Caesarstone(CSTE) - 2021 Q4 - Annual Report

Financial Performance and Costs - In 2021, 50.0% of the company's revenues were denominated in U.S. dollars, with significant portions in Australian dollars (18.4%) and Canadian dollars (13.1%) [21] - The average cost of quartz increased by 12.0% in 2021, following a 3.2% increase in 2020, impacting gross profit margins [26] - Polyester costs rose by approximately 54% in 2021, which could lead to a decrease of about 1% in gross profit margin if prices increase by 10% [27] - Raw materials accounted for approximately 29% of the cost of goods sold in 2021, with quartz making up about 33.8% of raw materials costs [26] - Rising costs of raw materials and shipping could materially and adversely affect the company's financial condition if these costs cannot be passed on to customers [22] - The company has significant intangible assets, with goodwill amounting to $45.8 million and other intangible assets totaling $9.6 million as of December 31, 2021 [29] - The company has approximately $3.8 million in unrecognized tax benefits as of December 31, 2021 [61] - The company is subject to various international operational risks, including fluctuations in exchange rates and compliance with foreign regulations [58] - The company is exposed to potential tax liabilities due to uncertainties in tax determinations and inter-company arrangements [61] Supply Chain and Operational Challenges - The company experienced disruptions in its supply chain during 2021, which are expected to continue into 2022, affecting the availability of essential raw materials [25] - The company faces challenges in managing its production and supply chain, which could lead to inefficiencies and hinder product availability [30] - The company’s operations are subject to disruptions from various factors, including COVID-19-related supply chain difficulties, which could adversely affect business performance [30] - Disruptions in the supply chain due to geopolitical tensions, such as those between Turkey and Israel, could adversely impact the company's ability to enforce supply contracts [37] - Labor disputes could result in work stoppages, impacting product output and contractual obligations, which may adversely affect financial results [87] Market and Competitive Landscape - The company faces intense competition from manufacturers of alternative surface materials, which could adversely impact its market share and financial results [28] - The company aims to expand its product offerings and grow its business in response to customer demands and competitive pressures, particularly through acquisitions like Lioli and Omicron [29] - The engineered quartz surfaces represented 20% of the total countertops by volume installed in the U.S. in 2020, indicating a significant market opportunity [33] - The company’s revenues are significantly concentrated geographically, with the four largest markets accounting for 85.1% of total revenues in 2021, specifically the U.S. (47.4%), Australia (18.4%), Canada (13.1%), and Israel (6.1%) [39] - The company faces potential legal exposure related to silicosis claims, with an estimated total net exposure of approximately $36.2 million after accounting for product liability insurance coverage [44] Regulatory and Compliance Issues - Increased media coverage regarding the hazards of exposure to respirable crystalline silica (RCS) may adversely affect consumer preferences and lead to a material decline in revenues [45] - Regulatory changes in Australia, including a new code of practice for managing RCS exposure, may disrupt the market and impose additional compliance costs on the company [46] - The Australian federal government established a national dust disease taskforce in July 2019, which may lead to further regulatory scrutiny and potential market disruptions [46] - The company faces compliance risks related to environmental and health regulations, which may result in increased costs and operational disruptions [49] - The company may incur additional expenses to comply with new regulations regarding RCS exposure, which could negatively impact financial results [47] Employee and Labor Dynamics - High turnover rates of key employees at acquired companies like Lioli could result in operational delays and negatively impact financial results [29] - The company has experienced a significant increase in employee turnover during 2021, complicating recruitment and retention efforts post-COVID-19 [96] - Labor shortages and increased turnover have led to higher employee-related costs, impacting profitability and operational efficiency [98] - The competitive market for qualified personnel has made it challenging for the company to attract and retain skilled employees, affecting business operations [97] - Increased labor costs due to shortages and turnover could materially affect the company's operations, results, liquidity, and cash flows [98] Strategic Initiatives and Growth Plans - The company is increasing its distribution network in the United States, particularly in the South, Southeast, and Ohio Valley markets, following the Omicron Acquisition [33] - The company is accelerating its strategy to acquire basic product models from third-party OEMs, primarily from China, Spain, and Italy, to optimize production capabilities [32] - The company has commenced manufacturing and sales of porcelain products, including porcelain slabs and countertops, following the Lioli Acquisition, which may face adverse tariffs impacting sales into the EEU [37] - Future acquisitions may require substantial cash usage or incur significant debt, impacting business operations and share price if perceived as overpayment [96] - Integration of acquired businesses may be difficult, costly, and time-consuming, potentially disrupting ongoing operations and management focus [96] Shareholder and Corporate Governance - As of March 11, 2022, Kibbutz Sdot-Yam and Tene beneficially owned 14,029,494 shares, constituting approximately 40.7% of the company's shares [65] - The concentration of share ownership may limit the ability of other shareholders to influence corporate matters, potentially affecting share price [77] - Future sales of ordinary shares by major shareholders could negatively impact the market price of the company’s shares [82] - The company cannot assure the amount or timing of future dividend payments and may decide not to pay dividends [73] - The company revised its dividend policy in February 2020 to provide for a quarterly cash dividend of up to 50% of reported net income attributable to controlling interest [73]