounted for approximately 38.2% of raw materials cost
in 2023. Accordingly, our cost of sales and overall results of operations are impacted significantly by fluctuations in quartz prices.
In 2023 and 2022, the average cost of quartz decreased by 7.7% and increased by 17.9%, respectively. The decrease in 2023 was primarily
due to a decrease in shipping costs. Any future increases in the cost of minerals may adversely impact our margins and net income.
Given the significance of polyester costs relative to our total raw material expenditures,
our cost of sales and overall results of operations are impacted significantly by fluctuations in polyester prices, which generally correlate
with benzine prices. In 2023, our average polyester costs decreased by approximately 31% as a result of decrease in energy prices and
shipping costs. In 2022, our average polyester costs increased by approximately 23% as a result of unfavorable market conditions. Any
future increases in polyester costs may adversely impact on our margins and net income.
We are exposed to fluctuations in the prices of pigments, although to a lesser extent
than with polyester. For example, the cost of titanium dioxide, our principal white pigmentation agent, decreased in 2023 by approximately
28% due to decrease in energy prices and improved product sourcing, compared with an increase of 11% during 2022. Any future increases
in pigments costs may adversely impact on our margins and net income.
The gross profit margins on sales in our direct markets are generally higher than
in our indirect markets in which we use third-party distributors, due to the elimination of the third-party distributor’s margin.
In many markets, our expansion strategy is to work with third-party distributors who we believe will be able to increase sales more rapidly
in their market and be more cost effective than if we distributed our products directly. However, in several markets we distribute directly,
including the United States, Australia, Canada and in the United Kingdom, Scandinavia, Singapore and India. In the future, we intend to
evaluate other potential markets to distribute directly.
Research and development, net
Our research and development expenses consist primarily of salaries and related personnel
costs, as well as costs for subcontractor services and costs of materials consumed in connection with the design and development of our
products. We expense all our research and development costs as incurred.
Selling and marketing
Selling and marketing expenses consist primarily of compensation and associated costs
for personnel engaged in sales, marketing, distribution and advertising and promotional expenses. In 2023, our advertising and promotional
expenses as well as marketing assistance expenses slightly increased in order to continue porcelain marketing efforts and maintain the
Caesarstone brand. In 2022 expenses increased in connection with the increase in sales team, primarily in the U.S. and the launch of porcelain
products globally.
General and administrative
General and administrative expenses consist primarily of compensation and associated
costs for personnel engaged in finance, human resources, information technology, legal and other administrative activities, as well as
fees for legal and accounting services. See “—Other factors impacting our results of operations—Agreements with Kibbutz
Sdot-Yam” and “ITEM 7: Major Shareholders and Related Party Transactions—Related Party Transactions.”
Goodwill and long-lived assets impairment charges
Impairment of long-lived assets: in 2023 and 2022 year-ends, the Company identified indicators for impairment,
among others, reduced demand due to global market conditions, lower utilization in certain plants, increased inflation and higher interest
rates. Following these indicators and following the announcements on closures of Sdot Yam and Richmond Hill plants, and in accordance
with ASC360, we recorded the following impairment expenses:
| • |
During 2022 - a property, plant and equipment expenses of $26.4 million related to Sdot Yam facility. |
| • |
During 2023 - property plant and equipment expenses of $27.5 million related to Richmond
Hill facility and $1.0 million related to Sdot Yam facility, and right of use assets impairment of $16.6 million related to Sdot Yam facility
land use agreement. |
Goodwill: As of December 31, 2023 and 2022 our goodwill was fully impaired. During the year ended December
31, 2022 the Company recorded goodwill impairment of $44.8 million.
See also Note 6 and Note 7 to our financial statements included elsewhere in this
report.
Legal settlements and loss contingencies, net
Legal settlements and loss contingencies, net consists of expenses related to settlements
expenses and estimated exposure not covered by our insurance applicable mainly to individual silicosis claims. We recorded $4.8 million
of credit for these expenses in 2023, compared to $0.6 million of expenses in 2022, and $3.3 million in 2021. The change from 2022 to
2023 is mainly attributed to a reduction in estimates made by our legal counsel in light of certain court rulings, and also due to lower
then estimated settlement amounts in Israel. See “—Financial Information—Consolidated Financial Statements and Other
Financial Information—Legal Proceedings—Claim by former South African distributor”.
Finance (income) expenses, net
Finance expenses (income), net, consist primarily of bank and credit card fees, borrowing
costs and exchange rate differences arising from changes in the value of monetary assets and monetary liabilities stated in currencies
other than the functional currency of each entity. These expenses are partially offset by interest income on our cash balances and gains
on derivative instruments. The finance income during 2023 related mainly to exchange rate differences arising from changes in the value
of monetary assets and monetary liabilities in Israel due to the strengthening of the USD against the NIS.
Corporate taxes
As we operate in multiple countries, our income is subject to taxation in different
jurisdictions with a range of tax rates. Our effective tax rate was 24.5% in 2023, 1.4% in 2022 and 9.8% in 2021. In 2023 our effective
tax rate is attributable mostly to taxable loss position in Israel and the United States for three consecutive years and as a result establishing
full valuation allowance on the deferred tax assets, net. In 2022 and 2021 the lower effective tax rate is attributable mainly to taxable
losses in certain entities and to deferred tax assets recorded to capture carry forward NOLs. See also note 12 to our financial statements
included elsewhere in this report.
The standard corporate tax rate for Israeli companies was 23% in each of 2023, 2022,
and 2021. Our non-Israeli subsidiaries are taxed according to the tax laws in their respective countries of origination.
Effective January 1, 2011, with the enactment of Amendment No. 68 to the Israeli Tax
Law, both of our Israeli facilities operate under a consolidated “Preferred Enterprise” status. The “Preferred Enterprise”
status provides the portion related to the Bar-Lev manufacturing facility with the potential to be eligible for grants of up to 20% of
the investment value in approved assets and a reduced flat corporate tax rate, which applies to the industrial enterprise’s entire
preferred income, 7.5% in 2017 onward. For the portion related to the Sdot-Yam facility, this status provides us with a reduced flat corporate
tax rate, which applies to the industrial enterprise’s entire preferred income, which was 16% during the same period. During 2023,
and as part of the company’s restructuring plan, the company closed Sdot-Yam manufacturing facility, ending future portion related
to Sdot-Yam facility and reduced corporate tax rate applied to this income.
In December 2017, the U.S. enacted significant tax reform commencing with the year
ended December 31, 2017, including, but not limited to (1) reducing the U.S. federal corporate income tax rate to 21% effective 2018;
and (2) imposing a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries of U.S. companies that had not been
previously taxed in the U.S.
The TCJA also established new tax provisions affecting 2018, including, but not limited
to (1) creating a new provision designed to tax global intangible low-tax income; (2) generally eliminating U.S. federal taxes on dividends
from foreign subsidiaries; (3) eliminating the corporate alternative minimum tax; (4) creating the base erosion anti-abuse tax; (5) establishing
a deduction for foreign derived intangible income; (6) repealing the domestic production activity deduction; and (7) establishing new
limitations on deductible interest expense and certain executive compensation.
The reduction of the U.S. federal corporate income tax rate required us to remeasure
our deferred tax assets and liabilities as of the date of enactment. For the year ended December 31, 2017, we decreased the net deferred
tax liability as a result of such remeasurement, resulting in tax income benefit for the year ended December 31, 2017.
As of December 31, 2019, certain provisions of the TCJA remains subject to Internal
Revenue Service as well as state tax authorities’ guidance and interpretation which could have a material adverse effect on our
cash tax liabilities, results of operations, and financial condition. In addition, the TCJA could be subject to potential amendments and
technical corrections, any of which could materially lessen or increase certain adverse impacts of the legislation on us and our business.
We will continue to evaluate the effects of the TCJA on us as federal and state tax authorities issue additional regulations and guidance.
On March 27, 2020, the CARES Act was enacted in response to the COVID-19 pandemic.
The CARES Act has a number of beneficial tax provisions. Among the provision of the CARES Act, the business interest deduction limit under
Code Sec. 163(j) is increased to 50 percent of our adjusted taxable income in the U.S. for tax year 2020. In addition, Net operating losses
(NOLs) arising in tax years beginning in 2019, 2020, and 2021 now have a five-year carryback period and an unlimited carryforward period.
Under the CARES Act we carryback our U.S. NOL for the year ended December 31, 2021 to prior taxable years.
For more information about the tax benefits available to us as an Approved Enterprise
or as a Beneficiary Enterprise or as Preferred Enterprise, see “ITEM 10.E: Additional Information—Taxation—Israeli tax
considerations and government programs.”
Net income (loss) attributable to non-controlling interest
In October 2020, we acquired a majority stake in Lioli and for the year ended on December
31, 2023, 39.6% of Lioli’s net income was attributed to its minority shareholders. In 2023, Lioli had a net loss of approximately
$1.5 million.
Other factors impacting our results of operations
Share-based compensation
We recorded share-based compensation expenses of $1.0 million, $1.5 million and $1.8 million in 2023, 2022
and 2021, respectively, and expect to record $2.8 million over a weighted average period of 3 years from December 31, 2023. For more information,
see also Note 13 to our financial statements included elsewhere in this report.
Agreements with Kibbutz Sdot-Yam
We are party to a series of agreements with our largest shareholder, the Kibbutz,
which govern different aspects of our relationship. Pursuant to these agreements, in consideration for using facilities leased to us or
for services provided by the Kibbutz, we paid to the Kibbutz an aggregate of $10.2 million in 2023, $11.3 million in 2022 and $11.0 million
in 2021 (excluding VAT).
For more information on these agreements, see “ITEM 7.B: Major Shareholders
and Related Party Transactions—Related Party Transactions.”
Management Services Agreement with Tene
In November 2021, we entered into a management services agreement with Tene Growth
Capital 3 Funds Management Company Ltd., the management company of the general partner of Tene Investment in Projects 2016, L.P., pursuant
to which Tene Investment in Projects 2016, L.P. provides us with the services of an Executive Chairman of the Board (by Dr. Ariel Halperin),
and regular business development advice services, for an aggregate annual management fee of NIS 750,000 plus VAT and expenses (excluding
services of an additional director, Mr. Dori Brown, who no longer serves on our board).
For more information on these agreements, see “ITEM 7.B: Major Shareholders
and Related Party Transactions—Related Party Transactions.”
Acquisitions
During 2022:
Magrab Acquisition On July 6, 2022, the Company completed the acquisition
of 100% of the shares of Magrab Naturtsen AB ("Magrab"), a leading distributor in Sweden, establishing first direct go-to-market presence
in E.U., for a total net consideration of approximately $2.2 million, with an additional considerations of up to approximately $1.5 million.
Comparison of period-to-period results of operations
The following table sets forth our results of operations as a percentage of revenues
for the periods indicated:
|
Year ended December 31, |
||||||||||||||||||||||||
|
2023 |
2022 |
2021 |
||||||||||||||||||||||
|
Amount |
% of Revenue |
Amount |
% of Revenue |
Amount |
% of Revenue |
|||||||||||||||||||
|
(in thousands of U.S. dollars) |
||||||||||||||||||||||||
|
Consolidated Income Statement Data: |
||||||||||||||||||||||||
|
Revenues: |
$ |
565,231 |
100 |
% |
$ |
690,806 |
100 |
% |
$ |
643,892 |
100 |
% | ||||||||||||
|
Cost of revenues |
473,292 |
83.7 |
527,561 |
76.4 |
472,394 |
73.4 |
||||||||||||||||||
|
Gross profit |
91,939 |
16.3 |
163,245 |
23.6 |
171,498 |
26.6 |
||||||||||||||||||
|
Operating expenses: |
||||||||||||||||||||||||
|
Research and development, net |
5,086 |
0.9 |
4,098 |
0.6 |
4,216 |
0.7 |
||||||||||||||||||
|
Selling and marketing |
82,222 |
14.5 |
94,412 |
13.7 |
85,725 |
13.3 |
||||||||||||||||||
|
General and administrative |
49,490 |
8.8 |
51,596 |
7.5 |
50,845 |
7.9 |
||||||||||||||||||
|
Impairment expenses related to goodwill and long lived assets
|
47,939 |
8.5 |
71,258 |
10.3 |
||||||||||||||||||||
|
Legal settlements and loss contingencies, net |
(4,770 |
) |
(0.8 |
) |
568 |
0.1 |
3,283 |
0.5 |
||||||||||||||||
|
Total operating expenses |
179,967 |
31.8 |
221,932 |
32.3 |
144,069 |
22.4 |
||||||||||||||||||
|
Operating income (loss) |
(88,028 |
) |
(15.6 |
) |
(58,687 |
) |
(8.5 |
) |
27,429 |
4.3 |
||||||||||||||
|
Finance expenses, net |
(1,069 |
) |
(0.2 |
) |
(3,079 |
) |
(0.4 |
) |
7,590 |
1.2 |
||||||||||||||
|
Income before taxes on income (loss) |
(86,959 |
) |
(15.4 |
) |
(55,608 |
) |
(8.1 |
) |
19,839 |
3.1 |
||||||||||||||
|
Taxes on income |
21,281 |
3.8 |
758 |
0.1 |
1,950 |
0.3 |
||||||||||||||||||
|
Net income (loss) |
$ |
(108,240 |
) |
(19.1 |
) |
$ |
(56,366 |
) |
(8.2 |
) |
$ |
17,889 |
2.8 |
% | ||||||||||
|
Net income (loss) attributable to non-controlling interest
|
(584 |
) |
0.1 |
688 |
0.1 |
(1,077 |
) |
(0.2 |
) | |||||||||||||||
|
Net income (loss) attributable to controlling interest |
$ |
(107,656 |
) |
(19.0 |
)% |
$ |
(57,054 |
) |
(8.3 |
)% |
$ |
18,966 |
2.9 |
% | ||||||||||
Year ended December 31, 2023, compared to year
ended December 31, 2022
Revenues
Revenues decreased by $125.6 million, or 18.2%, to $565.2 million in 2023 from $690.8 million. The decrease
in 2023 is mainly due to lower volume related to macroeconomic conditions including relatively high inflation and interest rate hikes
across our main markets which resulted in lower demand for our products.
Cost of revenues and gross profit margins
Cost of revenues in 2023 amounted to $473.3 million compared to $527.6 million in
2022 as a result of lower revenues as mentioned above. Gross margins during 2023 decreased to 16.3% compared to 23.6% in 2022, as a result
of increased manufacturing costs, due to lower capacity utilization which resulted in lower fixed-costs absorption, increase in logistics
costs per unit, higher raw material prices offset by a decrease in shipping prices and favorable selling prices.
Gross profit decreased from $163.2 million in 2022 to $91.9 million in 2023, with
a decrease in gross margin of 7.4%, from 23.6% in 2022 to 16.3% in 2023. The decrease in gross margin primarily reflects the increase
in manufacturing costs due to lower capacity utilization which resulted in lower fixed-costs absorption, increase in logistics costs per
unit higher raw material prices, offset by a decrease in shipping prices and favorable selling prices.
Operating expenses
Research and development. Research and development
expenses remained relatively unchanged and amounted to $5.1 million in 2023 and $4.1 million in 2022.
Selling and marketing. Selling and marketing expenses decreased
by $12.1 million, or 12.9%, to $ 82.2 million in 2023 from $94.4 million in 2022, stemming mainly from cost savings initiatives in our
U.S. market related to lower volumes and lower labor expenses. Marketing expenses as a percentage of revenue increased from 13.7% in 2022
to 14.5% in 2023. In 2022 our advertising and promotional expenses as well as marketing assistance expenses increased mainly to support
future growth in the U.S and to support porcelain launch.
General and administrative. General and administrative
expenses (without impairment) decreased by $ 2.1 million, or 4.1%, to $49.5 million in 2023 from $51.6 million in 2022.
Legal settlements and loss contingencies, net. Legal
settlements and loss contingencies, net, decreased by $5.3 million, from $0.6 million in 2022 to -$4.8 million in 2023. The change from
2022 to 2023 is mainly attributed a reduction in estimates made by our legal counsels in light of certain court rulings, and also due
to lower then estimated settlement amounts in Israel.
Impairment of Goodwill and Long-lived assets. During 2023 and 2022,
the Company performed impairment tests of its goodwill and indefinite-lived intangible assets and its long-lived assets which resulted
in a pre-tax non cash impairment charge of $45.1 million and $71.3 million, respectively. The Company performed these tests after determining
a triggering event had occurred, taking into consideration the impact of market capitalization, higher weighted average cost of capital
(“WACC”), and deteriorating macroeconomic conditions, and the fact the company announced on closing of its Sdot Yam and Richmond
Hill plants. In connection with the closure of our plants in Israel and in the U.S. the Company recorded $2.9 million restructuring expenses.
Finance (income) expenses, net
In 2023 the Company had finance income of $1.1 million, compared to finance income
of $3.1 million in 2022. The difference was primarily a result of exchange rate differences arising from changes in the value of monetary
assets and monetary liabilities in Israel due to the strengthening of the NIS against the USD.
Taxes on income
Taxes on income increased by $20.5 million to $21.3 million in 2023, from $0.7 million
in 2022. Our effective tax rate was 24.5% in 2023 compared with 1.4% in 2022. This was mostly due to taxable loss position in Israel and
the United States for three consecutive years and as a result deleting the related deferred tax assets.
Net income (loss) attributable to non-controlling interest
In 2023, net loss attributable to non-controlling interest amounted to $0.6 million.
In 2022, net income attributable to non-controlling interest amounted to $0.7 million.
Year ended December 31, 2022, compared to year
ended December 31, 2021
For a comparison of the years ended December 31, 2022, and 2021, see “ITEM 5.A.
Operating and Financial Review and Prospects—Operating Results—Year ended December 31, 2022 compared to year ended December
31, 2021” included in our annual report on Form 20-F for the year ended December 31, 2022, filed with the SEC on March 15, 2023,
which comparative information is herein incorporated by reference.
Seasonality
Our results of operations are impacted by seasonal factors, including construction
and renovation cycles. We believe that traditionally the second and third quarters of the year exhibits higher sales volumes than other
quarters because demand for mineral surface products is generally higher during the summer months in the northern hemisphere, when the
weather is more favorable for renovation projects and new construction, as well as the impact of efforts to complete such projects before
the beginning of the new school year. Conversely, the first quarter is impacted by a slowdown in new construction and renovation projects
during the winter months in the northern hemisphere. Similarly, sales in Australia during the third quarter are negatively impacted due
to fewer construction and renovation projects.
During periods of economic slowdown, seasonality trends might not manifest as was the case in 2023 results.
| B. |
Liquidity and Capital Resources |
Our primary capital requirements have been to fund production capacity expansions,
as well as investments in and acquisitions of third-party distributors, such as the purchase of Caesarstone Canada Inc., our acquisition
of the business of our former Australian distributor and establishing our U.K. operations, our investment in and acquisitions of Caesarstone
USA (formerly known as U.S. Quartz Products, Inc.) Lioli, Omicron and Caesarstone Scandinavia, and the construction of our manufacturing
facility in the United States. Our other capital requirements have been to fund our working capital needs, operating costs, meet required
debt payments, finance a repurchase of our shares and to pay dividends on our share capital.
Capital resources have primarily consisted of cash flows from operations and borrowings
under our credit facilities. Our working capital requirements are affected by several factors, including demand for our products, raw
material costs and shipping costs.
Our inventory strategy is to maintain sufficient inventory levels to meet anticipated
customer demand for our products. Our inventory is significantly impacted by sales in the United States, Australia and Canada, our largest
markets, due to the 40-120 days required to ship our products to these locations from Israel or other production sources. We continue
to focus on meeting market demand for our products while improving our inventory efficiency over the long term by implementing procedures
to improve our production planning process.
We minimize working capital requirements through our distribution network that allows
sales and marketing activities to be provided by third-party distributors. We believe that, based on our current business plan, our cash,
cash equivalents and short-term bank deposits on hand, cash from operations and borrowings available to us under our revolving credit
line and short-term facilities, we will be able to meet our capital expenditure and working capital requirements, and liquidity needs
for at least the next twelve months. We may require additional capital to meet our liquidity needs and future growth requirements. Continued
instability in the global market may increase our capital needs, and conditions in the capital markets could adversely affect our ability
to obtain additional capital to grow or sustain our business and would affect the cost and terms of such capital.
The Company’s material cash requirements include the following contractual and
other obligations:
Leases
The Company has lease arrangements for certain equipment and facilities, including
for manufacturing, logistics and offices. As of December 31, 2023, the Company had lease payment obligations of $138.1 million, with $26.0
million payable within 12 months.
Purchase Obligations
As of December 31, 2023, the Company had manufacturing equipment and raw material
purchase obligations of $18.6 million all payable within 12 months. The Company’s purchase obligations are primarily noncancelable.
Debt
As of December 31, 2023, the Company had outstanding bank credits and debts of an
aggregate principal amount of $5.1 million all payable within 12 months. Future interest payments associated with the these amounts total
$0.5 million, all payable within 12 months.
See also Note 8 and Note 15 to the financial statements included elsewhere in this
report.
Cash flows
The following table presents the major components of net cash flows used in and provided
by operating, investing and financing activities for the periods presented:
|
Year ended December 31, |
||||||||||||
|
2023 |
2022 |
2021 |
||||||||||
|
(in thousands of U.S. dollars) |
||||||||||||
|
Net cash provided (used) by operating activities |
$ |
66,529 |
$ |
(23,311 |
) |
$ |
20,684 |
|||||
|
Net cash used in investing activities |
(40,526 |
) |
(7,285 |
) |
(34,885 |
) | ||||||
|
Net cash provided (used) by financing activities |
(23,779 |
) |
9,156 |
(25,254 |
) | |||||||
Cash provided by operating activities
Operating activities consist primarily of net income adjusted for certain non-cash
items. Adjustments to net income for non-cash items include depreciation and amortization, share-based compensation and deferred taxes.
In addition, operating cash flows are impacted by changes in operating assets and liabilities, principally inventories, accounts receivable,
prepaid expenses and other assets, accounts payable and accrued expenses.
Cash provided by operating activities increased during 2023 by $89.8 million from
($23.3) million to $66.5 million, mainly due to lower Inventory levels, lower raw material and shipping costs and an impact of the Sdot
Yam plant closure during 2023.
Cash used in operating activities decreased in 2022 by $44 million from $20.7 million
to cash used $23.3 million mainly due to decrease in trade payables by $49.3 million during 2022 compared to an increase by $46.1 million
during 2021, and impairment of long-term assets by $71.3 million during 2022. During 2022 our working capital increased as a result of
higher inventory levels resulting from higher raw materials and shipping costs slightly offset by improved collection from customers.
Cash used in investing activities
Net cash used in investing activities for the years ended December 31, 2023, 2022
and 2021 were $40.5 million, $7.3 million, and $34.9 million, respectively. In 2023, investing activities included $36.5 million of investing
in short-term bank deposits, $11.2 million of capital expenditure offset by $7.1 million proceeds from sales and maturity of marketable
securities. In 2022, investing activities included $17.8 million of capital expenditure and $ 2.2 million of cash consideration paid for
the Magrab Acquisition, offset by $12.4 million proceeds from securities. In 2021, investing activities included $31.5 million of
capital expenditures, and $1.3 million of investment in marketable securities.
Cash used in financing activities
Net cash used in financing activities for 2023 was $23.8 million, which included repayment
of a bank credit in the same amount. Net cash provided from financing activities for 2022 was $9.2 million, which included $18.6 million
short term loans receipts from banks offset by an $8.6 million dividend payment to stockholders. Net cash used in financing activities
for 2021 was $25.3 million, which included a $11.8 million bank credit repayment, $10.7 million of dividends paid, and $1.3 million of
repayment of a financial leaseback arrangement related to our Bar-Lev facility.
Credit facilities
As of December 31, 2023, we had a bank debt from commercial banks in India, in the
amount of $7.2 million, presented in long-term and short-term liabilities, including a utilized credit line of $2.8 million bearing interest
at the rate in a range of 8.8% to 9.45% (linked to MCLR/T-Bill) per annum. As of December 31, 2022, we had a long-term bank debt from
commercial banks in India, as a result of the Lioli Acquisition, in the amount of $6.6 million, presented in short-term liabilities, together
with a credit line of $2.7 million bearing interest at the rate equal to 7.4% per annum equal to MCLR+0.20%. The bank debt is to be repaid
on a monthly basis through 2025. While the loan is outstanding, Lioli is subject to certain covenants including, among others, limiting
its ability to divest assets, pay dividends, borrow additional funds and place other encumbrances on its assets. The loan agreement with
the bank in Lioli contains customary covenants. Lioli is in compliance with the requirement of the financial covenants under the
agreement of own capital contribution. The Loan Agreement also contains certain customary negative covenants that require Lioli to refrain
from certain actions unless the bank’s consent is obtained. Lioli debt is secured by an SBLC from Caesarstone and floating charge
on all of Lioli’s assets.
In addition, Lioli was provided with a shareholder’s loan by all its shareholders
(including its minority shareholders). Such loan is denominated in INR and amounts to $3.9 million, including the approximately $3.4 million
that the Company extended during 2021 in part in accordance with the terms of the Lioli Acquisition, and which was used to repay certain
selling shareholders. The loan bears an interest rate per annum equal to Libor rate plus 4.5% and is to be repaid during the third quarter
of 2025.
During 2022, we secured a $30 million credit line in from and Israeli bank, which
we have not utilized during 2023, and the credit line agreement expired during July 2023.
In addition, we had long-term and short-term debt related to the Bar-Lev sale and
lease-back transaction with the Kibbutz, fully repaid during 2022.
As of December 31, 2023, we had short term line of $12 million from banks in India,
of which 7.2 million were utilized as of December 31, 2023.
See also Note 8 and Note 15 to the financial statements included elsewhere in this
report.
Capital expenditures
Our capital expenditures mainly included the expansion, improvement and maintenance
of our manufacturing capacity and capabilities, expansion on our north America distribution network and investment and improvements in
our information technology systems. In 2023, 2022 and 2021 our capital expenditures were $ 11.2 million, $17.8 million, and $31.5 million,
respectively. For more information, see “Item 4.A. Information on the Company –Principal Capital Expenditures”.
Land purchase agreement and leaseback
Pursuant to a land purchase agreement entered on March 31, 2011, which became effective
upon our IPO, Kibbutz Sdot-Yam acquired from us our rights in the lands and facilities of the Bar-Lev Industrial Park in consideration
for NIS 43.7 million (approximately $10.9 million). The carrying value of the Bar-Lev land at the time of closing this transaction was
NIS 39.0 million (approximately $10.4 million). The land purchase agreement was executed simultaneously with the execution of a land use
agreement.
Pursuant to the land use agreement, Kibbutz Sdot-Yam permits us to use the Bar-Lev
land for a period of ten years commencing on September 2012, that will be automatically renewed, unless we give two years’ prior
notice, for a ten-year term in consideration for an annual fee of NIS 4.1 million (approximately $1.1 million) to be linked to increases
in the Israeli consumer price index. The fee is subject to adjustment following January 1, 2021, and every three years thereafter at the
option of Kibbutz Sdot-Yam if Kibbutz Sdot-Yam chooses to obtain an appraisal that supports such an increase. During 2021, the Kibbutz
utilized its option under the agreement and the annual fees for Bar-Lev land were updated to NIS 8.1 million (approximately $2.6 million).
The transaction was not qualified as “sale lease-back” accounting under
both ASC 840 and ASC 842 and the Company recorded the entire amount received as consideration as a liability. This liability was matured
at August 31, 2022.
| C. |
Research and Development, Patents and Licenses |
Our R&D department is located in Israel. As of December 31, 2023, our corporate
R&D department was comprised of 17 employees, all of whom have extensive experience in engineered stone surface manufacturing, polymer
science, engineering, product design and engineered stone surface applications. In addition, our R&D for porcelain manufacturing is
conducted by two dedicated employees located in India, whose activities are supported by the R&D department in Israel. In 2023, research
and development costs accounted for approximately 0.9% of our revenues, and in 2022 and 2021, research and development costs accounted
for approximately 0.6% and 0.7% of our revenues, respectively.
We pursue a strategy of identifying certain innovative proprietary technologies and
seeking patent protection when applicable. We have obtained patents for certain of our technologies and have pending patent applications
which relate to our manufacturing technology and certain products. We act to protect other innovative proprietary technologies developed
by us by implementing confidentiality protection measures without pursuing patent registration. No patent application is material to the
overall conduct of our business.
Research and development expenses were $5.1 million, $4.1 million and $4.2 million
in 2023, 2022 and 2021, respectively.
For a description of our research and development policies, see “ITEM 4.B: Information
on the Company—Business Overview—Research and development.”
| D. |
Trend Information |
Other than as described in Item 3.D. “Risk Factors”,
in Item 5.A. “Operating Results—Factors impacting our results of operations”, and in Item 5.B. “Liquidity and
Capital Resources” of this annual report, which are incorporated by reference herein, we are not aware of any trends, uncertainties,
demands, commitments or events that are reasonably likely to have a material effect on our net revenues, income from operations, profitability,
liquidity or capital resources, or that would cause the disclosed financial information to be not necessarily indicative of future operating
results or financial condition.
| E. |
Critical Accounting Estimates |
Our accounting policies affecting our financial condition and results of operations
are more fully described in our consolidated financial statements for the years ended December 31, 2023, 2022 and 2021, included in this
annual report. The preparation of our financial statements requires management to make judgments, estimates and assumptions that affect
the amounts reflected in the consolidated financial statements and accompanying notes, and related disclosure of contingent assets and
liabilities. We base our estimates upon various factors, including past experience, where applicable, external sources and on other assumptions
that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different
assumptions or conditions and could have a materially adverse effect on our reported results.
In many cases, the accounting treatment of a particular transaction, event or activity
is specifically dictated by accounting principles and does not require management’s judgment in its application, while in other
cases, management’s judgment is required in the selection of the most appropriate alternative among the available accounting principles,
that allow different accounting treatment for similar transactions.
We believe that the accounting policies discussed below are critical to our financial
results and to the understanding of our past and future performance as these policies relate to the more significant areas involving management’s
estimates and assumptions. We consider an accounting estimate to be critical if: (1) it requires us to make assumptions because information
was not available at the time, or it included matters that were highly uncertain at the time we were making our estimate; and (2) changes
in the estimate or different estimates that we could have selected may have had a material impact on our financial condition or results
of operations.
Revenue recognition
We derive our revenues from sales of quartz surfaces mostly through a combination
of direct sales in certain markets and indirectly through a network of distributors in other markets.
Under ASC 606, revenue is recognized when a customer obtains control of promised goods
or services in an amount that reflects the consideration the entity expects to receive in exchange for those goods or services. In addition,
ASC 606 requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.
We apply the following five steps in accordance with ASC 606:
(1) identify the contract
with a customer: A contract is an agreement between two or more parties that creates enforceable rights and obligations. In evaluating
the contract, we analyze the customer’s intent and ability to pay the amount of promised consideration (credit risk) and consider
the probability of collecting substantially all the consideration. We determine whether collectability is reasonably assured on a customer-by-customer
basis pursuant to various criteria including our historical experience, credit insurance results and other inputs.
(2) identify the performance
obligations in the contract: At a contract’s inception, we assess the goods or services promised in a contract with a customer and
identify the performance obligations. The main performance obligation is the delivery of our products.
(3) determine the transaction
price: Our products that are sold through agreements with distributors are non-exchangeable, non-refundable, non-returnable and without
any rights of price protection or stock rotation. Accordingly, we consider all the distributors to be end-consumers. For certain revenue
transactions with specific customers, we are responsible also for the fabrication and installation of our products. We recognize such
revenues upon receipt of acceptance evidence from the end consumer which occurs upon completion of the installation. Although, in general,
we do not grant rights of return, there are certain instances where such rights are granted. We maintain a provision for returns in accordance
with ASC 606, which is estimated, based primarily on historical experience as well as management judgment, and is recorded through a reduction
of revenue.
(4) allocate the transaction
price to the performance obligations in the contract: The majority of our revenues are sales of goods, therefore there is one main performance
obligation that absorbs the transaction price.
(5) recognize revenue when
a performance obligation is satisfied: Revenue is recognized when or as performance obligations are satisfied by transferring control
of a promised good or service to a customer. Control transfers at a point in time, which affects when revenue is recorded. The majority
of our revenues deriving from sales of products which are recognized when control is transferred based on the agreed International Commercial
terms, or “INCOTERMS”.
We adopted ASC 606 in the first quarter of 2018 using the modified retrospective method,
no cumulative effect adjustment as of the date of the adoption was required.
Prior years information has not been restated and continues to be reported under the
old accounting standard 605, “Revenue Recognition” (ASC 605).
Lease accounting
On January 1, 2019, we adopted Accounting Standards Update (“ASU”)
No. 2016-02, Leases (“Topic 842”), as amended, which supersedes the lease accounting
guidance under Topic 840, and generally requires lessees to recognize operating and financing lease liabilities and corresponding Right-Of-Use
(“ROU”) assets on the balance sheet and to provide enhanced disclosures surrounding
the amount, timing and uncertainty of cash flows arising from leasing arrangements. We adopted the new guidance using the modified retrospective
transition approach by applying the new standard to all leases existing on the date of initial application and not restating comparative
periods. The most significant impact was the recognition of ROU assets and lease liabilities for operating leases.
Following the closure of Sdot Yam plant, we evaluated our right of use asset resulted
from non-cancelable lease agreement effective through 2032. Based on future estimated sublease we recorded an impairment of $16,6 million
during 2023.
See Note 2 and Note 10 to our Consolidated Financial Statements for the year ended
December 31, 2023 for further information regarding leases.
Allowance for credit loss
Our trade receivables are derived from sales to customers located mainly in the United
States, Australia, Canada, Israel and Europe. We perform ongoing credit evaluations of our customers and to date have not experienced
any substantial losses. In certain circumstances, we may require letters of credit or prepayments. We maintain an allowance for credit
loss for estimated losses from the inability of our customers to make the required payments that we have determined to be doubtful of
collection. We determine the adequacy of this allowance by regularly reviewing our accounts receivable and evaluating individual customers’
receivables, considering customers’ financial condition, credit history and other current economic conditions. If a customer’s
financial condition were to deteriorate, which might impact its ability to make payment, then additional allowances may be required. Provisions
for credit loss are recorded in general and administrative expenses. Our allowance for credit loss was $12.2 million, $9.8 million and
$9.0 million as of December 31, 2023, 2022 and 2021, respectively.
Inventory valuation
The majority of our inventory consists of finished goods and of raw materials. Inventories
are valued at the lower of cost or net realizable value, with cost of finished goods determined on the basis of direct manufacturing costs
plus allocable indirect costs representing allocable operating overhead expenses and manufacturing costs and cost of raw materials determined
using the “standard cost” method which approximates actual cost on a weighted average basis. We assess the valuation of our
inventory on a quarterly basis and periodically write down the value for different finished goods and raw material categories based on
their quality classes and ageing. If we consider specific inventory to be obsolete, we write such inventory down to zero. Inventory provisions
are provided to cover risks arising from slow-moving items, discontinued products, excess inventories, and net realizable value lower
than cost. The process for evaluating these write-offs often requires us to make subjective judgments and estimates concerning prices
at which such inventory will be able to be sold in the normal course of business. Accelerating the disposal process or incorrect estimates
of future sales potential may cause actual results to differ from the estimates at the time such inventory is disposed of or sold. Inventory
provision was $27.4 million, $21.7 million, and $16.8 million as of December 31, 2023, 2022 and 2021, respectively.
Goodwill and other long-lived assets
The purchase price of an acquired business is allocated between intangible assets
and the net tangible assets of the acquired business with the residual of the purchase price recorded as goodwill. The determination of
the value of the intangible assets acquired involves certain judgments and estimates. These judgments can include, but are not limited
to, the cash flows that an asset is expected to generate in the future and the appropriate weighted average cost of capital.
We assess the impairment of goodwill of our reporting unit annually during the fourth
quarter of each fiscal year, or more often if events or changes in circumstances indicate that the carrying value may not be recoverable.
Goodwill is tested for impairment at the reporting unit level by first performing a qualitative assessment to determine whether it is
more likely than not that the fair value of the reporting unit is less than is carrying value. If the reporting unit does not pass the
qualitative assessment, then the reporting unit’s carrying value is compared to its fair value. We have only one reporting unit
because all our components have similar economic characteristic, and we determine its fair value based on fair value methodologies include
estimates of future cash flows, future short-term and long-term growth rates and weighted average cost of capital, see also Note 2l and
7 in our financial statements.
As of December 31, 2022, our goodwill and identifiable intangible assets totaled $0
million and $8.8 million, respectively. As of December 31, 2023, our goodwill and identifiable intangible assets totaled $0 million and
$6.5 million, respectively. The decrease in intangible assets was mainly attributable to the amortization of intangibles assets related
to the Lioli, Omicron and Magrab acquisitions.
We also evaluate the carrying value of all long-lived assets, such as property, plant
and equipment and right of use assets, for impairment whenever events or changes in circumstances indicate that the carrying value of
an asset may not be recoverable. We will record an impairment loss when the carrying value of the underlying asset group exceeds its estimated
fair value. In determining whether long-lived assets are recoverable, our estimate of undiscounted future cash flows over the estimated
life of an asset is based upon our experience, historical operations of the asset, an estimate of future asset profitability and economic
conditions. The future estimates of asset profitability and economic conditions require estimating such factors as sales growth, inflation
and the overall economics of the countertop industry. Our estimates are subject to variability as future results can be difficult to predict.
If a long-lived asset is found to be non-recoverable, we record an impairment charge equal to the difference between the asset’s
carrying value and fair value.
As of December 31, 2023 and December 31, 2022, the Company identified indicators for
impairment, among others, slowdown in demand due to global market conditions, lower production utilization in certain plants, increased
inflation and higher interest rates. Following these indicators and in accordance with ASC360, we recorded the following impairment expenses:
| • |
During 2022, property plant and equipment expenses of $26.4 million related to Sdot Yam facility. |
| • |
During 2023, a property plant and equipment expenses of $27.5 million related to Richmond
Hill facility and $1.0 million related to Sdot Yam facility, and right of use assets of $16.6 million related to Sdot Yam facility.
|
See also Note 6 and Note 7 to our financial statements included elsewhere in this
report.
Fair value measurements
The performance of fair value measurements is an integral part of the preparation
of financial statements in accordance with generally accepted accounting principles. Fair value is defined as the price that would be
received to sell the asset or paid to transfer the liability in an orderly transaction between market participants to sell or transfer
such an asset or liability. Selection of the appropriate valuation techniques, as well as determination of assumptions, risks and estimates
used by market participants in pricing the asset or liability requires significant judgment. Although we believe that the inputs used
in our evaluation techniques are reasonable, a change in one or more of the inputs could result in an increase or decrease in the fair
value for example, of certain assets and certain liabilities and could have an impact on both our consolidated balance sheets and consolidated
statements of income.
Business Combination
We allocate the fair value of purchase consideration to the tangible assets acquired,
liabilities assumed, and intangible assets acquired based on their estimated fair value. The excess of the fair value of purchase consideration
over the fair values of these identifiable assets and liabilities is recorded as goodwill. Such valuations require our management to make
significant estimates and assumptions, especially with respect to intangible assets. Significant estimates in valuing certain intangible
assets include, but are not limited to, future expected cash flows from acquired operations and other intangible assets, their useful
lives and discount rates. Our management’s estimates of fair value are based upon assumptions believed to be reasonable, but which
are inherently uncertain and unpredictable, and, as a result, actual results may differ from estimates. During the measurement period,
which is not to exceed one year from the acquisition date, we may record adjustments to the assets acquired and liabilities assumed, with
the corresponding offset to goodwill. Upon the conclusion of the measurement period, any subsequent adjustments are recorded to earnings.
Accounting for contingencies
We are involved in various product liability, commercial, environmental claims and
other legal proceedings that arise from time to time in the course of business. We record accruals for these types of contingencies to
the extent that we conclude their occurrence is probable and that the related liabilities are estimable. When accruing these costs, we
will recognize an accrual in the amount within a range of loss that is the best estimate within the range. When no amount within the range
is a better estimate than any other amount, we accrue the minimum amount within the range. We record anticipated recoveries under the
applicable insurance policies, in the amounts that are covered, and we believe their collectability is probable. Legal costs are expensed
as incurred.
For unasserted claims or assessments, we followed the accounting guidance in ASC 450-20-50-6,
450-20-25-2 and 450-20-55-2 in which we must first determine that the probability that an assertion will be made is likely, then, a determination
as to the likelihood of an unfavorable outcome and the ability to reasonably estimate the potential loss is made.
We review the adequacy of the accruals on a periodic basis and may determine to alter
our reserves at any time in the future if we believe it would be appropriate to do so. As such, accruals are based on management’s
judgment as to the probability of losses and, where applicable, accruals may materially differ from settlements or other agreements made
with regards to such contingencies.
See Note 11 to our financial statements included elsewhere in this annual report and
“ITEM 8.A: Financial Information—Consolidated Financial Statements and Other Financial Information—Legal Proceedings”
for further information regarding legal matters.
Income taxes
We account for income taxes in accordance with ASC 740, “Income Taxes”,
which requires that deferred tax assets and liabilities be recognized using enacted tax rates for the effect of temporary differences
between the financial reporting and tax basis of recorded assets and liabilities. ASC 740 also requires that deferred tax assets be reduced
by a valuation allowance if it is more likely than not that some portion or all the deferred tax asset will not be realized. We have recorded
a valuation allowance to reduce our subsidiaries’ deferred tax assets to the amount that we believe is more likely than not to be
realized. Our assumptions regarding future realization may change due to future operating performance and other factors.
ASC 740 requires that companies recognize in their consolidated financial statements
the impact of a tax position if that position is not more likely than not of being sustained on audit based on the technical merits of
the position. ASC 740 also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods
and disclosure. We accrue interest and penalties related to unrecognized tax benefits in our tax expenses.
We establish reserves for tax-related uncertainties based on estimates of whether,
and the extent to which, additional taxes will be due. These reserves are established when we believe that certain positions might be
challenged despite our belief that our tax return positions are in accordance with applicable tax laws. As part of the determination of
our tax liability, management exercises considerable judgment in evaluating tax positions taken by us in determining the income tax provision
and establishes reserves for tax contingencies in accordance with ASC 740 guidelines. We adjust these reserves in light of changing facts
and circumstances, such as the closing of a tax audit, new tax legislation, or the change of an estimate based on new information. To
the extent that the final tax outcome of these matters is different from the amounts recorded, such differences will affect the provision
for income taxes in the period in which such determination is made. The provision for income taxes includes the effect of reserve provisions
and changes to reserves that are considered appropriate, as well as the related net interest and penalties.
We file income tax returns in Australia, Canada, Israel, Singapore, England, India,
Sweden and the United States. The Israeli tax authorities audited our income tax returns for the fiscal years leading up to and including
2019 and we were examined by the IRS in the United States for our income tax return for the fiscal years leading up to and including 2018.
We may be further subject to examination in the other countries in which we file tax returns and for any subsequent years. Management’s
judgment is required in determining our provision for income taxes in each of the jurisdictions in which we operate. The provision for
income tax is calculated based on our assumptions as to our entitlement to various benefits under the applicable tax laws in the jurisdictions
in which we operate. The entitlement to such benefits depends upon our compliance with the terms and conditions set out in these laws.
Although we believe that our estimates are reasonable and that we have considered future taxable income and ongoing prudent and feasible
tax strategies in estimating our tax outcome, there is no assurance that the final tax outcome will not be different than those which
are reflected in our historical income tax provisions and accruals. Such differences could have a material effect on our income tax provision,
net income and cash balances in the period in which such a determination is made. See also note 12 to our financial statements included
elsewhere in this report.
ITEM 6: Directors, Senior
Management and Employees
| A. |
Directors and Senior Management |
Our directors and executive officers, their dates of birth and positions as of March 6, 2024, are as follows:
|
Name |
Date of Birth |
Position | ||
|
Officers |
||||
|
Yosef (Yos) Shiran |
March 26, 1962 |
Chief Executive Officer | ||
|
Nahum Trost |
September 24, 1978 |
Chief Financial Officer | ||
|
David Cullen |
April 10, 1959 |
Managing Director, APAC | ||
|
Ken Williams |
April 4, 1961 |
Managing Director, North America | ||
|
Edward Smith |
May 14, 1973 |
Managing Director, UK | ||
|
Idit Maayan Zohar |
November 11, 1972 |
Chief Marketing Officer | ||
|
Amihai Seider |
November 29, 1967 |
Vice President, Global Operations | ||
|
Erez Margalit |
July 14, 1967 |
Vice President, Global Research and Development | ||
|
Ron Mosberg |
December 15, 1979 |
General Counsel and Corporate Secretary | ||
|
Lilach Gilboa |
April 8, 1972 |
Vice President, Global Human Resources | ||
|
Gilad Frenkel |
October 25, 1969 |
Managing Director, ROW | ||
|
José Luis Ramón |
February 2, 1975 |
VP of Global Porcelain | ||
|
Directors |
||||
|
Dr. Ariel Halperin(4) |
March 18,1955 |
Chairman | ||
|
Nurit Benjamini (1)(2)(3)(5)(6) |
October 27, 1966 |
Director | ||
|
Lily Ayalon(1)(2)(3)(5)(6) |
June 17, 1965 |
Director | ||
|
David Reis (5) |
February 10, 1961 |
Director | ||
|
Maxim Ohana |
December 26, 1950 |
Director | ||
|
Ronald Kaplan(3) (5) |
August 15, 1951 |
Director | ||
|
Ornit Raz (1)(2)(3)(5) |
August 29, 1971 |
Director | ||
|
Giora Wegman |
December 14, 1951 |
Director | ||
|
Tom Pardo Izhaki |
June 3, 1983 |
Director |
| (1) |
Member of our audit committee. |
| (2) |
Member of our compensation committee. |
| (3) |
Member of our nominating committee. |
| (4) |
Member of our strategy committee. |
| (5) |
Independent under the Nasdaq rules. |
| (6) |
External director under the Israeli Companies Law. |
Executive Officers
Yos Shiran has been serving as our Chief Executive
Officer since March 2022. Mr. Shiran’s previously held this position from January 2009 until August 2016. Mr. Shiran’s serves
as co-founder and chief executive officer of SENSEQ Ltd. from September 2016, founder and Chairman of Elight Ltd. and co-founder and chairman
of the board of Inflow Ltd. from January 2021. Before his initial term as Chief Executive Officer of the Company, Mr. Shiran was the chief
executive officer and director of Tefron Ltd. (NYSE: TFR) from January 2001 until August 2008, and prior thereto served as chief executive
officer of Technoplast Industries Ltd. from February 1995 until December 2000. Mr. Shiran has a B.Sc. in industrial engineering from Ben-Gurion
University, Israel, and an MBA from Bar-Ilan University, Israel.
Nahum Trost has been serving
as our Chief Financial Officer since September 2021. Mr. Trost served as our Director of Finance, leading corporate finance since 2014.
Mr. Trost possesses over 20 years of experience in various financial roles, including extensive experience in financing, capital and accounting,
primarily at companies with an international focus. Prior to joining us in April 2014, Mr. Trost served in various positions at Lumenis
Ltd. and his last role was Vice President of Corporate finance. Mr. Trost also served as a CPA with Ernst & Young. He holds a bachelor’s
degree in economics and accounting from the Haifa University, Israel, and a master’s degree in business economics from the Israeli
Technological Institute Technion.
David Cullen has been serving
as our Managing Director, APAC, since May 2019. Previously, from April 2010 to May 2019, Mr. Cullen served as Chief Executive Officer
for Caesarstone Australia. Prior to joining us, from January 2009 to March 2010, Mr. Cullen served as General Manager in Australia of
Komatsu Ltd., a Japanese manufacturer of industrial and mining equipment. From January 2006 to November 2008, he served as Chief Executive
Officer of Global Food Equipment Pty Ltd., an Australian importer and distributor of commercial food equipment. From 2004 to 2006, he
served as Chief Executive Officer of White International Pty Ltd., an Australian supplier of industrial and residential pump products.
From 2003 to 2004, Mr. Cullen served as Chief Executive Officer of Daisytek Australia Pty Ltd, a subsidiary of Daisytek International
Corporation. From 1996 to 2002, he served as Chief Executive Officer of Tech Pacific Australia Pty Ltd., the largest distributor of IT
equipment in the Asia-Pacific region. Mr. Cullen has held various other management positions in other companies since 1985. Mr. Cullen
holds a Bachelor of Commerce degree from the University of New South Wales.
Ken Williams currently
serves as our Americas – President and CEO. Previously, he has served as our President of North America from January 2019 to December
2021 and from March 2016 to January 2019, served as our President of Caesarstone Canada. Prior to joining us, from February 1999 to March
2016, Mr. Williams held various senior executive level leadership positions, including Executive Vice President of Sales and Marketing,
in a number of Masco Corporation divisions, a global company involved in the design, manufacture and distribution of branded home improvement
and building products. Previously, Mr. Williams held general management positions and leadership roles at Fortune Brands, the Rehill Company
Ltd. and Thorne Stevenson Kellogg Management Consultants. Mr. Williams holds a Bachelor of Business Administration Degree from Trent University
in Ontario, Canada.
Edward Smith has been serving
as Managing Director, UK since September 2023 previously, from 1994 to 2023 he held various positions within Saint-Gobain, including:
Programme Director Jewson (from January 2019 to March 2023); MD George Boyd (from January 2017 to December 2022); Business Development
Director Jewson (from January 2015 to Dec 2018); Area Director (from January 2013 to December 2015). Mr. Smith holds a BSC Hons degree
in Environmental Biology from Sunderland University.
Idit Maayan-Zohar has been
serving as our Global Chief Marketing Officer since February 2022. Prior to that, from 2012, Ms. Maayan-Zohar held various managerial
positions in our Global Marketing Department, serving most recently as the Director of Global Marketing & Customer Experience. Previously,
from 2006 to 2012, Ms. Maayan-Zohar served as Advertising Manager at Bank Hapoalim, one of the leading banks in Israel and prior to that
as an Advertising Manager at Bezeq, The Israeli telecommunications company. Ms. Maayan-Zohar holds a B.A. in Business Administration from
the College of Management Academic Studies and an M.B.A in Communication and Political Science from Bar-Ilan University.
Amihai Seider has been
serving as our Vice President, Global Production since March 2019. Prior to joining us, from August 2003, Mr. Seider held various managerial
positions at Haifa Chemicals, Israel-based specialty fertilizer manufacturer including VP Operations from May 2012 and Plant Manager from
September 2006 to May 2012. Previously, from 1994 to 2003, Mr. Seider held managerial roles at Electrochemical Industries (1952) Ltd.,
a manufacturer and distributer of chemical products including as Plant Manager from 2000 to 2003. Mr. Seider holds a B.Sc. in Chemical
Engineering from Technion University, and an M.B.A. from Haifa University, Israel.
Erez Margalit has been
serving as our Vice President Research and Development since August 2013 and joined us in December 2010 as our R&D Engineering Manager.
Prior to joining us, from 2008 to October 2010, Mr. Margalit served as Director of Equipment, Reliability and Services of Fab1 and Fab2
of Tower Semiconductor Ltd., a manufacturer of microelectronic devices. From 2001 to 2008, Mr. Margalit served as Technical Manager for
several departments in Tower Semiconductor Ltd. Mr. Margalit has specialized in designing, developing and implementing unique industry
machinery for unique applications. Mr. Margalit holds a degree in Electronics (Practical Engineer) from Yezreel Valley College.
Ron Mosberg has served
as our General Counsel & Corporate Secretary since September 2018. Prior to joining us, from 2015, Mr. Mosberg served as the General
Counsel and Corporate Secretary at Enzymotec Ltd., an Israeli based global nutraceutical company. Previously, from 2007 to 2015, Mr. Mosberg
worked as a lawyer at leading Israeli law firms. Mr. Mosberg holds an LL.B. in Law and Psychology from Tel Aviv University, Israel.
Lilach Gilboa has
been serving as our Vice President, Human Resources since July 2023. This is her second tenure as our Vice President of Human Resources,
as she previously held this position from January 2007 until December 2018. Prior to Ms. Gilboa’s current appointment, starting
in 2020, she held the role of Global VP of Human Resources at Watergen Ltd., a global technology company in the field of water-from-air
solutions. Previously, from 2019, she served as the Global Head of HR at Hazera Seeds Ltd., a biotechnology company. Before her initial
term as our VP HR, Ms. Gilboa also served as our Human Resources Manager from 2003 to 2006. Before joining us in 2003, she served as the
Human Resources Manager at Comverse Technology, Inc. (from 2002) and ECI Telecom (from 1997). She holds a master’s degree in organizational
Sociology from Tel Aviv University, Israel, and a bachelor’s degree in organizational Behavior Studies from The College of Management
Academic Studies, Israel
Amir Cahana has been serving
as Managing Director, Israel from February 2022. Previously, from 2019, he has served as sales Director of Israel market. Prior to joining
the Company, from 2017 to 2018, Mr. Cahana served as Israel Manager at Como, a SaaS company providing a platform for loyalty solutions
for retailors chains. From 2002 to 2016, Mr. Cahana served in several trade and sales managing positions at CBC Group LTD (Coca-Cola Israel)
including Immediate Consumption Channel Manager and Modern Trade Channel Manager. Mr. Cahana holds a B.A in Economics and Management from
the Academic College of Tel Aviv-Jaffa and MBA from the Open University in Israel.
Gilad Frenkel has been
serving as our Managing Director ROW since February 2024. Prior to Joining us from September 2020 to August 2023, he served as Chief Commercial
Officer at Metzerplas, an innovative leader in production and design of drip irrigation systems and infrastructure pipes. Previously,
from 2011 to 2020 Mr. Frenkel served as EVP Global Sales & Marketing at Avgol, a global leader in the manufacture of high-performance
nonwoven materials for the Hygiene market. From 1995 to 2011, Mr. Frenkel held various senior positions at Nilit, an international market
leader in manufacturing and marketing of nylon 6.6 (polyamide) fibers and thermoplastics, including in sales, marketing, business development
and operation. Mr. Frenkel hold a degree in Industrial Engineering & Management from the Technion – Israel Institute of Technology.
José Luis Ramón
has been serving as our Vice President Business Development since January 2024. Prior to joining us, from March 2020 to June 2023, he
served as Chief Executive Officer at Neolith Group, a global company driving the sintered stone surfaces market with presence in more
than 100 countries. From January 2016 to March 2020, he served as Vice President and General Manager for Industrial Printing Division
at Electronics for Imaging, Inc. (Nasdaq: EFII), a global leader in digital printing technologies operating worldwide in multiple industries
and headquartered at Silicon Valley, California US. Mr. Ramón, served previously at Cosentino Group as Corporate Chief Operating
Officer from January 2005 to March 2015 (previously on different roles from June 2002); Cosentino is a family-owned corporation that produces
and distributes high-value surfaces for the world of architecture and design, with multiple brands and omnichannel approach. Mr. Ramón
held other executive, strategic adviser, and board director positions in other companies as well as diverse materials industry associations
since 1999. Mr. Ramón holds a B.Sc. in Industrial Engineering, Mechanics & Materials by Polytechnic University of Valencia in
Spain and an Executive master’s degree by IE Business School, Spain.
Directors
Dr. Ariel Halperin has
been serving as our chairman of the board of directors since December 2016, after previously serving as our director between December
2006 to May 2013. Dr. Halperin is the senior managing partner of Tene Investment Funds, an Israeli private equity fund focusing on established
growth companies with leading global market positions, since 2004 and is the founding partner in Tenram Investments Ltd. a private investment
company engaged in domestic and foreign real estate investments since 2000. From 1992 to 2000, Dr. Halperin led negotiations related to
the Kibbutzim Creditors Agreement, serving as trustee for the Israeli government, Israeli banks and the Kibbutzim. Dr. Halperin currently
serves as a director of several Tene Investment Funds' portfolio companies, including Qnergy Inc., Gadot Chemical Terminals (1985) Ltd.,
Gadot Agro Ltd., Sharon-Laboratories Ltd., Questar Ltd. (formerly: Traffilog Ltd.) and Designated Holdings Ltd. (Haifa Group Ltd).
Dr. Halperin holds a B.A. in Mathematics and Economics and a Ph.D. in Economics from The Hebrew University of Jerusalem in Israel and
a Post-Doctorate in Economics from the Massachusetts Institute of Technology in Cambridge, Massachusetts.
Nurit Benjamini has been
serving as our external director under the Companies Law since December 2020. Mrs. Benjamini is Chief Financial Officer of F2 Venture
Capital, From December 2013 to November 2022, Ms. Benjamini served as the Chief Financial Officer of Crazy Labs Ltd., a top 5 mobile games
developer and publisher. From 2011 to 2013, Ms. Benjamini served as the Chief Financial Officer of Wix.com (NASDAQ: WIX); from 2007 to
2011, she served as the Chief Financial Officer of CopperGate Communications Ltd., and from 2000 to 2007, she served as the Chief Financial
Officer of Compugen Ltd. (NASDAQ: CGEN). Ms. Benjamini earned both a B.A. degree in economics and business and an M.B.A. in finance from
Bar Ilan University, Israel.
Lily Ayalon has
been serving as our external director under the Companies Law since December 2020. Ms. Ayalon currently is a business consultant and serves
on the board of directors for several companies (Discount Investments Corporation Ltd, Hertz Properties Group Limited, Westdale America
Limited, Shikun & Binui ltd (until the end of 3/23), Alpa Cosmetics, Jewelry, Accessories (until the end of 4/23), Meitav ltd, Haifaport
ltd). From 2010 to 2015, Ms. Ayalon served as the Senior Deputy Director General of the Government Companies Authority; from 2006 to 2009,
she served as the Deputy Chief Executive Officer, CFO, and CEO of a subsidiary of the New Hamashbir Group Ltd.; from 2004 to 2006, she
served as the Chief Financial Officer of Amot Investments. Ms. Ayalon is a certified public accountant and earned both a B.A. degree in
accounting and economics and an M.B.A in finance from the Hebrew University of Jerusalem, Israel.
David Reis has been serving
as our director since October 2023. Additionally, he has been serving as a director of Stratasys Ltd. (Nasdaq: SSYS) since June 2013.
During his tenure with Stratasys, he also served as vice chairman of the board of directors of Stratasys and as an executive director.
Since 2017, Mr. Reis has served as Chairman at Enercon Technologies Ltd., Tuttnauer Ltd and Seed X Inc. (since 2020) and a director at
Scodix Ltd (since 2021). Mr. Reis served as the Chief Executive Officer of Stratasys from March 2009 until June 30, 2016. Previously,
he served as Chief Executive Officer and President of NUR Macroprinters Ltd. (NURMF.PK), a wide format printer manufacturer that was acquired
by HP, from February 2006 to March 2008. Prior to joining NUR, Mr. Reis served as the Chief Executive Officer and President of ImageID,
an automatic identification and data capture solution provider, and of Scitex Vision, a developer and manufacturer of wide-format printers.
Mr. Reis holds a B.A. in Economics and Management from the Technion-Israel Institute of Technology and an M.B.A. from the University of
Denver. Mr. Reis is also a graduate of the Harvard Business School Advanced Management Program.
Maxim Ohana has been serving
as our director since October 2023. He has previously served as the Chairman of the Board from 2010 to 2013. Prior to that, Mr. Ohana
served as chairman of the board of directors of the Economic Council, Kibbutz Sdot Yam from 2008 to 2012. From 2000 to 2008, Mr. Ohana
served as Chief Executive Officer of Sdot-Yam Marble Floors Company (1995) Ltd. and from 1997 to 2000, he served as Chief Executive Officer
of Hagor Industries Ltd. From 1993 to 1997, Mr. Ohana served as Chief Executive Officer of Cement Products Caesarea Ltd. and from 1990
to 1993, he served as Chief Executive Officer of Kibbutz Sdot Yam’s businesses and operations. Mr. Ohana holds a diploma in general
studies from the Kibbutzim College of Education, Technology and the Arts (Seminar Ha’Kibbutzim), Israel
Ronald Kaplan has been
serving as our director since December 2015. Mr. Kaplan has served as chairman of the board of directors of Trex Company, Inc. (NYSE:
TREX), a major manufacturer of wood-alternative decking, railings and other outdoor items made from recycled materials, since August 2015.
From May 2010 to August 2015, Mr. Kaplan served as Chairman, President and Chief Executive Officer of Trex Company, Inc. From January
2008 to May 2010, Mr. Kaplan served as a director and President and Chief Executive Officer of Trex Company, Inc. From February 2006 through
December 2007, Mr. Kaplan served as Chief Executive Officer of Continental Global Group, Inc., a manufacturer of bulk material handling
systems. For 26 years prior to this, Mr. Kaplan was employed by Harsco Corporation (NYSE: HSC), an international industrial services and
products company, at which he served in a number of capacities, including as senior vice president, operations, and, from 1994 through
2005, as President of Harsco Corporation’s Gas Technologies Group, which manufactures containment and control equipment for the
global gas industry. Mr. Kaplan received a B.A. in economics from Alfred University and a M.B.A. from the Wharton School of Business,
University of Pennsylvania.
Dr. Ornit Raz has been
serving as our director since October 2023. Prior to that, Dr. Raz served as the Chief Executive Officer of ELA Beverage Containers Collection
Corporation Ltd., the Israeli national recycling corporation from 2020 to 2023. From 2016 to 2020, Dr. Raz served as the Chief Executive
Officer of the Israel Institute for Occupational Safety and Hygiene (a national statutory corporation); from 2016 to 2018 she served as
Chairman of the Board of Directors of the Israeli Consumer Council (Government Companies Authority) from 2013 to 2015, she served as the
Chief Executive Officer of Food Industries Association- Manufactures Association of Israel, and from 2007 to 2013, she served as the Chief
Executive Officer of Israel Bio-Organic Agriculture Association. Dr. Raz holds an MSc and PhD from the Technion, Israel Institute of Technology,
Faculty of Industrial Engineering Management, specializing in Behavioral and Management Sciences, and a Post Doctorate from the Massachusetts
Institute of Technology, Sloan School of Management in Cambridge, Massachusetts, USA.
Giora Wegman has been serving
as our director since October 2023. Mr. Wegman has served as the Chairman of Kibbutz Sdot Yam’s Economic Council since 2020; since
2010, Mr. Wegman has served as a director at Hatnuaa Emek Hefer Ltd. From 2010 to 2020, Mr. Wegman served as our Deputy Chief Executive
Officer; from 2008 to 2010, he served as the Financial Manager of Kibbutz Sdot Yam and a member of the Board; from 1988 to 2006, Mr. Wegman
held various positions with the Company, including Joint CEO, VP production and Production Manager, and before that he held various positions
at Kibbutz Sdot Yam. Mr. Wegman holds a practical mechanical engineer degree from Ruppin College, Israel and a business administration
degree from Tel Aviv University, Israel.
Tom Pardo Izhaki has been
serving as the Chief Financial Officer of Kibbutz Sdot-Yam since 2017. From 2013 to 2017, Ms. Pardo Izhaki served as the Chief Financial
Officer of the A.T. Group. From 2008 to 2013, she served as a supervisor of the department of assurance services at PWC Israel and, from
2002 to 2008, in a senior bookkeeping role at Sdot-Yam Marble & Tiles Ltd. Ms. Pardo Izhaki holds a B.A. in Economics and Accounting
from Haifa University, and an M.A. in Accounting from Bar-Ilan University, Israel. Ms. Pardo Izhaki is qualified as a Certified Public
Accountant in Israel.
| B. |
Compensation of Officers and Directors |
The aggregate compensation paid by us and our subsidiaries to our current executive
officers, including stock-based compensation, for the year ended December 31, 2023, was $6.5 million. This amount includes $0.7 million
set aside or accrued to provide pension, severance, retirement or similar benefits or expenses.
CEO Compensation
Pursuant to the employment agreement we entered into with our Chief Executive Officer, Yos Shiran, dated
March 9, 2023, and which was approved by our shareholders on October 30, 2023, Mr. Shiran’s terms of employment will be entitled
to, among other things: (i) A monthly gross salary of NIS 214,000 (approximately $ 59,000) as well as customary social benefits and
reimbursement of expenses; (ii) a signing bonus of up to NIS 1 million (approximately $260,000), of which NIS 500,000 was already paid,
and NIS 500,000 of which will be paid on the first anniversary of his employment, at the discretion of the Board following an assessment
of Mr. Shiran’s performance; (iii) Up to $1,200,000 in an annual cash bonus for each fiscal year commencing 2024 based on quantitative
performance goals. Mr. Shiran received an annual cash bonus of $600,000 for 2023, based on similar performance criteria.
Mr. Shiran was granted grant of options to purchase 1,000,000 ordinary shares of the Company, with an exercise
price equal to $4.68, which was the closing price of our ordinary shares as traded on Nasdaq on the date of approval of the grant by our
board of directors (the “Initial Grant”); upon the first anniversary of Mr. Shiran’s employment date, he will
be entitled to be granted additional 200,000 options to purchase ordinary shares, with an exercise price equal to the closing price of
the ordinary shares of the Company on such date (the “Anniversary Grant”). Options granted under the Initial Grant and the
Anniversary Grant (together, the “CEO Grants”) shall be subject to the Company’s 2020 Plan (as defined below) and in
accordance with the following additional terms: the CEO Grants will vest over a period of four years, whereby 25% of the options will
vest upon the first year of the grant, and subsequently 6.25% of the options will vest on a quarterly basis during the three years thereafter.
Accelerated Vesting: in the event that prior to the vesting of all options granted
as part of the CEO Grant, an acquisition of the Company or an asset transfer of all or substantially all of the assets of the Company
(collectively, “M&A Event”) will occur, while Mr. Shiran is employed by the Company and holds the position of the Company’s
Chief Executive Officer, then immediately prior to, and contingent upon, the closing of such M&A Event, all of Mr. Shiran’s
unvested options will become fully vested and exercisable.
We and Mr. Shiran may each terminate the agreement (other than for cause) with ninety
(90) days prior written notice (the “Notice Period”). Upon termination by us (not for cause), during the first 12 months of
Mr. Shiran’s employment, then the adjustment period shall be six months; if such termination or resignation occurs following the
first twelve months then the adjustment period shall be nine months (the “Adjustment Period”).
During both the Notice Period and Adjustment Period, Mr. Shiran’s relationship
with the Company will remain that of an employee-employer, and Mr. Shiran will remain entitled to all terms and benefits set forth above,
including bonuses and equity grants.
Mr. Shiran’s employment agreement includes additional customary provisions,
such as non-competition, non-solicitation, confidentiality, intellectual property assignment, participation in Company insurance plans
(including its education fund, or Keren Hishtalmut) and reimbursement of expenses, and 25 days of annual vacation days.
Directors Compensation
Each of our directors (other than the Chairman of the board of directors and Mr. Ronald
Kaplan) is entitled to the payment of annual fee of NIS 120,000 (approximately $34,000) and payment of NIS 3,350 (approximately $950)
per meeting for participating in meetings of the board and committees of the board. The annual fee shall not exceed the maximum annual
fee of an expert external director set forth in the Companies Regulations (Rules regarding Compensation and Expenses of External Directors)
5760-2000 as adjusted by the Companies Regulations (Relief for Public Companies with Shares Listed for Trading on a Stock Market Outside
of Israel), 5760-2000. The compensation awarded for participating in resolutions adopted without an actual convening (meaning, unanimous
written resolutions) and for participating through media communication will be reduced as follows: (1) for resolutions that will be adopted
without an actual convening, the participation compensation will be reduced to 50%; and (2) for participation through media communication,
the participation compensation will be reduced to 60%.
Mr. Ronald Kaplan is entitled to an annual fee of $75,000 and a per-meeting fee of
$2,500 for participation in meetings of the board and committees of the board. The participation fees of Mr. Kaplan for meetings held
through media communication shall be reduced by 50% and for meetings by written consent shall be reduced to 25%.
Until November 2021, Dr. Ariel Halperin, our chairman of the board of directors, was
entitled to an annual fee in the amount of NIS 750,000 (approximately $233,000), payable in equal quarterly installments. According to
a management services agreement with Tene Growth Capital 3 Funds Management Company Ltd., (the management company of the general partner
of Tene Investment in Projects 2016, L.P.) that we entered into on October 2021, Tene Investment in Projects 2016, L.P. provides us with
the services of an Executive Chairman of the Board, by Dr. Ariel Halperin, and regular business development advice services for an aggregate
annual management fee of NIS 750,000 plus VAT. The payment due pursuant to the Management Services Agreement replaced all other arrangements
for payment to Dr. Ariel Halperin as Chairman of the board of directors during the term of the Management Services Agreement. For more
information on these agreements, see “ITEM 7.B: Major Shareholders and Related Party Transactions—Related Party Transactions.”
The participation compensation and the annual fee is inclusive of all expenses incurred
by our directors in connection with their participation in a meeting held at our offices or at the director’s residence area, or
with regard to resolutions resolved by written consent or teleconference, provided that with respect to independent directors residing
outside of Israel (other than chairman of the board and external directors), their travel and lodging expenses related to their participation
and physical attendance at any board or board committee meeting will be borne by us. In addition, our directors are entitled to reimbursement
for travelling expenses when traveling abroad on our behalf and other expenses incurred in the performance of their duties and services
to us.
Directors’ Equity Compensation
Following the approval of our general meeting held on October 30, 2023, each of our directors was awarded
3,750 options to purchase ordinary shares of the Company, with an exercise price of $4.02 per share (the closing price of our ordinary
shares on Nasdaq as of the date of grant). Such options were granted under the 2020 Share Incentive Plan and will vest in three equal
annual installments, subject to continuous service on our board of directors on the relevant vesting date.
Individual Covered Executive Compensation
The table below reflects the compensation granted to our five most highly compensated
office holders (as defined in the Companies Law) during or with respect to the year ended December 31, 2023. We refer to the five individuals
for whom disclosure is provided herein as our “Covered Executives.” For purposes of the table below, “compensation”
includes amounts accrued or paid in connection with salary cost, consultancy fees, bonuses, equity-based compensation, retirement or termination
payments, benefits and perquisites such as car, phone and social benefits and any undertaking to provide such compensation. All amounts
reported in the table are in terms of cost to the Company, as recognized in our financial statements for the year ended December 31, 2023.
Each of the Covered Executives was covered by our D&O liability insurance policy and was entitled to indemnification and exculpation
in accordance with applicable law and our articles of association.
|
Name and Principal Position (1) |
Salary (2) |
Bonus (3) |
Equity-Based Compensation (4) |
All other compensation (5) |
Total |
|||||||||||||||
|
(in U.S. dollars) |
||||||||||||||||||||
|
Yos Shiran |
781,776 |
600,000 |
368,247 |
5,100 |
1,755,123 |
|||||||||||||||
|
Ken Williams |
405,731 |
62,387 |
29,511 |
2,222 |
499,851 |
|||||||||||||||
|
Nahum Trost |
292,661 |
42,358 |
76,088 |
46,189 |
457,295 |
|||||||||||||||
|
Erez Margalit |
318,312 |
42,358 |
45,277 |
48,963 |
454,910 |
|||||||||||||||
|
David Cullen |
375,731 |
32,255 |
31,697 |
13,242 |
452,924 |
|||||||||||||||
| (1) |
All Covered Executives are employed by us on a full-time (100%) basis. |
| (2) |
Salary includes the Covered Executive’s gross salary plus payment of social benefits made by us on behalf of such Covered Executive.
Such benefits may include, to the extent applicable to the Covered Executive, payments, contributions and/or allocations for savings funds
(such as managers’ life insurance policy), education funds (referred to in Hebrew as “keren hishtalmut”), pension, severance,
risk insurances (such as life, or work disability insurance), payments for social security and tax gross-up payments, vacation, medical
insurance and benefits, convalescence or recreation pay and other benefits and perquisites consistent with our policies. |
| (3) |
Represents annual bonuses granted to the Covered Executive based on formulas set forth in the bonus plans and approvals set forth
in the respective resolutions of our compensation committee and the board of directors. |
| (4) |
Represents the equity-based compensation expenses recorded in our consolidated financial statements for the year ended December 31,
2022, based on the option’s and RSU’s award’s fair value, calculated in accordance with accounting guidance for equity-based
compensation. For a discussion of the assumptions used in reaching this valuation, see Note 2w to our consolidated financial statements.
|
| (5) |
Includes mainly leased car, mobile phone and other fringe benefit expenses. |
Employment and consulting agreements with executive officers
We have entered into written employment or service agreements with each of our executive
officers.
Employment agreements
We have entered into written employment or services agreements with each of our office
holders who is not a director. These agreements each contain customary provisions regarding non-competition, confidentiality of information
and assignment of inventions. The non-competition provision generally applies for a period of six months following termination of employment.
The enforceability of covenants not to compete in Israel and the United States is subject to limitations. In addition, we are required
to provide notice of between two and six months prior to terminating the employment of certain of our senior executive officers other
than in the case of a termination for cause. The terms of engagement of our chief executive officer are described above.
Indemnification agreements
Our articles of association permit us to exculpate, indemnify and ensure our directors
and office holders to the fullest extent permitted by law, subject to limited exceptions. We have entered into agreements with each of
our current directors and office holders exculpating them from a breach of their duty of care to us to the fullest extent permitted by
law, subject to limited exceptions, and undertaking to indemnify them to the fullest extent permitted by law. See “ITEM 6.C: Directors,
Senior Management and Employees—Board Practices—Exculpation, insurance and indemnification of office holders.”
Directors’ service contracts
There are no arrangements or understandings between us and any of our subsidiaries,
on the one hand, and any of our directors, on the other hand, providing for benefits upon termination of their employment or service as
directors of our Company or any of our subsidiaries.
Equity incentive plan
In November 2020, we adopted the 2020 Caesarstone Share Incentive Plan (the “2020
Plan”) that replaced our 2011 Incentive Compensation Plan (the “2011 Plan”).
Awards previously issued under the 2011 Plan will continue to be governed by the terms of the 2011 Plan.
The maximum aggregate number of our shares available for issuance as awards under
the 2020 Plan is (i) 2,500,000 authorized but unissued shares, plus (ii) up to 1,000,000 shares carried over from the 2011 Plan,
and shares underlying outstanding awards granted pursuant to the 2011 Plan if expired, cancelled, terminated, forfeited or settled in
cash in lieu of issuance of shares, which will be available for grant of awards pursuant to the 2020 Plan. However, except subject to
certain adjustments, in no event will more than 3,500,000 shares be available for issuance pursuant to the exercise of incentive stock
options. As of March 1, 2024, the number of ordinary shares allocated under the 2020 Plan was 2,102,985 ordinary shares. Considering the
number of options and RSUs already granted, as of March 1, 2024, 1,297,015 ordinary shares remained available for future option or RSU
grants under the 2020 Plan. As of March 1, 2024, the number of ordinary shares underlying outstanding equity awards allocated under the
2011 and 2020 equity incentive plans was 2,713,226 ordinary shares.
Under the 2020 Plan, we provide stock-based compensation to our directors, executive
officers, employees and consultants, and those of our affiliates. The 2020 Plan is intended to further our success by increasing the ownership
interest of certain of our and our subsidiaries employees, directors and consultants and to enhance our and our subsidiary’s ability
to attract and retain employees, directors and consultants. See also Note 13 to our financial statements included elsewhere in this report
for additional information about grants of options and RSUs in recent years.
The 2020 Plan provides for granting awards under various tax regimes, including, without
limitation, in compliance with Section 102 of the Israeli Income Tax Ordinance (New Version), 5721-1961 (the “Ordinance”),
and Section 3(i) of the Ordinance and for awards granted to our United States employees or service providers, including those who are
deemed to be residents of the United States for tax purposes, Section 422 of the Code and Section 409A of the Code.
Section 102 of the Ordinance allows employees, directors and officers who are not
controlling shareholders and are considered Israeli residents to receive favorable tax treatment for compensation in the form of shares
or options. Our non-employee service providers and controlling shareholders may only be granted options under section 3(i) of the Ordinance,
which does not provide for similar tax benefits.
The 2020 Plan provides for the grant of stock options (including incentive stock options
and nonqualified stock options), ordinary shares, restricted shares, restricted share units and other share-based awards.
Options granted under the 2020 Plan to our employees who are U.S. residents may qualify
as “incentive stock options” within the meaning of Section 422 of the Code or may be non-qualified stock options.
In the event of termination of a grantee’s employment or service with the company
or any of its affiliates, all vested and exercisable awards held by such grantee as of the date of termination may be exercised within
one hundred and twenty (120) days after such date of termination, unless otherwise determined by the administrator, but in any event no
later than the date of expiration of the award’s term. After the one hundred and twenty (120) day period, all unexercised awards
will terminate, and the shares covered by such awards shall again be available for issuance under the 2020 Plan.
In the event of termination of a grantee’s employment or service with the company
or any of its affiliates due to such grantee’s death, permanent disability or retirement, all vested and exercisable awards held
by such grantee as of the date of termination may be exercised by the grantee or the grantee’s legal guardian, estate, or by a person
who acquired the right to exercise the award by bequest or inheritance, as applicable, within twelve months after such date of termination,
unless otherwise provided by the administrator, but in any event no later than the date of expiration of the award’s term. Any awards
which are unvested as of the date of such termination or which are vested but not then exercised within the twelve-month period following
such date, will terminate and the shares covered by such awards shall again be available for issuance under the 2020 Plan.
In the event of termination of a grantee’s employment or service on due to such
grantee’s retirement, all exercisable awards held by such grantee as of the date of retirement may be exercised at any time within
the three (3) month period after the date of such retirement, unless otherwise determined by the administrator.
Notwithstanding any of the foregoing, if a grantee’s employment or services
with the company or any of its affiliates is terminated for “cause” (as defined in the 2020 Plan), all outstanding awards
held by such grantee (whether vested or unvested) will terminate on the date of such termination and the shares covered by such awards
shall again be available for issuance under the 2020 Plan, unless otherwise determined by the administrator.
Grant of stock options to Chief Executive Officer
See “ITEM 6.B: Directors, Senior Management and Employees—Compensation—CEO
Compensation.”
| C. |
Board Practices |
Corporate governance practices
We are a “foreign private issuer”, as such term is defined in Rule 405 under the Securities
Act. As a foreign private issuer we will be permitted to comply with Israeli corporate governance practices instead of the certain listing
rules of Nasdaq, provided that we disclose which requirements we are not following and the equivalent Israeli requirements.
We rely on this “foreign private issuer exemption” with respect to the
quorum requirement for shareholder meetings and with respect to Nasdaq shareholder approval rules. Whereas under the corporate governance
rules of Nasdaq, a quorum requires the presence, in person or by proxy, of holders of at least 33 1/3% of the total issued and outstanding
voting power of our shares at each general meeting of shareholders, pursuant to our articles of association, and as permitted under the
Companies Law, the quorum required for a general meeting of shareholders will consist of at least two shareholders present in person or
by proxy in accordance with the Companies Law who hold or represent at least 33 1/3% of the total outstanding voting power of our shares,
except if (i) any such general meeting of shareholders was initiated by and convened pursuant to a resolution adopted by the board of
directors and (ii) at the time of such general meeting, we qualify as a “foreign private issuer,” then in such case, the requisite
quorum will consist of two or more shareholders present in person or by proxy who hold or represent at least 25% of the total outstanding
voting power of our shares (and if the meeting is adjourned for a lack of quorum, the quorum for such adjourned meeting will be, subject
to certain exceptions, any number of shareholders).
.
We otherwise comply with Nasdaq corporate governance rules generally applicable to
U.S. domestic companies listed on Nasdaq. We may in the future decide to use the foreign private issuer exemption with respect to some
or all the other Nasdaq Global Select Market corporate governance rules. We also comply with Israeli corporate governance requirements
under the Companies Law applicable to public companies.
Board of directors and officers
As of the date of this report, our board of directors consists of nine directors,
five of whom are independent under the Nasdaq rules, including Ms. Nurit Benjamini and Ms. Lily Ayalon, who serve as our external directors
and whose appointment fulfills the requirements of the Companies Law for the company to have two external directors (see “—External
directors”). Specifically, our board of directors has determined that each of Nurit Benjamini, Lily Ayalon, Ronald Kaplan, Ornit
Raz and David Ries meets the independence standards under the rules of Nasdaq. In reaching this conclusion, the board of directors determined,
following the recommendation of our nominating committee, that none of these directors has a relationship that would preclude a finding
of independence and any relationships that these directors have with us do not impair their independence.
Under our articles of association, the number of directors on our board of directors
must be no less than seven and no more than 11 and must include at least two external directors. The minimum and maximum number of directors
may be changed, at any time and from time to time, with the approval of at least 65% of the total voting power of our shareholders.
Each director holds office until the annual general meeting of our shareholders in
the subsequent year unless the tenure of such director expires earlier pursuant to the Companies Law or unless he or she is removed from
office as described below, except our external directors, who have a term of office of three years under Israeli law (see “—External
directors—Election and dismissal of external directors”).
The directors who are serving in office shall be entitled to act even if a vacancy
occurs on the board of directors. However, should the number of directors, at the time in question, become less than the minimum set forth
in our articles of association, the remaining director(s) would be entitled to act for the purpose of filling the vacancies or to convene
a general meeting, but not for any other purpose.
Any director who retires from his or her office would be qualified to be re-elected
subject to any limitation affecting such a director’s appointment as a director under the Companies Law. See “—External
directors” for a description of the provisions relating to the reelection of external directors.
A general meeting of our shareholders may remove a director from office prior to the
expiry of his or her term in office (“Removed Director”) by a simple majority vote
(except for external directors, who may be dismissed only as set forth under the Companies Law), provided that the Removed Director is
given a reasonable opportunity to state his or her case before the general meeting. If a director is removed from office as set forth
above, the general meeting shall be entitled, in the same session, to elect another director in his or her stead in accordance with the
maximum number of directors permitted by our articles of association as stated above. Should it fail to do so, the board of directors
shall be entitled to do so. Any director who is appointed in this manner shall serve in office for the period remaining of the term in
office of the director who was removed and shall be qualified to be re-elected.
Any amendment of our articles of association regarding the election of directors,
as described above, requires a simple majority vote. See “—External directors” for a description of the procedure for
the election of external directors.
In addition, under the Companies Law, our board of directors must determine the minimum
number of directors who are required to have financial and accounting expertise. Under applicable regulations, a “director with
financial and accounting expertise” is a director who, by reason of his or her education, professional experience and skill, has
a high level of proficiency in and understanding of business accounting matters and financial statements so that he or she is able to
fully understand our financial statements and initiate debate regarding the manner in which the financial information is presented. The
determination of whether a director possesses financial and accounting expertise is made by the board of directors. In determining the
number of directors required to have such expertise, the board of directors must consider, among other things, the type and size of the
company and the scope and complexity of its operations. Our board of directors has determined that we require at least one director with
the requisite financial and accounting expertise and that each of Ms. Nurit Benjamini and Ms. Lily Ayalon has such expertise.
There are no family relationships among any of our office holders (including directors).
Alternate directors
Our articles of association provide, subject to the limitations under the Companies
Law, that any director may, by written notice to us, appoint another person who is qualified to serve as a director to serve as an alternate
director. The appointment of an alternate director shall be subject to the consent of the board of directors. The alternate director will
be regarded as a director. Under the Companies Law, a person who is not qualified to be appointed as a director, a person who is already
serving as a director or a person who is already serving as an alternate director for another director, may not be appointed as an alternate
director. Nevertheless, a director who is already serving as a director may be appointed as an alternate director for a member of a committee
of the board of directors so long as he or she is not already serving as a member of such committee, and if the alternate director is
to replace an external director, he or she is required to be an external director and to have either “financial and accounting expertise”
or “professional expertise,” depending on the qualifications of the external director he or she is replacing. A person who
does not have the requisite “financial and accounting experience” or the “professional expertise,” depending on
the qualifications of the external director he or she is replacing, may not be appointed as an alternate director for an external director.
A person who is not qualified to be appointed as an independent director, pursuant to the Companies Law, may not be appointed as an alternate
director of an independent director.
External directors
Qualifications of external directors
Under the Companies Law, companies incorporated under the laws of the State of Israel
that are “public companies,” including companies with shares listed on the Nasdaq Global Select Market, are required to appoint
at least two external directors who meet the qualification requirements under the Companies Law. Such external directors are not required
to be Israeli residents in case the company is listed on a foreign stock exchange (such as us). The appointment of external directors
is made by a special majority resolution of the general meeting of our shareholders. At a shareholders’ meeting held on October
30, 2023, each of Ms. Nurit Benjamini and Ms. Lily Ayalon were elected to serve as external directors of the Company for another three-year
term, commencing on December 1, 2023, and expiring on November 30, 2026.
A person may not be appointed as an external director if the person is a relative
of a controlling shareholder or if on the date of the person’s appointment or within the preceding two years the person or his or
her relatives, partners, employers or anyone to whom that person is subordinate, whether directly or indirectly, or entities under the
person’s control have or had any affiliation with any of (each an “Affiliated Party”):
(1) us; (2) any person or entity controlling us on the date of such appointment; (3) any relative of a controlling shareholder; or (4)
any entity controlled, on the date of such appointment or within the preceding two years, by us or by our controlling shareholder. If
there is no controlling shareholder or any shareholder holding 25% or more of voting rights in the company, a person may not serve as
an external director if the person has any affiliation to the chairperson of the board of directors, the general manager (chief executive
officer), any shareholder holding 5% or more of the company’s shares or voting rights or the senior financial officer as of the
date of the person’s appointment.
The term “controlling shareholder” means a shareholder with the ability
to direct the activities of the company, other than by virtue of being an office holder. A shareholder is presumed to have “control”
of the company and thus to be a controlling shareholder of the company if the shareholder holds 50% or more of the “means of control”
of the company. “Means of control” is defined as (1) the right to vote at a general meeting of a company or a corresponding
body of another corporation; or (2) the right to appoint directors of the corporation or its general manager.
The term “affiliation” includes:
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an employment relationship; |
| • |
a business or professional relationship maintained on a regular basis; |
| • |
control; and |
| • |
service as an office holder, excluding service as a director in a private company prior to the first offering of its shares to the
public if such director was appointed as a director of the private company in order to serve as an external director following the initial
public offering. |
The term “relative” is defined as a spouse, sibling, parent, grandparent,
descendant, spouse’s descendant, sibling and parent and the spouse of each of the foregoing.
The term “office holder” is defined as a general manager, chief business
manager, deputy general manager, vice general manager, or any other person assuming the responsibilities of any of the foregoing positions,
without regard to such person’s title, and a director or manager directly subordinate to the general manager.
A person may not serve as an external director if that person or that person’s
relative, partner, employer, a person to whom such person is subordinate (directly or indirectly) or any entity under such person’s
control has a business or professional relationship with any entity that has an affiliation with any Affiliated Party, even if such relationship
is intermittent (excluding insignificant relationships). Additionally, any person who has received compensation intermittently (excluding
insignificant relationships) other than compensation permitted under the Companies Law may not continue to serve as an external director.
No person can serve as an external director if the person’s position or other
affairs create, or may create a conflict of interest with the person’s responsibilities as a director or may otherwise interfere
with the person’s ability to serve as a director or if such a person is an employee of the Israel Securities Authority or of an
Israeli stock exchange. If at the time an external director is appointed all current members of the board of directors, who are not controlling
shareholders or relatives of controlling shareholders, are of the same gender, then the external director to be appointed must be of the
other gender. In addition, a person who is a director of a company may not be elected as an external director of another company if, at
that time, a director of the other company is acting as an external director of the first company.
The Companies Law provides that an external director must either meet certain professional
qualifications or have financial and accounting expertise, and that at least one external director must have financial and accounting
expertise. However, if at least one of our other directors (1) meets the independence requirements of the Exchange Act, (2) meets the
Nasdaq requirements for membership on the audit committee and (3) has financial and accounting expertise as defined in the Companies Law
and applicable regulations, then neither of our external directors is required to possess financial and accounting expertise as long as
both possess other requisite professional qualifications as required under the Companies Law and regulations promulgated thereunder.
The regulations promulgated under the Companies Law define an external director with
requisite professional qualifications as a director who satisfies one of the following requirements: (1) the director holds an academic
degree in either economics, business administration, accounting, law or public administration, (2) the director either holds an academic
degree in any other field or has completed another form of higher education in the company’s primary field of business or in an
area which is relevant to his or her office as an external director in the company, or (3) the director has at least five years of experience
serving in any one of the following, or at least five years of cumulative experience serving in two or more of the following capacities:
(a) a senior business management position in a company with a substantial scope of business, (b) a senior position in the company’s
primary field of business or (c) a senior position in public administration.
Our board of directors has determined that each of our external directors, Ms. Nurit
Benjamini and Ms. Lily Ayalon, qualifies as an “audit committee financial expert,” as defined by the rules of the SEC, and
has the requisite financial experience required by the Nasdaq rules and the Companies Law.
Under the Companies Law, until the lapse of a two-year period from the date that an
external director has ceased to act as an external director (and until the lapse of a one-year period, with respect to such external director
spouse or children) certain prohibitions apply to the ability of the company and its controlling shareholders, including any corporations
controlled by a controlling shareholder to grant such former external director or his or her spouse or children any benefits (directly
or indirectly).
Election and dismissal of external directors
Under Israeli law, external directors are elected by a majority vote at a shareholders’
meeting, provided that either:
| • |
the majority of the shares that are voted at the meeting in favor of the election of the external director, excluding abstentions,
include at least a majority of the votes of shareholders who are not controlling shareholders or have a personal interest in the appointment
(excluding a personal interest that did not result from the shareholder’s relationship with the controlling shareholder); or
|
| • |
the total number of shares held by the shareholders mentioned in the paragraph above that are voted against the election of the external
director does not exceed two percent of the aggregate voting rights in the company. |
Under Israeli law, the term of office for external directors for Israeli companies
traded on certain foreign stock exchanges, including the Nasdaq Global Select Market, such as the Company, may be extended, indefinitely,
in increments of additional three-year terms, in each case provided that: (i) both the audit committee and the board of directors confirm
that, in light of the expertise and contribution of the external director, the extension of such external director’s term would
be in the interest of the company; (ii) the appointment to the additional term is subject to the reelection provision described above;
and (iii) the term during which the nominee served as an external director and the board of directors’ and audit committee’s
reasoning for the extension of such term were presented before the general meeting of shareholders prior to the approval of the extension.
An external director may be removed by the same special majority of the shareholders
required for his or her election, if he or she ceases to meet the statutory qualifications for appointment or if he or she violates his
or her fiduciary duty to the company. An external director may also be removed by order of an Israeli court if the court finds that the
external director is permanently unable to exercise his or her office, has ceased to meet the statutory qualifications for his or her
appointment, has violated his or her fiduciary duty to the company, or has been convicted by a court outside Israel of certain offenses
detailed in the Companies Law.
If the vacancy of an external directorship causes a company to have fewer than two
external directors, the company’s board of directors is required under the Companies Law to call a special general meeting of the
company’s shareholders as soon as possible to appoint such number of new external directors so that the company thereafter has two
external directors.
Under the regulations pursuant to the Companies Law, a public company with securities
listed on certain foreign exchanges, including the Nasdaq Global Select Market, that satisfies the applicable domestic country laws and
regulations that apply to companies organized in that country relating to the appointment of independent directors and composition of
audit and compensation committees and have no controlling shareholder may adopt an exemption from the requirement to appoint external
directors or comply with the audit committee and compensation committee composition requirements under the Companies Law. We may adopt
this exemption in the future if we no longer have a controlling shareholder.
Additional provisions
Under the Companies Law, each committee authorized to exercise any of the powers of
the board of directors must include only directors and is required to include at least one external director and each of the audit and
compensation committees are required to include all of the external directors.
An external director is entitled to compensation and reimbursement of expenses in
accordance with regulations promulgated under the Companies Law and is prohibited from receiving any other compensation, directly or indirectly,
in connection with serving as an external director except for certain exculpation, indemnification and insurance provided by the company,
as specifically allowed by the Companies Law.
Audit committee
Our audit committee consists of Ms. Nurit Benjamini, Ms. Lily Ayalon and Ms. Ornit
Raz. Ms. Nurit Benjamini serves as the chairperson of the audit committee.
Companies Law requirements
Under the Companies Law, the board of directors of any public company must appoint
an audit committee comprised of at least three directors, including all the external directors. The audit committee may not include:
| • |
the chairperson of the board of directors; |
| • |
a controlling shareholder or a relative of a controlling shareholder; and |
| • |
any director employed by, or providing services on an ongoing basis to, the company, a controlling shareholder of the company or
an entity controlled by a controlling shareholder of the company or any director who derives most of his or her income from the controlling
shareholder. |
According to the Companies Law, the majority of the members of the audit committee,
as well as the majority of members present at audit committee meetings, are required to be “independent” (as defined below)
and the chairperson of the audit committee is required to be an external director. Any persons disqualified from serving as a member of
the audit committee may not be present at the audit committee meetings, unless the chairperson of the audit committee has determined that
such person is required to be present at the meeting or if such person qualifies under one of the exemptions of the Companies Law. Without
derogating from the aforementioned, under the Companies Law, a company’s general counsel and a company’s secretary, which
are not a controlling shareholder or relative thereof, may be present at an audit committee meeting if the committee has requested their
presence.
The term “independent director” is defined under the Companies Law as
an external director or a director who meets the following conditions and who is appointed or classified as such according to the Companies
Law: (1) the conditions for his or her appointment as an external director (as described above) are satisfied and the audit committee
approves the director having met such conditions and (2) he or she has not served as a director of the company for over nine consecutive
years with any interruption of up to two years of his or her service not being deemed a disruption to the continuity of his or her service.
Under the regulations promulgated under the Companies Law, an audit committee of companies
such as ours may deem a director which qualifies as an independent director, among others, under the Nasdaq listing rules, to be an independent
director within the meaning of the Companies Law, provided that such director complies with the Companies Law requirements for external
directors with respect to a lack of affiliation with a controlling shareholder, its relatives and entities under its control or his or
her relative’s control, excluding the company itself or any of its subsidiaries. In addition, companies such as ours may extend
the term of office of an independent director who has served for more than nine years for additional periods of three years each if such
director continues to comply with the Companies Law requirements for external director’s lack of affiliation as described above.
Nasdaq requirements
Under the Nasdaq rules, we are required to maintain an audit committee consisting
of at least three independent directors, all of whom are financially literate and one of whom has accounting or related financial management
expertise.
All members of our audit committee meet the requirements for financial literacy under
the applicable rules of the SEC and the Nasdaq rules. Our board of directors has determined that each of Ms. Nurit Benjamini and Ms. Lily
Ayalon qualifies as an “audit committee financial expert,” as defined by applicable rules of the SEC and has the requisite
financial experience as defined by Nasdaq rules.
Each of the members of the audit committee is “independent” under relevant
Nasdaq rules and as defined in Rule 10A-3(b)(1) under the Exchange Act, which is different from the general test for independence of members
of the board.
Approval of transactions with related parties
The approval of the audit committee is required to affect specified actions and transactions
with office holders and controlling shareholders and their relatives, or in which they have a personal interest. See “—Fiduciary
duties and approval of specified related party transactions under Israeli law.” For the purpose of approving transactions with controlling
shareholders, the term “controlling shareholder” also includes any shareholder that holds 25% or more of the voting rights
of the company if the company has no shareholder that owns more than 50% of its voting rights. For purposes of determining the holding
percentage stated above, two or more shareholders who have a personal interest in a transaction that is brought for the company’s
approval are deemed as joint holders. The audit committee may not approve an action or a transaction with a controlling shareholder or
with an office holder unless at the time of approval the audit committee meets the composition requirements under the Companies Law and
provided such transaction is in the interest of the Company.
Audit committee role
Our board of directors has adopted an audit committee charter setting forth the responsibilities
of the audit committee consistent with the rules of the SEC and Nasdaq rules, which include, among other responsibilities:
| • |
retaining and terminating our independent auditors, subject to board of directors and shareholder ratification; |
| • |
pre-approval of audit and non-audit services to be provided by the independent auditors; |
| • |
reviewing with management and our independent directors our quarterly and annual financial reports prior to their submission to the
SEC; and |
| • |
approval of certain transactions with office holders and controlling shareholders and other related-party transactions. |
Additionally, under the Companies Law, the role of the audit committee includes the
identification of irregularities in our business management, among other things, by consulting with the internal auditor or our independent
auditors and suggesting an appropriate course of action to the board of directors. In addition, the audit committee or the board of directors,
as set forth in the articles of association of the company, is required to approve the yearly or periodic work plan proposed by the internal
auditor. The audit committee is required to assess the company’s internal audit system and the performance of its internal auditor. The
Companies Law also requires that the audit committee assess the scope of the work and compensation of the company’s external auditor.
In addition, the audit committee is required to determine whether certain related party actions and transactions are “material”
or “extraordinary” for the purpose of the requisite approval procedures under the Companies Law, whether certain transactions
with a controlling shareholder will be subject to a competitive procedure (regardless of whether or not such transactions are deemed extraordinary
transactions) and to set forth the approval process for transactions that are “non-negligible” (meaning, transactions with
a controlling shareholder that are classified by the audit committee as non-negligible, even though they are not deemed extraordinary
transactions), as well as determining which types of transactions would require the approval of the audit committee, optionally based
on criteria which may be determined annually in advance by the audit committee. The audit committee charter states that in fulfilling
its role the committee is entitled to demand from us any document, file, report or any other information that is required for the fulfillment
of its roles and duties and to interview any of our employees or any employees of our subsidiaries in order to receive more details about
his or her line of work or other issues that are connected to the roles and duties of the audit committee.
Nominating Committee
We have a nominating committee comprised of four of our directors, Ms. Nurit Benjamini,
Ms. Lily Ayalon, Ms. Ornit Raz and Mr. Ronald Kaplan, each of whom has been determined by our board of directors to be independent under
the applicable Nasdaq rules. Ms. Lily Ayalon serves as the Chairperson of the Nominating Committee. Our board of directors has adopted
a nominating committee charter setting forth the responsibilities of the committee which include, among other responsibilities:
| • |
conduct of the appropriate and necessary inquiries into the backgrounds and qualifications of possible candidates to serve as directors;
|
| • |
review and recommend to the board any nominees for election as directors, including nominees recommended by shareholders, and consideration
of the performance of incumbent directors whose terms are expiring in determining whether to nominate them to stand for re-election;
|
| • |
review and recommend to the board regarding board member qualifications, board composition and structure, and recommend if necessary,
measures to be taken so that the board reflects the appropriate balance of knowledge, experience, skills, expertise and diversity required
for the board; and |
| • |
perform such other activities and functions as required by applicable law, stock exchange
rules or provisions in our articles of association, or as are otherwise necessary and advisable, in its or the board’s discretion,
for the efficient discharge of its duties. |
Compensation Committee
We have a compensation committee consisting of three of our directors, Ms. Nurit Benjamini,
Ms. Lily Ayalon and Ms. Ornit Raz, each of whom has been determined by our board of directors to be independent under the applicable Nasdaq
rules. Ms. Lily Ayalon serves as the Chairperson of the compensation committee. Our board has adopted a compensation committee charter
setting forth the responsibilities of the committee which include, among other responsibilities:
| • |
reviewing and recommending overall compensation policies with respect to our Chief Executive Officer and other office holders;
|
| • |
reviewing and approving corporate goals and objectives relevant to the compensation of our Chief Executive Officer and other office
holders including evaluating their performance in light of such goals and objectives and determining their compensation based on such
evaluation; |
| • |
reviewing and approving the granting of options and other incentive awards; and |
| • |
reviewing, evaluating and making recommendations regarding the compensation and benefits for our non-employee directors. |
The compensation committee is also authorized to retain and terminate compensation
consultants, legal counsel or other advisors to the committee and to approve the engagement of any such consultant, counsel or advisor,
to the extent it deems necessary or appropriate.
Pursuant to the Companies Law, Israeli public companies are required to appoint a
compensation committee comprised of at least three directors, including all the external directors, who must also constitute a majority
of its members. All other members of the compensation committee, who are not external directors, must be directors who receive compensation
that is in compliance with regulations promulgated under the Companies Law. In addition, the chairperson of the compensation committee
must be an external director. The Companies Law further stipulates that directors who are not qualified to serve on the audit committee,
as described above, may not serve on the compensation committee either and that, similar to the audit committee, generally, any person
who is not entitled to be a member of the compensation committee may not attend the compensation committee’s meetings.
The responsibilities of the compensation committee under the Companies Law include:
(i) making recommendations to the board of directors with respect to the approval of the compensation policy and any extensions thereto;
(ii) periodically reviewing the implementation of the compensation policy and providing the board of directors with recommendations with
respect to any amendments or updates thereto; (iii) reviewing and resolving whether or not to approve arrangements with respect to the
terms of office and employment of office holders; and (iv) resolving whether or not to exempt a transaction with a candidate for chief
executive officer from shareholder approval.
Compensation Policy under the Companies Law
In accordance with the Companies Law, we have adopted a compensation policy for our
executive officers and directors. The purpose of the policy is to describe our overall compensation strategy for our executive officers
and directors and to provide guidelines for setting their compensation, as prescribed by the Companies Law.
The compensation policy must be determined and later reevaluated according to certain
factors, including: the advancement of the company’s objectives, business plan and long-term strategy; the creation of appropriate
incentives for office holders, while considering, among other things, the company’s risk management policy; the size and the nature
of the company’s operations; and with respect to variable compensation, the contribution of the office holder towards the achievement
of the company’s long-term goals and the maximization of its profits, all with a long-term objective and according to the position
of the office holder.
According to the Israeli Companies Law, the policy must be reviewed and readopted
at least once every three years. The adoption of the compensation policy requires the approval of the compensation committee, the board
of directors and our shareholders, in that order. The shareholders’ approval must include the majority of shares voted at the meeting.
In addition to the majority vote, the shareholder approval must satisfy either of two additional tests:
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the majority includes at least a majority of the shares voted by shareholders other than our controlling shareholders or shareholders
who have a personal interest in the adoption of the compensation policies; or |
| • |
the total number of shares held by non-controlling shareholders and disinterested shareholders that voted against the adoption of
the compensation policies, does not exceed 2% of the aggregate voting rights of our company. |
In accordance with the Companies Law, our policy was last re-adopted in October 2023 by the compensation
committee, the board of directors and our shareholders, and is filed as an exhibit to this annual report.
Compensation of Directors and Executive Officers
Directors. Under the Companies Law, the compensation
of our directors requires the approval of our compensation committee, the subsequent approval of the board of directors and, unless exempted
under the regulations promulgated under the Companies Law, the approval of the shareholders at a general meeting. If the compensation
of our directors is inconsistent with our Compensation Policy, then shareholder approval will also be required, as follows:
| • |
at least a majority of the shares held by all shareholders who are not controlling shareholders and do not have a personal interest
in such matter, present and voting at such meeting, are voted in favor of the compensation package, excluding abstentions; or |
| • |
the total number of shares of non-controlling shareholders and shareholders who do not have a personal interest in such matter voting
against the compensation package does not exceed 2% of the aggregate voting rights in the company. |
Executive Officers other than the Chief Executive
Officer. The Companies Law requires the compensation of a public company’s executive officers (other than the chief executive
officer) to be approved by, first, the compensation committee; second by the company’s board of directors and third, if such compensation
arrangement is inconsistent with the company’s stated compensation policy, the company’s shareholders (by a special majority
vote as discussed above with respect to the approval of director compensation). However, if the shareholders of the company do not approve
a compensation arrangement with an executive officer (other than the chief executive officer) that is inconsistent with the company’s
stated compensation policy, the compensation committee and board of directors may override the shareholders’ decision if each of
the compensation committee and the board of directors provide detailed reasons for their decision after reconsidering the compensation
arrangement, while taking into consideration that the shareholders of the company did not approve the compensation arrangement.
Chief Executive Officer. The compensation
of a public company’s chief executive officer requires the approval of first, the company’s compensation committee; second,
the company’s board of directors; and third, the company’s shareholders (by a special majority vote as discussed above with
respect to the approval of director compensation). However, if the shareholders of the company do not approve the compensation arrangement
with the chief executive officer, the compensation committee and board of directors may override the shareholders’ decision if each
of the compensation committee and the board of directors provide a detailed report for their decision after reconsidering the compensation
arrangement, while taking into consideration that the shareholders of the company did not approve the compensation arrangement.
The compensation committee and board of directors approval should be in accordance
with the company’s stated compensation policy; however, in special circumstances, they may approve compensation terms of a chief
executive officer that are inconsistent with such policy provided that they have considered those provisions that must be included in
the compensation policy according to the Companies Law and that shareholder approval was obtained (by a special majority vote as discussed
above with respect to the approval of director compensation). The compensation committee may waive the shareholder approval requirement
with regards to the approval of the engagement terms of a candidate for the chief executive officer position, if they determine that the
compensation arrangement is consistent with the company’s stated compensation policy, the chief executive officer did not have a
business relationship with the company or a controlling shareholder of the company and that having the engagement transaction subject
to a shareholder vote would impede the company’s ability to employ the chief executive officer candidate.
Notwithstanding the above, the amendment of existing compensation terms of executive
officers (including the chief executive officer and excluding officers who are also directors), requires only the approval of the compensation
committee, provided that the committee determines that the amendment is not material in relation to the existing terms.
Internal auditor
Under the Companies Law, the board of directors of a public company must appoint an
internal auditor based on the recommendation of the audit committee. The role of the internal auditor is, among other things, to examine
whether a company’s actions comply with applicable law and orderly business procedure. Under the Companies Law, the internal auditor
may not be an interested party or an office holder or a relative of an interested party or of an office holder, nor may the internal auditor
be the company’s independent auditor or the representative of the same.
An “interested party” is defined in the Companies Law as (i) a holder
of 5% or more of the issued share capital or voting power in a company, (ii) any person or entity who has the right to designate one or
more directors or to designate the chief executive officer of the company, or (iii) any person who serves as a director or as a chief
executive officer of the company. Our internal auditor is Mr. Ofer Orlitzky of Leon, Orlitzky and Co.
Fiduciary duties and approval of specified related party transactions
under Israeli law
Fiduciary duties of office holders
The Companies Law imposes a duty of care and a duty of loyalty on all office holders
of a company.
The duty of care requires an office holder to act with the degree of proficiency with
which a reasonable office holder in the same position would have acted under the same circumstances. The duty of care includes, among
other things, a duty to use reasonable means, in light of the circumstances, to obtain:
| • |
information on the business advisability of a given action brought for his or her approval or performed by virtue of his or her position;
and |
| • |
all other important information pertaining to such action. |
The duty of loyalty incumbent on an office holder requires him or her to act in good
faith and for the benefit of the company, and includes, among other things, the duty to:
| • |
refrain from any act involving a conflict of interest between the performance of his or her duties in the company and his or her
other duties or personal affairs; |
| • |
refrain from any activity that is competitive with the business of the company; |
| • |
refrain from exploiting any business opportunity of the company for the purpose of gaining a personal advantage for himself or herself
or others; and |
| • |
disclose to the company any information or documents relating to the company’s affairs which the office holder received as
a result of his or her position as an office holder. |
We may approve an act specified above which would otherwise constitute a breach of
the office holder’s duty of loyalty, provided that the office holder acted in good faith, the act or its approval does not harm
the company, and the office holder discloses his or her personal interest, including any related material information or document, a sufficient
time before the approval of such act. Any such approval is subject to the terms of the Companies Law, setting forth, among other things,
the organs of the company entitled to provide such approval, and the methods of obtaining such approval.
Disclosure of personal interest of an office
holder and approval of related party transactions
Companies Law requires that an office holder promptly disclose to the company any
personal interest that he or she may have and all related material information or documents relating to any existing or proposed transaction
by the company. An interested office holder’s disclosure must be made promptly and, in any event, no later than the first meeting
of the board of directors at which the transaction is considered. An office holder is not obliged to disclose such information if the
personal interest of the office holder derives solely from the personal interest of his or her relative in a transaction that is not considered
as an extraordinary transaction.
Under the Companies Law, once an office holder has complied with the above disclosure
requirement, a company may approve a transaction between the company and the office holder or a third party in which the office holder
has a personal interest, pursuant to the certain procedures as set forth in the Companies Law. However, a company may not approve a transaction
or action that is not to the company’s benefit.
Under the Companies Law, unless the articles of association of a company provide otherwise,
a transaction with an office holder or with a third party in which the office holder has a personal interest, which is not an extraordinary
transaction, requires the approval by the board of directors. Our articles of association provide that such a transaction, which is not
an extraordinary transaction, shall be approved by the board of directors or a committee of the board of directors or any other entity
(which has no personal interest in the transaction) authorized by the board of directors. If the transaction considered is an extraordinary
transaction with an office holder or a third party in which the office holder has a personal interest, then audit committee approval is
required prior to approval by the board of directors. For the approval of compensation arrangements with directors and executive officers,
see “— Compensation of Directors and Executive Officers.”
Any person who has a personal interest in the approval of a transaction that is brought
before a meeting of the board of directors, or the audit committee may not be present at the meeting or vote on the matter. However, if
the chairman of the board of directors or the chairman of the audit committee, as applicable, has determined that the presence of an office
holder with a personal interest is required, such office holder may be present at the meeting for the purpose of presenting the matter.
Notwithstanding the foregoing, a director who has a personal interest may be present at the meeting of the audit committee or the board
of directors and vote on the matter if a majority of the directors or members of the audit committee, as applicable, have a personal interest
in the approval of such transaction. If a majority of the directors at a board of directors meeting have a personal interest in the transaction,
such transaction also requires approval of the shareholders of the company.
A “personal interest” is defined under the Companies Law as the personal
interest of a person in an action or in a transaction of the company, including the personal interest of such person’s relative
or the interest of any other corporate body in which the person and/or such person’s relative is a director or general manager,
a holder of 5% or more of the issued and outstanding share capital of the company or its voting rights, or has the right to appoint at
least one director or the general manager, but excluding a personal interest stemming solely from the fact of holding shares in the company.
A personal interest also includes (1) a personal interest of a person who votes according to a proxy of another person, including in the
event that the other person has no personal interest, and (2) a personal interest of a person who gave a proxy to another person to vote
on his or her behalf regardless of whether the discretion of how to vote lies with the person voting or not.
An “extraordinary transaction” is defined under the Companies Law as any
of the following:
| • |
a transaction other than in the ordinary course of business; |
| • |
a transaction that is not on market terms; or |
| • |
a transaction that may have a material impact on the company’s profitability, assets or liabilities. |
Disclosure of personal interests of a controlling
shareholder and approval of transactions
Companies Law also requires that a controlling shareholder promptly disclose to the
company any personal interest that he or she may have and all related material information or documents relating to any existing or proposed
transaction by the company. A controlling shareholder’s disclosure must be made promptly and, in any event, no later than the first
meeting of the board of directors at which the transaction is considered. See “—Audit committee—Approval of transactions
with related parties” for the definition of a controlling shareholder. Extraordinary transactions with a controlling shareholder
or in which a controlling shareholder has a personal interest, including a private placement in which a controlling shareholder has a
personal interest, and the terms of engagement of the company, directly or indirectly, with a controlling shareholder or a controlling
shareholder’s relative (including through a corporation controlled by a controlling shareholder), regarding the company’s
receipt of services from the controlling shareholder, and if such controlling shareholder is also an office holder or an employee of the
company, regarding his or her terms of service or employment, require the approval of each of (i) the audit committee or the compensation
committee with respect to the terms of the engagement of the company, (ii) the board of directors and (iii) the shareholders, in that
order. In addition, the shareholder approval must fulfill one of the following requirements:
| • |
a majority of the shares held by shareholders who have no personal interest in the transaction and are voting at the meeting must
be voted in favor of approving the transaction, excluding abstentions; or |
| • |
the shares voted by shareholders who have no personal interest in the transaction who vote against the transaction represent no more
than 2% of the voting rights in the company. |
In addition, any extraordinary transaction with a controlling shareholder or in which
a controlling shareholder has a personal interest with a term of more than three years requires the approval described above, every three
years; however, transactions not involving the receipt of services or compensation can be approved for a longer term, provided that the
audit committee determines that such longer term is reasonable under the circumstances.
The Companies Law requires that every shareholder that participates, in person, by
proxy or by voting instrument in a vote regarding a transaction with a controlling shareholder, must indicate in advance or in the ballot
whether or not that shareholder has a personal interest in the vote in question. Failure to so indicate will result in the invalidation
of that shareholder’s vote.
Duties of shareholders
Under the Companies Law, a shareholder has a duty to refrain from abusing its power
in the company and to act in good faith and in an acceptable manner in exercising its rights and performing its obligations to the company
and to other shareholders, including, among other things, when voting at meetings of shareholders on the following matters:
| • |
an amendment to the articles of association; |
| • |
an increase in the company’s authorized share capital; |
| • |
a merger; and |
| • |
the approval of related party transactions and acts of office holders that require shareholder approval. |
A shareholder also has a general duty to refrain from discriminating against other
shareholders.
The remedies generally available upon a breach of contract will also apply to a breach
of the shareholder duties mentioned above, and in the event of discrimination against other shareholders, additional remedies are available
to the injured shareholder.
In addition, any controlling shareholder, any shareholder that knows that its vote
can determine the outcome of a shareholder vote and any shareholder that, under a company’s articles of association, has the power
to appoint or prevent the appointment of an office holder, or any other power with respect to a company, is under a duty to act with fairness
towards the company. The Companies Law does not describe the substance of this duty except to state that the remedies generally available
upon a breach of contract will also apply in the event of a breach of the duty to act with fairness, taking the shareholder’s position
in the company into account.
Approval of private placements
Under the Companies Law and the regulations promulgated thereunder, a private placement
of securities does not require approval at a general meeting of the shareholders of a company; provided however, that in special circumstances,
such as a private placement completed in lieu of a special tender offer (see “ITEM 10.B: Additional Information—Memorandum
and Articles of Association—Acquisitions under Israeli law”) or a private placement which qualifies as a related party transaction
(see “—Fiduciary duties and approval of specified related party transactions under Israeli law”), approval at a general
meeting of the shareholders of a company is required.
Code of Conduct and Business Ethics
Our board of directors adopted a written Code of Business Conduct and Ethics setting
forth our expectations regarding personal and corporate conduct for all of our directors, officers, employees and representatives. For
more information, see “Item 16B. Code of Ethics.”
Exculpation, insurance and indemnification of office holders
Under the Companies Law, a company may not exculpate an office holder from liability
for a breach of the duty of loyalty. An Israeli company may exculpate an office holder in advance from liability to the company, in whole
or in part, for damages caused to the company as a result of a breach of duty of care but only if a provision authorizing such exculpation
is included in its articles of association. Our articles of association include such a provision. The company may not exculpate in advance
a director from liability arising out of a prohibited dividend or distribution to shareholders.
Under the Companies Law and the Securities Law, 5728—1968 (“Securities
Law”), a company may indemnify an office holder in respect of the following liabilities, payments and expenses incurred for
acts performed by him as an office holder, either in advance of an event or following an event, provided its articles of association include
a provision authorizing such indemnification:
| • |
a monetary liability incurred by or imposed on him or her in favor of another person pursuant to a judgment, including a settlement
or arbitrator’s award approved by a court. However, if an undertaking to indemnify an office holder with respect to such liability
is provided in advance, then such undertaking must be limited to certain events, which, in the opinion of the board of directors, can
be foreseen based on the company’s activities when the undertaking to indemnify is given, and to an amount or according to criteria
determined by the board of directors as reasonable under the circumstances, and such undertaking shall detail the foreseen events described
above and amount or criteria; |
| • |
reasonable litigation expenses, including reasonable attorneys’ fees, incurred by the office holder as a result of an investigation
or proceeding instituted against him or her by an authority authorized to conduct such investigation or proceeding, provided that (i)
no indictment was filed against such office holder as a result of such investigation or proceeding; and (ii) no financial liability, was
imposed upon him or her as a substitute for the criminal proceeding as a result of such investigation or proceeding or, if such financial
liability was imposed, it was imposed with respect to an offense that does not require proof of criminal intent or in connection with
a monetary sanction; |
| • |
a monetary liability imposed on him or her in favor of an injured party at an Administrative Procedure (as defined below) pursuant
to Section 52(54)(a)(1)(a) of the Securities Law; |
| • |
expenses incurred by an office holder or certain compensation payments made to an injured party that were instituted against an office
holder in connection with an Administrative Procedure under the Securities Law, including reasonable litigation expenses and reasonable
attorneys’ fees; and |
| • |
reasonable litigation expenses, including attorneys’ fees, incurred by the office holder or imposed by a court in proceedings
instituted against him or her by the company, on its behalf, or by a third party, or in connection with criminal proceedings in which
the office holder was acquitted, or as a result of a conviction for an offense that does not require proof of criminal intent. |
An “Administrative Procedure” is defined as a procedure pursuant to chapters
H3 (Monetary Sanction by the Israeli Securities Authority), H4 (Administrative Enforcement Procedures of the Administrative Enforcement
Committee) or I1 (Arrangement to prevent Procedures or Interruption of procedures subject to conditions) to the Securities Law.
Under the Companies Law and the Securities Law, a company may insure an office holder
against the following liabilities incurred for acts performed by him or her as an office holder if and to the extent provided in the company’s
articles of association:
| • |
a breach of duty of loyalty to the company, provided that the office holder acted in good faith and had a reasonable basis to believe
that the act would not harm the company; |
| • |
a breach of duty of care to the company or to a third party, to the extent such a breach arises out of the negligent conduct of the
office holder; |
| • |
a monetary liability imposed on the office holder in favor of a third party; |
| • |
a monetary liability imposed on the office holder in favor of an injured party at an Administrative Procedure pursuant to Section
52(54)(a)(1)(a) of the Securities Law; and |
| • |
expenses incurred by an office holder in connection with an Administrative Procedure instituted against him or her, including reasonable
litigation expenses and reasonable attorneys’ fees. |
Under the Companies Law, a company may not indemnify, exculpate or insure an office
holder against any of the following:
| • |
a breach of a duty of loyalty, except for indemnification and insurance for a breach of the duty of loyalty to the company to the
extent that the office holder acted in good faith and had a reasonable basis to believe that the act would not prejudice the company;
|
| • |
a breach of duty of care committed intentionally or recklessly, excluding a breach arising out of the negligent conduct of the office
holder; |
| • |
an act or omission committed with intent to derive illegal personal benefit; or |
| • |
a fine, monetary sanction or forfeit levied against the office holder. |
Under the Companies Law, exculpation, indemnification and insurance of office holders
must be approved by the compensation committee and the board of directors and, with respect to directors or controlling shareholders,
their relatives and third parties in which such controlling shareholders have a personal interest, also by the shareholders.
Our articles of association permit us to exculpate, indemnify and ensure our office
holders to the fullest extent permitted or to be permitted by law. Our office holders are currently covered by a directors and officers’
liability insurance policy. We have agreements with each of our current office holders exculpating them from a breach of their duty of
care to us to the fullest extent permitted by law, subject to limited exceptions, and undertaking to indemnify them to the fullest extent
permitted by law, subject to limited exceptions. This indemnification is limited to events determined as foreseeable by the board of directors
based on our activities, and to an amount or according to criteria determined by the board of directors as reasonable under the circumstances.
The maximum aggregate amount of indemnification that we may pay to our office holders based on such indemnification agreement is an amount
equal to 25% of our shareholders’ equity on a consolidated basis, less a provision that was made for indemnification as stated,
based on our most recent financial statements made publicly available before the date on which the indemnification payment was made. Such
indemnification amounts are in addition to any insurance amounts. Each office holder who previously received an indemnification letter
from us and agreed to receive this new letter of indemnification, gave his approval to the termination of all previous letters of indemnification
that we have provided to him or her in the past, if any; however, in the opinion of the SEC, indemnification of office holders for liabilities
arising under the Securities Act is against public policy and therefore unenforceable.
We previously entered into letters of indemnification with some former office holders
that currently remain in effect, and pursuant to which we undertook to indemnify them with respect to certain liabilities and expenses
then permitted under the Companies Law, which are similar to those described above. These letters of indemnification are limited to foreseeable
events that were determined by the board of directors and indemnity payments are limited to a maximum amount of $2.0 million for one series
of related events for each office holder.
D. Employees
As of December 31, 2023, we had 1,813 employees, of whom 457 were based in Israel, including 21 individuals
who provide services to us through our manpower agreement (“Manpower Agreement”) with
Kibbutz Sdot-Yam, discussed below, and with whom we do not have employment relationships, 574 employees in the United States (including
123 employees in our Richmond Hill facility we announced on its closure on December 13, 2023), 123 employees in Australia, 127 in Canada,
445 in India, 58 in the United Kingdom, 24 in Asia and 5 in Sweden. The following table shows the breakdown of our global workforce by
category of activity as of December 31 for the past three fiscal years:
|
As of December 31, |
||||||||||||
|
Department |
2023 |
2022 |
2021 |
|||||||||
|
Manufacturing and operations |
1,080 |
1,339 |
1,397 |
|||||||||
|
Research and development |
19 |
17 |
24 |
|||||||||
|
Sales, marketing, service and support |
533 |
557 |
651 |
|||||||||
|
Management and administration |
181 |
198 |
200 |
|||||||||
|
Total |
1,813 |
2,111 |
2,272 |
|||||||||
_________
The size of our global workforce decreased by 298 employees in 2023. Such decrease is due to company restructuring
plan which includes the closure of Sdot Yam facility.
Israeli labor laws (applicable to our Israeli employees) govern the length of the
workday, minimum wages for employees, procedures for hiring and dismissing employees, determination of severance pay, annual leave, sick
days, advance notice of termination of employment, equal opportunity and anti-discrimination laws and other conditions of employment.
Subject to certain exceptions, Israeli law generally requires severance pay upon the retirement, death or dismissal of an employee, and
requires us and our employees to make payments to the NII, which is similar to the U.S. Social Security Administration. Our employees
have pension plans in accordance with the applicable Israeli legal requirements.
None of our employees work under any collective bargaining agreements. Extension orders
issued by the IMEI apply to us and affect matters such as cost of living adjustments to salaries, length of working hours and week, recuperation
pay, travel expenses, and pension rights. We have never experienced labor-related work stoppages or strikes and, while there can be no
assurance that we will not experience any, we believe that our relations with our employees are satisfactory.
E. Share Ownership
Beneficial Ownership of Executive Officers and Directors
The following table sets forth certain information regarding the beneficial ownership
of our ordinary shares as of March 1, 2024, of each of our directors and executive officers.
|
Name of Beneficial Owner
|
Number of Shares Beneficially Held(1) |
Percent of Class |
|||
|
Executive Officers |
|||||
|
Yos Shiran |
* |
* |
|||
|
Nahum Trost |
* |
* |
|||
|
David Cullen |
* |
* |
|||
|
Ken Williams |
* |
* |
|||
|
Edward Smith |
* |
* |
|||
|
Idit Maayan Zohar |
* |
* |
|||
|
Amir Cahana |
* |
* |
|||
|
Amihai Seider |
* |
* |
|||
|
Erez Margalit |
* |
* |
|||
|
Ron Mosberg |
* |
* |
|||
|
Lilach Gilboa |
* |
* |
|||
|
Gilad Frenkel |
* |
* |
|||
|
José Luis Ramón |
* |
* |
|||
|
Directors |
|||||
|
Dr. Ariel Halperin(2) |
14,089,994 |
40.8 |
|||
|
Nurit Benjamini |
* |
* |
|||
|
Lily Ayalon |
* |
* |
|||
|
David Reis |
* |
* |
|||
|
Maxim Ohana |
* |
* |
|||
|
Ronald Kaplan |
* |
* |
|||
|
Ornit Raz |
* |
* |
|||
|
Giora Wegman |
* |
* |
|||
|
Tom Pardo Izhaki |
* |
* |
|||
|
All current directors and executive officers
as a group (22 persons)(2) |
_________
| * |
Less than one percent of the outstanding ordinary shares. |
| (1) |
As used in this table, “beneficial ownership” means the sole or shared power
to vote or direct the voting or to dispose or direct the disposition of any security. For purposes of this table, a person is deemed to
be the beneficial owner of securities that can be acquired within 60 days from March 1, 2024, through the exercise of any option or warrant.
Ordinary shares subject to options that are currently exercisable or exercisable within 60 days, or other awards that are convertible
into our ordinary shares within 60 days, are deemed outstanding for computing the ownership percentage of the person holding such options
or other agreements, but are not deemed outstanding for computing the ownership percentage of any other person. The percentages are based
upon 34,536,236 ordinary shares outstanding as March 1, 2024. All our shareholders, including the shareholders listed above, have the same voting rights attached to
their ordinary shares. See “ITEM 10.B: Additional Information—Memorandum and Articles of Association—Voting.”
Our directors and executive officers hold, in the aggregate, (i) 388,234 options immediately exercisable
or exercisable within 60 days from March 1, 2024, with a weighted average exercise price of $13.1 per share and have expiration dates
generally seven years after the grant date, (ii) 28,078 RSUs that vest within 60 days from March 1, 2024, and (iii) 8,600 ordinary shares.
|
| (2) |
Consists of (i) 60,500 options to acquire our ordinary shares held directly by Dr. Halperin
and (ii) 14,029,494 ordinary shares beneficially owned by Tene Investment in Projects 2016, L.P. (“Tene”).
As further described in footnote (2) under “ITEM 7.A: Major Shareholders and Related Party Transactions—Major Shareholders,”
Each of Dr. Halperin, Tene Growth Capital III (G.P.) Company Ltd. (“Tene III”), and
Tene Growth Capital 3 (Fund 3 G.P.) Projects, L.P (“Tene III Projects”) may be deemed
to share voting power over the 14,029,494 ordinary shares and dispositive power over the 5,589,494 ordinary shares, in each case, beneficially
owned by Tene. See “ITEM 7.A: Major Shareholders and Related Party Transactions—Major Shareholders.” |
ITEM
7: Major Shareholders and Related Party Transactions
| A. |
Major Shareholders |
The following table sets forth certain information regarding the beneficial ownership
of our outstanding ordinary shares as of the date indicated below, by each person who we know beneficially owns 5.0% or more of the outstanding
ordinary shares. For information on the beneficial ownership of each of our directors and executive officers individually and as a group,
see “ITEM 6.E: Directors, Senior Management and Employees—Share Ownership.”
Beneficial ownership of ordinary shares is determined in accordance with the rules
of the SEC and generally includes any ordinary shares over which a person exercises sole or shared voting or investment power, or the
right to receive the economic benefit of ownership. For purposes of the table below, we deem shares subject to options or other agreements
that are currently exercisable or exercisable within 60 days of March 1, 2024, to be outstanding and to be beneficially owned by the person
holding the options for the purposes of computing the percentage ownership of that person but we do not treat them as outstanding for
the purpose of computing the percentage ownership of any other person. The amounts and percentages are based upon 34,536,236 ordinary
shares outstanding as of March 1, 2024.
All our shareholders, including the shareholders listed below, have the same voting
rights attached to their ordinary shares. See “ITEM 10.B: Additional Information—Memorandum and Articles of Association—Voting.”
A description of any material relationship that our principal shareholders have had
with us or any of our predecessors or affiliates within the past three years is included below under “—Related Party Transactions.”
|
Name of Beneficial Owner |
Number of Shares Beneficially
Owned |
Percentage of Shares Beneficially
Held |
||||||
|
Mifalei Sdot-Yam Agricultural Cooperative Society Ltd. (1)(3) |
14,029,494 |
40.6 |
% | |||||
|
Tene Investment in Projects 2016, L.P.(2)(3) |
14,029,494 |
40.6 |
% | |||||
|
The Phoenix Holdings Ltd. (4) |
3,928,671 |
11.4 |
% | |||||
|
Global Alpha Capital Management Ltd. (5) |
2,981,057 |
8.6 |
% | |||||
(1) Based on a Schedule 13D/A filed on September 19, 2023 by Mifalei Sdot-Yam Agricultural
Cooperative Society Ltd. (“Mifalei Sdot-Yam”). Mifalei Sdot-Yam is controlled by Sdot-Yam
Business, Holding and Management – Agricultural Cooperative Society Ltd., which is in turn controlled by Kibbutz Sdot-Yam. Mifalei
Sdot-Yam holds shared voting power, over 14,029,494 ordinary shares and sole dispositive power over 10,440,000 ordinary shares. No individual
member of Mifalei Sdot-Yam has dispositive power or casting vote over the ordinary shares. The Economic Council elected by the members
of Kibbutz Sdot-Yam manages the economic activities and strategy of Kibbutz Sdot-Yam. The Economic Council takes its decisions by majority
vote and currently has eleven members, including Shai Bober and Tom Pardo, which are directors on our board. The
address of Kibbutz Sdot-Yam is MP Menashe 3780400, Israel. Our board of directors operates independently from the Economic Council.
Kibbutz Sdot-Yam is a communal society, referred to in Hebrew as a “kibbutz”
(plural “kibbutzim”) with approximately 460 members and an additional 350 residents
located in Israel on the Mediterranean coast between Tel Aviv and Haifa. Established in 1940, Kibbutz Sdot-Yam is a largely self-governed
community of members who share certain social ideals and professional interests on a communal basis. Initially, the social idea behind
the formation of the kibbutzim in Israel was to create a communal society in which all members share equally in all the society’s
resources and which provides for the needs of the community. Over the years, the structure of the kibbutzim has evolved, and today there
are a number of different economic and social arrangements adopted by various kibbutzim.
Today, each member of Kibbutz Sdot-Yam continues to own an equal part of the assets
of the Kibbutz. The members of Kibbutz Sdot-Yam are engaged in a number of economic activities, including agriculture, industrial operations
and outdoor venue operations. A number of Kibbutz members are engaged in professions outside the Kibbutz. The Kibbutz is the owner and
operator of several private companies. The Kibbutz community holds in common all land, buildings and production assets of these companies.
Some of the members of Kibbutz Sdot-Yam work in one of the production activities of
Kibbutz Sdot-Yam, according to the requirements of Kibbutz Sdot-Yam and the career objectives of the individual concerned. Other members
work outside of Kibbutz Sdot-Yam in businesses owned by other entities. Each member receives income based on the position the member holds
and his or her economic contribution to the community, as well as on the size and composition of his or her family. Each member’s
income depends on the income of Kibbutz Sdot-Yam from its economic activities. Each member has a personal pension fund that is funded
by Kibbutz Sdot-Yam, and all accommodation, educational, health and old age care services, as well as social and municipal services, are
provided either by or through Kibbutz Sdot-Yam and are subsidized by Kibbutz Sdot-Yam.
The elected Economic Council is the key economic decision-making body of Kibbutz Sdot-Yam.
Kibbutz Sdot-Yam also has a General Secretary (chairman) and other senior officers, all of whom are elected by the members of Kibbutz
Sdot-Yam at its General Meeting for terms of seven years. A meeting of the members of the Kibbutz may remove a member of the Economic
Council by simple majority vote.
As of December 31, 2023, 21 of our employees, or 0.01% of our total workforce, were
also members of Kibbutz Sdot-Yam.
(2) Based on a Schedule 13D/A filed on September 19, 2023 and on information provided
to the Company by the beneficial owner, Tene Investment in Projects 2016, L.P. (“Tene”)
has shared voting power over 14,029,494 ordinary shares and shared dispositive 3,589,494 ordinary shares, which it directly owns. Pursuant
to the Shareholders’ Agreement as amended by the September Amendment (as defined below), Tene also shares voting power over 10,440,000
Ordinary Shares beneficially owned by Mifalei Sdot-Yam. Dr. Ariel Halperin is the sole director of Tene Growth Capital III (G.P.)
Company Ltd. (“Tene III”), which is the general partner of Tene Growth Capital 3 (Fund
3 G.P.) Projects, L.P (“Tene III Projects”), which is the general partner of Tene.
Dr. Halperin is also a member of our board of directors. Each of Dr. Halperin, Tene III and Tene III Projects may thus be deemed
to share voting power over the 14,029,494 ordinary shares and dispositive power over the 3,589,494 ordinary shares, in each case, beneficially
owned by Tene.
(3) On October 13, 2016, based on approval from the Israeli Antitrust Commission, Mifalei Sdot-Yam and Tene entered into the shareholders’ agreement (“Shareholders’ Agreement”), memorialized in a term sheet (the “Term Sheet”) signed by Mifalei Sdot-Yam and Tene on September 5, 2016, and further amended on February 20, 2018 and September 18, 2023. The amendment executed on September 18, 2023 (the “September Amendment”) replaced the Shareholders Agreement in its entirety. Pursuant to the September Amendment:
| • |
The parties agreed to vote at general meetings of our shareholders in the same manner, following discussions intended to reach an
agreement on any matters proposed to be voted upon, with Mifalei Sdot-Yam determining the manner in which both parties will vote if no
agreement is reached, except with respect to certain carved-out matters, with respect to which Tene, for so long as it holds more than
3% of the issued and outstanding share capital of the Company, will determine the manner in which both parties will vote if no agreement
is reached. In addition, each of Mifalei Sdot-Yam and Tene shall be entitled to vote separately in any manner with respect to the appointment,
replacement or terms of compensation of the Company’s Chief Executive Officer. |
| • |
In the event Tene holds less than 3% of the issued and outstanding share capital of the
Company, then the director nominated by Tene will be replaced by an alternate director (in accordance with applicable law and the articles
of association) nominated by Mifalei Sdot-Yam from a list of nominees that was agreed by the parties at the time the Amendment was signed
for a period ending on the earlier of (i) 60 days (after which time the director may resign) and (ii) the date of a general meeting
for the election of directors, and thereafter Tene will vote all its shares for the election of four directors nominated by Mifalei Sdot-Yam.
|
| • |
The parties agree that Dr. Ariel Halperin will serve as the chairperson of the Board until June 30, 2024,
and thereafter act to appoint Mr. David Reis as the new chairperson of the board of directors. |
| • |
The parties agree that Dr. Ariel Halperin will serve as the chairperson of the Board until June 30, 2024,
and thereafter act to appoint Mr. David Reis as the new chairperson of the Board. |
| • |
Tene granted Mifalei Sdot-Yam a right of first refusal and Mifalei Sdot-Yam granted Tene certain tag-along rights with respect to
their disposition of ordinary shares. If Tene sells more than 3% of the issued and outstanding share capital of the Company without providing
Mifalei Sdot-Yam its right of first offer then certain rights contemplated under the September Amendment will terminate, including Tene’s
tag-along right. |
| • |
The call option granted by Mifalei Sdot-Yam pursuant to the Term Sheet was not extended and expired on September 9, 2023. The call
option contemplated an option to exercise 2,000,000 ordinary shares of the Company. |
(4) Based on Schedule 13G/A filed with the SEC on February 26, 2024, by The Phoenix Holdings Ltd., as of
December 31, 2023, The Phoenix Holdings Ltd. held shared voting and dispositive power over 3,928,671 ordinary shares. These ordinary shares
are beneficially owned by various direct or indirect, majority or wholly owned subsidiaries of The Phoenix Holding Ltd. (the “Subsidiaries”).
The Subsidiaries manage their own funds and/or the funds of others, including for holders of exchange-traded notes or various insurance
policies, members of pension or provident funds, unit holders of mutual funds, and portfolio management clients. Each of the Subsidiaries
operates under independent management and makes its own independent voting and investment decisions. The address of The Phoenix Holding
Ltd. is Derech Hashalom 53, Givataim, 53454, Israel.
(5) Based on Schedule 13G/A filed with the SEC on February 8, 2024 by Global Alpha
Capital Management Ltd., as of December 31, 2023, Global Alpha Capital Management Ltd held sole voting power over 2,154,231 ordinary shares,
and sole dispositive power over 2,981,057 ordinary shares. The address of the Global Alpha Capital Management Ltd. is 1800 McGill College,
Suite 1300, Montreal, Quebec, H3A 3J6, Canada.
Changes in Ownership
Prior to our IPO in March 2012, Kibbutz Sdot-Yam owned 18,715,000, or 70.1% of our ordinary shares. Immediately
after the IPO, due to our issuance of ordinary shares, the Kibbutz’s ownership in our ordinary shares decreased to 56.1%. As a result
of two subsequent public offerings of ordinary shares completed in 2013 and 2014, the Kibbutz sold 6,325,000 of the 17,765,000 ordinary
shares it owned, decreasing its ownership percentage to 32.8% immediately after those offerings. Pursuant to the Shareholders’ Agreement,
effective October 13, 2016, the Kibbutz sold to Tene 1,000,000 of its 11,440,000 ordinary shares and granted to Tene the Call Option to
purchase 2,000,000 ordinary shares, which expired on September 9, 2023 in accordance with the September Amendment. During 2018, Tene purchased
an additional 2,589,494 ordinary shares in the open market. The parties also agreed to vote at general meetings of our shareholders together,
such that they share voting power over 14,029,424 ordinary shares. As a result, as of March 1, 2024, the Kibbutz and Tene beneficially
owned 40.6% of our ordinary shares.
Beneficial ownership by holders of more than 5% of our ordinary shares is shown in
the table above.
Registered Holders
Based on a review of the information provided to us by our transfer agent, as of March
1, 2024, there were three registered holders of our ordinary shares, one of which (Cede & Co., the nominee of the Depositary Trust
Company) is a United States registered holder, holding approximately 59.3% of our outstanding ordinary shares.
| B. |
Related Party Transactions |
Related Party Transactions Policy
Our audit committee adopted and annually reapproves a policy, which lays out the procedures
for approving transactions with our controlling shareholders, currently Kibbutz Sdot-Yam and Tene, and certain of our office holders and
other related persons. Pursuant to this policy, as required by the Companies Law, for each transaction with our controlling shareholder
or transactions in which our controlling shareholder has a personal interest as well as transactions with our office holders or transactions
in which our office holders have a personal interest, our audit committee is required to determine whether such transaction is an extraordinary
transaction and, with respect to controlling shareholder transactions only, whether it is a negligible transaction. Subject to our audit
committee’s determination, negligible transactions and non-extraordinary transactions are subject to a competitive procedure comprised
of obtaining two third-party quotes for such transaction and additional requirements as required by the Companies Law. An extraordinary
transaction, which is not negligible, is subject, generally, to a tender in addition to the approvals required by the Companies Law. In
addition, this policy determines certain transactions with our controlling shareholder as negligible and non-extraordinary transactions
which are ongoing transactions but are required to be approved retroactively on an annual basis. Pursuant to this policy, we have, and
may in the future, engage in transactions with our controlling shareholder and officeholders including with respect to services consumed
by us for our operational needs as well as contribute donations to associations in which our controlling shareholder or shareholders has
or have a personal interest.
The following is a description of our related party transactions as defined under
Item 7.B of Form 20-F, since January 1, 2021.
Relationship and agreements with Kibbutz Sdot-Yam
We have entered into certain agreements with Kibbutz Sdot-Yam pursuant to which Kibbutz
Sdot-Yam provides us with, among other things, a portion of our labor force, electricity, maintenance, and other services.
Pursuant to certain of these agreements, in consideration for using facilities licensed
to us or for services provided by Kibbutz Sdot-Yam, we paid the Kibbutz an aggregate of $10.2 million in 2023, $11.3 million in 2022,
$11.0 million in 2021 (excluding VAT), as set forth in more detail below. We believe that these services are rendered to us in the ordinary
course of our business and that they represent terms no less favorable than those that would have been obtained from an unaffiliated third
party. Nevertheless, a determination with respect to such matters requires subjective judgments regarding valuations, and regulators and
other third parties may question whether our agreements with Kibbutz Sdot-Yam are no less favorable to us than if they had been negotiated
with unaffiliated third parties.
Under the Companies Law, we are required to approve every three years any extraordinary
transaction in which a controlling shareholder has a personal interest and that has a term of more than three years, unless the company’s
audit committee, constituted in accordance with the Companies Law, determines, solely with respect to agreements that do not involve compensation
to a controlling shareholder or his or her relatives, in connection with services rendered by any of them to the company or their employment
with the company, that a longer term is reasonable under the circumstances, or another exemption applies under Israeli law. Our audit
committee has determined that the term of all the agreements entered into between us and Kibbutz Sdot-Yam are reasonable under the relevant
circumstances, including our Manpower Agreement entered into between Kibbutz Sdot-Yam and us on January 1, 2011, as amended on July 30,
2015 and November 27, 2018 and extended on August 31, 2021 (except, as it relates to office holders which portion terminated in November
2021), and the Services Agreement entered into between Kibbutz Sdot-Yam and us on July 20, 2011, as amended on February 13, 2012, July
30, 2015, November 27, 2018 and October 14, 2021.
Land use agreement
Land leased to Kibbutz Sdot-Yam by the ILA and the Caesarea Development
Corporation
Our headquarters and research and development facilities are located on the grounds
at Kibbutz Sdot-Yam and include 30,744 square meters of facility and 60,870 square meters of un-covered yard. The headquarters and facilities
are located on lands title to which is held by the ILA, and which are leased or subleased to Kibbutz Sdot-Yam pursuant to the following
agreements: (i) a 49-year lease from the ILA signed in July 1978 that commenced in 1962 and expired in 2011 and has been extended pursuant
to an option in the agreement for an additional 49 years, and (ii) a new agreement entered into in April 2014 between Kibbutz Sdot-Yam
and the Caesarea Development Corporation pursuant to which Kibbutz Sdot-Yam leases the relevant premises (including such premises which
are leased by the Kibbutz to us) from the Caesarea Development Corporation until year 2037. The ILA may terminate its leases with Kibbutz
Sdot-Yam in certain circumstances, including if Kibbutz Sdot-Yam breaches its agreements therewith, commences proceedings to disband or
liquidate or in the event that Kibbutz Sdot-Yam ceases to be a “kibbutz” as defined in the lease (meaning, a registered cooperative
society classified as a kibbutz). The ILA may, from time to time, change its regulations governing the lease agreements, and these changes
could affect the terms of the land use agreement, as amended, including the provisions governing its termination.
Kibbutz Sdot-Yam currently permits us to use the land and facilities pursuant to a
land use agreement which became effective in March 2012 and expires 20 years thereafter. Under the land use agreement, Kibbutz Sdot-Yam
agreed to permit us to use approximately 100,000 square meters of land leased to the Kibbutz, consisting both of facilities and unbuilt
areas, in consideration for an annual fee of NIS12.9 million ($4.0 million in 2013 and thereafter, plus VAT, and beginning in 2013, adjusted
every six months based on any increase of the Israeli consumer price index compared to the index as of January 2011. The annual fee may
be adjusted if the Kibbutz is required to pay significantly higher lease fees to the ILA or Caesarea Development Corporation, and every
three years thereafter if Kibbutz Sdot-Yam chooses to obtain an appraisal. The appraiser will be mutually agreed upon or, in the absence
of agreement, will be chosen by Kibbutz Sdot-Yam out of the list of appraisers recommended at that time by Bank Leumi Le-Israel B.M. (“Bank
Leumi”). Every addition or deletion of space is accounted for based on the original rates mentioned above.
In addition, in the land use agreement, we have waived any claims for payment of NIS
18.0 million ($4.6 million) from Kibbutz Sdot-Yam with respect to prior investments in infrastructure on Kibbutz Sdot-Yam’s lands
used by us under the prior land use agreement.
During 2021, following a request by the Kibbutz, in accordance with its rights under
the land lease agreements for Sdot-Yam and Bar-Lev facilities the terms of the land lease agreement, a market assessment of an appointed
independent appraiser was obtained and following such appraisal process, we are required to pay an amount of NIS 18.6 million (US$ 6.0
million) and NIS 8.1 million (US$ 2.6 million) annually for each of the Sdot-Yam and the Bar-Lev facilities, respectively.
Under the land use agreement, we are not permitted to decrease or return any portion
of the land under the agreement to Kibbutz Sdot-Yam. Kibbutz Sdot-Yam has the right to accept or reject any such written request at its
sole discretion. However, if the Kibbutz refuses or does not respond to the request within a three-month period, we are allowed to propose
an accepted third-party, who will be granted subordinate rights of use. In any case, we will continue to be liable to Kibbutz Sdot-Yam
with respect to such lands.
We have committed to fund the cost of the construction, up to a maximum of NIS 3.3
million ($1.1 million) plus VAT, required to change the access road leading to Kibbutz Sdot-Yam and our facilities, such that the entrance
to our facilities will be separated from the entrance into Kibbutz Sdot-Yam. From the said amount, the Kibbutz has already set off an
amount of NIS 300,000 for expenses incurred by it. In addition, we committed to pay NIS 200,000 (approximately $64,000) plus VAT to cover
the cost of paving an area of land leased from Kibbutz Sdot-Yam with such payment deducted in monthly installments over a four-year period
beginning the year the construction completed from the lease payments to be made to Kibbutz Sdot-Yam under the land use agreement related
to our Sdot-Yam facility.
In connection with this agreement, we reached non-monetary agreements with Kibbutz
Sdot-Yam allowing them access to certain infrastructures located in the leased premises such as electrical, water and sewage.
While Kibbutz Sdot-Yam is responsible under the agreement for obtaining various licenses,
permits, approvals and authorizations necessary for use of the property, we have waived any monetary recourse against Kibbutz Sdot-Yam
for failure to receive such licenses, permits, approvals and authorizations.
Land purchase and leaseback agreement
On June 6, 2007, we entered into a long-term lease agreement with the ILA in the lands
and facilities of the Bar-Lev Industrial Center for an initial period of 49 years as of February 6, 2005, with an option to renew for
an additional term of 49 years as of the end of the initial period. On March 31, 2011, we entered into a land purchase and leaseback agreement
with Kibbutz Sdot-Yam, pursuant to which, effective as of September 1, 2012, Kibbutz Sdot-Yam acquired from us our rights in the lands
and facilities of the Bar-Lev Industrial Park in consideration for NIS 43.7 million ($10.9 million). Pursuant to the land purchase and
leaseback agreement, we were required to obtain certain third-party consents from, among others, the Israeli Tax Authorities and from
the Israeli Investment Center. All such consents have been obtained. The land purchase and leaseback agreement were executed simultaneously
with the execution of a land use agreement. Pursuant to the land use agreement, Kibbutz Sdot-Yam permits us to use the Bar-Lev land for
a period of 10 years commencing in September 2012 that will be automatically renewed unless we give two years prior notice, for an additional
10-year term in consideration for an annual fee of NIS 4.1 million ($1.2 million) to be linked to the increase of the Israeli consumer
price index. In accordance with the terms of the agreement, we elected to extend the term of the agreement for another 10 years until
August 31, 2032.
Following a request by the Kibbutz, in accordance with its rights under the land lease
agreements for Sdot-Yam and Bar-Lev facilities the terms of the land lease agreement, a market assessment of an appointed independent
appraiser was obtained, and amounts paid starting at 2021 are based on such appraisal.
Under the land use agreement, we may not decrease or return to Kibbutz Sdot-Yam any
part of the land underlying the land use agreement; however, subject to several limitations, we may be able to sublease such lands to
a person approved in advance by Kibbutz Sdot-Yam. We may assign our rights under the land use agreement pursuant to a merger with a third
party and to any corporation under our control. In such an event, we will continue to be liable to Kibbutz Sdot-Yam with respect to such
lands. In addition, subject to certain exceptions, if we need additional facilities on the land that we are permitted to use by Kibbutz
Sdot-Yam, subject to obtaining the permits required by law, Kibbutz Sdot-Yam may build such facilities for us by using the proceeds of
a loan that we will make to Kibbutz Sdot-Yam, which loan shall be repaid to us by off-setting the monthly additional payment that we would
pay for such new facilities and, if not fully repaid during the lease term, upon termination thereof.
Agreement for Additional Land on the Grounds
Near Our Bar-Lev Manufacturing Facility
In August 2013, we entered into the Agreement for Additional Land, pursuant to which
Kibbutz Sdot-Yam acquired additional land of approximately 12,800 square meters on the grounds near our Bar-Lev manufacturing facility,
which we required in connection with the construction of the fifth production line at our Bar-Lev manufacturing facility and leased it
to us for a monthly fee of approximately NIS 70,000 (approximately $20,000). Under the agreement, Kibbutz Sdot-Yam committed to (i) acquire
the long-term leasing rights of the Additional Bar-Lev Land from the ILA, (ii) perform preparation work and construction, in conjunction
with the administrative body of Bar-Lev industrial park and other contractors according to our plans, (iii) build a warehouse according
to our plans, and (iv) obtain all permits and approvals required for performing the preparation work of the Additional Bar-Lev Land and
for the building of the warehouse. The warehouse in Bar-Lev will be situated both on the current and new land. The financing of the building
of the warehouse is to be made through a loan that will be granted by us to Kibbutz Sdot-Yam, in the amount of the total cost related
to the building of the warehouse, and such loan, including principal and interest, shall be repaid by setoff of the lease due to Kibbutz
Sdot-Yam by us for our use of the warehouse. The principal amount of the loan will bear interest at a rate of 5.3% a year. On November
30, 2015, the land preparation work had been completed and the holding of the Additional Bar-Lev Land was delivered to us. To date, the
warehouse has not been constructed.
Pursuant to the above-mentioned land use agreements in Sdot-Yam and Bar-Lev, we paid
to Kibbutz Sdot-Yam an aggregate of $7.9 million in 2023, $8.2 million in 2022, and $7.7 million in 2021.
Manpower agreement
In March 2001, we entered into a Manpower Agreement with Kibbutz Sdot-Yam, which was
amended in December 2006. Pursuant to the agreement, Kibbutz Sdot-Yam agreed to provide us with labor services staffed by Kibbutz members,
candidates for Kibbutz membership and Kibbutz residents (each a “Kibbutz Appointee”).
This agreement was replaced by a new Manpower Agreement, signed on July 20, 2011, with a term of 10 years from January 1, 2011 that was
automatically renewed on December 31, 2020 and will be further automatically renewed, unless one of the parties gives six months’
prior notice, for additional one-year periods until December 31, 2030. Our audit committee has determined that the term of the Manpower
Agreement with Kibbutz Sdot-Yam is reasonable under the relevant circumstances except as it relates to office holders. In November 2021,
the portion of the agreement that relates to office holders terminated and was not renewed.
Under the Manpower Agreement and addendums thereto, Kibbutz Sdot-Yam provides us with
labor services staffed by Kibbutz Appointees. The consideration to be paid for each Kibbutz Appointee is based on our total cost of employment
for a non-Kibbutz Appointee employee performing a similar role. The number of Kibbutz Appointees may change in accordance with our needs.
Under the Manpower Agreement, we will notify Kibbutz Sdot-Yam of any roles that require staffing, and if the Kibbutz offers candidates
with skills similar to other candidates, we will give preference to the hiring of the relevant Kibbutz members. Kibbutz Sdot-Yam is entitled
under the Manpower Agreement, at its sole discretion, to discontinue the engagement of any Kibbutz Appointee of manpower services through
his or her employment by Kibbutz Sdot-Yam and require such appointee to become employed directly by us.
Under the Manpower Agreement, we will contribute monetarily to assist with the implementation
of a professional reserve plan to encourage young Kibbutz members to obtain the necessary education for future employment with us. We
will provide up to NIS 250,000 (approximately $77 thousands) per annum for this plan linked to changes in the Israeli consumer price index
plus VAT. We will also implement a policy that prioritizes the hiring of such young Kibbutz members as our employees upon their graduation.
Pursuant to the Manpower Agreement, we paid to Kibbutz Sdot-Yam an aggregate of $1.6 million in 2023, $1.8 million in 2022, and $1.8 million
in 2021. As of December 31, 2023, we engaged 21 Kibbutz Appointees on a permanent basis.
Services agreement
On July 20, 2011, we entered into a services agreement with Kibbutz Sdot-Yam, as amended
on February 13, 2012 (“Original Services Agreement”). Pursuant to the Original Services
Agreement, the Kibbutz provided us with various services related to our operational needs. The Original Services Agreement also outlined
the distribution mechanism between us and Kibbutz Sdot-Yam for certain expenses and payments due to local authorities, such as taxes and
fees in connection with our business facilities. The agreement expired on March 21, 2015.
On July 30, 2015, following the approval of our audit committee and the board, our
shareholders approved an amended services agreement for a period of three years. On November 27, 2018, following the approval of our audit
committee and the board, our shareholders approved a further amended services agreement (“Amended
Services Agreement”) for an additional period of three years, which was extended in 2021 for an additional three-year period.
Under the Amended Services Agreement, Kibbutz Sdot-Yam continues to provide us with various services it provides in the ordinary course
of our business. The amount that we pay Kibbutz Sdot-Yam under the Amended Services Agreement depends on the scope of services we will
receive and is based on rates specified in such agreement which were determined based on market terms, taking into account the added value
of consuming services from Kibbutz Sdot-Yam, considering its physical proximity to our manufacturing plant in Sdot-Yam and its expertise.
The amounts we pay for the services are subject to certain adjustments for increases in the Israeli consumer price index. In addition,
the Amended Services Agreement grants Kibbutz Sdot-Yam a right of first proposal in special projects with respect to the metal workshop
services. The Amended Services Agreement also outlines the distribution mechanism between us and the Kibbutz for certain expenses and
payments due to local authorities, such as certain taxes and fees in connection with our business facilities. Each party may terminate
such agreement upon a material breach, following 30 days prior notice, or upon liquidation of the other party, following a 45-days’
prior notice. In connection with such agreements, we paid the Kibbutz Sdot-Yam an aggregate of $0.8 million in 2023, $1.3 million in 2022,
and $1.5 million in 2021.
From time to time, we enter into additional arrangements in the ordinary course of
business, at market prices and on market terms, with Kibbutz Sdot-Yam, which are not material in accordance with related party transaction
procedures adopted by our audit committee and our board of directors.
Management Services Agreement with Tene
In October 2021, we entered into a management services agreement with Tene Growth
Capital 3 Funds Management Company Ltd., the management company of the general partner of Tene Investment in Projects 2016, L.P., pursuant
to which Tene Investment in Projects 2016, L.P. provides us with certain management services for an aggregate annual management fee of
NIS 870,000 plus VAT, paid in equal quarterly installments.
The fees for the services include (i) services provided by the active Chairman
of the Board (who will devote his time in accordance with our needs, as required from time to time, with the scope of the position estimated
to be approximately 28 hours per month); (ii) one (1) director service, that since expired; and (iii) regular business development advice,
including financial and strategic advice made available by Tene Management through its employees, officers and directors and/or consultants
(the “Management Services”).
During the term of the Management Services Agreement, either party has the right to
terminate the Management Services detailed in section (ii) of the definition of the Management Services above at any time and for any
reason or for no reason upon thirty (30) days prior written notice to the other party and following such termination the annual management
fee shall be reduced to NIS 750,000 plus VAT.
We agreed to reimburse Tene Management for all expenses reasonably required in the
performance of the Management Services under the Management Services Agreement pursuant to the terms and conditions of our policies, as
may be amended from time to time.
The Management Services pursuant to the agreement will be provided by Dr. Ariel Halperin
and Mr. Dori Brown and/or officeholders of Tene Management, and if necessary, by employees and/or consultants of Tene Management, depending
on our needs.
The term of the Management Services Agreement is for three (3) years commencing the
date the agreement was approved by our shareholders on November 17, 2021. Either party has the right to cancel the Management Services
Agreement at any time for any reason or for no reason upon thirty (30) days written notice to the other party or effective immediately
if Tene Managements’ representatives are no longer serving as our directors.
At the end of the term of the Management Services Agreement the parties may decide
to extend it, subject to the receipt of approvals required under applicable Israeli laws.
Agreements with directors and officers
Employment agreements
See “ITEM 6.B: Directors, Senior Management and Employees—Compensation—Employment
and consulting agreements with executive officers”.
Indemnification agreements
See “ITEM 6.C: Directors, Senior Management and Employees—Board Practices—Exculpation,
insurance and indemnification of office holders.”
| C. |
Interests of Experts and Counsel |
Not applicable.
ITEM 8: Financial Information
| A. |
Consolidated Financial Statements and Other Financial Information |
Consolidated Financial Statements
For our audited consolidated financial statements for the year ended December 31,
2022, please see pages F-4 to F-5 of this report.
Legal Proceedings
Claims related to alleged occupational illnesses
Overview
Since 2008, we have been named, either directly or as a third-party defendant and
are currently subject to numerous claims for damages related to occupational illnesses contracted through exposure to particles during
cutting, polishing, sawing, grinding, breaking, crushing, drilling, sanding or sculpting our products.
As of December 31, 2023, we were subject to pending lawsuits delivered to us, we should
with respect to 172 injured persons globally (of which 74 were in Israel, 76 in Australia and 22 in the United States) and had received
pre-litigation demand letters with respect to additional 9 persons, in each case relating mainly to silicosis claims.
With respect to claims filed in Israel, a judgment was entered by the District Court during 2013, pursuant
to which we were found to be comparatively liable for 33% of the plaintiff’s total damages. The remaining liability was imposed
on the plaintiff at 40%, as contributory negligence of the plaintiff, and on the State of Israel at 27%. Following an appeal to the Israeli
Supreme Court, the parties entered into a settlement agreement and the District Court’s ruling was cancelled, although it remains
a non-binding guideline. During December 2023, a judgment was rendered by an Israeli District Court, completely dismissing the claims
for damages as it was demonstrated that the injured person was properly warned over the years, yet failed to take the necessary measures
to comply with safety guidelines.
In November 2015 and in May 2017, we entered into agreements with the State of Israel
and with our main distributors in Israel, respectively, with the consent of our insurance carriers, under which we agreed with the State
and each of our main distributors to cooperate, subject to certain terms, with respect to joint defense of individual claims filed by
injured persons during a certain time period (NII claims are excluded from our agreement with the State) and on the apportionments between
us of the total liability of us, the State, and the distributors, if found, in such claims. During January 2020, the State of Israel approved
an additional 5-year extension to this agreement which as of December 31, 2022 is in effect with 2 distributers only.
With respect to claims filed in Australia, while there is still no
precedent in Australia as to the liability of manufacturers and suppliers in silicosis claims, our insurance carriers acting within their
rights under our insurance policies have elected to negotiate and/or agree to settlements in most Australian cases. This practice has
led us to recognize these claims as probable and include a provision with respect thereto. See Note See Note 11 of the notes to the financial
statements included elsewhere in this annual report. We may still elect to defend ourselves in such claims. If we are unsuccessful in
defending any claim, a precedent may be set against the Company, which may also adversely affect our position in other claims. With regard
to claims filed against us in the U.S, at this early stage of litigation we are unable to estimate the probability of the actual exposure
and we intend to vigorously defend the claims, subject to the insurers’ consent. See also “ITEM 3.D. Key Information—Risk
Factors— Results of bodily injury claims may have a material adverse effect on our business, operating results, and financial condition”.
Our Probable Risks Related to Outstanding Claims
We intend to contest the pending claims against us, although there can be no assurance
that we will succeed in these claims and it is possible that we will be liable for damages in connection with some of such claims. As
of December 31, 2023, we estimate that our total exposure with respect to pending claims in Israel and Australia related to 150 injured
persons is approximately $25.7 million, although the actual outcome of such claims may vary significantly from such estimates due to the
major variance in litigation awards. The number of injured persons does not include pre-litigation demand letters and settled claims.
Insurance
We have regional product liability insurance policies in the United States and Canada, each with a coverage
of up to $20 million per claim or per year, each in its relevant local currency, subject to certain terms and limitations, with relatively
low deductibles and valid through March 31, 2024. In India, we have a public liability insurance policy in the amount of INR 500
million ($6.0 million) effective until March 31, 2024.
Our employer liability insurance excludes silicosis damages and, therefore, in case
that we are found liable for any of our employees’ illness with silicosis, we will have to bear compensation for such damages, after
the deduction of payments made by the NII to an employee of ours, which might have an adverse effect on our business and results of operations.
However, in few cases, our carrier agreed to contribute (without admission) towards settlements albeit the silicosis exclusions.
General
From time to time, we are involved in other legal proceedings and claims in the ordinary
course of business related to a range of matters, including environmental, contract, employment claims, product liability and warranty
claims, and claims related to modification and adjustment or replacement of product surfaces sold. While the outcome of these other claims
cannot be predicted with certainty, we do not believe that any such claims will have a materially adverse effect on us, either individually
or in the aggregate. See Note 11 of the notes to the financial statements included elsewhere in this annual report.
Dividends
In February 2020, we revised our dividend policy to provide for a quarterly cash dividend
of up to 50% of reported net income attributable to controlling interest on a year-to-date basis, less any amount already paid as dividend
for the respective period (the “Calculated Dividend”), subject in each case to approval
by the Company’s board of directors. If the Calculated Dividend is less than $0.10 per share, no dividend shall be paid. In the
fourth quarter of 2020, we distributed a cash dividend in the amount of $0.14 per share, in the second quarter of 2021, we distributed
a cash dividend in the amount of $0.21 per share, in the fourth quarter of 2021, we distributed a cash dividend in the amount of $0.10
per share and in the third quarter of 2022, we distributed a cash dividend in the amount of $0.25 per share. During 2023 we did not distributed
dividends. Until 2021 each dividend distribution was subject to withholding tax of 20%, in 2022, the dividend distribution was subject
to withholding tax of 20.5%.
We cannot provide assurances regarding whether we will be able to issue a dividend
in the future in accordance with our dividend policy and may decide not to pay dividends in the future. The related withholding tax rate
can vary in accordance with the local laws and jurisdictions at the time of the dividend payment.
Under Israeli law, we may declare and pay dividends only if, upon the determination
of our board of directors, there is no reasonable concern that the distribution will prevent us from meeting the terms of our existing
and foreseeable obligations as they become due. The distribution of dividends is further limited by Israeli law to the greater of retained
earnings and earnings generated over the two most recent years. In the event that we do not have retained earnings or earnings generated
over the two most recent years legally available for distribution, we may seek the approval of the court to distribute a dividend. The
court may approve our request if it is convinced that there is no reasonable concern that a payment of a dividend will prevent us from
satisfying our existing and foreseeable obligations as they become due.
To the extent we declare a dividend, we do not intend to distribute dividends from
earnings related to our Approved/Beneficiary Enterprise programs. The taxable income exemption provided under the Approved/Beneficiary
Enterprise program is valid exclusively for undistributed earnings, and as a result, a distribution of earnings related to our Approved/Beneficiary
Enterprise programs would subject us to additional tax payments upon a distribution of these earnings as dividends.
The payment of dividends may be subject to Israeli withholding taxes. See “ITEM
10.E: Additional Information—Taxation—Israeli tax considerations and government programs—Taxation of our shareholders—Dividends”.
| B. |
Significant Changes |
Since the date of our audited financial statements included elsewhere in this annual
report, there have not been any significant changes in our financial position.
ITEM
9: The Offer and Listing
Not applicable, except for Items 9.A.4 and 9.C, which are detailed below.
| A. |
Offer and Listing Details |
Our ordinary shares have been trading on the Nasdaq Global Select Market under the
symbol “CSTE” since March 2012.
| B. |
Plan of Distribution |
Not applicable.
| C. |
Markets |
See “—Offer and Listing Details” above.
| D. |
Selling Shareholders |
Not applicable.
| E. |
Dilution |
Not applicable.
| F. |
Expenses of the Issue |
Not applicable.
ITEM
10: Additional Information
| A. |
Share Capital |
Not applicable.
| B. |
Memorandum of Association and Articles of Association |
Our authorized share capital consists of 200,000,000 ordinary shares, par value NIS
0.04 per share, of which 35,639,332 are issued and 34,536,236 are outstanding as of March 1, 2024.
A copy of our amended and restated articles of association is attached as Exhibit
1.1.
The information called for by this item is set forth in Exhibit 2.1 to this annual
report on Form 20-F and is incorporated herein by reference.
Listing
Our ordinary shares are listed on the Nasdaq Global Select Market under the symbol
“CSTE.”
| C. |
Material Contracts |
Summaries of the following material contracts and amendments to these contracts are
included in this annual report in the places indicated:
|
Material Contract |
Location in This Annual Report |
|
Agreements with Kibbutz Sdot-Yam |
“ITEM 7: Major Shareholders and Related Party Transactions—Related Party
Transactions—Relationship and agreements with Kibbutz Sdot-Yam.” |
|
Management Services Agreement with Tene |
“ITEM 7: Major Shareholders and Related Party Transactions—Related Party
Transactions—Management Services Agreement with Tene.” |
|
Agreements with Breton S.p.A. (Italy) |
“ITEM 3: Key Information—Risk Factors—If
we are unable to manufacture and/or ship our existing products globally as planned, our results of operations and future prospects will
suffer.” |
|
Form of Indemnification Agreement |
“ITEM 6: Directors, Senior Management and Employees—Board Practices—Exculpation,
insurance and indemnification of officer holders.” |
| D. |
Exchange Controls |
In 1998, Israeli currency control regulations were liberalized significantly, so that
Israeli residents generally may freely deal in foreign currency and foreign assets, and non-residents may freely deal in Israeli currency
and Israeli assets. There are currently no Israeli currency control restrictions on remittances of dividends on the ordinary shares or
the proceeds from the sale of the shares provided that all taxes were paid or withheld; however, legislation remains in effect pursuant
to which currency controls can be imposed by administrative action at any time.
Non-residents of Israel may freely hold and trade our securities. Neither our memorandum
of association nor our articles of association nor the laws of the State of Israel restrict in any way the ownership or voting of ordinary
shares by non-residents, except that such restrictions may exist with respect to citizens of countries which are in a state of war with
Israel. Israeli residents are allowed to purchase our ordinary shares.
| E. |
Taxation |
The following description is not intended to constitute a complete analysis of all
tax consequences relating to the acquisition, ownership and disposition of our ordinary shares. You should consult your own tax advisor
concerning the tax consequences of your particular situation, as well as any tax consequences that may arise under the laws of any state,
local, foreign or other taxing jurisdiction.
Israeli tax considerations and government programs
The following is a brief summary of the material Israeli tax laws applicable to us,
and certain Israeli Government programs benefiting us. This section also contains a discussion of material Israeli tax consequences concerning
the ownership of and disposition of our ordinary shares. This summary does not discuss all aspects of Israeli tax law that may be relevant
to a particular investor in light of his or her personal investment circumstances or to some types of investors, such as traders in securities,
who are subject to special treatment under Israeli law. Because some parts of this discussion are based on new tax legislation that has
not yet been subject to judicial or administrative interpretation, we cannot assure you that the Israeli governmental and tax authorities
or the Israeli courts will accept the views expressed below. The discussion below is subject to amendment under Israeli law or changes
to the applicable judicial or administrative interpretations of Israeli law, which could affect the tax consequences described below.
See also note 12 to our financial statements included elsewhere in this report.
The discussion below does not cover all possible tax considerations.
Potential investors are urged to consult their own tax advisors as to the Israeli or other tax consequences of the purchase, ownership
and disposition of our ordinary shares, including, the effect of any foreign, state or local taxes.
General corporate tax structure in Israel
Israeli resident companies are generally subject to corporate tax, which rate has
been fluctuating during the last few years. The corporate tax rate is 23% as of 2018 and thereafter. However, the effective corporate
tax rate payable by a company that derives income from a Preferred Enterprise, a Special Preferred Enterprise, a Preferred Technology
Enterprise or Special Preferred Technology Enterprise (as discussed below) may be considerably less.
Capital gains generated by an Israeli resident company are subject to tax at the prevailing
corporate tax rate. Under Israeli tax legislation, a corporation will be considered as an “Israeli resident company” if (i)
it was incorporated in Israel or (ii) the control and management of its business are exercised in Israel.
Foreign Exchange Regulations:
Commencing in taxable year 2014, we had elected and were permitted by the ITA to measure
our taxable income and file our tax return under the Israeli Income Foreign Exchange Regulations. Under the Foreign Exchange Regulations,
an Israeli company may calculate its tax liability in U.S. dollars according to certain orders. The tax liability, as calculated in U.S.
dollars, is translated into NIS based on the exchange rate as of December 31 of each year.
Law for the Encouragement of Industry (Taxes),
5729-1969
The Law for the Encouragement of Industry (Taxes), 5729-1969, generally referred to
as the “Encouragement of Industry Law”, provides several tax benefits for “Industrial Companies”. Pursuant to
the Encouragement of Industry Law, a company qualifies as an Industrial Company if it is a resident of Israel which was incorporated in
Israel and at least 90% of its gross income in any tax year (exclusive of income from certain government loans) is generated from an “Industrial
Enterprise” that it owns and located in Israel or in the “Area”, in accordance with the definition under Section 3A
of the Israeli Income Tax Ordinance. An Industrial Enterprise is defined as an enterprise whose principal activity, in a given tax year,
is industrial manufacturing.
An Industrial Company is entitled to certain tax benefits, including: (i) an amortization
of the cost of a purchased patent, the right to use a patent or know-how that were purchased in good faith and are used for the development
or promotion of the Industrial Enterprise over an eight-year period, beginning from the year in which such rights were first used, (ii)
the right to elect to file consolidated tax returns, under certain conditions, with additional Israeli Industrial Companies controlled
by it, and (iii) the right to deduct expenses related to public offerings in equal amounts over a period of three years beginning from
the year of the offering.
Eligibility for benefits under the Encouragement of Industry Law is not contingent
upon the approval of any governmental authority.
There is no assurance that we qualify or will continue to qualify as an Industrial
Company or that the benefits described above will be available in the future.
Law for the Encouragement of Capital Investments,
1959
The Investment Law provides certain incentives for capital investment in a production
facility (or other eligible assets). Generally, an investment program that is implemented in accordance with the provisions of the Investment
Law, is entitled to benefits. These benefits may include cash grants from the Israeli government and tax benefits, based upon, among other
things, the geographic location in Israel of the facility in which the investment is made. In order to qualify for these incentives, a
Preferred Enterprise, a Special Preferred Enterprise, a Preferred Technology Enterprise and a Special Preferred Technology Enterprise
is required to comply with the requirements of the Investment Law.
The Investment Law has been amended several times over the recent years, with the
three most significant changes effective as of April 1, 2005, as of January 1, 2011 (the “2011
Amendment”) and as of January 1, 2017 (the “2017 Amendment”).The 2011
Amendment introduced new benefits instead of the benefits granted in accordance with the provisions of the Investment Law prior to the
2011 Amendment. However, companies entitled to benefits under the Investment Law as in effect up to January 1, 2011 were entitled
to choose to continue to enjoy such benefits, provided that certain conditions are met, or elect instead, irrevocably, to forego such
benefits and elect the benefits of the 2011 Amendment. The 2017 Amendment introduces new benefits for Technological Enterprises, alongside
the existing tax benefits.
The following discussion is a summary of the Investment Law following its most recent
amendments:
The Preferred Enterprise Regime—the 2011 Amendment
Eligible companies under the 2011 Amendment can receive benefits as a “Preferred
Enterprise.” In order to receive benefits as a Preferred Enterprise, the 2011 Amendment states, among other requirements, that a
company must meet certain conditions including owning an industrial enterprise that meets the “Competitive Enterprise” conditions
as described by the Investment Law. The benefits granted to a Preferred Enterprise are determined depending on the location of the Preferred
Enterprise within Israel.
Qualified enterprises located in specific locations within Israel are eligible for grants and/or loans simultaneously with tax benefits.
Grants and/or loans are approved by the Investment Center.
Pursuant to the 2017 Amendment, in 2017 and thereafter, the corporate tax rate for
Preferred Enterprise which is located in a specified development zone was decreased to 7.5%, while the reduced corporate tax rate for
other development zones remains 16%. Income derived by a Preferred Company from a ‘Special Preferred Enterprise’ (as such
term is defined in the Investment Law) would be entitled, during a benefits period of 10 years, to further reduced tax rates of 8%, or
to 5% if the Special Preferred Enterprise is located in a certain development zone. As of January 1, 2017, the definition for ‘Special
Preferred Enterprise’ includes less stringent conditions.
A company that pays a dividend to Israeli shareholders out of income generated from
the Preferred Enterprise is required to withhold tax on such distribution at a rate of 20% (in the case of non-Israeli shareholders –
subject to the receipt in advance of a valid certificate from the ITA allowing for a reduced tax rate, 20% or a reduced rate under an
applicable double tax treaty). However, if such dividends are paid to an Israeli company, no tax is required to be withheld (although,
if such dividends are subsequently distributed to individuals or a non-Israeli company, withholding tax at a rate of 20% or such lower
rate as may be provided in an applicable tax treaty, will apply).
Under the 2011 Amendment and from January 1, 2011, our facilities have “Preferred Enterprise”
status, which entitles us to tax benefits at a flat reduced corporate tax rate that will apply to the industrial enterprise’s entire
preferred income. From 2017 onwards, tax rate for the income portion related to Bar-Lev is reduced to 7.5% and Sdot-Yam tax rate remains
unchanged. During 2023, and part of the company’s restructuring plan, the company closed Sdot-Yam manufacturing facility, ending
future portion related to Sdot-Yam facility and reduced corporate tax rate applied to this income.
There can be no assurance that we will comply with the conditions required to remain
eligible for benefits under the Investment Law in the future or that we will be entitled to any additional benefits thereunder. The benefits
available to Preferred Enterprises are conditioned upon terms stipulated in the Investment Law and regulations. If we do not fulfill these
conditions in whole or in part, the benefits can be reduced or canceled and we may be required to refund the amount of the benefits, linked
to the Israeli consumer price index, with interest or other monetary penalties.
The New Technological Enterprise Incentives
Regime—the 2017 Amendment
The 2017 Amendment provides new tax benefits for two types of “Technology Enterprises”,
as described below, and is in addition to the other existing tax beneficial programs under the Investment Law.
The new incentives regime will apply to “Preferred Technology Enterprises”
that meet certain conditions, including: (1) the R&D expenses in the three years preceding the tax year were at least 7% on average
of one year out of the company’s turnover or exceeded NIS 75 million (approximately $20.7 million) for a year; and (2) one of the
following: (a) at least 20% of the workforce (or at least 200 employees) are employees whose full salary has been paid and reported in
the company’s financial statements as R&D; (b) a venture capital investment approximately equivalent to at least NIS 8 million
(approximately $2.2 million) was previously made in the company and the company did not change its line of business; (c) growth in sales
by an average of 25% or more over the three years preceding the tax year, provided that the turnover was at least NIS 10 million (approximately
$2.8 million), in the tax year and in each of the preceding three years; or (d) growth in workforce by an average of 25% or more over
the three years preceding the tax year, provided that the company employed at least 50 employees, in the tax year and in each of the preceding
three years.
A “Special Preferred Technology Enterprise” is an enterprise that meets
conditions 1 and 2 above, and in addition has total annual consolidated revenues above NIS 10 billion (approximately $2.8 billion).
Preferred Technology Enterprises will be subject to a reduced corporate tax rate of
12% on their income that qualifies as “Preferred Technology Income”, as defined in the Investment Law. The tax rate is further
reduced to 7.5% for a Preferred Technology Enterprise located in development zone A. These corporate tax rates shall apply only with respect
to the portion of intellectual property developed in Israel. In addition, a Preferred Technology Company will enjoy a reduced corporate
tax rate of 12% on capital gain derived from the sale of certain “Benefitted Intangible Assets” (as defined in the Investment
Law) to a related foreign company if the Benefitted Intangible Assets were acquired from a foreign company on or after January 1, 2017
for at least NIS 200 million (approximately $55.1 million), and the sale receives prior approval from the Israel Innovation Authority
(previously known as the Israeli Office of the Chief Scientist) (“IIA”). Special Preferred
Technology Enterprises will be subject to 6% on “Preferred Technology Income” regardless of the company’s geographic
location within Israel. In addition, a Special Preferred Technology Enterprise will enjoy a reduced corporate tax rate of 6% on capital
gain derived from the sale of certain “Benefitted Intangible Assets” to a related foreign company if the Benefitted Intangible
Assets were either developed by the Special Preferred Enterprise or acquired from a foreign company on or after January 1, 2017, and the
sale received prior approval from IIA. A Special Preferred Technology Enterprise that acquires Benefitted Intangible Assets from a foreign
company for more than NIS 500 million (approximately $137.9 million), will be eligible for these benefits for at least ten years, subject
to certain approvals as specified in the Investment Law.
Dividends distributed to Israeli shareholders by a Preferred Technology Enterprise
or a Special Preferred Technology Enterprise, paid out of Preferred Technology Income, are generally subject to withholding tax at source
at the rate of 20% (in the case of non-Israeli shareholders – subject to the receipt in advance of a valid certificate from the
ITA allowing for a reduced tax rate, 20% or such lower rate as may be provided in an applicable tax treaty). However, if such dividends
are paid to an Israeli company, no tax is required to be withheld (although, if such dividends are subsequently distributed to individuals
or a non-Israeli company, withholding tax at a rate of 20% or such lower rate as may be provided in an applicable tax treaty, will apply).
If such dividends are distributed to a parent foreign company holding, solely or together with other foreign companies, at least 90% of
the shares of the distributing company and other conditions are met, the withholding tax rate will be 4% (or a lower rate under a tax
treaty, if applicable, subject to the receipt in advance of a valid certificate from the ITA allowing for a reduced tax rate). Currently,
we do not meet the above conditions to be eligible for the tax benefits pursuant to the New Technology Enterprise Incentives Regime—the
2017 Amendment.
The Encouragement of Industrial Research and
Development Law, 5744-1984
IIA’s grants may limit our ability to manufacture products, or transfer technologies
developed using these grants outside of Israel. If we were to seek approval to manufacture products, to consummate a merger or acquisition
transaction with a non-Israeli party or to transfer technologies developed using these grants outside of Israel, we could be subject to
additional royalty requirements or be required to pay certain redemption fees. If we were to violate these restrictions, we could be required
to refund any grants previously received, together with interest and penalties, and may be subject to criminal charges.
Taxation of our shareholders
Capital gains
Capital gains tax is imposed on the disposal of capital assets by an Israeli resident
and on the disposal of such assets by a non-Israeli resident if those assets are either (i) located in Israel; (ii) shares or rights to
shares in an Israeli resident company, or (iii) represent, directly or indirectly, rights to assets located in Israel unless a tax treaty
between Israel and the seller’s country of residence provides otherwise. The Israeli Income Tax Ordinance distinguishes between
“Real Capital Gain” and “Inflationary Surplus.” The Real Capital Gain on the disposition of a capital asset is
the amount of total capital gain in excess of Inflationary Surplus. Inflationary Surplus is computed, generally, on the basis of the increase
in the Israeli Consumer Price Index or, in certain circumstances, according to the change in the foreign currency exchange rate, between
the date of purchase and the date of disposal of the capital asset.
Real Capital Gain generated by a company is generally subject to tax at the corporate
tax rate (23% in 2022). As of January 1, 2012, the Real Capital Gain accrued by individuals on the sale of our securities is taxed at
the rate of 25%. However, if the individual shareholder is a “Controlling Shareholder” (meaning, a person who holds, directly
or indirectly, alone or together with another person who collaborates with such person on a permanent basis, 10% or more of one of the
Israeli resident company’s “means of control” (including, among other rights, the right to company profits, voting rights,
the right to the company’s liquidation proceeds and the right to appoint a company director) at the time of sale or at any time
during the preceding 12 month period, such gain will be taxed at the rate of 30%.
Individual and corporate shareholders dealing in securities in Israel are taxed at
the tax rates applicable to business income – 23% for corporations in 2023 and a marginal tax rate of up to 47% +3% surtax, for
an individual in 2023 unless the benefiting provisions of an applicable treaty applies.
Notwithstanding the foregoing, capital gains generated from the sale of securities
publicly traded on the Tel Aviv Stock Exchange or on a recognized stock exchange outside of Israel, by a non-Israeli shareholder (individual
and corporation) may be exempt under the Israeli Income Tax Ordinance from Israeli taxes provided that all the following conditions are
met: (i) the securities were purchased upon or after the registration of the securities on a recognized stock exchange (this requirement
generally does not apply to shares purchased on or after January 1, 2009), (ii) the seller of the securities does not have a permanent
establishment in Israel to which the generated capital gain is attributed and (iii) with respect to securities listed on a recognized
stock exchange outside of Israel, such shareholders are not subject to the Israeli Income Tax Law (Inflationary Adjustments) 5745-1985.
However, non-Israeli corporation will not be entitled to the foregoing exemptions if Israeli residents (a) have a controlling interest
of more than 25% in such non-Israeli corporation, or (b) are the beneficiaries of or are entitled to 25% or more of the revenues or profits
of such non-Israeli corporation, whether directly or indirectly.
In addition, the sale of the securities may be exempt from Israeli capital gain tax
under the provisions of an applicable tax treaty. For example, the Convention between the Government of the United States of America and
the Government of Israel with respect to Taxes on Income (“Israel-U.S.A. Double Tax Treaty”)
exempts U.S. residents (for purposes of the Israel-U.S.A. Double Tax Treaty) from Israeli capital gains tax in connection with such sale,
exchange or disposition provided, among others, that (i) the U.S. resident owned, directly or indirectly, less than 10% of the Israeli
resident company’s voting power at any time within the 12-month period preceding such sale; (ii) the seller, if an individual, has
been present in Israel for less than 183 days (in the aggregate) during the taxable year; (iii) the capital gain from the sale was not
generated through a permanent establishment of the U.S. resident which is maintained in Israel; the capital gain arising from such sale,
exchange or disposition is not attributed to real estate located in Israel; (v) the capital gains arising from such sale, exchange or
disposition is not attributed to royalties; and (vi) the shareholder is a U.S. resident (for purposes of the Israel-U.S.A. Double Tax
Treaty) is holding the shares as a capital asset.
The purchaser of the securities, the stockbrokers who effected the transaction or
the financial institution holding the traded securities through which payment to the seller is made are obligated to withhold Israeli
tax at source from such payment. Shareholders may be required to demonstrate that they are exempt from tax on their capital gains in order
to avoid withholding at source at the time of sale. Specifically, in transactions involving a sale of all of the shares of an Israeli
resident company, in the form of a merger or otherwise, the ITA may require from shareholders who are not liable for Israeli tax to sign
declarations in forms specified by this authority or obtain a specific exemption from the ITA to confirm their status as non-Israeli resident,
and in the absence of such declarations or exemptions, may require the purchaser of the shares to withhold taxes at source.
A detailed return, including a computation of the tax due, must be filed and an advance
payment must be paid on January 31 and July 30 of each tax year for sales of securities traded on a stock exchange made within the previous
six months. However, if all tax due was withheld at the source according to applicable provisions of the Israeli Income Tax Ordinance
and the regulations promulgated thereunder, the return does not need to be filed provided that (i) such income was not generated
from business conducted in Israel by the taxpayer, (ii) the taxpayer has no other taxable sources of income in Israel with respect
to which a tax return is required to be filed and an advance payment does not need to be made, and (iii) the taxpayer is not obligated
to pay excess tax (as further explained below). Capital gains are also reportable on an annual income tax return.
Dividends
Israeli residents who are individuals are generally subject to Israeli income tax
for dividends paid on shares (other than bonus shares or share dividends) at the rate of 25%, or 30% if the recipient of such dividend
is a Controlling Shareholder at the time of distribution or at any time during the preceding 12-month period. However, dividends distributed
from taxable income accrued from Preferred Enterprise or Preferred Technology Enterprise to Israeli individuals are subject to withholding
tax at the rate of 20%. However, if such dividends are distributed to an Israeli company, no withholding tax is imposed (although, if
such dividends are subsequently distributed to individuals or a non-Israeli company, withholding tax at a rate of 20% or such lower rate
as may be provided in an applicable tax treaty, subject to the receipt in advance of a valid certificate from the ITA allowing for a reduced
tax rate, will apply). An average rate will be set in case the dividend is distributed from mixed types of income (regular and preferred
income).
Israeli resident corporations are generally exempt from Israeli corporate tax for
dividends paid on shares of Israeli resident corporations.
Non-Israeli resident (either an individual or a corporation) is generally subject
to an Israeli income tax on the receipt of dividends at the rate of 25% or 30% (if the dividend recipient is a Controlling Shareholder
at the time of distribution or at any time during the preceding 12-month period) or 20% or such lower rate as may be provided in an applicable
tax treaty, subject to the receipt in advance of a valid certificate from the ITA allowing for a reduced tax rate, if the dividend is
distributed from income attributed to Preferred Enterprise or Preferred Technology Enterprise. Such dividends are generally subject to
Israeli withholding tax at a rate of 25% so long as the shares are registered with a Nominee Company (whether the recipient is a Controlling
Shareholder or not), and 20% if the dividend is distributed from income attributed to a Preferred Enterprise or Preferred Technology Enterprise.
Under the Israel-U.S.A. Double Tax Treaty the following rate will apply to dividends distributed by an Israeli resident company to a U.S.
resident (for purposes of the Israel-U.S.A. Double Tax Treaty): if (A) the U.S. resident is a corporation which held during the portion
of the taxable year preceding the date of payment of the dividend and during the whole of its prior taxable year (if any), at least 10%
of the outstanding shares of the voting stock of the Israeli resident paying company and (B) not more than 25% of the gross income of
the Israeli resident paying company for such prior taxable year (if any) consists of certain type of interest or dividends then the maximum
tax rate is 12.5% on dividends. The aforementioned rates will not apply if the dividend income was generated through a permanent establishment
of the U.S. resident which is maintained in Israel. If the dividend is attributable partly to income derived from a Preferred Enterprise,
and partly to other sources of income, the withholding rate will be a blended rate reflecting the relative portions of the two types of
income.
Our company is obligated to withhold tax, upon the distribution of a dividend attributed
to a Preferred Enterprise’s income from the amount distributed at the following rates: (i) Israeli resident corporations –
0%, (ii) Israeli resident individuals –20% and (iii) non-Israeli residents – 25% or 30%, and subject to the receipt in advance
of a valid certificate from the ITA allowing for a reduced tax rate – 20% or a reduced tax rate provided under the provisions of
an applicable double tax treaty. If the dividend is distributed from income not attributed to the Preferred Enterprise, the following
withholding tax rates will apply: (a) for securities registered and held by a Nominee Company: (i) Israeli resident corporations –
0%, (ii) Israeli resident individuals – 25% and (iii) non-Israeli residents – 25%, unless a reduced tax rate is provided under
the provisions of an applicable double tax treaty (subject to the receipt in advance of a valid certificate from the ITA allowing for
a reduced tax rate); (b) in all other cases: (i) Israeli resident corporations – 0%, (ii) Israeli resident individuals – 25%
or 30% (if the dividend recipient is a Controlling Shareholder at the time of the distribution or at any time during the preceding 12
month period), and (iii) non-Israeli residents – 25% or 30% as referred to above with respect to Israeli resident individuals, unless
a reduced tax rate is provided under the provisions of an applicable double tax treaty (subject to the receipt in advance of a valid certificate
from the ITA allowing for a reduced tax rate).A non-Israeli resident who receives dividends from which tax was withheld is generally exempt
from the obligation to file tax returns in Israel with respect to such income, provided that (i) such income was not generated from
business conducted in Israel by the taxpayer, (ii) the taxpayer has no other taxable sources of income in Israel with respect to
which a tax return is required to be filed, and (iii) the taxpayer is not obligated to pay excess tax (as further explained below).
Estate and gift tax
Israeli law presently does not impose estate or gift taxes.
Excess Tax
Individual holders who are subject to tax in Israel (whether any such individual is
an Israeli resident or non-Israeli resident) and who have taxable income that exceeds a certain threshold in a tax year (NIS 663,241 for
2022 and NIS 698,280 for 2023), which amount is linked to the annual changes to the Israeli Consumer Price Index), will be subject to
an additional tax at the rate of 3% on his or her taxable income for such tax year that is in excess of such amount. For this purpose,
taxable income includes, but is not limited to, taxable capital gains from the sale of securities and taxable income from interest and
dividends.
United States federal income taxation
The following is a description of the material United States federal income tax consequences
to a U.S. Holder (as defined below) of the acquisition, ownership and disposition of our ordinary shares. This description addresses only
the United States federal income tax consequences to holders that hold such ordinary shares as capital assets for United States federal
income tax purposes. This description does not address tax considerations applicable to holders that may be subject to special tax rules,
including, without limitation:
| • |
banks, financial institutions or insurance companies; |
| • |
real estate investment trusts, regulated investment companies or grantor trusts; |
| • |
dealers or traders in securities, commodities or currencies; |
| • |
tax-exempt entities; |
| • |
certain former citizens or long-term residents of the United States; |
| • |
persons that received our shares as compensation for the performance of services; |
| • |
persons that will hold our shares as part of a “hedging,” “integrated” or “conversion” transaction
or as a position in a “straddle” for United States federal income tax purposes; |
| • |
partnerships (including entities classified as partnerships for United States federal income tax purposes) or other pass-through
entities, or holders that will hold our shares through such an entity; |
| • |
S-corporations; |
| • |
holders that acquire ordinary shares as a result of holding or owning our preferred shares; |
| • |
U.S. Holders (as defined below) whose “functional currency” is not the U.S. Dollar; |
| • |
persons subject to special tax accounting rules as a result of any item of gross income with respect to our ordinary shares being
taken into account in an applicable financial statement; or |
| • |
holders that own directly, indirectly or through attribution 10% or more of the voting power or value of our shares. |
Moreover, this description does not address the United States federal estate, gift
or alternative minimum tax consequences, or any state, local or foreign tax consequences, of the acquisition, ownership and disposition
of our ordinary shares.
This description is based on the United States Internal Revenue Code of 1986, as amended
(the “Code”), existing, proposed and temporary United States Treasury Regulations and
judicial and administrative interpretations thereof, in each case as in effect and available on the date hereof. All the foregoing is
subject to change, which change could apply retroactively and could affect the tax consequences described below. There can be no assurances
that the U.S. Internal Revenue Service will not take a different position concerning the tax consequences of the acquisition, ownership
and disposition of our ordinary shares or that such a position could not be sustained.
For purposes of this description, a “U.S. Holder” is a beneficial owner
of our ordinary shares that, for United States federal income tax purposes, is:
| • |
an individual holder that is a citizen or resident of the United States; |
| • |
a corporation (or other entity treated as a corporation for United States federal income tax purposes) created or organized in or
under the laws of the United States or any state thereof, including the District of Columbia; |
| • |
an estate the income of which is subject to United States federal income taxation regardless of its source; or |
| • |
a trust if such trust has validly elected to be treated as a United States person for United States federal income tax purposes or
if (1) a court within the United States is able to exercise primary supervision over its administration and (2) one or more United States
persons have the authority to control all of the substantial decisions of such trust. |
If a partnership (or any other entity treated as a partnership for United States federal
income tax purposes) holds our ordinary shares, the tax treatment of a partner in such partnership will generally depend on the status
of the partner and the activities of the partnership. Such a partner or partnership should consult its tax advisor as to its tax consequences.
You should consult your tax advisor with respect to the United
States federal, state, local and foreign tax consequences of acquiring, owning and disposing of our ordinary shares.
Distributions
Subject to the discussion below under “Passive foreign investment company considerations,”
if you are a U.S. Holder, the gross amount of any distribution made to you with respect to our ordinary shares before reduction for any
Israeli taxes withheld therefrom, other than pro rata distributions of our ordinary shares to all our shareholders, generally will be
includible in your income as dividend income to the extent such distribution is paid out of our current or accumulated earnings and profits
as determined under United States federal income tax principles. Subject to the discussion below under “Passive foreign investment
company considerations,” non-corporate U.S. Holders may qualify for the lower rates of taxation with respect to dividends on ordinary
shares applicable to long-term capital gains (meaning, gains from the sale of capital assets held for more than one year) provided that
certain conditions are met, including certain holding period requirements and the absence of certain risk reduction transactions. However,
such dividends will not be eligible for the dividends received deduction generally allowed to corporate U.S. Holders. Subject to the discussion
below under “Passive foreign investment company considerations,” to the extent that the amount of any distribution by us exceeds
our current and accumulated earnings and profits as determined under United States federal income tax principles, it will be treated first
as a tax-free return of your adjusted tax basis in our ordinary shares and thereafter as capital gain. We do not expect to maintain calculations
of our earnings and profits under United States federal income tax principles and, therefore, U.S. Holders should expect that the entire
amount of any distribution generally will be reported as dividend income.
Dividends paid to U.S. Holders with respect to our ordinary shares will be treated as foreign source income,
which may be relevant in calculating your foreign tax credit limitation. Subject to certain conditions and limitations, Israeli tax withheld
on dividends may be deducted from your taxable income or credited against your United States federal income tax liability. The limitation
on foreign taxes eligible for credit is calculated separately with respect to specific classes of income. For this purpose, dividends
that we distribute generally should constitute “passive category income,” or, in the case of certain U.S. Holders, “general
category income.” A foreign tax credit for foreign taxes imposed on distributions may be denied if you do not satisfy certain minimum
holding period requirements. In addition, for periods in which we are a “United Stated-owned foreign corporation”, a portion
of dividends paid by us may be treated as U.S. source solely for purposes of the foreign tax credit. We would be treated as a United States-owned
foreign corporation if 50% or more of the total value or total voting power of our stock is owned, directly, indirectly or by attribution,
by United States persons. To the extent any portion of our dividends is treated as U.S. source income pursuant to this rule, the ability
of a U.S. Holder to claim a foreign tax credit for any Israeli withholding taxes payable in respect of our dividends may be limited. A
U.S. Holder entitled to benefits under the United States-Israel Tax Treaty may, however, elect to treat any dividends as foreign source
income for foreign tax credit purposes if the dividend income is separated from other income items for purposes of calculating the U.S.
Holder’s foreign tax credit. Furthermore, Treasury Regulations that apply to taxable years beginning on or after December 28, 2021
may in some circumstances prohibit a U.S. Holder from claiming a foreign tax credit unless the taxes are creditable under the Israel –
U.S.A Double Tax Treaty and the holder is eligible for benefits under the U.S.-Israel Tax Treaty and elects its application. However,
a recent notice from the IRS indicates that the U.S. Department of the Treasury and the IRS are considering proposing amendments to such
Treasury regulations and allows, subject to certain conditions, taxpayers to defer the application of many aspects of such Treasury regulations
for taxable years beginning on or after December 28, 2021 and ending before the date that a notice or other guidance withdrawing or modifying
the temporary relief is issued (or any later date specified in such notice or other guidance). The rules relating to the determination
of the foreign tax credit are complex, and you should consult your tax advisor to determine whether and to what extent you will be entitled
to this credit.
Future distributions with respect to our ordinary shares may be paid in U.S. dollars
or NIS. If a distribution is denominated in NIS, the amount of such distribution will equal the U.S. dollar value of the NIS received,
calculated by reference to the exchange rate in effect on the date that distribution is received, whether or not the U.S. Holder in fact
converts any NIS received into U.S. dollars at that time. If the distribution is converted into U.S. dollars on the date of receipt, a
U.S. Holder generally will not be required to recognize foreign currency gain or loss in respect of the distribution. A U.S. Holder may
have foreign currency gain or loss if the distribution is converted into U.S. dollars after the date of receipt. Any gains or losses resulting
from the conversion of NIS into U.S. dollars will be treated as ordinary income or loss, as the case may be, of the U.S. Holder and will
be U.S.-source.
Sale, exchange or other disposition of ordinary
shares
Subject to the discussion below under “Passive foreign investment company considerations,”
U.S. Holders generally will recognize gain or loss on the sale, exchange or other disposition of our ordinary shares equal to the difference
between the amount realized on such sale, exchange or other disposition and such holder’s adjusted tax basis in our ordinary shares,
and such gain or loss will be capital gain or loss. The adjusted tax basis in an ordinary share generally will be equal to the cost of
such ordinary share. If you are a non-corporate U.S. Holder, capital gain from the sale, exchange or other disposition of ordinary shares
is generally eligible for a preferential rate of taxation applicable to capital gains, if your holding period for such ordinary shares
exceeds one year (meaning, such gain is long-term capital gain). The deductibility of capital losses for United States federal income
tax purposes is subject to limitations under the Code. Any such gain or loss that a U.S. Holder recognizes generally will be treated as
U.S. source income or loss for foreign tax credit limitation purposes. Accordingly, in the event any Israeli tax (including withholding
tax) is imposed upon such sale or other disposition, a U.S. Holder may not be able to utilize foreign tax credits unless such holder has
foreign source income or gain in the same category from other sources. Moreover, there are special rules under the income tax treaty
between the Israel-U.S.A. Double Tax Treaty, which may impact a U.S. Holder’s ability to claim a foreign tax credit. Furthermore,
Treasury Regulations that apply to taxable years beginning on or after December 28, 2021 may in some circumstances prohibit a U.S. Holder
from claiming a foreign tax credit unless the taxes are creditable under the U.S.-Israel Tax Treaty and the holder is eligible for benefits
under the U.S.-Israel Tax Treaty and elects its application. However, a recent notice from the IRS indicates that the U.S. Department
of the Treasury and the IRS are considering proposing amendments to such Treasury regulations and allows, subject to certain conditions,
taxpayers to defer the application of many aspects of such Treasury regulations for taxable years beginning on or after December 28, 2021
and ending before the date that a notice or other guidance withdrawing or modifying the temporary relief is issued (or any later date
specified in such notice or other guidance). The rules relating to the determination of the foreign tax credit are complex, and
you should consult your tax advisor to determine whether and to what extent you will be entitled to this credit.
Passive foreign investment company considerations
If we were to be classified as a “passive foreign investment company,”
or PFIC, in any taxable year, a U.S. Holder would be subject to special rules generally intended to reduce or eliminate any benefits from
the deferral of United States federal income tax that a U.S. Holder could derive from investing in a non-U.S. company that does not distribute
all of its earnings on a current basis.
A non-U.S. corporation will be classified as a PFIC for United States federal income
tax purposes in any taxable year in which, after applying certain look-through rules, either:
| • |
at least 75% of its gross income is “passive income”; or |
| • |
at least 50% of the average value of its gross assets is attributable to assets that produce “passive income” or are
held for the production of passive income. |
Passive income for this purpose generally includes dividends, interest, royalties,
rents, gains from commodities and securities transactions, the excess of gains over losses from the disposition of assets, which produce
passive income, and includes amounts derived by reason of the temporary investment of funds raised in offerings of our ordinary shares.
If a non-U.S. corporation owns at least 25% by value of the stock of another corporation, the non-U.S. corporation is treated for purposes
of the PFIC tests as owning its proportionate share of the assets of the other corporation and as directly receiving its proportionate
share of the other corporation’s income. If we are classified as a PFIC in any year with respect to which a U.S. Holder owns our
ordinary shares, we will continue to be treated as a PFIC with respect to such U.S. Holder in all succeeding years during which the U.S.
Holder owns our ordinary shares, regardless of whether we continue to meet the tests described above.
Based on the composition of our income, the composition and estimated fair market
value of our assets and the nature of our business, we do not believe we were a PFIC for the taxable year ended December 31, 2023 and
do not expect that we will be classified as a PFIC for the taxable year ending December 31, 2024. However, no official determination as
to our PFIC status has been made for the year ended December 31, 2023. Additionally, because PFIC status is based on our income, assets
and activities for the entire taxable year, it is not possible to determine whether we will be characterized as a PFIC for a particular
taxable year until after the close of the taxable year. Moreover, the determination of our PFIC status annually is based on tests which
are factual in nature, and our status in future years will depend on our income, assets and activities in those years. Furthermore, because
the value of our gross assets is likely to be determined in large part by reference to our market capitalization, a decline in the value
of our ordinary shares may result in our becoming a PFIC. There can be no assurance that we will not be considered a PFIC for any taxable
year. If we were a PFIC then unless you make one of the elections described below, a special tax regime will apply to both (a) any “excess
distribution” by us to you (generally, your ratable portion of distributions in any year which are greater than 125% of the average
annual distribution received by you in the shorter of the three preceding years or your holding period for our ordinary shares) and (b)
any gain realized on the sale or other disposition of the ordinary shares.
Under this regime, any excess distribution and realized gain will be treated as ordinary
income and will be subject to tax as if (a) the excess distribution or gain had been realized ratably over your holding period, (b) the
amount deemed realized in each year had been subject to tax in each year of that holding period at the highest marginal rate for such
year (other than income allocated to the current period or any taxable period before we became a PFIC, which will be subject to tax at
the U.S. Holder’s regular ordinary income rate for the current year and will not be subject to the interest charge discussed below),
and (c) the interest charge generally applicable to underpayments of tax had been imposed on the taxes deemed to have been payable in
those years. In addition, dividend distributions made to you will not qualify for the lower rates of taxation applicable to long-term
capital gains discussed above under “Distributions.” Certain elections may be available that would result in an alternative
treatment (such as mark-to-market treatment) of our ordinary shares. We do not intend to provide the information necessary for U.S. Holders
to make qualified electing fund elections if we are classified as a PFIC. U.S. Holders should consult their tax advisors to determine
whether any of these elections would be available and if so, what the consequences of the alternative treatments would be in their particular
circumstances.
If we are determined to be a PFIC, the general tax treatment for U.S. Holders described
in this paragraph would apply to indirect distributions and gains deemed to be realized by U.S. Holders in respect of any of our subsidiaries
that also may be determined to be PFICs.
If a U.S. Holder owns ordinary shares during any year in which we are classified as
a PFIC and the U.S. Holder recognizes gain on a disposition of our ordinary shares or receives distributions with respect to our ordinary
shares, the U.S. Holder generally will be required to file an IRS Form 8621 with respect to the company, generally with the U.S. Holder’s
federal income tax return for that year. If our company were a PFIC for a given taxable year, then you should consult your tax advisor
concerning your annual filing requirements.
U.S. Holders should consult their tax advisors regarding whether we are a PFIC and
the potential application of the PFIC rules.
Backup withholding tax and information reporting
requirements
United States backup withholding tax and information reporting requirements may apply
to certain payments to certain holders of stock. Information reporting generally will apply to payments of dividends on, and to proceeds
from the sale or redemption of, our ordinary shares made within the United States, or by a U.S. payor or U.S. middleman, to a holder of
our ordinary shares, other than an exempt recipient (including a payee that is not a United States person that provides an appropriate
certification and certain other persons). A payor will be required to withhold backup withholding tax from any payments of dividends on,
or the proceeds from the sale or redemption of, ordinary shares within the United States, or by a U.S. payor or U.S. middleman, to a holder,
other than an exempt recipient, if such holder fails to furnish its correct taxpayer identification number or otherwise fails to comply
with, or establish an exemption from, such backup withholding tax requirements. Any amounts withheld under the backup withholding rules
will be allowed as a credit against the beneficial owner’s United States federal income tax liability, if any, and any excess amounts
withheld under the backup withholding rules may be refunded, provided that the required information is timely furnished to the U.S. Internal
Revenue Service.
3.8% Medicare Tax on “Net Investment
Income”
Certain U.S. Holders who are individuals, estates or trusts are required to pay an
additional 3.8% tax on, among other things, dividends and capital gains from the sale or other disposition of ordinary shares.
Foreign asset reporting
Certain U.S. Holders, who are individuals, are required to report information relating
to an interest in our ordinary shares, subject to certain exceptions (including an exception for shares held in accounts maintained by
U.S. financial institutions). U.S. Holders are urged to consult their tax advisors regarding their information reporting obligations,
if any, with respect to their ownership and disposition of our ordinary shares.
The above description is not intended to constitute a complete
analysis of all tax consequences relating to the acquisition, ownership and disposition of our ordinary shares. You should consult your
tax advisor concerning the tax consequences of your particular situation.
| F. |
Dividends and Paying Agents |
Not applicable.
| G. |
Statements by Experts |
Not applicable.
| H. |
Documents on Display |
You may read and copy this annual report on Form 20-F, including the related exhibits
and schedules, and any document we file with the SEC through the SEC’s website at http://www.sec.gov.
As a foreign private issuer, we are exempt from the rules under the Exchange Act related
to the furnishing and content of proxy statements, and our officers, directors and principal shareholders are exempt from the reporting
and short-swing profit recovery provisions contained in Section 16 of the Exchange Act. Furthermore, as a foreign private issuer, we are
also not subject to the requirements of Regulation Fair Disclosure (“FD”) promulgated
under the Exchange Act. In addition, we are not required under the Exchange Act to file annual or other reports and consolidated financial
statements with the SEC as frequently or as promptly as U.S. companies whose securities are registered under the Exchange Act. Instead,
we must file with the SEC, within 120 days after the end of each fiscal year, or such other applicable time as required by the SEC, an
annual report on Form 20-F containing consolidated financial statements audited by an independent registered public accounting firm. We
also intend to furnish certain other material information to the SEC under cover of Form 6-K.
We maintain a corporate website at http://www.caesarstone.com.
Information contained on, or that can be accessed through, our website does not constitute a part of this annual report on Form
20-F. We have included our website address in this annual report on Form 20-F solely as an inactive textual reference.
| I. |
Subsidiary Information |
Not applicable.
| J. |
Annual Report to Security Holders |
Not applicable.
ITEM 11: Quantitative and Qualitative Disclosures About Market
Risk
Since July 1, 2012, our functional currency has been the U.S. dollar. We conduct business
in a large number of countries and, as a result, we are exposed to foreign currency fluctuations. The majority of our revenues are denominated
in U.S. dollars, Australian dollars and Canadian dollars. Sales in Australian dollars accounted for 18.8%, 16.8% and 18.4% of our revenues
in 2023, 2022 and 2021, respectively. Sales in Canadian dollars accounted for 13.4%, 13.5% and 13.1% of our revenues in 2023, 2022
and 2021, respectively. As a result, devaluation of the Australian dollar, and to a lesser extent, the Canadian dollar, relative to the
U.S. dollar could reduce our profitability significantly. Our expenses are largely denominated in U.S. dollars, NIS and Euros, and a smaller
proportion in Canadian dollars, Australian dollars, British pound, Singaporean dollar and Indian Rupee. As a result, a revaluation of
the NIS, or to a lesser extent, the Euro, relative to the U.S. dollar could reduce our profitability significantly.
The following table presents information about the year over year percentage changes
in the average exchange rates of the principal currencies that impact our results of operations:
|
Australian dollar against U.S. dollar |
Canadian dollar against U.S. dollar |
NIS against U.S. dollar |
Euro against U.S. dollar |
|||||||||||||
|
2022 |
(7.6 |
)% |
(3.7 |
)% |
(3.8 |
)% |
(11 |
)% | ||||||||
|
2023 |
(4.5 |
)% |
(3.7 |
)% |
(9.0 |
)% |
2.6 |
% | ||||||||
Assuming a 10% decrease in the Canadian dollar relative to the U.S. dollar and assuming
no other changes, our operating income would have decreased by $3.9 million in 2023.
Devaluation of NIS relative to the U.S. dollar would decrease our revenues generated
in Israel. However, our NIS operating costs when reported in U.S. dollars would decrease to a greater extent, resulting in higher operating
income. As a result, assuming a 10% decrease in NIS relative to the U.S. dollar and assuming no other changes, our operating income, as
reported in U.S. dollars, would have increased by $7.5 million in 2023.
An appreciation of the Euro relative to the U.S. dollar would increase our revenues
generated in Europe and certain other countries. However, our Euro operating costs when reported in U.S. dollars would increase to a greater
extent, resulting in lower operating income. Assuming a 10% decrease in the Euro relative to the U.S. dollar and assuming no other changes,
our operating income would have increased by $1.3 million in 2023.
Our exposure related to exchange rate changes on our net asset position denominated
in currencies other than the U.S. dollar varies with changes in our net asset position. Net asset position refers to financial assets,
such as trade receivables and cash, less financial liabilities, such as loans and accounts payable. The impact of any such transaction
gains or losses is reflected in finance expenses, net. Our most significant exposure as of December 31, 2023, relates to a potential change
in the exchange rate of the EUR and British pound and to a lesser extent to the Canadian Dollar, Singaporean dollar, and the Indian Rupee
relative to the U.S. dollar. Assuming a 10% decrease in the Australian dollar relative to the U.S. dollar, and assuming no other changes,
finance expenses, net would have decreased by $0.1 million. Assuming a 10% decrease in the GBP, EUR, Singaporean dollar, NIS, Canadian
Dollar and Indian Rupee relative to the U.S. dollar, and assuming no other changes, finance expenses, net would have increased by $0.9
million, $0.8 million, $0.4 million, $0.4 million, $0.3 million and $0.1 million in 2023, respectively.
We use forward contracts to manage currency risk with respect to those currencies
in which we generate revenues or incur expenses. Our functional currency is the U.S. dollar, and we use Australian/U.S. dollar, Euro/U.S.
dollar and U.S. dollar/Canadian dollar and GBP/ U.S. dollar forward contracts. The derivatives instruments partially offset the impact
of foreign currency fluctuations. We may in the future use derivative instruments to a greater extent or engage in other transactions
or invest in market risk sensitive instruments if we determine that it is necessary to offset these risks. Currency instruments other
than our U.S. dollar/NIS forward contracts are not designated as hedging accounting instruments under ASC 815, Derivatives and Hedging.
Therefore, we have been incurring financial loss or income as a result of these derivatives.
As of December 31, 2023, we had the following foreign currency hedge portfolio (U.S.
dollar in thousands):
|
USD/NIS |
EUR/USD |
GBP/USD |
USD/CAD |
AUD/USD |
TOTAL |
||||||||||||||||||||
|
Sell forward contracts |
Notional |
21,162 |
--- |
--- |
--- |
--- |
21,162 |
||||||||||||||||||
| Fair Value |
539 |
--- |
--- |
--- |
--- |
539 |
|||||||||||||||||||
| Average
rate |
3.705 |
--- |
--- |
--- |
--- |
--- |
|||||||||||||||||||
|
Total notional value |
21,162 |
--- |
--- |
--- |
--- |
21,162 |
|||||||||||||||||||
|
Total fair value |
$ |
539 |
$ |
--- |
$ |
--- |
$ |
--- |
$ |
--- |
$ |
539 |
|||||||||||||
As of December 31, 2023, net embedded gain on our foreign currency open derivatives transactions was $0.5
million. As of December 31, 2022, net embedded loss on our foreign currency open derivatives transactions was $0.1 million. As of
December 31, 2021, net embedded gain on our foreign currency open derivatives transactions was $1.4 million.
For the year ended December 31, 2023, our finance from derivatives including the impact
of the foreign exchange rate derivatives fair value measurement resulted in income of $1.4 million. For the year ended December 31, 2022
our finance expenses resulted from derivatives including the impact of the foreign exchange rate derivatives fair value measurement were
$1.5 million. For the year ended December 31, 2021, our finance income resulted from derivatives including the impact of the foreign exchange
rate derivatives fair value measurement were $2.1 million.
Interest rates
We had cash and short-term bank deposits totaling $91 million on December 31, 2023.
Our cash, cash equivalents and short-term bank deposits are held for working capital and other purposes. We do not enter into investments
for trading or speculative purposes. Due to the short-term nature of the investments in cash equivalents and our relatively low debt balances,
we do not believe that changes in interest rates will have a material impact on our financial position and results of operations and,
therefore, we believe that a sensitivity analysis would not be material to investors. However, declines in interest rates will reduce
future investment income.
Inflation
Inflationary factors such as increases in the cost of our labor may adversely affect
our operating results. Although we do not believe that inflation has had a material impact on our financial position or results of operations
to date, a high rate of inflation in the future may have an adverse effect on our ability to maintain current levels of gross profit margins
and operating expenses as a percentage of revenues if the selling prices of our products do not increase in line with increases in costs.
ITEM 12: Description of Securities
Other Than Equity Securities
Not applicable.
PART II
ITEM 13: Defaults, Dividend
Arrearages and Delinquencies
None.
ITEM 14: Material Modifications
to the Rights of Security Holders and Use of Proceeds
None.
ITEM 15: Controls and Procedures
(a) Disclosure
Controls and Procedures. Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has
evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under
the Exchange Act) as of December 31, 2023. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded
that, as of December 31, 2023, our disclosure controls and procedures were effective such that the information required to be disclosed
by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods
specified in SEC rules and forms, and is accumulated and communicated to our management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
(b) Management’s
Annual Report on Internal Control Over Financial Reporting. Our management, under the supervision of our Chief Executive Officer
and Chief Financial Officer, is responsible for establishing and maintaining adequate internal control over financial reporting as defined
in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with generally
accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that:
| • |
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions
of our assets; |
| • |
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations
of our management and directors; and |
| • |
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets
that could have a material effect on the financial statements. |
Our management, including our Chief Executive Officer and Chief Financial Officer,
assessed the effectiveness of our internal control over financial reporting as of December 31, 2023. In making this assessment, our management
used the criteria established in Internal Control—Integrated Framework (2013) issued by
the Committee of Sponsoring Organizations of the Treadway Commission. Our management has concluded, based on its assessment, that our
internal control over financial reporting was effective as of December 31, 2023 to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of consolidated financial statements for external reporting purposes in accordance with generally
accepted accounting principles.
(c) Attestation
Report of the Registered Public Accounting Firm. Our independent registered public accounting firm has audited the consolidated
financial statements included in this annual report on Form 20-F, and as part of its audit, has issued an unqualified audit report on
the effectiveness of our internal control over financial reporting as of December 31, 2023. This report is included in pages F-2 and F-3
of this annual report on Form 20-F and is incorporated herein by reference.
(d) Changes
in Internal Control Over Financial Reporting. During the period covered by this report, no changes in our internal control over
financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) have occurred that have materially
affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 16: Reserved
ITEM 16A: Audit Committee
Financial Expert
Our board of directors has determined that each of Ms. Nurit Benjamini and Ms. Lily
Ayalon qualifies as an “audit committee financial expert,” as defined by the rules of the SEC, and has the requisite financial
experience required by the Nasdaq rules. In addition, Ms. Nurit Benjamini and Ms. Lily Ayalon are each independent directors as such term
is defined in Rule 10A-3(b)(1) under the Exchange Act and under Nasdaq rules.
ITEM
16B: Code of Ethics
The Company has adopted a code of ethics (“Code
of Ethics”) that applies to all the employees, directors and officers. We have posted these codes on our corporate website
at https://ir.caesarstone.com/governance/governance-documents/default.aspx. Information
contained on, or that can be accessed through, our website does not constitute a part of this annual report and is not incorporated by
reference herein.
Waivers of our Code of Ethics may only be granted by the board of directors. Any amendments
to this Code of Ethics or any waiver that is granted, and the basis for granting the waiver, will be publicly communicated as appropriate.
Under Item 16B of Form 20-F, if a waiver or amendment of the Code of Ethics applies to our principal executive officer, principal
financial officer, principal accounting officer, controller and other persons performing similar functions and relates to standards promoting
any of the values described in Item 16B(b) of Form 20-F, we will disclose such waiver or amendment (i) on our website within
five business days following the date of amendment or waiver in accordance with the requirements of Instruction 4 to Item 16B
or (ii) through the filing of a Form 6-K. We granted no waivers under our Code of Ethics in 2023.
ITEM
16C: Principal Accountant Fees and Services
Fees Paid to the Auditors
The following table sets forth, for each of the years indicated, the fees billed by
our independent registered public accounting firm.
|
2023 |
2022 |
|||||||
|
(in thousands of U.S. dollars) |
||||||||
|
Audit fees(1) |
$ |
954 |
$ |
743 |
||||
|
Audit-related fees(2) |
58 |
1 |
||||||
|
Tax fees(3) |
44 |
82 |
||||||
|
All other fees(4) |
21 |
193 |
||||||
|
Total |
$ |
1,077 |
$ |
1,019 |
||||
| (1) |
“Audit fees” include fees for services performed by our independent public accounting firm in connection with the integrated
audit of our annual audit consolidated financial statements for 2023 and 2022, and its internal control over financial reporting as of
December 31, 2023 and 2022, certain procedures regarding our quarterly financial results submitted on Form 6-K, and consultation concerning
financial accounting and reporting standards. |
| (2) |
“Audit-related fees” relate to assurance and associated services that are traditionally performed by the independent
auditor. |
| (3) |
“Tax fees” include fees for professional services rendered by our independent registered public accounting firm for tax
compliance and tax advice and tax planning services on actual or contemplated transactions. |
| (4) |
“Other fees” include fees for services rendered by our independent registered public accounting firm with respect to
supply chain consulting, governmental incentives, due diligence investigations and other matters. |
Audit Committee’s Pre-Approval Policies and Procedures
Our audit committee has adopted a pre-approval policy for the engagement of our independent
accountant to perform certain audit and non-audit services. Pursuant to this policy, which is designed to assure that such engagements
do not impair the independence of our auditors, the audit committee pre-approves annually a catalog of specific audit and non-audit services
in the categories of audit service, audit-related service and tax services that may be performed by our independent accountants, in addition
to its ad-hoc approval of certain additional minor services.
ITEM
16D: Exemptions from the Listing Standards for Audit Committees
Not applicable.
ITEM
16E: Purchases of Equity Securities by the Company and Affiliated Purchasers
None.
ITEM 16F: Change in Registrant’s
Certifying Accountant
Starting 2023, Grant Thornton Australia are no longer the auditors of a significant
subsidiary.
ITEM
16G: Corporate Governance
As a foreign private issuer, we are permitted under Nasdaq Rule 5615(a)(3) to follow
Israeli corporate governance practices instead of the Nasdaq corporate governance rules, provided we disclose which requirements we are
not following and the equivalent Israeli requirement. We must also provide the Nasdaq Global Select Market with a letter from outside
counsel in our home country, Israel, certifying that our corporate governance practices are not prohibited by Israeli law.
We rely on this “home country practice exemption” with respect to the
quorum requirement for shareholder meetings. Whereas under the listing rules of the Nasdaq Stock Market, a quorum requires the presence,
in person or by proxy, of holders of at least 33 1/3% of the total issued outstanding voting power of our shares at each general meeting
of shareholders, pursuant to our articles of association, and as permitted under the Companies Law, the quorum required for a general
meeting of shareholders consists of at least two shareholders present in person or by proxy in accordance with the Companies Law, who
hold or represent at least 331/3% of the total outstanding voting power of our shares, except if (i) any such general meeting of shareholders
was initiated by and convened pursuant to a resolution adopted by the board of directors and (ii) at the time of such general meeting,
we qualify to use the forms and rules of a “foreign private issuer,” the requisite quorum will consist of two or more shareholders
present in person or by proxy who hold or represent at least 25% of the total outstanding voting power of our shares (and if the meeting
is adjourned for a lack of quorum, the quorum for such adjourned meeting will be, subject to certain exceptions, any number of shareholders).
We comply with the Nasdaq corporate governance rules requiring that listed companies
have a majority of independent directors and maintain a compensation and nominating committee composed entirely of independent directors.
We are also subject to Israeli corporate governance requirements applicable to companies incorporated in Israel whose securities are listed
for trading on a stock exchange outside of Israel. Finally, unlike Nasdaq rules, which requires listed issuers to make annual reports
on Form 20-F available to shareholders in one of a number of specific manners, Israeli law does not require us to distribute such reports
directly to shareholders, and the generally accepted business practice in Israel is not to distribute such reports to shareholders but
to make such reports available through a public website. In addition, we will make our annual report on Form 20-F containing audited financial
statements available to our shareholders at our offices (in addition to a public website).
We may in the future provide the Nasdaq Global Select Market with an additional letter
or letters notifying the organization that we are following our home country practices, consistent with the Companies Law and practices,
in lieu of other requirements of Nasdaq Rule 5600.
ITEM
16H: Mine Safety Disclosures
Not applicable.
ITEM
16I: Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Not applicable.
ITEM
16J. Insider Trading Policies
Not applicable.
ITEM
16K. Cybersecurity
Cybersecurity Risk Management
and Strategy
We have developed and implemented a cybersecurity risk management program intended
to protect the confidentiality, integrity, and availability of our critical systems and information.
Our program’s design is based on the NIST (National Institute
of Standards and Technology framework). This does not imply that we meet any particular technical standards, specifications, or requirements,
but only that we use the NIST cyber security framework (CSF) as a guide to help us identify, assess, and manage cybersecurity risks relevant
to our business, and in its design was aided by external advisors experts in the field.
Our cybersecurity risk management program shares common methodologies, reporting channels
and governance processes that apply across the enterprise to other legal, compliance, strategic, operational, and financial risk areas.
Our cybersecurity risk management program includes:
| • |
risk assessments designed to help identify material cybersecurity risks to our critical systems, information, products, services,
and our broader enterprise IT environment; |
| • |
a security team principally responsible for managing our cybersecurity risk assessment processes, our security controls, and
our response to cybersecurity incidents; |
| • |
the use of external service providers, where appropriate, to assess, test or otherwise assist with aspects of our security controls;
|
| • |
cybersecurity awareness training of our employees, incident response personnel, and senior management; |
| • |
a cybersecurity incident response plan that includes procedures for responding to cybersecurity incidents; and |
| • |
a third-party risk management process for service providers, suppliers, and vendors. |
We have not identified risks from known cybersecurity threats, including as a result
of any prior cybersecurity incidents, that have materially affected or are reasonably likely to materially affect us, including our operations,
business strategy, results of operations, or financial condition.
Cybersecurity Governance
Our board of directors considers cybersecurity risk as part of its risk oversight
function and has delegated to the Audit Committee oversight of cybersecurity and other information technology risks, among other, via
the internal audit plan. The audit committee oversees management’s activities to address the cybersecurity risk.
The board of directors and our audit committee receive reports from management and
internal auditor on our cybersecurity risks. In addition, management updates the audit committee, as necessary, regarding any material
cybersecurity incidents, as well as any incidents with lesser impact potential. In addition, they periodically receive briefings from
management on our cyber security activities and incidents.
Our cybersecurity management team, includes our CEO, CFO, CIO, CSIO, General Counsel
and Director of IT Infrastructure, is convening on a quarterly basis and is responsible for assessing and managing our material risks
from cybersecurity threats. The team has primary responsibility for our overall cybersecurity risk management program and supervises both
our internal cybersecurity personnel and our retained external cybersecurity consultants. Our cybersecurity management team’s skills
and experience cover the areas of management, finance, investor relations, legal, Information Systems and Infrastructure and cyber security.
Our cybersecurity management team supervises efforts to prevent, detect, mitigate,
and remediate cybersecurity risks and incidents through various means, which may include briefings from internal security personnel; threat
intelligence and other information obtained from governmental, public or private sources, including external consultants engaged by us;
and alerts and reports produced by security tools deployed in the IT environment.
PART III
ITEM 17: Financial Statements
Not applicable.
ITEM 18: Financial Statements
See Financial Statements included at the end of this report.
ITEM 19: Exhibits
INDEX OF EXHIBITS
|
Number |
Description | |
| 4.11
|
Management
Services Agreement, by and between Tene Growth Capital 3 Funds Management Company Ltd. and the Registrant, dated November 2021 (7) | |
|
101.INS |
Inline XBRL Instance Document |
|
101.SCH |
Inline XBRL Taxonomy Extension Schema Document |
|
101.PRE |
Inline XBRL Taxonomy Presentation Linkbase Document |
|
101.CAL |
Inline XBRL Taxonomy Calculation Linkbase Document |
|
101.LAB |
Inline XBRL Taxonomy Label Linkbase Document |
|
101.DEF
104 |
Inline XBRL Taxonomy Extension Definition Linkbase Document
Cover Page Interactive Data File (embedded within the Inline XBRL document)
|
| (1) |
Previously filed with the Securities and Exchange Commission on March 6, 2012 as Exhibit 3.1 to the Company’s registration
statement on Form F-1/A (File No. 333-179556) and incorporated by reference herein. |
| (2) |
Previously filed with the Securities and Exchange Commission on February 16, 2012 pursuant to a registration statement on Form F-1
(File No. 333-179556) and incorporated by reference herein. |
| (3) |
Previously filed with the Securities and Exchange Commission on March 7, 2016 pursuant as Exhibit 4.5 to the Company’s
annual report on Form 20-F for the year ended December 31, 2015 and incorporated by reference herein. |
| (4) |
Previously filed with the Securities and Exchange Commission on December 23, 2020 as Exhibit 99.1 to the Company’s Registration
Statement on Form S-8 (File No. 333-251642) and incorporated by reference herein. |
| (5) |
Previously filed with the Securities and Exchange Commission on October 13, 2021 as Exhibit 99.1 to the Company’s current report
on Form 6-K and incorporated by reference herein. |
| (6) |
Previously filed with the Securities and Exchange Commission on March 15, 2022 pursuant as Exhibit 4.10 to the Company’s annual
report on Form 20-F for the year ended December 31, 2021 and incorporated by reference herein. |
| (7) |
Previously filed with the Securities and Exchange Commission on March 15, 2022 pursuant as Exhibit 4.11 to the Company’s annual
report on Form 20-F for the year ended December 31, 2021 and incorporated by reference herein |
| * |
Portions of this exhibit were omitted, and a complete copy of each agreement was provided separately to the Securities and Exchange
Commission pursuant to the Company’s application requesting confidential treatment under Rule 24b-2 under the Exchange Act, which
was subsequently approved by the SEC. |
| ** |
Certain confidential information contained in this document, marked by brackets, was omitted because it is both (i) not material
and (ii) would likely cause competitive harm to the Company if publicly disclosed. “(***)” indicates where the information
has been omitted from this exhibit |
| ∞ |
English translation of original Hebrew document |
SIGNATURES
The registrant hereby certifies that it meets all of the requirements
for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.
| |
Caesarstone Ltd. |
|
|
|
|
|
By:/s/
Yosef (Yos) Shiran
Yosef (Yos) Shiran)
Chief Executive Officer
|
|
|
|
|
Date: March 6, 2024 |
|
CAESARSTONE LTD. AND ITS SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2023
INDEX
|
Page
|
|
|
(PCAOB ID No. 1281)
|
F-2 - F-5
|
|
F-6 - F-7
|
|
|
F-8
|
|
|
F-9
|
|
|
F-10
|
|
|
F-11 - F-12
|
|
|
F-13 - F-70
|
|
|
(PCAOB ID No. 2233)
|
F-71 - F-72
|
- - - - - - - - - - -
 |
Kost Forer Gabbay & Kasierer
144 Menachem Begin Road, Building A,
Tel-Aviv 6492102, Israel
|
Tel: +972-3-6232525
Fax: +972-3-5622555
ey.com
|
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, 2023 and 2022, 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, 2023, 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, 2023 and 2022, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2023, 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, 2022, and total revenues constituting 17% 2022 and 18% in 2021 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, 2023, 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 6, 2023 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.
|
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 provision of the Silicosis claims was complex due to the significant estimation required in determining the Company’s liability amount of $26 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 provision of the Silicosis claims, 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.
|
|
Impairment of long-lived assets of Richmond Hill production facility
|
||
|
Description of the matter
|
As reflected in the Company’s consolidated financial statements, in Note 2k, as of December 31, 2023, the Company’s recorded an impairment charge of $27.5 Million for Long lived assets related to Richmond hill production facility.
Management identified the closure of its production facility in Richmond hill were indicators for impairment. Consequently, Management performed an impairment test of the long-lived assets of Richmond Hill production facility.
Auditing the Company's impairment test for long-lived assets of Richmond Hill production facility was complex and judgmental due to the significant estimation and assumptions in determining the fair value of the long-lived assets. In particular, management's significant assumptions used in determining the fair value of long-lived assets of Richmond Hill production facility included estimation of the fair value for a unit of equipment (machine, storage facility, etc.), land and building, according to the age of the assets and its condition. Management estimated the equipment value according to accepted equipment prices in the relevant market (local or international market). Land and building value estimated in comparison with sale of same type of properties in the area and the anticipated future benefit from the use of the property. These assumptions are sensitive and affected by the specific market and industry qualitive 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 long-lived assets impairment assessment process. Among other, we tested controls over management's review of the significant assumptions in estimating the fair value of the long-lived assets of Richmond Hill production facility of the Company.
To test the estimated fair value of the long-lived assets of Richmond Hill production facility, our audit procedures included, among others, understanding the company's valuation process, using a professional with specialized skills and knowledge to review the valuation of the equipment, and specialist to review the valuation land and building, understand the work assumptions and the selected data used as part of the assessment. In addition, we performed a sensitivity analysis using independent comparative calculation to estimate the fair value of the long-lived assets of the Richmond Hill production facility.
We also evaluated the related disclosures for long lived assets included in Notes 2k, 6 and 10 to the consolidated financial statements.
|
|
/s/KOST FORER GABBAY & KASIERER
|
|
A Member of EY Global
|
|
We have served as the Company's auditor since 2004
|
|
Tel-Aviv, Israel
|
|
March 6, 2024
|
|
|
|
|
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, 2023, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission 2013 framework (the COSO criteria). In our opinion, Caesarstone Ltd. and subsidiaries (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2023, based on the COSO criteria.
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, 2023 and 2022, 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, 2023, and the related notes and our report dated March 6, 2023 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 provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
|
/s/KOST FORER GABBAY & KASIERER
|
|
A Member of EY Global
|
|
Tel-Aviv, Israel
|
|
March 6, 2024
|
F - 5
CAESARSTONE LTD. AND ITS SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
U.S. dollars in thousands
|
December 31,
|
|||||||||||
|
Note
|
2023
|
2022
|
|||||||||
|
ASSETS
|
|||||||||||
|
CURRENT ASSETS:
|
|||||||||||
|
Cash and cash equivalents
|
$
|
54,623
|
$
|
52,081
|
|||||||
|
Short-term bank deposits
|
36,500
|
-
|
|||||||||
|
Short-term available for sale marketable securities
|
3
|
-
|
7,077
|
||||||||
|
Trade receivables (net of allowance for credit loss of $12,214 and $9,756 at December 31, 2023 and 2022, respectively)
|
66,888
|
77,898
|
|||||||||
|
Other accounts receivable and prepaid expenses
|
4
|
25,489
|
32,570
|
||||||||
|
Inventories
|
5
|
136,446
|
238,232
|
||||||||
|
Total current assets
|
319,946
|
407,858
|
|||||||||
|
LONG-TERM ASSETS:
|
|||||||||||
|
Severance pay fund
|
1,994
|
3,410
|
|||||||||
|
Deferred tax assets, net
|
12
|
3,061
|
16,251
|
||||||||
|
Long-term deposits and other
|
14
|
4,961
|
3,255
|
||||||||
|
Property, plant and equipment, net
|
6
|
123,480
|
169,292
|
||||||||
|
Operating lease right-of-use assets
|
10
|
120,156
|
144,098
|
||||||||
|
Intangible assets, net
|
7
|
6,257
|
8,817
|
||||||||
|
Total long-term assets
|
259,909
|
345,123
|
|||||||||
|
Total assets
|
$
|
579,855
|
$
|
752,981
|
|||||||
CAESARSTONE LTD. AND ITS SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
U.S. dollars in thousands (except share data)
|
December 31,
|
|||||||||||
|
Note
|
2023
|
2022
|
|||||||||
|
LIABILITIES AND EQUITY
|
|||||||||||
|
CURRENT LIABILITIES:
|
|||||||||||
|
Short-term bank credit and current maturities of long- term bank loan
|
8
|
$
|
5,118
|
$
|
26,135
|
||||||
|
Trade payables
|
42,848
|
62,194
|
|||||||||
|
Related party
|
14
|
257
|
283
|
||||||||
|
Short term legal settlements and loss contingencies
|
11
|
16,106
|
17,595
|
||||||||
|
Accrued expenses and other liabilities
|
9
|
56,894
|
58,777
|
||||||||
|
Total current liabilities
|
121,223
|
164,984
|
|||||||||
|
LONG-TERM LIABILITIES:
|
|||||||||||
|
Long-term loan from related parties
|
14
|
479
|
483
|
||||||||
|
Long-term bank loan
|
15
|
2,070
|
4,340
|
||||||||
|
Accrued severance pay
|
3,065
|
4,750
|
|||||||||
|
Deferred tax liabilities, net
|
12
|
3,006
|
4,288
|
||||||||
|
Long-term warranty provision
|
1,204
|
1,262
|
|||||||||
|
Long term legal settlements and loss contingencies
|
11
|
11,814
|
19,572
|
||||||||
|
Long-term operating lease liabilities
|
10
|
114,146
|
124,353
|
||||||||
|
Total long-term liabilities
|
135,784
|
159,048
|
|||||||||
|
COMMITMENTS AND CONTINGENT LIABILITIES
|
11
|
||||||||||
|
REDEEMABLE NON-CONTROLLING INTEREST
|
1,2
|
7,789
|
7,903
|
||||||||
|
EQUITY:
|
13
|
||||||||||
|
Share capital-
|
|||||||||||
|
Ordinary shares of NIS 0.04 par value - 200,000,000 shares authorized at December 31, 2023 and 2022; 35,635,548 and 35,610,399 issued at December 31, 2023 and 2022, respectively; 34,532,452 and 34,507,303 shares outstanding at December 31, 2023 and 2022, respectively
|
371
|
371
|
|||||||||
|
Additional paid-in capital
|
164,456
|
163,431
|
|||||||||
|
Capital fund related to non-controlling interest
|
(5,587
|
)
|
(5,587
|
)
|
|||||||
|
Accumulated other comprehensive loss, net
|
(8,402
|
)
|
(9,578
|
)
|
|||||||
|
Retained earnings
|
203,651
|
311,839
|
|||||||||
|
Treasury shares at cost – 1,103,096 ordinary shares at December 31, 2023 and 2022
|
(39,430
|
)
|
(39,430
|
)
|
|||||||
|
Total equity
|
315,059
|
421,046
|
|||||||||
|
Total liabilities and equity
|
579,855
|
752,981
|
|||||||||
CAESARSTONE LTD. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
U.S. dollars in thousands (except per share data)
|
Year ended December 31,
|
||||||||||||
|
2023
|
2022
|
2021
|
||||||||||
|
Revenues
|
$
|
565,231
|
$
|
690,806
|
$
|
643,892
|
||||||
|
Cost of revenues
|
473,292
|
527,561
|
472,394
|
|||||||||
|
Gross profit
|
91,939
|
163,245
|
171,498
|
|||||||||
|
Operating expenses:
|
||||||||||||
|
Research and development
|
5,086
|
4,098
|
4,216
|
|||||||||
|
Selling and marketing
|
82,222
|
94,412
|
85,725
|
|||||||||
|
General and administrative
|
49,490
|
51,596
|
50,845
|
|||||||||
|
Impairment and restructuring expenses related to goodwill and long lived assets
|
47,939
|
71,258
|
-
|
|||||||||
|
Legal settlements and loss contingencies, net
|
(4,770
|
)
|
568
|
3,283
|
||||||||
|
Total operating expenses
|
179,967
|
221,932
|
144,069
|
|||||||||
|
Operating income (loss)
|
(88,028
|
)
|
(58,687
|
)
|
27,429
|
|||||||
|
Finance expenses (income), net
|
(1,069
|
)
|
(3,079
|
)
|
7,590
|
|||||||
|
Income (loss) before taxes on income
|
(86,959
|
)
|
(55,608
|
)
|
19,839
|
|||||||
|
Taxes on income
|
21,281
|
758
|
1,950
|
|||||||||
|
Net income (loss)
|
$
|
(108,240
|
)
|
$
|
(56,366
|
)
|
$
|
17,889
|
||||
|
Net income (loss) attributable to non-controlling interest
|
(584
|
)
|
688
|
(1,077
|
)
|
|||||||
|
Net income (loss) attributable to controlling interest
|
$
|
(107,656
|
)
|
$
|
(57,054
|
)
|
$
|
18,966
|
||||
|
Basic and diluted net income (loss) per share of Ordinary shares
|
$
|
(3.13
|
)
|
$
|
(1.66
|
)
|
$
|
0.51
|
||||
|
Weighted average number of Ordinary shares used in computing basic income (loss) per share (in thousands)
|
34,519
|
34,488
|
34,462
|
|||||||||
|
Weighted average number of Ordinary shares used in computing diluted income (loss) per share (in thousands)
|
34,519
|
34,488
|
34,570
|
|||||||||
CAESARSTONE LTD. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
U.S. dollars in thousands
|
Year ended December 31,
|
||||||||||||
|
2023
|
2022
|
2021
|
||||||||||
|
Net income (loss)
|
$
|
(108,240
|
)
|
$
|
(56,366
|
)
|
$
|
17,889
|
||||
|
Other comprehensive income (loss) before tax:
|
||||||||||||
|
Foreign currency translation adjustments
|
38
|
(8,932
|
)
|
(2,186
|
)
|
|||||||
|
Unrealized income (loss) on foreign currency cash flow hedge
|
764
|
(699
|
)
|
329
|
||||||||
|
Unrealized income (loss) on available for sale marketable securities
|
100
|
(84
|
)
|
(59
|
)
|
|||||||
|
Income tax expense related to components of other comprehensive loss
|
212
|
(11
|
)
|
(26
|
)
|
|||||||
|
Total other comprehensive income (loss), net of tax
|
1,114
|
(9,726
|
)
|
(1,942
|
)
|
|||||||
|
Comprehensive income (loss)
|
(107,126
|
)
|
(66,092
|
)
|
15,947
|
|||||||
|
Less - comprehensive loss attributable to non-controlling interest
|
646
|
164
|
1,232
|
|||||||||
|
Comprehensive income (loss) attributable to controlling interest
|
$
|
(106,480
|
)
|
$
|
(65,928
|
)
|
$
|
17,179
|
||||
CAESARSTONE LTD. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
U.S. dollars in thousands (except share data)
|
Common stock
|
Additional
paid-in
|
Retained
|
Accumulated
other
comprehensive
income (loss),
|
Capital fund
related to non-
controlling
|
Treasury
|
Total
|
||||||||||||||||||||||||||
|
Shares
|
Amount
|
capital
|
earnings
|
net (1)
|
interest
|
shares
|
equity
|
|||||||||||||||||||||||||
|
Balance as of January 1, 2021
|
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 (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
|
|||||||||||||||||||||
|
-
|
||||||||||||||||||||||||||||||||
|
Other comprehensive loss
|
-
|
-
|
-
|
-
|
(8,874
|
)
|
-
|
-
|
(8,874
|
)
|
||||||||||||||||||||||
|
Net loss attributable to controlling interest
|
-
|
-
|
-
|
(57,054
|
)
|
-
|
-
|
-
|
(57,054
|
)
|
||||||||||||||||||||||
|
Equity-based compensation expense (2)
|
-
|
-
|
1,502
|
-
|
-
|
-
|
-
|
1,502
|
||||||||||||||||||||||||
|
Adjustment to redemption value of the non-controlling interest
|
-
|
-
|
-
|
(198
|
)
|
-
|
-
|
-
|
(198
|
)
|
||||||||||||||||||||||
|
Dividend paid
|
-
|
-
|
-
|
(8,625
|
)
|
-
|
-
|
-
|
(8,625
|
)
|
||||||||||||||||||||||
|
Cashless exercise of options and RSUs
|
34,233
|
(
|
)
|
(
|
)
|
-
|
-
|
-
|
-
|
-
|
||||||||||||||||||||||
|
Balance as of December 31, 2022
|
34,507,303
|
371
|
163,431
|
311,839
|
(9,578
|
)
|
(5,587
|
)
|
(39,430
|
)
|
421,046
|
|||||||||||||||||||||
|
-
|
||||||||||||||||||||||||||||||||
|
Other comprehensive income
|
-
|
-
|
-
|
-
|
1,176
|
-
|
-
|
1,176
|
||||||||||||||||||||||||
|
Net loss attributable to controlling interest
|
-
|
-
|
-
|
(107,656
|
)
|
-
|
-
|
-
|
(107,656
|
)
|
||||||||||||||||||||||
|
Equity-based compensation expense (2)
|
-
|
-
|
1,025
|
-
|
-
|
-
|
-
|
1,025
|
||||||||||||||||||||||||
|
Adjustment to redemption value of the non-controlling interest
|
-
|
-
|
-
|
(532
|
)
|
-
|
-
|
-
|
(532
|
)
|
||||||||||||||||||||||
|
Cashless exercise of options and RSUs
|
25,149
|
(
|
)
|
(
|
)
|
-
|
-
|
-
|
-
|
-
|
||||||||||||||||||||||
|
Balance as of December 31, 2023
|
34,532,452
|
371
|
164,456
|
203,651
|
(8,402
|
)
|
(5,587
|
)
|
(39,430
|
)
|
315,059
|
|||||||||||||||||||||
(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.
CAESARSTONE LTD. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
U.S. dollars in thousands
|
Year ended December 31,
|
||||||||||||
|
2023
|
2022
|
2021
|
||||||||||
|
Cash flows from operating activities:
|
||||||||||||
|
Net income (loss)
|
$
|
(108,240
|
)
|
$
|
(56,366
|
)
|
$
|
17,889
|
||||
|
Adjustments required to reconcile net income to net cash provided by operating activities:
|
||||||||||||
|
Depreciation and amortization
|
30,007
|
36,344
|
35,407
|
|||||||||
|
Share-based compensation expense
|
1,025
|
1,502
|
1,846
|
|||||||||
|
Accrued severance pay, net
|
(268
|
)
|
(58
|
)
|
121
|
|||||||
|
Changes in deferred tax, net
|
11,905
|
(5,693
|
)
|
(4,473
|
)
|
|||||||
|
Capital loss (gain) from sale of property, plant and equipment
|
18
|
67
|
(3
|
)
|
||||||||
|
Decrease in trade receivables
|
11,760
|
2,612
|
815
|
|||||||||
|
Decrease (increase) in other accounts receivable and prepaid expenses
|
8,145
|
3,645
|
(9,036
|
)
|
||||||||
|
Decrease (increase) in inventories
|
101,549
|
(40,884
|
)
|
(54,189
|
)
|
|||||||
|
Increase (decrease) in trade payables
|
(29,465
|
)
|
(21,032
|
)
|
28,277
|
|||||||
|
Increase in warranty provision
|
(165
|
)
|
(119
|
)
|
112
|
|||||||
|
Legal settlements and loss contingencies, net
|
(4,770
|
)
|
568
|
3,283
|
||||||||
|
Decrease in right of use assets
|
7,865
|
28,056
|
25,906
|
|||||||||
|
Decrease in lease liabilities
|
(9,516
|
)
|
(36,478
|
)
|
(22,085
|
)
|
||||||
|
Contingent consideration related to acquisition
|
264
|
120
|
(288
|
)
|
||||||||
|
Amortization of premium and accretion of discount on marketable securities, net
|
63
|
238
|
412
|
|||||||||
|
Changes in accrued interest related to marketable securities
|
39
|
74
|
42
|
|||||||||
|
Goodwill and long-lived assets impairment charges
|
47,939
|
71,258
|
-
|
|||||||||
|
Decrease in accrued expenses and other liabilities including related party
|
(1,626
|
)
|
(7,165
|
)
|
(3,352
|
)
|
||||||
|
Net cash (used in) provided by operating activities
|
66,529
|
(23,311
|
)
|
20,684
|
||||||||
|
Cash flows from investing activities:
|
||||||||||||
|
Net cash paid for acquisitions
|
-
|
(2,245
|
)
|
-
|
||||||||
|
Investment in short-term deposits
|
(36,500
|
)
|
-
|
-
|
||||||||
|
Purchase of property, plant and equipment
|
(11,168
|
)
|
(17,801
|
)
|
(31,477
|
)
|
||||||
|
Proceeds from sale of property, plant and equipment
|
177
|
12
|
9
|
|||||||||
|
Repayment of assumed shareholders loan related to acquisition
|
-
|
-
|
(1,966
|
)
|
||||||||
|
Investment in marketable securities
|
-
|
-
|
(11,738
|
)
|
||||||||
|
Sale and maturity of marketable securities
|
7,100
|
12,401
|
10,395
|
|||||||||
|
Proceeds from (investment in) long-term deposits
|
(135
|
)
|
348
|
(108
|
)
|
|||||||
|
Net cash used in investing activities
|
(40,526
|
)
|
(7,285
|
)
|
(34,885
|
)
|
||||||
CAESARSTONE LTD. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
U.S. dollars in thousands
|
Year ended December 31,
|
||||||||||||
|
2023
|
2022
|
2021
|
||||||||||
|
Cash flows from financing activities:
|
||||||||||||
|
Dividend paid
|
$
|
-
|
$
|
(8,625
|
)
|
$
|
(10,681
|
)
|
||||
|
Proceeds (repayment) of short-term bank credit and loans, net
|
(23,268
|
)
|
18,640
|
(11,761
|
)
|
|||||||
|
Contingent and deferred considerations related to acquisition
|
(511
|
)
|
-
|
(1,492
|
)
|
|||||||
|
Repayment of a financing liability of land
|
-
|
(859
|
)
|
(1,320
|
)
|
|||||||
|
Net cash used in financing activities
|
(23,779
|
)
|
9,156
|
(25,254
|
)
|
|||||||
|
Effect of exchange rate differences on cash and cash equivalents
|
318
|
(794
|
)
|
(478
|
)
|
|||||||
|
Increase (decrease) in cash and cash equivalents
|
2,542
|
(22,234
|
)
|
(39,933
|
)
|
|||||||
|
Cash and cash equivalents at beginning of year
|
52,081
|
74,315
|
114,248
|
|||||||||
|
Cash and cash equivalents at end of year
|
$
|
54,623
|
$
|
52,081
|
$
|
74,315
|
||||||
|
Cash received (paid) during the year for:
|
||||||||||||
|
Interest paid
|
$
|
(716
|
)
|
$
|
(1,159
|
)
|
$
|
(1,915
|
)
|
|||
|
Interest received
|
$
|
849
|
$
|
439
|
$
|
465
|
||||||
|
Tax paid
|
$
|
(1,852
|
)
|
$
|
(4,968
|
)
|
$
|
(7,377
|
)
|
|||
|
Non cash activity during the year for:
|
||||||||||||
|
Changes in trade payables balances related to purchase of property, plant and equipment
|
$
|
188
|
$
|
(925
|
)
|
$
|
(56
|
)
|
||||
|
Operating lease liabilities and right-of-use assets
|
$
|
19,364
|
$
|
18,569
|
$
|
57,343
|
||||||
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. 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 stone and other materials sold under the Company's premium Caesarstone brand. The Company's products are sold in over 60 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, Sweden, 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 currently manufactures its engineered surfaces in two manufacturing facilities located in Bar-Lev Industrial Park in northern Israel and in Morbi, India, through its subsidiary (see also b below).
| 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 part of the agreement, the Company granted Lioli’s minority shareholders a put option and Lioli’s minority shareholders granted the Company a call option for its interest, each exercisable any time after April 1, 2024 and before the 20th anniversary of the acquisition date based on a mechanism as set forth in the agreement between the parties.
F - 13
CAESARSTONE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share data)
| NOTE 1:- |
GENERAL (Cont.)
|
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 offering, the Company holds 60.4% of Lioli's shares.
As of December 31, 2023 and 2022, the Company revaluated its minority’s Put Option, in accordance with ASC 820 "Fair Value Measurements and Disclosures", at level 3, and based on it the non-controlling interest fair value in Lioli amounted to $7,789 and to $7,903, respectively.
| 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.
| NOTE 1:- |
GENERAL (Cont.)
|
| d. |
Acquisition of Magrab Naturtsen AB:
|
On July 6, 2022, the Company completed the acquisition of 100% of the shares of Magrab Naturtsen AB ("Magrab"), a stone supplier in Sweden, for a total net consideration of approximately $3,109.
The consideration included a deferred consideration arrangement that requires the Company to pay up to approximately SEK 10,500 (approximately $1,000) of additional consideration to Magrab’s former shareholder to be paid during two years following the acquisition date. The fair value of the deferred consideration arrangement at the acquisition date was $875. The acquisition agreement included additional consideration in a form of an earn-out arrangement with Magrab’s former shareholder, that requires the Company to pay up to approximately SEK 4,000 (approximately $380) of additional amounts subject to reaching certain Revenues and EBITDA achievements during two years following the acquisition date. In order to receive the earn-out payments Magrab's former shareholder have to remain as a full-time employee of the Company at the expiry of the earn-out periods, and therefore this earn-out arrangement does not meet the contingent consideration under ASC805 "Business Combinations”.
The Magrab acquisition was accounted for as a business combination in accordance with ASC 805 "Business Combinations”.
The following table summarizes the purchase price allocation of Magrab Acquisition at the acquisition date:
|
Components of Purchase Price:
|
||||
|
Cash
|
$
|
2,607
|
||
|
Deferred consideration
|
875
|
|||
|
Less: Cash acquired
|
373
|
|||
|
Net for allocation
|
3,109
|
|||
|
|
||||
|
Allocation of Purchase Price:
|
||||
|
|
||||
|
Net tangible assets (liabilities):
|
||||
|
Trade receivables and other current assets, net
|
524
|
|||
|
Property, plant and equipment, net
|
41
|
|||
|
Inventories, net
|
1,233
|
|||
|
ROU assets
|
446
|
|||
|
Trade payables
|
(523
|
)
|
||
|
Accrued expenses and other liabilities
|
(378
|
)
|
||
|
Short-term lease liability
|
(22
|
)
|
||
|
Long-term lease and other non-current liabilities
|
(424
|
)
|
||
|
Total net tangible assets
|
897
|
|||
|
|
||||
|
Identifiable intangible assets:
|
||||
|
Customer relationships (1)
|
1,789
|
|||
|
Deferred tax liabilities
|
(369
|
)
|
||
|
Total identifiable intangible assets acquired
|
1,420
|
|||
|
|
||||
|
Goodwill (2)
|
792
|
|||
|
Total purchase price allocation
|
$
|
3,109
|
| NOTE 1:- |
GENERAL (Cont.)
|
| (1) |
Customer relationships represent the underlying relationships and agreements with Magrab'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 8 years, amortized using the straight-line method.
|
| (2) |
The goodwill is primarily attributable to expected synergies resulting from the acquisition.
|
In 2022, the Company recognized $80 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.
During 2023, the Company paid the first payment for the above mentioned considerations in the amount of approximately SEK 7,250 (approximately $700).
| e. |
Major suppliers:
|
In 2023, the Company acquired approximately 69% of its minerals (such as quartz) consumption from Turkey, of which approximately 63% was supplied by Mikroman Madencilik San ve TIC.LTD.STI ("Mikroman"), constituting approximately 44% of Company's total minerals, and approximately 32% was supplied by Ekom Eczacibasi Dis Ticaret A.Ş. (“Ekom”), constituting approximately 22% of Company’s total minerals. If Mikroman or Ekom cease supplying the Company with minerals or if the Company's supply of minerals generally from Turkey is adversely impacted, the Company's other suppliers may be unable to meet the Company's minerals 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.
| 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 mainly in U.S. dollars (USD), Australian dollars (AUD) and Canadian dollars (CAD). 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.
Accordingly, monetary accounts maintained in currencies other than the USD are re-measured into dollars in accordance with Accounting Standards Codification, "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.
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 (Cont.)
| 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 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.
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, 2023 and 2022.
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.)
| 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.
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.
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, 2023 and 2022, the notional amount of these forward contracts into which the Company entered was $21,162, and $41,699, respectively, and the unrealized income recorded in accumulated other comprehensive income, net, from the Company's currency forward NIS transactions was $0 and $333, 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, 2023 and 2022, the notional amount of foreign exchange and styrene forward and option contracts into which the Company entered was $0 and $13,247, respectively.
The foreign exchange forward contracts will expire at various times through 2024.
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 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,
|
||||||||
|
2023
|
2022
|
||||||||
|
Derivative assets:
|
|||||||||
|
Derivatives designated as hedging instruments:
|
|||||||||
|
Foreign exchange option and forward contracts
|
Other accounts receivable and prepaid expenses
|
539
|
39
|
||||||
|
Derivatives not designated as hedging instruments:
|
|
||||||||
|
Foreign exchange option and forward contracts
|
Other accounts receivable and prepaid expenses
|
-
|
333
|
||||||
|
Total
|
|
539
|
371
|
||||||
|
|
|
||||||||
|
Derivative liabilities:
|
|
||||||||
|
|
|
||||||||
|
Derivatives designated as hedging instruments:
|
|||||||||
|
Foreign exchange option and forward contracts
|
Accrued expenses and other liabilities
|
-
|
(450
|
)
|
|||||
|
Derivatives not designated as hedging instruments:
|
|
||||||||
|
Foreign exchange option and forward contracts
|
Accrued expenses and other liabilities
|
-
|
(62
|
)
|
|||||
|
Styrene forward contract
|
Accrued expenses and other liabilities
|
-
|
(430
|
)
|
|||||
|
Total
|
|
-
|
(942
|
)
|
|||||
The following tables present fair value amounts of, and gains and losses recorded in relation to, the Company's derivative instruments and related hedged items:
|
Gain (loss) recognized in
other comprehensive
income, net
|
Gain (loss) recognized in
statements of income
|
||||||||||||||||
|
Year ended
December 31,
|
Statements of income
|
Year ended
December 31,
|
|||||||||||||||
|
2023
|
2022
|
Item
|
2023
|
2022
|
|||||||||||||
|
Derivatives designated as hedging instruments:
|
|||||||||||||||||
|
Foreign exchange forward contract
|
951
|
(709
|
)
|
Cost of revenues and Operating expenses
|
(3,306
|
)
|
(2,555
|
)
|
|||||||||
|
Derivatives not designated as hedging instruments:
|
|
||||||||||||||||
|
Foreign exchange forward and options contracts
|
-
|
-
|
Financial expenses, net
|
1,313
|
(1,506
|
)
|
|||||||||||
|
Styrene forward contracts
|
-
|
-
|
Financial expenses, net
|
113
|
(520
|
)
|
|||||||||||
|
|
|
||||||||||||||||
|
Total
|
951
|
(709
|
)
|
|
(1,880
|
)
|
(4,581
|
)
|
|||||||||
| 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.
The following table provides the details of the change in the Company's provision for inventory write-downs:
|
December 31,
|
||||||||
|
2023
|
2022
|
|||||||
|
Inventory provision, beginning of year
|
$
|
21,738
|
$
|
16,789
|
||||
|
Increase in inventory provision
|
9,848
|
11,165
|
||||||
|
Write off
|
(4,148
|
)
|
(6,216
|
)
|
||||
|
Inventory provision, end of year
|
$
|
27,438
|
$
|
21,738
|
||||
| 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
|
||
|
Leasehold improvements
|
Over the shorter of the term of the lease or the life of the asset
|
| 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.
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.)
| 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.
The Company's evaluation of recoverability is performed at the lowest level of assets group to which identifiable cash flows are largely independent of the cash flows of other asset group. Recoverability of the asset group is measured by a comparison of the aggregate undiscounted future cash flows the asset group is expected to generate to the carrying amounts of the asset group. If such evaluation indicates that the carrying amount of the asset group is not recoverable, an impairment loss is calculated based on the excess of the carrying amount of the asset group over its fair value.
The Company identified indicators for impairment, among others, slow down in demand due to global market conditions, lower production utilization in certain plants, increased inflation and higher interest rates, and the manufacturing facilities closure in Sdot Yam and in Richmond hill. In 2022, the Company recorded an impairment loss for the excess of the book value over its fair value related to Sdot Yam manufacturing facility, in the amount of $26,429. In 2023, the Company recorded an impairment loss for the excess of the book value over its fair value related to US manufacturing facility, in the amount of $27,486 and additional impairment loss related to Sdot Yam manufacturing facility in the amount of $986.
Following the closure of Sdot Yam manufacturing facility during 2023, the Company evaluated it's right of use asset resulted from non-cancelable lease agreement effective through 2032. Based on future estimated sublease the Company recorded an impairment of $16,575 during 2023.
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 - 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.)
| 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 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 performed an annual goodwill impairment test during the fourth quarter of each fiscal year, or more frequently, if an event occurs or circumstances change that would indicate the carrying amount may be impaired. The Company operates as one reporting unit, and 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.
The fair value of the reporting unit was estimated in accordance with . ASC 820, "Fair Value Measurements". The Company applied assumptions that marketplace participants would consider in determining the fair value of its reporting unit.
The process of evaluating the potential impairment of goodwill is subjective and requires significant judgment. 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.
As of December 31, 2022, the company performed an impairment test of the goodwill in accordance with ASC350, and recognized a full impairment charge for its goodwill balances in the amount of $44,829. (see also Note 7).
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.)
| 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:
|
2023
|
2022
|
|||||||
|
January 1,
|
$
|
2,501
|
$
|
2,680
|
||||
|
Charged to costs and expenses relating to new sales
|
1,289
|
1,461
|
||||||
|
Costs of product warranty claims
|
(1,792
|
)
|
(1,923
|
)
|
||||
|
Foreign currency translation adjustments
|
360
|
283
|
||||||
|
December 31,
|
2,358
|
2,501
|
||||||
| 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 probable 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 - 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.)
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.
The Company has elected to apply the practical expedient such that it does not evaluate payment terms of one year or less for the existence of a significant financing component.
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.
| 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 - 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.)
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, 2023, 2022 and 2021 were $15,726, $14,777 and $15,307, 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 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, 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, 2023 and 2022.
F - 28
CAESARSTONE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share data)
NOTE 2:-SIGNIFICANT ACCOUNTING POLICIES (Cont.)
The following table provides the detail of the change in the Company's allowance for credit loss:
|
2023
|
2022
|
|||||||
|
January 1,
|
$
|
9,756
|
$
|
9,036
|
||||
|
Charges to expenses
|
3,654
|
2,141
|
||||||
|
Write offs
|
(1,158
|
)
|
(1,144
|
)
|
||||
|
Foreign currency translation adjustments
|
(38
|
)
|
(277
|
)
|
||||
|
December 31,
|
$
|
12,214
|
$
|
9,756
|
||||
| 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, 2023, 2022 and 2021 amounted to approximately $2,102, $2,614 and $2,539, respectively.
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.)
| t. |
Fair value of financial instruments:
|
In accordance with ASC 820, the Company measures the below assets and liabilities at fair value using the various valuation techniques. The assets and liabilities are classified within Level 1 for using quoted market prices, Level 2 for alternative pricing sources and models utilizing market observable inputs, and Level 3 unobservable inputs which are supported by little or no market activity, also using third party appraisers.
The following table sets forth the Company’s assets and liabilities that were measured at fair value as of December 31, 2023 and 2022 by level within the fair value hierarchy:
|
Fair value measurements
|
||||||||||
|
Fair Value
|
as of December 31,
|
|||||||||
|
Description
|
Hierarchy
|
2023
|
2022 |
|
||||||
|
Measured at fair value on a recurring basis:
|
||||||||||
|
|
||||||||||
|
Assets:
|
||||||||||
|
Cash equivalents:
|
||||||||||
|
Money market mutual funds
|
Level 1
|
$
|
-
|
$
|
27
|
|||||
|
|
||||||||||
|
Short-term marketable securities:
|
||||||||||
|
Corporate bonds
|
Level 2
|
$
|
-
|
$
|
7,077
|
|||||
|
Derivative assets
|
Level 2
|
$
|
539
|
$
|
371
|
|||||
|
Liabilities:
|
||||||||||
|
Derivative liabilities
|
Level 2
|
$
|
-
|
$
|
(942
|
)
|
||||
|
Redeemable Non-Controlling Interest (*):
|
Level 3
|
$
|
7,789
|
$
|
7,903
|
|||||
|
(*) The change in fair value of redeemable non-controlling interest valued using significant unobservable inputs (Level 3), was included in note 2x. The Company estimated the fair value of redeemable non-controlling interest using Monte Carlo simulation. The valuation requires management to make certain assumptions about the model inputs, including forecast cash flows, the discount rate and the volatility. The fair value measurement is based on inputs not observable in the market and thus represent Level 3 measurements as defined in ASC 820. The extent to which the actual results differ from assumptions made within the probability-weighted analyses will result in adjustments to this liability in future periods.
|
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.)
Measured at fair value on a nonrecurring basis:
| (a) |
As of December 31, 2023, in accordance with Subtopic 360-10, long-lived assets held and used were written down to their fair value, resulting in an impairment charge of $28,472 related to Property Plant and Equipment included in US and Sdot Yam manufacturing facility, and $16,575 related to ROU asset related to Sdot Yam.
As of December 31, 2022, long-lived assets held and used were written down to their fair value, resulting an impairment charge of $26,429, related to Property Plant and Equipment included in Sdot Yam facility production.
|
| (b) |
As of December 31, 2023 and 2022, the goodwill balance was $0. During fiscal year 2022, in accordance with Subtopic 350-20, goodwill was written down in an impairment charge of $44,829, which was included in the consolidated statements of income for that period.
|
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.
| u. |
Basic and diluted net income (loss) per share:
|
Basic net income (loss) 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 (loss) 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, 2023, 2022 and 2021 there were approximately 2,310,543, 1,534,500, and 0 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,
|
||||||||
|
2023
|
2022
|
|||||||
|
Accumulated loss on marketable securities
|
$
|
-
|
$
|
(125
|
)
|
|||
|
Accumulated income (loss) on derivative instruments
|
539
|
(412
|
)
|
|||||
|
Accumulated foreign currency translation differences and other
|
(8,941
|
)
|
(9,041
|
)
|
||||
|
Total accumulated other comprehensive loss, net
|
$
|
(8,402
|
)
|
$
|
(9,578
|
)
|
||
F - 32
CAESARSTONE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share data)
NOTE 2:-SIGNIFICANT ACCOUNTING POLICIES (Cont.)
The following table summarizes the changes in AOCI, net of taxes for the year ended:
|
Unrealized gains (losses) on derivative instruments
|
Unrealized gains (losses) on marketable securities
|
Accumulated foreign currency translation differences and other
|
Total
|
|||||||||||||
|
Balance at January 1, 2022
|
297
|
(40
|
)
|
(961
|
)
|
(704
|
)
|
|||||||||
|
Other comprehensive income (loss) before reclassifications
|
(3,264
|
)
|
(85
|
)
|
(8,080
|
)
|
(11,429
|
)
|
||||||||
|
Amounts reclassified from AOCI
|
2,555
|
-
|
-
|
2,555
|
||||||||||||
|
Net current period OCI
|
(709
|
)
|
(85
|
)
|
(8,080
|
)
|
(8,874
|
)
|
||||||||
|
Balance at December 31, 2022
|
(412
|
)
|
(125
|
)
|
(9,041
|
)
|
(9,578
|
)
|
||||||||
|
Other comprehensive income (loss) before reclassifications
|
(2,355
|
)
|
125
|
100
|
(2,130
|
)
|
||||||||||
|
Amounts reclassified from AOCI
|
3,306
|
-
|
-
|
3,306
|
||||||||||||
|
Net current period OCI
|
951
|
125
|
100
|
1,176
|
||||||||||||
|
Balance at December 31, 2023
|
539
|
-
|
(8,941
|
)
|
(8,402
|
)
|
||||||||||
The following table shows the amounts reclassified from AOCI into the Consolidated Statements of Income, and the associated financial statement line item, for 2023 and 2022:
|
December 31,
|
||||||||
|
2023
|
2022
|
|||||||
|
Affected line item in the consolidated statements of income
|
||||||||
|
Cost of revenues
|
$
|
2,287
|
$
|
1,921
|
||||
|
Research and development
|
102
|
68
|
||||||
|
Marketing and selling
|
414
|
249
|
||||||
|
General and administrative
|
503
|
317
|
||||||
|
Total loss
|
$
|
3,306
|
$
|
2,555
|
||||
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’s accounting policy is to account for forfeitures as they occur.
The exercise price of each option is generally Company's stock price on the date of the grant. Options generally become exercisable over approximately to period, subject to the continued employment. All options expire after 7 years from the date of grant. In addition, commencing in 2015 the Company granted certain of its employees and officers with restricted stock units ("RSUs"), vesting over approximately a period from the grant date. RSUs fair value is measured at the grant date based on the market value of Company's common stock. RSUs that are cancelled or forfeited become available for future grants.
In 2023 and 2022, 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,
|
||||||
|
2023
|
2022
|
|||||
|
Dividend yield
|
0 - 3%
|
|
0 - 3%
|
|||
|
Expected volatility
|
40-46.0%
|
40-45.0%
|
||||
|
Risk-free interest rate
|
4-4.9%
|
1-4.3%
|
||||
|
Expected life (in years)
|
4-6.9
|
4-5.5
|
||||
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). In case of grant to Company's CEO or directors, the expected term equales to the contractual life.
For the vast majority of the options granted in 2023 and 2022, 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.
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 offering, the Company holds 60.4% of Lioli's shares on a fully diluted basis.
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,
|
||||||||||||
|
2023
|
2022
|
2021
|
||||||||||
|
Beginning of the year
|
$
|
7,903
|
$
|
7,869
|
$
|
7,701
|
||||||
|
Assuming the non controlling interest due to acquisition
|
-
|
-
|
-
|
|||||||||
|
Net income (loss) attributable to non-controlling interest
|
(584
|
)
|
688
|
(1,077
|
)
|
|||||||
|
Adjustment to Put option value (*)
|
532
|
198
|
1,399
|
|||||||||
|
Foreign currency translation adjustments
|
(62
|
)
|
(852
|
)
|
(154
|
)
|
||||||
|
Redeemable non-controlling interest - end of the year
|
$
|
7,789
|
$
|
7,903
|
$
|
7,869
|
||||||
| (*) |
See also Note 1b.
|
F - 35
CAESARSTONE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share data)
NOTE 2:-SIGNIFICANT ACCOUNTING POLICIES (Cont.)
| y. |
Contingencies:
|
The Company is involved in various product liability, commercial, government investigations, environmental claims and other legal proceedings that arise from time to time in the course of business. The Company records accruals for these types of contingencies to the extent that the Company concludes their occurrence is probable and that the related liabilities are estimable. When accruing these costs, the Company will recognize an accrual in the amount within a range of loss that is the best estimate within the range. When no amount within the range is a better estimate than any other amount, the Company accrues for the minimum amount within the range. The Company records anticipated recoveries under existing insurance contracts that are probable of occurring at the amount that is expected to be collected. Legal costs are expensed as incurred. For unasserted claims or assessments, the Company followed the accounting guidance in ASC 450 Contingencies, 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 adjustment to goodwill. Upon the finalization of the measurement period, any subsequent adjustments are recorded to earnings.
Acquisition-related costs are recognized separately from the acquisition and are expensed as incurred. See also Note 1.
F - 36
CAESARSTONE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share data)
NOTE 2:-SIGNIFICANT ACCOUNTING POLICIES (Cont.)
| aa. |
Exit or disposal activities:
The company accounts for exit and disposal cost obligations, including restructuring activities, under ASC 420-10 "Exit or Disposal Cost Obligations", which requires that the company record liabilities for such activities only when such liability has been incurred. During 2023 the company closed it's facility in Sdot-Yam, Israel and announced the closure of its manufacturing facility in Richmond hill, Georgia, USA.
|
Total restructuring expenses for the year ended December 31, 2023 for the manufacturing facilities closures totaled approximately $2.9 million, included within the operating expenses on the consolidated statements of comprehensive income. Out of the $2.9 million, employee termination costs were approximately $1.0 million and decommissioning and restoration costs were approximately $1.9 million. As of December 31, 2023 approximately $1.5 million is recorded under accrued expenses and other liabilities.
The company concluded that the above actions were triggering events for an impairment test under ASC 360, property, Plant and Equipment. Refer also to note 2(t) and 6.
F - 37
CAESARSTONE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share data)
| NOTE 2:- |
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|
| ab. |
Impact of recently issued accounting standards:
|
Recently issued accounting standards and adopted by the Company:
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 December 15, 2022, and interim periods within those fiscal years. Early adoption is permitted. The adoption of the standards did not have a material impact on the Company’s consolidated financial statements.
Recently issued accounting standards and not yet adopted by the Company:
In November 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, which requires public entities to disclose information about their reportable segments’ significant expenses and other segment items on an interim and annual basis. Public entities with a single reportable segment are required to apply the disclosure requirements in ASU 2023-07, as well as all existing segment disclosures and reconciliation requirements in ASC 280 on an interim and annual basis. ASU 2023-07 is effective for fiscal years beginning after December 15, 2023, and for interim periods within fiscal years beginning after December 15, 2024, with early adoption permitted. The Company is currently evaluating the impact of adopting ASU 2023-07.
In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, which requires public entities, on an annual basis, to provide disclosure of specific categories in the rate reconciliation, as well as disclosure of income taxes paid disaggregated by jurisdiction. ASU 2023-09 is effective for fiscal years beginning after December 15, 2024, with early adoption permitted. The Company is currently evaluating the impact of adopting ASU 2023-09.
| NOTE 3: |
MARKETABLE SECURITIES
|
As of December 31, 2023, there is no outstanding marketable securities held by the company.
The following is a summary of available-for-sale marketable securities at December 31, 2022:
|
Amortized
cost
|
Gross unrealized
gains
|
Gross unrealized
losses
|
Accrued
Interest
|
Fair
value
|
||||||||||||||||
|
|
||||||||||||||||||||
|
Available-for-sale – matures within one year:
|
||||||||||||||||||||
|
Corporate bonds
|
$
|
7,164
|
$
|
-
|
$
|
126
|
$
|
39
|
$
|
7,077
|
||||||||||
|
Total
|
$
|
7,164
|
$
|
-
|
$
|
126
|
$
|
39
|
$
|
7,077
|
||||||||||
As of December 31, 2023 and 2022 the Company didn’t record an allowance for credit losses for its AFS marketable debt securities.
| NOTE 4:- |
OTHER ACCOUNTS RECEIVABLE AND PREPAID EXPENSES
|
|
December 31,
|
||||||||
|
2023
|
2022
|
|||||||
|
Prepaid expenses
|
$
|
5,388
|
$
|
6,313
|
||||
|
Government authorities
|
4,410
|
13,005
|
||||||
|
Advances to suppliers
|
3,102
|
3,439
|
||||||
|
Derivatives
|
539
|
371
|
||||||
|
Other receivables (*)
|
12,050
|
9,442
|
||||||
|
$
|
25,489
|
$
|
32,570
|
|||||
(*) Including mainly insurance receivables, see also note 11.
| NOTE 5:- |
INVENTORIES
|
|
December 31,
|
||||||||
|
2023
|
2022
|
|||||||
|
Raw materials
|
$
|
11,884
|
$
|
32,443
|
||||
|
Work-in-progress
|
2,390
|
4,058
|
||||||
|
Finished goods
|
122,172
|
201,731
|
||||||
|
$
|
136,446
|
$
|
238,232
|
|||||
| NOTE 6:- |
PROPERTY, PLANT AND EQUIPMENT, NET
|
|
December 31,
|
||||||||
|
2023
|
2022
|
|||||||
|
Cost:
|
||||||||
|
Machinery and manufacturing equipment, net (1)
|
$
|
339,657
|
$
|
334,156
|
||||
|
Office equipment and furniture
|
40,012
|
36,079
|
||||||
|
Motor vehicles
|
4,933
|
5,139
|
||||||
|
Buildings and leasehold improvements
|
131,269
|
129,679
|
||||||
|
Prepaid expenses related to operating lease (2)
|
939
|
939
|
||||||
|
516,810
|
505,992
|
|||||||
|
Accumulated depreciation and impairment:
|
||||||||
|
Machinery and manufacturing equipment, net
|
249,499
|
230,063
|
||||||
|
Office equipment and furniture
|
27,866
|
24,491
|
||||||
|
Motor vehicles
|
3,908
|
3,832
|
||||||
|
Buildings and leasehold improvements
|
56,984
|
51,722
|
||||||
|
Prepaid expenses related to operating lease
|
173
|
163
|
||||||
|
Impairment of fixed assets (3)
|
54,900
|
26,429
|
||||||
|
393,330
|
336,700
|
|||||||
|
Depreciated cost
|
$
|
123,480
|
$
|
169,292
|
||||
| (1) |
Presented net of investment grants received in the total amount of $7,463.
|
| (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.
|
| (3) |
Non cash pre-tax impairment charges recognized in 2023 were $28,472, Non cash pre-tax impairment charges recognized in 2022 were $26,429 (see also Note 2k)
|
Depreciation expenses were $27,387, $33,813 and $32,394 for the years ended December 31, 2023, 2022 and 2021, respectively.
F - 40
CAESARSTONE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share data)
| NOTE 7:- |
GOODWILL AND INTANGIBLES
|
a. Goodwill:
The changes in the carrying amount of goodwill for the years ended December 31, 2023 and 2022 are as follows:
|
Balance as of January 1, 2022
|
$
|
45,800
|
||
|
Acquired through business combination (*)
|
792
|
|||
|
Goodwill Impairment (**)
|
(44,829
|
)
|
||
|
Foreign currency translation adjustments
|
(1,763
|
)
|
||
|
Balance as of December 31, 2022 and 2023
|
$
|
-
|
(*) Resulting from Magrab acquisition, see also Notes 1(d).
(**)The Company performs its annual testing of goodwill in the fourth quarter of each year in accordance with ASC 350 (see also Note 2l). During the fourth quarter of 2022, the Company conducted an impairment test of its reporting unit. Due to factors such as a decrease in the Company's market value, lower-than-expected projected future cash flows, and higher interest rates, a pre-tax, non-cash goodwill impairment charge of $44,829 was recorded.
b. Intangible assets:
|
December 31,
|
||||||||
|
2023
|
2022
|
|||||||
|
Original amounts:
|
||||||||
|
Customer relationships (*)
|
$
|
13,983
|
$
|
13,983
|
||||
|
Accumulated amortization:
|
||||||||
|
Customer relationships
|
(7,687
|
)
|
(5,067
|
)
|
||||
|
Foreign currency translation adjustment
|
(39
|
)
|
(99
|
)
|
||||
|
Total intangibles assets
|
$
|
6,257
|
$
|
8,817
|
||||
| (*) |
In 2022, includes $1,789 Acquired through business combination of Magrab.
|
| (1) |
Amortization expense amounted to $2,620 and $2,531 for the years ended December 31, 2023 and 2022, respectively.
|
| (2) |
Estimated amortization expenses for the following years as of December 31, 2023:
|
|
2024
|
2,662
|
||
|
2025
|
2,472
|
||
|
2026
|
224
|
||
|
2027
|
224
|
||
|
2028
|
224
|
||
|
2029 and on
|
451
|
||
|
$
|
6,257
|
F - 41
CAESARSTONE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share data)
| NOTE 8:- |
SHORT-TERM BANK CREDIT AND CURRENT MATURITIES OF LONG-TERM LOAN
|
|
Short-term bank credit and loans are classified as follows:
|
|
Weighted average interest
|
|||||||||||||||||
|
Currency
|
December 31,
|
December 31,
|
|||||||||||||||
|
2023
|
2022
|
2023
|
2022
|
||||||||||||||
|
%
|
|||||||||||||||||
|
Short-term bank credit (*)
|
USD
|
-
|
6.3
|
$
|
-
|
$
|
21,183
|
||||||||||
|
Short-term bank credit (**)
|
INR
|
10.1
|
7.6
|
$
|
2,801
|
$
|
2,674
|
||||||||||
|
Current maturities of Long- term bank loan and other (**)
|
INR
|
8.9
|
7.6
|
$
|
2,317
|
$
|
2,278
|
||||||||||
|
Total
|
$
|
5,118
|
$
|
26,135
|
|||||||||||||
|
(*) As of December 31, 2023, the company has no credit lines in Israeli banks. The credit line outstanding as of December 31, 2022, in Israeli banks was fully repaid during 2023.
|
|
|
|
(**) Credit line and bank loan in Lioli - During 2022, Lioli engaged with a new bank and signed a new loan agreement. The loan agreement with the bank in Lioli contains customary covenants. Lioli is in compliance with the requirement of the financial covenants under the agreement of own capital contribution. 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 secured by a SBLC (Stand By Letter of Credit) from Caesarstone and floating charge on all of Lioli’s assets. (see also Note 15).
|
| NOTE 9:- |
ACCRUED EXPENSES AND OTHER LIABILITIES
|
|
December 31,
|
||||||||
|
2023
|
2022
|
|||||||
|
Employees and payroll accruals
|
$
|
13,410
|
$
|
13,029
|
||||
|
Accrued expenses
|
8,833
|
12,003
|
||||||
|
Advances from customers
|
2,413
|
1,998
|
||||||
|
Taxes payable
|
5,617
|
4,892
|
||||||
|
Warranty provision
|
1,154
|
1,239
|
||||||
|
Derivatives
|
-
|
942
|
||||||
|
Sales return provision
|
875
|
604
|
||||||
|
Operating lease liability short-term
|
23,932
|
22,741
|
||||||
|
Contingent consideration liability and other
|
660
|
1,329
|
||||||
|
$
|
56,894
|
$
|
58,777
|
|||||
F - 42
CAESARSTONE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share data)
| NOTE 10:- |
LEASES
|
As of December 31, 2023, the Company had operating lease agreements for facilities and vehicles in the United States, Canada, Australia, United Kingdom, European Union, Israel, India, Sweden 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.
| a. |
The following table summarizes the Company’s lease-related assets and liabilities recorded on the consolidated balance sheet:
|
|
Classification
|
December 31, 2023
|
December 31, 2022
|
|||||||
|
Assets:
|
|||||||||
|
Operating lease assets (*)
|
Operating lease right-of-use assets
|
$
|
120,156
|
$
|
144,098
|
||||
|
Total lease assets
|
$
|
120,156
|
$
|
144,098
|
|||||
|
Liabilities:
|
|||||||||
|
Current lease liabilities
|
Accrued expenses and other liabilities
|
23,932
|
22,741
|
||||||
|
Long-term lease liabilities
|
Long-term operating lease liabilities
|
114,146
|
124,353
|
||||||
|
Total lease liabilities
|
$
|
138,078
|
$
|
147,094
|
|||||
(*) Following the closure of Sdot Yam plant, the Company evaluated it's right of use asset resulted from non-cancelable lease agreement effective through 2032. Based on future estimated sublease the Company recorded an impairment of $16,575 during 2023.
|
Lease term and discount rate:
|
December 31,
2023
|
December 31,
2022
|
||||
|
Weighted-average remaining lease term — operating leases
|
7.29 years
|
7.92 years
|
||||
|
Weighted-average discount rate — operating leases
|
2.74%
|
|
2.47%
|
|
|
December 31, 2023
|
December 31, 2022
|
|||||||
|
Operating lease cost:
|
||||||||
|
Operating lease expense
|
$
|
28,771
|
$
|
27,583
|
||||
|
Variable lease expense (*)
|
1,113
|
2,123
|
||||||
|
Sublease income
|
(477
|
)
|
(999
|
)
|
||||
|
Total operating lease cost
|
$
|
29,407
|
$
|
28,707
|
||||
| (*) |
Includes short-term leases, index, maintenance and variable lease costs.
|
| c. |
The maturity of the Company’s operating lease liabilities for contracts with lease term greater than one year as of December 31, 2023 are as follows:
|
|
December 31,
|
||||
|
2024
|
25,963
|
|||
|
2025
|
23,534
|
|||
|
2026
|
21,206
|
|||
|
2027
|
17,816
|
|||
|
2028
|
14,997
|
|||
|
2029 and thereafter
|
47,780
|
|||
|
Total future lease payments (*)
|
151,296
|
|||
|
Less imputed interest
|
(13,218
|
)
|
||
|
Total
|
$
|
138,078
|
||
| (*) |
Total lease payments have not been reduced by sublease rental payments of approximately $326 due in the future under non-cancelable subleases.
|
| d. |
For additional information regarding lease transactions between related parties, refer to Note 14.
|
F - 44
CAESARSTONE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share data)
| NOTE 10:- |
LEASES (Cont.)
|
| e. |
The following table presents supplemental cash flow information related to the lease costs for operating leases:
|
|
December 31, 2023
|
December 31, 2022
|
|||||||
|
Cash paid for amounts included in measurement of lease liabilities:
|
||||||||
|
Operating cash flows for operating leases
|
$
|
27,471
|
$
|
26,003
|
||||
| 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. During the years the Company and WOMAG filed counter claims in the court of South Africa and in Israel.
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 minimal disputed amounts were settled during 2022.
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 workers compensation regulators), 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.
|
| NOTE 11:- |
COMMITMENTS AND CONTINGENT LIABILITIES (Cont.)
|
Individual claims in Israel
As of December 31, 2023, the Company is subject to 150 pending bodily injury claims (individual claims and NII subrogation or related future probable claims) 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, 2023, the Company has 9 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 year 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 during 2022, the Company paid without any admission of liability, an aggregate amount of NIS 9.0
million (approximately $2,557)
to fund certain safety related equipment at fabrication facilities in Israel, as well as plaintiff’s compensation and legal
expenses. The amounts transferred were fully utilized during 2023.
During 2021 the Company received refund of NIS 7.0 million (approximately $2,100) from its insurance carrier which was recorded as a reduction of legal settlements expenses.
Individual claims in Australia:
As of December 31, 2023, Company’s subsidiary in Australia is subject to 74 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’, 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.
Individual claims in the U.S.:
As of December 31, 2023, Company’s subsidiary in U.S. (Caesarstone U.S.) is subject to 22 pending bodily injury claims that have been submitted in U.S. against it directly, or that have named the Company as third-party defendant by fabricators in U.S. Since such claims are at an early stage in accordance with ASC 450, therefore no provision is provided.
Summary of the provisions for claims mentioned:
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 bodily injury claims in Israel and Australia (including class action) as of December 31, 2023 and 2022 totaled to $25,717 and $35,980 respectively, of which $14,509 and $16,408 is reported in short term legal settlements and loss contingencies and $11,208 and $19,572 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 updated its provision in 2023, 2022 and 2021 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 according to ASC 450, taking into consideration new claims filed, settlements reached and other new information available.
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.)
|
A summary of bodily injury claims for which the Company provided provision is as follows:
|
Year ended December 31,
|
||||||||||||
|
2023
|
2022
|
2021
|
||||||||||
|
Outstanding claims, January 1,
|
221
|
203
|
173
|
|||||||||
|
New claims
|
63
|
87
|
73
|
|||||||||
|
Settled and dismissed claims
|
(60
|
)
|
(69
|
)
|
(43
|
)
|
||||||
|
Outstanding claims, December 31
|
224
|
221
|
203
|
|||||||||
Insurance
The Company maintains insurance for product liability claims, including for bodily injury claims related to exposure to silica dust, where such insurance cover can be obtained. 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, 2023, 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 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, 2023, and 2022, the insurance receivable totaled to $8,361 and $7,306, respectively, reported in the other accounts receivable and prepaid expenses.
During the years ended December 31, 2023 and 2022, legal settlements and loss contingencies expenses related to the bodily injury claims related to exposure to silica dust totaled to a credit of $4,847 and expense of $597, 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.
| NOTE 11:- |
COMMITMENTS AND CONTINGENT LIABILITIES (Cont.)
|
|
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, 2023, are for purchase obligations to certain suppliers and amounted to $18,611 for the fiscal year 2024.
| c. |
Pledges and guarantees:
|
| 1. |
As of December 31, 2023, the Company had outstanding guarantees and letters of credit with various expiration dates in a principal amount of approximately $8,327 related to facilities, machinery and equipment, and other miscellaneous guarantees.
|
| 2. |
See also note 15.
|
| NOTE 12:- |
TAXES ON INCOME
|
| a. |
Israeli taxation:
|
| 1. |
Corporate tax rate:
|
The corporate tax rate in Israel was 23% in 2023 and 2022, and 2021.
| 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). During 2023 the company closed it’s Sdot-Yam manufacturing facility, resulting future tax benefits only from it’s manufacturing facility 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.
| 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.
|
| 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, 2023). 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 dividends during November 2021 and during September 2022, both was partially attributed to the above amendment.
Of the Company's retained earnings as of December 31, 2023, approximately $20,169 is tax-exempt earnings attributable to its Approved Enterprise.
As of December 31, 2023, if the income attributed to the Approved Enterprise would have been distributed as a dividend, the Company would have incurred a tax liability of approximately $5,042.
F - 52
CAESARSTONE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share data)
| NOTE 12:- |
TAXES ON INCOME (Cont.)
|
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 did not apply to such order.
| 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 – 25.3% tax rate (federal and state).
Company incorporated in Australia - 30% tax rate.
Company incorporated in Singapore - 17% tax rate.
Company incorporated in Canada – 27.7% tax rate (federal and state).
Company incorporated in England – 25% tax rate.
Company incorporated in India – 30% tax rate.
Company incorporated in Sweden – 20.6% 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.
F - 53
CAESARSTONE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share data)
| NOTE 12:- |
TAXES ON INCOME (Cont.)
|
| 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,
|
||||||||
|
2023
|
2022
|
|||||||
|
Deferred tax assets:
|
||||||||
|
Goodwill and Intangible assets
|
$
|
227
|
$
|
253
|
||||
|
Other temporary differences including operating lease (1)
|
28,558
|
35,277
|
||||||
|
Temporary differences related to inventory (2)
|
9,068
|
8,150
|
||||||
|
Property and equipment
|
3,315
|
2,834
|
||||||
|
Carryforward losses, deductions and credits (3)
|
10,451
|
4,569
|
||||||
|
Less-valuation allowance
|
(29,198
|
)
|
(1,796
|
)
|
||||
|
Total deferred tax assets
|
22,421
|
49,287
|
||||||
|
Deferred tax liabilities:
|
||||||||
|
Property and equipment
|
(2,844
|
) |
(8,680
|
)
|
||||
|
Intangible Assets
|
(1,533
|
)
|
(1,687
|
)
|
||||
|
Other temporary differences including operating lease
|
(17,989
|
)
|
(26,957
|
)
|
||||
|
Total deferred tax liabilities
|
(22,366
|
)
|
(37,324
|
)
|
||||
|
Deferred tax assets, net
|
$
|
55
|
$
|
11,963
|
||||
| (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) |
Parent company and certain subsidiaries have tax loss carry-forwards totaling approximately $141,560 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.
|
F - 54
CAESARSTONE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share data)
| NOTE 12:- |
TAXES ON INCOME (Cont.)
|
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. During 2023, the Company recorded a full valuation allowance on deferred tax assets in the U.S and Israel in accordance with ASC 740, due to accumulated 3-year loss position and its estimation that future taxable income is not probable.
| d. |
A reconciliation of the Company's effective tax rate to the statutory tax rate in Israel is as follows:
|
|
Year ended December 31,
|
||||||||||||
|
2023
|
2022
|
2021
|
||||||||||
|
Income (loss) before taxes on income
|
$
|
(86,959
|
)
|
$
|
(55,608
|
)
|
$
|
19,839
|
||||
|
Statutory tax rate in Israel
|
23
|
%
|
23
|
%
|
23
|
%
|
||||||
|
Income (loss) taxes at statutory rate
|
$
|
(20,001
|
)
|
$
|
(12,790
|
)
|
$
|
4,563
|
||||
|
Increase (decrease) in tax expenses resulting from:
|
||||||||||||
|
Tax benefit arising from reduced rate as an "Preferred Enterprise"
|
9,996
|
2,622
|
(1,245
|
)
|
||||||||
|
Non-deductible expenses, net
|
1,818
|
10,745
|
1,039
|
|||||||||
|
Increase (decrease) in taxes from prior years, also related to settlement with tax authorities |
419
|
(735
|
)
|
(1,502
|
)
|
|||||||
|
Tax adjustment in respect of foreign subsidiaries' different tax rates
|
(1,120
|
) |
(239
|
)
|
(650
|
)
|
||||||
|
Provision for withholding tax assets |
2,828 |
- | - | |||||||||
|
Uncertain tax position
|
-
|
-
|
110
|
|||||||||
|
Changes in valuation allowance
|
27,402
|
1,079
|
(385
|
)
|
||||||||
|
Others
|
(61
|
)
|
76
|
20
|
||||||||
|
Income tax expense
|
$
|
21,281
|
$
|
758
|
$
|
1,950
|
||||||
|
Effective tax rate
|
(24.5
|
)%
|
(1
|
)%
|
10
|
%
|
||||||
|
Per share amounts (basic and diluted) of the tax benefit resulting from an "Preferred Enterprise"
|
$
|
0.29
|
$
|
(0.04
|
)
|
$
|
(0.04
|
)
|
||||
F - 55
CAESARSTONE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share data)
| NOTE 12:- |
TAXES ON INCOME (Cont.)
|
| e. |
Income (loss) before taxes on income is comprised as follows:
|
|
Year ended December 31,
|
||||||||||||
|
2023
|
2022
|
2021
|
||||||||||
|
Domestic
|
$
|
(38,831
|
)
|
$
|
(18,671
|
)
|
$
|
19,539
|
||||
|
Foreign
|
(48,128
|
)
|
(36,937
|
)
|
300
|
|||||||
|
$
|
(86,959
|
)
|
$
|
(55,608
|
)
|
$
|
19,839
|
|||||
| f. |
Tax expenses on income are comprised as follows:
|
| 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, 2023:
Israel 2019 – present
Australia 2019 - present
Canada 2018 - present
United States 2019 - present
Singapore 2019 - present
England 2019 – present
India 2022 – present
Sweden 2022 - present
F - 56
CAESARSTONE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share data)
| NOTE 12:- |
TAXES ON INCOME (Cont.)
|
| h. |
Uncertain tax positions:
|
The balances at December 31, 2023 and 2022 include a liability for unrecognized tax benefits of $2,891, 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, 2021
|
$
|
3,663
|
||
|
Increase in tax positions for current year
|
110
|
|||
|
Gross tax liabilities at December 31, 2021
|
3,773
|
|||
|
Increase in tax positions for current year
|
(882
|
)
|
||
|
Gross tax liabilities at December 31, 2022
|
2,891
|
|||
|
Release of tax position of prior years
|
-
|
|||
|
Gross tax liabilities at December 31, 2023
|
$
|
2,891
|
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 - 57
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, 2023 and 2022:
|
|
Authorized
|
Outstanding
|
|||||||||||||||
|
December 31,
|
December 31,
|
|||||||||||||||
|
2023
|
2022
|
2023
|
2022
|
|||||||||||||
|
Number of shares
|
||||||||||||||||
|
Ordinary shares of NIS 0.04 par value each
|
|
200,000,000
|
|
200,000,000
|
|
34,532,452
|
|
34,507,303
|
||||||||
| 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 per share. 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 $8,625 in 2022 mostly out of its non-tax exempt profit under the beneficiary enterprise (see also note 12).
F - 58
CAESARSTONE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share data)
| NOTE 13:- |
SHAREHOLDERS' EQUITY (Cont.)
|
| d. |
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, 2023, there were 2,340,110 options and restricted stock units (RSUs) outstanding under the Plans and 1,673,915 shares available or reserved for future issuance under the plan.
As of December 31, 2023, there was $2,770 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 3.0 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, 2023:
|
Number
of options
|
Weighted
average
exercise
price
|
Aggregate
intrinsic
value
|
||||||||||
|
Outstanding - beginning of the year
|
1,546,150
|
14.58
|
-
|
|||||||||
|
Granted
|
1,315,800
|
4.71
|
||||||||||
|
Exercised
|
-
|
-
|
||||||||||
|
Forfeited
|
(582,550
|
)
|
15.72
|
|||||||||
|
Outstanding - end of the year
|
2,279,400
|
8.63
|
-
|
|||||||||
|
Options exercisable at the end of the year
|
641,325
|
15.41
|
-
|
|||||||||
|
Vested and expected to vest
|
641,325
|
15.41
|
-
|
|||||||||
The weighted average fair value of options granted during 2023, 2022 and 2021 was $1.9, $3.8 and $5.2 per option. The weighted average fair value of options vested during 2023, 2022 and 2021 was $12.96, $12.30 and $14.07 per option. The intrinsic value of options exercised during 2023, 2022 and 2021 was $0.
F - 59
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 2023 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, 2023. 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, 2023:
|
Number
of RSUs
|
Weighted
average
fair value
|
Aggregate
intrinsic value
|
||||||||||
|
Outstanding - end of the year
|
74,887
|
12.17
|
428
|
|||||||||
|
Granted
|
23,809
|
4.11
|
||||||||||
|
Exercised
|
(25,477
|
)
|
11.77
|
|||||||||
|
Forfeited
|
(12,508
|
)
|
2.80
|
|||||||||
|
Outstanding - end of the year
|
60,711
|
8.51
|
227
|
|||||||||
|
RSUs exercisable at the end of the year
|
-
|
-
|
-
|
|||||||||
|
Vested and expected to vest
|
60,711
|
8.51
|
227
|
|||||||||
The awards outstanding as of December 31, 2023 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)
|
60,711
|
5.64
|
$
|
0.01
|
-
|
-
|
$
|
-
|
||||||||||||||||||
|
$4.0-9.5
|
1,455,200
|
6.25
|
$
|
5.01
|
23,150
|
5.68
|
$
|
8.07
|
||||||||||||||||||
|
$10.2-19.7
|
709,200
|
3.32
|
$
|
13.13
|
503,175
|
2.90
|
$
|
13.17
|
||||||||||||||||||
|
$20.3-29.5
|
115,000
|
0.67
|
$
|
26.70
|
115,000
|
0.67
|
$
|
26.70
|
||||||||||||||||||
|
2,340,111
|
641,325
|
|||||||||||||||||||||||||
Compensation expenses related to options and RSUs granted were recorded in the consolidated statements of operations, as follows:
|
December 31,
|
||||||||
|
2023
|
2022
|
|||||||
|
Cost of revenues
|
$
|
95
|
$
|
315
|
||||
|
Research and development expenses
|
89
|
69
|
||||||
|
Marketing and selling expenses
|
298
|
201
|
||||||
|
General and administrative expenses
|
543
|
917
|
||||||
|
Total
|
$
|
1,025
|
$
|
1,502
|
||||
| NOTE 14:- |
TRANSACTIONS WITH RELATED PARTIES
|
Company's controlling shareholder, is Mifalei Sdot-Yam Agricultural Cooperative Society Ltd. (“Mifalei Sdot-Yam”), which is controlled by Sdot-Yam Business Holding and Management – Agricultural Cooperative Society Ltd., which is in turn controlled by Kibbutz Sdot-Yam (for convenience purposes, collectively referred as the “Kibbutz"). The Kibbutz has an ownership interest in the Company of approximately 30.2%, as of December 31, 2023.
On September 5, 2016, the Kibbutz and Tene Investment in Projects 2016 Limited Partnership (“Tene”) entered into the shareholders’ agreement (“Shareholders’ Agreement”), memorialized in a term sheet , pursuant to which both the Kibbutz and Tene are deemed the Company’s controlling shareholders under the Israeli Companies Law. The Shareholders’ Agreement further amended on February 20, 2018 and September 18, 2023, In which the amendment executed on September 18, 2023 (the “September Amendment”) replaced the Shareholders Agreement in its entirety. Pursuant to the September Amendment, the parties agreed, among other things, to vote at general meetings of the Company’s shareholders in the same manner, following discussions intended to reach an agreement on any matters proposed to be voted upon. However, if no agreement is reached, the Kibbutz will determine the manner in which both parties will vote, except with respect to certain carved-out matters, to which Tene, for so long as it holds more than 3% of the issued and outstanding share capital of the Company, will determine the manner in which both parties will vote.
In addition, each of the Kibbutz and Tene shall be entitled to vote separately in any manner with respect to the appointment, replacement or terms of compensation of the Company’s Chief Executive Officer. Among others, according to the September Amendment Tene granted the Kibbutz a right of first refusal and the Kibbutz granted Tene certain tag-along rights with respect to their disposition of ordinary shares. If Tene sells more than 3% of the issued and outstanding share capital of the Company without providing the Kibbutz its right of first offer then certain rights contemplated under the September Amendment will terminate, including Tene’s tag-along right.
As of December 31, 2023 the Kibbutz and Tene beneficially own 14,029,494 ordinary shares (or approximately 40.6% 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 The Kibbutz such was automatically renewed during 2023 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.
| NOTE 14:- |
TRANSACTIONS WITH RELATED PARTIES (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 the Kibbutz and the Company, with respect to the engagement of office holders affiliated with the Kibbutz, 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, the Kibbutz 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 the Kibbutz 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. the Kibbutz 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 the Kibbutz and require such appointee to become employed directly by the Company.
The manpower agreement and addendum also includes the Kibbutz’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 $1,553, $1,768 and $1,803 for the years ended December 31, 2023, 2022 and 2021, respectively.
F - 62
CAESARSTONE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share data)
| NOTE 14:- |
TRANSACTIONS WITH RELATED PARTIES (Cont.)
|
| b. |
Services from the Kibbutz:
|
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, the Kibbutz 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 the Kibbutz 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 the Kibbutz, 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 The Kibbutz 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 $810, $1,334 and $1,468 for the years ended December 31, 2023, 2022 and 2021, respectively.
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 (Cont.)
|
| c. |
Land Use Agreement with the Kibbutz:
|
Land leased to the Kibbutz 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. As per the agreement, the annual fee may be adjusted after January 1, 2021 and every three years thereafter, at the election of the Kibbutz by obtaining an updated appraisal. The appraiser will be mutually agreed upon or, in the absence of agreement, will be chosen by the Kibbutz 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 the Kibbutz as long as the Company continues to operate production lines elsewhere in Israel, and its headquarters must remain at The Kibbutz. Notwithstanding with the above mentioned, during 2023 the Company announced on closing the Sdot Yam plant with the permission of the Kibbutz. The Company is still liable to cover the land use agreement as is, and it may sublease part of the lands and buildings to a third party, subject to Kibbutz approval by case.
The Company may also not decrease or return to the Kibbutz any part of the land underlying the land use agreement; however, it may submit a written request to the Kibbutz to return certain lands. The Kibbutz 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 the Kibbutz. In such event, the Company will continue to be liable to the Kibbutz with respect to such lands.
In addition, the Company has committed to fund the cost of construction, up to a maximum of NIS 3.3 million (approximately $910) plus VAT, required to change the access road leading to The Kibbutz and its facilities, such that the entrance of the Company's facilities will be separated from the entrance into The Kibbutz. From the said amount, the Kibbutz has already set-off an amount of NIS 300,000 (approximately $83) for expenses incurred by it. In addition, the Company has committed to pay NIS 200,000 (approximately $55) plus VAT to cover the cost of paving an area of land leased from the Kibbutz 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 the Kibbutz under the land use agreement related to the Company's Sdot-Yam facility.
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 (Cont.)
|
| d. |
Financing liability of land:
|
Pursuant to the Land Use Agreement, the Company has entered into an agreement with The Kibbutz dated August 6, 2013, under which the Kibbutz 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, the Kibbutz 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 the Kibbutz, in the amount of the total cost related to the building of the warehouse and such loan, including principal and interest, shall be repaid by setoff of the lease due to Kibbutz Sdot Yam by 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, 2023, the construction of the warehouse has not started yet.
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 (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 The Kibbutz, the Company completed the selling of the rights in the lands and facilities of the Bar-Lev Industrial Center (the "Bar-Lev Grounds") to The Kibbutz 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, the Kibbutz 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, 2022 and every three years thereafter at the option of The Kibbutz if The Kibbutz 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 the Kibbutz from a list of assessors recommended at that time by Bank Leumi. During 2022, the Kibbutz elected this option and the parties mutually agreed upon a land appraiser, and based on its study the fees were adjusted for 2022 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 was matured in August 31, 2022. And since that period, the related lease charges recorded under the land use agreement expenses.
The Company's payments pursuant to the land use agreements related to Sdot-Yam and Bar-Lev mentioned above totaled to $7,857, $8,162 and $7,665 for the years ended December 31, 2023, 2022 and 2021, respectively.
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 (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,
|
||||||||||||
|
2023
|
2022
|
2021
|
||||||||||
|
Cost of revenues
|
$
|
8,232
|
$
|
8,870
|
$
|
8,157
|
||||||
|
Research and development
|
$
|
486
|
$
|
574
|
$
|
547
|
||||||
|
Selling and marketing
|
$
|
621
|
$
|
730
|
$
|
723
|
||||||
|
General and administrative
|
$
|
848
|
$
|
951
|
$
|
873
|
||||||
|
Finance expenses, net
|
$
|
-
|
$
|
(392
|
)
|
$
|
106
|
|||||
| 2. |
Balances with related party and other loan:
|
F - 67
CAESARSTONE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share data)
| NOTE 15:- |
LONG-TERM BANK LOAN
|
| a. |
As part of the Lioli’s acquisition in 2020, Lioli assumed also a bank loan from commercial banks in India. The loan agreement includes certain covenants that Lioli is required to meet. As of December 31, 2023 and 2022 the covenants are met and the loan is presented under long-term bank loan (see also Note 8). |
| b. |
During 2022, lioli refinanced its old loan and signed on a new loan agreement with HDFC Bank. The new loan is denominated in Indian rupee and as of December 31, 2023 the loan carries interest rate of 8.8% (linked to MCLR). The long-term loan repayable in equal monthly installment till October 2025 and outstanding balance as of December 31, 2023 is $2,070.
|
| c. |
The loan is secured by creating charge on Lioli’s land, building and plant and machineries and current assets including stock, receivables and other current assets. The Company has also provided the stand by letter of credit as a security.
|
| NOTE 16:- |
MAJOR CUSTOMER AND GEOGRAPHIC INFORMATION
|
| a. |
The Company manages its business on the basis of one reportable segment. The data is presented in accordance with Accounting Standard Codification 280, "Segments Reporting" ("ASC 280"). The following is a summary of revenue and long-lived assets (including Property, plant and equipment, intangible assets and operating lease right-of-use assets) by geographic area. Revenues are attributed to geographic areas based on the location of end customers.
|
The following table presents total revenues for the years ended December 31, 2023, 2022 and 2021, respectively:
F - 68
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.)
|
No customer represented 10% or more of the Company’s total revenues for the years ended December 31, 2023, 2022 and 2021.
| b. |
The following table presents total long-lived assets as of December 31, 2023 and 2022:
|
| NOTE 17:- |
SELECTED SUPPLEMENTARY STATEMENTS OF INCOME DATA
|
| a. |
Finance (income) expense, net:
|
|
Year ended December 31,
|
||||||||||||
|
2023
|
2022
|
2021
|
||||||||||
|
Finance expenses:
|
||||||||||||
|
Interest in respect credit cards and bank fees
|
$
|
4,957
|
$
|
5,380
|
$
|
4,702
|
||||||
|
Interest in respect of loans
|
377
|
346
|
2,035
|
|||||||||
|
Amortization/accretion of premium/discount on marketable securities
|
-
|
237
|
200
|
|||||||||
|
Realized gain/loss from marketable securities, net
|
63
|
-
|
134
|
|||||||||
|
Changes in derivatives fair value
|
-
|
1,509
|
-
|
|||||||||
|
Foreign exchange transactions losses
|
154
|
3,818
|
6,023
|
|||||||||
|
5,551
|
11,290
|
13,094
|
||||||||||
|
Finance income:
|
||||||||||||
|
Interest in respect of cash and cash equivalent and short-term bank deposits
|
1,473
|
20
|
147
|
|||||||||
|
Changes in derivatives fair value
|
680
|
-
|
4,950
|
|||||||||
|
Interest income from marketable securities
|
107
|
287
|
407
|
|||||||||
|
Foreign exchange transactions gains
|
4,360
|
14,062
|
-
|
|||||||||
|
6,620
|
14,369
|
5,504
|
||||||||||
|
Finance expenses (income), net
|
$
|
(1,069
|
)
|
$
|
(3,079
|
)
|
$
|
7,590
|
||||
F - 69
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.)
|
| b. |
Net earnings (loss) per share:
|
The following table sets forth the computation of basic and diluted net earnings per share:
Numerator:
|
Year ended December 31,
|
||||||||||||
|
2023
|
2022
|
2021
|
||||||||||
|
Net income (loss) attributable to controlling interest, as reported
|
$
|
(107,656
|
)
|
$
|
(57,054
|
)
|
$
|
18,966
|
||||
|
Adjustment to redemption value of non-controlling interest
|
(532
|
)
|
(198
|
)
|
(1,399
|
)
|
||||||
|
Numerator for basic and diluted net income (loss) per share
|
$
|
(108,188
|
)
|
$
|
(57,252
|
)
|
$
|
17,567
|
||||
Denominator (in thousands):
|
Year ended December 31,
|
||||||||||||
|
2023
|
2022
|
2021
|
||||||||||
|
Denominator for basic income (loss) per share
|
34,519
|
34,488
|
34,462
|
|||||||||
|
Effect of dilutive stock based awards
|
-
|
-
|
108
|
|||||||||
|
Denominator for diluted income (loss) per share
|
34,519
|
34,488
|
34,570
|
|||||||||
Earnings per share:
|
Basic and diluted earnings (loss) per share
|
$
|
(3.13
|
)
|
$
|
(1.66
|
)
|
$
|
0.51
|
- - - - - - - - - - -
F - 70
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Caesarstone Australia Pty Ltd
Opinion on the financial statements
We have audited the accompanying balance sheets of Caesarstone Australia Pty Ltd (the “Company”) as of December 31, 2022 and 2021, the related statements of operations, comprehensive income, equity, and cash flows for each of the three years in the period ended December 31, 2022, and the related notes (collectively referred to as the “financial statements”) (not included herein). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2022, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated March 15, 2023 expressed an unqualified opinion.
Basis for opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical audit matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Impairment of Goodwill
In accordance with ASC 350 Intangibles – Goodwill and Other, goodwill is allocated to the Company’s reporting units. Caesarstone Australia is considered its own reporting unit with AUD $22.245 million goodwill allocated prior to assessment of impairment. For each reporting unit to which goodwill has been allocated, the Company is required to assess the impairment of goodwill annually. Management assessed the fair value of the Australian company as a reporting unit, and determined an impairment loss of AUD $22.245 million. We identified the impairment of goodwill as a critical audit matter.
The principal considerations for our determination that impairment of goodwill is a critical audit matter are the level of management judgement and estimation uncertainty involved in the valuation of the fair value of the reporting unit.
Our audit procedures related to the impairment of goodwill included the following, among others:
| • |
Obtaining an understanding, evaluating the design and operating effectiveness of the controls around the goodwill impairment process;
|
| • |
Assessing the reasonableness of management’s determination of the reporting unit and the allocation of goodwill;
|
| • |
Assessing management’s impairment model for compliance with ASC 350 and ASC 820;
|
| • |
Obtaining an understanding of the significant inputs and assumptions in management’s model, and assessing for reasonableness including:
|
| o |
Reviewing the key inputs of the model and corroborating key assumptions against supporting documentation;
|
| o |
Assessing the appropriateness of revenue growth assumptions in management’s forecast of cash flows in the current operating environment;
|
| o |
Engaging our internal valuation specialists to assess the appropriateness of the impairment model as a fair value approach consistent with ASC 820;
|
| o |
Engaging our internal valuation specialists to develop a range of independent estimates of the discount rate and comparing those to the discount rate selected by management;
|
| o |
Performing sensitivity analysis on the significant inputs and assumptions made by management in preparing the valuation model; and
|
| • |
Assessing the adequacy of disclosures in the financial report.
|
Bodily injury claims related to exposure to silica dust
Caesarstone Australia is facing a growing number of legal claims under workers’ compensation for bodily injury claims related to exposure to silica dust. Caesarstone Australia also have insurance which is expected to cover some of the costs of settling claims. In accordance with ASC 450-20 Loss Contingencies, a loss must be recognised when the loss is reasonably estimable. We identified the liability for bodily injury claims as a critical audit matter.
The principal considerations for our determination that the liability for bodily injury claims is a critical audit matter are the significant judgements and estimates involved in determining the loss liability to be recognized, including estimating the settlement amounts, claim amounts and expected portions payable by Caesarstone Australia.
Our audit procedures related to the bodily injury claims related to exposure to silica dust included the following, among others:
| • |
Obtaining an understanding, evaluating the design and operating effectiveness of the controls around the recognition and measurement of the liability;
|
| • |
Inquiring directly with all the Company’s attorneys utilized throughout the year;
|
| • |
Obtaining an understanding of the significant inputs and assumptions in management’s estimate of the liability and assessing for reasonableness including:
|
| o |
Inquiring with the Company’s attorneys and management regarding the status of open legal claims, relevant claim amounts, and other key assumptions and judgements;
|
| o |
Assessing the reasonableness of assumptions by reference to historical settlement amounts;
|
| o |
Recalculating the estimated claim liability; and
|
| • |
Assessing the adequacy of disclosures in the financial report.
|
/s/ GRANT THORNTON AUDIT PTY LTD
We have served as the Company’s auditor since 2008.
Melbourne, Australia
March 15, 2023
F - 72