20-F 1 zk2227452.htm 20-F CAESARSTONE LTD. - 1504379 - 2022
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


Form 20-F

(Mark One)

REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2021

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______ to ______

OR

SHELL COMPANY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Date of event requiring this shell company report.

Commission File Number 001-35464


CAESARSTONE LTD.

(Exact Name of Registrant as specified in its charter)

 

ISRAEL

(Jurisdiction of incorporation or organization)

 

Kibbutz Sdot-Yam

MP Menashe, 3780400

Israel

(Address of principal executive offices)

 

Yuval Dagim

Chief Executive Officer

Caesarstone Ltd.

MP Menashe, 3780400

Israel

Telephone: +972 (4) 636-4555

Facsimile: +972 (4) 636-4400

(Name, telephone, email and/or facsimile number and address of company contact person)

 

Securities registered or to be registered pursuant to Section 12(b) of the Securities Act of 1933:

 

Title of each class

Trading Symbol

Name of each exchange on which registered

Ordinary Shares, par value NIS 0.04 per share

CSTE

The Nasdaq Stock Market LLC

Securities registered or to be registered pursuant to Section 12(g) of the Act: None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of December 31, 2021: 34,473,070 ordinary shares


 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act:

Yes ☐         No

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934:

Yes ☐       No

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days:

Yes ☒       No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files):

Yes ☒       No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See definition of “accelerated filer,” “large accelerated filer” and “emerging growth company” in Rule 12b-2 of the Exchange Act (Check one):

 

Large accelerated filer ☐

Accelerated filer

Non-accelerated filer ☐

 

 

Emerging growth company

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act. ☐

† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.

Indicate by check mark whether the registrant has filed a report on the attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

U.S. GAAP

International Financial Reporting Standards as issued by the International Accounting Standards Board ☐

Other ☐

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow:

Item 17 ☐       Item 18 ☐

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):

Yes ☐       No


PRELIMINARY NOTES
Introduction
 
As used herein, and unless the context suggests otherwise, the terms “Caesarstone,” “Company,” “we,” “us” or “ours” refer to Caesarstone Ltd. and its consolidated subsidiaries. In this document, references to “NIS” or “shekels” are to New Israeli Shekels, and references to “dollars,” “USD” or “$” refer to U.S. dollars.
 
Our reporting currency is the United States (“U.S.”) dollar. The functional currency of each of our non-U.S. subsidiaries is the local currency in which it operates. These subsidiaries’ financial statements are translated into the U.S. dollar, the parent company’s functional currency, using the current rate method.
 
Other financial data appearing in this annual report that is not included in our consolidated financial statements and that relate to transactions that occurred prior to December 31, 2021 are reflected using the exchange rate on the relevant transaction date. With respect to all future transactions, U.S. dollar translations of NIS amounts presented in this annual report are translated at the rate of $1.00 = NIS 3.11, the representative exchange rate published by the Bank of Israel as of December 31, 2021.
 
Market and Industry Data and Forecasts
 
This annual report includes data, forecasts and information obtained from industry publications and surveys and other information available to us. Some data is also based on our good faith estimates, which are derived from management’s knowledge of the industry and independent sources. Forecasts and other metrics included in this annual report to describe the countertop industry are inherently uncertain and speculative in nature and actual results for any period may materially differ. We have not independently verified any of the data from third-party sources, nor have we ascertained the underlying assumptions relied upon therein. While we are not aware of any misstatements regarding the industry data presented herein, estimates and forecasts involve uncertainties and risks and are subject to change based on various factors, including those discussed under the headings “—Forward-Looking Statements” and “ITEM 3: Key Information—Risk Factors” in this annual report.
 
Unless otherwise noted in this annual report, Freedonia Custom Research, a division of MarketResearch.com, Inc.  (“Freedonia”) is the source for third-party industry data and forecasts. The Freedonia report, dated March 12, 2021 (“Freedonia Report”), represents data, research opinion or viewpoints developed independently by Freedonia and does not constitute a specific guide to action. In preparing the report, Freedonia used various sources, including publicly available third-party financial statements; government statistical reports; press releases; industry magazines; and interviews with manufacturers of related products (including us), manufacturers of competitive products, distributors of related products, and government and trade associations. Growth rates in the Freedonia Report are based on many variables, such as currency exchange rates, raw material costs and pricing of competitive products, and such variables are subject to wide fluctuations over time. The Freedonia Report speaks as of its final publication date (and not as of the date of this filing), and the opinions and forecasts expressed in the Freedonia Report are subject to change by Freedonia without notice. Management believes this third-party report to be reputable, but has not independently verified the underlying data sources, methodologies, or assumptions. The report and other publications referenced are generally available to the public and were not commissioned by the Company.

 
Special Note Regarding Forward-Looking Statements and Risk Factor Summary
 
This annual report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (“Securities Act”), Section 21E of the Securities Exchange Act of 1934, as amended (“Exchange Act”), and the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995, that are based on our management’s beliefs and assumptions and on information currently available to our management. Forward-looking statements include information concerning our possible or assumed future results of operations, business strategies, financing plans, competitive position, industry environment, potential growth opportunities, potential market opportunities and the effects of competition. Forward-looking statements include all statements that are not historical facts and can be identified by terms such as “anticipates,” “believes,” “could,” “seeks,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “projects,” “should,” “will,” “would” or similar expressions that convey uncertainty of future events or outcomes and the negatives of those terms. These statements may be found in several sections of this annual report, including, but not limited to “ITEM 3: Key Information—Risk Factors,” “ITEM 4: Information on the Company,” “ITEM 5: Operating and Financial Review and Prospects,” “ITEM 10: Additional Information—Taxation—United States Federal Income Taxation—Passive foreign investment company considerations.” Forward-looking statements reflect our current views with respect to future events and are based on assumptions and are subject to risks and uncertainties, including those described in “ITEM 3.D. Key Information—Risk Factors.” Important factors that could affect our actual results and cause them to differ materially from those expressed in forward-looking statements include, but are not limited to, the items in the following list, which also summarizes some of our principal risks:
 

the impact of the coronavirus (COVID-19) pandemic on end-consumers, the global economy and our business and results of operations;
 

adverse global conditions, including macroeconomic and geopolitical uncertainty, may negatively impact our financial results
 

Constraints in the global supply of, prices for, and availability of transportation of the raw materials, finished goods and other products essential to our operations;
 

changes in the availability or prices to the prices of our raw materials or to the suppliers of our raw materials;
 

downturns in the home renovation, remodeling and residential construction sectors or the economy generally;
 

disruptions to our information technology systems globally, including by deliberate cyber-attacks;
 

future foreign exchange rates and fluctuations in such rates, particularly the NIS, Australian dollar, Canadian dollar, British pound, Indian Rupee and the Euro;
 

Our ability to raise funds to finance our current and future capital needs;
 

Our ability to pass rising costs to our customers;
 

competitive pressures from other manufacturers of quartz and other surface materials as well as increased competition from lower-priced alternatives;
 

risks associated with changes in global trade policies or the imposition of tariffs;
 

our ability to successfully consummate business combinations or acquisitions and our success in integrating our most recently acquired Lioli Ceramica Private Limited (“Lioli”) and Omicron Granite and Tile (“Omicron”) businesses into our operations;
 

our ability to manage required changes in our production and supply chain, and manufacture our products efficiently;
 

disturbances to our operations, the operations of our equipment and raw material suppliers, distributors, customers, consumers or other third parties;
 

our ability to effectively manage changes to our production and supply chain and effectively collaborate with Original Equipment Manufacturer (“OEM”) suppliers;
 

our ability to execute our strategy to expand sales in certain markets;
 

impacts on revenue from sales disruptions in our geographic concentrations or key 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 outcome of litigations including those regarding silicosis, other bodily injury claims or other legal proceedings in which we are involved, and our ability to use our insurance policy to cover damages;
 

regulatory requirements and any changes thereto relating to crystalline silica dust and related hazards;
 

the extent of our liability for environmental, health and safety, product liability and other matters;
 

the protection of our brand, technology and intellectual property;
 

our tax position, including meeting certain conditions required to receive certain tax benefits, our exposure to U.S. tax liabilities and related consequences under the U.S. Internal Revenue Code, and the continued availability of certain tax benefits granted by the Israeli government ;
 

compliance with and impacts of laws and changes in laws where we operate (Primarily Israel, the U.S., Canada and Australia);
 

our ability to retain our senior management team and other skilled and experienced personnel;
 

the effect of the share ownership by the Kibbutz and Tene;
 

our ability to manage or resolve conflicts of interest arising from employee affiliations with Kibbutz Sdot-Yam (the “Kibbutz”) and with Tene Investment in Projects 2016 Limited Partnership (“Tene”);
 

the effects of enforcements against us, our officers and directors in the United States;
 

our ability to maintain our lease agreements with the Kibbutz, the Israeli Lands Administration (the “ILA”) and Caesarea Development Corporation;
 

coverage by equity research analysts, publicly announced financial guidance, investor perceptions and our ability to meet other expectations (such as Environmental Social and Governance);
 

the impacts of conditions in Israel, such as negative economic conditions or labor unrest;
 

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 status as a foreign private issuer and related exemptions with respect thereto; and
 

our expectations regarding regulatory matters applicable to us.
 
The preceding list is not intended to be an exhaustive list of all our forward-looking statements. Forward-looking statements reflect our current views with respect to future events and are based on assumptions and are subject to risks and uncertainties, including those described in “ITEM 3.D. Key Information—Risk Factors.”
 
You should not put undue reliance on any forward-looking statements. Actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors described in this annual report, including factors beyond our ability to control or predict. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that future results, levels of activity, performance and events and circumstances reflected in the forward-looking statements will be achieved or will occur. Any forward-looking statement made in this annual report speaks only as of the date hereof. Except as required by law, we undertake no obligation to update publicly any forward-looking statements for any reason after the date of this annual report, to conform these statements to actual results or to changes in our expectations.

 
TABLE OF CONTENTS
 
PART I  1
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( i )

PART II
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PART III
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( ii )

PART I
 
ITEM 1: Identity of Directors, Senior Management and Advisers
 
Not applicable.
 
ITEM 2: Offer Statistics and Expected Timetable
 
Not applicable.
 
ITEM 3: Key Information
 
A.
[Reserved]
 
B.
Capitalization and Indebtedness
 
Not applicable.
 
C.
Reasons for the Offer and Use of Proceeds
 
Not applicable.
 
D.
Risk Factors
 
Our business faces significant risks and uncertainties. You should carefully consider all the information set forth in this annual report and in our other filings with the United States Securities and Exchange Commission (the “SEC”). Our business, financial condition and results of operations could be materially and adversely affected by any of these risks. In that event, the trading price of our ordinary shares would likely decline, and you might lose all or part of your investment. This report also contains forward-looking statements that involve risks and uncertainties. Our results could materially differ from those anticipated in these forward-looking statements, as a result of certain factors including the risks described below and elsewhere in this report and our other SEC filings. See also “Special Note Regarding Forward-Looking Statements and Risk Factor Summary” on page iv of this annual report.
 
Risks Related to our Business
 
Economic and External Risks
 
The COVID-19 pandemic could further impact end-consumers and the global economy in general, lower demand for our products, disrupt our operations and materially and adversely affect our business and financial results.
 
The impact of the COVID-19 pandemic has resulted in a widespread public health crisis and governmental authorities have implemented numerous measures attempting to contain and mitigate the effects of the virus. The COVID-19 pandemic has increased market uncertainty and volatility, led to travel and other restrictions, including individual quarantines, and significantly affected consumer and businesses behaviors. The volatility in stock markets around the world has and may continue to materially and adversely impact stock prices and trading volumes for us and other companies.  The culmination of these dramatic large-scale events could result in a global economic recession, depression, excessive inflation or other sustained adverse market events and significantly decrease home renovation and remodeling activity and new residential construction, and in turn reduce the demand for our products, thus materially and adversely affecting our business and results of operations.
 
The COVID-19 pandemic may also adversely affect our ability to conduct our business effectively due to disruptions to our production and supply chain, availability and cost of shipping services, availability and productivity of personnel. We attempted to comply with rapidly changing restrictions, such as travel restrictions, curfews and others. Additionally, the impact of the COVID-19 pandemic on international shipping, including fewer available shipping providers and routes, has significantly increased costs, and has increased, and may continue to increase, our cost of goods sold in the future. Such increase has and may in the future materially adversely affect our business, financial condition and results of operations.  Any future shipping delays and cost increases as a result of the COVID-19 pandemic, or any future pandemic or resurgence, could have a material adverse effect on our business and results of operations.
1

 
Governmental actions in response to the Covid-19 pandemic, in locations where we operate could further limit our operations, which may have a material adverse effect on our operations and financial results, for example gathering restrictions, isolation for COVID-19 positive and for people who were in contact with a COVID-19  positive person, and reduced workforce in the education system and more generally in the public sector. The widespread COVID-19 pandemic may further disrupt our ability to manufacture products and impact the operations of our customers and modes of shipping, any of which could lead to reduction in customer orders and sales to certain regions and end-markets. In addition, the COVID-19 pandemic increased risks for insolvency due to cash-flow management and credit availability, and as some customers may be impacted more severely, we could face collection difficulties, which would have an adverse effect on our financial results.
 
The COVID-19 pandemic further contributed to costs entailed with producing at our facilities, such as, but not limited to: compliance with heightened environmental health and safety standards, including any governmental mandates to mitigate the spread of the COVID-19 pandemic; labor; energy; raw material costs; and taxes. If the production costs of our products continue to increase, it could negatively and materially impact our results.
 
In addition, we are facing challenges in recruiting employees. A significant reduction in our workforce brought about as a result of the COVID-19 pandemic, and current difficulties to recruit required personnel and/or our compliance with instructions imposed by governmental authorities may harm our ability to continue operating our business and materially and adversely affect our operations and financial condition. Further, we cannot assure you that we will be designated an “essential business”, as defined under the government instructions, and moreover, we cannot foresee whether the Israeli authorities will impose further restrictive instructions in the future, which if implemented may lead to significant changes and potentially a shutdown of our operations.
 
Authorities around the world have and may continue implementing similar restrictions on business and individuals in their jurisdictions. We cannot assure you that we will be able to continue to manage our international operations and business effectively, which would have material adverse effect on our results of operations. See “—Our operating results may suffer due to our failure to manage our international operations effectively or due to regulatory changes in foreign jurisdictions where we operate”.
 
Future outbreaks of the COVID-19 pandemic leading to additional restrictions and regulations related to the COVID-19 pandemic containment efforts may further challenge our ability to conduct our operations and, as a result, may materially and adversely affect our financial results. For example, in Morbi, India, where our subsidiary Lioli is located, the prevalence of the COVID-19 disease and death rates were relatively high during 2021 and caused some disruptions to our operations.  Additionally, Lioli relies on production materials and equipment from diverse locations, and as a result, any restrictions related to the COVID-19 pandemic that impact the delivery of such could materially and adversely impact the ability of our Lioli facility to continue production. Although operations at Lioli are currently not disrupted by the COVID-19 pandemic restrictions imposed by local or federal authorities or deliveries of production materials, we cannot assure you that operations at Lioli will continue to run or that Morbi or Indian authorities will not institute restrictions and regulations that affect our operations.  Currently the trajectory of the COVID-19 outbreak remains highly uncertain and we cannot predict the duration, severity or effect of the pandemic or any future containment effort.
 
Adverse global conditions, including macroeconomic and geopolitical uncertainty, may negatively impact our financial results.
 
Global conditions, dislocations in the financial markets, or inflation could adversely impact our business. In addition, the global macroeconomic environment has been and may continue to be negatively affected by, among other things, instability in global economic markets, increased trade tariffs and trade disputes, instability in the global credit markets, supply chain weaknesses, instability in the geopolitical environment as a result of the Russian Ukraine conflict, the withdrawal of the United Kingdom from the European Union, and other political tensions, and foreign governmental debt concerns. Such challenges have caused, and may continue to cause, uncertainty and instability in local economies and in global financial markets, which may adversely affect our business.
2

 
Additionally, economic downturns and geopolitical challenges in regions of the world that are critical to our operations have in the past and could in the future cause supply chain and other disruptions that impact our business. For example, Russia’s and Ukraine’s conflict, and the possibility of retaliatory measures taken by the U.S. and NATO have created global security concerns that could have a lasting adverse impact on regional and global economies. Although we do not have operations in Ukraine or Russia, we have in the past sold product to local distributers, an activity that may be halted for various some of our suppliers, including an important raw material used in our ceramic production is based in Ukraine and has ceased its operations. Procuring alternatives and amending production may be costly and may not be possible in a timely fashion, which could disrupt our production and have an adverse impact on our business’s results of operations, financial condition and profitability.
 
Downturns in the home renovation and remodeling and new residential construction sectors or the economy generally and a lack of availability of consumer credit could materially and adversely impact end-consumers and lower demand for our products, which could cause our revenues and net income to decrease.
 
Our products are primarily used as countertops in residential kitchens. As a result, our sales depend significantly on home renovation and remodeling spending, as well as new residential construction spending, primarily in the United States, Australia (unless stated otherwise, reference to Australia in this report includes Australia and New Zealand), Canada and Israel. We estimate (supported by the Freedonia Report), that approximately 60%-70% of our revenue in our main markets (U.S., Australia, Canada) is related to residential renovations and remodeling activities, while 30%-40% is related to new residential construction.
 
During periods of industry downturn, housing markets are likely to experience an oversupply of both new and resale home inventory, an increase in foreclosures, and reduced levels of consumer demand for new homes as a result of fluctuations in interest rates, consumer confidence, government programs and unemployment. During such periods, customers may choose to reduce their discretionary spending and, as a result, delay or cancel their home renovation or remodeling projects.
 
In addition, many of our customers are homebuyers or homeowners who finance their home purchases, construction and renovation projects through loans or lenders that provide mortgage financing. Downturns in the housing market and/or the economy generally could limit the availability of consumer credit. A tightening of lending standards by financial institutions could reduce the ability of consumers to obtain suitable financing for their renovation and remodeling expenditures or home purchases, which could in term materially and adversely affect our ability to grow or sustain our business, our revenues and net income. See also “—The COVID-19 pandemic could further impact end-consumers and the global economy in general, lower demand for our products, disrupt our operations and materially and adversely affect our business and results of operations” and “—Disturbances to our operations or the operations of our suppliers, distributors, customers, consumers or other third parties could materially adversely affect our business.”
 
We may need to raise funds to finance our current and future capital needs, which may dilute the value of our outstanding ordinary shares, increase our financial expenses or limit our business activities.
 
We may need to raise additional funds to finance our existing and future capital needs, including to fund ongoing working capital requirements. If we raise additional funds through the sale of equity securities, these transactions may dilute the value of our outstanding ordinary shares. Any debt financing would increase our level of indebtedness and could negatively affect our liquidity and restrict our operations. We may be unable to raise additional funds on terms favorable to us or at all. If financing is not available or is not available on acceptable terms, we may be unable to fund our future needs. This may prevent us from increasing our market share, capitalizing on new business opportunities or remaining competitive in our industry, which could materially and adversely affect our business, prospects, financial condition and results of operations.
3

Our results of operations may be materially and adversely affected by fluctuations in currency exchange rates, and we may not have adequately hedged against them.
 
We conduct business in multiple countries, which exposes us to risks associated with fluctuations in currency exchange rates between the U.S. dollar (our functional currency) and other currencies in which we conduct business. In 2021, 50.0% of our revenues were denominated in U.S. dollars, 6.0% in NIS, 6.0% in Euros, 13.1% in Canadian dollars, 18.4% in Australian dollars and a smaller portion in other currencies. In 2021, the majority of our expenses were denominated in U.S. dollars, NIS and Euros, and a smaller proportion in Canadian and Australian dollars and other currencies. As a result, weakening of the Australian and Canadian dollars and strengthening of the NIS and, to a lesser extent, strengthening of the Euro against the U.S. dollar presents a significant risk to us and may impact our business significantly. For example, the NIS appreciated 7.5% and 6.4% against the U.S. dollar during 2020 and 2021, respectively, and resulted in finance expenses of approximately $6.8 million and $7.5 million in such years See “ITEM 11: Quantitative and Qualitative Disclosures About Market Risk.” for the impact of currencies fluctuation on our operating income. We translate sales and other results denominated in foreign currency into U.S. dollars for our financial statements; therefore, during periods of a strengthening dollar, our reported international sales and earnings could be reduced because foreign currencies may translate into fewer U.S. dollars.
 
In addition, we currently engage in derivatives transactions, such as forward and option contracts, to hedge against the risks associated with our foreign currency exposure. Our strategy to hedge our cash flow exposures involves consistent hedging of exchange rate risk in variable ratios up to 100% of the exposure over rolling 12 months. As of December 31, 2021, our average hedging ratio was approximately 24% out of our expected currencies exposure for 2022. Moreover, our currency derivatives, except for our U.S. dollar/NIS forward contracts, are currently not designated as hedging accounting instruments under Accounting Standards Codification (“ASC”) 815, Derivatives and Hedging. Hedging results are charged to finance expenses, net, and therefore, do not offset the impact of currency fluctuations on our operating income. Our U.S. dollar/NIS forward contracts are charged to operating expenses as designated hedge instruments, partially offsetting the impact of the U.S. dollar/NIS currency fluctuations on our operating income. While we may decide to enter into additional hedging transactions in the future, the availability and effectiveness of these transactions may be limited and we may not be able to successfully hedge our exposure, which could adversely affect our financial condition and results of operations. See “ITEM 11: Quantitative and Qualitative Disclosures About Market Risk.”
 
If we are unable to pass rising costs to our customers, it could have a material adverse effect on our business.
 
The prices of our raw materials, and energy related costs vary significantly in recent months with market conditions, and in addition, because we acquire our raw materials from third-party suppliers that are located outside of the regions where we manufacture our products, our baseline shipping and import costs are often higher than those of our competitors and are also dependent on shipping availability and cost. While we are attempting to pass on such increases costs to our customers, our ability to do so depends on many factors including competition in our markets. If we are unable to mitigate the increase in these costs, particularly raw material and shipping, our financial condition and results of operations could be materially and adversely affected.
 
4

 
If we are unable to compete with lower-priced products and pass increase costs to our customers, our market share may decrease, and our financial results may be adversely and materially impacted.
 
We have invested considerable resources to position our quartz surface products as premium branded products. Due to our products’ high quality and positioning, we generally set our prices—especially for our differentiated products—at a higher level than alternate surfaces and quartz surfaces provided by other manufacturers. Manufacturers located in the Asia-Pacific region (predominantly China) and certain parts of Europe can produce quartz surface products at a lower cost, including quartz surface products which imitate our products and designs. Many of these manufacturers are able to reduce their production costs by purchasing their raw materials in the same or nearby regions where they produce their goods. Further penetration of these products into our market may reduce our market share, limit our ability to increase prices and have a material adverse effect on our financial condition and results of operations.
 
Global trade is affected by governmental involvement including through antidumping and countervailing duties and these may cause unforeseeable market changes that could adversely impact our financial results.
 
Antidumping and countervailing duty orders are designed to provide relief from imports sold at unfairly low or subsidized prices by imposing special duties on such imports. Such orders normally benefit domestic suppliers in the country in which the duty orders are in place and foreign suppliers not covered by the orders. During 2018 and 2019, antidumping and countervailing duty (“AD/CVD”) petitions were filed with the U.S. Department of Commerce (“DOC”) and the International Trade Commission (“ITC”). The petitions, which were filed by a U.S. quartz manufacturer, alleged that Chinese, and subsequently Indian and Turkish manufacturers injured the U.S. domestic quartz industry and therefore duties were required to offset such unfair trade practices. Ultimately, the DOC and ITC imposed AD/CVD duties ranging approximately between 265% and 340% for Chinese, and between 3.81% and 80.79% for Indian and Turkish manufacturers.
 
The imposition of AD/CVD orders have driven some of the affected manufacturers to direct their products into other markets in which we operate (including markets in which we hold a higher market share than in the U.S., such as Australia) thereby adversely impacting our operations and financial results.  Finally, any duties and tariffs imposed by the U.S. or other regulators may not succeed in remediation of any impact caused by the relevant imports. Chinese, Indian and Turkish exporters may shift their focus to other, competing materials, to circumvent the duties. As a result, our non-U.S. markets have faced increased competitive pressures. Changes in the AD/CVD tariffs may increase uncertainty and our financial results may be adversely and materially impacted.
 
On October 29, 2021 the European Ceramic Tile Manufacturers' Federation, filed a complaint to the European Commission (“Commission”) in which it requested that the Commission initiate an anti-dumping investigation concerning imports to the EU of ceramic tiles originating in India and Turkey between July 2020 and June 2021 (“Complaint”). The Complaint provides a very board definition of characteristics of what will be considered “ceramic tiles”. Such characteristics include large size ceramic slabs (120 x 120 CM or larger) which are similar to the type of ceramic slabs which are also manufactured by our subsidiary, Lioli, an India-based producer of porcelain slabs.
 
The Complaint is focused on small size ceramic slabs which are considered low-end products (used primarily for floors and wall cladding), compared to the large size ceramic slab considered premium products sold at higher margins. Therefore, Lioli has filed a petition to exclude from the Compliant such large size ceramic slabs.
 
If the Commission does not agree to exclude Lioli’s large size ceramic slab and it is further found by the Commission that anti-dumping has indeed occurred during such period, then the Commission may impose duties on ceramic slab imported to the EU which will be applied to Lioli’s products as well.
 
The current antidumping and countervailing duty orders may not remain in effect and continue to be enforced from year to year, the products and countries currently covered by orders may no longer be covered, and duties may not continue to be assessed at the same rates.  For example, in the United States, rates of duty can change as a result of “administrative reviews” of antidumping and countervailing duty orders. These orders can also be revoked as a result of periodic “sunset reviews,” which determine whether the orders will continue to apply to imports from particular countries. Antidumping and countervailing duties in the European Union and Canada are also subject to periodic reviews. In the European Union and in Canada, such reviews can include interim reviews, expiry reviews and other types of proceedings that may result in changes in rates of duty or termination of the duties.
5

Operational Risks
 
Constraints in the global supply of, prices for and availability of transportation of the raw materials, finished goods and other products essential to our operations could cause our results of operations and prospects to suffer.
 
We currently manufacture our products at our two facilities in Israel, one facility in the United States and one facility in India. In addition, we source a portion of our supply chain from OEMs which are also subject to similar risks. We actively manage our global supply chain and production facilities in Israel, U.S. and India, during 2021, we experienced disruption and volatility in our supply chain that we expect to continue through 2022. Supply chain issues have occurred on a global scale fueled by COVID-19 pandemic and have caused delays in the arrival of or otherwise constrained our supply of raw materials, particularly quartz and porcelain, which are essential and non-fungible components in the manufacture of our countertops and surface products. Other supply chain risks include, but are not limited to: disruptions in shipping logistics, as ports and other channels of entry from where we import, export and deliver our products have been closed or continue to operate at reduced capacity; shutdowns or reduced operations at our suppliers’ facilities; changes in the market prices for quartz and the countertop materials upon which we rely; and shortages of raw materials as a result of high levels of demand or reduced capacity of our suppliers. Difficulties or interruptions obtaining the raw materials required for our manufacturing operations, including any difficulties in the short term or long term to obtain Ukraine clay, bentonite due to the current situation in Ukraine, has and could continue to delay our output or supply of products and harm our relationships with our customers, damage our brand and reputation and have a material adverse effect on our results of operations. There can be no assurance that we will continue to effectively manage our global supply chain and manufacturing operations in the future and that the impacts of the challenges in supply chain and material procurement, brought about by COVID-19 geopolitical events and market conditions will not materially adversely affect our business, financial condition, results of operations and growth prospects. If these conditions continue to worsen, we cannot assure you that we will be able to successfully secure raw materials to our various manufacturing facilities in a timely or profitable manner. In addition, price increases imposed by our OEMs and other suppliers for raw materials and transportation providers used in our business, if we are unable to pass these costs increases to our customers, in whole or in part, it could have a material adverse effect on our business and consolidated results of operations.
 
Changes in the prices of our raw materials have increased our costs and decreased our margins and net income in the past and may increase our costs and decrease our margins in the future.
 
The principal raw materials used for our products are polyester and quartz. In 2021, raw materials used in manufacturing processes accounted for approximately 29% of our cost of goods sold. The cost of raw materials consists of the purchase prices of such materials and costs related to the logistics of delivering the materials to our manufacturing facilities. The raw materials we use for our products are subject to price volatility caused by weather, supply conditions, government regulations, economic and political climate, labor costs, and other unpredictable factors. Our raw materials costs are also impacted by changes in foreign currency exchange rates, mainly the Euro as it relates to polyester and other raw materials purchased from Europe. Any increase in raw material prices increases our cost of sales and can decrease our margins and net income. Furthermore, we may face market conditions that will make it impossible to pass all or some of the increased costs to our customers. If we are unable to recover these costs it may have a material adverse effect on our financial results. For cost of our raw materials in 2021 and prior years, see “ITEM 5.A: Operating Results and Financial Review and Prospects—Operating Results—Cost of revenues and gross profit margin.”
 
Quartz, which includes quartz, quartzite and other dry minerals and engineered materials containing high amounts of silica (together referred to in this annual report as “quartz” unless otherwise specifically stated), is the main raw material component used in our engineered quartz products. Quartz accounted for approximately 33.8% of our raw materials cost in 2021. Our cost of sales and overall results of operations may be impacted significantly by fluctuations in quartz prices. For example, if the cost of quartz at our plants had risen by 10% in 2021, we would have experienced a decrease of approximately 0.9% in our gross profit margin in such year. In 2021, our average cost of quartz increased by 12.0%, following an increase of 3.2% during 2020. Any future increases in quartz prices could also materially and adversely impact our margins and net income.
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Polyester, which acts as a binding agent in our products, accounted for approximately 35.3% of our raw materials costs in 2021. Accordingly, our cost of sales and overall results of operations may be impacted significantly by fluctuations in polyester prices. For example, if the cost of polyester had risen by 10% in 2021, we would have experienced a decrease of approximately 1% in our gross profit margin in such year. The cost of polyester we incur is a function of, among other things, manufacturing capacity, demand and the price of crude oil and more specifically benzene. Our cost of polyester fluctuated significantly over the years. In 2021, our average polyester cost increased by approximately 54%. We acquire polyester on an annual framework basis, or a purchase order basis based on our projected needs for the subsequent one to three months. Going forward, we may experience pressure from our polyester suppliers to increase prices even during a period covered by purchase orders.
 
Since 2020, we have been using a dynamic hedging strategy to reduce our exposure to changes in the polyester prices. This strategy involves hedging certain components of our polyester formula in variable ratios of the exposure over rolling 12 months. Therefore, future fluctuations in polyester prices which we have not adequately hedged could materially and adversely affect our profitability. Moreover, our polyester contract derivatives are currently not designated as hedging accounting instruments under Accounting Standards Codification (“ASC”) 815, Derivatives and Hedging. Hedging results are charged to finance expenses, net, and therefore, do not offset the impact of polyester prices on our operating income.
 
Pigments are also used to manufacture our products. Although pigments account for a significantly lower percentage of our raw material costs than polyester, we encountered in the past and may experience in the future fluctuations in pigment prices. For example, the cost of titanium dioxide, our principal white pigmentation agent, decreased by approximately 0.2% and increased by approximately 16.4% in 2020 and 2021, respectively. Such prices fluctuations may also have a materially adverse impact on our margins and net income.
 
As a result of recent global economic conditions (as discussed in the risk factor entitled “Adverse global conditions, including macroeconomic and geopolitical uncertainty, may negatively impact our financial results”), the prices of raw materials used for our products has been particularly volatile in fiscal 2021 and the first quarter of fiscal 2022, and hedging mechanisms and strategies used to mitigate this price volatility have been limited, for example the current situation in Ukraine may also make it more difficult in the short-term and long-term to obtain Ukraine clay, bentonite used in our ceramic production.  If we are unable to increase the price of our products to cover increased costs, to offset operating cost increases or are not successful in our commodity hedging program, then commodity and raw material price volatility or increases could materially and adversely affect our profitability, financial condition and results of operations. Moreover, future decisions not to engage in hedging transactions or ineffective hedging transactions might result in increased cost volatility, potentially adversely impacting our profitability, financial condition and results of operations. If we are unable to source raw materials, that could limit our ability to utilize our manufacturing facilities, in addition, increases in the prices of these raw materials recover these both may have a material adverse effect on our financial results.
 
For cost of our raw materials in 2021 and prior years, see “ITEM 5.A: Operating Results and Financial Review and Prospects—Operating Results—Cost of revenues and gross profit margin.”
 
We face intense competitive pressures from manufacturers of other surface materials, which could materially and adversely affect our results of operations and financial condition.
 
Our surface products compete with several surface materials such as granite, laminate, marble, manufactured solid surface, concrete, stainless steel, wood, and other porcelain and quartz surfaces. We compete with manufacturers of these surface materials with respect to a range of factors. These factors include, among other things, brand awareness and brand position, product quality, product differentiation, design and breadth of product offerings, slab dimensions, new product development and time to market, availability and supply time, technological innovation, popular home interior design trends, pricing, availability of inventory on demand, distribution coverage, customer service and versatility in products portfolio.
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Since we seek to position our products as a premium alternative to other surface materials, the perception among end-consumers and other stakeholders of our products is a key competitive differentiator. If we are unable to anticipate or react quickly to changes in consumer preference in these areas, we may lose market share and our results of operations may suffer. If consumer preference shifts away from materials we are offering to other materials, or away from branded surfaces, our market share may be reduced, and our financial results may be materially and adversely impacted.
 
Competition increases with increased global production capacity by new and existing competitors. Should our competitors be able to produce products more efficiently at lower prices, adapt more quickly to changes in consumer preferences and demands, have a diversified product offering, or acquire complementary businesses, we may lose market share and our financial results may suffer.
 
Our ability to fully integrate acquisitions, joint ventures and/or investments, including our previously announced acquisitions of Lioli and Omicron, could be more difficult, costly and time-consuming than we expect and therefore disrupt our business and adversely affect the value of our shares.
 
Our success will depend, in part, on our ability to expand our product offerings and grow our business in response to customer demands, competitive pressures and industry trends in the home renovation and construction sectors. We pursue our growth strategy by acquiring complementary businesses across the globe, including our previously announced acquisitions of Lioli, an India-based porcelain countertop slab producer, in October 2020 (the “Lioli Acquisition”), and Omicron, a stone supplier based in Pompano Beach, Florida, in December 2020 (the “Omicron Acquisition”).
 
The combination of independent businesses is a complex, costly and time-consuming process. While our management continues to make progress in integrating Lioli’s and Omicron’s businesses with ours, such efforts are still underway and are expected to continue through 2022. During this time, we and our management have encountered, and are likely to continue to encounter, ongoing challenges with respect to achieving anticipated synergies. For example, we have experienced a high turnover rate of key employees at Lioli, which we attribute to challenges assimilating Lioli employees into our workplace culture and maintaining consistent operational standards and processes. We seek to manage these transitions carefully, such as by establishing employee training and development programs. However, any continued retention issues at our acquired companies will result in a loss of institutional knowledge about those businesses. Failure to address these risks, such as by successfully retaining current employees or recruiting new professionals with relevant industry knowledge, will likely result in operational delays and negatively impact our financial results.
 
In addition, we may be exposed to unforeseen or undisclosed claims and liabilities arising from the operations of Lioli and Omicron from periods prior to the dates we acquired them. For example, although we believe that we have a good and marketable title to the Lioli manufacturing facility in Morbi, Gujarat, India, there are certain historic discrepancies between records of different local and regional authorities in Gujarat, India, including records of titles to physically non-existing plots, that might result in our ownership to the facility or its parts being challenged, including by title holders of existing and non-existing adjacent plots. Our ability to seek indemnification from the former owners for these and any other claims or liabilities could be significant and limited by various factors, including the specific limitations contained in the respective acquisition agreements and the financial ability of the former owners. If we are unable to enforce any indemnification rights we may have, or if we do not have any right to indemnification, we could be held liable for the costs or obligations associated with such claims or liabilities, which could adversely affect our operating performance.
 
In addition, as a result of the Lioli Acquisition and the Omicron Acquisition we carry a significant amount of intangible assets (including goodwill) on our balance sheet. As of December 31, 2021, our goodwill and other intangible assets (including Lioli and Omicron acquisitions), amounted to $45.8 million and $9.6 million, respectively. The future occurrence of potential indicators of impairment could include, for example, a significant adverse change in business climate, an adverse action or assessment by a regulator, unanticipated competition, a material negative change in relationships with significant customers, strategic decisions made in response to economic or competitive conditions, continued loss of key personnel, or an expectation that a reporting unit or a significant portion of a reporting unit will be sold or disposed of, and could result in goodwill impairment charges. Although we have not recorded goodwill impairment charges in the past, we cannot guarantee that we will not experience goodwill impairments in the future.
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If we fail to effectively manage required changes in our production and supply chain, we may be unable to serve the market or suffer additional inefficiencies.
 
Our production and supply chain processes are complex and rely on our estimates and forecasts in terms of volume as well as product mix. These processes are characterized by an interdependent network of suppliers and material needs, owned and leased manufacturing locations, external manufacturing partners, distribution networks, shared service delivery centers and information systems, each of which supports our ability to provide our products to our customers consistently. The Lioli Acquisition and Omicron Acquisition further expanded our production and supply chain, as well as product offerings, into new global markets. While we continue integrating Lioli and the Omicron into our existing business, we must also effectively manage the increased complexity resulting from manufacturing and sourcing products and materials on a vaster global scale. A failure to accurately forecast or manage our needed inventories, as well as any disruptions in our production and supply chain processes, may hinder the availability of our products in the market, result in loss of sales, increase shipping costs and harm our relationships with our customers, damage our brand and reputation and have a materially adverse effect on our results of operations. In addition, if we are unsuccessful in adjusting our manufacturing operations to such changes, or to changes in the demand for our products, we may be unable to grow our business and revenue, maintain our competitive position or improve our profitability.
 
The ability of suppliers to deliver parts, components and manufacturing equipment to our facilities, and our ability to manufacture without disruption, could affect the timely delivery of our products and fulfillment of our contracts with distributors and customers.
 
We have purchased the majority of our manufacturing production lines from Breton S.p.A. (“Breton”), a manufacturer of lines to produce engineered stone slabs. We depend on Breton for certain spare parts for our production line equipment and for their support and know-how required to resolve specific technical problems in their manufacturing equipment and anticipate we will continue to do so in the future. If Breton were to cease business, or otherwise experienced an inability or delay in providing specialty machine components and spare parts, know-how or technical support to us, we would be unable to obtain such components or expertise for an indeterminate amount of time. As a result, the output of our products to our distributor sand customers could be prevented or delayed.
 
In addition, our operations are subject to disruption for a variety of reasons, including COVID-19-related supply chain difficulties or slowdowns, work stoppages, labor relations, damage to our manufacturing facilities or products caused by hazards, human error, negligence or other failures or circumstances beyond our control. There can be no assurance that we will continue to effectively manage our global supply chain and manufacturing operations in the future and that the impacts of COVID-19 and other global developments on our supply chain and manufacturing will not materially adversely affect our business, financial condition, results of operations and growth prospects. See “—The COVID-19 pandemic could further impact end-consumers and the global economy in general, lower demand for our products, disrupt our operations and materially and adversely affect our business and results of operations” and “—Disturbances to our operations or the operations of our suppliers, distributors, customers, consumers or other third parties could materially adversely affect our business.”
 
Our insurance policies have limited coverage in case of certain disruptions or significant damage to our manufacturing facilities and may not fully compensate us for the cost of replacement and any loss from business interruptions. Any damage to our facilities or interruption in manufacturing, whether due to limitations in manufacturing capacity or arising from factors outside of our control, could result in delays or failure in meeting contractual obligations and could have a materially adverse effect on our relationships with our distributors and customers, and on our financial results.
 
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Problems inherent in the use of OEM suppliers, such as a failure to effectively collaborate or diversify our relationships with various OEMs, could materially adversely affect our competitive position or profitability.
 
In order to optimize our production capabilities, meet market demands and adjust to changes in market dynamics, during 2021 we accelerated our strategy to acquire certain basic product models from third-party engineered stone and ceramic OEMs, primarily from China, Spain and Italy. We anticipate further increasing this activity during 2022.
 
The successful expansion of our supplier network through OEM relationships will depend on several factors, including, for example:
 

our ability to manage our relationships with OEMs;
 

the extent to which we experience delays in delivery of products from OEMs or the quality of products produced by these OEMs does not meet our standards;
 

damage or disruption to the ability of our OEMs to develop, manufacture and transport our products as a result of factors within or outside their control;
 

failure by such OEMs to comply with applicable laws and regulations or accepted industry standards; and
 

our ability to agree on the commercial terms with such vendors, or effectively enforce the terms of any verbal or written agreements, which could cause OEMs to cease manufacturing in the amounts required to meet the demand for our products, or at all.
 
If any of the above factors should materialize, we could experience adverse impacts to our business, financial condition and results of operations. Moreover, our failure to effectively manage our OEM supplier-partnerships could require us to locate alternative manufacturers or produce the products using our facilities, which could cause substantial delays in manufacturing, increase our costs, negatively impact our brand, reputation, and the quality of our products in case we rely on new vendors, and require us to adjust our products and our manufacturing processes. Even if we do effectively manage such relationships, they may not help us to successfully optimize our operations and reduce costs. In addition, cooperation with OEMs may require us to expose certain intellectual property relating to our products and designs, the confidentiality of which we may not be able to further control or enforce. Finally, if we experience demand for our products that exceeds our manufacturing capacity and we fail to acquire slab models from OEMs, we may not have sufficient inventory to meet our customers’ demands, which would negatively impact our revenues, reputation and potentially cause us to lose market share.
 
A key element of our strategy is to expand our sales in certain markets, such as the United States. Failure to expand such sales would have a materially adverse effect on our future growth and prospects.
 
A key element of our strategy is to expand sales of our products in certain of our key existing markets, as well as additional new markets that we believe have high growth potential. In line with our growth acceleration plan, we are continuing to make strategic investments to increase our distribution network in the United States, including through the expansion of our brand into the South, Southeast and Ohio Valley markets via the Omicron Acquisition, and most recently, by increasing the headcount of our U.S. sales force in 2021. We estimate we can continue to expand our brand and the sales of our engineered quartz and porcelain products in the United States where, according to Freedonia, engineered quartz surfaces represented 20% of the total countertops by volume installed in 2020.
 
We face several challenges in generating demand for our products in the United States or other markets, including increasing consumers’ awareness of our brand for their kitchen countertops and other interior settings. If the market for our products in these regions does not develop as we expect, our future growth, business, prospects, financial condition and operating results will be adversely affected. In addition, changes to trade environments, including imposition of import tariffs or withdrawal from or revisions to international trade policies or agreements, may affect our growth potential globally, and further impact other markets in which we operate. See “—Competition from manufacturers of lower priced products may reduce our market share, alter consumer preferences and materially and adversely affect our results of operations and financial condition”.
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Even if we are able to increase our brand awareness and the demand for our products in these and other regions we consider to be viable markets, we may face certain challenges in supplying materials to large retailers in these regions. For more information, see “—A sizable proportion of our sales in North America is attributable to a limited number of large retailers; any deterioration of our relationships with such retailers or deterioration in their business performance (in fields relevant to the sale of our products) could adversely impact our results of operations.” Additionally, our reliance on third-party suppliers to provide installation and fabrication services to large retailers could impair our relationship with our customers, which could also materially harm our business and results of operations. Our success will depend, in large part, upon consumer acceptance and adoption of our products and brand in these markets, on the level of our execution, our go-to market strategy and its implementation and the timely availability of our products across regions, and if we do not effectively expand into these markets, there could be an adverse impact on our sales and financial condition.
 
A sizable proportion of our sales in North America is attributable to a limited number of large retailers; any deterioration of our relationships with such retailers or deterioration in their business performance (in fields relevant to the sale of our products) could adversely impact our results of operations.
 
We supply our products to retailers in a manner that includes fabrication and installation of countertops, primarily from our quartz surfaces, performed by third party contractors. While we expect that these retailers will continue to purchase our products, there is no assurance that such current agreements will be renewed at all or on similar terms. In case these collaborations are terminated or not renewed, our revenue could significantly decrease.
 
Our sales to retailers, may be affected, among other things, by their focus, sales and promotional events, the timing, scope and other terms that are determined exclusively by such retailers and can impact our sales volume. Accordingly, these sales have been, and may continue to be, volatile, and we may not be able to maintain or increase such sales or to maintain its current profitability level. In particular, as a result of the COVID-19 pandemic, governmental mandates resulted in the capacity limitations at businesses and the temporary shutdown of non-essential businesses, including for example IKEA. These restrictions, which negatively affected our sales volumes in 2021, could continue to negatively affect our sales volumes in the future and have a material adverse impact on our business depending on the duration of the COVID-19 pandemic and its effects. See also “—The COVID-19 pandemic could further impact end-consumers and the global economy in general, lower demand for our products, disrupt our operations and materially and adversely affect our business and results of operations” and “—Disturbances to our operations or the operations of our suppliers, distributors, customers, consumers or other third parties could materially adversely affect our business”.
 
In addition, we have entered into arrangements with third parties for the supply of fabrication and installation services to and we may enter into such agreements with other third parties. The success of these third-party relationships may impact our supply of countertops, inventory levels, quality and service level standards and ability to manage the installation and fabrication of countertops to meet the end consumers’ demands at reasonable prices. If we are unable to successfully manage the installation and fabrication services performed for us by these third-party fabricators and installers, we may experience relatively high waste of our products used by fabricators for such works, and complaints from end-consumers with respect to supply time, quality and service level of the fabrication and installation, including defects and damages. Such risks could expose us to warranty-related damages, which, if not covered back-to-back by the fabricators engaged by us, could have a materially adverse effect on our financial results, reputation and brand position and lead to the termination of our agreements with retailers.
 
We rely on select suppliers in specific regions for the raw materials used in the production of our products, and we may encounter significant manufacturing delays if we experience disruptions in these supply arrangements and/or are required to change suppliers.
 
Our principal raw materials for engineered quartz products are quartz, polyester and pigments. We acquire quartz from quartz manufacturers from Turkey, India, Israel and several European countries. We typically transact business with our quartz suppliers on an annual framework basis, under which we execute purchase orders from time to time. In 2021, approximately 62% of our quartz was imported from several suppliers in Turkey. We acquire polyester from several suppliers, mainly from Europe, on an annual framework basis, or on a purchase order basis based on our projected needs for the subsequent one to three months. We acquire other raw materials used in our engineered quartz products from a limited number of suppliers on a purchase order basis, and our ability to preset prices in advance is limited. Additionally, the principal raw materials used in our porcelain products are clay minerals, natural minerals (such as feldspar) and chemical additives. We typically transact business with our suppliers of these raw materials on an annual framework basis, under which we execute purchase orders from time to time. Because nearly all of our supply arrangements are based on our projected or anticipated needs, we cannot be certain that any of our current suppliers will continue to provide us with the quantities of raw materials that we require or will be able to satisfy our anticipated specifications and quality requirements. We may also experience a shortage of such materials if, for example, demand for our products increases.
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In addition, we may lose our supply contracts or arrangements, or the ability to effectively enforce our rights thereunder, if our supplier relationships are disrupted as a result of factors beyond our control, including, for example, political tensions in the regions where our supplies are located. For instance, in recent years, rising tensions between Turkey and the State of Israel have increased the risk that our commercial arrangements with Turkish suppliers for quartz may be adversely and materially impacted. If political tensions between Turkey and Israel worsen, and our Turkish quartz suppliers fail to perform in accordance with our arrangements, we may not be able to successfully enforce them.
 
If we are unable to agree upon prices with suppliers of our raw materials, our suppliers could cease supplying us with the raw materials required for our products. If our supply of raw materials is adversely impacted to a material extent or if, for any other reason, any of our suppliers do not perform in accordance with our agreements with them or cease supplying us with the relevant material for any reason, we would need to locate alternate suppliers. Securing replacement suppliers could result in substantial delays in manufacturing, increase our costs, negatively impact the quality of our products, or require us to adjust our products and our manufacturing processes. Any such delays in or disruptions to the manufacturing process could materially and adversely impact our reputation, revenues and results of operations as well as other business aspects, such as our ability to serve our customers and meet their order requests.
 
For more information with regards to suppliers of raw materials used in our products, see “ITEM 4.B: Information on the Company—Business Overview—Raw materials and Service Provider Relationships.”
 
In addition to our traditional engineered quartz offering, we have commenced manufacturing of porcelain products and sales of porcelain, natural stone and other materials, and may pursue a further expansion of our product offering, including introducing new products and materials, which may be unsuccessful, and may divert management’s attention and negatively affect our margins and results of operations.
 
Our competitive advantage is due, in part, to our ability to develop and introduce innovative new and improved products and to strengthen our brand. To maintain such advantage, we may develop our own new products or acquire manufacturers of products that are competing with, or complimentary to, ours. Such new products may include new surface materials and complementary products. Introducing new products involves uncertainties, such as predicting changing consumer preferences, developing, manufacturing, marketing and selling new technologies, products and materials, and entering new market segments.
 
For example, as a result of the Lioli Acquisition, we have commenced manufacturing and sales of porcelain slabs for different applications, including flooring and cladding, and we intend to extend our produced porcelain countertops offering. Lioli may face adverse tariffs for sale into the EEU See also “—Global trade is affected by governmental involvement including through antidumping and countervailing duties and these may cause unforeseeable market changes that could adversely impact our financial results.” In addition, our recently acquired Omicron locations in the U.S. also sell natural stone and ancillary products for kitchen installation and fabrication. Although we believe that the expansion into new products, materials and, in some cases, applications represent an opportunity to leverage our existing business, no guarantee can be given as to customer demand for the new products. Moreover, in the future we may decide to introduce additional new products and enter new markets, whether through cooperation with third-party manufacturers or manufacturing at our own facilities.
 
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Despite our intention to expand our manufacturing and sales of porcelain or other additional products, we may not be successful in capturing the market share dominated by competitors in this area, offer innovative alternatives ahead of the competition or maintain the strength of our brand. Such new initiatives may require increased time and resources from our management, result in higher than expected expenses and have a material adverse effect on our margins and results of operation. 
 
Our revenues are subject to significant geographic concentration and any disruption to sales within one of our key existing markets, or to sales to a major customer therein, could materially and adversely impact our results of operations and prospects.
 
Our sales are subject to significant geographic concentration, with four largest markets accounting for 85.1% of revenues. In 2021, sales in the United States, Australia (including New Zealand), Canada and Israel accounted for 47.4%, 18.4%, 13.1% and 6.1% of our revenues, respectively. Our results of operations could be materially and adversely impacted by a range of factors, including spending on home renovation and remodeling and new residential construction in the region (as discussed above), local competitive changes, changes in consumers’ quartz surface or countertop preferences and regulatory changes that specifically impact these markets (such as imposition of antidumping and countervailing duties in the United States as discussed above), as well as by our performance in each of these markets. Sales in our main markets could be materially and adversely impacted by other general economic conditions, including in a global or local recession, depression, excessive inflation or other sustained adverse market events and increases in imports of cheaper quartz surfaces from low cost countries manufacturers into such markets, especially the United States, Australia and Canada. Stronger local currencies could make lower-priced imported goods more competitive than our products. Although we face different challenges and risks in each of the markets in which we operate, due to the existence of a high level of geographic concentration, should an adverse event occur in any of these jurisdictions, our results of operations and prospects could be impacted disproportionately.
 
In addition, we derived a mid-single digit percentage of our total revenues in 2021 from one customer. Revenues from this significant customer increased during 2021. The loss of or a further decrease in business from such customer could have a material adverse effect on our revenues, results of operations and our financial condition.
 
Our business is subject to disruptions and quarterly fluctuations in revenues and net income as a result of seasonal factors, weather-related conditions, natural disasters, building construction cycles and actions by third parties over which we have no control, which are hard to predict with certainty.
 
Our results of operations are impacted by seasonal factors, weather-related conditions, and construction and renovation cycles. The levels of manufacturing, fabrication, distribution, and installation of our products generally follow activity in the construction and renovation industries. Severe weather conditions, such as unusually prolonged cold conditions, hurricanes, severe storms, earthquakes, floods, fires, droughts, other natural disasters or similar events could reduce, delay or halt the construction and renovation industries in the markets in which we operate, and our businesses may be adversely affected. Markets in which we operate that are impacted by winter weather, such as snowstorms and extended periods of rain, may experience a slowdown in construction activity during the beginning and the end of each calendar year, and this winter slowdown contributes to lower sales in our first and fourth quarters. Natural disasters including tornados, hurricanes, floods and earthquakes may damage our facilities, the launch facilities we use or those of our suppliers, which could have a material adverse effect on our business, financial condition and results of operations. Traditionally, the second and third quarters of the year exhibit higher sales volumes than first and fourth quarters, however during 2021 that was not the case as the revenues generated in the fourth quarter of 2021 were similar to the second and third quarter revenues in 2021. For more information, see “ITEM 5.A: Operating and Financial Review and Prospects—Operating Results—Factors impacting our results of operations” and “ITEM 5.A: Operating and Financial Review and Prospects—Operating Results—Quarterly results of operations and seasonality.” Adverse weather in a particular quarter or a prolonged winter period can also impact our quarterly results. Our future results of operations may experience substantial fluctuations from period to period as a consequence of such adverse weather. Increased or unexpected quarterly fluctuations in our results of operations may increase the volatility of our share price and cause declines in our share price even if they do not reflect a change in the overall performance of our business.
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Furthermore, our ability, and that of our suppliers, OEM suppliers, distributors, customers and other third parties, to develop, manufacture, transport, distribute, sell, install and use our products is critical to our success. Damage or disruption to our or their operations could occur due to various factors, some of which cannot be foreseen, including, among others, telecommunications failures; power, fuel or water shortages; strikes, labor disputes or lack of availability of qualified personnel; or other reasons beyond our control or the control of such third parties. Failure to take adequate steps to mitigate the likelihood or potential impact of such events, or to effectively manage such events if they occur, could continue to result in adverse effects on our business, financial condition or results of operations.
 
Our distributors’ actions may have a materially adverse effect on our business and results of operations. Our results of operations may be further impacted by the actions of our re-sellers.
 
Sales to third-party distributors accounted for approximately 10% of our revenues in 2021. In our indirect markets, we depend on the success of the selling and marketing efforts of our third-party distributors, and any disruption in our distribution network could materially impair our ability to sell our products or market our brand, which could materially and adversely affect our business and results of operations. As we have limited control over these distributors, their actions could also materially harm our brand and company reputation in the marketplace.
 
In the majority of our distribution arrangements, we operate based on an initial agreement or general terms of sale or, in certain cases, without any agreement, in writing or at all. The lack of a written agreement with many of our distributors may lead to ambiguities, costs and challenges in enforcing terms of such arrangements, including where we wish to terminate early due to the distributor’s failure to meet annual sales targets. We have experienced difficulties, including litigation, in connection with the termination of certain of our distributors due to disputes regarding their terms of engagement. See “ITEM 8.A: Financial Information—Consolidated Financial Statements and Other Financial Information—Legal proceedings.” Additionally, we may be unable to distribute our products through another distributor within the territory during the period in which we must give prior termination notice, or to identify and retain new distributors upon termination, which may materially and adversely impact our market share, results of operations, relationships with our customers and end-consumers and brand reputation. Because some of our distributors operate on nonexclusive terms, distributors may also distribute competitors’ countertop surfaces or other surface materials, which may cause us to lose market share. If we opt to distribute our products directly upon termination of existing arrangements with our distributors, ramping up our logistics and shipping capabilities could require significant time and financial commitments, which could materially and adversely impact our market share and results of operations. We cannot assure you that we will be able to successfully transition to direct distribution in a timely or profitable manner.
 
In the United States, we supply our products in part to sellers who in turn re-sell them to fabricators, contractors, developers and builders. Certain actions by such third parties may also materially harm our brand and reputation.
 
The termination of arrangements with distributors and re-sellers may lead to litigation, resulting in significant legal fees for us and detracting our management’s effort, time and resources. In addition, our distributors and re-sellers generally disclose to us sales volumes and other information on a monthly or quarterly basis. Inaccurate sales forecasts, on which we have already relied on in our production planning or our failure to understand correctly the information in a sales report could cause significant, unexpected volatility in our sales and may impact our ability to make plans regarding our supply chain. Any of these events could materially and adversely affect or cause unexpected fluctuations in our results of operations.
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Legal, Regulatory, Safety and Security Risks
 
Results of Silicosis and other bodily injury claims may have a material adverse effect on our business, operating results, and financial condition.
 
Silicosis is a potentially fatal progressive occupational lung disease and is characterized by scarring of the lungs and damage to the breathing function. Inhalation of dust containing fine silica particles (respirable crystalline silica, or RCS) may occur while performing certain tasks, including among others, processing materials that contain crystalline silica (with quartz having a relatively high crystalline silica content) if safety measures are not implemented, which in turn can cause silicosis and other health issues.
 
Since 2008, we have been named, either directly or as a third party defendant, in numerous lawsuits alleging damages caused by exposure to RCS related to our products filed by individuals (including fabricators and their employees, and our former employees), their successors, employers and the State of Israel, and in subrogation claims by the Israeli National Insurance Institute (the “NII”), WorkerCover in several states in Australia, and others. As of December 31, 2021, we were subject to pending lawsuits with respect to 154 injured persons globally (of which 114 were in Israel, 38 in Australia and two in the United States) and had received pre-litigation demand letters with respect to additional 18 persons, in each case relating to silicosis claims. One of the injured persons filed against us a lawsuit in the Central District Court in Israel with a motion for its recognition as a class action; and subsequently we reached a settlement agreement with the lead-plaintiff with respect to this claim, pursuant to which we will make a payment on a one-time basis, without any admission of liability, of an aggregate amount of approximately NIS 9.0 million (approximately $2.9 million) to fund certain safety related expenses at fabrication facilities in Israel, as well as the plaintiff’s compensation and legal expenses. This settlement has been approved by the competent courts in 2021 and the parties are in the process of performing the settlement agreement, a process that will continue throughout 2022. Most of the claims asserted against us do not specify a total amount of damages sought and the plaintiffs’ future damages, if any, is intended to be determined at trial or settlement discussions.
 
Although we intend to vigorously contest some of the pending claims, we cannot provide any assurance that we will be successful. As of December 31, 2021, we estimated based on the current legal conditions that our total exposure with respect to all then-pending lawsuits in Israel and Australia was approximately $42.9 million (which we made a provision for on our balance sheet), however, the actual outcome of such lawsuits may vary from our estimate. We believe that we have $6.7 million of coverage under our product liability insurance and, accordingly, our net exposure with respect to such pending claims is estimated to be $36.2 million. At this early stage of litigation, we are unable to estimate the probability of the actual exposure in the claims filed against us in the U.S.
 
Any pending or future litigation is subject to significant uncertainty. Our estimated total net exposure with respect to pending claims is subject to change for a variety of reasons, including an unpredictable adverse development in the pending cases. We cannot estimate the number of potential claimants that may file claims against us, the jurisdictions in which such claims may be filed, who the claimants are or the nature of the claims. Consistent with the experience of other companies involved in silica-related litigation, there may be an increase in the number of asserted claims against us. In addition, punitive damages may be awarded in certain jurisdictions, even though they are rare in Israel. We may be also subject to putative class action lawsuits in the future in Israel and abroad and we cannot be certain whether such claims will succeed in being certified or on their merits. An actual outcome which is higher than our estimate could have a material adverse effect on our financial results and cash flow.
 
Any uninsured damages to which we are subject in existing or future potential litigation, the cost of defending any uninsured claims, compliance costs, and the loss of business from fabricators who no longer find it practical to fabricate our products, may have a material adverse impact on our revenues and profits. Moreover, even if we are found only partially liable to a plaintiff’s damages, in some jurisdictions the plaintiff may seek to collect all his damages from us, requiring us to collect separately from our co-defendants their allocated portion of the damages and there can be no assurance that we will succeed in such collection.
 
As of December 31, 2021, 22 of our employees, out of which 11 were employed in our plants in Israel as of such date, were banned by occupational physicians from working in a workplace with dust due to diagnose or suspected diagnose of silicosis or other lung diseases, and any expenses not covered by the National Insurance Institute of Israel which we may incur in this respect are not covered by our employer liability insurance. However, so far, we managed to receive contribution in settlements also from insurers of fabricators, although insurers (such as ours) alleged that there is no insurance coverage for silicosis in employer liability insurance. In addition, as of December 31, 2021 there were two outstanding lawsuits that had been filed against us by former employees.
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We currently have limited product liability insurance policies, which apply to us and our subsidiaries and cover claims related to bodily injuries though in most cases these policies exclude damages caused by exposure to hazardous dust. In recent years, we have been able to obtain such insurance only on less favorable terms than previously. If we are unable to renew our product liability insurances at all or in part, if we cannot obtain insurance on as favorable terms as previously, or if our insurance is terminated early, decreased, provides inadequate coverage or if we are subject to silicosis-related claims excluded by our product liability insurance policy or by our employer liability insurance policy, we may incur significant legal expenses and become liable for damages, in each case, that are not covered by insurance. For example, as of September 2020 our Australian product liability insurance ceased coverage of newly diagnosed silicosis related claims. Such events might have a material adverse effect on our business and results of operations. As of December 31, 2021, our insurance receivables for silicosis-related claims totaled $6.7 million. Although we believe that it is probable that such receivables will be paid to us when such payments are due, if our insurers become insolvent in the future or for other reason do not pay such amounts in full or on a timely basis, such failure could have a material adverse effect on our financial results and cash flow.
 
In addition, media coverage regarding the hazards associated with exposure to RCS in the engineered quartz surfaces, which intensified significantly primarily in Australia, may adversely affect consumer preferences toward our products, damage our brand and reputation and lead to loss of sales and a material adverse effect to our revenues and financial results. Increased awareness of this issue, and media focus may also trigger greater governmental and regulatory scrutiny and action, which may increase our costs of compliance therewith, lead to greater propensity for litigation against us or ultimately even result in a ban of quartz-based products.
 
Any of the risks described above relating to claims regarding silicosis and other bodily injury claims may have a material adverse effect on our business, operating results and financial condition. For more information, see “ITEM 8.A: Financial Information—Legal Proceedings—Claims related to alleged silicosis and other injuries.” See also Note 11 to the financial statements included elsewhere in this report.
 
Regulatory requirements and any changes thereto relating to hazards associated with exposure to RCS in stone and engineered quartz surfaces may adversely and materially affect our business.
 
During recent years, after identifying exposure to silica in the engineered quartz and stone countertop industry as a health hazard to workers involved in manufacturing, cutting, fabricating, finishing and installing quartz and stone countertops, several local regulatory bodies have issued safety alerts and promoted new regulations. For example, in 2015, the Israeli Ministry of Economy and Industry (“IMEI”) proposed a new law aimed at improving the health, protection and safety of persons engaged in fabrication of engineered quartz surfaces by imposing, among other things, obligations to obtain permits for operating a fabrication business. While, that law did not pass, there is still a possibility of regulatory involvement or renewed attempts for legislation that could adversely affect our market and so results of our operations. In July 2019, the Australian federal government established a national dust disease taskforce in light of the re-emergence of silicosis. In October 2019, Queensland State in Australia approved a new code of practice on managing RCS exposure in the stone benchtop industry, that included, among others, prohibiting uncontrolled dry cutting and periodic air monitoring requirements. In early 2020, Victoria State in Australia announced its intention to execute a licensing initiative in its territory, after prohibiting uncontrolled dry cutting of engineered stone, and such licensing scheme is to enter into effect by the end of 2022. Western Australia State recently changed its exposure standard for RCS, in addition to launching a new health surveillance requirement for silica, according to which employers will be required to provide a low-dose high-resolution CT scan instead of the previously required chest X-ray. In February 2020, the U.S. Occupational Safety and Health Administration published a National Emphasis Program addressing the hazards of silica in various industries. Contemplated and current regulatory initiatives in the U.S., Australia and Israel are necessary to improve health and safety, however, these changes may also disrupt the market or impose burdens on fabricators and distributors potentially causing them to shift towards using other materials, which could materially and adversely impact our business. Further regulatory changes regarding the ability to use, process or sell stone countertops, particularly engineered quartz, and the safety measures required in such activities may materially adversely affect our business.
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In New-South Wales, Australia, a Legislative Council Committee was formed to review the State’s response to silicosis in the manufactured stone industry. The Legislative Council Committee issued its final report in March 2020 after receiving submission and holding hearings with interested parties, and recommended, among other things: providing all manufactured stone workers a low-dose high-resolution CT scan (instead of X-ray); obliging all manufacturers and suppliers to provide safety data sheets and to affix standardized warning labels on all manufactured stone products; further reducing the workplace exposure standard for RCS; and establishing a silicosis register.
 
We may be required to incur additional expenses associated with exposure to RCS in the engineered quartz surfaces industry to enhance our compliance with current and future laws, regulations or standards. Failure to comply with existing regulatory requirements or any changes thereto may expose us to regulatory actions (as detailed below in “—The extent of our liability for environmental, health and safety, product liability and other matters may be difficult or impossible to estimate and could negatively impact our financial condition and results of operations”) as well as to lawsuits by our employees. Greater regulatory scrutiny and action may also lead to greater propensity for litigation against us or ultimately result in a government ban of our products.
 
Environmental, health and safety regulations, product liability regulations, industry standards and other similar matters may be costly, difficult or impossible to comply with under our existing operations and could negatively impact our financial condition and results of operations.
 
Our manufacturing facilities are subject to numerous Israeli, U.S. federal and state (Georgia) and Indian federal and Gujarati laws and regulations which may cause us to incur significant costs and liabilities. We are also subject to industry standards and policies imposed by our customers (such as large retailers), relating to environmental, health and safety, use of our products and other matters such as dust, acetone and styrene control, as detailed in “ITEM 4.B: Information on the Company—Business Overview—Environmental and Other Regulatory Matters.” Other aspects of our activities are subject to local laws wherever we operate, including Canada, Australia, Singapore and the United Kingdom. These laws, ordinances and regulations can be subject to change and such change could result in increased compliance costs, the need for additional capital expenditures, or otherwise adversely affect us. In February 2022, Israel adopted a long term goal for the reduction of environmental styrene emissions. Although such goal is not expected to impact our current operations, the adoption of new regulations could create an additional burden for any future investment in our Israeli facilities.  Our recently purchased plant in India is relatively new, thus is still in the stages of adjustments to comply with local regulations and permits, including issues of groundwater abstraction and water consumption, gas use, diesel generator capacity use and emission standards. Violations of environmental, health and safety laws and regulations may lead to civil and criminal sanctions against us, our directors, officers or employees. Liability under these laws and regulations and compliance with various industry standards and policies involves inherent uncertainties and in some cases may compel the installation of additional equipment and subject us to substantial penalties, injunctive orders and facility shutdowns, as well as damages to our reputation and brand and may therefore lead to loss in revenue. If our operations are enjoined because of failure to comply with such regulations, or if we are required to install expensive equipment in order to meet regulatory requirements, it could materially adversely affect our results of operations. Any contemplated expansion of our facilities will also need to meet standards imposed by laws, regulations and other industry standards. Violations of environmental laws could also result in obligations to investigate or remediate potential contamination, third-party property damage or personal injury claims resulting from potential migration of contaminants off-site. Violations of such laws and regulations may also constitute a breach of current or future commercial contracts we have with third parties and impact our cooperation with customers and suppliers. We have identified in the past and may identify in the future compliance risks related to environmental and health and safety regulation standards. Preparation and implementation of mitigation plans for such risks may take time during which we may not be in full compliance with applicable laws and standards.
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In addition, the operation of our manufacturing facilities in Israel, the United States (Georgia) and India (Gujarat) is subject to applicable permits, standards, licenses and approvals. Any expansions or improvements to our facilities will be subject to obtaining appropriate permits, and we cannot be certain that such permits will be obtained in a timely matter, or at all. For detailed information, see “ITEM 4.B: Information on the Company—Business Overview—Environmental and Other Regulatory Matters”. We expect our business licenses to be extended by the relevant authorities for a specified term and we intend to seek subsequent extensions on an ongoing basis. Generally, failure to obtain a permit or license required for the operation of our facilities, or failure to comply with the requirements thereunder, may result in civil and criminal penalties, fines, court injunctions, imprisonment, and operations stoppages. If we are unable to obtain, extend or maintain the business license for any of our plants, we would be required to cease operations at such location, which would materially adversely affect our results of operations. Our ability to obtain necessary permits and approvals for our manufacturing facilities may be subject to additional costs and possible delays beyond our initial projections. In addition, to demonstrate compliance with underlying permits licenses or approvals, we are required to perform a considerable amount of monitoring, record-keeping and reporting. We may not have been, or may not be, at all times, in complete compliance with such requirements and we may incur material costs or liabilities in connection with such violations, or in connection with remediation at our sites or certain third-party manufacturing sites if we are found liable in relation thereto.
 
From time to time, we face compliance issues related to our manufacturing facilities. See “ITEM 4.B: Information on the Company—Business Overview—Environmental and Other Regulatory Matters” for additional information on compliance with environmental, health and safety and other relevant regulations relating to our facilities, including with respect to our compliance with styrene ambient air standards and dust emission occupational health standards.
 
New environmental laws and regulations, new interpretations of existing laws and regulations, increased governmental enforcement or other developments in Israel, the United States (Georgia) and India (Gujarat) could require us to make additional unforeseen expenditures. These expenditures and other costs for environmental compliance could have a material adverse effect on our business’s results of operations, financial condition and profitability. The range of reasonably possible losses from our exposure to environmental liabilities in excess of amounts accrued to date cannot be reasonably estimated at this time. For example, recently the Israeli Ministry of Environmental Protection added to the requirements involved in extending a plant's toxin permit additional conditions regarding cyber risk management, which apply immediately.
 
In addition, our manufacturing, distribution and other facilities are subject to health and safety regulations, including workplace safety and transportation. Although we introduced safety rules and procedures at all our facilities and provide safety trainings to our employees and contractors on a regular basis, breaches of such safety measures have occurred in the past and may occur in the future. If our employees or contractors do not follow and we do not successfully enforce the safety procedures established in our facilities or otherwise do not meet the relevant laws and standards, our employees or contractors may be subject to work-related injuries. As a result, we and our officers and directors could be subject to claims, fines, orders and injunctions due to workplace accidents involving our employees or contractors. For example, in recent years, serious accidents related to our operations occurred in Canada. Although we believe that such accidents resulted from safety breaches by our contractors, for one of these accidents, proceedings were filed against us by the local authorities. Although we maintain workers’ compensation and liability insurance, it may not provide adequate coverage against potential liabilities and can expose us, our directors and officers to administrative and criminal proceedings.
 
Other than as described above, we cannot predict whether we may become liable under environmental, product liability and health and safety statutes, rules, regulations and case law of the countries in which we operate. The amount of any such liability in the future or its impact on our business operation otherwise could be significant and may adversely impact our financial condition and results of operations.
 
The steps that we have taken to protect our brand, technology and other intellectual property may not be adequate, and we may not succeed in preventing others from appropriating our intellectual property.
 
We believe that our trademarks (registered and unregistered) are important to our brand, success and competitive position. We anticipate that, as the countertop market becomes increasingly competitive, maintaining and enhancing our brand, proprietary technology and other intellectual property may become more important, difficult and expensive. In the past, some of our trademark applications for certain classes of applications of our products have been rejected or opposed in certain markets. We have in the past, are currently, and may in the future be, subject to opposition proceedings with respect to applications for registration of our intellectual property, such as our trademarks. As with all intellectual property rights, such application may be rejected entirely or awarded subject to certain limitations such as territories, any current or future markets or applications. These limitations to registering our brand names and trademarks in various countries and applications may restrict our ability to promote and maintain a cohesive brand throughout our key markets, which could materially harm our competitive position and materially and adversely impact our results of operations. Additionally, if we are unsuccessful in challenging a third party’s products based on trademark infringement, continued sales of such products could materially and adversely affect our sales and our brand and result in the shift of consumer preference away from our products.
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There can be no assurance that new or pending patent applications for our technologies and products will be approved in a timely manner or at all, or that, if granted, such patents will effectively protect our intellectual property. There can be no assurance that we will develop patentable intellectual property in the future, and we have chosen and may further choose not to pursue patents for innovations that are material to our business.
 
While we continue to make significant investments in innovating the design of our products and register design patents on selected models, it may not be adequate to prevent our competitors from imitating our designs and copying our innovative ideas.
 
Despite our efforts to execute confidentiality agreements with our consultants, suppliers, customers, employees and managers, our know-how and trade secrets could be disclosed to third parties, which could cause us to lose any competitive advantage resulting from such know-how or trade secrets, as well as related intellectual property protections in certain cases.
 
The actions we take to establish and protect our intellectual property may not be adequate to prevent unlawful copy and use of our technology by third parties or imitation of our products and the offering of them under our trademarks by others. These actions may also not be adequate to prevent others, including our competitors, from obtaining intellectual property rights overcoming ours, and limiting or blocking the production and sales of our existing or future products and applying certain technologies. Our competitors may seek to limit our marketing and offering of products relying on their alleged intellectual property rights.
 
We may face significant expenses and liability in connection with the protection of our intellectual property rights in and outside the United States. The laws of certain foreign countries may not protect intellectual property rights to the same extent as the laws of the United States.
 
Third parties have claimed, and may from time to time claim, that our current or future products infringe their patent or other intellectual property rights. Under such circumstances, we may be required to expend significant resources in order to contest such claims and, in the event that we do not prevail, we may be required to seek a license for certain technologies, develop non-infringing technologies or discontinue some of our products. In addition, any future intellectual property litigation, regardless of its outcome, may be expensive, divert the efforts of our personnel and disrupt or damage relationships with our customers.
 
For more information, see “ITEM 4.B: Information on the Company—Business Overview—Intellectual Property.”

Disruptions to or our failure to upgrade and adjust our information technology systems globally, may materially impair our operations, hinder our growth and materially and adversely affect our business and results of operations.
 
We believe that an appropriate information technology (“IT”) infrastructure is important in order to support our daily operations and the growth of our business. To this end, we are implementing a digital transformation within the Company to better streamline processes and support our business strategy. Our technological and digital investments are geared towards operational enhancements in supply chain management and production, along with improvement of our go-to-market tools.
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If we experience difficulties in implementing new or upgraded information systems or experience significant system failures, or if we are unable to successfully modify our management information systems or respond to changes in our business needs, we may not be able to effectively manage and grow our business, and we may fail to meet our reporting obligations. Additionally, if our current back-up storage arrangements and our disaster recovery plan are not operated as planned, we may not be able to effectively recover our information system in the event of a crisis, which may materially and adversely affect our business and results of operations.
 
In the current environment, there are numerous and evolving risks to cybersecurity and privacy, including criminal hackers, hacktivists, state-sponsored intrusions, industrial espionage, employee malfeasance and human or technological error. High-profile security breaches at other companies and in government agencies have increased in frequency and sophistication in recent years. Although we take steps designed to secure our IT infrastructure and sensitive data and enhance our business continuity and disaster recovery capabilities, we can provide no assurance that our current IT system or any updates or upgrades thereto, the current or future IT systems of our distributors or re-sellers or the IT systems of online paying agents that we use or may use in the future, are fully protected against third-party intrusions, viruses, hacker attacks, information or data theft or other similar risks. We carry data protection liability insurance against cyber-attacks, however the potential magnitude of cyber events and the exceptions to these policies means that we may not be able to recover our damages from such an event.
 
We have experienced and expect to continue to experience actual and attempted cyber-attacks of our IT networks, such as through phishing scams and ransomware. Although none of these actual or attempted cyber-attacks has had a material adverse impact on our operations or financial condition, we cannot guarantee that any such incidents will not have such an impact in the future. Furthermore, a cyber-attack that bypasses our IT security systems or those of our distributors, re-sellers, online paying agents or other third party contractors, causing an IT security breach, could lead to a material disruption of our information systems, the loss of business information and loss of service to our customers, which could, among other things, disrupt our business, force us to incur costs or cause reputational damage. There is no assurance that we will be insulated from claims relating to cyber-attacks or withstand legal challenges in relation to our agreements with third parties. Additionally, we have access to sensitive information relating to our employees as well as business partners and customers in the ordinary course of business. Any failure or perceived failure by us, or our third-party contractors on our behalf, to comply with local and foreign laws regarding privacy and data security, as well as contractual commitments in this respect, may result in governmental enforcement actions, fines, or litigation, which could have an adverse effect on our reputation and business. If a significant data breach occurred, our reputation could be materially and adversely affected, confidence among our customers may be diminished, or we may be subject to legal claims, any of which may contribute to the loss of customers and have a material adverse effect on us. To the extent that such disruptions or uncertainties result in delays or cancellations of customer orders or the manufacture or shipment of our products, or in theft, destruction, loss, misappropriation or release of our confidential data or our intellectual property, our business and results of operations could be materially and adversely affected.
 
These risks will increase as we increase our cooperation with and reliance on third party contractors that provide cloud solutions and store increasingly large amounts of data, as part of our digital focus and enhancement of go to market tools.
 
Legislative or regulatory action in these areas is also evolving, and we may be unable to adapt our IT systems or to manage the IT systems of third parties to accommodate these changes. Increasing regulatory focus on information security and data privacy issues and expanding laws in these areas may result in increased compliance costs and expose us to increased liability. Globally, new and emerging laws, such as the General Data Protection Regulation (“GDPR”) in Europe and state laws in the U.S. on privacy, data and related technologies, such as the California Consumer Privacy Act (“CCPA”), create new compliance obligations, create new private rights of action and expand the scope of potential liability, either jointly or severally with our customers and suppliers. The GDPR, which became effective on May 25, 2018, imposed new compliance obligations for the collection, use, retention, security, processing, transfer and deletion of personally identifiable information of individuals and created enhanced rights for individuals. The CCPA, which grants expanded rights to access and delete personal information, and the right to opt out of the sale of personal information, among other things, became effective on January 1, 2020. These and any other new and emerging laws and regulations, may force us to bear the burden of more onerous obligations in our contracts or otherwise increase our potential liability to customers, regulators, or other third parties.
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Cybersecurity and complying with personal data rights pose economic, operational and reputational risks. If we are unable to implement the technological and digital projects required to support our future growth and profitability in compliance with applicable rules and regulations, our business and results of operations will be materially adversely affected.  In addition, the devotion of additional resources to the security of our information technology systems in the future could significantly increase the cost of doing business or otherwise adversely impact our financial results.

As a result of the COVID-19 pandemic, a greater number of our employees are working remotely and accessing our IT systems and networks remotely, which may further increase our vulnerability to cybercrimes and cyberattacks and increase the stress on our technology infrastructure and systems. Although we maintain data protection liability insurance, exclusions from coverage are added into these policies and coverage may not be sufficient to cover all of our losses from any future breaches or failures of our IT systems, networks and services.

From time to time, we are subject to litigation, disputes or other proceedings, which could result in unexpected expenses and time and resources that could have a materially adverse impact on our results of operation, profit margins, financial condition and liquidity.
 
We are currently involved in several legal disputes, including against certain fabricators (our customers) and their employees in Israel and Australia, as well as against our former workers, as further detailed in “ITEM 8.A: Financial Information—Consolidated Financial Statements and Other Financial Information—Legal Proceedings.” In addition, from time to time, we are involved in other legal proceedings and claims in the ordinary course of business related to a range of matters, including contract law, intellectual property rights, employment, product liability and warranty claims, and claims related to modification and adjustment or replacement of product surfaces sold.
 
The outcome of litigation and other legal matters is always uncertain, and the actual outcome of any such proceedings may materially differ from estimates. An adverse ruling in these proceedings could have a materially adverse effect on us. If we are unsuccessful in defending such claims or elect to settle any of these claims, we could incur material costs and could be required to pay varying amounts of monetary damages, some of which may be significant, and/or incur other penalties or sanctions, some or all of which may not be covered by insurance. For example, our ongoing dispute with our former South African distributer is still unresolved (see “—Financial Information—Consolidated Financial Statements and Other Financial Information—Legal Proceedings—Claim by former South African distributor”), during 2020 we settled a product liability lawsuit that was filed against and have paid approximately $0.5 million. Although we maintain product liability insurance, we cannot be certain that our coverage, if applicable, will be adequate for liabilities actually incurred or that insurance will continue to be available to us on economically reasonable terms, or at all. These material costs could have a materially adverse effect on our business, results of operations and financial condition.

Our operating results may suffer due to our failure to manage our international operations effectively or due to regulatory changes in foreign jurisdictions where we operate.
 
Our products are sold in over 50 countries throughout the world, our raw materials, equipment and machinery are acquired in different countries, our products are manufactured in Israel, the United States and India, and our global management operates from Israel. We are therefore subject to risks associated with having international operations and expanding globally, including risks related to complying with the law and regulations of various foreign governments and regulatory authorities. These laws and regulations may apply to us, our subsidiaries, individual directors, officers, employees and agents, and may restrict our operations, trade practices, investment or acquisition decisions or partnership opportunities. Accordingly, our sales, purchases and operations are subject to risks and uncertainties, including, but not limited to:
 

fluctuations in exchange rates;
 
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fluctuations in land and sea transportation costs, as well as delays or other changes in transportation and other time-to-market delays, including as a result of strikes;
 

unpredictability of foreign currency exchange controls;
 

compliance with unexpected changes in regulatory requirements;
 

compliance with a variety of regulations and laws in each relevant jurisdiction;
 

difficulties in collecting accounts receivable and longer collection periods;
 

changes in tax laws and interpretation of those laws;
 

taxes, tariffs, quotas, custom duties, trade barriers and other similar restrictions on our sales, purchases and exports which could be imposed by certain jurisdictions;
 

negative or unforeseen consequences resulting from the introduction, termination, modification, or renegotiation of international trade agreements or treaties or the imposition of countervailing measures or antidumping duties or similar tariffs;
 

difficulties enforcing intellectual property and contractual rights in certain jurisdictions; and
 

economic changes, geopolitical regional conflicts, such as the invasion of Ukraine by Russia, terrorist activity, political unrest, civil strife, acts of war, strikes and other economic or political uncertainties.
 
Significant political developments could also have a materially adverse effect on us.
 
In the United States, due to our substantial sales, distribution, import and manufacturing operations, potential or actual changes in fiscal, tax and labor policies could have uncertain and unexpected consequences that materially impact our business, results of operations and financial condition.
 
Tariffs, taxes or other trade barriers could require us to change manufacturing sources, reduce prices, increase spending on marketing or product development, withdraw from or not enter certain markets or otherwise take actions that could be adverse to us. The U.S. federal government may propose additional changes to international trade agreements, tariffs, taxes, and other government rules and regulations. These regulatory changes could significantly impact our business and financial performance. For example, the expansive sanctions being imposed by the U.S., EU and other countries against Russia, and any proposed changes to the prior imposition of tariffs on imports from China, Mexico and Canada. In particular, given the unpredictable nature of the U.S.-China relationship and its sizable impact on global economic stability, our business and operating success may be materially adversely affected if recent normalization attempts by these two countries do not endure and additional tariffs or other restrictions on free trade are imposed by either country. Any such changes may impact the level of free trade or tariff prices on goods imported into the United States. Moreover, changes in U.S. political, regulatory and economic conditions or in its policies governing international trade and foreign manufacturing and investment in the U.S. could adversely affect our sales in the U.S. In Europe, the U.K. formally exited the European Union (“E.U.”) on January 31, 2020 (“Brexit”). Following a transition period during which existing trade rules continued to apply through December 31, 2020, the U.K. and the E.U. entered into an EU-UK trade and cooperation agreement that details the future economic relationship between the U.K. and the E.U. The EU-UK trade and cooperation agreement went into effect on January 1, 2021, however, there is still uncertainty on the application and interpretation of many of the provisions, including with respect to the relationship between the Republic of Ireland. Although the E.U. is not a key market of ours, Brexit has and for the foreseeable future will continue to adversely affect economic and market conditions in the U.K., the E.U. and its member states and elsewhere, and contribute to uncertainty and instability in global financial markets, which may adversely affect our business and financial condition to the extent the global economy or home renovation, remodeling and construction sectors are negatively impacted or harm our ability to further expand into the European and U.K. markets.
 
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The regulatory framework for privacy and data security issues worldwide is currently in flux and is likely to remain so for the foreseeable future. A failure by us or a third-party contractor providing services to us to comply with applicable privacy and data security laws and regulations may result in sanctions, statutory or contractual damages or litigation.
 
All these risks could also result in increased costs or decreased revenues, either of which could have a materially adverse effect on our profitability. As we continue to expand our business globally, we may have difficulty anticipating and effectively managing these and other risks that our global operations may face, which may materially and adversely affect our business outside of Israel and our financial condition and results of operations.
 
We may have exposure to greater-than-anticipated tax liabilities.
 
The determination of our worldwide provision for income taxes and other tax liabilities requires significant judgment, and there are many transactions and calculations where the ultimate tax determination is uncertain. We have applied the guidance in ASC 740, “Income Taxes” in determining our accrued liability for unrecognized tax benefits, which totaled approximately $3.8 million as of December 31, 2021. See also note 12 to our financial statements included elsewhere in this report. Although we believe our estimates are reasonable, the ultimate outcome may differ from the amounts recorded in our financial statements and may materially affect our financial results in the period or periods for which such determination is made.
 
We have entered transfer pricing arrangements that establish transfer prices for our inter-company operations. However, our transfer pricing procedures are not binding on the applicable taxing authorities. The amount of income tax that we pay could be materially and adversely affected by earnings being lower than anticipated in jurisdictions where we have lower statutory rates and higher than anticipated in jurisdictions where we have higher statutory rates. From 2015 onward, our U.S. manufacturing operations also carry inter-company transactions at transfer prices and arrangements set by us. We cannot be certain that tax authorities will not disfavor our inter-company arrangements and transfer prices in the relevant jurisdictions. Taxing authorities outside of Israel could challenge our allocation of income between us and our subsidiaries and contend that a larger portion of our income is subject to tax in their jurisdictions, which may have higher tax rates than the rates applicable to such income in Israel. Any adjustment in one country while not followed by counter-adjustment in the other country, may lead naturally to double taxation for the group. Any change to the allocation of our income as a result of review by such taxing authorities could have a negative effect on our operating results and financial condition.
 
Our facilities in Israel receive different tax benefits as “Preferred Enterprises” under the Israeli Law for the Encouragement of Capital Investments, 1959 (“Investment Law”), with our production lines qualifying to receive different grants and/or reduced company tax rates. Therefore, some of our production lines also receive tax benefits based on our revenues and the allocation of those revenues between the two facilities in Israel. As a result, the Israeli taxing authorities could challenge our allocation of income between these two facilities and contend that a larger portion of our income is subject to higher tax rates. In Israel, there are no tax benefits to production outside of the country. As such, our portion of taxable income in Israel that relates to the U.S. manufacturing facility might not have tax benefits, based on certain interpretations. The Israel Tax Authority (“ITA”) could challenge the allocation of income related to production in Israel and income related to production outside of Israel, which may result in significantly higher taxes. There are currently no legal regulations governing this allocation and certain of the ITA’s internal guidelines have ambiguities. Moreover, we may lose all our tax benefits in Israel in the event that our manufacturing operations outside of Israel exceed certain production levels (currently set at 50% of the overall production and subject to future changes by the ITA).
 
In the United States, H.R. 1, originally known as the 2017 Tax Cuts and Jobs Act (the “TCJA”) made significant changes to the U.S. Internal Revenue Code, including a reduction in the federal income corporate tax rate from a top marginal rate of 35% to a flat rate of 21% and limitations on certain corporate deductions and credits. In addition, the TCJA requires complex computations to be performed that were not previously required in U.S. tax law, significant judgments to be made in interpretation of the provisions of the TCJA and significant estimates in calculations, and the preparation and analysis of information not previously relevant or regularly produced. The U.S. Treasury Department, the IRS, and other standard-setting bodies could interpret or issue guidance on how provisions of the TCJA will be applied or otherwise administered that is different from our interpretation. Finally, foreign governments may enact tax laws in response to the TCJA that could result in further changes to global taxation and materially affect our financial position and results of operations. While we have provided the effect of the TCJA in our Consolidated Financial Statements as included in Note 12 to our financial statements included elsewhere in this report, the application of accounting guidance for various items and the ultimate impact of the TCJA on our business are currently uncertain.
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We are entitled to a property tax abatement (starting in the 2014 tax year) with respect to our U.S manufacturing facility and the capital investment made in such facility for ten years at 100% and an additional five years at 50% subject to our satisfaction of certain qualifying terms with respect to headcount, average salaries paid to our employees and total capital investment amount in our U.S manufacturing facility. The tax abatement is granted pursuant to bond purchase loan agreements we entered with the Development Authority of Bryan County. If we do not meet the qualifying terms of the bond, we will bear the applicable property tax, which will be recognized in our operating costs and which would materially and adversely impact our projected margins and results of operations. See “ITEM 4.D: Information on the Company—Property, Plants and Equipment.”
 
Certain U.S. holders of our ordinary shares may suffer adverse tax consequences if we or any of our non-U.S. subsidiaries are characterized as a “controlled foreign corporation”, or a CFC, under Section 957(a) of the Internal Revenue Code of 1986, as amended.
 
A non-U.S. corporation is considered a CFC if more than 50% of (1) the total combined voting power of all classes of stock of such corporation entitled to vote, or (2) the total value of the stock of such corporation, is owned, or is considered as owned by applying certain constructive ownership rules, by United States shareholders who each own stock representing 10% or more of the vote or 10% or more of the value on any day during the taxable year of such non-U.S. corporation (“10% U.S. Shareholder”). Because our group includes one or more U.S. subsidiaries, certain of our non-U.S. subsidiaries could be treated as CFCs (regardless of whether we are treated as a CFC). Generally, 10% U.S. Shareholders of a CFC are required to report annually and include currently in its U.S. taxable income such 10% U.S. Shareholder’s pro rata share of the CFC’s “Subpart F income”, “global intangible low-taxed income”, and investments in U.S. property by CFCs, regardless of whether we make an actual distribution to such shareholders. “Subpart F income” includes, among other things, certain passive income (such as income from dividends, interests, royalties, rents and annuities or gain from the sale of property that produces such types of income) and certain sales and services income arising in connection with transactions between the CFC and a person related to the CFC. An individual that is a 10% U.S. Shareholder with respect to a CFC generally would not be allowed certain tax deductions or foreign tax credits that would be allowed to a 10% U.S. Shareholder that is a U.S. corporation. Failure to comply with these reporting obligations may subject a 10% U.S. Shareholder to significant monetary penalties and may prevent the statute of limitations with respect to such shareholder’s U.S. federal income tax return for the year for which reporting was due from starting. We cannot provide any assurances that we will assist investors in determining whether any of our non-U.S. subsidiaries is treated as a CFC or whether any investor is treated as a 10% U.S. Shareholder with respect to any such CFC or furnish to any 10% U.S. Shareholders information that may be necessary to comply with the aforementioned reporting and tax payment obligations. A United States investor should consult its tax advisors regarding the potential application of these rules to an investment in our ordinary shares.

Risks Related to our Relationship with Kibbutz Sdot-Yam
 
Our directors and employees who are members of Kibbutz Sdot-Yam and Tene may have conflicts of interest with respect to matters involving the Company.
 
As of March 11, 2022, the Kibbutz, together Tene, being parties to a voting agreement, beneficially owned 14,029,494 constituting approximately 40.7% of our shares. Both the Kibbutz and Tene are deemed our controlling shareholders under the Israeli Companies Law. The Kibbutz and Tene also agreed to use their best efforts to prevent any dilutive transactions that would reduce the Kibbutz’s holdings in us below 26% on a fully diluted basis and to cause that at least four directors on behalf of the parties are elected to our board of directors. For more information, see “ITEM 7.A. Major Shareholders and Related Party Transactions—Major Shareholders.” Two members of our board of directors and a number of our key employees are members of the Kibbutz. Certain of these individuals also serve in different positions in the Kibbutz, including business manager of the Kibbutz. Such individuals have fiduciary duties to both us and Kibbutz Sdot-Yam. As a result, our directors and executive officers who are members of the Kibbutz may have real or apparent conflicts of interest on matters affecting both us and the Kibbutz and, in some circumstances, such individuals may have interests adverse to us. For example, in the annual general meeting of our shareholders held in December 2015, the Kibbutz opposed the independent nominees our board of directors proposed to nominate to the board and suggested two alternative nominees identified by the Kibbutz as independent. In addition, two members of our board of directors, including the chairman of the board of directors, also serve as partners in Tene. Since these individuals have fiduciary duties to both us and Tene, there may be real or apparent conflicts of interest in this respect as well. See “ITEM 6.A: Directors, Senior Management and Employees—Directors and Senior Management.”
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Our headquarters and one of our two manufacturing facilities in Israel are located on lands leased by Kibbutz Sdot-Yam from the Israel Lands Administration and the Edmond Benjamin de Rothschild Caesarea Development Corporation Ltd. If we are unable to continue to lease such lands from Kibbutz Sdot-Yam, our business and future business prospects may suffer.
 
One of our manufacturing facilities, our headquarters and our research and development facilities are located on lands leased by the Kibbutz pursuant to two lease agreements between the Kibbutz and the ILA, and an additional lease agreement between the Kibbutz and the Edmond Benjamin de Rothschild Caesarea Development Corporation Ltd. (“Caesarea Development Corporation”).
 
The first lease agreement between the Kibbutz and the ILA has been extended through 2060. The second agreement between the Kibbutz and the ILA expired in late 2009, and in February 2017, the District Court approved a settlement pursuant to which the Kibbutz and the ILA will enter into a new lease agreement for a period of 49 years, with an option to renew for additional 49 years. Based on information we received from the Kibbutz, the parties are still in the process of finalizing the terms of the lease agreement. Previous agreements between the Kibbutz and the ILA with respect to this property contained restrictions with respect to the use of the property by the Kibbutz. We cannot assure you that our current use of the property and the rights granted to us by the Kibbutz pursuant to the land use agreement will not provide the ILA with the right to terminate the rights of the Kibbutz to the property.
 
The lease agreement between the Kibbutz and the Caesarea Development Corporation permits the Kibbutz to use the property for the community needs of the Kibbutz and is in effect until year 2037. Caesarea Development Corporation charges the Kibbutz based on the use of the relevant portion of the property for industrial purposes, and thus, has provided recognition to the Kibbutz’s use of such portion of the property for industrial purposes.
 
Each of the ILA and the Caesarea Development Corporation may terminate their respective lease in certain circumstances, including if the Kibbutz breaches its agreements therewith, commences proceedings to disband or liquidate, or in the event that the Kibbutz ceases to be organized as a “kibbutz” as defined in the lease (meaning, a registered cooperative society classified as a kibbutz). If any of the leases and the rights of Kibbutz Sdot-Yam to use the properties described above terminate, we may be unable to maintain our operations on these lands, which would have a materially adverse effect on our operations.
 
For more information on these agreements, see “ITEM 7.B: Major Shareholders and Related Party Transactions—Related Party Transactions.”
 
Pursuant to certain agreements between us and Kibbutz Sdot-Yam, we depend on Kibbutz Sdot-Yam with respect to leasing the buildings and areas of our manufacturing facilities in Israel, acquiring new land as well as building additional facilities should we need them.
 
Our Bar-Lev facility is leased from the Kibbutz pursuant to a land purchase and leaseback agreement effective as of September 1, 2012. The land purchase and leaseback agreement was simultaneously executed with a land use agreement pursuant to which the Kibbutz permits us to use the site for a period of ten years with an automatic renewal for an additional ten years unless we provide the Kibbutz two years’ advance notice that we do not wish to renew the lease. In 2021, the agreement was automatically extended for an additional ten year period.
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Our Sdot-Yam facility, located in the Kibbutz, is also leased from the Kibbutz, pursuant to a land use agreement effective as of March 2012 for a period of 20 years. We may not terminate the operation of either of the two production lines at our Sdot-Yam facility as long as we continue to operate production lines elsewhere in Israel. Additionally, our headquarters must remain at the Kibbutz. As a result of these restrictions, our ability to reorganize our manufacturing operations and headquarters in Israel is limited.
 
In addition, pursuant to the agreements we entered into with the Kibbutz with respect to our Bar-Lev and Sdot-Yam facilities, in the event of a material change in the payments made by the Kibbutz to the ILA or the Caesarea Development Corporation or changes in the market conditions, every three years the Kibbutz may appoint an independent appraiser to reassess the fees we agreed to pay to the Kibbutz in light of such changes. If an independent appraiser concludes that the fees payable by us to the Kibbutz for the Bar-Lev and Sdot-Yam facilities are below market, the Kibbutz can, in its sole discretion, adjust such fees to the market value with a binding effect on us. Such appraisal took place during 2021, and resulted in an increase of the lease fees. See “—Other factors impacting our results of operations— Agreements with Kibbutz Sdot-Yam ..”
 
Pursuant to the land use agreements between us and the Kibbutz, subject to certain exceptions, if we need additional facilities on the land that we are permitted to use under such land use agreements, then, subject to obtaining the permits required by law, the Kibbutz will build such facilities for us by using the proceeds of a loan that we will make to the Kibbutz, which loan shall be repaid to us by off-setting the additional monthly payment that we would pay for such new facilities and, if not fully repaid during the lease term, upon termination thereof. As a result, we depend on the Kibbutz to build such facilities in a timely manner. While the Kibbutz is responsible under the agreement for obtaining various licenses, permits, approvals and authorizations necessary for our use of the property, with respect to our use of property in Sdot-Yam, we have waived any monetary recourse against the Kibbutz for failure to receive such licenses, permits, approvals and authorizations.
 
If we are unable to renew our existing lease agreements with the Kibbutz in the future, we may be required to move our Israeli facilities and headquarters to an alternate location. In addition, the Kibbutz may not be able, in a timely manner, to purchase additional land or build additional facilities that we may require due to increased demand for our products or obtain the necessary licenses or permits for existing or current property. This could result in increased costs, substantial delays and disruptions to the manufacturing process, which could materially and adversely impact our reputation, revenues and results of operations as well as other business aspects, such as our ability to serve our customers and meet the existing or increased demand for our products. We may also suffer losses to the extent we have waived monetary recourse against the Kibbutz for failure to obtain licenses and permits for some of our currently leased property. For more information with respect to our agreements with the Kibbutz, see “ITEM 7.B: Major Shareholders and Related Party Transactions—Related Party Transactions.”
 
Regulators and other third parties may question whether our agreements with Kibbutz Sdot-Yam are no less favorable to us than if they had been negotiated with unaffiliated third parties.
 
Our headquarters, research and development facilities and our two manufacturing facilities in Israel are located on lands leased by the Kibbutz. We have entered into certain agreements with the Kibbutz pursuant to which the Kibbutz provides us with, among other things, a portion of our labor force, electricity, maintenance, security and other services. We believe that such services are rendered to us in the normal course of business and they represent terms no less favorable than those that would have been obtained from an unaffiliated third party. Nevertheless, a determination with respect to such matters requires subjective judgments regarding valuations, and regulators and other third parties may question whether our agreements with the Kibbutz are in the ordinary course of our business and are no less favorable to us than if they had been negotiated with unaffiliated third parties. As a result, the tax treatment for these transactions may also be called into question, which could have a materially adverse impact on our operating results and financial condition. See “ITEM 7.B: Major Shareholders and Related Party Transactions—Related Party Transactions.”
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Under Israeli law, our board, audit committee and shareholders may be required to reapprove certain of our agreements with Kibbutz Sdot-Yam every three years, and their failure to do so may expose us to liability and cause significant disruption to our business.
 
The Companies Law requires that the authorized corporate organs of a public company approve every three years any extraordinary transaction in which a controlling shareholder has a personal interest and that has a term of more than three years, unless a company’s audit committee determines, solely with respect to agreements that do not involve compensation to a controlling shareholder or his or her relatives, in connection with services rendered by any of them to the company or their employment with the company, that a longer term is reasonable under the circumstances. Our implementation of this requirement with respect to the agreements entered between us and the Kibbutz may be challenged by regulators and other third parties.
 
Our audit committee has determined that the terms of all the agreements entered into between us and the Kibbutz are reasonable under the relevant circumstances, except for the services agreement entered into between the Kibbutz and us on July 20, 2011 (as amended). See “ITEM 7.B: Major Shareholders and Related Party Transactions—Related Party Transactions.” The extension of our services agreement with the Kibbutz have been approved in 2021 under the Companies Law requirements and is subject to re-approval in 2024.
 
If the relevant corporate organs do not re-approve the services agreement in accordance with the Companies Law, or if it is determined that re-approval of our other agreements with the Kibbutz is required every three years and the re-approval is not obtained, we will be required to terminate such agreements, which may be considered a breach under the terms of such agreements, and could expose us to damage claims and legal fees, and cause significant disruption to our business. In addition, we would be required to find suitable replacements for the services provided to us by the Kibbutz under the services agreement, which may take time, and we can provide no assurance that we can obtain the same or better terms with a third party than those we have agreed to with the Kibbutz.
 
Risks Related to our Ordinary Shares
 
We cannot provide any assurance regarding the amount or timing of dividend payments.
 
In February 2020, we revised our dividend policy to provide for a quarterly cash dividend of up to 50% of reported net income attributable to controlling interest on a year-to-date basis, less any amount already paid as dividend for the respective period (the “Calculated Dividend”), subject in each case to approval by the Company’s board of directors. If the Calculated Dividend is less than $0.10 per share, no dividend shall be paid. In the fourth quarter of 2019, we distributed a cash dividend in the amount of $0.15 per share, in the fourth quarter of 2020, we distributed a cash dividend in the amount of $0.14 per share, in the second quarter of 2021, we distributed a cash dividend in the amount of $0.21 per share and in the fourth quarter of 2021, we distributed a cash dividend in the amount of $0.10 per share, in each case subject to withholding tax of 20%. We cannot provide assurances regarding the amount or timing of any dividend payments and may decide not to pay dividends in the future.

The price of our ordinary shares may be volatile.
 
The market price of our ordinary shares could be highly volatile and may fluctuate substantially as a result of many factors, including but not limited to (i) actual or anticipated fluctuations in our results of operations; (ii) variance in our financial performance from the expectations of market analysts; (iii) announcements by us or our competitors of significant business developments, changes in distributor relationships, acquisitions or expansion plans; (iv) changes in the prices of our raw materials or the products we sell; (v) our involvement in litigation, specifically for example, any adverse precedent set in Australia in connection with silica related claims; (vi) our sale of ordinary shares or other securities in the future; (vii) market conditions in our industry; (viii) changes in key personnel; (ix) the trading volume of our ordinary shares; (x) changes in the estimation of the future size and growth rate of our markets; (xi) changes in our board of directors, including director resignations; (xii) actions of investors and shareholders, including short seller reports and proxy contests; and (xiii) general economic and market conditions unrelated to our business or performance, such as increased shipping and handling markets. See also “—The COVID-19 pandemic could further impact end-consumers and the global economy in general, lower demand for our products, disrupt our operations and materially and adversely affect our business and results of operations”.
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In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been instituted against that company relating to the price of shares. We have been in the past subject to a putative securities class action which was settled and covered by our insurance carriers. We cannot assure you that in the future we may not be subject to further litigation or that it will be fully covered by our insurance carriers.
 
Our share price is impacted by reports from research analysts, publicly announced financial guidance, investor perceptions and our ability to meet other expectations about our business.
 
The trading market for our ordinary shares relies in part on the research and reports that equity research analysts publish about us and our business. Recently, two analysts discontinued research coverage of our business. If additional analysts do not establish research coverage, or if the current research analyst ceases coverage of our company or fails to publish reports on our Company regularly, we could lose visibility in the market and demand for our shares may decline, which might cause our share price and trading volume to decline.
 
The price of our ordinary shares could also decline if one or more securities analysts downgrade our ordinary shares or if one or more of those analysts issue other unfavorable commentary. The market price for our ordinary shares has been in the past, and may be in the future, materially and adversely affected by statements made in reports issued by short sellers regarding our business model, our management and our financial accounting. In the past, we have also faced difficulty accurately projecting our earnings and have missed certain of our publicly announced guidance. If our financial results for a period do not meet our guidance or if we reduce our guidance for future periods, the market price of our ordinary shares may decline. We have experienced in the past, and may experience in the future, a decline in the value of our shares as a result of the foregoing factors.
 
Environmental, social and governance (“ESG”) and sustainability reporting is becoming more broadly expected by investors, shareholders and other third parties. We may face reputational damage in the event our corporate responsibility initiatives or objectives do not meet the standards set by our investors, shareholders, lawmakers, listing exchanges or other constituencies, or if we are unable to achieve an acceptable ESG or sustainability rating. A low ESG or sustainability rating by a third-party rating service could also result in the exclusion of our ordinary shares from consideration by certain investors. Ongoing focus on corporate responsibility matters by investors and other parties as described above may impose additional costs or expose us to new risks.
 
The substantial share ownership position of Kibbutz Sdot-Yam and Tene will limit your ability to influence corporate matters.
 
As of March 11, 2022, the Kibbutz and Tene beneficially owned 14,029,494 ordinary shares constituting 40.7% of our outstanding ordinary shares. As a result of this concentration of share ownership and their voting agreement described above, the Kibbutz and Tene are considered controlling shareholders under the Israeli Companies Law, and, acting on their own or together, will continue to have significant voting power on all matters submitted to our shareholders for approval. These matters include:
 

the composition of our board of directors (other than external directors);
 

approving or rejecting a merger, consolidation or other business combination; and
 

amending our articles of association, which govern the rights attached to our ordinary shares.
 
This concentration of ownership of our ordinary shares could delay or prevent proxy contests initiated by other shareholders, mergers, tender offers, open-market purchase programs or other purchases of our ordinary shares that might otherwise give you the opportunity to realize a premium over then-prevailing market price of our ordinary shares. The interests of the Kibbutz or Tene may not always coincide with the interests of our other shareholders. This concentration of ownership may also lead to proxy contests. For example, prior to the voting arrangement between Tene and the Kibbutz, in connection with our annual general meeting of shareholders held in December 2015, the Kibbutz issued a proxy to our shareholders, in which it opposed the independent nominees our board of directors proposed to nominate to the board and suggested two alternative nominees. Such initiatives, which may not coincide with the interests of our other shareholders, result in us incurring unexpected costs and could divert our management’s time and attention. This concentration of ownership may also materially and adversely affect our share price.
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In recent years, Israeli issuers listed on securities exchanges in the United States have also been faced with governance-related demands from activist shareholders, unsolicited tender offers and proxy contests. Responding to these types of actions by activist shareholders could be costly and time-consuming for management and our employees and could disrupt our operations or business model in a way that would interfere with our ability to execute our strategic plan.
 
As a foreign private issuer whose shares are listed on the Nasdaq Global Select Market, we may follow certain home country corporate governance practices instead of certain Nasdaq requirements.
 
As a foreign private issuer whose shares are listed on the Nasdaq Global Select Market, we are permitted to follow certain home country corporate governance practices instead of certain requirements of the rules of Nasdaq. As permitted under the Israeli Companies Law, our articles of association provide that the quorum for any ordinary meeting of shareholders shall be the presence of at least two shareholders present in person, by proxy or by a voting instrument, who hold at least 25% of the voting power of our shares instead of 33 1/3% of the issued share capital required under Nasdaq requirements. At an adjourned meeting, any number of shareholders constitutes a quorum.
 
In the future, we may also choose to follow Israeli corporate governance practices instead of Nasdaq requirements with regard to, among other things, the composition of our board of directors, compensation of officers and director nomination procedures. In addition, we may choose to follow Israeli corporate governance practice instead of Nasdaq requirements with respect to shareholder approval for certain dilutive events (such as for issuances that will result in a change of control of the company, certain transactions other than a public offering involving issuances of a 20% or more interest in the company and certain acquisitions of the stock or assets of another company) and for the adoption of, and material changes to, equity incentive plans. Accordingly, our shareholders may not be afforded the same protection as provided under Nasdaq corporate governance rules. Following our home country governance practices, as opposed to the requirements that would otherwise apply to a U.S. company listed on the Nasdaq Global Select Market, may provide less protection than is accorded to investors of domestic issuers. See “ITEM 16G: Corporate Governance.”
 
As a foreign private issuer, we are not subject to the provisions of Regulation FD or U.S. proxy rules and are exempt from filing certain Exchange Act reports.
 
As a foreign private issuer, we are exempt from the rules and regulations under the Exchange Act related to the furnishing and content of proxy statements, and our officers, directors and principal shareholders are exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the Exchange Act. In addition, we are not required under the Exchange Act to file annual and current reports and financial statements with the SEC as frequently or as promptly as U.S. domestic companies whose securities are registered under the Exchange Act, we are permitted to disclose limited compensation information for our executive officers on an individual basis and we are generally exempt from filing quarterly reports with the SEC under the Exchange Act. Moreover, we are not required to comply with Regulation FD, which restricts the selective disclosure of material nonpublic information to, among others, broker-dealers and holders of a company’s securities under circumstances in which it is reasonably foreseeable that the holder will trade in the company’s securities on the basis of the information. These exemptions and leniencies reduce the frequency and scope of information and protections to which you may otherwise have been eligible in relation to a U.S. domestic issuer.
 
We would lose our foreign private issuer status if (a) a majority of our outstanding voting securities were either directly or indirectly owned of record by residents of the United States and (b)(i) a majority of our executive officers or directors were United States citizens or residents, (ii) more than 50% of our assets were located in the United States or (iii) our business were administered principally in the United States. Our loss of foreign private issuer status would make U.S. regulatory provisions mandatory. The regulatory and compliance costs to us under U.S. securities laws as a U.S. domestic issuer may be significantly higher. If we are not a foreign private issuer, we will be required to file periodic reports and registration statements on U.S. domestic issuer forms with the SEC, which are more detailed and extensive than the forms available to a foreign private issuer. We would also be required to follow U.S. proxy disclosure requirements, including the requirement to disclose, under U.S. law, more detailed information about the compensation of our senior executive officers on an individual basis. We may also be required to modify certain of our policies to comply with accepted governance practices associated with U.S. domestic issuers. Such conversion and modifications will involve additional costs. In addition, we would lose our ability to rely upon Nasdaq exemptions from certain corporate governance requirements that are available to foreign private issuers.
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The market price of our ordinary shares could be negatively affected by future sales of our ordinary shares.
 
As of March 11, 2022, we had  34,475,995 shares outstanding. This included approximately 14,029,494  ordinary shares, or 40.7% of our outstanding ordinary shares, beneficially owned by the Kibbutz and Tene, which can be resold into the public markets in accordance with the restrictions of Rule 144, including volume limitations, applicable to resales by affiliates or holders of restricted securities.
 
Sales by us or by the Kibbutz, Tene or other large shareholders of a substantial number of our ordinary shares in the public market, or the perception that these sales might occur, could cause the market price of our ordinary shares to decline or could materially impair our ability to raise capital through a future sale of, or pay for acquisitions using, our equity securities.
 
As of March 11, 2022, 2,216,720 ordinary shares were reserved for issuance under our 2011 option plan and our 2020 Share Incentive Plan of which options to purchase 1,649,575 ordinary shares were outstanding, with a weighted average exercise price of $16.7 per share, and 90,578 restricted stock units (“RSUs”) were outstanding. To the extent they are covered by our registration statements on Form S-8, these shares may be freely sold in the public market upon issuance, except for shares held by affiliates who have certain restrictions on their ability to sell.
 
Risks Relating to our Incorporation and Location in Israel
 
If we fail to comply with Israeli law restrictions concerning employment of Jewish employees on Saturdays and Jewish holidays, we and our office holders may be exposed to administrative and criminal liabilities and our operational and financial results may be materially and adversely impacted.
 
We are subject to the Israeli Hours of Work and Rest Law, 1951 (“Rest Law”), which imposes certain restriction on the employment terms and conditions of our employees. Among others, the Rest Law prohibits the employment of Jewish employees on Saturdays and Jewish holidays, unless a permit is obtained from the IMEI. Employment of Jewish employees on such days without a permit constitutes a violation of the Rest Law. We received a permit from the IMEI to employ Jewish employees on Saturdays and Jewish holidays in connection with most of the production machinery in our Sdot-Yam facility, effective until December 31, 2022. There is no assurance that we will be able to maintain such permit while we do not actually employ Jewish employees on Saturdays, or, if cancelled by the IMEI, that we will be able to obtain such permit in the future. If we fail to obtain such permit in the future or if we are deemed to be in any violation of the Rest Law, we may be required to halt operations of our manufacturing facilities on Saturdays and Jewish holidays, we and our officers may be exposed to administrative and criminal liabilities, including fines, and our ability to utilize our Sdot-Yam facility and therefore our operational and financial results could be materially and adversely impacted.
 
Conditions in Israel could materially and adversely affect our business.
 
We are incorporated under Israeli law and our principal offices and two of our manufacturing facilities (Sdot-Yam and Bar-Lev) are located in Israel. Accordingly, political, economic and military conditions in Israel directly affect our business. Since the establishment of the State of Israel in 1948, a number of armed conflicts have occurred between Israel and its neighboring countries. These conflicts involved missile strikes against civilian targets in various parts of Israel including most recently, central Israel, and negatively affected business conditions in Israel as well as home starts and the building industry in Israel.
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Our facilities are in range of rockets that may be fired from Lebanon, Syria or the Gaza Strip into Israel. In the event that our facilities are damaged as a result of hostile action or hostilities otherwise disrupt the ongoing operation of our facilities, our ability to deliver products to customers could be materially and adversely affected. Our commercial insurance in Israel covers losses that may occur as a result of acts of war or terrorist attacks on our facilities and disruption to the ongoing operations for damages of up to $40 million, if such damages are not covered by the Israeli government, which in certain cases covers direct damages caused by terrorist attacks or acts of war. Even if insurance is maintained and adequate, we cannot assure you that it will reduce or prevent any losses that may occur as a result of such actions or will be exercised in a timely manner to meet our contractual obligations with customers and vendors.
 
In addition, popular uprisings in various countries in the Middle East and North Africa have affected the political stability of those countries. Such instability may lead to deterioration in the political and trade relationships that exist between the State of Israel and these countries, such as Turkey, from which we import a significant amount of our raw materials. Moreover, some countries around the world restrict doing business with Israel and Israeli companies, and additional countries may impose restrictions on doing business with Israel and Israeli companies if hostilities in Israel or political instability in the region continues or increases. These restrictions may limit materially our ability to obtain raw materials from these countries or sell our products to companies and customers in these countries. In addition, there have been increased efforts by activists to cause companies and consumers to boycott Israeli goods. Such efforts, particularly if they become more widespread, may materially and adversely impact our ability to sell our products out of Israel.
 
Our employees in Israel, generally males, including executive officers, may be called upon to perform military service on an annual basis until they reach the age of 40 (and in some cases, up to 45 or 49). In emergency circumstances, they could be called to immediate and prolonged active duty. Our operations could be disrupted by the absence of a significant number of our employees related to military service or the absence for extended periods of one or more of our key employees for military service. Such disruption could materially and adversely affect our business and results of operations. Additionally, the absence of a significant number of the employees of our Israeli suppliers and contract manufacturers related to military service may disrupt their operations, in which event our ability to deliver products to customers may be materially and adversely affected.
 
Any hostilities involving Israel or the interruption or curtailment of trade between Israel and its present trading partners, or a significant downturn in the economic or financial condition of Israel, could materially and adversely affect our operations and product development, cause our revenues to decrease and materially harm the share price of publicly traded companies with operations in Israel, such as us.
 
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.
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If a union of our employees is formed in the future, we may enter into a collective bargaining agreement with our employees, which may increase our costs and limit our managerial freedom, and if we are unable to reach a collective bargaining agreement, we may become subject to strikes and work stoppages, all of which may materially and adversely affect our business.
 
The tax benefits that are available to us require us to continue to meet various conditions and may be terminated or reduced in the future, which could increase our costs and taxes.
 
Our Israeli facilities have been granted “Preferred Enterprise” status by the Israeli Authority for Investment and Development of the Industry and Economy (“Investment Center”), which provides us with investment grants (in respect of certain Approved Enterprise programs) and makes us eligible for tax benefits under the Investment Law.
 
In order to remain eligible for the tax benefits of a “Preferred Enterprise” we must continue to meet certain conditions stipulated in the Investment Law and its regulations, as amended, and in certificates of approval issued by the Investment Center (in respect of Approved Enterprise programs), which may include, among other things, selling more than 25% of our products to markets of over 14 million residents in 2012 (such export criteria will further be increased in the future by 1.4% per annum) in a specific tax year, making specified investments in fixed assets and equipment, financing a percentage of those investments with our capital contributions, filing certain reports with the Investment Center, complying with provisions regarding intellectual property and the criteria set forth in the specific certificate of approval issued by the Investment Center or the ITA. If we do not meet these requirements, the tax benefits could be canceled and we could be required to refund any tax benefits and investment grants that we received in the past adjusted to the Israeli consumer price index and interest, or other monetary penalties. Further, in the future, these tax benefits may be reduced or discontinued. If these tax benefits are cancelled, our Israeli taxable income would be subject to regular Israeli corporate tax rates. The standard corporate tax rate for Israeli companies has been 23% since 2018.
 
Effective as of January 1, 2011, the Investment Law was amended (“Amendment No. 68” or the “2011 Amendment”). Under Amendment No. 68, the criteria for receiving tax benefits were revised. In the future, we may not be eligible to receive additional tax benefits under this law. The termination or reduction of these tax benefits would increase our tax liability, which would reduce our profits. Additionally, if we increase our activities outside of Israel through acquisitions, for example, our expanded activities might not be eligible to be included in future Israeli tax benefit programs. We may lose all our tax benefits in Israel in the event that our manufacturing operations outside of Israel exceed certain production levels (currently set at 50% of the overall production and subject to future changes by the ITA). We do not foresee such circumstances as probable in the coming years. From 2017 onward, our current Preferred, the tax rate for the portion of our income related to the Bar-Lev manufacturing facility was reduced to 7.5% and Sdot-Yam tax rate 16%..
 
Historically, some portions of income were tax exempt, but that is no longer the case. In the event of a distribution of a dividend from the tax-exempt income described above, we will be subject to tax at the corporate tax rate applicable to our Approved Enterprise’s and Beneficiary Enterprise’s income on the amount distributed (grossed-up to reflect the pre-tax income that it would have had to earn in order to distribute the dividend) in accordance with the effective corporate tax rate that would have been applied had we not relied on the exemption. In addition to the reduced tax rate, a distribution of income attributed to an “Approved Enterprise” and a “Beneficiary Enterprise” will be subject to 15% withholding tax (or a reduced rate under an applicable double tax treaty, subject to the receipt in advance of a valid certificate from the ITA allowing for a reduced tax rate). As for a “Preferred Enterprise,” dividends are generally subject to 20% withholding tax from 2014 (or a reduced rate under an applicable double tax treaty, subject to the receipt in advance of a valid certificate from the ITA allowing for a reduced tax rate). However, because we announced our election to apply the provisions of Amendment No. 68 prior to June 30, 2015, we will be entitled to distribute exempt income generated by any Approved/Beneficiary Enterprise to our Israeli corporate shareholders tax free (See “ITEM 10.E: Additional Information—Taxation—Israeli tax considerations and government programs—Law for the Encouragement of Capital Investments, 1959”).
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The amendment to the Investment Law stipulated that investments in subsidiaries, including in the form of acquisitions of subsidiaries from an unrelated party, may also be considered as a deemed dividend distribution event, increasing the risk of triggering a deemed dividend distribution event and potential tax exposure. The ITA’s interpretation is that this provision applies retroactively to investments and acquisitions made prior to the amendment.
 
It may be difficult to enforce a U.S. judgment against us, our officers and directors in Israel or the United States, or to assert U.S. securities laws claims in Israel or serve process on our officers and directors.
 
We are incorporated in Israel. Other than one director, none of our directors, or our independent registered public accounting firm, is a resident of the United States. None of our executive officers is resident in the United States. The majority of our assets and the assets of these persons are located outside the United States. Therefore, it may be difficult for an investor, or any other person or entity, to enforce a U.S. court judgment based upon the civil liability provisions of the U.S. federal securities laws against us or any of these persons in a U.S. or Israeli court, or to effect service of process upon these persons in the United States. Additionally, it may be difficult for an investor, or any other person or entity, to assert U.S. securities law claims in original actions instituted in Israel. Israeli courts may refuse to hear a claim based on a violation of U.S. securities laws on the grounds that Israel is not the most appropriate forum in which to bring such a claim. Even if an Israeli court agrees to hear a claim, it may determine that Israeli law and not U.S. law is applicable to the claim. If U.S. law is found to be applicable, the content of applicable U.S. law must be proved as a fact, which can be a time-consuming and costly process. Certain matters of procedure will also be governed by Israeli law. There is little binding case law in Israel addressing the matters described above.
 
Your rights and responsibilities as our shareholder will be governed by Israeli law which may differ in some respects from the rights and responsibilities of shareholders of United States corporations.
 
Since we are incorporated under Israeli law, the rights and responsibilities of our shareholders are governed by our articles of association and Israeli law. These rights and responsibilities differ in some respects from the rights and responsibilities of shareholders in U.S.-based corporations. In particular, a shareholder of an Israeli company has a duty to act in good faith and in a customary manner in exercising its rights and performing its obligations towards the company and other shareholders and to refrain from abusing its power in the company, including, among other things, in voting at the general meeting of shareholders on certain matters, such as an amendment to the company’s articles of association, an increase of the company’s authorized share capital, a merger of the company and approval of related party transactions that require shareholder approval. A shareholder also has a general duty to refrain from discriminating against other shareholders. In addition, a controlling shareholder or a shareholder who knows that it possesses the power to determine the outcome of a shareholders’ vote or to appoint or prevent the appointment of an office holder in the company or has another power with respect to the company, has a duty to act in fairness towards the company. However, Israeli law does not define the substance of this duty of fairness. See “ITEM 6.C: Directors, Senior Management and Employees—Board Practices—Board Practices—Fiduciary duties and approval of specified related party transactions under Israeli law—Duties of shareholders.” Additionally, the parameters and implications of the provisions that govern shareholder behavior have not been clearly determined by the Israeli courts. These provisions may be interpreted to impose additional obligations and liabilities on our shareholders that are not typically imposed on shareholders of United States corporations.
 
Provisions of Israeli law may delay, prevent or make undesirable a merger transaction, or an acquisition of all or a significant portion of our shares.
 
Israeli corporate law regulates mergers by mandating certain procedures and voting requirements and requires that a tender offer be affected when more than a specified percentage of shares in a company are purchased. Further, Israeli tax considerations may make potential transactions undesirable to us or to some of our shareholders whose country of residence does not have a tax treaty with Israel granting tax relief to such shareholders from Israeli tax. With respect to mergers, Israeli tax law allows for tax deferral in certain circumstances but makes the deferral contingent on the fulfillment of numerous conditions, including a holding period of two years from the date of the transaction during which certain sales and dispositions of shares of the participating companies are restricted. Moreover, with respect to certain share swap transactions, the tax deferral is limited in time, and when such time expires, the tax becomes payable even if no actual disposition of the shares has occurred. See “ITEM 10.B: Additional Information—Memorandum and Articles of Association—Acquisitions under Israeli law.”
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Under Israeli law, our two external directors have terms of office of three years. Our current external directors have been elected by our shareholders to serve for a three-year term commencing December 1, 2020.
 
These provisions of Israeli law could have the effect of delaying or preventing a change in control and may make it more difficult for a third party to acquire us or our shareholders to elect different individuals to our board of directors, even if doing so would be beneficial to our shareholders, and may limit the price that investors may be willing to pay in the future for our ordinary shares.
 
If we are considered a “monopoly” under Israeli law, we could be subject to certain restrictions that may limit our ability to freely conduct our business to which our competitors may not be subject.
 
Under the Israeli Economic Competition law (formerly, the Restrictive Trade Practices Law, 1988) (the “Israeli Competition Law”), a company that either supplies more than 50% of any asset or service in Israel or, in some cases, in a specific geographical area in Israel, or holds market power in a relevant market, is deemed to be a monopoly. The determination of monopoly status depends on an analysis of the relevant product or service market, but it does not require a positive declaration, and the status is achieved by virtue of such market share threshold being crossed or the existence of market power.
 
Depending on the analysis and the definition of the relevant product market in which we operate, we may be deemed to be a “monopoly” under Israeli law. Under the Israeli Competition Law, a monopoly is prohibited from participating in certain business practices, including unreasonably refusing to provide the relevant product or service, or abuse of market power by means of discriminating between similar transactions or charging what are considered to be unfair prices, and from engaging in certain other practices. The Israeli Competition Commissioner may determine that a company that is a monopoly has abused its position in the market and may subsequently order such company to change its conduct in matters that may materially and adversely affect the public, including imposing business restrictions on a company determined to be a monopoly and giving instructions with respect to the prices charged by the monopoly. If we are indeed deemed to be a monopoly and the Commissioner finds that we have abused our position in the market by taking anticompetitive actions and using anti-competitive practices, such as those described above, it would serve as prima facie evidence in private actions and class actions against us alleging that we have engaged in anti-competitive behavior. Furthermore, the Commissioner may order us to take or refrain from taking certain actions, which could limit our ability to freely conduct our business. Violations of the Israeli Competition Law can constitute a criminal offence, may lead to civil claims, administrative penalties and may expose a company to class actions.
 
Sales in Israel accounted for approximately 6.1% of our revenues in 2021. We have a significant market position in certain jurisdictions outside of Israel and cannot assure you that we are not, or will not become, subject to the laws relating to the use of dominant product positions in particular countries, which laws could limit our business practices and our ability to consummate acquisitions.
 
General Risk Factors
 
If we do not manage our inventory effectively, our results of operations could be materially adversely affected.
 
We must manage our inventory effectively in order to meet the demand for our products. If our forecasts for any Specific Stock Keeping Unit (“SKU”) exceed actual demand, we could experience excess inventory, resulting in increased logistic costs. If we ultimately determine that we have excess inventory, we may have to reduce our prices and write-down inventory which could have an adverse effect on our business, financial condition and results of operations. If we have insufficient inventory levels, we may not be able to respond to the market demand for our products, resulting in reduced sales and market share.
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Our limited resources and significant competition for business combination or acquisition opportunities may make it difficult for us to complete a combination or acquisition, and any combination or acquisition that we complete may disrupt our business and fail to achieve our intended objectives.
 
We have in the past and intend to continue growing our business through a combination of organic growth and acquisitions. For more information, see “ITEM 4: Information on the Company—History and Development of the Company—Our History.” While we believe there are a number of target businesses we might consider acquiring, including, in certain instances, our distributors, manufacturers of quartz surfaces and other surfaces like ceramic, we may be unable to persuade those targets of the benefits of a combination or acquisition. Our ability to compete with respect to a combination with or acquisition of certain larger target businesses will be determined by, among other factors, our available financial resources. This inherent competitive limitation may give others an advantage in pursuing such combinations or acquisitions.
 
Any combination or acquisition that we effect will be accompanied by several risks, including, but not limited to:
 

the difficulty of integrating the operations and personnel of the acquired business;
 

the potential disruption of our ongoing business;
 

the potential distraction of management;
 

expenses related to the acquisition;
 

potential unknown liabilities associated with acquired businesses;
 

challenges integrating completed combinations or acquisitions in an efficient and timely manner; and
 

failure to realize the expected synergies or benefits in connection with a future combination or acquisition.
 
If we are not successful in completing combinations or acquisitions that we pursue in the future, we may incur substantial expenses and devote significant management time and resources without a successful result. Acquisitions which may include the expansion of our business into new products, like ceramic, and new applications, could distract the attention of management, impose high expenses and investments and expose our business to additional risks. Such acquisitions carry further risks associated with the entry into new business lines in which we do not have prior experience, and there can be no assurance that any such business expansion would be successful. In addition, future combinations or acquisitions could require the use of substantial portions of our available cash, incur significant debt that could impact the way that we run our business, or result in dilutive issuances of securities. For more information, see “—Fully integrating Lioli’s and Omicron’s businesses may be more difficult, costly and time-consuming than expected, which may adversely affect our results of operations and the value of our common shares” and “—In addition to our traditional engineered quartz offering, we have commenced manufacturing of porcelain products and sales of porcelain, natural stone and other materials, and may pursue a further expansion of our product offering, including introducing new products and materials, which may be unsuccessful, and may divert management’s attention and negatively affect our margins and results of operations.” These factors could each adversely impact our share price and, additionally, our share price may be adversely impacted if the market assesses that we overpaid for a particular acquisition.
 
We depend on our senior management team and other skilled and experienced personnel to operate our business effectively, and the loss of any of these individuals could materially and adversely affect our business and our future financial condition or results of operations.
 
We are dependent on the skills and experience of our senior management team and other skilled and experienced personnel. These individuals possess strategic, managerial, sales, marketing, operational, manufacturing, logistical, financial and administrative skills that are important to the operation of our business. During 2021 we have experienced a significant increase in turnover across our operations and challenges in recruiting and retaining employees as labor markets change around the world post-COVID-19.
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Retention of institutional knowledge and the ability to attract, motivate and retain personnel, as well as the ability to successfully onboard our senior management as a team comprised of several new members, are crucial for implementing our business strategy, without which our business and our future financial condition or results of operations could suffer materially and adversely. We do not carry key man insurance with respect to any of our executive officers or other employees. We cannot assure you that we will be able to retain all our existing senior management personnel and key personnel or to attract additional qualified personnel when needed.
 
The market for qualified personnel is competitive in the geographies in which we operate. Moreover, the COVID-19 pandemic has also caused a shift to virtual or hybrid recruiting and employment, which has increased the difficulty in timely attracting new employees, integrating and introducing them into our corporate culture and retaining them for the longer term. Companies with whom we compete have expended and will likely continue to expend more resources than we do on employee recruitment and are often better able to offer more favorable compensation and incentive packages than we can. We seek to retain and motivate existing personnel through our compensation practices, company culture, and career development opportunities.  If we are unable to attract and retain qualified personnel when and where they are needed, our ability to operate and grow our business could be impaired. Moreover, if we are not able to properly balance investment in personnel with sales, our profitability may be adversely affected.
 
In addition, factors beyond our control may damage or disrupt the ability of our senior management or key employees to perform their critical roles in the Company. In particular, the ongoing COVID-19 pandemic may affect the health and livelihood of our management and employees. The pandemic has led governments in the jurisdictions in which we operate, including the location of our headquarters and manufacturing facilities, to implement reductions in onsite workforce, travel restrictions and individual quarantines. Such limitations may lead to significant changes in the operations of our business, such as reduction in number of shifts at our plants, reduced sales activity and lack of back office support, and materially adversely affect our business and financial condition. See also “—The COVID-19 pandemic could further impact end-consumers and the global economy in general, lower demand for our products, disrupt our operations and materially and adversely affect our business and financial results” and “—Disturbances to our operations or the operations of our suppliers, distributors, customers, consumers or other third parties could materially adversely affect our business.”
 
Labor shortages and increased turnover or increases in employee and employee-related costs could have adverse effects on our profitability.
 
We have recently experienced increased difficulties in recruitment at some of our production facilities and other locations. While we have historically experienced some level of ordinary course turnover of employees, the COVID-19 pandemic and resulting actions and impacts have exacerbated labor shortages and increased turnover. A number of factors have had and may continue to have adverse effects on the labor force available to us, including reduced employment pools, unemployment subsidies, including unemployment benefits offered in response to the COVID-19 pandemic, and other government regulations, which include laws and regulations related to workers’ health and safety, and wage and hour practices. Labor shortages and increased turnover rates within our team members have led to and could in the future lead to increased costs, such as increased overtime to meet demand and increased wage rates to attract and retain employees and could negatively affect our ability to efficiently operate our production facilities or otherwise operate at full capacity. An overall or prolonged labor shortage, lack of skilled labor, increased turnover or labor inflation could have a material adverse impact on our operations, results of operations, liquidity or cash flows.
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ITEM 4: Information on the Company
 
A.
History and Development of the Company
 
Our History
 
Caesarstone Ltd. was founded in 1987 and incorporated in 1989 in the State of Israel. We began as a leading manufacturer of high-end engineered surfaces used primarily as countertops in residential and commercial buildings, and are now a multi material designer, producer and reseller of countertops. We design, develop produce and source engineered quartz, natural stone and porcelain products that offer aesthetic appeal and functionality through a distinct variety of colors, styles, textures, and finishes used primarily as countertops, vanities, and other interior and exterior spaces.
 
Our products are currently sold in over 50 countries through a combination of direct sales in certain markets performed by our subsidiaries and indirectly through a network of independent distributors in other markets. We acquired the businesses of our former Australian, Canadian, U.S. and Singaporean distributors, and established such businesses within our own subsidiaries in such countries. In March 2012, we listed our shares on the Nasdaq Global Select Market. In 2017, we started selling our products in the U.K. directly through our U.K. subsidiary, Caesarstone (UK) Ltd. In December 2020, we acquired Omicron, a premier stone supplier which operated several locations across Florida, Ohio, Michigan and Louisiana. We now generate a substantial portion of our revenues in the United States, Australia and Canada from direct distribution of our products. In addition, in October 2020, we acquired a majority stake in Lioli, an India-based producer of porcelain slabs, which also sells its porcelain products in India and other markets.
 
We are a company limited by shares organized under the laws of the State of Israel. We are registered with the Israeli Registrar of Companies in Jerusalem. Our registration number is 51-143950-7. Our principal executive offices are located at Kibbutz Sdot-Yam, MP Menashe, 3780400, Israel, and our telephone number is +972 (4) 610-9368. We have irrevocably appointed Caesarstone USA as our agent for service of process in any action against us in any United States federal or state court. The address of Caesarstone USA is 1401 W. Morehead Street, Suite 100, Charlotte, NC, 28208. The SEC maintains an internet site at http:/www.sec.gov that contains reports and other information regarding issues that file electronically with the SEC. Our securities filings, including this annual report and the exhibits thereto, are available on the SEC’s website. For more information about us, our website is www.caesarstone.com. The information contained in, or connected with, our SEC filings on the SEC internet site and our website shall not be deemed to be incorporated by reference in this annual report.
 
Principal Capital Expenditures
 
Our capital expenditures for fiscal years 2021, 2020 and 2019 amounted to $31.5 million, $19.8 million and $23.6 million, respectively. The majority of our investment activities have historically been related to the purchase of manufacturing equipment and components for our production lines. For additional information on our capital expenditures, see “ITEM 5.B: Liquidity and Capital Resources–Capital expenditures.”
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B.
Business Overview
 
We are a multi material designer, producer and reseller of countertops used in residential and commercial buildings globally. The global countertop industry generated approximately $117 billion in sales to end consumers in 2020 based on average installed price, which includes fabrication, installation and other service related costs, as per the following charts:
 
 
The majority of our sales are at the wholesale level to fabricators and distributors and exclude fabrication, installation and other service related costs.
 
The engineered quartz countertop is a growing category in the countertop market and continues to take market share from other materials, such as granite, manufactured solid surfaces and laminate. Between 1999 and 2020, global engineered quartz sales to end-consumers grew at a compound annual growth rate of 16.6% compared to a 5.0% compound annual growth rate in total global countertop sales to end-consumers during the same period. Following the Lioli Acquisition, we intend to commence marketing and sales of porcelain countertops under our Caesarstone brand. Porcelain represents one of the fastest growing categories in the global countertop market. and between 2014 and 2020, the porcelain sales to end-consumers grew at a compound annual growth rate of 14.9%.
 
 
In recent years, quartz penetration rate, by volume, other than in Israel, increased in our key markets, as detailed in the following chart:

Quartz penetration in our key markets

   
For the year ended December 31,
 
   
2020
   
2016
   
2014
   
2012
   
2010
 
Region
                             
United States
   
20
%
   
14
%
   
8
%
   
6
%
   
5
%
Australia (not including New Zealand)
   
47
%
   
45
%
   
39
%
   
35
%
   
32
%
Canada
   
28
%
   
24
%
   
18
%
   
12
%
   
9
%
Israel (*)
   
67
%
   
87
%
   
86
%
   
85
%
   
82
%

(*) In Israel, quartz lost market share mainly to porcelain, which increased its market share from a de-minimis rate in 2016 to over 20% in 2020, a trend we estimate continued thorugh 2022.
 
Our products consist primarily of engineered quartz, natural stone and porcelain slabs that are currently sold in over 50 countries through a combination of direct sales in certain markets and indirectly through a network of independent distributors in other markets. Our products are primarily used as indoor & outdoor kitchen countertops in the renovation and remodeling and residential construction end markets. Other applications for our products include vanity tops, back splashes, furniture, and other interior and exterior surfaces that are used in a variety of residential and non-residential applications. High quality engineered quartz offers durability, non-porous characteristics, superior scratch, stains and heat resistance levels, making it durable and ideal for kitchen and other applications relative to competing products such as granite, manufactured solid surfaces and laminate. Porcelain is characterized by its hardness and its stain resistance, as well as extreme heat and UV resistance. Through our design and manufacturing processes we can offer a wide variety of colors, styles, designs and textures.
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From 2010 to 2021, our revenue grew at a compound annual growth rate of 11.3%. From 2020 to 2021, our revenue increased at an annual rate of 32.4%. In 2021, we generated revenue of $643.9 million, net income attributable to controlling interest of $19.0 million, adjusted EBITDA of $68.2 million and adjusted net income attributable to controlling interest of $28.6 million. Adjusted EBITDA and adjusted net income attributable to controlling interest are non-GAAP financial measures. See “ITEM 8.B: Business Overview—Non-GAAP Financial Measures” below for a description of how we define adjusted EBITDA and adjusted net income attributable to controlling interest and reconciliations of net income to adjusted EBITDA and net income attributable to controlling interest to adjusted net income attributable to controlling interest.
 
Our Products
 
Our products are generally marketed under the Caesarstone brand. Currently, our porcelain products manufactured in India are marketed either under the Caesarstone brand, mainly for counter-top applications in selected markets, and under the existing Lioli brand mainly for flooring and cladding applications. Most of our stone and ceramic products are installed as countertops in residential kitchens. Other applications of our products include vanity tops, back splashes, and exterior surfaces. In addition, we sell natural stone, sinks and various ancillary fabrication tools and materials. Our standard size engineered quartz slabs, constituting the majority of our products measure 120 inches long by 56 1/2 inches wide, and 131 1/2 inches long by 64 1/2 inches wide for the jumbo slabs, with a thickness of 1/2 of an inch, 3/4 of an inch or 1 1/4 inches, and 3/4 of an inch or 1 1/4 inches for the jumbo slabs. On average engineered quartz surfaces are comprised on average of 85% quartz blended with polyester, and pigments. Our engineered quartz products’ composition gives them superior strength and resistance levels to heat impact, scratches, cracks, and chips. Polyester, which acts as a binding agent in our engineered quartz products, make such products non-porous and highly resistant to stains. Pigments act as a dyeing agent to vary our products’ colors and patterns. Our standard size porcelain countertop slabs measure 126 inches long by 63 inches wide, 94 inches long by 47 inches wide and 47 inches by 47 inches mm, with a thickness of 1/2 inches, 1/3 inches and 1/4 inches, in matt and polished finishes. Porcelain surfaces are typically comprised of clay minerals, natural minerals, and chemical additives, and offer non-porous characteristics as well as scratch and heat resistance.
 
We design our products with a wide range of colors, finishes, textures, thicknesses, and physical properties, which help us meet the different functional and aesthetic demands of end-consumers. Our designs range from fine-grained patterns to coarse-grained color blends with a variegated visual texture. Through offering new designs, we capitalize on Caesarstone’s brand name and foster our position as a leading innovator in the counter-top space.
 
Our product offerings consist of four collections, each of which is designed to have a distinct aesthetic appeal. We use a multi-tiered pricing model across our products and within each product collection ranging from lower price points to higher price points. Each product collection is designed, branded, and marketed with the goal of reinforcing our products’ premium quality.
 
We introduced our original product collection, Classico, in 1987, and today, this collection still generates more revenue than our other collections. Launched in 2012, our Supernatural collection, which is marketed as specialty high-end, offers designs inspired by natural stone and which are manufactured using proprietary technology. In 2018, we launched our new Metropolitan collection, inspired by the rough and unpolished textures found in industrial architecture. In 2020, we introduced our Outdoor collection, an innovative product category, which comprises stain resistant, easy-to-clean surfaces, made of a highly durable material, proven to withstand UV-rays and the most extreme environmental conditions over a long term, intended for use in outdoor cooking spaces.
 
We regularly introduce new colors and designs to our product collections based on consumer trends. We offer over 70 different colors of quartz products, with five textures and three thicknesses generally available for each collection. Each year we typically introduce between four to eight new colors and models.
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In 2018, we began to offer porcelain slabs sourced through OEMs and following the Lioli Acquisition, from Lioli as well.
 
In addition, following the Omicron Acquisition, we now offer to our customers in the United States resale of natural stone, as well as various ancillaries and fabrication and installation accessories.
 
A key focus of our product development is a commitment to substantiating our claim of our products’ superior quality, strength, and durability. Our products undergo regular tests for durability and strength internally by our laboratory operations group and by external accreditation organizations. Products in our portfolio are accredited by organizations overseeing safety and environment performance, such as the NSF International and GREENGUARD Indoor Air Quality. Generally, our products support green building projects and allow contractors to receive Leadership in Energy and Design (“LEED”) points for projects incorporating our products.
 
Distribution
 
Our four largest markets based on sales are currently the United States, Australia (including New Zealand), Canada and Israel. In 2021, sales of our products in these markets accounted for 47.4%, 18.4%, 13.1% and 6.1% of our revenues, respectively. Total sales in these markets accounted for 85.1% of our revenues in 2021. For a breakdown of revenues by geographic market for the last three fiscal years, see “ITEM 5.A: Operating Results and Financial Review and Prospects—Operating Results.”
 
Direct Markets
 
We currently have direct sales channels in the United States, Australia, Canada, Israel, the United Kingdom (“U.K.”) and Singapore. Our direct sales channels allow us to maintain greater control over the entire sales channel within a market. As a result, we gain greater insight into market trends, receive feedback more readily from end-consumers, fabricators, architects and designers regarding new developments in tastes and preferences, and have greater control over inventory management. Our subsidiaries’ warehouses in each of these countries maintain inventories of our products and are connected to each subsidiary’s sales department. We supply our products primarily to fabricators, who in turn resell them to contractors, developers, builders and consumers, who are generally advised by architects and designers. In certain market channels in the U.S., Canada and Australis, we also provide, together with our products, fabrication and installation services, which we source from third party fabricators. We believe that our supply of a fabricated and installed Caesarstone countertop is a competitive advantage in such channels, which enables us to better control our products’ prices as well as to promote a full solution to our customers, while in some of these cases our products are sold under different brands.
 
In Israel, where our headquarters are located, we distribute our products directly to several local distributors who in turn sell them to fabricators. This arrangement reduces our financial exposure and simplifies our logistics in the Israeli market. Although we sell our products to distributors in this market, we consider this a direct market due to the warranty we provide to end-consumers, as well as our fabricator technical and health and safety instruction programs and our local sales and marketing activities. In the United States, Australia, Canada, the United Kingdom, and Singapore we have established direct distribution channels with distribution locations in major urban centers complemented by arrangements with various third parties, sub-distributors or stone suppliers in certain areas of the United States.
 
Indirect Markets
 
We distribute our products in other territories in which we do not have a direct sales channel through third-party distributors, who generally distribute our products to fabricators on an exclusive or non-exclusive basis in a specific country or region. Fabricators sell our products to contractors, developers, builders and consumers. In some cases, our distributors operate their own fabrication facilities. Additionally, our distributors may sell to sub-distributors located within the territory who in turn sell to fabricators.
 
In most cases, we engage one or more distributors to serve a country or territory. Today, we sell our products in over 45 countries through third-party distributors, and over 50 countries in total. Sales to third-party distributors accounted for approximately 10% of our revenues in 2021. This strategy often allows us to accelerate our penetration into multiple new markets. Our distributors typically have prior stone surface experience and close relationships with fabricators, builders and contractors within their respective territory.
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We work closely with our distributors to assist them in preparing and executing a marketing strategy and comprehensive business plan. Ultimately, however, our distributors are responsible for the sales and marketing of our products and providing technical support to their customers within their respective territories. To assist some of our distributors in the promotion of our brand in these markets, we provide marketing materials and in certain cases, monetary participation in marketing activities. Our distributors devote significant effort and resources to generating and maintaining demand for our products along all levels of the product supply chain in their territory. To this end, distributors use our marketing products and strategies to develop relationships with local builders, contractors, developers, architects and designers. Certain distributors, as well as sub-distributors, do not engage in brand promotion activities and their activities are limited to sales promotion, warehousing and distributing to fabricators or other customers.
 
We do not control the pricing terms of our distributors’ or sub-distributors’ sales to customers. As a result, prices for our products may vary.
 
Sales and Marketing
 
Sales
 
We manufacture or source our products based upon our rolling projections of the demand for our products.
 
Since 2019, we have operated under a regional structure which consists of North America, APAC, EMEA and Israel. Under this structure, each region manages the direct distribution channels and focuses on penetrating new markets within its territory, as well as further develops its key growth indirect sales markets.
 
We believe our products still have significant growth opportunities in the United States, Canada and Europe. For information on sales trends in the markets in which we operate, see “ITEM 5: Operating and Financial Review and Prospects—Components of statement of income”. In 2016, we established a direct sales channel in the United Kingdom and starting in January 2017 we have been selling and distributing our products in the U.K. directly through our U.K. subsidiary. In December 2020, we acquired Omicron, a premier stone supplier servicing the Florida, Ohio, Michigan and Louisiana markets in the U.S. We intend to continue to invest resources to further strengthen and increase our penetration in our existing markets. We are also exploring alternative sales channels and methodologies to further enhance our presence in each market.
 
Marketing
 
We position our engineered quartz, porcelain and natural stone surfaces as premium branded products in terms of their designs, quality and pricing. Through our marketing, we seek to convey our products’ ability to elevate the overall quality of an entire kitchen or other setting. Our marketing strategy is to deliver this message every time our end-consumers, customers, fabricators, architects and designers meet our brand. We also aim to communicate our position as a design-oriented global leader in engineered surfaces innovation and technology.
 
The goal of our marketing activities is to drive marketing and sales efforts across the regions, while creating demand for our products from end-consumers, fabricators, contractors, architects and designers, which we refer to as a “push-and-pull demand strategy.” We combine both pushing our products through all levels of the product supply chain while generating demand from end-consumers as a complementary strategy.
 
We implement a multi-channel marketing strategy in each of our territories and market not only to our direct customers, but to the entire product supply chain, including fabricators, developers, contractors, kitchen retailers, builders, architects and designers. We use multiple marketing channels, including advertisements in home interior magazines and websites, the placement of our display stands and sample books in kitchen retails stores and our company’s website and social media presence. We share knowledge with fabricators about our products and their capabilities, installation methods and safety requirements through manuals, seminars and webinars. In addition, our “Master of Stone” program operates as an online training platform, with content aimed at educating fabricators on the topics of Health & Safety, professional know-how and added value content for fabrication plant managers and making safety and professional working guidelines accessible to our fabricators worldwide.
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Our marketing materials are developed by our global marketing department in Israel and are used globally. In 2021, we spent $15.3 million on direct advertising and promotional activities.
 
Our websites are a key part of our marketing strategy enabling us to create data-driven personal relationship, on and off site, in order to increase engagement and conversion to sale. Our websites enable our business partners, customers and end-consumers to view currently available designs, photo galleries of installations of our products in a wide range of settings, instructions with respect to the correct usage of our products and offer an innovative cutting-edge experience with rich content and interactive tools to empower and guide consumers at any stage of their renovation journey. We also conduct marketing activity in the social media arena mainly to increase our brand awareness among end-consumers, architects and designers.
 
During 2020, we opened a new Israeli showroom named “Caesarstone Concept House” where we introduced innovative technology-driven consumer experience.
 
We also seek to increase awareness of our brand and products through a range of other methods, such as trade shows, home design shows, design competitions, media campaigns and through our products’ use in high profile projects and iconic buildings. In recent years, we have collaborated with renowned designers, who created exhibitions and particles from our products. Our design initiatives attracted press coverage around the world.
 
Research and Development
 
Our research and development (“R&D”) department is primarily located in Israel. As of December 31, 2021, our corporate R&D department was comprised of 16 employees, all of whom have extensive experience in engineered quartz surface manufacturing, polymer science, engineering, product design and engineered quartz surface applications. In addition, our R&D for porcelain manufacturing is conducted by eight dedicated employee located in India. In 2021, R&D costs accounted for approximately 0.7% 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 quartz surface industry. We also study and evaluate consumer trends by attending industry exhibitions and hosting international design workshops with market and design specialists from various regions.
 
Customer Service
 
We believe that our ability to provide outstanding customer service is a strong competitive differentiator. Our relationships with our customers are established and maintained through the coordinated efforts of our sales, marketing, production and customer service personnel. In our direct markets, the warranty period varies. We provide end-consumers with various warranties depending on the relevant markets ranging from a ten-year limited warranty to limited lifetime warranties in selected markets such as the United States, Canada and Israel. In our indirect markets, end-consumers, warranty issues on our products are addressed by our local distributor. We provide all our distributors a limited direct manufacturing defect warranty and our distributors are responsible for providing warranty coverage to end-customers. The warranties provided by our distributors vary in term. In our direct markets, following an end-consumer call, our technicians are sent to the product site within a short time. We provide readily accessible resources and tools regarding the fabrication, installation, care and maintenance of our products. We believe our comprehensive global customer service capabilities and the sharing of our service-related know-how differentiate our company from our competitors.
 
Raw Materials and Service Provider Relationships
 
Quartz, polyester and pigment are the primary raw materials used in the production of our engineered quarts products. We acquire raw materials from third-party suppliers. Suppliers ship raw materials for our engineered quartz products to our manufacturing facilities in Israel and the U.S. primarily by sea. Our raw materials are generally inspected at the suppliers’ facilities and upon arrival at our manufacturing facilities in Israel and the U.S. The cost of our raw materials consists of the purchase prices of such materials and costs related to the logistics of delivering the materials to our manufacturing facilities. Our raw materials costs are also impacted by changes in foreign currency exchange rates.
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Quartz is the main raw material component used in our engineered quartz products. Raw quartz must be processed into finer grades of sand and powder before we use it in our manufacturing process. We purchase quartz from our quartz suppliers after it was already processed by them. We acquire quartz from suppliers primarily in Turkey, Belgium, India, Portugal, the U.S. and Israel. In 2021, approximately 62% of our quartz, including mainly quartzite, which is used across all of our engineered quartz products, was imported from several suppliers in Turkey. Approximately 40% of the imported quartz from Turkey (or 25% of our total quartz) was acquired from Mikroman Madencilik San ve TIC.LTD.STI (“Mikroman”) and approximately 33% of the imported quartz from Turkey (or 20% of our total quartz) was acquired from Polat Maden Sanayi ve Ticaret A.S (“Polat”). Our current supply arrangements with Polat and Mikroman are set forth in letter agreements.
 
Similar to our arrangements with Mikroman and Polat described above, we typically transact business with our quartz suppliers on an annual framework basis, under which we execute purchase orders from time to time. Quartz imported from Turkey, Europe and Israel for our U.S. manufacturing facility entails higher transportation costs.
 
In most cases, we acquire polyester from several suppliers, on an annual framework basis or purchase order basis based on our projected needs for the subsequent one to three months. Typically, suppliers are unwilling to agree to preset prices for periods longer than a quarter and suppliers’ prices may vary during a quarter as well.
 
Pigments for our engineered quartz production in Israel are purchased from Israel and suppliers abroad. Pigments for our U.S. engineered quartz production are primarily purchased from U.S. vendors.
 
The principal raw materials for our porcelain products are clay minerals (such as Ukraine clay, bentonite), natural minerals (such as feldspar) and chemical additives. While we acquire feldspar locally from Indian suppliers, Ukraine clay and bentonite are imported from the relevant regions. We typically transact business with our suppliers of raw materials for porcelain products on an annual framework basis, under which we execute purchase orders from time to time.
 
Our strategy is to maintain, whenever practicable, multiple sources for the purchase of our raw materials to achieve competitive pricing, provide flexibility and protect against supply disruption.
 
See “ITEM 3.D. Key Information—Risk Factors—We may encounter significant delays in manufacturing if we are required to change the suppliers for the raw materials used in the production of our products.” For our cost of raw materials in 2021 and prior years, see “ITEM 5.A: Operating Results and Financial Review and Prospects—Operating Results—Cost of revenues and gross profit margin.”
 
Manufacturing and Facilities
 
Our products are manufactured at our four manufacturing facilities located in Kibbutz Sdot-Yam in central Israel, Bar-Lev Industrial Park in northern Israel, Richmond Hill, Georgia in the U.S. and, following the Lioli Acquisition, in Morbi, Gujarat in India. Our Sdot-Yam facility includes our first two production lines. We completed our Bar-Lev manufacturing facility in 2005, which included our third production line, and we established our fourth production line at this facility in 2007 and our fifth production line at this facility in 2013. We completed our U.S. manufacturing facility in 2015, where we began to operate our sixth production line in the second quarter of 2015 and our seventh line in the fourth quarter of 2015. In addition to a $135 million as an initial investment, we have the option to further invest and expand in Richmond Hill to accommodate additional manufacturing capacity in the future as needed to satisfy potential demand. During 2020, in response to the pandemic impact on our business we reduced the utilization of our production facilities in Israel and the U.S and currently we are still only partially utilizing our U.S. production facility. As part of the Lioli Acquisition, in 2020 we acquired a porcelain slab manufacturing facility, which is comprised of one production line currently in operation.
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Finished slabs are shipped from our facilities in Israel and the U.S. to our distribution centers worldwide, directly to customers and to third-party distributors worldwide. Finished porcelain slabs manufactured at our Morbi facility are distributed via third-party distributors and are shipped from India worldwide. For further discussion of our facilities, see “ITEM 4.D: Information on the Company—Property, plants, and equipment.”
 
The manufacturing process for our engineered quartz products typically involves the blending of quartz (85% on average) with polyester and pigments. Using machinery acquired primarily from Breton, the leading supplier of engineered stone manufacturing equipment, together with our proprietary manufacturing enhancements, this mixture is compacted into slabs by a vacuum and vibration process. The slabs are then moved to a curing kiln where the cross-linking of the polyester is completed. Lastly, the slabs are gauged, calibrated and polished to enhance shine.
 
The manufacturing process for our porcelain products typically involves blending of clay, natural minerals (such as feldspar) and chemical additives required for the shaping process. The multi-ingredient mixture is fed to a ball mill, together with water, to achieve fine grinding. The excess water is then removed, and the resulting powder is shaped into slabs. Slabs are first moved to dryers and then passed through a glaze line, where they are decorated with different applicators. Decorated slabs are passed through digital printing machines and then go into a curing kiln for final firing process. Lastly, the slabs are gauged, calibrated and polished to enhance shine.
 
We maintain strict quality control and safety standards for our products and manufacturing process. Our manufacturing facilities have several safety certifications from third-party organizations, including an OHSAS 18001 safety certification from the International Quality Network for superior manufacturing safety operations.
 
In addition, since 2018 we have increased our outsourcing capabilities and currently purchase a certain portion of our engineered quartz slabs from third-party quartz manufacturers that meet our specifications. We conduct quality control and quality assurance processes with respect to such outsourcing of our products. In 2021, OEMs products accounted for less than 10% of revenues, and we are aiming to increase purchases from OEMs in 2022. For more information, see ITEM 3.D: Key Information - Operational Risks.
 
Seasonality
 
For a discussion of seasonality, please refer to “ITEM 5.A: Operating and Financial Review and Prospects—Operating Results—Factors impacting our results of operations” and “ITEM 5.A: Operating and Financial Review and Prospects—Operating Results—Quarterly results of operations and seasonality.”

Competition
 
We believe that we compete principally based upon product quality, breadth of colors and designs offering and innovation, brand awareness and position, pricing and customer service. We believe that we differentiate ourselves from competitors on the basis of our premium brand, our signature product designs, our products and designs innovation, our ability to directly offer our products in major markets globally, our focus on the quality of our product offerings, our customer service-oriented culture, our high involvement in the product supply chain and our leading distribution partners.
 
The dominant surface materials used by end-consumers in each market vary. Our products compete with a number of other surface materials as well as similar materials offered by other producers and re-sellers. The manufacturers of these products consist of a number of regional as well as global competitors. Some of our competitors may have greater resources than we have, and may adapt to changes in consumer preferences and demand more quickly, expand their materials offering, devote greater resources to design innovation and establishing brand recognition, manufacture more versatile slab sizes and implement processes to lower costs.
 
The engineered quartz and porcelain surface market is highly fragmented and is also served by a number of regional and global competitors. We also face growing competition from low-cost manufacturers from Asia and Europe. Large multinational companies have also invested in their engineered quartz and porcelain surface production capabilities. For more information, see “ITEM 3.D. Key Information—Risk Factors—We face intense competitive pressures from manufacturers of other surface materials, which could materially and adversely affect our results of operations and financial condition” and “ITEM 3.D. Key Information—Risk Factors—Competition from manufacturers of lower priced products may reduce our market share, alter consumer preferences and materially and adversely affect our results of operations and financial condition”.
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Information Technology Systems
 
We believe that an appropriate information technology infrastructure is important in order to support our daily operations and the growth of our business.
 
We implemented various IT systems to support our business and operations. Our Enterprise Resource Planning (“ERP”) software provides us with accessible quality data that support our forecasting, planning and reporting. Accurate planning is important in order to support sales and optimize working capital and cost as our products can be built in a number of combinations of sizes, colors, textures and finishes. Given our global expansion, we implemented a global ERP based on an Oracle platform. Our MES systems manage work processes on the production floor in our facilities and Salesforce enhances our Customer Relationship Management (“CRM”) infrastructure.
 
We are implementing a digital transformation within our organization to better streamline processes and support our business strategy. We continued investing in our digital transformation projects for better consumer engagement and customer experience. Our technological and digital investments will be geared towards operational enhancements in inventory management and production, along with transforming our go-to-market tools. We seek to update our IT infrastructure to enhance our ability to prevent and respond to cyber threats and conduct training for our employees in this respect. For further details, see “ITEM 3.D. Key Information—Risk Factors—Disruptions to or our failure to upgrade and adjust our information technology systems globally, may materially impair our operations, hinder our growth and materially and adversely affect our business and results of operations.”
 
Intellectual Property
 
Our Caesarstone brand is central to our business strategy, and we believe that maintaining and enhancing the Caesarstone brand is critical to expanding our business.
 
We have obtained trademark registrations in certain jurisdictions that we consider material to the marketing of our products, including CAESARSTONE® and our Caesarstone logo. We have obtained trademark registrations for additional marks that we use to identify certain product collections, as well as other marks used for certain of our products. While we expect our current and future applications to mature into registrations, we cannot be certain that we will obtain such registrations. In many of our markets we also have trademarks, including registered and unregistered marks, on the colors and models of our products. We believe that our trademarks are important to our brand, success and competitive position. In order to mitigate the risk of infringement, we conduct an ongoing review process before applying for registration. However, we cannot be certain that third parties will not oppose our application or that the application will not be rejected in whole or in part. In the past, some of our trademark applications for certain classes of our products’ applications have been rejected or opposed in certain markets and may be rejected for certain classes in the future, in all or parts of our markets, including without limitation, for flooring and wall cladding. We are currently subject to opposition proceedings with respect to applications for registration of our trademark Caesarstone in certain jurisdictions.
 
To protect our know-how and trade secrets, we customarily require our employees and managers to execute confidentiality agreements or otherwise agree to keep our proprietary information confidential. Typically, our employment contracts also include clauses requiring these employees to assign to us all inventions and intellectual property rights they develop in the course of their employment and agree not to disclose our confidential information. We limit access to our trade secrets and implement certain protections to allow our know-how and trade secret to remain confidential.
 
In addition to confidentiality agreements, we seek patent protection for some of our latest technologies. We have obtained patents for certain of our technologies and have pending patent applications that were filed in various jurisdictions, including the United States, Europe, Australia, Canada, China and Israel, which relate to our manufacturing technology and certain products. No patent application of ours is material to the overall conduct of our business. There can be no assurance that pending applications will be approved in a timely manner or at all, or that such patents will effectively protect our intellectual property. There can be no assurance that we will develop patentable intellectual property in the future, and we have chosen and may further choose not to pursue patents for innovations that are material to our business.
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Environmental and Other Regulatory Matters
 
Environmental and Health and Safety Regulations
 
Our manufacturing facilities and operations in Israel, our manufacturing facility in Georgia, United States and our manufacturing facility in Gujarat, India are subject to numerous Israeli, U.S. and Indian environmental and workers’ health and safety laws and regulations, respectively, and our supply chain operations are subject to applicable local laws and regulations. For instance, applicable U.S. laws and regulations include federal, state and local laws and regulations, including Georgia state laws. Laws and regulations in the U.S. and other countries govern, among other things, exposure to pollutants, protection of the environment; setting standards for emissions; generation, treatment, import, purchase, use, storage, handling, disposal and transport of hazardous wastes, chemicals and materials, including sludge; discharges or releases of hazardous materials into the environment, soil or  water; permissible exposure levels to hazardous materials; product specifications; nuisance prevention;; soil, water or other contamination from hazardous materials and remediation requirements arising therefrom; and protection of workers’ health and safety.
 
In addition to being subject to regulatory and legal requirements, our manufacturing facilities in Israel, the United States and India operate under applicable permits, licenses and approvals with terms and conditions containing a significant number of prescriptive limits and performance standards. Business licenses for our facilities in Israel contain conditions related to a number of requirements, including with respect to dust emissions, air quality, the disposal of effluents and process sludge, and the handling of waste, chemicals and hazardous materials. Subject to certain terms, the business license for our Sdot-Yam plant is in effect until December 31, 2025. The business license for our Bar-Lev plant is in effect until June 30, 2022, and the Company is in the process of seeking an extension. The business license for our U.S. facility is renewed every year subject to a fee paid to the city and county. Our site in India has a Factory License which is a basic license issued by the Inspectorate of Factories, which is in effect until December 31, 2023. The site in India has also obtained a Consent to Operate (the “CTO”) from the State Pollution Control Board, which is a permit issued to any factory in India with all the compliance requirements related to environmental aspects, such as air emission, water and wastewater management, waste management. The CTO is valid until September 28, 2023. We operate in Israel under poison permits that regulate our use of poisons and hazardous materials. Our current poison permits are valid until January 2023 for both our Israeli facilities. In addition, we dispose of wastewater from our Israeli manufacturing facilities to a treatment plant pursuant to permits obtained from the Israeli Ministry of Environmental Protection (“IMEP”), which are effective until March 31, 2022 and the Company is in process of its extension. Our facility in the United States is required to obtain and follow a General Permit for Storm Water Discharges Associated with Industrial Activity of the Georgia Environmental Protection Division (“GEPD”), an air quality permit from GEPD and other requirements and regulations including among others specific limitations on emission levels of hazardous substances, such as styrene, specific limitations on RCS levels inside our plant, allowable wastewater discharge limits, oil spill prevention rule, hazardous waste handling requirements and fire protection measures requirements. Our site in India is required to comply with all applicable conditions, including with respect to water consumption, wastewater discharge, air emission monitoring and pollution control devices, hazardous wastes storage and disposal, specified in the CTO. We are currently in the process of renewing the plant’s Fire NOC (No Objection Certification), which expired in July 2021 due to a requirement to install a Fire Hydrant system in the entire plant area. In all our manufacturing facilities, we are implementing measures on an ongoing basis in order to achieve and maintain compliance with dust and styrene environmental and occupational emissions standards and to reduce such emissions to minimum thresholds.
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Each of these permits, licenses and standards require a significant amount of monitoring, record-keeping and reporting in order for us to demonstrate compliance therewith.
 
Official representatives of the health and safety and environment authorities in Israel, the States of Georgia and Gujarat visit our facilities from time to time, to inspect issues such as workplace safety, industrial hygiene, monitoring lockout tag out programs, exposure and emissions, water treatment, noise and others. Such inspections may result in citations, penalties, revocation of our business license or limitation or shut down of our facilities’ operations. It may also require us to make further investments in our facilities.
 
From time to time, we face environmental and health and safety compliance issues related to our manufacturing facilities


Emissions - Israel. In December 2019, the IMEP issued the additional terms to the business license for our Bar-Lev facility, which require among others, performing a constant monitoring of styrene emission. Accordingly, we implemented the required terms, including an online styrene emission monitoring system that was installed at our Bar-Lev facility during September 2020. The IMEP closely monitors our Bar-Lev facility’s implementation of the additional terms and emissions, specifically of styrene. During July 2021, the Company received a warning letter from the IMEP in which our Bar-Lev plant was notified of violations of the Clean Air Act and the plant’s business license terms, following an unannounced styrene emission sampling that revealed several cases of deviations from the styrene emission standard under the Clean Air Act in Israel. The IMEP has ordered the Company to take corrective and preventive actions, including reducing the expected timeframe for installation of additional Regenerative Thermal Oxidizer (“RTO”) system and to implement a continuous (online) monitoring device on the Bar-Lev plant’s fence. We are cooperating with the IMEP and are currently in the process of implementing all its requirements and remaining additional terms. Similarly, in October 2020 we received from the IMEP the final version of the additional terms to the business license for our Sdot-Yam facility, which required, among others, implementation of a continuous monitoring of the facility’s styrene emission. Accordingly, we implemented the required terms, including an online styrene emission monitoring system that was installed at Sdot-Yam plant in May 2021. The IMEP closely monitors our Sdot-Yam facility emissions, specifically for its styrene emissions. During January 2021 we were informed of several cases of deviations from the styrene emission standard under the Clean Air Act in Israel at our Sdot-Yam plant, which were identified in an unannounced continuous monitoring inspection that was conducted on the Sdot-Yam plant’s fence by the municipal supervisory authority. Recently the municipal supervisory authority advised (but did not order) that a continuous monitoring system on the Sdot-Yam plant’s fence should be installed, and that advice is being reviewed. In February 2022, Israel adopted a long term goal for the reduction of environmental styrene emissions. Although such goal is not expected to impact our current operations, the adoption of new regulations could create an additional burden for any future investment in our Israeli facilities. We are constantly in the process of taking the required corrective actions in order to comply with the business license terms, the styrene emission standard and the IMEP instructions
 

Workers’ safety and health. The Israeli Ministry of Economics, Labor Division (“IMOE”) in Israel the U.S. Occupational Safety and Health Administration (“OSHA”) in the U.S. and the Indian Ministry of Labor and Employment, conduct audits of our plants, in which, among other things, it examines if there were any deviations from permitted ambient levels of RCS, styrene and acetone in the plants. We seek, on an ongoing basis, to continue reducing the level of exposure of our employees to RCS, styrene and acetone, while enforcing our employees’ use of personal protection equipment.
 
Other Regulations
 
We are subject to the Israeli Rest Law, which, among other things, prohibits the employment of Jewish employees on Saturdays and Jewish holidays, unless a permit is obtained from the IMEI. We received a permit from the IMEI to employ Jewish employees on Saturdays and Jewish holidays in connection with most of the production machinery in our Sdot-Yam facility, effective until December 31, 2022.
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If we are deemed to be in violation of the Rest Law, we may be required to halt operations of our manufacturing facilities on Saturdays and Jewish holidays, we and our officers may be exposed to administrative and criminal liabilities, including fines, and our operational and financial results could be materially and adversely impacted. For more information, see “Item 3.D. Key Information—Risk Factors—Risks relating to our incorporation and location in Israel—If we fail to comply with Israeli law restrictions concerning employment of Jewish employees on Saturdays and Jewish holidays, we and our office holders may be exposed to administrative and criminal liabilities and our operational and financial results may be materially and adversely impacted.”
 
For information on other regulations applicable, or potentially applicable, to us, see the following risks factors in “ITEM 3.D. Key Information—Risk Factors”:
 

“Risks related to our business and industry—We may have exposure to greater-than-anticipated tax liabilities.”
 

“Risks related to our incorporation and location in Israel— Conditions in Israel could materially and adversely affect our business.”
 

“Risks related to our incorporation and location in Israel—The tax benefits that are available to us require us to continue to meet various conditions and may be terminated or reduced in the future, which could increase our costs and taxes.”
 

“Risks related to our incorporation and location in Israel—If we are considered a ‘monopoly’ under Israeli law, we could be subject to certain restrictions that may limit our ability to freely conduct our business to which our competitors may not be subject.
 
Legal Proceedings
 
See “ITEM 8.A: Financial Information—Consolidated Financial Statements and Other Financial Information—Legal Proceedings.”
 
Non-GAAP Financial Measures
 
We use certain non-GAAP financial measures to evaluate our performance in conjunction with other performance metrics. The following are examples of how we use such non-GAAP measures:
 

Our annual budget is based in part on these non-GAAP measures.
 

Our management and board of directors use these non-GAAP measures to evaluate our operational performance and to compare it against our work plan and budget.
 
Our non-GAAP financial measures, adjusted gross profit, adjusted EBITDA and adjusted net income attributable to controlling interest, have no standardized meaning and accordingly have limitations in their usefulness to investors. We provide such non-GAAP data because management believes that such data provide useful information to investors. However, investors are cautioned that, unlike financial measures prepared in accordance with U.S. GAAP, non-GAAP measures may not be comparable with similar measures used by other companies. These non-GAAP financial measures are presented solely to permit investors to more fully understand how management and our board assesses our performance. The limitations of these non-GAAP financial measures as performance measures are that they provide a view of our results of operations without reflecting all events during a period and may not provide a comparable view of our performance to other companies in our industry.
 
Investors should consider non-GAAP financial measures in addition to, and not as replacements for, or superior to, measures of financial performance prepared in accordance with GAAP.
 
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In arriving at our presentation of non-GAAP financial measures, we exclude items that either have a non-recurring impact on our income statement or which, in the judgment of our management, are items that, either as a result of their nature or size, could, were they not singled out, potentially cause investors to extrapolate future performance from an improper base. In addition, we also exclude share-based compensation expenses to facilitate a better understanding of our operating performance, since these expenses are non-cash and accordingly, we believe do not affect our business operations. While not all inclusive, examples of these items include:
 

amortization of purchased intangible assets;
 

legal settlements (both gain or loss) and loss contingencies, due to the difficulty in predicting future events, their timing and size;
 

material items related to business combination activities important to understanding our ongoing performance;
 

excess cost of acquired inventory;
 

expenses related to our share-based compensation;
 

significant one-time offering costs;
 

significant one-time non-recurring items (both gain or loss);
 

material extraordinary tax and other awards or settlements, both amounts paid and received; and
 

tax effects of the foregoing items.
 
   
2021
   
2020
   
2019
   
2018
   
2017
 
                               
Reconciliation of Gross profit to Adjusted Gross profit:
                             
Gross profit
 
$
171,498
   
$
133,942
   
$
148,639
   
$
163,414
   
$
197,223
 
Share-based compensation expense (a)
   
321
     
416
     
285
     
163
     
285
 
Non-recurring import related expenses (income)
   
     
     
(1,501
)
   
2,104
     
 
Amortization of assets related to acquisitions
   
852
     
529
     
     
     
 
Other non-recurring items (b)
   
     
     
1,661
     
     
 
Adjusted Gross profit
 
$
172,671
   
$
134,887
   
$
149,084
   
$
165,681
   
$
197,508
 

(a)
Share-based compensation includes expenses related to stock options and restricted stock units granted to employees and directors of the Company.
 
(b)
In 2019, reflects mainly to one-time amortization of machinery equipment with no future alternative use, and one-time inventory write down due to discontinuation of certain product group manufacturing.
 
   
2021
   
2020
   
2019
   
2018
   
2017
 
Reconciliation of Net Income to Adjusted EBITDA:
                             
Net income
 
$
17,889
   
$
7,622
   
$
12,862
   
$
24,568
   
$
27,558
 
Finance expenses, net
   
7,590
     
10,199
     
5,578
     
3,639
     
5,583
 
Taxes on income
   
1,950
     
4,700
     
6,243
     
4,560
     
7,402
 
Depreciation and amortization
   
35,407
     
29,460
     
28,587
     
28,591
     
29,926
 
Legal settlements and loss contingencies, net (a)
   
3,283
     
6,319
     
12,359
     
8,903
     
24,797
 
Contingent consideration adjustment related to acquisition
   
284
     
     
     
     
 
Share-based compensation expense (b)
   
1,845
     
2,858
     
3,632
     
1,684
     
5,277
 
Provision for employee fringe benefits (c)
   
     
     
     
     
(114
)
Non-recurring import related expense (income)
   
     
     
(1,501
)
   
2,104
     
 
Acquisition-related expenses
   
     
921
     
     
     
 
Other non-recurring items (d)
   
     
     
1,286
     
1,157
     
 
Adjusted EBITDA
 
$
68,248
   
$
62,079
   
$
69,046
   
$
75,206
   
$
100,429
 
 
(a)
Consists of legal settlements expenses and loss contingencies, net related to product liability claims and other adjustments to ongoing legal claims, including related legal fees. In 2017, this also includes Kfar Giladi arbitration results.
 
(b)
Share-based compensation includes expenses related to stock options and restricted stock units granted to employees and directors of the Company.
 
(c)
In 2017, relates to an adjustment of provision for taxable employee fringe benefits as a result of a settlement with the Israel Tax Authority and with the NII.
 
(d)
In 2019, relates to non-recurring expenses related to North American region establishment, one-time charge related to reduction in headcount and certain activities including discontinuation of certain product group manufacturing, and in 2018 also relocation expenses of Caesarstone USA headquarters (Company’s subsidiary).
 
49


   
2021
   
2020
   
2019
   
2018
   
2017
 
Reconciliation of Net Income Attributable to Controlling Interest to Adjusted Net Income Attributable to Controlling Interest:
                             
Net income attributable to controlling interest
 
$
18,966
   
$
7,218
   
$
12,862
   
$
24,405
   
$
26,202
 
Legal settlements and loss contingencies, net (a)
   
3,283
     
6,319
     
12,359
     
8,903
     
24,797
 
Contingent consideration adjustment related to acquisition
   
284
     
     
     
     
 
Amortization of assets related to acquisitions, net of tax
   
2,391
     
446
     
     
     
 
Share-based compensation expense (b)
   
1,845
     
2,858
     
3,632
     
1,684
     
5,277
 
Provision for employee fringe benefits (c)
   
     
     
     
     
(114
)
Non-cash revaluation of lease liabilities (d)
   
2,918
     
3,189
     
3,615
     
     
 
Non-recurring import related expense (income)
   
     
     
(1,501
)
   
2,104
         
Acquisition-related expenses
   
     
921
     
     
     
 
Other non-recurring items (e)
   
     
     
2,486
     
1,157
     
 
Total adjustments before tax
   
10,721
     
13,733
     
20,591
     
13,848
     
29,960
 
Less tax on above adjustments (f)
   
1,054
     
4,488
     
6,729
     
2,168
     
6,343
 
Total adjustments after tax
 
$
9,667
   
$
9,245
   
$
13,862
   
$
11,680
     
23,617
 
Adjusted net income attributable to controlling interest
 
$
28,633
   
$
16,463
   
$
26,724
   
$
36,085
   
$
49,819
 
 
(a)
Consists of legal settlements expenses and loss contingencies, net related to product liability claims and other adjustments to ongoing legal claims, including related legal fees. In 2017, this also includes Kfar Giladi arbitration results.
 
(b)
Share-based compensation includes expenses related to stock options and restricted stock units granted to employees and directors of the Company.
 
(c)
Relates to an adjustment of provision for taxable employee fringe benefits as a result of a settlement with the Israel Tax Authority and with the NII made during 2017.
 
(d)
Exchange rate differences deriving from revaluation of lease contracts in accordance with FASB ASC 842.
 
(e)
In 2019, relates to non-recurring expenses related to North American region establishment, one time charge related to reduction in headcount and certain activities including discontinuation of certain product group manufacturing, one time amortization of machinery equipment with no future alternative use, and in 2018 also relocation expenses of Caesarstone USA headquarters (Company’s subsidiary).
 
(f)
Based on the effective tax rates of the relevant periods.
 
C.
Organizational Structure
 
The legal name of our company is Caesarstone Ltd. On June 9, 2016, the Israeli Register of Companies approved to change our name from Caesarstone Sdot-Yam Ltd. to Caesarstone Ltd.
 
Caesarstone was organized under the laws of the State of Israel. We have five direct wholly-owned subsidiaries: Caesarstone Australia PTY Limited, which is incorporated in Australia, Caesarstone South East Asia PTE LTD, which is incorporated in Singapore, Caesarstone (UK) Ltd., which is incorporated in the United Kingdom, Caesarstone Canada Inc., which is incorporated in Canada, and Caesarstone USA, Inc., which, together with its two wholly-owned subsidiaries, Caesarstone Technologies USA, Inc. and Omicron, are incorporated in the United States. In addition, following the Lioli Acquisition, Caesarstone Ltd. holds a majority interest of Lioli, incorporated in India, and therefore is consolidating the results of its operations in our Consolidated Financial Statements.
50

 
In 2019, we transitioned into a new regional structure which consists of North America, APAC, EMEA and Israel.
 
D.
Property, Plants and Equipment
 
Our manufacturing facilities are located in Israel, the United States and India. The following table sets forth our most significant facilities as of December 31, 2021:
 
Properties
Issuer’s Rights
Location
Purpose
Size
Kibbutz Sdot-Yam(1)
Land Use Agreement
Caesarea, Central Israel
Headquarters, manufacturing facility, research and development center
Approximately 30,000 square meters of facility and approximately 48,000 square meters of un-covered yard*
Bar-Lev Industrial Park manufacturing facility(2)
Land Use Agreement & Ownership
Carmiel, Northern Israel
Manufacturing facility
Approximately 23,000 square meters of facility and approximately 50,000 square meters of un-covered yard**
Belfast Industrial Center(3)(4)
Ownership
Richmond Hill, Georgia, United States
Manufacturing facility
Approximately 26,000 square meters of facility and approximately 401,000 square meters of un-covered yard (excluding 56,089 square meters of wetland)
Bharat Nagar(5)
Ownership
Morbi, Gujarat, India
Manufacturing facility
Approximately 60,000 square meters of facility and approximately 55,000 square meters of open land, gas yard, effluent treatment plant, labor colony and roads

* Square-meter figures with respect to properties in Israel are based on data measured by the relevant municipalities used for local tax purposes.
 
** Square-meter figures based on data used by Israeli municipalities for local tax purpose is adjusted to reflect the property leased from Kibbutz Sdot-Yam as agreed between us and the Kibbutz during 2014. This does not include additional 5,000 square meters adjacent to the manufacturing facility, which we acquired in December 2019.
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(1)
Leased pursuant to a land use agreement with Kibbutz Sdot-Yam entered in March 2012 with a term of 20 years, which replaced the former land use agreement. Starting from September 2014 we use an additional 9,000 square meters pursuant to Kibbutz Sdot-Yam’s consent under terms materially similar to the land use agreement. However, we have the right to return such additional office space and premises to Kibbutz Sdot-Yam at any time upon 90 days’ prior written notice. In September 2016, we exercised our right to return to the Kibbutz an additional office space of approximately 400 square meters which we used since January 2014 under terms materially similar to the land use agreement. The lands on which these facilities are located are held by the ILA and leased or subleased by Kibbutz Sdot-Yam pursuant to agreements described in “ITEM 7.B: Major Shareholders and Related Party Transactions—Related Party Transactions—Relationship and agreements with Kibbutz Sdot-Yam—Land use agreement.”
 

(2)
We own 2,673 square meters of facility and 2,550 square meters of uncovered yard, and the remainder is leased pursuant to a land use agreement with Kibbutz Sdot-Yam entered into in March 2011, with a term of 10 years commencing in September 2012, which will be automatically renewed, unless we give two years’ prior notice, for an additional 10-year term. In 2021, the agreement was extended for an additional ten year period. This agreement was executed simultaneously with the land purchase and leaseback agreement we entered into with Kibbutz Sdot-Yam, according to which Kibbutz Sdot-Yam acquired from us our rights in the lands and facilities of the Bar-Lev industrial center, under a long term lease agreement we entered into with the ILA on June 6, 2007 to use the premises for an initial period of 49 years as of February 6, 2005, with an option to renew for an additional term of 49 years as of the end of the initial period. For more information, see “ITEM 7.B: Major Shareholders and Related Party Transactions—Related Party Transactions—Relationship and agreements with Kibbutz Sdot-Yam—Land purchase agreement and leaseback.”
 

(3)
On September 17, 2013, we entered into a purchase agreement for the purchase of approximately 45 acres of land in Richmond Hill, Georgia, United States, comprising approximately 36.6 acres of upland and approximately 9 acres of wetland for our new U.S. manufacturing facility, the construction of which was completed in 2015. On June 22, 2015, we exercised a purchase option in the agreement and acquired approximately 19.4 acres of land, comprising approximately 18.0 acres of upland. On November 25, 2015, we entered into a new purchase agreement for the purchase of approximately 54.9 acres of additional land situated adjacent to the previously purchased land, comprising approximately 51.1 acres of upland.
 

(4)
In December 2014, we entered into a bond purchase loan agreement, were issued a taxable revenue bond on December 1, 2014, and executed a corresponding lease agreement. Pursuant to these agreements, the Development Authority of Bryan County, an instrumentality of the State of Georgia and a public corporation (“DABC”), has acquired legal title of our facility in Richmond Hill, in the State of Georgia, U.S., and in consideration leased such facilities back to us. In addition, the facility was pledged by DABC in favor of us and DABC has committed to re-convey title to the facility to us upon the maturity of the bond or at any time at our request, upon our payment of $100 to DABC. Therefore, we consider such facilities to be owned by us. This arrangement was structured to grant us property tax abatement for ten years at 100% and additional five years at 50%, subject to our satisfying certain qualifying conditions with respect to headcount, average salaries paid to our employees and the total capital investment amount in our U.S. plant. In December 2015, we entered into an additional bond purchase loan agreement with the Development Authority of Bryan County, and were issued a second taxable revenue bond on December 22, 2015, to cover additional funds and assets which were utilized in the framework of constructing, acquiring and equipping our U.S. facility. If we were to expand our current U.S. facility, we would have been entitled to an additional taxable revenue bond and a corresponding property tax abatement. In 2017, we notified DABC that we will not be utilizing such additional bond at this time and, accordingly, it has expired.
 

(5)
In October 2020, we acquired a majority stake, in Lioli, which owns the Bharat Nagar facility in Morbi, Gujarat, India. For more information on our title to the property in Morbi, Gujarat, India, see “ITEM 3.D. Key Information—Risk Factors—Operational Risks—Fully integrating Lioli’s and Omicron’s businesses may be more difficult, costly and time-consuming than expected, which may adversely affect our results of operations and the value of our common shares.”
 
For further discussion and details of the productive capacity of our facilities, see “ITEM 4.B: Information on the Company—Business Overview—Manufacturing and Facilities.” Various environmental issues may affect our utilization of the above-mentioned facilities. For a further discussion, see “Item 4.B. Information on the Company—Business Overview—Environmental and Other Regulatory Matters—Environmental and Health and Safety Regulations” above.
 
52




ITEM 4A: Unresolved Staff Comments
 
Not applicable.
 
ITEM 5: Operating and Financial Review and Prospects
 
A.
Operating Results
 
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial information presented in “ITEM 3: Key Information,” our audited consolidated balance sheets as of December 31, 2021 and 2020, the related consolidated income statements and cash flow statements for each of the three years ended December 31, 2021, 2020 and 2019, and related notes and the information contained elsewhere in this annual report. Our financial statements have been prepared in accordance with U.S. GAAP. See “ITEM 3.D: Key InformationRisk Factors” and “Special Note Regarding Forward-Looking Statements.”
 
Company overview
 
We are a leading manufacturer and reseller of high-end engineered surfaces used primarily as countertops in residential and commercial buildings. We design, develop and produce engineered quartz and porcelain products that offer aesthetic appeal and functionality through a distinct variety of colors, styles, textures, and finishes used in countertops, vanities, and other interior and exterior surfaces. Our high-quality engineered quartz surfaces are marketed and sold under our premium Caesarstone brand. We have grown to become one of the largest global providers of engineered quartz surfaces. Our products accounted for approximately 5% of global engineered quartz by volume in 2020. Our sales in the United States, Australia (including New Zealand), Canada and Israel, our four largest markets, accounted for 47.4%, 18.4%, 13.1% and 6.1% of our revenues in 2021. We believe that our revenues will continue to be highly concentrated among a relatively small number of geographic regions for the foreseeable future. For further information with respect to our geographic concentration, see “ITEM 3.D: Key Information—Risk Factors—Our revenues are subject to significant geographic concentration and any disruption to sales within one of our key existing markets could materially and adversely impact our results of operations and prospects.”
 
Between 2010 to 2021, our revenue grew at a compound annual growth rate of 11.3% driven mainly by the continued quartz penetration and the Lioli and Omicron acquisitions, increased remodeling spending in all our top three markets and growth in the residential segment in the United States, our largest market. In addition, the portion of innovative designs within our offering increased over time. Revenue increased by 32.4% between 2020 and 2021. See “—Comparison of period-to-period results of operations—Year ended December 31, 2021 compared to year ended December 31, 2020—Revenues” for additional information. From 2020 to 2021, our adjusted gross profit margin decreased from 27.5% to 26.6%, adjusted EBITDA margin decreased from 12.8% to 10.6%, and adjusted net income margin attributable to controlling interest increased from 3.4% to 4.4% over the same period. We define each of such margins by dividing adjusted gross profit, adjusted EBITDA and adjusted net income attributable to controlling interest, respectively, by revenues. Adjusted EBITDA and adjusted net income attributable to controlling interest are non-GAAP financial measures, see “ITEM 8.B: Business Overview—Non-GAAP Financial Measures” for a description of how we define adjusted EBITDA and adjusted net income attributable to controlling interest and reconciliations of net income to adjusted EBITDA and net income attributable to controlling interest to adjusted net income attributable to controlling interest. We attribute the decrease in the adjusted EBITDA margin mainly due to higher raw material prices, particularly polyester, and shipping price increases which were partially offset by favorable product mix, selling price increases, and more favorable exchange rates.
53

 
Our mission is to be the first brand of choice for countertops all around the world. We believe that a significant portion of our future growth will come from our U.S. market where we see the greatest growth opportunity. We believe that transitioning to direct sales will contribute to our future growth in the long term. We believe that in order to remain competitive in the long term, we will need to grow our business both organically and through acquisitions.
 
As part of the Company’s business growth strategy, strategic acquisitions are considered opportunities to enhance our value proposition through differentiation and competitiveness. In recent years and as further described below, we have successfully executed on this strategy, including our 2020 acquisitions of Lioli, an India-based developer and producer of porcelain countertop slabs with manufacturing facilities in Asia, and Omicron, a premier stone supplier operating in several locations across the United States in Florida, Ohio, Michigan and Louisiana, which now operate as part of our United States operations. Under the terms of the transaction agreement, Caesarstone acquired Omicron for an approximately $19 million. For more information, see “2020 Acquisitions” below
 
Factors impacting our results of operations
 
We consider the following factors to be important in analyzing our results of operations:
 

Our sales are impacted by home renovation and remodeling and new residential construction, and to a lesser extent, commercial construction. We estimate (supported by the Freedonia Report), that approximately 60%-70% of our revenue in our main markets (U.S., Australia, Canada) is related to residential renovations and remodeling activities, while 30%-40% is related to new residential construction.
 

Our revenues and results of operations exhibit some quarterly fluctuations as a result of seasonal influences which impact construction and renovation cycles. Due to the fact that certain of our operating costs are fixed, the impact of such fluctuations on our profitability is material. We believe that the second and third quarters tend to exhibit higher sales volumes than the other quarters because demand for our surfaces and other products is generally higher during the summer months in the northern hemisphere with the effort to complete new construction and renovation projects before the new school year. Conversely, the first quarter is typically impacted by the winter slowdown in the northern hemisphere in the construction industry and might impact sales in Israel depending on the timing of the spring holiday a particular year. Similarly, sales in Australia during the first quarter are negatively impacted by fewer construction and renovation projects. The fourth quarter is susceptible to being impacted by the onset of winter in the northern hemisphere although the fourth quarter of 2021 demonstrated higher revenues not in line with this trend given the increased demand to our products.
 

We conduct business in multiple countries in North America, South America, Europe, Asia-Pacific, Australia and the Middle East and as a result, we are exposed to risks associated with fluctuations in currency exchange rates between the U.S. dollar and certain other currencies in which we conduct business. A significant portion of our revenues is generated in U.S dollar, and to a lesser extent the Australian dollar, Canadian dollar, Euro and NIS. In 2021, 50% of our revenues were denominated in U.S. dollars, 18.4% in Australian dollars, 13.1% in Canadian dollars, 6.0% in Euros and 6.0% in NIS. As a result, devaluations of the Australian dollars, and to a lesser extent, the Canadian dollar relative to the U.S. dollar may unfavorably impact our profitability. Our expenses are largely denominated in U.S. dollars, NIS and Euro, with a smaller portion in Australian dollars and Canadian dollars. As a result, appreciation of the NIS, and to a lesser extent, the Euro relative to the U.S. dollar may unfavorably affect our profitability. We attempt to limit our exposure to foreign currency fluctuations through forward contracts, which, except for U.S. dollar/NIS forward contracts, are not designated as hedging accounting instruments under ASC 815, Derivatives and Hedging. As of December 31, 2021, we had total outstanding forward contracts with a notional amount of $75.8 million. These transactions were for a period of up to 12 months. The fair value of these foreign currency derivative contracts was positive $1.4 million, which is included in current assets and current liabilities, as of December 31, 2021. For further discussion of our foreign currency derivative contracts, see “ITEM 11: Quantitative and Qualitative Disclosures About Market Risk.” In addition, we entered derivative instruments not designated as hedging accounting to partially manage our exposure to fluctuations of styrene prices. As of December 31, 2021, we had one outstanding forward contract, related to styrene prices, with a notional amount of $0.3 million. This transaction was for a period of 1 month. The fair value of this styrene forward derivative contract was positive $0.2 million, which is included in current assets, as of December 31, 2021.
 
54

Components of statements of income
 
Revenues
 
We derive our revenues from sales of quartz and, to a lesser extent, other surfaces and materials, mostly to fabricators and resellers in our direct markets and to third-party distributors in our indirect markets. In the United States, Australia, Canada and Singapore the initial purchasers of our products are primarily fabricators. In Israel, the purchasers are a small number of local distributors who, in turn, sell to fabricators. In the United States, we also sell our products to a small number of sub-distributors, stone resellers as well as to large retailers. The purchasers of our products in our other markets are our third-party distributors who, in turn, sell to sub-distributors and fabricators. Our direct sales accounted for 90%, for the years ended December 31, 2021.
 
Revenue is recognized when a customer obtains control of promised goods or services in an amount that reflects the consideration the entity expects to receive in exchange for those goods or services.
 
The warranties that we provide vary by market. In our indirect markets, we provide all our distributors with a limited direct manufacturing defect warranty. In all our indirect markets, distributors are responsible for providing warranty coverage to end-customers. In Australia, Canada, the United States, the United Kingdom and Singapore we provide end-consumers with a limited warranty on our products for interior countertop applications. In Israel, we typically provide end-consumers with a direct limited manufacturing defect warranty on our products. Based on historical experience, warranty issues are generally identified within one and a half years after the shipment of the product and a significant portion of defects are identified before installation. We record a reserve on account of possible warranty claims, included in our cost of revenues. Historically, warranty claims expenses have been low, accounting for approximately 0.3% of our total cost of goods sold in 2021.
 
The following table sets forth the geographic breakdown of our revenues during the periods indicated:
 
   
Year ended December 31,
 
   
2021
   
2020
    2019  
Geographical Region
 
% of total revenues
   
Revenues in thousands of USD
   
% of total revenues
   
Revenues in thousands of USD
   
% of total revenues
   
Revenues in thousands of USD
 
United States
   
47.4
%
 
$
305,353
     
42.7
%
 
$
207,496
     
45.9
%
 
$
250,471
 
Canada
   
13.1
     
84,467
     
14.9
     
72,492
     
15.7
     
85,979
 
Latin America
   
0.7
     
4,702
     
0.4
     
2,149
     
0.8
     
4,115
 
Australia (incl. New Zealand)
   
18.4
     
118,714
     
21.3
     
103,587
     
19.8
     
108,150
 
Asia
   
4.7
     
30,390
     
3.0
     
14,566
     
2.8
     
15,514
 
EMEA
   
9.4
     
60,836
     
9.3
     
45,201
     
7.9
     
43,054
 
Israel
   
6.1
     
39,430
     
8.4
     
40,921
     
7.1
     
38,692
 
Total
   
100
%
 
$
643,892
     
100.0
%
 
$
486,412
     
100.0
%
 
$
545,974
 

Revenue in 2021 was $643.9 million compared to $486.4 million in the prior year. On a constant currency basis, 2021 revenue was higher by 28.1% year-over-year, mainly due to the Omicron and Lioli acquisitions and an increase in demand for our products. The decrease in 2020 revenues compared to 2019 on a constant currency basis was 11.0% and was mainly due to 2020 COVID-19 impacts.
55

 
Revenues in the U.S. increased by 47.2% in 2021 compared to a decline of 17.2% in 2020. The increase in 2021 also included the impact of the initial consolidation of Omicron results commencing January 1, 2021.
 
Revenues in Canada increased by 16.5% in 2021 compared to a decline of 15.7% in 2020, representing a 9.0% increase and 15.1% decrease on a constant-currency basis, respectively.
 
Revenues in Latin America increased by 118.9% in 2021 compared to a decrease of  47.8% in 2020.
 
Revenues in Australia increased by 14.6% in 2021 compared to a decrease of 4.2% in 2020. On a constant currency basis, revenues in Australia increased by 5.2% in 2021 and declined by 3.7% in 2020.
 
Revenues in Asia increased by 108.6% in 2021 compared to a decrease of 6.1% in 2020. On a constant currency basis, revenues in Asia increased by 107% in 2021 and declined by 5.4% in 2020. The increase in 2021 compared to 2020 is also attributed to the consolidation of Lioli commencing October, 2020.
 
Revenues in EMEA increased by 34.6% in 2021 and by 5.0% in 2020. On a constant-currency basis, revenue increased in EMEA by 28.2% in 2021 and 4.1% in 2020.
 
Revenues in Israel decreased by 3.6% in 2021 compared to an increase of 5.8% in 2020. On a constant currency basis, revenues decreased by 9.3% in 2021 and  increased by 2% in 2020.
 
For additional information, see “—Comparison of period-to-period results of operations—Year ended December 31, 2021 compared to year ended December 31, 2020—Revenues.”
 
Cost of revenues and gross profit margin
 
Our cost of revenues includes the cost of manufactured products sold as well as the cost of purchased products from third parties such as quartz, ceramic, natural stone and other ancillary products. We experienced increased costs that are connected with the global supply chain environment and the increase in cost of our two main components of the manufactured items, the quartz and polyester. Approximately 29% of our cost of revenues is raw material costs. The cost of our raw materials consists of the purchase prices of such materials and costs related to the logistics of delivering the materials to our manufacturing facilities, but does not include raw materials included in products not manufactured by us. Our raw materials costs are also impacted by changes in foreign exchange rates. Our principal raw materials, quartz and polyester jointly accounted for approximately 69% of our total raw material cost in 2021. The balance of our cost of revenues consists primarily of manufacturing costs, related overhead and the cost of other products not manufactured by us. Cost of revenues in our direct distribution channels also includes the cost of delivery from our manufacturing facilities to our warehouses, warehouse operational costs, as well as additional delivery costs associated with the shipment of our products to customer sites in certain markets. In the U.S. and Canada, we also incur fabrication and installation costs related to retail sales and other commercial building projects. In the case of our indirect distribution channels, we bear the cost of delivery to the seaport closest to our production plants and our distributors bear the cost of delivery from the seaport to their warehouses.
 
Quartz is one of our principal raw materials. In 2021, approximately 62% of our total quartz was from several suppliers in Turkey, with the major part acquired from Mikroman and Polat.
 
Quartz accounted for approximately 33.8% of our raw materials cost in 2021. Accordingly, our cost of sales and overall results of operations are impacted significantly by fluctuations in quartz prices. In 2021 and 2020, the average cost of quartz increased by 12% and  3.2%, respectively.  The increase in 2021 was primarily due to an increase in shipping costs, while the increase in 2020 was mainly due to a more expensive sand mix, caused by a more expensive product mix, and to a lesser extent by an increase in shipping costs. Any future increases in quartz costs may adversely impact our margins and net income.
 
Given the significance of polyester costs relative to our total raw material expenditures, our cost of sales and overall results of operations are impacted significantly by fluctuations in polyester prices, which generally correlate with benzine prices. In 2021, our average polyester costs increased by approximately 54.1% as a result of market conditions (a sharp increase in cost of raw materials composing resin due to higher energy prices affected by the COVID-19 pandemic).  In 2020, our average polyester costs decreased by approximately 18%, due to market conditions (led by lower energy prices affected by the COVID-19 pandemic) and adding alternative suppliers. Any future increases in polyester costs may adversely impact our margins and net income.
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We are exposed to fluctuations in the prices of pigments, although to a lesser extent than with polyester. For example, the cost of titanium dioxide, our principal white pigmentation agent, increased in 2021 by approximately 16.4% due to its manufacturing process which consumes a lot of energy and increased in price. Any future increases in pigments costs may adversely impact our margins and net income.
 
The gross profit margins on sales in our direct markets are generally higher than in our indirect markets in which we use third-party distributors, due to the elimination of the third-party distributor’s margin. In many markets, our expansion strategy is to work with third-party distributors who we believe will be able to increase sales more rapidly in their market and more cost effective than if we distributed our products directly. However, in several markets we distribute directly, including the United States, Australia, Canada and in the United Kingdom Singapore and India. In the future, we intend to evaluate other potential markets to distribute directly.
 
Research and development, net
 
Our research and development expenses consist primarily of salaries and related personnel costs, as well as costs for subcontractor services and costs of materials consumed in connection with the design and development of our products. We expense all our research and development costs as incurred.
 
Marketing and selling
 
Marketing and selling expenses consist primarily of compensation and associated costs for personnel engaged in sales, marketing, distribution and advertising and promotional expenses. In 2021 our advertising and promotional expenses as well as marketing assistance expenses increased mainly to support growth in demand and revenues. In 2020 our expenses decreased due to the cost-cutting efforts we implemented due to COVID-19. In each of 2020 and 2019, our expenses decreased as part of our cost-savings initiatives mainly attributed to the U.S. and the decrease was also partially attributable to the formation of the North America region at the beginning of 2020 that yielded cost savings due to synergies. This was partially offset by increased costs in the United Kingdom to support growth in the newly established direct distribution operations.
 
General and administrative
 
General and administrative expenses consist primarily of compensation and associated costs for personnel engaged in finance, human resources, information technology, legal and other administrative activities, as well as fees for legal and accounting services. See “—Other factors impacting our results of operations—Agreements with Kibbutz Sdot-Yam” and “ITEM 7: Major Shareholders and Related Party Transactions—Related Party Transactions.”
 
Legal settlements and loss contingencies, net
 
Legal settlements and loss contingencies, net consists of expenses related to settlements expenses and estimated exposure not covered by our insurance applicable to individual silicosis claims and other ongoing claims. We recorded $3.3 million of such expenses in 2021, $6.3 million in 2020 and $12.4 million in 2019. The decrease from 2020 to 2021 is mainly attributed to a refund we received in 2021 from our insurance company in connection with the class action litigation in Israel. See “—Financial Information—Consolidated Financial Statements and Other Financial Information—Legal Proceedings—Claim by former South African distributor”.
 
Finance expenses, net
 
Finance expenses, net, consist primarily of bank and credit card fees, borrowing costs and exchange rate differences arising from changes in the value of monetary assets and monetary liabilities stated in currencies other than the functional currency of each entity. These expenses are partially offset by interest income on our cash balances and gains on derivative instruments. The decrease in finance expenses during 2021 related mainly to realized and unrealized gains on derivatives not designated as hedge instruments.
57

 
Corporate taxes
 
As we operate in a number of countries, our income is subject to taxation in different jurisdictions with a range of tax rates. Our effective tax rate was 9.8% in 2021, 38.1% in 2020 and 32.7% in 2019. In 2020, a higher portion of our pre-tax income was attributable to our subsidiaries which are subject to higher tax rates compared to our income derived in Israel. In 2021 the lower effective tax rate is attributable mainly to taxable losses in certain entities and to deferred tax assets recorded to capture carry-forward NOLs.
 
The standard corporate tax rate for Israeli companies was 23% in each of 2021, 2020 and 2019. Our non-Israeli subsidiaries are taxed according to the tax laws in their respective countries of origination.
 
Effective January 1, 2011, with the enactment of Amendment No. 68 to the Israeli Tax Law, both of our Israeli facilities operate under a consolidated “Preferred Enterprise” status. The “Preferred Enterprise” status provides the portion related to the Bar-Lev manufacturing facility with the potential to be eligible for grants of up to 20% of the investment value in approved assets and a reduced flat corporate tax rate, which applies to the industrial enterprise’s entire preferred income, 7.5% in 2017 onward. For the portion related to the Sdot-Yam facility, this status provides us with a reduced flat corporate tax rate, which applies to the industrial enterprise’s entire preferred income, which was 16% during the same period.
 
In December 2017, the U.S. enacted significant tax reform commencing with the year ended December 31, 2017, including, but not limited to (1) reducing the U.S. federal corporate income tax rate to 21% effective 2018; and (2) imposing a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries of U.S. companies that had not been previously taxed in the U.S.
 
The TCJA also established new tax provisions affecting 2018, including, but not limited to (1) creating a new provision designed to tax global intangible low-tax income; (2) generally eliminating U.S. federal taxes on dividends from foreign subsidiaries; (3) eliminating the corporate alternative minimum tax; (4) creating the base erosion anti-abuse tax; (5) establishing a deduction for foreign derived intangible income; (6) repealing the domestic production activity deduction; and (7) establishing new limitations on deductible interest expense and certain executive compensation.
 
The reduction of the U.S. federal corporate income tax rate required us to remeasure our deferred tax assets and liabilities as of the date of enactment. For the year ended December 31, 2017, we decreased the net deferred tax liability as a result of such remeasurement, resulting in tax income benefit for the year ended December 31, 2017.
 
As of December 31, 2019, certain provisions of the TCJA remains subject to Internal Revenue Service as well as state tax authorities’ guidance and interpretation which could have a material adverse effect on our cash tax liabilities, results of operations, and financial condition. In addition, the TCJA could be subject to potential amendments and technical corrections, any of which could materially lessen or increase certain adverse impacts of the legislation on us and our business. We will continue to evaluate the effects of the TCJA on us as federal and state tax authorities issue additional regulations and guidance.
 
On March 27, 2020, the CARES Act was enacted in response to the COVID-19 pandemic. The CARES Act has a number of beneficial tax provisions. Among the provision of the CARES Act, the business interest deduction limit under Code Sec. 163(j) is increased to 50 percent of our adjusted taxable income in the U.S. for tax year 2020. In addition, Net operating losses (NOLs) arising in tax years beginning in 2019, 2020, and 2021 now have a five-year carryback period and an unlimited carryforward period. Under the CARES Act we carryback our U.S. NOL for the year ended December 31, 2021 to prior taxable years.
 
For more information about the tax benefits available to us as an Approved Enterprise or as a Beneficiary Enterprise or as Preferred Enterprise, see “ITEM 10.E: Additional Information—Taxation—Israeli tax considerations and government programs.”
58

 
Net income attributable to non-controlling interest
 
In October 2020, we acquired a majority stake in Lioli and for the year ended on December 31, 2021, 45% of Lioli’s net income was attributed to its minority shareholders. In 2021, Lioli had a net loss of approximately $2.4 million.
 
Other factors impacting our results of operations
 
Share-based compensation
 
We recorded share-based compensation expenses of $1.8 million, $2.9 million and $3.6 million in 2021, 2020 and 2019, respectively, and expect to record $2.7 million over a weighted average period of 3.1 years from December 31, 2021. For more information, see also Note 13 to our financial statements included elsewhere in this report.
 
Agreements with Kibbutz Sdot-Yam
 
We are party to a series of agreements with our largest shareholder, the Kibbutz, which govern different aspects of our relationship. Pursuant to these agreements, in consideration for using facilities leased to us or for services provided by the Kibbutz, we paid to the Kibbutz an aggregate of $11.0 million in 2021, $9.4 million in 2020 and $9.5 million in 2019 (excluding VAT). During 2021 and following the assessment of an appointed appraiser, the fees under the lease agreements were increased and adjusted for 2021 onwards for total annual amount of approximately NIS 26.7 million (approximately $8.6 million), linked to the Israeli consumer price index.
 
For more information on these agreements, see “ITEM 7.B: Major Shareholders and Related Party Transactions—Related Party Transactions.”
 
Management Services Agreement with Tene
 
In November 2021, we entered into a management services agreement with Tene Growth Capital 3 Funds Management Company Ltd., the management company of the general partner of Tene Investment in Projects 2016, L.P., pursuant to which Tene Investment in Projects 2016, L.P. provides us with the services of an Executive Chairman of the Board (by Dr. Ariel Halperin), the services of an additional director (by Mr. Dori Brown) and regular business development advice for an aggregate annual management fee of NIS 870,000 plus VAT and expenses. The payment due pursuant to the Management Services Agreement replaced all other arrangements for payment to Dr. Ariel Halperin and Mr. Dori Brown as Chairman of the board of directors or director during the term of the Management Services Agreement.
 
For more information on these agreements, see “ITEM 7.B: Major Shareholders and Related Party Transactions—Related Party Transactions.”
 
2020 Acquisitions
 
Lioli Acquisition. On August 31, 2020, the Company entered into a definitive agreement with Lioli to acquire a majority stake in Lioli, an India-based developer and producer of porcelain countertop slabs with manufacturing facilities in Asia. The terms of the agreement provided that at the first closing the Company would pay a cash investment of approximately $12 million, representing an enterprise value of approximately $34 million, including the assumption of debt of approximately $17.9 million and additional consideration of up to approximately $10 million to be paid in case certain conditions are to be met. As part of the Lioli Acquisition, the Company granted Lioli’s minority shareholders a put option under which they have the right to require us to purchase their remaining shares in Lioli, and likewise, the Company has a call option under which we have the right to require the minority shareholders to sell us their minority shares in Lioli. The consideration to be paid for the shares transferred pursuant to these options is based on an EBITDA multiplier. These options become exercisable as of April 1, 2024 and until the 20th anniversary of the Lioli Acquisition.  During March 2022, we invested an additional $2.5 million in Lioli by subscribing for new securities, thereby increasing our ownership percentage to 66.4% of Lioli’s outstanding shares, constituting 60.4% of Lioli’s shares on a fully diluted basis.
 
Omicron Acquisition. On December 31, 2020, the Company simultaneously signed and closed on its transaction to acquire the entire membership interests Omicron, a premier stone supplier operating in several locations across the United States in Florida, Ohio, Michigan and Louisiana, which now operate as part of our United States operations. Under the terms of the transaction agreement, Caesarstone acquired Omicron for an approximately $19 million.
59

 
Comparison of period-to-period results of operations
 
The following table sets forth our results of operations as a percentage of revenues for the periods indicated:
 
 
 
Year ended December 31,
 
 
 
2021
   
2020
   
2019
 
 
 
Amount
   
% of Revenue
   
Amount
   
% of Revenue
   
Amount
   
% of Revenue
 
 
 
(in thousands of U.S. dollars)
 
 
                                   
Consolidated Income Statement Data:
                                   
Revenues:
 
$
643,892
     
100
%
 
$
486,412
     
100
%
 
$
545,974
     
100.0
%
Cost of revenues
   
472,394
     
73.4
     
352,470
     
72.5
     
397,335
     
72.8
 
Gross profit
   
171,498
     
26.6
     
133,942
     
27.5
     
148,639
     
27.2
 
Operating expenses:
                                               
Research and development, net
   
4,216
     
0.7
     
3,974
     
0.8
     
4,146
     
0.8
 
Marketing and selling
   
85,725
     
13.3
     
62,047
     
12.8
     
66,770
     
12.2
 
General and administrative
   
50,845
     
7.9
     
39,081
     
8.0
     
40,681
     
7.5
 
Legal settlements and loss contingencies, net
   
3,283
     
0.5
     
6,319
     
1.3
     
12,359
     
2.3
 
Total operating expenses
   
144,069
     
22.4
     
111,421
     
22.9
     
123,956
     
22.7
 
Operating income
   
27,429
     
4.3
             
4.6
     
24,683
     
4.5
 
Finance expenses, net
   
7,590
     
1.2
     
22,521
     
2.1
     
5,578
     
1.1
 
Income before taxes on income
   
19,839
     
3.1
     
10,199
     
2.5
     
19,105
     
3.5
 
Taxes on income
   
1,950
     
0.3
     
4,700
     
0.9
     
6,243
     
1.1
 
Net income
 
$
17,889
     
2.8
%
 
$
7,622
     
1.6
%
 
$
12,862
     
2.4
%
Net income (loss) attributable to non-controlling interest
   
(1,077
)
   
(0.2
)
   
404
     
0.1
     
     
 
Net income attributable to controlling interest
 
$
18,966
     
2.9
%
 
$
7,218
     
1.5
%
 
$
12,862
     
2.4
%

Year ended December 31, 2021 compared to year ended December 31, 2020
 
Revenues
 
Revenues  increased by $157.5 million, or  32.4%, to $ 643.9 million in 2021 from $ 486.4 million in 2020 mainly due to the Omicron and Lioli acquisitions, and an increase in demand for our products across most regions.
 
Cost of revenues and gross profit margins
 
Cost of revenues in 2021 amounted to $472.4 million compared to $352.5 million in 2020 as a result of the higher revenues generated during 2021. Gross profit increased from $133.9 million in 2020 to $171.5 million in 2021, with a decrease in gross margin of 90 basis points, from 27.5% in 2020 to 26.6% in 2021. The decrease in gross margin mainly reflects higher raw material prices, particularly polyester, and shipping price increases which were partially offset by favorable product mix, selling price increases, and more favorable exchange rates.
 
Operating expenses
 
Research and development. Research and development expenses remained relatively unchanged and amounted to $4.2 million in 2021 and $4.0 million in 2020.
 
Marketing and selling. Marketing and selling expenses increased by $23.7  million, or  38.2%, to $ 85.7 million in 2021 from $62.0 million in 2020. Marketing expenses as percent of revenue increased from 12.8% in 2020 to 13.3% in 2021. This was mainly to support growth in demand and revenues and also as a result of the consolidation of the recently acquired businesses of Omicron and Lioli. In 2020, our expenses decreased due to the cost-cutting efforts caused by COVID-19 and to a lesser extent government pandemic grants.
60

 
General and administrative. General and administrative expenses increased by $ 11.8 million, or 30.1%, to $50.8 million in 2021 from $39.0 million in 2020. This increase is mainly due to COVID-19 cost cutting in 2020 and Omicron and Lioli acquisition consolidated during the entire 2021.
 
Legal settlements and loss contingencies, net. Legal settlements and loss contingencies, net, decreased by $3.0 million, or  48%, from $6.3 million in 2020 to $3.3 million in 2021. This decrease is mainly attributed to a refund received in 2021 from our insurance carrier in connection with the bodily injury class action in Israel.

Finance expenses, net
 
Finance expenses decreased to $7.6 million in 2021 from $10.2 million in 2020. The difference was primarily a result of higher income from the Company’s derivatives instruments mainly attributed to the styrene hedge contracts.
 
Taxes on income
 
Taxes on income declined by $2.7 million to $2.0 million in 2021 from $4.7 million in 2020. Our effective tax rate was 9.8% in 2021 compared with 38% in 2020. This was mostly due to taxable loss in Israel, lease liability update and lower taxable income allocated to the U.S.
 
Net income attributable to non-controlling interest
 
In 2021, net loss attributable to non-controlling interest amounted to $1.1 million. In 2020 net income attributable  to non-controlling interest amounted to $0.4 million, and was fully attributable to the majority stake in Lioli acquired in the fourth quarter of 2020.
 
Year ended December 31, 2020 compared to year ended December 31, 2019
 
For a comparison of the years ended December 31, 2020 and 2019, see “ITEM 5.A. Operating and Financial Review and Prospects—Operating Results—Year ended December 31, 2020 compared to year ended December 31, 2019” included in our annual report on Form 20-F for the year ended December 31, 2020, filed with the SEC on March 22, 2021, which comparative information is herein incorporated by reference.
 
Quarterly results of operations and seasonality
 
The following table presents our unaudited condensed consolidated quarterly results of operations for the eight quarters in the period from January 1, 2020 to December 31, 2021. We also present reconciliations of gross margins to adjusted gross margins, net income to adjusted EBITDA and net income attributable to controlling interest to adjusted net income attributable to controlling interest for the same periods. This information should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this annual report. For more information on our use of non-GAAP financial measures, see “ITEM 8.B: Business Overview—Non-GAAP Financial Measures.” We have prepared the unaudited condensed consolidated quarterly financial information for the quarters presented below on the same basis as our audited consolidated financial statements. The historical quarterly results presented below are not necessarily indicative of the results that may be expected for any future quarters or periods.
61


   
Three months ended
 
   
Dec. 31, 2021
   
Sept. 30, 2021
   
June 30, 2021
   
Mar. 31, 2021
   
Dec. 31, 2020
   
Sept. 30, 2020
   
June 30, 2020
   
Mar. 31, 2020
 
   
(as a % of revenue)
 
       
Consolidated Income Statement Data:
                                               
Revenues:
   
100.0
%
   
100.0
%
   
100.0
%
   
100.0
%
   
100.0
%
   
100.0
%
   
100.0
%
   
100.0
%
Gross profit
   
23.2
     
26.2
     
28.0
     
29.7
     
28.1
     
31.4
     
20.4
     
28.8
 
Operating income (loss)
   
2.0
     
5.4
     
3.2
     
6.9
     
5.9
     
12.1
     
(2.9
)
   
1.8
 
Net income (loss)
   
(1.9
)
   
3.6
     
0.9
     
9.5
     
(1.4
)
   
10.3
     
(5.9
)
   
2.1
 

   
Three months ended
 
   
Dec. 31, 2021
   
Sept. 30, 2021
   
June 30, 2021
   
Mar. 31, 2021
   
Dec. 31, 2020
   
Sept. 30, 2020
   
June 30, 2020
   
Mar. 31, 2020
 
   
(in thousands of U.S. dollars)
 
       
Consolidated Income Statement Data:
                                               
Revenues:
 
$
171,057
   
$
163,341
   
$
163,462
   
$
146,032
   
$
136,896
   
$
123,922
   
$
99,037
   
$
126,557
 
Revenues as a percentage of annual revenue
   
26.6
%
   
25.3
%
   
25.4
%
   
22.7
%
   
28.1
%
   
25.5
%
   
20.4
%
   
26.0
%
Gross profit
 
$