zk1618152.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 
Form 20-F
 
(Mark One)
 
 
o
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
 
OR
 
 
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended December 31, 2015
 
OR
 
 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from ______ to ______
 
OR
 
 
o
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 SDOT-YAM 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)
 
Yosef Shiran
Chief Executive Officer
Caesarstone Sdot-Yam 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
Name of each exchange on which registered
Ordinary Shares, par value NIS 0.04 per share
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, 2015: 35,294,755 ordinary shares, NIS 0.04 par value per share
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act:
 
Yes x No o
 
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 o No x
 
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 x No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (section 229.405 of this chapter), and (2) has been subject to such filing requirements for the past 90 days:
 
Yes x No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act (Check one):
     
Large accelerated filer x
Accelerated filer o
Non-accelerated filer o
 
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
     
U.S. GAAP x
International Financial Reporting Standards as issued
Other o
 
by the International Accounting Standards Board o
 
 
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 o Item 18 o
 
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 o No x
 
 
ii

 
 
PRELIMINARY NOTES
 
Introduction
 
As used herein, and unless the context suggests otherwise, the terms “Caesarstone,” “Company,” “we,” “us” or “ours” refer to Caesarstone Sdot-Yam 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 U.S. dollar. Our functional currency through June 30, 2012 was the NIS. For the periods in which our functional currency was the NIS, our consolidated financial statements were translated into U.S. dollars using the current rate method as follows: assets and liabilities were reflected using the exchange rate at the balance sheet date; revenues and expenses were reflected at the average exchange rate for the relevant period; and equity accounts were reflected using the exchange rate at the relevant transaction date. Translation gains and losses were reported as a component of shareholders’ equity. Starting on July 1, 2012, our functional currency became the 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, 2015 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 3.902, the representative exchange rate published by the Bank of Israel as of December 31, 2015.
 
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, Inc. (“Freedonia”) is the source for third-party industry data and forecasts. The Freedonia Report, dated February 19, 2015, represents data, research opinion or viewpoints developed independently on our behalf and does not constitute a specific guide to action. In preparing the report, Freedonia used various sources, including publically 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. We have inquired of Freedonia, and been informed that as of the date of this filing, there has been no change in the Freedonia Report, and Freedonia has not reviewed such report from the date of its publication by Freedonia.
 
 
iii

 
 
Special Note Regarding Forward-Looking Statements
 
This annual report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), Section 21E of the Securities Exchange Act of 1934, as amended (the “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 on Form 20-F, including, but not limited to “ITEM 3: Key Information—Risk Factors,” “ITEM 4: Information on Caesarstone,” “ITEM 5: Operating and Financial Review and Prospects,” “ITEM 10: Additional Information—Taxation—United States Federal Income Taxation—Passive foreign investment company considerations.” These statements include, but are not limited to, statements regarding:
 
 
our ability to respond to new market developments;
 
our intent to penetrate further our existing markets and penetrate new markets;
 
our belief in the sufficiency of our cash flows to meet our needs for the next year;
 
our plans to invest in developing, manufacturing and offering innovative products;
 
our plans to establish a second manufacturing facility in the State of Georgia and install production lines in addition to the existing two production lines, a process toward which we have already taken initial steps;
 
our plans to invest in the promotion and strengthening of our brand;
 
our plans to invest in research and development for the development of new quartz products;
 
our ability to increase quartz’s penetration in our existing markets and new markets;
 
our ability to successfully compete with other quartz surfaces manufacturers, suppliers and distributors, and with suppliers and distributors of other materials used in countertops;
 
our ability to acquire third-party distributors, manufacturers of quartz surfaces products or other products and raw material suppliers;
 
our plans to continue our international presence;
 
our expectations regarding future prices of quartz, polyester and pigments;
 
future foreign exchange rates, particularly the NIS, Australian dollar, Canadian dollar and the euro;
 
our expectations regarding our future product mix;
 
our expectations regarding the outcome of litigation or other legal proceedings in which we are involved, and our ability to use our insurance policy to cover damages; and
 
our expectations regarding regulatory matters applicable to us.
 
The preceding list is not intended to be an exhaustive list of all of 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. 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.
 
 
iv

 
 
TABLE OF CONTENTS
 
     
 
1
 
1
 
1
 
1
 
A.
Selected Financial Data
 
1
 
B.
Capitalization and Indebtedness
 
6
 
C.
Reasons for the Offer and Use of Proceeds
 
6
 
D.
Risk Factors
 
6
 
35
 
A.
History and Development of Caesarstone
 
35
 
B.
Business Overview
 
35
 
C.
Organizational Structure
 
46
 
D.
Property, Plants and Equipment
 
47
 
48
 
48
 
A.
Operating Results
 
48
 
B.
Liquidity and Capital Resources
 
66
 
C.
Research and Development, Patents and Licenses
 
69
 
D.
Trend Information
 
69
 
E.
Off-Balance Sheet Arrangements
 
69
 
F.
Contractual Obligations
 
70
 
71
 
A.
Directors and Senior Management
 
71
 
B.
Compensation of Officers and Directors
 
75
 
C.
Board Practices
 
79
 
D.
Employees
 
93
 
E.
Share Ownership
 
94
 
95
 
A.
Major Shareholders
 
95
 
B.
Related Party Transactions
 
97
 
C.
Interests of Experts and Counsel
 
102
 
102
 
A.
Consolidated Financial Statements and Other Financial Information
 
102
 
B.
Significant Changes
 
108
 
108
 
A.
Offer and Listing Details
 
108
 
B.
Plan of Distribution
 
109
 
C.
Markets
 
109
 
D.
Selling Shareholders
 
109
 
E.
Dilution
 
109
 
F.
Expenses of the Issue
 
109
 
109
 
A.
Share Capital
 
109
 
B.
Memorandum of Association and Articles of Association
 
109
 
C.
Material Contracts
 
114
 
D.
Exchange Controls
 
114
 
E.
Taxation
 
115
 
F.
Dividends and Paying Agents
 
124
 
G.
Statements by Experts
 
124
 
H.
Documents on Display
 
124
 
I.
Subsidiary Information
 
124
 
125
 
126
 
 
v

 

 
 
127
 
127
 
127
 
127
 
128
 
128
 
128
 
129
 
129
 
129
 
129
 
130
 
130
 
130
 
130
 
130
 
130
 
 
vi

 
 
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. 
Selected Financial Data
 
You should read the following selected consolidated financial data in conjunction with “ITEM 5: Operating and Financial Review and Prospects” and our consolidated financial statements and the related notes included elsewhere in this annual report on Form 20-F. The consolidated income statement data for the years ended December 31, 2015, 2014 and 2013 and the consolidated balance sheet data as of December 31, 2015 and 2014 are derived from our audited consolidated financial statements included in “ITEM 18: Financial Statements,” which have been prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”). The consolidated income statement data for the years ended December 31, 2012 and 2011 and the consolidated balance sheet data as of December 31, 2013, 2012 and 2011 have been derived from our audited consolidated financial statements which are not included in this annual report. The information presented below under the caption “Other Financial Data” and “Dividends declared per share” contains information that is not derived from our financial statements.
 
   
2015
   
2014
   
2013
   
2012
   
2011
 
                               
Consolidated Income Statement Data:
                             
Revenues                                           
  $ 499,515     $ 447,402     $ 356,554     $ 296,564     $ 259,671  
Cost of revenues                                           
    299,290       257,751       194,436       169,169       155,377  
Gross profit                                           
    200,225       189,651       162,118       127,395       104,294  
Operating expenses:
                                       
Research and development, net (1)
    3,052       2,628       2,002       2,100       2,487  
Marketing and selling
    59,521       55,870       51,209       46,911       34,043  
General and administrative
    36,612       36,111       32,904       28,423       30,018  
Legal settlements and loss contingencies, net
    4,654       -       -       -       -  
Total operating expenses
    103,839       94,609       86,115       77,434       66,548  
Operating income
    96,386       95,042       76,003       49,961       37,746  
Finance expenses, net
    3,085       1,045       1,314       2,773       4,775  
Income before taxes on income
    93,301       93,997       74,689       47,188       32,971  
Taxes on income
    13,843       13,738       10,336       6,821       3,600  
Income after taxes on income
    79,458       80,259       64,353       40,367       29,371  
Equity in losses of affiliate (2)
                            67  
Net income
  $ 79,458     $ 80,259     $ 64,353     $ 40,367     $ 29,304  
Net income attributable to non-controlling interest
    1,692       1,820       1,009       735       252  
Net income attributable to controlling interest
    77,766       78,439       63,344       39,632       29,052  
Dividend attributable to preferred shareholders
                            (8,376 )
Net income attributable to the Company’s ordinary shareholders
    77,766       78,439       63,344       39,632       20,676  
Basic net income per ordinary share
    2.21       2.25       1.83       1.21       1.06  
Diluted net income per ordinary share
    2.19       2.22       1.80       1.21       1.06  
Weighted average number of ordinary shares
used in computing basic income per share
    35,253       34,932       34,667       32,642       19,565  
Weighted average number of ordinary shares
used in computing diluted income per share
    35,464       35,394       35,210       32,700       19,565  
Dividends declared per share
                                       
Shekels*
 
NIS
   
NIS
   
NIS
   
NIS
3.78    
NIS
0.50  
Dollars*
  $     $ 0.57     $ 0.58     $ 1.02     $ 0.14  

 
 

 
 
   
At December 31,
 
   
2015
   
2014
   
2013
   
2012
   
2011
 
   
(in thousands)
 
Consolidated Balance Sheet Data:
                             
Cash, cash equivalents and short term bank deposits
  $ 62,807     $ 54,327     $ 92,248     $ 72,733     $ 11,950  
Working capital (3)
    168,841       124,306       145,702       117,712       28,592  
Total assets
    529,742       439,000       377,556       321,049       246,317  
Total liabilities
    120,680       109,274       104,333       90,026       103,661  
Redeemable non-controlling interest
    8,841       8,715       7,624       7,106       6,205  
Shareholders’ equity
    400,221       321,011       265,599       223,917       136,451  
 
 
Year ended December 31,
 
 
2015
 
2014
 
2013
 
2012
 
2011
 
 
(in thousands)
 
Other Financial Data:
                             
Adjusted EBIDTA (4)
  $ 125,667     $ 116,553     $ 91,711     $ 69,445     $ 58,774  
Adjusted net income attributable to controlling interest (4)
    83,682       82,498       63,959       44,008       34,765  
Capital expenditures
    76,495       86,373       27,372       13,481       8,785  
Depreciation and amortization
    22,334       17,176       14,994       14,368       14,615  
 

* Prior to 2012, the Company declared and paid its dividends in NIS. Conversion to U.S. dollar appears herein for reporting purposes. Starting in 2013, dividends were declared and paid in U.S. dollar. Therefore, no conversion is required.

(1)
Research and development expenses are presented net of grants that we received from the Office of the Chief Scientist (“OCS”) of the Ministry of Economy and Industry of the State of Israel between 2009 and 2013.
(2)
Reflects our proportionate share of the net loss of our U.S. distributor, Caesarstone USA, Inc. (“Caesarstone USA”), in which we acquired a 25% equity interest on January 29, 2007. We accounted for our investment using the equity method. In 2011, the amount represents a loss through May 18, 2011, the date on which we acquired the remaining 75% equity interest in Caesarstone USA and began to consolidate its results of operations.
(3)
Working capital is defined as total current assets minus total current liabilities.
(4)
The tables below reconcile net income to adjusted EBITDA and net income attributable to controlling interest to adjusted net income attributable to controlling interest for the periods presented and are unaudited.
 
 
2

 

 
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 work plan and budget.
 
Our non-GAAP financial measures, Adjusted EBITDA and adjusted net income attributable to controlling interest, have no standardized meaning and accordingly have limitations in their usefulness to investors. We provide such non-GAAP data because management believes that such data provide useful information to investors. However, investors are cautioned that, unlike financial measures prepared in accordance with U.S. GAAP, non-GAAP measures may not be comparable with similar measures used by other companies. These non-GAAP financial measures are presented solely to permit investors to more fully understand how management and our board assesses our performance. The limitations of these non-GAAP financial measures as performance measures are that they provide a view of our results of operations without reflecting all events during a period and may not provide a comparable view of our performance to other companies in our industry.
 
Investors should consider non-GAAP financial measures in addition to, and not as replacements for, or superior to, measures of financial performance prepared in accordance with GAAP.
 
In arriving at our presentation of non-GAAP financial measures, we exclude items that either have a non-recurring impact on our income statement or which, in the judgment of our management, are items that, either as a result of their nature or size, could, were they not singled out, potentially cause investors to extrapolate future performance from an improper base. In addition, we also exclude share-based compensation expenses to facilitate a better understanding of our operating performance, since these expenses are non-cash and accordingly 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 on-going performance;
 
 
·
excess cost of acquired inventory;
 
 
·
expenses related to our share based compensation;
 
 
·
significant one-time offering costs;
 
 
·
material tax and other awards or settlements, both amounts paid and received; and
 
 
·
tax effects of the foregoing items.
 
 
3

 

   
Year ended December 31,
 
   
2015
   
2014
   
2013
   
2012
   
2011
 
   
(in thousands)
 
Reconciliation of Net Income to Adjusted EBIDTA:
                             
Net income
  $ 79,458     $ 80,259     $ 64,353     $ 40,367     $ 29,304  
Finance expenses, net
    3,085       1,045       1,314       2,773       4,775  
Taxes on income
    13,843       13,738       10,336       6,821       3,600  
Depreciation and amortization
    22,334       17,176       14,994       14,368       14,615  
Legal settlements and loss contingencies, net (a)
    4,654                          
Equity in losses of affiliate, net(b)
                            67  
Excess cost of acquired inventory(c)
 
__
      231       188       885       4,021  
Share-based compensation expense(d)
    2,293       2,642       2,514       3,007       1,259  
Inventory–change of estimate (e)
                (3,458 )            
Follow–on expenses (f)
          657       1,470              
IPO bonus(g)
                      1,970        
Caesarstone USA contingent consideration adjustment(h)
                      255        
Litigation gain(i)
                      (1,001 )     (1,783 )
Provision for employee fringe benefits (j)
          939                    
Settlement with tax authorities (k)
          (134 )                  
Microgil loan and inventory write down(l)
                            2,916  
Adjusted EBITDA
  $ 125,667     $ 116,553     $ 91,711     $ 69,445     $ 58,774  


(a)
Consists of legal settlements expenses and loss contingencies, net, related to individual silicosis claims.
(b)
Consists of our portion of the results of operations of Caesarstone USA prior to its acquisition by us in May 2011.
(c)
Consists of charges to cost of goods sold for the difference between the higher carrying cost of the inventory of two of our subsidiaries, Caesarstone USA’s inventory at the time of its acquisition and inventory that was purchased from its sub-distributors, and Caesarstone Australia Pty Limited’s inventory that was purchased from its distributor, and the standard cost of our inventory, which adversely impacts our gross margins until such inventory is sold. The majority of the acquired inventory from Caesarstone USA was sold in 2011, and the majority of the inventory purchased from the Australian distributor was sold in 2012.
(d)
Share-based compensation consists primarily of changes in the value of share-based rights granted in January 2009 to our Chief Executive Officer, as well as changes in the value of share-based rights granted in March 2008 to the former chief executive officer of Caesarstone Australia Pty Limited. In 2012, share-based compensation consisted primarily of expenses related to stock options granted to our employees as well as changes in the value of share-based rights granted in January 2009 to our Chief Executive Officer. In 2013, share-based compensation consisted of expenses related to stock options granted to our employees. In 2014, share-based compensation consists of expenses related to stock options granted to our employees as well as expenses related to share-based bonus rights granted during 2014. In 2015, share-based compensation consists of expenses related to stock options and restricted stock units granted to our employees as well as expenses related to share-based bonus rights granted during 2014.
(e)
Relates to a change in estimate for the value of inventory following the implementation of our new ERP system in April 2013.
(f)
In 2013, follow-on expenses consist of direct expenses related to a follow-on offering that closed in April 2013, including a bonus paid by our former shareholder, Tene Investment Fund (“Tene”), to certain of our employees that under U.S. GAAP we are required to expense against paid-in capital. In 2014, follow-on expenses consist of direct expenses related to a follow-on offering that closed in June 2014.
(g)
Consists of the payment of $1.72 million to certain of our employees and $0.25 million to our chairman of the board of directors for their contribution to the completion of our initial public offering (“IPO”).
(h)
Relates to the change in fair value of the contingent consideration that was part of the consideration transferred in connection with the acquisition of Caesarstone USA.
(i)
In 2011, litigation gain consists of a mediation award in our favor pursuant to two trademark infringement cases brought by Caesarstone Australia Pty Limited. In 2012, litigation gain resulted from a settlement agreement with the former chief executive officer of Caesarstone Australia Pty Limited related to litigation that had been commenced in 2010. Pursuant to the settlement, he transferred to us the ownership of all his shares in Caesarstone Australia Pty Limited received in connection with his employment. We did not make any payments in connection with such transfer or other payments to the former chief executive officer. As a result of the settlement, we reversed the liability provision in connection with the litigation and the adjustment is presented net of the related litigation expenses incurred in connection with the settlement.
(j)
Relates to an adjustment of provision for taxable employee fringe benefits as a result of a settlement with the Israel Tax Authority and with the Israeli National Insurance Institute (“NII”).
(k)
Relates to a refund of Israeli value added tax (“VAT”) associated with a bad debt from 2007.
(l)
Relates to our writing down to zero the cost of inventory provided to Microgil Agricultural Cooperative Society Ltd. (“Microgil”), our former third-party quartz processor in Israel, in 2011 in the amount of $1.8 million and our writing down to zero our $1.1 million loan to Microgil, in each case, in connection with a dispute. See “ITEM 8: Financial Information—Consolidated Financial Statements and Other Financial Information—Legal proceedings”.
 
 
4

 

 
   
Year ended December 31,
 
   
2015
   
2014
   
2013
   
2012
   
2011
 
   
(in thousands)
 
Reconciliation of Net Income Attributable to Controlling Interest to Adjusted Net Income Attributable to Controlling Interest:
                             
Net income attributable to controlling interest
  $ 77,766     $ 78,439     $ 63,344     $ 39,632     $ 29,052  
Legal settlements and loss contingencies, net (a)
    4,654                          
Excess cost of acquired inventory(b)
          231       188       885       4,021  
Litigation gain(c)
                      (1,001 )     (1,783 )
Inventory – change of estimate(d)
                (3,458 )            
Follow-on expenses(e)
          657       1,470              
IPO bonus(f)
                      1,970        
Caesarstone USA contingent consideration adjustment(g)
                      255        
Microgil loan and inventory write down(h)
                            2,916  
Share-based compensation expense(i)
    2,293       2,642       2,514       3,007       1,259  
Provision for employee fringe benefits (j)
    -       939                    
Settlement with tax authorities (k)
    -       134                    
Tax adjustment (l)
    -       342                    
Total adjustments before tax
    6,947       4,677       714       5,116       6,413  
Less tax on above adjustments
    1,031       618       99       740       700  
Total adjustments after tax
    5,916       4,059       615       4,376       5,713  
Adjusted net income attributable to controlling interest
  $ 83,682     $ 82,498     $ 63,959     $ 44,008     $ 34,765  


(a)
Consists of legal settlements expenses and loss contingencies, net, related to individual silicosis claims.
(b)
Consists of charges to cost of goods sold for the difference between the higher carrying cost of the inventory of two of our subsidiaries, Caesarstone USA’s inventory at the time of its acquisition and inventory that was purchased from its distributor, and Caesarstone Australia Pty Limited’s inventory that was purchased from its distributor, and the standard cost of our inventory, which adversely impacts our gross margins until such inventory is sold. The majority of the acquired inventory from Caesarstone USA was sold in 2011, and the majority of the inventory purchased from the Australian distributor was sold in 2012.
(c)
In 2011, litigation gain consists of a mediation award in our favor pursuant to two trademark infringement cases brought by Caesarstone Australia Pty Limited. In 2012, litigation gain resulted from a settlement agreement with the former chief executive officer of Caesarstone Australia Pty Limited related to litigation that had been commenced in 2010. Pursuant to the settlement, he transferred to us the ownership of all his shares in Caesarstone Australia Pty Limited received in connection with his employment. We did not make any payments in connection with such transfer or other payments to the former chief executive officer. As a result of the settlement, we reversed the liability provision in connection with the litigation and the adjustment is presented net of the related litigation expenses incurred in connection with the settlement.
(d)
Relates to a change in estimate for the value of inventory following the implementation of our new ERP system in April 2013.
(e)
In 2013, follow-on expenses consist of direct expenses related to a follow-on offering that closed in April 2013, including a bonus paid by our former shareholder, Tene, to certain of our employees that under U.S. GAAP we are required to expense against paid-in capital. In 2014, follow-on expenses consist of direct expenses related to a follow-on offering that closed in June 2014.
(f)
Consists of the payment of $1.72 million to certain of our employees and $0.25 million to our chairman of the board of directors for their contribution to the completion of our IPO.
(g)
Relates to the change in fair value of the contingent consideration that was part of the consideration transferred in connection with the acquisition of Caesarstone USA.
(h)
Relates to our writing down to zero the cost of inventory provided to Microgil, our former third-party quartz processor in Israel, in 2011 in the amount of $1.8 million and our writing down to zero our $1.1 million loan to Microgil, in each case, in connection with a dispute. See “ITEM 8.A: Financial Information—Consolidated Financial Statements and Other Financial Information—Legal proceedings.”
(i)
Share-based compensation consists primarily of changes in the value of share-based rights granted in January 2009 to our Chief Executive Officer, as well as changes in the value of share-based rights granted in March 2008 to the former chief executive officer of Caesarstone Australia Pty Limited. In 2012, share-based compensation consisted primarily of expenses related to stock options granted to our employees as well as changes in the value of share-based rights granted in January 2009 to our Chief Executive Officer. In 2013, share-based compensation consisted of expenses related to stock options granted to our employees. In 2014, share-based compensation consists of expenses related to stock options granted to our employees as well as expenses related to share-based bonus rights granted during 2014. In 2015, share-based compensation consists of expenses related to stock options and restricted stock units granted to our employees as well as expenses related to share-based bonus rights granted during 2014.
(j)
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.
(k)
Relates to a refund of Israeli VAT associated with a bad debt from 2007.
(l)
Relates to an adjustment in taxes as a result of a tax settlement we reached with Israeli tax authorities.

 
5

 
 
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. You should carefully consider all of the information set forth in this annual report and in our other filings with the United States Securities and Exchange Commission (the “SEC”), including the following risk factors which we face and which are faced by our industry. 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” on page iv of this annual report.
 
Risks related to our business and industry
 
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 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. Our products are also used in commercial applications. Spending in each of the above-mentioned sectors declined significantly since 2008 in most of the markets in which we operate and, to date, many of these markets, including the United States, Canada, Australia, and particularly Europe, recovered only to a certain degree. For example, housing completions in the United States and Canada in 2015 were 35.7% and 6.9% below 2007 levels, respectively (according to the National Association of Home Builders and Statistics Canada), and renovation spending in Australia was estimated to be 8.7% below 2007 level (according to the HIA- Housing Industry Association). Spending on home renovation and remodeling and new residential construction depends significantly on the availability of consumer credit, as well as other factors such as interest rates, consumer confidence, government programs and unemployment. Such factors also affect spending on commercial projects. Any of these factors could result in a tightening of lending standards by financial institutions and reduce the ability of consumers to finance renovation and remodeling expenditures or home purchases. Consumers’ ability to access financing varies across our operating markets. Declining home values, increased home foreclosures and tightening of credit standards by lending institutions in certain markets have negatively impacted the home renovation and remodeling and the new residential construction sectors in several of our key existing markets since 2008.
 
If the housing market is negatively impacted as a result of an economic downturn or if other significant economic negative trends occur, we may be unable to grow our business and our revenues and net income may be adversely affected.
 
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. 
 
Our sales are subject to significant geographic concentration. In 2015, sales in the United States, Australia, Canada and Israel accounted for 44.7%, 22.1%, 14.2% and 7.9% of our revenues, respectively. Each country has different characteristics and our results of operations could be adversely impacted by a range of factors, including local competitive changes, changes in consumers’ quartz surface or countertop preferences and regulatory changes that specifically impact these markets. Sales in our main markets could be adversely impacted by other general economic conditions, including increase in imports from Asian manufacturers into such markets, especially the United States, Australia and Canada. Stronger local currencies could make lower-priced and lower-quality imported goods more competitive than our products.
 
In addition, in light of our geographic concentration, a downturn in levels of home renovation and remodeling or new residential construction spending, in particular in the United States, Australia, Canada or Israel, could adversely affect our revenues and net income. In general, our revenues are generated more from home renovations and new residential single-family construction than from construction of multi-family units.
 
 
6

 
 
In the United States, renovation and remodeling spending, which we estimate accounted for approximately 60% of our sales in this country, were estimated to increase by only 5.6% in 2015 (according to the Joint Center for Housing Studies, Harvard University), compared to an increase of 12.5% in 2014. Housing completions, which we estimate accounted for approximately 25% of our U.S. sales, increased by 9.3% in 2015 compared with 15.7% in 2014. In Australia, renovation and remodeling spending, which we estimate accounted for  approximately 60% of our sales in the country, grew by 3.9% and 1.5% in 2015 and 2014, respectively. Growth in housing completions, which we estimate accounted for approximately 35% of our sales in Australia, increased by 13.6% in 2015 following an increase of 14.9% in 2014 (according to the HIA). In Canada, renovation and remodeling spending, which we estimate accounted for approximately 60% of our total sales in this country, grew by 4.1% in the first 9 months of 2015 compared to a similar period in 2014 (according to Statistics Canada), and by 7.4% in 2014. However, housing completions, which we estimate accounted for approximately 35% of our sales in Canada, increased by 7.2% in 2015 compared with a decline of 2.2% in 2014.
 
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.
 
We face intense competitive pressures, which could adversely affect our results of operations and financial condition.
 
Our quartz surface products compete with a number of other surface materials such as granite, laminate, marble, manufactured solid surface, concrete, stainless steel, wood and ceramic. Large surfaces made of ceramic, a durable material with sizes similar to our products’ sizes, are manufactured using a relatively new technology. We compete with manufacturers of these surface materials and other quartz surfaces, and our ability to maintain or grow our market share, revenue and profits is dependent on a range of factors, including brand awareness and brand position, product quality, product differentiation and breadth of product offerings, new product development and time to market, technological innovation, pricing, availability of inventory on demand, and customer service. Since we seek to position our products as a premium alternative to other surface materials, including other quartz surfaces, the perception among end-consumers and other players in our products’ value chain of the quality and leadership of our products is a key competitive differentiator. In addition, to maintain our price levels, margins, competitive position and increase demand for our quartz surface products, we must continue to develop and introduce new product designs supported by proprietary manufacturing knowledge or otherwise differentiated from our competitors' products that meet consumer preferences. Some of our competitors may be able to adapt to changes in consumer preferences and demand more quickly, devote greater resources to creating innovative designs, successfully copying our designs and technologies and establishing brand recognition, manufacture more versatile slab sizes, implement processes to lower costs, acquire complementary businesses, such as raw material suppliers, and expand more rapidly or adopt more aggressive pricing policies than we can. For example, some of our competitors who manufacture quartz surfaces also market and sell ceramic surfaces for countertops. Additionally, a number of our competitors have greater financial and capital resources than we do and continue to invest heavily to achieve increased production efficiencies and brand recognition. Competitors may also be in a better position to access emerging sales channels in various markets, and may have more diversified product offerings involving materials in addition to quartz surfaces.
 
Our market share in specific markets or globally, as well as our revenues, margins and net income may be adversely affected if:
 
 
manufacturers of other surface materials or other quartz surface manufacturers successfully brand their products as premium products;
 
 
consumers place less value on premium branded quartz surfaces or quartz surfaces market becomes a commodity market;
 
 
we are unable to develop new product designs based on consumer demand that are supported by new technologies and know-how developed by us;
 
 
we are unable to respond rapidly or at all to changes in consumers’ preferences, such as in the size of quartz surfaces;
 
 
7

 
 
 
we are unable to maintain the strength of the Caesarstone brand and its reputation for high quality, innovation, emphasis on design and excellent service;
 
 
we are unable to place sufficient inventory to fulfill the demand in the markets;
 
 
we are unable to complete our additional manufacturing capabilities as we may require;
 
 
new products of similar or better characteristics are marketed by competitors and we are unable to expand our offering to include such new products;
 
 
we are unable to compete with lower-priced products perceived as comparable to ours and produced by manufacturers of other surface materials or other quartz surface manufacturers; or
 
 
our manufacturing efficiency declines as a result of decreasing capacity, expanding capacity and/or increased expenses to meet quality standards in connection with the use of new product development technologies or with the use of new production lines.
 
In addition, changes in any of these competitive factors may be sufficient to cause a distributor, retailer, contractor or fabricator to change manufacturers, which would harm our sales in a particular market.
 
We face competition from providers of quartz surfaces that set prices considerably lower than the prices of our premium products, which could adversely impact our sales and margins.
 
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. We face competition in all of our key markets, primarily from manufacturers located in the Asia-Pacific region and in Europe that market quartz surface products at lower price points, including quartz surface products which imitate our products and designs. Manufacturers in China, Vietnam and other countries in the Asia-Pacific region frequently benefit from labor and energy costs that are significantly lower than our costs and enable them to price their products lower than our products. Under these circumstances, we face direct competition that significantly undercuts the prices that we are able to charge and that we seek to charge our customers, as well as the prices that our distributors and fabricators are able to charge consumers. Even if we seek to lower the prices that we charge for our products in certain markets, we may be unable to achieve the same labor and energy costs in order to maintain current margins on our products. Some of these competitors have developed know-how and technical capabilities to manufacture products similar to our products and other competitors may do so in the future. We have also experienced instances of our competitors marketing products with similar appearances and similar model names to some of our products. Competition of this nature may increase in the markets in which we operate and may develop in new markets. Even if these competitors are unable to compete with us in all markets in which we sell our products, the introduction of similar products may result in lowering or eliminating the value that distributors and end-consumers place on our premium brand and products. Such competition or change in perception could result in significantly lower sales and reduced profit margins. Competition from manufacturers in the Asia- Pacific region, especially from China, has increased in North America, particularly in light of the recent growth in new construction of multifamily units, where selling price represents a significant competitive advantage. If we do not enter this market segment, which requires lower pricing, we could lose market share as well as growth opportunities. However, offering lower priced products, branded under Caesarstone or another brand, may adversely affect our brand position and our profit margins.
 
Silicosis and related claims might have a material adverse effect on our business, operating results and financial condition.
 
As of the date of this report, we are party to 74 pending bodily injury lawsuits that have been filed in Israel since 2008 against us directly or that have named us as third-party defendants by fabricators or their employees in Israel, by the injured successors, by the State of Israel or by others. Such lawsuits include, among others, one lawsuit filed by three fabricators, four lawsuits filed by the National Insurance Institute (“NII”), one lawsuit which was filed by both the NII and a fabricator, an appeal which was filed in connection with a judgment granted in one of the lawsuits and a lawsuit filed against us where the claimants applied for its certification by the court as a class action. As of today, we have also received nine pre-litigation letters threatening to file claims against us on behalf of certain fabricators and their employees in Israel.
 
 
8

 
 
The plaintiffs in such lawsuits claim that they contracted illnesses, including silicosis, through exposure to silica particles during cutting, polishing, sawing, grinding, breaking, crushing, drilling, sanding or sculpting our products. Silicosis is an occupational lung disease that is progressive and sometimes fatal, and is characterized by scarring of the lungs and damage to the breathing function. Inhalation of dust containing fine silica particles as a result of poorly protected and controlled, or unprotected and uncontrolled, exposure, while working in different occupations, including among other things, processing quartz, granite, marble and other materials and working with quartz, can cause silicosis and other diseases. Silica comprises approximately 90% of engineered stones such as our products, and smaller concentrations of silica are present in natural stones. Therefore, in some of the lawsuits it is claimed that fabrication of engineered stones creates higher exposure to silica dust, and, accordingly, creates a higher risk of silicosis. In some of the lawsuits, such claims are supported by expert opinions or certain articles. In February 2015, the U.S. Occupational Safety and Health Administration (“OSHA”) and the U.S. National Institute for Occupational Safety and Health (“NIOSH”) published a hazard alert identifying exposure to silica as a health hazard to workers involved in manufacturing, finishing and installing natural and manufactured (engineered) stone countertop products, both in fabrication shops and during in-home finishing/installation.
 
Most of the claims asserted against us do not specify a total amount of damages sought and the plaintiffs’ future damages, if any, will be determined at trial. Although we intend to vigorously contest the pending claims, we cannot provide any assurance that we will be successful. As of December 31, 2015, we estimated that our total exposure with respect to 71 pending lawsuits (not including the lawsuit where the claimants filed a motion for its certification as a class action and lawsuits settled) is approximately $14.8 million, although the actual outcome of such lawsuits may vary significantly from such estimate. We believe that we have $10.2 million of coverage under our product liability insurance, and accordingly, our total out-of-pocket exposure with respect to such pending claims is estimated to be $4.7 million. We cannot make an estimate with respect to threatened claims of which we have received notices through pre-litigation letters. Currently, only one lawsuit has been resolved by Israeli courts in a judgment and without settlement between the parties. Such judgment was later cancelled by the Supreme Court, following out of court settlements between some of the parties, as described in “ITEM 8.A: Financial Information- Legal Proceedings”.
 
A lawsuit by a single plaintiff and a motion for the recognition of this lawsuit as a class action were filed against us in the Central District Court in Israel, as described below in “ITEM 8.A: Financial Information-— Legal Proceedings”. 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.
 
We are exposed in Israel to potential future subrogation claims by the NII, providing for reimbursement of its payments related to damages paid or that will be paid to plaintiffs, if we are found liable for the plaintiffs’ damages. As of today, four of the 74 pending claims against us were brought by the NII and one claim was filed by the NII together with an individual plaintiff, for subrogation of payments the NII had made or will make in the future with respect to seven fabricators who allegedly contracted silicosis. The amount of damages to which we may be liable to the NII in any subrogation claim may not exceed the actual amount of an injured person’s damages for which we would be found liable, if at all, after deducting any compensation which we would pay to such injured person pursuant to his/her direct or indirect claim against us.
 
Any pending or future litigation is subject to significant uncertainty. Our estimated total out-of-pocket 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 in the future or the nature of their claims. In addition, punitive damages may be awarded in certain jurisdictions, even though they are rare in Israel. Furthermore, we may face future engineering and compliance costs to enhance our compliance with existing standards relating to silica or to meet new standards if such standards are heightened. Our fabricator customers may also face engineering and compliance costs related to the fabrication of our products and similar products, which could cause them to resort to fabricating alternative products that do not carry the same risks associated with silica dust generated from the fabrication of our products. OSHA is currently considering lowering the permissible exposure limit to silica dust. In addition, the Israeli Ministry of Economy and Industry, or the IMEI, recently proposed a new law, aimed at improving the health protection and safety of persons engaged in fabrication of engineered quartz surfaces by imposing obligations to obtain permits for engineered stone fabrication and marketing. Under the proposed law, if accepted by the Israeli parliament, fabricators and sellers of quartz surfaces would be required to obtain permits periodically, which may be issued subject to meeting certain requirements to be set by the IMEI. Such regulatory changes, if they are not effectively enforced or executed or if they impose a burden on the operations of fabricators and distributors, may adversely impact our business in Israel, increase the market share of surfaces made from other material and harm our financial results.
 
 
9

 
 
Any damages to which we are subject in litigation, the cost of defending any claims, compliance costs, and the loss of business from fabricators who no longer find it practical to fabricate our products, may have a materially adverse impact on our revenues and profits. Moreover, because Israeli law and the laws of several other jurisdictions recognize joint and several liability among co-defendants in civil suits, and because insurers of fabricators’ employers denied insurance coverage for such fabricators with respect to silicosis-related claims due to alleged silicosis exclusions in employment liability policies, even if we are found only partially liable to a plaintiff’s damages, 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.
 
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. Such claims could be asserted by claimants in different jurisdictions, including Israel, the United States, Canada, Australia and other markets where our products are distributed and sold and could result in significant legal expenses and damages. Although we believe that claimants in any future silica-related claims involving us should be limited to persons involved in the fabrication of our products and those in the immediate vicinity of fabrication activities, claimants may potentially also include our employees or end consumers, seeking compensation for bodily or emotional/non-physical damages. Seven employees currently employed in our plants in Israel have been diagnosed with silicosis or suspected to have silicosis, and any expenses not covered by the NII which we may incur in this respect are not covered by our employer liability insurance.
 
We currently have product liability insurance policies which apply to us and our subsidiaries and cover the silicosis claims, subject to certain terms and limitations described in “ITEM 8.A: Financial Information—Legal Proceedings.” If we are unable to renew our insurance at all or in part, from our current insurers or from others, we are unable to obtain coverage from other insurance providers, we cannot obtain insurance on as favorable terms as previously, our insurance is terminated early, our insurance coverage is decreased, our insurance coverage inadequately covers damages for which we are found liable, or we become subject to silicosis 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, and our management could expend significant time addressing such claims. Such events might have a material adverse effect on our business and results of operations.
 
As of December 31, 2015, our insurance receivables totaled $10.2 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. See Note 10 to our financial statements attached elsewhere in this report.
 
For more information, see “ITEM 8.A: Financial Information— Legal Proceedings—Claims related to alleged silicosis injuries.”

Our results of operations may be 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 since July 1, 2012) and other currencies in which we conduct business. In 2015, 46.0% of our revenues were denominated in U.S. dollars, 22.1% in Australian dollars, 14.2% in Canadian dollars, 9.8% in Euros and 7.9% in NIS. In 2015, the majority of our expenses were denominated in U.S. dollars, NIS and Euros, and a smaller proportion in Australian and Canadian dollars. As a result, weakening of the Australian and Canadian dollars and strengthening of the NIS and Euro against the U.S. dollar presents a significant risk to us and may impact our business significantly. For example, in 2015, the Australian dollar depreciated 16.6% against the U.S. dollar compared to 2014 on an annual average basis, which resulted in our operating income decreasing by $18.4 million, or 3.7% of our revenues in 2015, compared to 2014. In 2015, the Canadian dollar depreciated 13.5% against the U.S. dollar compared to 2014 on an annual average basis, which resulted in our operating income decreasing by $7.6 million, or 1.5% of our revenues in 2015, compared to 2014. Although we currently engage in derivatives transactions, such as forward and option contracts, to minimize our currency risk, we do not hedge all of the exposure. We have been using a dynamic hedging strategy to hedge our cash flow exposures. This strategy involves consistent hedging of exchange rate risk in variable ratios ranging to up to 100% of the exposure over rolling 12 months. As of December 31, 2015, our average hedging ratio was approximately 50%. Therefore, future currency exchange rate fluctuations against which we have not adequately hedged could adversely affect our profitability. Moreover, our currency derivatives, except for our U.S. dollar/NIS forward contracts, are currently not designated as hedging accounting instruments under Accounting Standards Codification (“ASC”) 815, Derivatives and Hedging (originally issued as SFAS 133). Hedging results are charged to finance expenses, net, and therefore, do not offset the impact of currency fluctuations on our operating income. As an exception, starting from the middle of May 2014, our U.S. dollar/NIS forward contracts are charged to operating expenses. See “ITEM 11: Quantitative and Qualitative Disclosures About Market Risk.”
 
 
10

 
 
Changes in the prices of our raw materials have increased our costs and decreased our margins and net income in the past and may increase our costs and decrease our margins in the future.
 
In 2015, raw materials accounted for approximately 43% of our cost of goods sold. The cost of raw materials consists of the purchase prices of such materials and costs related to the logistics of delivering the materials to our manufacturing facilities. Our raw materials costs are also impacted by changes in foreign currency exchange rates, mainly the euro as it relates to polyester.
 
Quartz, which includes quartz, quartzite and other dry minerals (together referred to in this annual report as “quartz,” unless otherwise specifically stated), is the main raw material component used in our products. Quartzite, which represents approximately 60% of our total quartz consumption, is contained in all of our products. We acquire quartzite from four suppliers in Turkey. Quartz accounted for approximately 35% of our raw materials cost in 2015. Our cost of sales and overall results of operations are impacted significantly by fluctuations in quartz prices. For example, if our cost of quartz was to rise by 10% and we were not able to pass along any of such increase to our customers or achieve other offsetting savings, we would experience a decrease of approximately 0.9% in our gross profit margin. We do not have long-term supply contracts with our suppliers of quartz. In 2011 and 2012, our cost of quartz was relatively stable. From 2013 to 2015, we experienced selective price increases from our Turkish quartz suppliers, such that the average cost of quartz supplied to our facilities in Israel increased by approximately 3% and 4% in 2013 and 2014, respectively, and decreased by approximately 1.5% in 2015. The decrease in 2015 was related to an approximately 16% devaluation of the euro compared to the U.S. dollar in 2015 on an annual average basis, which affected the cost of purchasing Quartz from non-Turkish European suppliers. Quartz imported for our U.S. manufacturing facility involves higher transportation costs, therefore our total average quartz costs increased by approximately 1.3% in 2015. In 2016, we intend to continue to acquire quartz for our U.S. manufacturing facility mainly from the same sources we use for our Israeli facilities, but expect a slight increase in our domestic supply compared to 2015. Any future increases in quartz prices may adversely impact our margins and net income. 
 
Polyester, which acts as a binding agent in our products, accounted for approximately 36% of our raw materials costs in 2015. Accordingly, our cost of sales and overall results of operations are impacted significantly by fluctuations in polyester prices. For example, if the cost of polyester was to rise by 10%, and we were not able to pass along any of such increase to our customers or achieve other offsetting savings, we would experience a decrease of approximately 0.9% in our gross profit margin. The cost of polyester we incur is a function of, among other things, manufacturing capacity, demand and the price of crude oil. We acquire polyester on a purchase order basis based on our projected needs for the subsequent one to three months. We have found that increases in prices may be difficult to pass on to our customers. In 2010, average polyester cost increased by approximately 9%, despite an approximately 20% increase of the cost denominated in euro, given a stronger NIS (our functional currency during this period) compared to the euro. In 2011, there was a further increase of approximately 12%, both in NIS and in euro. During 2012 through 2014, average polyester costs stabilized with up to approximately 2% deviations in euro and up to approximately 5% in U.S. dollar (our functional currency since July 1, 2012). In 2015, average polyester costs decreased by approximately 27%, of which approximately 12% was due to a change in our prices denominated in euro, and the rest related to an approximately 16% weakening of the euro compared to the U.S. dollar on an average annual basis. Any future increases in polyester prices may adversely impact our margins and net income.

Pigments are also used to manufacture our quartz surface products. Although pigments account for a significantly lower percentage of our raw material costs than polyester, fluctuations in pigment prices may also adversely impact our margins and net income. For example, the cost of titanium dioxide, our principal white pigmentation agent, increased by approximately 36% in 2011. However, since 2011, the cost of titanium dioxide decreased continuously by approximately 5%, 25%, 4% and 20% in 2012, 2013, 2014 and 2015, respectively.
 
 
11

 

 
Our directors and executive officers who are members of Kibbutz Sdot-Yam may have conflicts of interest with respect to matters involving the Company. 
 
Three members of our board of directors, one of our executive officers and a number of our key employees are members of Kibbutz Sdot-Yam, or the Kibbutz. Kibbutz Sdot-Yam is our controlling shareholder and beneficially owned 32.5% of our shares as of February 24, 2016. Certain of these individuals also serve in different positions in the Kibbutz, including business manager and general counsel 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 Kibbutz Sdot-Yam and, in some circumstances, such individuals may have interests adverse to us.  In the annual general meeting of our shareholders held in December 2015, Kibbutz Sdot-Yam 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. Following a proxy contest in which three of our directors who are members of the Kibbutz participated on behalf of the Kibbutz, the requisite majority of shareholders approved the nominees proposed by our board of directors.  See “ITEM 6.A: Directors, Senior Management and Employees—Directors and Senior Management.”
 
A key element of our strategy is to expand our sales in certain markets, such as the United States and Canada, which will require a substantial effort to build awareness and develop the quartz surface market, and our failure to do so would have a material adverse effect on our future growth and prospects.
 
A key element of our strategy is to grow our business by expanding sales of our products in certain existing markets that we believe have high growth potential, but in which we have a limited presence, as well as in select new markets. In particular, we intend to focus our growth efforts on the United States and Canada. In 2014, according to Freedonia, engineered quartz surfaces represented only 8% of the total countertops by volume installed in the United States. We face several challenges in achieving consumer acceptance and adoption of our products in the United States, Canada or other markets, including driving consumers’ desire to use quartz surfaces for their kitchen countertops and other interior settings. If the market for quartz surfaces does not develop as we expect or develops more slowly than we expect, our future growth, business, prospects, financial condition and operating results will be harmed. Our success will depend, in large part, upon consumer acceptance and adoption of our products in these markets. Consumer tastes and preferences differ in the markets into which we are expanding as compared to those in which we already have substantial sales. We may also seek to expand into additional markets in the future.
 
In connection with our growth strategy, in May 2013, Caesarstone USA entered into an agreement with IKEA U.S. East LLC (“IKEA”), pursuant to which Caesarstone USA serves as IKEA’s exclusive non-laminate countertop vendor in the United States. Pursuant to the agreement, Caesarstone USA sources, fabricates and installs the countertop products, primarily from our quartz surfaces, all of which are not marketed under our brand. In October 2014, Caesarstone Canada Inc. (“Caesarstone Canada”) entered into a similar agreement with IKEA Canada Limited Partnership (“IKEA Canada”), and since December 2014, Caesarstone Canada has been acting as IKEA Canada’s exclusive non-laminate countertop vendor in Canada. In line with that same strategy, we may enter into similar agreements with other third parties.
 
Entering into arrangements with such third parties for the supply of surface materials and fabrication and installation services may impact our supply of countertops, inventory levels, quality and service level standards and ability to manage the installation and fabrication of countertops to meet customers’ demands and at reasonable prices. If we are unable to successfully manage the installation and fabrication services performed for us by independent fabricators and installers, we may experience relatively high waste of our products used by fabricators for such works, and end consumers may voice complaints with respect to supply time, quality and service level of the fabrication and installation, including defects and damages.  Such risks related to the fabrication and installation services provided by us could expose us to warranty-related damages, which if not covered back-to-back by the fabricators engaged by us, could adversely affect our financial results, harm our reputation and brand position and lead to the termination of our agreement with IKEA. In addition, our gross profit margins related to products sold pursuant to our agreement with IKEA are lower than our average margins due to a volume discount and primarily because we provide fabrication and installation services and non-quartz product, which are not our core business. Our operating margins related to products sold pursuant to our agreement with IKEA are similar to our model given the minimal marketing and selling expenses related to such collaboration; however we cannot assure that this will be the case going forward.
 
 
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Our sales through IKEA and IKEA Canada are affected, among other things, by their sales and promotional events, the timing of which is determined exclusively by IKEA and IKEA Canada and can impact our sales volume. Accordingly, our sales through IKEA and IKEA Canada have been and may continue to be volatile and we may not be able to maintain or increase such sales. Our current agreements with IKEA and IKEA Canada are effective until December 31, 2016 and January 31, 2017, respectively, unless terminated earlier in accordance with their terms. There is no assurance that these agreements will be renewed, and in case that they are not renewed, with the cessation of our sales through IKEA and IKEA Canada, our revenue in the U.S. and Canada would significantly decrease.
 
If demand for our products continues to grow, we may need to further expand our manufacturing facility in the United States. If we fail to achieve this further expansion, we may be unable to grow our business and revenue, maintain our competitive position or improve our profitability.
 
During 2015, we expanded our production capacity to meet anticipated demand through the construction of a new manufacturing facility with capacity for two production lines in Richmond Hill, the State of Georgia, the United States. The first production line in our U.S. facility became operational in the second quarter of 2015 and the second production line became operational in the fourth quarter of 2015. These two lines are currently at different stages of ramp-up. In addition to this investment, we have started initial steps towards establishing an additional facility in Richmond Hill to accommodate additional manufacturing capacity in the future as needed to satisfy potential demand. Although we are experienced in constructing manufacturing facilities for our quartz surfaces in Israel, in 2015 we began to operate our first manufacturing facility outside of Israel and cannot assure you that we will be able to successfully operate manufacturing facilities in the U.S. in a timely or profitable manner. Our investment related to the U.S. facility was approximately $130 million in total, of which approximately $2 million remain to be invested during 2016.  For the construction of an additional U.S. facility, we depend on third-party construction companies to assist in the design, construction and validation of our new facilities, as well as on machinery and equipment suppliers. Actual costs related to the establishment of such additional facility in the U.S., as well as the timing of completing the construction, may be materially different from what we are estimating. In addition, we will need to obtain a number of permits and regulatory approvals with respect to any additional facility and production lines operation in the United States.
 
We have recruited staff, employees and managers to our U.S. facility. Our ability to successfully operate our U.S. facility and any additional facility we may establish in the U.S. in the future will greatly depend on our ability to hire, train and retain an adequate number of employees, in particular employees with the appropriate level of knowledge, background and skills. Should we be unable to hire and retain such employees, and an adequate number of them, our business and financial results could be negatively impacted. If we are unable to establish and/or operate these facilities or successfully transfer or continue to transfer our manufacturing processes, technology and know-how in a timely and cost-effective manner, or at all, then we may experience disruptions in our operations and be unable to meet demand for our products, which could have a negative impact on our business and financial results. Moreover, to meet our future capacity expansion timeline, we are dependent on certain capital equipment manufacturers, third party contractors and machinery suppliers, such as Breton S.p.A. (“Breton”), a manufacturer of lines for the production of engineered stone slabs, from which we have purchased the majority of our production lines, including three of our most recently acquired production lines. Pursuant to our agreement with Breton, dated October 18, 2012, we acquired and installed our fifth production line at our Bar-Lev manufacturing facility. That agreement also included an option to purchase an additional line, which we subsequently exercised in 2013 in connection with our acquisition of the first production line for our first U.S. facility. We entered into an agreement with Breton for the acquisition of our second production line for the same facility on June 5, 2014. Breton’s lines include technological improvements and specifications that may not be currently available at other relevant machinery suppliers. If Breton ceases its operations, at all or in part, or does not have sufficient capacity, it could materially delay or prevent our ability to complete the establishment of additional production lines.
 
In addition, we believe that any such new investment will cause temporary inefficiencies that will adversely impact our margins. In 2015, our margins were adversely impacted by temporary inefficiencies in the performance of the first two production lines in our U.S. facility and by the higher costs we incurred relative to the revenue we have generated from these lines. We believe that our efficiency in our U.S. facility will improve over time.
 
If the demand for our products increases and we are unable to expand our manufacturing capabilities because of our reliance on a limited number of third party suppliers or for any other reason which may be outside of our control, our business, operating results and financial condition may be materially adversely affected. Conversely, if the demand for our products decreases or if we do not produce the number of products that we plan to after the expansion projects are complete and operational, we may not be able to spread a significant amount of our fixed operational expenses over the production volume, thereby increasing our per unit cost, which would have a negative impact on our financial condition and results of operations.
 
 
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We have entered into bond purchase loan agreements with the Development Authority of Bryan County, dated December 1, 2014 and December 22, 2015 pursuant to which we are granted a property tax abatement with respect to our U.S manufacturing 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 the total capital investment amount in our U.S manufacturing facility. 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 adversely impact our projected margins and results of operations. See “ITEM 4.D: Information on Caesarstone - Property, Plants and Equipment”.
 
We may encounter significant delays in manufacturing if we are required to change the suppliers for the quartz used in the production of our products.
 
Our principal raw materials are quartz, polyester and pigments. We acquire quartz from quartz manufacturers from Turkey, India, Israel and a number of European countries. We do not have long-term supply contracts with our suppliers of quartz and execute purchase orders from time to time. We cannot be certain that any of our current suppliers will continue to provide us with the quantities of quartz that we require or satisfy our anticipated specifications and quality requirements. We may also experience a shortage of quartz if, for example, demand for our products increases.
 
In 2015, approximately 71% of our quartz was imported from four suppliers in Turkey and we expect a similar level in 2016. There have been significant tensions between Turkey and the State of Israel that have raised questions as to whether commercial arrangements between companies in these countries would be adversely impacted. If tensions between Turkey and Israel worsen, our Turkish suppliers may not provide us with quartz shipments. Of the 71% of quartz acquired from Turkey in 2015, approximately 41% was acquired from Mikroman Madencilik San ve TIC.LTD.STI (“Mikroman”), which constitutes approximately 29% of our total quartz, and approximately 36% was acquired from Polat Maden Sanayi ve Ticaret A.S (“Polat”), which constitutes approximately 25% of our total quartz. Our current supply arrangement with Polat is set forth in a letter agreement, and our arrangement with Mikroman is memorialized in an unsigned draft letter agreement which is being finalized as of the date of this report. We expect our agreements with Mikroman and Polat with respect to prices and quantities to remain unchanged through the end of 2016. However, if they fail to perform in accordance with these arrangements, we may not be successful in enforcing them. If we are unable to agree upon prices with such suppliers or effectively enforce the terms of these verbal or written agreements, our suppliers could cease supplying us with quartzite and quartz. If our supply of quartzite from Turkey is adversely impacted or if, for any other reason, any of our Turkish quartzite suppliers does not perform in accordance with our agreements with them or ceases supplying us with quartzite, for any reason, we would need to locate and qualify alternate suppliers. This could result in substantial delays in manufacturing, increase our costs, negatively impact the quality of our products or require us to adjust our products and our manufacturing processes. Any such delays in or disruptions to the manufacturing process could materially and adversely impact our reputation, revenues and results of operations as well as other business aspects, such as our ability to serve our customers and meet their order requests.
 
We face risks of litigation and liability claims on environmental, health and safety, product liability and other matters, and the extent of such exposure can be difficult or impossible to estimate, but could negatively impact our financial condition and results of operations.
 
Our manufacturing facilities and operations in Israel and our manufacturing facility in the State of Georgia, United States, are subject to numerous Israeli and U.S. laws and regulations, respectively. For information on our facilities, see “ITEM 4.D: Information on Caesarstone—Property, Plants and Equipment.” Applicable U.S. laws and regulations include federal, state and local environmental laws and regulations, specifically of the State of Georgia. Laws and regulations in both countries deal with pollution and the protection of the environment, standards for emissions, discharges into the environment or to water, the disposal of effluents, soil and water contamination, product specifications, the generation, treatment, import, purchase, use, storage and transport of hazardous materials, the storage, treatment and disposal and remediation of solid and hazardous waste, including sludge, and the protection of worker health and safety. Liability under these laws and regulations involves inherent uncertainties. Violations of environmental, health and safety laws and regulations may lead to civil and criminal sanctions against us, our directors, officers or our employees, Caesarstone Technologies USA, Inc., our subsidiary which operates our U.S. manufacturing facility, and our subsidiary’s officers and employees. In some cases, liability under such laws and regulations may result in compelling installation of additional controls and substantial penalties, injunctive orders and facility shutdowns. If our operations are enjoined because of failure to comply with environmental regulations, the decrease in production could adversely affect our results of operations. Violations of environmental laws could also result in obligations to investigate or remediate contamination, third-party property damage or personal injury claims allegedly due to the migration of contaminants off-site.
 
 
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In addition, the operation of our manufacturing facilities in Israel and in the United States is subject to applicable permits, standards, licenses and approvals, such as business permits, poisons permits in Israel, building permits, and sewer-water disposal approval in Richmond Hill, the State of Georgia. Currently, we are also seeking to obtain building permits with respect to improvements and additions made to our manufacturing facilities in Israel. Our ability to obtain necessary permits and approvals for our manufacturing facilities in Israel and in the United States may be subject to additional costs and possible delays beyond our initial projections. All of these permits, licenses, approvals, limits and standards require a considerable amount of monitoring, record-keeping and reporting in order for us to demonstrate compliance with the underlying permit, license, approval, limit or standard. Generally, non-compliance with permits, licenses and approvals, their absence or incomplete documentation of our compliance status with license, permits and approvals may result in the imposition of fines, penalties and injunctive relief. We may not have been, or may not be, at all times, in complete compliance with all applicable legal requirements and we may incur material costs or liabilities in connection with such violations, or in connection with remediation at our sites, or third-party sites where it has been alleged that we have liability, in excess of the amounts we have accrued. We may also incur unexpected interruptions to our operations, administrative injunctions requiring operation stoppages, fines and other penalties or be unable to renew our permits to operate our manufacturing facilities and expand the buildings at our manufacturing facilities to accommodate capacity increases.

From time to time, we face compliance issues related to our two manufacturing facilities in Israel:
 
 
We have presented a plan to the Israeli Ministry of the Protection of the Environment, or the IMPE, to address environmental regulatory issues related to the emission of styrene gas from our Bar Lev facility. While we have applied and continue to apply measures to correct the styrene ambient air standards in our facilities, our constant controlling of styrene emission levels requires strict maintenance and compliance with work processes, and there is no assurance that we will succeed in complying with the required standards on a continuous basis. Following a hearing held in December 2015 by the IMPE with respect to the styrene emission levels from our plant in Sdot Yam, the IMPE indicated that it intends to conduct unannounced inspections of our facilities. The IMPE has indicated that it would conduct such inspections of our Bar Lev facility as well. In the event that during such unannounced inspections IMPE decides that it finds styrene emission levels to be above the standards, it may lead to the revocation of our business license, facility shutdowns and other sanctions, as described above.  For further discussion, see “ITEM 4.B: Information on Caesarstone—Business Overview—Environmental and Other Regulatory Matters—Environmental Regulations—Styrene gas emissions.”
 
 
We are currently implementing measures in order to comply with dust emission occupational health standards. There is no assurance that we will be successful in employing these measures, and an ultimate failure to comply could have a material adverse effect on our business and results of operations. Recently, we were notified by the IMEI that due to deviations from the dust and styrene employees’ health and safety emission standards in our Bar Lev facility, it objected to the renewal of the business license for our Bar Lev facility. The business license for our Bar Lev facility was extended until April 30, 2016, and we are in discussions with the IMEI in order to obtain their approval of a further extension of such business license.
 
 
In 2014, the IMPE changed the classification of our sludge waste in Israel, which resulted in higher disposal costs. We are in the process of examining the permitted uses for our sludge waste following the new classification, to allow for reducing the disposal costs.  However, there is no assurance that we will be successful in reducing our costs. For a discussion of the IMPE’s analysis of our sludge waste disposal, see “ITEM 4.B: Information on Caesarstone—Business Overview—Environmental and Other Regulatory Matters—Environmental Regulations—Sludge waste disposal.”
 
 
We currently dispose of our waste water from our Bar-Lev and Sdot- Yam manufacturing facilities in a treatment plant pursuant to permits obtained from the IMPE, which expire on March 31, 2016 and December 31, 2016, respectively.  If any of these permits is not renewed, we will have to find an alternative solution to waste water disposal at some or all of our facilities in Israel, and the accompanying increase in costs may have an adverse effect on our business, financial condition or results of operations.
 
 
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From time to time, we are involved in other legal proceedings and claims in the ordinary course of business related to a range of matters, including environmental, contract, intellectual property rights, employment, product liability and warranty claims and claims related to modification and adjustment or replacement of product surfaces sold. We use various substances in our products and manufacturing operations, which have been or may be deemed to be hazardous or dangerous. Other than as described above, we cannot predict whether we may become liable under environmental and product liability statutes, rules, regulations and case law of the countries in which we operate. The amount of any such liability in the future could be significant and may adversely impact our financial condition and results of operations.
 
New environmental laws and regulations, new interpretations of existing laws and regulations, increased governmental enforcement of laws and regulations or other developments in Israel and in the United States could require us to make additional unforeseen expenditures. The requirements to be met, as well as the technology and length of time available to meet those requirements, continue to develop and change. These expenditures or 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.
 
We are subject to litigation, disputes or other proceedings, which could result in unexpected expenses and time and resources that could have a material adverse impact on our results of operation, profit margins, financial condition and liquidity.
 
In the past, claims have arisen from our relationships with distributors, service providers and employees. We are currently involved in several legal disputes described in “ITEM 8.A: Financial Information—Consolidated Financial Statements and Other Financial Information—Legal proceedings”, including:
 
In November 2011, Kfar Giladi Quarries Agricultural Cooperative Society Ltd. (“Kfar Giladi”), and Microgil Agricultural Cooperative Society Ltd. (“Microgil”), an entity we believe is controlled by Kfar Giladi, initiated arbitration proceedings against us that commenced in April 2012. We refer to Kfar Giladi and Microgil as “the claimants.” The claimants filed a complaint with the arbitrator against us seeking damages of NIS 232.8 million ($59.7 million), and in August 2012, we filed a complaint with the arbitrator seeking damages of NIS 76.6 million ($19.6 million) from the claimants. The arbitration arises out of a dispute related to the quartz processing agreement entered into by us in 2006 (the “Processing Agreement”) pursuant to which Kfar Giladi (which assigned its rights and obligations under the Processing Agreement to Microgil) committed to establish a production facility at its own expense within 21 months of the date of the agreement. Pursuant to the Processing Agreement, we committed to pay fixed prices for quartz processing services related to agreed-upon quantities of quartz over a period of ten years from the date set for the claimants to commence operating the production facility. We estimate that the total amount of such payments would have been approximately $55 million. It is our position that the production facility established by the claimants was not operational until approximately two years after the date required by the Processing Agreement, and as a result, we were unable to purchase the minimum quantities set forth in the Processing Agreement. It is also our position that the Processing Agreement was terminated by us following its breach by the claimants. In addition, we contend that once production began, the claimants failed to consistently deliver the required quantity and quality of ground quartz as agreed by the parties following the termination of the Processing Agreement. Our positions are disputed by the claimants.
 
In December 2007, we terminated our agreement in principle with our former South African agent, World of Marble and Granite (“WOMAG”), on the basis that it had breached the agreement. In the same month, we filed a claim for NIS 1.0 million ($0.3 million) in the Israeli District Court in Haifa based on such breach. In January 2008, WOMAG filed suit in South Africa seeking euro 15.7 million ($17.1 million). In September 2013, the South African Court determined that since a proceeding on the same facts was pending before another court (lis alibi pendens), the South African Court will stay the matter until the conclusion of the Israeli action. In December 2013, the magistrate’s court in Israel held that we were not entitled to terminate the agreement with WOMAG, as WOMAG had not breached the agreement. As the district court dismissed our appeal of the decision of the magistrate’s court, we have agreed with WOMAG to submit the matter to arbitration, which is to take place in South Africa in 2016. In October 2015, WOMAG amended its claim, seeking a reduced amount of  euro 7.1 million ($7.7 million) plus ZAR 43.7 million (South Africa RAND) ($2.8 million). It is our position that, as a detailed agreement was not entered into following the agreement in principle, the agreement in principle could be terminated upon reasonable notice, which we believe was provided. Although we intend to vigorously defend the case in the South African court, we believe that we recorded an adequate reserve for this claim.
 
 
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An adverse ruling in these proceedings could have a material adverse effect on us. If we are unsuccessful in defending a claim or elect to settle a claim, we could incur material costs that could have a material adverse effect on our business, results of operations and financial condition. See “ITEM 8.A: Financial Information—Consolidated Financial Statements and Other Financial Information—Legal proceedings” for more information regarding the material legal proceeding to which we are a party.
 
We have experienced quarterly fluctuations in revenues and net income as a result of seasonal factors and building construction cycles, which are hard to predict with certainty.
 
Our results of operations are impacted by seasonal factors, including construction and renovation cycles. We believe that the third quarter of the year exhibits higher sales volumes than other quarters because demand for quartz surface products is generally higher during the summer months in the northern hemisphere when the weather is more favorable for new construction and renovation projects, as well as due to efforts to complete such projects before the beginning of the new school year. Conversely, the first quarter is impacted by a slowdown in new construction and renovation projects during the winter months as a result of adverse weather conditions in the northern hemisphere, and, depending on the date of the spring holiday in Israel in a particular year, the first or second quarter is impacted by a reduction in sales in Israel due to such holiday. Similarly, sales during the first quarter in Australia are negatively impacted by fewer construction and renovation projects due to public holidays. In the third quarter of 2015, we generated 26.9% more revenue and a 41.9% higher adjusted EBITDA than the first quarter of 2015. 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.

We continuously explore opportunities for additional growth and business expansion, and may pursue a wider product offering, including introducing new products and materials. Such new initiatives 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 strengthen our brand. To maintain such advantage, strengthen our position in the market and grow our business, we may introduce new surface materials, introduce quartz surfaces designated for certain market segments under Caesarstone or another brand, and diversify our existing products offering through complementary products, such as sinks. Introducing new products involves uncertainties, such as gauging changing consumer preferences, developing, manufacturing, marketing and selling new technologies, products and materials, and entering into new market segments. Even if we decide to introduce new products and enter new markets, whether through cooperation with third party manufacturers or manufacturing at our own facilities, we may not be successful in capturing the market share dominated by competitors in this area, offer innovative alternatives ahead of the competition and 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 cause a material adverse affect on our margins and results of operation.
 
Consolidation in our industry may increase the competitive pressures to which we are subject and may enhance our competitors’ manufacturing, sales and marketing capabilities.
 
Due to the highly fragmented nature of the quartz surface market, we believe that consolidation is likely and a smaller number of large companies may take leading market positions. We believe we would encounter strong competition from any such larger companies following their consolidation. Larger companies are likely to benefit from economies of scale associated with quartz surface manufacturing that are becoming important to remain competitive in an increasingly global quartz surface market. Such economies of scale will be increasingly important as the quartz surface market matures in the future. In addition, larger companies may have significantly greater resources than we do to penetrate markets, in particular, by investing significant sums in raising awareness for their brand among end-consumers in order to drive sales of their products, as well as by operating manufacturing facilities closer to customers and end-consumers in various regions worldwide. If we are unable to grow our business organically or undertake our own acquisitions, we may lose market share, which could adversely affect our business, financial condition and results of operations.
 
 
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A significant portion of our revenues is derived from the distribution of our products by third-party distributors, and our distributors’ actions may have a material adverse effect on our business and results of operations. Our results of operations may be further impacted by the actions of our re-sellers in the United States.
 
Sales to third-party distributors accounted for 10.5% of our revenues in 2015. In indirect markets where we rely on third-party distributors, we depend on the success of their selling and marketing efforts. We have less control in markets where we sell through distributors than in markets where we distribute directly. The actions of our distributors could also harm our brand and company reputation in the marketplace. Any disruption in our distribution network could have a material negative effect on our ability to sell our products or market our brand, which could materially and adversely affect our business and results of operations.

Our initial engagements with some of our distributors are pursuant to agreement or terms of sale, as applicable, granting such distributor one year of exclusivity in that market in consideration for meeting minimum sales targets. After the initial one-year period, we may enter into a distribution agreement for a longer period of several years. However, in the majority of cases we continue to operate on the basis of our initial agreement or general terms of sale, with or without its extension in writing, or without an agreement. We supply our products to distributors upon the receipt of a purchase order. Some of our distributors operate on nonexclusive terms of sale agreements or without any written agreements. The lack of a written agreement with many of our distributors may lead to ambiguities, costs and challenges in enforcing our rights. Our distribution agreements generally include annual sales targets, and if any distributor fails to meet its sales targets, we may attempt to terminate our distribution agreement with that distributor. Unless otherwise indicated in a specific agreement, if we terminate a distribution engagement without cause, we may be required to provide reasonable prior notice, although the exact period may not be specified. 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.” We may be unable to distribute our products through another distributor within the territory during the notice period, which may have an adverse effect on our business and results of operations, our relationships with our customers and end-consumers and our brand reputation. This may also result in our loss of market share to competitors. Upon termination, we may experience difficulties in identifying and retaining new distributors. Distributors may generally terminate a distribution agreement with us upon reasonable notice (although our written agreements with distributors, where applicable, provide for termination without cause only after the initial period). As a result, distributors may distribute a competitor’s quartz surfaces or other surface materials, which may cause us to lose market share. We may be unable to develop an alternative distribution network in a region. The termination of distribution arrangements may result in litigation. We may have to incur significant legal fees and management may have to devote significant effort, time and resources to defending litigation-related issues, which may detract from their ability to run our business.

In the U.S., we supply our products in part to re-sellers who in turn sell them to fabricators, contractors, developers and builders. The actions of our re-sellers may also harm our brand and reputation in the marketplace. Any disruption in our relationships with re-sellers could have a negative effect on our ability to sell our products or market our brand in the respective territories in which they operate, which could materially and adversely affect our business and results of operations. The termination of arrangements with re-sellers may result in litigation, as a result of which we may have to incur significant legal fees and management may have to devote significant effort, time and resources to defending litigation-related issues, which may detract from their ability to run our business.
 
In addition, our distributors, and our re-sellers in the U.S., generally disclose to us sales volumes and other information on a monthly or quarterly basis. We do not have audit rights with respect to these reports and, therefore, cannot verify their accuracy. An inaccurate report as to sales volumes could result in a significant and unexpected volatility in sales to a distributor or re-seller during a particular period and may impact our ability to plan our supply of demand to our products. Even if the reports are accurate, a distributor or re-seller may make subsequent revisions to the information it has provided or we may fail to understand its future sales prospects. Either of these events could result in the accumulation of excess inventory by that distributor or re-seller and unexpected fluctuations in our sales. Any of these events could adversely affect or cause unexpected fluctuations in our results of operations.
 
 
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We sell our products through our subsidiaries and distributors in over 50 countries, purchase our raw materials, equipment and machinery from vendors in different countries and manufacture our products in Israel and the United States. Our operating results may suffer if we are unable to manage our international operations effectively.
 
Our products are sold in over 50 countries throughout the world, our raw materials, equipment and machinery are acquired in different countries and our products are manufactured in Israel and the United States. We are therefore subject to risks associated with having international operations. In 2015, 92.1% of our revenues were derived from sales outside Israel. We anticipate that sales from operations outside of Israel will continue to represent a significant portion of our total sales. Our sales, purchases and operations outside of Israel are subject to risks and uncertainties, including:
 
 
fluctuations in exchange rates;
 
 
fluctuations in land and sea transportation costs, as well as delays in transportation and other time-to-market delays, including as a result of strikes;
 
 
unpredictability of foreign currency exchange controls;
 
 
compliance with unexpected changes in regulatory requirements;
 
 
compliance with a variety of regulations and laws in each of the jurisdictions we operate, where we purchase raw materials, equipment or machinery or where our products are sold;
 
 
difficulties in collecting accounts receivable and longer collection periods;
 
 
changes in tax laws and interpretation of those laws; and
 
 
difficulties enforcing intellectual property and contractual rights in certain jurisdictions.
 
In addition, certain jurisdictions could impose taxes, tariffs, quotas, custom duties, trade barriers and other similar restrictions on our sales, purchases and exports. We are also subject to the Foreign Corrupt Practices Act (the “FCPA”) and may be subject to the U.K. Bribery Act, which prohibit companies and their intermediaries from making improper payments to foreign government officials and other persons for the purpose of obtaining or retaining business. If we are found to be in violation of the FCPA, the U.K. Bribery Act or other anti-bribery laws (either due to acts or inadvertence of our employees, or due to the acts or inadvertence of others), we could suffer criminal or civil penalties or other sanctions, which could have a material adverse effect on our business.
 
Further, our business operations could be interrupted and negatively affected by economic changes, geopolitical regional conflicts, terrorist activity, political unrest, civil strife, acts of war, strikes and other economic or political uncertainties. For example, a labor slowdown from June 2014 through February 2015 at a seaport in California affected our ability to timely supply our products in part of the U.S. market and may have a further negative effect on our operations should it persist. All of these risks could also result in increased costs or decreased revenues, either of which could adversely affect our profitability. Our business is also expected to subject us and our representatives, agents and distributors to laws and regulations of the jurisdictions in which we operate or where our products are sold. We may depend on distributors and agents outside of Israel for compliance and adherence to local laws and regulations. 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 adversely affect our business outside of Israel and our financial condition and results of operations.
 
 
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The steps that we have taken to protect our brand and other intellectual property may not be adequate, and we may not succeed in preventing others from appropriating our intellectual property.
 
We have obtained trademark registrations that we consider material to the marketing of our products, all of which are marketed under the trade name Caesarstone, including CAESARSTONE®, CONCETTO®, and our Caesarstone logo. We have also obtained trademark registrations for additional marks related to our product collections, including MOTIVO®. In many of our markets, we also use trademarks (registered and unregistered) for the various colors and models of our products. We believe that our trademarks are important to our brand, success and competitive position. In the past, some of our trademark applications for certain classes of applications of our products have been rejected or opposed in certain markets and may be rejected for certain application classes in the future, in all or parts of our markets, including without limitation, for flooring and wall cladding. This may result in our inability to use our brand for certain applications of products, which could harm our competitive position and adversely impact our results of operations. We anticipate that, as the quartz surface market becomes increasingly competitive, maintaining and enhancing our brand may become more important, difficult, and expensive. If we are unsuccessful in challenging a third party’s products on the basis of trademark infringement, continued sales of such products could adversely affect our sales and our brand and result in the shift of consumer preference away from our products. We are currently subject to opposition proceedings with respect to applications for registration of our trademarks, including Caesarstone™, in certain jurisdictions with respect to certain trademark classifications. We have also in the past been, and may in the future be, subject to opposition proceedings with respect to applications for registration of our intellectual property, including but not limited to our trademarks. Barriers to registering our brand names and trademarks in various countries may restrict our ability to promote and maintain a cohesive brand throughout our key markets.
 
We have started to seek patent protection for some of our products and technologies. We have obtained patents for certain of our technologies and products, and have several 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. There can be no assurance that new or 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.
 
To protect our know-how and trade secrets, we customarily require our senior management and certain key employees 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. Despite our efforts, 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. The actions we take to protect our intellectual property rights may also not be adequate to prevent others from obtaining intellectual property rights overcoming ours, and blocking the production and sales of our existing or future products. Moreover, third parties, including our competitors, may establish intellectual property rights that may limit our ability to develop and sell certain new products and apply certain technologies. Our competitors may seek to limit our marketing and offering of products relying on their alleged intellectual property rights.  In addition, the laws of certain foreign countries may not protect intellectual property rights to the same extent as the laws of the United States. For example, historically, China has not protected intellectual property rights to the same extent as the United States, and infringement of intellectual property rights continues to pose a serious risk to doing business in China. We may face significant expenses and liability in connection with the protection of our intellectual property rights outside the United States. Any litigation, whether initiated by us to protect our intellectual property rights or by others claiming that we infringed their intellectual property rights, could be unsuccessful, may result in substantial costs, harm our reputation and require significant attention by our management and technical personnel. If we are unable to successfully protect our rights or resolve intellectual property conflicts with others, our business or financial condition may be adversely affected.
 
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 stop the sale of 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.
 
 
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Disruptions to our information technology systems as well as our failure to upgrade and adjust our information technology systems globally may disrupt our operations, hinder our growth and materially 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. Our enterprise resources planning (“ERP”) software provides us with accessible quality data, allowing us to accurately enter, price and configure valid products in a made-to-order, demand-driven manufacturing environment. Carefully maintained infrastructure is critical, given that our products can be built in a number of combinations of sizes, colors, textures and finishes, and our production control software enables us to carefully monitor the quality of our slabs. In 2014, we completed implementation of a new global ERP system based on an Oracle platform. Our management information systems will require modification and refinement as we grow and as our business needs change, which could prolong difficulties we experience with system transitions, and we may not always employ the most effective systems for our purposes. 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 our business, and we may fail to meet our reporting obligations.
 
Our servers and data are predominantly located in Israel. We have a data back-up system in place and we are currently working to establish a disaster recovery location and implement a complete disaster recovery plan to enable quick recovery from complete physical damage to our servers. If our current back-up storage arrangements and future 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.
 
Furthermore, we can provide no assurance that our current IT system is fully protected against third-party intrusions, viruses, hacker attacks, information or data theft or other similar threats. A cyber-attack that bypasses our IT security systems causing an IT security breach may lead to a material disruption of our information systems and/or the loss of business information. Any such event could have a material adverse effect on our business. We have experienced and expect to continue to experience actual or attempted cyber attacks of our IT systems or networks; however, none of these actual or attempted cyber attacks has had a material impact on our operations or financial condition. In addition, the continued worldwide threat of terrorism and heightened security in response to such threat may cause further disruptions and create further uncertainties or may otherwise materially harm our business. 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.
 
We may have exposure to greater-than-anticipated tax liabilities.
 
We have entered into transfer pricing arrangements that establish transfer prices for our inter-company operations. However, our transfer pricing procedures are not binding on the applicable taxing authorities. The amount of income tax that we pay could be 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.
 
 
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Our facilities in Israel receive different tax benefits as “Preferred Enterprises” under the Israeli Law for the Encouragement of Capital Investments, 1959 (the “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 will have no tax benefits. The 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 of 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.
 
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” (previously reported as FIN 48 “Accounting for Uncertainty in Income Taxes”) in determining our accrued liability for unrecognized tax benefits, which totaled approximately $1.4 million as of December 31, 2015. 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.
 
Our business may be affected by changes in consumer preferences or the development of alternative surface products.
 
The majority of our end-consumers are those installing or replacing kitchen countertops, and to a lesser extent, bathroom countertops and surfaces and other applications. Factors that strongly affect consumer purchasing decisions include popular home interior design trends, product quality, price, slab width, product line breadth, design leadership, time to market, customer service and distribution coverage. If we are unable to anticipate or react quickly to changes in consumer preferences in these areas, we may lose market share and our results of operations may suffer. In the future, consumers may not place as much value on branded quartz surfaces or prefer other brands, which could reduce our market share or require us to lower our prices. End-consumers’ preferences may change in response to poor installations of our products by third parties, including fabricators and installers, which we do not control. Widespread or publicized inferior installations of our products could have a material adverse impact on our brand. End-consumers’ demand for our products could change if a serial manufacturing defect is identified in our products, which could harm our reputation in the marketplace. The development of a new surface material that decreases consumers’ demand for quartz products due to its design, superior quality, price, technical parameters, level of service, availability, branding, trend or other factors may also result in a loss of market share and our results of operations may suffer. For example, technical ceramic surfaces have been offered in different markets as countertops in recent years and may in the future become a strong competitor of quartz surface products; however, it is not yet known if they will pose such a threat. If we are unsuccessful in competing against new surface materials, we could lose future sales and market share, which would have an adverse impact on our business, revenues, profitability and cash flows.
 
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 adversely affect our business and our future financial condition or results of operations.
 
We are dependent on the skills and experience of our senior management team and other skilled and experienced personnel. These individuals possess strategic, managerial, sales, marketing, operational, manufacturing, logistical, financial and administrative skills that are important to the operation of our business. We have experienced and may continue to experience employee and management turnover. The loss of any of these individuals and the inability to attract, retain and maintain additional personnel, each could prevent us from implementing our business strategy and could adversely affect our business and our future financial condition or results of operations. 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 of our existing senior management personnel and key personnel or to attract additional qualified personnel when needed.
 
 
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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 expect to encounter intense competition from other participants in our industry, including quartz surface manufacturers, suppliers and distributors, for business combination or acquisition opportunities in the highly fragmented global quartz surfaces market. Many of these participants are well-established and have significant experience identifying and effecting acquisitions of companies. These participants may possess greater technical, human and other resources, or more local industry knowledge than we do, and our financial resources may be relatively limited compared to many of them. In addition, 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 a number of risks, including 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 and potential unknown liabilities associated with acquired businesses. In connection with any acquisition, we may encounter liabilities in the future associated with its business that we did not experience prior to the acquisition or that were unknown at the time of acquisition that could have an adverse impact on our results of operations. Any inability to integrate completed combinations or acquisitions in an efficient and timely manner could have an adverse impact on our results of operations. In addition, we may not recognize 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 our management attention, 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 previous 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 or result in dilutive issuances of securities.
 
Any difficulties with, damage to, or interruptions of, our manufacturing could impair or delay our output of products and harm our relationships with our customers and suppliers. If we are unable to continue to manufacture our existing products as planned and to increase our manufacturing capacity, our results of operations and future prospects will suffer.
 
Any difficulties with or interruptions of our manufacturing operations could delay our output of products and harm our relationships with our customers. Currently, we manufacture all of our products at our two facilities in Israel and our facility in the U.S. Due to the specialized nature of our manufacturing equipment and the quartz surface industry, we have to date had so far limited ability to outsource any part of our manufacturing to third parties. Our manufacturing production lines are comprised mainly of machinery from Breton, currently a leading global supplier for many companies which sell engineered stone manufacturing equipment. We depend on Breton for certain spare parts for our production line equipment and new production lines, which we may decide to acquire in order to increase our manufacturing capacity to meet the growing demand for our product, and anticipate we will continue to do so in the future. Inability or delays in obtaining machinery or specialty machine components and spare parts from Breton could prevent or delay our output of products and any future production line expansion plans.
 
 
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Damage to our manufacturing facilities or products caused by human error or negligence, software or hardware failures, physical or electronic security breaches, power loss or other failures or circumstances beyond our control, including acts of God, fire, explosion, flood, war, insurrection or civil disorder, acts of, or authorized by, any government, terrorism, accident, labor trouble or shortage, or inability to obtain materials, equipment or transportation could interrupt or delay our manufacturing or other operations. We may also encounter difficulties or interruptions as a result of the application of enhanced manufacturing technologies or changes to production lines to improve our throughput, construction of our new manufacturing lines, or to upgrade or repair our existing manufacturing lines.
 
Labor disputes or enforcement actions by environmental and health and safety authorities could result in a full or partial work stoppage or strikes by employees, as the case may be, that could delay or interrupt our output of products.
 
Our insurance policies have limited coverage in case of significant damage to our manufacturing facilities and may not fully compensate us for the cost of replacement and any loss from business interruptions. As a result, we may not be adequately insured to cover losses in the case of significant damage to our manufacturing facilities. 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 material adverse effect on our relationships with our distributors and customers, and on our financial results. 
 
Risks related to our relationship with Kibbutz Sdot-Yam
 
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.
 
As of February 24, 2016, Kibbutz Sdot-Yam beneficially owned approximately 32.5% of our issued and outstanding ordinary shares. One of our manufacturing facilities (as well as our headquarters and our research and development facilities) are located on lands leased by Kibbutz Sdot-Yam pursuant to two lease agreements between Kibbutz Sdot-Yam and the Israel Lands Administration (“ILA”), and an additional lease agreement between Kibbutz Sdot-Yam and the Edmond Benjamin de Rothschild Caesarea Development Corporation Ltd. (“Caesarea Development Corporation”). Pursuant to these underlying lease agreements with the ILA and with the Caesarea Development Corporation, each of the ILA and the Caesarea Development Corporation may terminate their respective lease in certain circumstances, including if Kibbutz Sdot-Yam commences proceedings to disband or liquidate, or in the event that Kibbutz Sdot-Yam ceases to be organized as a “kibbutz” as defined in the lease (i.e., a registered cooperative society classified as a kibbutz). If either of the leases is terminated, we may be unable to use the land where our headquarters and one of our two manufacturing facilities are located, which would adversely affect our business.
 
The first lease agreement between Kibbutz Sdot-Yam and the ILA expired in 2011 and has been extended pursuant to an option in the lease agreement for an additional 49 years through 2060. The second agreement between Kibbutz Sdot-Yam and the ILA was extended on several occasions for three- to five-year periods and most recently expired in late 2009. After a series of discussions with the ILA to renew this expired agreement, in 2015 the Kibbutz submitted a motion to the District Court for an injunction instructing the ILA to execute a long term lease agreement with the Kibbutz. This agreement permitted Kibbutz Sdot-Yam to use the property only for agriculture, residential and other internal community purposes, and previous agreements between Kibbutz Sdot-Yam and the ILA with respect to this property contained similar restrictions. In addition, this agreement required Kibbutz Sdot-Yam to receive the ILA’s approval before entering into the land use agreement with us permitting us to use the land and facilities, and no such approval was obtained. Our current use of the property and the rights granted to us by Kibbutz Sdot-Yam to use the land pursuant to the land use agreement may give the ILA the right to terminate the rights of Kibbutz Sdot-Yam to the property.
 
The lease agreements between Kibbutz Sdot-Yam and the Caesarea Development Corporation permit Kibbutz Sdot-Yam to use the property for the community needs of Kibbutz Sdot-Yam. In April 2014 Kibbutz Sdot-Yam and the Caesarea Development Corporation entered into a new agreement pursuant to which Kibbutz Sdot-Yam leases the relevant premises (including such premises which are leased by the Kibbutz to us) from the Caesarea Development Corporation until year 2037. This agreement is subject to a public recording procedure.In addition, Caesarea Development Corporation charges Kibbutz Sdot-Yam based on the use of the relevant portion of the property for industrial purposes, and thus, has provided recognition to Kibbutz Sdot-Yam’s use of such portion of the property for industrial purposes.
 
 
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If 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 material adverse effect on our results of operations.

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 Kibbutz Sdot-Yam. On June 6, 2007, we have entered into a long-term lease agreement with the ILA, 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. On March 31, 2011, we have entered into a land purchase and leaseback agreement with Kibbutz Sdot- Yam, pursuant to which, effective as of September 1, 2012, Kibbutz Sdot-Yam acquired from us our rights in the lands and facilities of the site in consideration for NIS 43.7 million ($10.9 million). The land purchase and leaseback agreement was simultaneously executed with a land use agreement pursuant to which Kibbutz Sdot-Yam permits us to use the site for a period of ten years with an automatic renewal for an additional ten years unless we provide Kibbutz Sdot-Yam two years’ advance notice that we do not wish to renew the lease.
 
The lease of our Sdot-Yam facility, located in Kibbutz Sdot-Yam, is made pursuant to the land use agreement with Kibbutz Sdot-Yam that became effective in March 2012. 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 Kibbutz Sdot-Yam. As a result of these restrictions, our ability to reorganize our manufacturing operations and headquarters in Israel is limited.
 
Pursuant to the land use agreements between us and Kibbutz Sdot-Yam, with respect to both our Sdot-Yam and Bar-Lev manufacturing facilities, 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, Kibbutz Sdot-Yam will build such facilities for us by using the proceeds of a loan that we will make to Kibbutz Sdot-Yam, which loan shall be repaid to us by off-setting the 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 Kibbutz Sdot-Yam to build such facilities in a timely manner. While Kibbutz Sdot-Yam is responsible under the agreement for obtaining various licenses, permits, approvals and authorizations necessary for use of the property, we have waived any monetary recourse against Kibbutz Sdot-Yam for failure to receive such licenses, permits, approvals and authorizations. 
 
Pursuant to an additional agreement with Kibbutz Sdot-Yam that became effective in March 2012 and remains effective through October 2017 (“Agreement For Arranging For Additional Accord”), if we wish to acquire or lease any additional lands, whether on the grounds of our Bar-Lev manufacturing facility, or elsewhere in Israel, for the purpose of establishing new manufacturing facilities or production lines: (i) Kibbutz Sdot-Yam will purchase the land and build the required facilities on such land at its own expense in accordance with our needs; (ii) we will perform any necessary building adjustments at our expense; and (iii) Kibbutz Sdot-Yam will lease the land and the facility to us under a long-term lease agreement with terms to be negotiated in accordance with the then prevailing market price. As a result, we depend on Kibbutz Sdot-Yam to act in connection with the expansion of our facilities. We may also incur greater costs associated with the purchase of additional land or the construction of additional facilities than we could obtain from a third-party due to our arrangement with Kibbutz Sdot-Yam.
 
 
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Pursuant to the Agreement For Arranging For Additional Accord, we have entered into an agreement with Kibbutz Sdot-Yam dated August 6, 2013 (“Agreement For Additional Land”), pursuant to which Kibbutz Sdot-Yam acquired additional land of approximately 12,800 square meters on the grounds near our Bar-Lev manufacturing facility (“Additional Bar-Lev Land”), which we required in connection with the construction of the fifth production line at our Bar-Lev manufacturing facility and leased it to us at market value, in accordance with the terms of the Agreement For Arranging For Additional Accord. Under the agreement, Kibbutz Sdot-Yam committed to (i) acquire the long-term leasing rights of the Additional Bar-Lev Land from the ILA, (ii) perform such preparation work and construction, in conjunction with the administrative body of Bar-Lev industry park and other contractors according to our plans; (iii) build a warehouse according to our plans, and (iv) obtain all permits and approvals required for performing the preparation work of the Additional Bar-Lev Land and for the building of the warehouse. The warehouse in Bar-Lev will be situated both on the current and Additional Bar-Lev Land. The financing of the building of the warehouse will be made through a loan that will be granted by us to Kibbutz Sdot-Yam, in the amount of the total cost related to the building of the warehouse, and such loan, including principal and interest, shall be repaid by setoff of the lease due to Kibbutz Sdot-Yam by us for our use of the warehouse. The principal amount of the loan will bear interest at a rate of 5.3% a year.  In November 2015, the preparation work has been completed by the Kibbutz and the Additional Bar-Lev Land was delivered to the Company. The construction of the warehouse has not started yet and is pending receiving a building permit.

For more information with respect to these agreements, 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 Kibbutz Sdot-Yam, which beneficially owns 32.5% of our shares as of February 24, 2016. We have entered into certain agreements with Kibbutz Sdot-Yam pursuant to which Kibbutz Sdot-Yam provides us with, among other things, a portion of our labor force, electricity, maintenance, 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 Kibbutz Sdot-Yam 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. See “ITEM 7.B: Major Shareholders and Related Party Transactions—Related Party Transactions.”
 
Under Israeli law, our board, audit committee and shareholders may be required to reapprove certain of our agreements with Kibbutz Sdot-Yam every three years, and their failure to do so may expose us to liability and cause significant disruption to our business.
 
The Companies Law requires that the authorized corporate organs of a public company approve every three years any extraordinary transaction in which a controlling shareholder has a personal interest and that has a term of more than three years, unless a company’s audit committee, constituted in accordance with the Companies Law, determines, solely with respect to agreements that do not involve compensation to a controlling shareholder or his or her relatives, in connection with services rendered by any of them to the company or their employment with the company, that a longer term is reasonable under the circumstances. Our implementation of this requirement with respect to the agreements entered into between us and Kibbutz Sdot-Yam may be challenged by regulators and other third parties. See “ITEM 7.B: Major Shareholders and Related Party Transactions—Related Party Transactions—Relationship and agreements with Kibbutz Sdot-Yam.”
 
Our audit committee has determined that the terms of all the agreements entered into between us and Kibbutz Sdot-Yam are reasonable under the relevant circumstances, except for the manpower agreement entered into between Kibbutz Sdot-Yam and us on January 1, 2011, as it relates to office holders, and the services agreement entered into between Kibbutz Sdot-Yam and us on July 20, 2011 (as amended). See “ITEM 7.B: Major Shareholders and Related Party Transactions—Related Party Transactions.” Our manpower agreement, as it relates to office holders, and our services agreement, both with Kibbutz Sdot-Yam, have been reapproved in 2015 under the Companies Law requirements and are subject to re-approval in 2018. If the approval of our shareholders is required, it must fulfill one of the following requirements:
 
 
a majority of the shares held by shareholders who have no personal interest in the transaction and are voting at the meeting must be voted in favor of approving the transaction, excluding abstentions; or
 
 
the shares voted by shareholders who have no personal interest in the transaction who vote against the transaction represent no more than 2% of the voting rights in the company.
 
 
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If our audit committee, board and shareholders do not re-approve the manpower agreement and the services agreement, or if it is determined that re-approval of our other agreements with Kibbutz Sdot-Yam is required every three years and the re-approval is not obtained, we will be required to terminate the agreements, which may be considered a breach under the terms of the 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 Kibbutz Sdot-Yam under the manpower agreement and the service agreement, which may take time, and we can provide no assurance that we can obtain the same or better terms with a third party than those we have agreed to with Kibbutz Sdot-Yam.
 
Risks related to our ordinary shares
 
We cannot provide any assurance regarding the amount or timing of dividend payments.
 
Prior to our IPO, our controlling shareholders, at that time, received periodic dividends. In connection with our IPO, we determined not to pay any dividends until at least March 21, 2013, one year following such offering. We distributed a dividend in the amount of $20.1 million in December 2013 and in the amount of $20.0 million in December 2014. We currently expect that payments of dividends will be made from time to time based on the recommendation of our board of directors, after taking into account legal limitations, growth plans and contractual limitations under our credit agreements, and other factors that our board of directors may deem relevant. At this time, we do not have a declared dividend policy, although we may adopt one in the future, and 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.
 
Our ordinary shares were first offered publicly in our IPO in March 2012, at a price of $11.00 per share. In April 2013 and June 2014, pursuant to follow-on offerings, our shareholders registered and sold additional amounts of our ordinary shares at a price of $23.25 and $45.50 per share, respectively. Since the pricing of our June 2014 offering, our ordinary shares have traded as high as $72.01 per share and as low as $27.31 per share through February 24, 2016.
 
The market price of our ordinary shares could be highly volatile and may fluctuate substantially as a result of many factors, including:
 
 
actual or anticipated fluctuations in our results of operations;
 
 
variance in our financial performance from the expectations of market analysts;
 
 
announcements by us or our competitors of significant business developments, changes in distributor relationships, acquisitions or expansion plans;
 
 
changes in the prices of our raw materials or the products we sell;
 
 
our involvement in litigation;
 
 
our sale of ordinary shares or other securities in the future;
 
 
market conditions in our industry;
 
 
changes in key personnel;
 
 
the trading volume of our ordinary shares;
 
 
changes in the estimation of the future size and growth rate of our markets;
 
 
changes in our board of directors, including director resignations;
 
 
actions of investors and shareholders, including short seller reports and proxy contests; and
 
 
general economic and market conditions.
 
Although our ordinary shares are listed on the Nasdaq Global Select Market, an active trading market on the Nasdaq Global Select Market may not be sustained. If an active market for our ordinary shares is not sustained, it may be difficult or even impossible to sell ordinary shares in the United States.
 
 
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In addition, the stock markets have experienced extreme price and volume fluctuations. Broad market and industry factors may materially harm the market price of our ordinary shares, regardless of our business performance.

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. On August 25, 2015, we became subject to a putative securities class action claim in the U.S. District Court for the Southern District of New York related to losses allegedly suffered as a result of the decline in the market price of our ordinary shares. See “ITEM 8: Financial Information- Legal Proceedings”. Although we believe this claim is without merit and intend to contest it vigorously, we could incur substantial costs and our management’s attention and resources could be diverted as a result of this claim or any similar claim in the future. Expenses incurred and payments due with respect to this claim will be covered under our directors’ and officers’ liability insurance policy, subject to deductibles and the terms and limit of the coverage.

If equity research analysts do not publish research or reports about our business or if analysts, including short sellers, issue unfavorable commentary or downgrade our ordinary shares, the price of our ordinary shares could decline.
 
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. The price of our ordinary shares could decline if one or more securities analysts downgrade our ordinary shares or if one or more of those analysts issue other unfavorable commentary or cease publishing reports about us or our business. The market price for our common stock has been in the past, and may be in the future, adversely affected by allegations made in reports issued by short sellers regarding our business model, our management and our financial accounting.
 
The substantial share ownership position of Kibbutz Sdot-Yam will limit your ability to influence corporate matters.
 
As of February 24, 2016, Kibbutz Sdot-Yam beneficially owned 32.5% of our ordinary shares.  As a result of this concentration of share ownership, Kibbutz Sdot-Yam acting on its own will continue to have significant voting power on all matters submitted to our shareholders for approval, including:
 
 
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 shares 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 Kibbutz Sdot-Yam may not always coincide with the interests of our other shareholders. This concentration of ownership may lead to proxy contests initiated by Kibbutz Sdot-Yam. In connection with our annual general meeting of shareholders held in December 2015, Kibbutz Sdot-Yam 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. The majority of our shareholders rejected the proposal of Kibbutz Sdot-Yam and approved the nominees proposed by the board of directors. 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 adversely affect our share price.
 
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.
 
 
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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, director nomination procedures and quorum requirements at shareholders’ meetings. In addition, we may choose to follow Israeli corporate governance practice instead of Nasdaq requirements to obtain 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 percent 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 exemptions from certain corporate governance requirements on U.S. stock exchanges that are available to foreign private issuers.
 
Our United States shareholders may suffer adverse tax consequences if we are characterized as a passive foreign investment company.
 
Generally, if for any taxable year, 75% or more of our gross income is passive income, or at least 50% of our assets are held for the production of, or produce, passive income, we would be characterized as a passive foreign investment company for United States federal income tax purposes. There can be no assurance that we will not be considered a passive foreign investment company for any taxable year. If we are characterized as a passive foreign investment company, our U.S. shareholders may suffer adverse tax consequences, including having gains realized on the sale of our ordinary shares treated as ordinary income, rather than capital gain, the loss of the preferential rate applicable to dividends received on our ordinary shares by individuals who are U.S. holders, and having interest charges apply to distributions by us and the proceeds of share sales. See “ITEM 10.E: Additional Information—Taxation—United States Federal Income Taxation—passive foreign investment company considerations”.
 
 
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The market price of our ordinary shares could be negatively affected by future sales of our ordinary shares.
 
As of February 24, 2016, we had 35,190,255 ordinary shares outstanding. This included approximately 11,440,000 ordinary shares, or 32.5% of our ordinary shares, beneficially owned by Kibbutz Sdot-Yam, which can be resold into the public markets in accordance with the requirements of Rule 144, including volume limitations. Sales by us or by Kibbutz Sdot-Yam 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 impair our ability to raise capital through a future sale of, or pay for acquisitions using, our equity securities.
 
Kibbutz Sdot-Yam may require us to effect a registered offering of up to an additional 11,440,000 shares under the Securities Act for resale into the public markets. All shares sold pursuant to an offering covered by such registration statement or statements will be freely transferable. See “ITEM 7.B: Major Shareholders and Related Party Transactions—Related Party Transactions—Registration rights agreement.”
 
In addition to these registration rights, as of February 24, 2016, 1,300,910, ordinary shares were reserved for issuance under our 2011 Incentive Compensation Plan (the “Plan”) of which options to purchase 989,485 ordinary shares were outstanding, with a weighted average exercise price of $32.28 per share, and 55,100 Restricted Stock units (RSUs) were outstanding, with an exercise price of $0.01. On March 23, 2012, we filed a registration statement on Form S-8 registering up to 2,375,000 ordinary shares that we may issue under our stock incentive plans. On December 3, 2015, our shareholders approved an increase to the pool of shares reserved for issuance under the Plan by additional 900,000 shares. Shares included in such registration statement 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 adversely impacted.
 
We are subject to the Israeli Hours of Work and Rest Law, 1951 (the “Rest Law”), which 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 an infringement of the Rest Law. In January 2016, 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, 2017. There is no assurance that we will be able to obtain such permit in the future, and if we do not, we will be required to either refrain from operating our Sdot- Yam facility on Saturdays and Jewish holidays, or employ non-Jewish employees. Prior to obtaining such permit, in our Sdot-Yam facility, from the fourth quarter of 2015, our Jewish and non-Jewish employees worked only six days a week, not including Saturdays. In our Bar-Lev facility, our Jewish employees do not work on Saturdays, while our non-Jewish employees are employed on such days.
 
If we are deemed to be in violation of the Rest Law, we and our officers may be exposed to administrative and criminal liabilities, including fines, and our operational and financial results could be materially adversely impacted. If we fail to obtain a permit in the future or if we are unsuccessful in employing only non-Jewish employees on Saturdays and Jewish holidays, we may be required to halt operations of our manufacturing facilities in Israel during such days, have less production capacity and as a result experience a material adverse effect on our revenues and profitability.
 
Conditions in Israel could adversely affect our business.
 
We are incorporated under Israeli law and our principal offices and two of our manufacturing facilities are located in Israel. Accordingly, political, economic and military conditions in Israel directly affect our business. Since the State of Israel was established in 1948, a number of armed conflicts have occurred between Israel and its neighboring countries. Although Israel has entered into various agreements with Egypt, Jordan and the Palestinian Authority, there has been an increase in unrest and terrorist activity, which began in September 2000 and is continuing today with varying levels of severity. In mid-2006, Israel was engaged in an armed conflict with Hezbollah in Lebanon, resulting in thousands of rockets being fired from Lebanon and disrupting most day-to-day civilian activity in northern Israel. Starting in December 2008, for approximately three weeks, Israel engaged in an armed conflict with Hamas in the Gaza Strip, which involved missile strikes against civilian targets in various parts of Israel and negatively affected business conditions in Israel. An armed conflict between Israel and Hamas in the Gaza Strip occurred again in November 2012 and July and August 2014. 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. Recent 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. Any armed conflicts, terrorist activities or political instability in the region could adversely affect our business, financial condition and results of operations.
 
 
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Our facilities in the Bar-Lev Industrial Park are located in northern Israel and are in range of rockets that were fired during 2006 from Lebanon into Israel. In the armed conflict between Israel and Hamas in Gaza Strip in July and August 2014, rockets from Gaza Strip reached the area of our Sdot-Yam plant. 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 adversely affected. In addition, our commercial insurance in Israel does not cover losses that may occur as a result of acts of war; however, losses as a result of terrorist attacks are covered by our insurance for damages of up to $20 million to our facilities, as are losses due to a disruption to the ongoing operations, if such damages are not covered by the Israeli government. Although the Israeli government currently covers the reinstatement value of direct damages that are caused by terrorist attacks or acts of war, we cannot assure you that this government coverage will be maintained and will be adequate in the event we submit a claim. Even if 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.
 
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 adversely impact our ability to sell our products out of Israel. 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 adversely affect our operations and product development, cause our revenues to decrease and adversely affect the share price of publicly traded companies having operations in Israel, such as us.
 
Our operations may be disrupted by the obligations of personnel to perform military service.
 
As of December 31, 2015, we had 1,282 employees worldwide of whom 650 were based in Israel. Our employees in Israel, generally males, including executive officers, may be called upon to perform up to 54 days in each three-year period until they reach the age of 40. In the case of officers and certain reservists with specific military professions, the duty may extend up to 84 days in each three-year period and continue until they reach the age of 45 (and in some cases, up to 49). In emergency circumstances, these employees and executives could be called to immediate and prolonged active duty. In response to increased tension and hostilities, there have been occasional call-ups of military reservists, including in connection with the mid-2006 war in Lebanon and the conflicts with Hamas that occurred in December 2008, November 2012 and summer 2014, and it is possible that there will be additional call-ups in the future. 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 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 or the absence for extended periods of one or more of their key employees for military service may disrupt their operations, in which event our ability to deliver products to customers may be materially adversely affected.
 
Our operations may be affected by negative economic conditions or labor unrest in Israel.
 
General strikes or work stoppages, including at Israeli sea ports, 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 an 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 material adverse effect on our results of operations.
 
 
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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 material adverse effect on our relationships with our distributors and on our financial results.
 
In 2014, some of our employees in Israel have acted to form a workers’ union to be represented by the Histadrut, the Israeli workers’ union association. Following objections from other employees to the formation of a workers’ union, the Histadrut filed a claim in an Israeli court, in which the Histadrut argued that such objections were directed by our management in an attempt to deprive our employees of their right to unionize. The Histadrut applied for the grant of a declaratory order to prevent us from resisting our employees’ efforts to unionize and such temporary order was granted by the court with our consent. In addition, the Histadrut applied to impose on us damages in the amount of approximately NIS 2 million ($0.5 million) for seeking to disrupt our employees’ initiations to unionize. On June 3, 2015, it was resolved by the court, with the parties' consent, to dismiss the Histadrut's claim.
 
If a union of our employees is formed in the future, we may enter into a collective agreement with our employees, which may increase our costs and limit our managerial freedom, and if we are unable to reach a collective agreement, we may become subject to strikes and work stoppages, all of which may adversely affect our business.
 
The tax benefits that are available to us require us to continue to meet various conditions and may be terminated or reduced in the future, which could increase our costs and taxes.
 
Some of our Israeli facilities have been granted “Approved Enterprise” status by the Investment Center in the Israeli Ministry of Economy and Industry (the “Investment Center”) or have the status of a “Beneficiary Enterprise” or “Preferred Enterprise” which provides us with investment grants (in respect of certain Approved Enterprise programs) and makes us eligible for tax benefits under the Investment Law.
 
In order to remain eligible for the tax benefits of an “Approved Enterprise”, a “Beneficiary Enterprise” and/or a “Preferred Enterprise” we must continue to meet certain conditions stipulated in the Investment Law and its regulations, as amended, and in certificates of approval issued by the Investment Center (in respect of Approved Enterprise programs), which may include, among other things, selling more than 25% of our products to markets of over 14 million residents in 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. 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 was 25% in 2013, 26.5% in 2014 and 2015 and will decrease to 25% in 2016 and thereafter. 
 
Effective January 1, 2011, the Investment Law was amended (“Amendment No. 68”). 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 of 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.
 
 
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Finally, 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 in accordance with the effective corporate tax rate that would have been applied had we not relied on the exemption—tax rate of no more than 25%. 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. As for a “Preferred Enterprise,” dividend is subject to 20% withholding tax from 2014 (or a reduced rate under an applicable double tax treaty). However, because we announced our election to apply the provisions of Amendment No. 68 prior to July 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”).
 
In November 2012, amendment No. 69 to the Investment Law (the “Trapped Earnings Law”) came into effect. The amendment provides temporary, partial, relief from corporate taxation on distributions of dividends from exempt income for companies that elect the “relief option” through November 2013. The Trapped Earnings Law allows a company to qualify a portion of its exempt income (“Elected Earnings”) for a reduced tax rate ranging between 6% and 17.5%, instead of corporate tax rate of up to 25%. We decided not to use the relief option. As such, our exempt income may be subject to an argument by the ITA, as described below.
 
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. Other than one executive officer, 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.” The Israeli corporate law underwent extensive revisions in past years. The parameters and implications of the provisions that govern shareholder behavior have not been clearly determined by the Israeli courts. These provisions may be interpreted to impose additional obligations and liabilities on our shareholders that are not typically imposed on shareholders of United States corporations.
 
 
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Provisions of Israeli law may delay, prevent or make undesirable a merger transaction, or an acquisition of all or a significant portion of our shares.
 
Israeli corporate law regulates mergers by mandating certain procedures and voting requirements, and requires that a tender offer be affected when more than a specified percentage of shares in a company are purchased. Further, Israeli tax considerations may make potential transactions undesirable to us or to some of our shareholders whose country of residence does not have a tax treaty with Israel granting tax relief to such shareholders from Israeli tax. With respect to mergers, Israeli tax law allows for tax deferral in certain circumstances but makes the deferral contingent on the fulfillment of numerous conditions, including a holding period of two years from the date of the transaction during which certain sales and dispositions of shares of the participating companies are restricted. Moreover, with respect to certain share swap transactions, the tax deferral is limited in time, and when such time expires, the tax becomes payable even if no actual disposition of the shares has occurred. See “ITEM 10.B: Additional Information—Memorandum and Articles of Association—Acquisitions under Israeli law.”
 
Under Israeli law, our two external directors have terms of office of three years. These directors have been elected by our shareholders to serve for an additional three-year term to commence March 21, 2015.

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.
 
Under Israeli law, we could be considered a “monopoly” and therefore could be subject to certain restrictions that may limit our ability to freely conduct our business to which our competitors may not be subject.
 
Sales in Israel accounted for 7.9% of our revenues in 2015. Our products account for a significant portion of kitchen countertop sales in Israel, but a relatively minor share of sales of all surface covers sold in Israel, including countertops. Under the Israeli Restrictive Trade Practices Law, 1988, (the “Israeli Anti-Trust Law”), a company that supplies more than 50% of any product or service in Israel or in a specific geographical area in Israel 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.
 
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 Anti-Trust 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 customers or charging what are considered to be unfair prices, and from engaging in certain other practices, all in order to protect the Israeli market against unfair competition. The Israeli Antitrust Commissioner may determine that a company that is a monopoly has abused its position in the market, it may subsequently order such company to change its conduct in matters that may 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 anti-competitive 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. To date, the Commissioner has not made any such determination. We do not believe we are a monopoly or that our operations constitute a violation of the provisions of the Israeli Anti-Trust Law even if we were found to be a monopoly under the Israeli Anti-Trust Law, but we cannot guarantee this to be the case.
 
 
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We have a significant market position in certain other 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.
 
ITEM 4: Information on Caesarstone
 
A.
History and Development of Caesarstone
 
Our History
 
Caesarstone Sdot-Yam Ltd. was founded in 1987 and incorporated in 1989 in the State of Israel. We are a leading manufacturer of high quality engineered quartz surfaces sold under our premium Caesarstone brand. Caesarstone is a pioneer in the engineered quartz surfaces industry. Our products consist of engineered quartz slabs that 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. Our products accounted for approximately 12% of global engineered quartz by volume in 2014. In 2008, 2010 and 2011, we acquired the business of our former Australian, Canadian and American distributors, respectively, and established such businesses within our own subsidiaries in such countries. We now generate a substantial portion of our revenues in the United States from direct distribution of our products. Our products are primarily used as kitchen countertops. Other applications include vanity tops, wall panels, back splashes, floor tiles, stair and other interior surfaces that are used in a variety of residential and non-residential applications. Our products’ hardness, as well as their non-porous characteristics, offers superior scratch, stain and heat resistance, making them extremely durable and ideal for kitchen and other applications relative to competing products such as granite, manufactured solid surfaces and laminate. Through our innovative design and manufacturing processes we are able to offer a wide variety of colors, styles, designs and textures.

In March 2012, we listed our shares on the Nasdaq Global Select Market. 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) 636-4555. We have irrevocably appointed Caesarstone USA as our agent to receive service of process in any action against us in any United States federal or state court. As of the date of this report, the address of Caesarstone USA is 6840 Hayvenhurst Ave., Suite 100, Van Nuys, California 91406. In March 2016, we intend to move the offices of Caesarstone USA to a new address, 9275 Corbin Avenue, Northridge, California, 91324. For more information about us, our website is www.caesarstone.com. The information contained therein or connected thereto shall not be deemed to be incorporated by reference in this annual report.
 
Principal Capital Expenditures
 
Our capital expenditures for fiscal years 2015, 2014 and 2013 amounted to $76.5 million, $86.4 million and $27.4 million, respectively. The majority of our investment activities have historically been related to the purchase of manufacturing equipment and components for our production lines, and in 2014 and 2015 the construction of a new manufacturing facility with two production lines in the United States. In order to support our overall business expansion, we will continue to invest in manufacturing equipment and components for our production lines and in further expanding manufacturing capacity as we may require, subject to growth in the demand for our products. Moreover, we may spend additional amounts of cash on acquisitions from time to time, if and when such opportunities arise. In 2015, we completed the vast majority of our investment in the two production lines of the U.S. manufacturing facility, which is estimated to cost approximately $130 million. Despite the fact that the timing of our next capacity expansion in the U.S. facility is not determined yet, we anticipate that our capital expenditures in 2016 will be significantly lower than 2015.
 
B.            Business Overview
 
The global countertop industry generated approximately $81 billion in sales to end consumers in 2014 based on average installed price, which includes fabrication, installation and other related costs. Sales to end-consumers include sales to end-consumers of countertops as opposed to sales at the wholesale level from manufacturers to fabricators and distributors.
 
 
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2014 Global Countertop Demand
 
2014 Global Countertop Demand by Material
 
We are a leading manufacturer of high-quality engineered quartz surfaces sold under our premium Caesarstone brand. Although the use of quartz is relatively new, it is the fastest growing material in the countertop industry and continues to take market share from other materials, such as granite, manufactured solid surfaces and laminate. Between 1999 and 2014, global engineered quartz sales to end-consumers grew at a compound annual growth rate of 15.7% compared to a 4.4% compound annual growth rate in total global countertop sales to end-consumers during the same period. In recent years, quartz penetration rate increased in our key markets, as detailed in the following chart:

Quartz penetration in our key markets
 
   
For the year ended December 31,
 
Region
 
2014
   
2012
   
2010
 
United States
    8 %     6 %     5 %
Australia
    39 %     35 %     32 %
Canada
    18 %     12 %     9 %
Israel
    86 %     85 %     82 %
 
Our products consist of engineered quartz 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. In 2011, we acquired our former U.S. distributor and now generate the substantial majority of our revenues in the United States from direct distribution of our products. Our products are primarily used as kitchen countertops in the renovation and remodeling and residential construction end markets. Other applications include vanity tops, wall panels, back splashes, floor tiles, stairs and other interior surfaces that are used in a variety of residential and non-residential applications. Our products’ hardness, as well as their non-porous characteristics, offers superior scratch, stains and heat resistance, making them durable and ideal for kitchen and other applications relative to competing products such as granite, manufactured solid surfaces and laminate. Through our design and manufacturing processes we are able to offer a wide variety of colors, styles, designs and textures. In 2014, our products accounted for approximately 12% of global engineered quartz by volume and we have captured approximately 19%, 55%, 36% and 84% of the countertop market share in the United States, Australia, Canada and Israel, by volume, respectively.
 
From 2005 to 2007, our revenue grew at a compound annual growth rate of 37.9%, and during the more challenging global economic environment from 2007 to 2009, at a compound annual growth rate of 11.5%. From 2009 to 2015, our revenue grew at a compound annual growth rate of 20.6%. In 2015, we generated revenue of $499.5 million, net income attributable to controlling interest of $77.8 million, adjusted EBITDA of $125.7 million and adjusted net income attributable to controlling interest of $83.7 million. See “ITEM 3.A: Key Information—Selected Financial Data” for a description of how we define adjusted EBITDA and adjusted net income attributable to controlling interest and reconciliations of net income to adjusted EBITDA and net income attributable to controlling interest to adjusted net income attributable to controlling interest.
 
 
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Our Products 
 
Our products to date are generally marketed under the Caesarstone brand. The substantial majority of our products are installed as countertops in residential kitchens. Other applications of our products include vanity tops, wall panels, back splashes, floor tiles, stairs and other interior surfaces. Our engineered quartz slabs measure 120 inches long by 56 1/2 inches wide and 130 inches long by 65 inches wide with a thickness of 1/2 of an inch, 3/4 of an inch or 1 1/4 inches. Engineered quartz surfaces are typically comprised of approximately 90% natural crushed quartz and approximately 10% polyester and pigments. Our products’ quartz composition gives them superior strength and resistance to heat, scratches, cracks and chips. Polyester, which acts as a binding agent in our products, make our products non-porous and highly resistant to stains. Pigments act as a dyeing agent to vary our products’ colors and patterns.
 
We engineer 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. We offer a wide spectrum of design options in the engineered quartz surface industry with different colors, textures and finishes designed to appeal to end-consumers’ preferences. Our designs range from fine-grained patterns to coarse-grained color blends with a variegated visual texture. Through offering new designs, we capitalize on Caesarstone’s brand name and foster our position as a leading innovator in the engineered quartz surface industry.
 
Our product offerings include 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 accounts for the  majority of our sales. Within this product collection, we offer over 70 different colors, with four textures and three thicknesses generally available for each of the collection’s colors. We have since introduced additional product collections, and currently have four collections: Classico, Concetto, Motivo, and Supernatural, which are marketed as specialty high-end product collections. The Concetto product collection, launched in 2003, features engineered quartz surfaces with hand-incorporated semi-precious stones. We launched our Motivo product collection in 2009, which features a range of patterned textures that can be customized. In 2012, we launched new products under our Supernatural collection, whose design was inspired by natural stone and which are manufactured using proprietary technology. We regularly introduce new colors and designs to our product collections based on consumer trends. In 2013, we introduced seven new colors to our Classico and Supernatural collections. In 2014, we introduced eight new colors to our Classico and Supernatural collections, including the Calacatta Nuvo product, which is inspired by the natural calacatta stone, and other products inspired by natural granite and marble. In 2015, we launched five new products under the Supernatural collection and four new colors under the Classico collection.
 
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. We are accredited by organizations overseeing safety and environment protection, such as the National Sanitation Foundation (NSF) and GREENGUARD Indoor Air Quality. Our products have been consistently ranked by the United States Green Building Council for their compliance with environmental standards, which allows 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, Canada and Israel. In 2015, sales of our products in these markets accounted for 44.7%, 22.1%, 14.2% and 7.9% of our revenues, respectively. Total sales in these markets accounted for 88.9% of our revenues in 2015. 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.”
 
 
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Direct Markets
 
We currently have direct sales channels in the United States, Australia, Canada, Israel and Singapore. Our direct sales channels allow us to maintain greater control over our entire sales channel within a market. As a result, we gain greater insight into market trends, receive feedback more readily from end-consumers, 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 to use Caesarstone products for a project
 
In Israel, where our headquarters and manufacturing operations are located, we distribute our products directly to several local distributors who in turn sell them to fabricators. This arrangement minimizes our financial exposure to end-consumers and provides us with significant depth of coverage 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 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. As of 2014, in Australia, Canada and the United States, the adoption rate of the engineered quartz surfaces was approximately 39%, 18% and 8%, respectively, of the overall countertop market by volume, and we have captured approximately 55%, 36% and 19% of countertop market share in Australia, Canada and the United States, respectively.
 
In the United States, our Caesarstone USA subsidiary entered into an agreement with IKEA in May 2013. Pursuant to that agreement, we exclusively supply all non-laminate slabs to IKEA customers in the United States, in addition to fabricating and installing the slabs. The surfaces provided under this agreement are then marketed by IKEA without a brand name. We have engaged several third-parties fabricators to provide us with the fabrication and installation services designated for IKEA customers. In 2015, we primarily supplied to IKEA customers our quartz surfaces.
 
In October 2014 Caesarstone Canada entered into a similar agreement with IKEA Canada, and since December 2014 we have been acting as IKEA’s exclusive non-laminate countertop vendor in Canada, and fabricating and installing the slabs. We have engaged several third-party fabricators to provide us with the fabrication and installation services designated for IKEA customers.
 
The agreements with IKEA and IKEA Canada will terminate on December 31, 2016 and January 31, 2017, respectively, unless terminated earlier in accordance with their terms. There is no assurance that these agreements will be renewed.
 
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 on an exclusive or non-exclusive basis in a specific country or region to fabricators. Fabricators sell our products to contractors, developers, builders and consumers. In most cases, we engage one distributor to serve a country or region. 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 10.5% of our revenues in 2015. This strategy often allows us to accelerate our penetration into multiple new markets. Our distributors typically have prior stone surface experience and close relationships with fabricators, builders and contractors within their respective territory.
 
We work closely with our distributors to assist them in preparing and executing a marketing strategy and comprehensive business plan; 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 our distributors in the promotion of our brand in these markets, we provide our distributors with 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.
 
 
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Sales and Marketing 
 
Sales
 
In the United States, Australia, Canada and Singapore we sell our products through our subsidiaries, that primarily sell them directly to fabricators with remainder of sales to sub-distributors and resellers, such as stone suppliers, in the United States. In the United States and Canada, we also sell to IKEA, where we also provide fabricating and installation services, through third-party fabricators engaged by us. Like in our indirect markets, in Israel, we sell to a limited number of distributors who sell our products to fabricators; however, we consider this a direct market due to our sales and marketing activities in this country, as well as our fabricator technical and health and safety instruction program and warranty program. In our indirect markets we sell to third-party distributors who in turn sell our products to fabricators and installers. For our direct sales, we manufacture engineered quartz slabs based upon our rolling projections of the demand for our products, and for our indirect sales, we manufacture our products on a purchase order basis. In both cases, we ship our products from our two manufacturing facilities in Israel, and, beginning in the second quarter of 2015, we serve the North American market also from our manufacturing facility in the United States.
 
In our indirect sales markets, we sell our products to distributors who are responsible for selling our products to fabricators. In some cases, our distributors operate their own fabrication facilities. In some cases, our distributors sell to sub-distributors located within the territory who in turn sell to fabricators. Unlike distributors, 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 fabricators. As a result, prices for our products for fabricators may vary among markets.

In recent years, our sales department, responsible for our global sales to third parties, which is based in Israel, has focused on penetrating new markets, as well as further developing our key growth indirect sales markets. We have developed a comprehensive methodology for evaluating and entering new markets. In particular, we analyze several factors within a market, including existing demand for stone products, supported by stone installation capabilities, gross domestic product per capita, the competitive landscape and the economic growth rate. We focus our efforts on those markets that we believe offer significant growth opportunity for our products. Potential distributors are evaluated based on their experience in the surface products industry, logistics and distribution capabilities and suitability to market our products. In recent years, we significantly increased the number of countries where we conduct indirect sales by appointing distributors in several new countries on an exclusive or non-exclusive basis, including Belgium, Russia, and countries in Eastern Europe. We intend to continue to penetrate new markets in collaboration with distributors.
 
In recent years, we have also significantly increased our revenues within our existing key direct markets in the United States, Australia, Canada and Israel. We believe our products still have significant growth opportunities in the United States, Australia and Canada. We intend to continue to invest resources to further strengthen and increase our penetration in each of these markets.
 
Marketing
 
We position our engineered quartz 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 interior setting. Our marketing strategy is to deliver this message every time our customers (including end-customers), fabricators, architects and designers come in contact with our brand. We also aim to communicate our position as a design-oriented global leader in engineered quartz surface innovation and technology.
 
The goal of our marketing activities is to drive marketing and sales efforts through our subsidiaries and our distributors, 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 believe that the combination of both pushing our products through all levels of the product supply chain while generating demand from end-consumers differentiates us from our competitors in the engineered quartz and surface material industries.
 
 
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We believe that by localizing our marketing activities at the distributor level (including in our direct markets), we increase the global exposure of our brand while tailoring marketing activities to the individual needs, tastes and preferences of a particular country. As such, marketing activities across our markets differ as we aim to promote sales among those who have the greatest influence on public perception in each market.
 
We and our distributors implement a multi-channel marketing strategy in each of our territories and market not only to our direct customers, but to the entire product supply chain, including fabricators, developers, contractors, kitchen retailers, builders, architects and designers. We use multiple marketing channels, including advertisements in home interior magazines and websites, the placement of our display stands and sample books in kitchen retails stores and our company website. Through our “Caesarstone University” program we educate fabricators about our products and their capabilities and installation methods through manuals and seminars. As a result, our markets benefit from highly trained fabricators with a comprehensive understanding of our products and the ability to install our products in a variety of applications.
 
Our marketing materials are developed by our global marketing department in Israel and are used by our distributors and subsidiaries globally. These materials may be slightly adjusted in their respective local markets, which helps in combining the special needs of each market and the global consistency of the Caesarstone brand. We offer our distributors a refund of a small percentage of their total purchases from us to buy our marketing materials, such as product brochures, promotional packages, print and online advertising materials, sample books, exhibition infrastructure, signage and stationary and display stands. This provides our distributors with significant flexibility to choose the best marketing strategy to implement in their particular territory. Occasionally, our local marketing departments in the United States, Australia and Canada develop their own tactical marketing materials in accordance with our global brand guidelines, in addition to using our marketing materials, due to the size and particular characteristics of these territories. In 2015, we spent $22.4 million on direct advertising and promotional activities. 

Our websites are a key part of our marketing strategy. We operate a global company website that serves as an international website for our distributors. Certain of our third-party distributors and our Australian subsidiary maintain their own websites, which are in accordance with our brand guidelines and linked to our website. Our websites enable fabricators and end-consumers to view currently available designs, photo galleries of installations of our products in a wide range of settings, and read product success stories, which feature high profile individuals’ and designers’ use of our products, as well as instructions with respect to the correct usage of our products. We also conduct marketing activity in the social media arena mainly to increase our brand awareness among end-consumers, architects and designers.
 
We also seek to increase awareness of our brand and products through a range of other methods, such as 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 department is located in Israel. The department is comprised of 15 employees and works closely with employees from other departments, all of whom have extensive experience in engineered quartz surface manufacturing, polymer science, engineering, product design and engineered quartz surface applications. Between 2009 and 2013, a small portion of our research and development efforts had benefited from grants from the OCS in the Israeli Ministry of Economy and Industry. In 2015, research and development costs accounted for approximately 0.6% of our total revenues. 
 
The strategic mission of our research and development 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.
 
In 2012, we launched the Supernatural collection. These products are designed to reflect our interpretation of natural stone. In 2013, we introduced seven new colors under our Classico and super natural collections. In 2014, we introduced eight additional new colors under our Classico and super natural collections, including our Calacatta Nuvo, which is our interpretation of natural calacatta stone, and other products inspired by natural granite and marble, all of which were the result of new proprietary technologies developed by our research and development department. In 2015, we launched additional products under our Supernatural collection and further colors under our Classico collection.
 
 
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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 indirect markets, we provide all of 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 with a three-year warranty provided in Europe and warranties lasting up to 20 years in other regions. In our direct markets, the warranty period also varies. We provide end-consumers with limited lifetime warranties in the United States and Canada, a ten-year limited warranty in Australia, and a three-year limited warranty in Israel. For end-consumers, warranty issues on our products are addressed by our local distributor. In our direct markets, following an end-consumer call, our technicians are sent to the product site within a short time. We train our distributors to handle local warranty issues through our “Caesarstone University” program. The Caesarstone University program includes 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, pigment and polyester are the primary raw materials used in the production of our products. We acquire our raw materials from third-party suppliers. Suppliers ship our raw materials to our manufacturing facilities in Israel  primarily by sea and to our U.S. facility the supply sources are primarily domestic, except for quartz, which is mostly imported. Our raw materials are generally inspected at the suppliers’ facilities and upon arrival at our manufacturing facilities in Israel and the U.S. We believe our strict raw material quality control procedures differentiate our products from those of our competitors because they limit the number of product defects and contribute to the superior quality and appearance of our products. The cost of our raw materials consists of the purchase prices of such materials and costs related to the logistics of delivering the materials to our manufacturing facilities.  Our raw materials costs are also impacted by changes in foreign currency exchange rates.
 
Quartz, which includes quartz, quartzite and other dry minerals, is the main raw material component used in our products, and is acquired from manufacturers generally in Turkey, India, Israel and a number of European countries. In 2015, we started to acquire limited quantities of quartz from the United States for our manufacturing operations in this country. We require supplies of particular grades of quartz for our products. In 2015, approximately 71% of our quartz was imported from four suppliers in Turkey, out of which approximately 41% was acquired from Mikroman, which constitutes approximately 29% of our total quartz, and approximately 36% was acquired from Polat, which constitutes approximately 25% of our total quartz. Our current supply arrangement with Polat is set forth in a letter agreement, and our arrangement with Mikroman is currently memorialized in an unsigned draft letter agreement which is being finalized as of the date of this report. We expect our agreements with Mikroman and Polat with respect to prices and quantities to remain unchanged through the end of 2016. However, if they fail to perform in accordance with these arrangements, we may not be successful in enforcing them. If we are unable to agree upon prices with such suppliers or effectively enforce the terms of these arrangements, our suppliers could cease supplying us with quartzite, which are used across all of our products. If our supply of quartzite from Turkey is adversely impacted or if, for any other reason, any of our Turkish quartzite suppliers does not perform in accordance with our agreements with them or ceases supplying us with quartzite, for any reason, we would need to locate and qualify alternative suppliers. This could result in substantial delays, increase our costs, negatively impact 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.
 
Aside from our arrangements with Mikroman and Polat described above, we typically transact business with our quartz suppliers on an annual framework agreement 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 2016, we intend to acquire quartz for our U.S. manufacturing facility mainly from those sources while continuing to review local suppliers as alternatives.
 
 
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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 already processed by them. In 2011 and 2012, our cost of quartz was relatively stable. From 2013 to 2015, we experienced selective price increases from our Turkish quartz suppliers, such that the average cost of quartz supplied to our facilities in Israel increased by approximately 3% and 4% in 2013 and 2014, respectively, and decreased by approximately 1.5% in 2015. The latest reduction was related to an approximately 16% devaluation of the euro compared to the U.S. dollar in 2015 on an annual average basis, which affected the cost of purchasing quartz from non-Turkish European suppliers. Given that quartz imported to our U.S. manufacturing facility involves higher transportation costs, our total average quartz costs increased by approximately 1.3% in 2015. In 2016, there are no material changes to the price of quartz in our arrangements with suppliers. Any future increases in quartz prices may adversely impact our margins and net income.
 
In most cases, we acquire polyester on a purchase order basis, from several European suppliers for our production in Israel and U.S. suppliers for our production in the U.S., based on our projected needs for the subsequent one to three months. Currently, suppliers are unwilling to agree to preset prices for periods longer than a quarter. Our cost of polyester, which generally correlates with oil prices, has fluctuated significantly. In 2010, average polyester cost increased by approximately 9%, despite an approximately 20% increase of the cost denominated in euros, given a stronger NIS (our functional currency during this period) compared to the euro. In 2011, there was a further increase of approximately 12%, both in the NIS and in the euro. During 2012 through 2014, average polyester costs stabilized with up to 2% deviations in euro and up to 5% U.S. dollars (our functional currency since July 1, 2012). In 2015, average polyester costs decreased by approximately 27%, of which approximately 12% was due to a change in our prices denominated in euros, and the balance related to an approximately 16% weakening of the euro compared to the U.S. dollar on an average annual basis.
 
Pigments for our production in Israel are purchased from Israel and suppliers abroad. Pigments for our U.S. production are primarily purchased from the U.S. We are exposed to fluctuations in the prices of pigments, although to a lesser extent than with polyester.
 
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.

Manufacturing and Facilities 
 
Our products are manufactured at our three manufacturing facilities located in Kibbutz Sdot-Yam in central Israel, Bar-Lev Industrial Park in northern Israel and Richmond-Hill, Georgia in the U.S. 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 began to partially operate the fifth production line at our Bar-Lev facility in the fourth quarter of 2013, and to fully operate it in the second quarter of 2014.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. Finished slabs are shipped from our facilities in Israel to distributors and customers worldwide and from our U.S facility to customers in North America. In addition, we have taken initial steps towards establishing our second building in the State of Georgia, to accommodate additional manufacturing capacity in the future as needed to satisfy potential demand. For further discussion of our facilities, see “ITEM 4.D: Information on Caesarstone—Property, plants, and equipment.”
 
The manufacturing process for our products involves blending approximately 90% natural crushed quartz with approximately 10% 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.
 
We maintain strict quality control and safety standards for our products and manufacturing process. As a result, we believe that utilizing in-house manufacturing facilities are the most effective way to ensure that our end-consumers receive high quality products. 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.
 
Seasonality
 
For a discussion of seasonality, please refer to “ITEM 5.A: Operating and Financial Review and Prospects—Operating Results—Quarterly results of operations and seasonality.”
 
 
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Competition 
 
We believe that we compete principally based upon product quality, new product development, brand awareness and position, pricing, customer service and breadth of product offerings. We believe that we differentiate ourselves from competitors on the basis of our signature product designs, our ability to 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 engineered quartz surface products compete with a number of other surface materials such as granite, laminate, marble, manufactured solid surface, concrete, stainless steel, wood and ceramic large slabs, a new countertop surface material entrant. The manufacturers of these products consist of a number of regional and global competitors. Some of our competitors may have greater resources than we have, and may adapt to changes in consumer preferences and demand more quickly, expand their materials offering, devote greater resources to design innovation and establishing brand recognition, manufacture more versatile slab sizes and implement processes to lower costs.
 
The engineered quartz surface market is highly fragmented and is also served by a number of regional and global competitors. We also face competition from low-cost manufacturers from Asia, especially from China, and from Europe. Large multinational companies have also invested in their engineered quartz surface production capabilities. We believe that we are likely to encounter strong competition from these competitors as a result of consolidation that may take place in the industry in the future. Such consolidation is likely to occur as a result of the economies of scale associated with engineered quartz manufacturing that are becoming important to remain competitive in an increasingly global engineered quartz surface market and will be increasingly important as the engineered quartz market matures in the future.

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. Our ERP software provides us with accessible quality data and allows us to accurately enter, price and configure valid products in a made-to-order, demand-driven manufacturing environment. Carefully maintained infrastructure is critical, given that our products can be built in a number of combinations of sizes, colors, textures and finishes, and our production control software enables us to carefully monitor the quality of our slabs. Given our global expansion, we implemented a global ERP based on an Oracle platform, in 2013 and 2014. 
 
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, all of which are used under the trade mark Caesarstone, including CAESARSTONE®, CONCETTO®, and our Caesarstone logo. We have obtained trademark registrations for additional marks that we use to identify certain product collections, including MOTIVO®, as well as other marks used for certain of our products. While we expect our 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 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.
 
 
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In addition to confidentiality agreements, we seek patent protection for some of our latest technologies. We have obtained patents for certain of our technologies and have pending patent applications that were filed in various jurisdictions, including the United States, Europe, Australia, Canada, China and Israel, which relate to our manufacturing technology and certain products. No patent application of ours is material to the overall conduct of our business. There can be no assurance that pending applications will be approved in a timely manner or at all, or that such patents will effectively protect our intellectual property. There can be no assurance that we will develop patentable intellectual property in the future, and we have chosen and may further choose not to pursue patents for innovations that are material to our business.
 
Environmental and Other Regulatory Matters 
 
Environmental and Health and Safety Regulations
 
Our manufacturing facilities and operations in Israel and our manufacturing facility in the State of Georgia, United States, whose first and second production lines became operational in 2015, are subject to numerous Israeli and U.S. environmental and workers' health and safety laws and regulations, respectively. Applicable U.S. laws and regulations include federal, state and local laws and regulations, and specifically of the State of Georgia. Laws and regulations in both countries deal with pollution and the protection of the environment, setting standards for emissions, discharges into the environment or to water, soil and water contamination, product specifications, generation, the treatment, import, purchase, use, storage and transport of hazardous materials, and the storage, treatment and disposal and remediation of solid and hazardous waste, including sludge and protection of worker health and safety. Violations of environmental, health and safety laws, regulations and permit conditions may lead to civil, and criminal sanctions against us, our directors, officers or our employees, Caesarstone Technologies USA, Inc., our subsidiary which operates our U.S. facility, and our subsidiary’s officers and employees, and, in some cases, may result in compelling installation of additional controls and substantial penalties, injunctive orders as well as permit revocations and facility shutdowns. Violations of environmental laws could also result in obligations to investigate or remediate contamination, third-party property damage or personal injury claims allegedly due to the migration of contaminants off-site. New Israeli and U.S. environmental and health and safety laws and regulations, new interpretations of existing laws and regulations, increased governmental enforcement of laws and regulations or other developments in Israel and in the U.S. could also require us to make additional expenditures. Many of these laws and regulations are becoming increasingly stringent, and the cost of compliance with these requirements can be expected to increase over time.
 
Beyond being subject to regulatory and legal requirements, our manufacturing facilities in Israel and in the United States may operate under applicable permits, licenses and approvals with terms and conditions containing a significant number of prescriptive limits and performance standards. The business licenses for our facilities 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. In particular, our manufacturing facilities in Israel are subject to specific conditions set forth in the business licenses and permits related to the use, storage and discharge of hazardous materials granted by national and municipal authorities. All of these permits, licenses, approvals, limits and standards require a significant amount of monitoring, record-keeping and reporting in order for us to demonstrate compliance with the underlying permit, license, approval, limit or standard. Non-compliance or incomplete documentation of our compliance status may result in the imposition of fines, penalties and injunctive relief, or the stripping of our license to operate our business.
 
From time to time, we face environmental and health and safety compliance issues related to our two manufacturing facilities in Israel.
 
 
Styrene gas emissions. The IMPE requires us to comply with the applicable obligations under the law and regulations related to styrene gas emission at both of our manufacturing facilities in Israel. We installed and implemented systems which we believe reduce the amount of styrene emissions as required and presented to IMPE a plan to further improve our control of styrene emission at our Bar Lev facility and comply with the styrene gas emission standards. We intend to continue monitoring, and, if necessary, applying corrective measures to control the styrene emissions at our facilities. With respect to our Sdot-Yam facility, the IMPE summoned us to a hearing held in January 2014, where it recommended an investigation to examine its allegations that, based on IMPE’s samplings, we exceeded the ambient air standards. In a further hearing held in December 2015, the IMPE indicated that it intends to conduct unannounced inspections of our Sdot-Yam facility. The IMPE has indicated that it would conduct such inspections of our Bar Lev facility as well. If the IMPE decides that we do not fully comply with the styrene emission standards, our business license may be revoked, our facilities’ operation may be limited or could be shut down and we could become subject to civil and criminal sanctions.
 
 
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Waste water disposal. We currently dispose of our waste water from our Bar-Lev and Sdot-Yam manufacturing facilities in a treatment plant pursuant to permits obtained from the IMPE that are currently effective until March 31, 2016 and December 31, 2016, respectively. If we are unable to extend our permits or the treatment plant does not obtain a renewal of its permit, we may need to use alternative treatment facilities and adjust to their standards and requirements, which may result in additional expenses.
 
 
Dust emissions. With respect to dust emissions both into the environment and inside our manufacturing facilities in Israel, we are implementing measures in order to achieve compliance with dust emission environmental standards and meet the health and safety standards with respect to permissible exposure limits. Recently we were notified by the IMEI that due to deviations from the dust and styrene emission standards in our Bar Lev facility, it objected to the renewal of the business license for our Bar Lev facility. The business license for our Bar Lev facility was extended until April 30, 2016, and we are in discussions with the IMEI in order to obtain their approval for a further extension.
 
 
Fire protection measures. We have established programs with the fire regulation authorities to adjust our fire protection measures to comply with their requirements and we are implementing the measures in our facilities in accordance with such programs. We received the fire regulation authorities’ approval for our Bar-Lev facility effective until April 2, 2016. We have submitted an updated follow up program to the fire regulation authorities with respect to our Sdot- Yam facility and it is currently pending their approval.
 
 
Sludge waste disposal
 
 
o
In January 2010, the IMPE ordered us to remove sludge waste that was disposed of in 2009 in a number of locations in northern Israel claiming that such disposal was unlawful. We have engaged in discussions with the IMPE with respect to which sites will require waste removal. We performed a feasible and practical clean-up project and currently believe that the clean- up was sufficient and that we have no further exposure in this respect.
 
 
o
In 2014, the IMPE analyzed our sludge waste and determined to classify our sludge as solid industrial waste. Such classification results in higher charges imposed on us in connection with the sludge disposal.
 
In addition, we operate in Israel under Poison Permits that regulate our use of poisons and hazardous materials. Our current Poison Permits are valid until the beginning of 2017 and impose on us certain requirements. Our inability to maintain each of such Poison Permits or to renew them could negatively impact our financial condition and result of operations. Failing to comply with such Poison Permits conditions may also expose us and our officers to criminal liability. 
 
Other than as described above, we believe that we operate our facilities in compliance in all material respects with applicable environmental and health and safety requirements. However, there can be no guarantee that these or newly discovered matters will not result in material costs or investments or otherwise interrupt our business operation.
 
Continued government and public emphasis on environmental issues can be expected to result in increased future investments for environmental controls at ongoing operations, which could negatively impact our financial condition and results of operations. Our ability to obtain necessary permits and approvals may be subject to additional costs and possible delays beyond what we initially plan for. We are seeking to obtain building permits with respect to buildings and installations that we have added at our manufacturing facilities in Israel, although we cannot assure that we will be able to obtain such building permits.
 
Other Regulation
 
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. In January 2016, we received a permit from the IMEI to employ Jewish employees on Saturdays and Jewish holidays in connection with the operation of most of the machinery in our Sdot-Yam facility, effective until December 31, 2017.  There is no assurance that we will be able to obtain such permit in the future or employ non-Jewish employees on Saturdays and Jewish holidays. Prior to obtaining such permit, we operated our Sdot- Yam facility six days a week from the fourth quarter of 2015. Following the receipt of such permit, we may operate our Sdot-Yam plant on Saturdays as we may need. In our Bar-Lev facility, our Jewish employees do not work on Saturdays and Jewish holidays, while our non-Jewish employees are employed on such days.
 
 
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If we are deemed to be in violation of the Rest Law, we and our officers may be exposed to administrative and criminal liabilities, including fines, and our operational and financial results could be materially adversely impacted. If we fail to receive a permit in the future, or if we are unsuccessful in employing only non-Jewish employees on Saturdays , we may be required to halt the operations of our facilities in Israel on those days, have less production capacity and as a result experience a material adverse effect on our revenues and profitability.

Legal proceedings
 
See “ITEM 8.A: Financial Information—Consolidated Financial Statements and Other Financial Information—Legal proceedings.”
 
C.            Organizational Structure
 
The legal name of our company is Caesarstone Sdot-Yam Ltd. On December 3, 2015, our shareholders resolved to change our legal name to “Caesarstone Ltd.”. Under the Companies Law, in order for such change to enter into effect, the Israeli Register of Companies (the “Registrar”) has to approve such change. As of the date of this annual report, we have not obtained the approval of the Registrar for such name change and therefore currently our legal name remains unchanged.
 
Caesarstone was organized under the laws of the State of Israel. We have four wholly-owned subsidiaries: Caesarstone Australia Pty Limited, which is incorporated in Australia, Caesarstone South East Asia PTE LTD, which is incorporated in Singapore, Caesarstone USA, Inc. and Caesarstone Technologies USA, Inc. (which is wholly-owned by Caesarstone USA, Inc.), both of which are incorporated in the United States.
 
We hold a 55% ownership interest in Caesarstone Canada, a joint venture we established in 2010 with our former distributor in Eastern Canada, Ciot, which operates fabrication facilities and is also a significant customer of Caesarstone Canada. The approval of both shareholders is required for certain corporate actions by the joint venture, including reducing the selling price of the joint venture’s products below a certain level. The joint venture has entered into a services agreement with Ciot pursuant to which Ciot provided logistical and support services to the joint venture. As of December 31, 2015, these services are no longer provided by Ciot. Caesarstone Canada is also obligated to distribute 30% of its profits per year as a dividend to its shareholders unless shareholder approval is obtained not to distribute such dividend. As of the date of this report, no such dividend has been distributed. In addition, we granted Ciot a put option and Ciot granted us a call option for its interest each exercisable any time between July 1, 2012 and July 1, 2023. Exercise of the put option requires six months’ prior notice, and if Ciot exercises such option in the future, we will be required to make a cash payment to them. Exercise of the call option does not require prior notice. The different purchase prices of each option following such an exercise is to be calculated based on the corporate value of Caesarstone Canada according to a formula that evaluates the number of slabs sold by Caesarstone Canada and the price per slab for Caesarstone Canada. In January 2011, a loan in the amount of Canadian dollar 4.0 million was made to Caesarstone Canada by its shareholders, Ciot and ourselves, on a pro rata basis.
 
We sell our products in over 50 countries through our subsidiaries and distributors.
 
 
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D.            Property, Plants and Equipment
 
Our manufacturing facilities are located on the following properties in Israel and the United States:
                 
Properties
 
Issuer’s rights
 
Location
 
Purpose
 
Size
Kibbutz Sdot-Yam(1)
 
Land Use Agreement
 
Caesarea, Central Israel
 
Headquarters, manufacturing facility, research and development center
 
30,744 square meters of facility and 60,870 square meters of un-covered yard*
Bar-Lev Industrial Park (2)
 
Land Use Agreement
 
Carmiel, Northern Israel
 
Manufacturing facility
 
22,137 square meters of facility and 53,261 square meters of un-covered yard* *
Belfast Industrial Center(3,4)
 
Ownership
 
Richmond Hill, Georgia, United States
 
Manufacturing facility
 
26,400 square meters of facility and 401,110 square meters of un-covered yard (excluding 56,089 square meters of wetland)
 
* 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 year 2014.
 
 
(1)
Leased pursuant to a land use agreement with Kibbutz Sdot-Yam entered into in March 2012 with a term of 20 years, which replaced the former land use agreement. Starting from January 2014, we use additional office space of approximately 400 square meters under terms materially similar to the 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. 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)
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, that will be automatically renewed, unless we give two years prior notice, for an additional 10- year term. This agreement was executed simultaneously with the land purchase and leaseback agreement we entered into with Kibbutz Sdot- Yam, according to which Kibbutz Sdot- Yam acquired from us our rights in the lands and facilities of the Bar Lev industrial center, under a long term lease agreement we entered into with the ILA on June 6, 2007 to use the premises for an initial period of 49 years as of February 6, 2005, with an option to renew for an additional term of 49 years as of the end of the initial period. For more information, see “ITEM 7.B: Major Shareholders and Related Party Transactions—Related Party Transactions—Relationship and agreements with Kibbutz Sdot-Yam—Land purchase agreement and leaseback.”
 
 
(3)
On September 17, 2013, we entered into a purchase agreement for the purchase of approximately 45 acres of land in Richmond Hill, the State of 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 which 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 establishing our U.S. facility. For a discussion of our expansion of this facility, including its financing and its related expenses, see “ITEM 4.A: Information on Caesarstone—History and Development of Caesarstone—Principal Capital Expenditures” and “ITEM 3.D: Key Information—Risk Factors— If demand for our products continues to grow, we may need to further expand our manufacturing facility in the United States. If we fail to achieve this further expansion, we may be unable to grow our business and revenue, maintain our competitive position or improve our profitability.
 
Various environmental issues may affect our utilization of the above-mentioned facilities. For a further discussion, see “—Environmental Regulations” above.
 
 
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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, 2015 and 2014, the related consolidated income statements and cash flow statements for each of the three years ended December 31, 2015, 2014, and 2013, and related notes and the information contained elsewhere in this annual report. Our financial statements have been prepared in accordance with U.S. generally accepted accounting principles. See “ITEM 3.D: Risk Factors” and “Special Note Regarding Forward Looking Statements.”
 
Company overview 
 
We are a leading manufacturer of high-quality engineered quartz surfaces sold under our premium Caesarstone brand. The substantial majority of our quartz surfaces are used as countertops in residential kitchens and sold primarily into the renovation and remodeling end markets. Other applications for our products include vanity tops, wall panels, back splashes, floor tiles, stairs and other interior surfaces that are used in a variety of residential and commercial applications.
 
Founded in 1987, Caesarstone is a pioneer in the engineered quartz surface industry. We have grown to become the largest provider of quartz surfaces in Australia, Canada, Israel, France and South Africa, and have significant market share in the United States and Singapore. Our products accounted for approximately 12% of global engineered quartz by volume in 2014. Our sales in the United States, Australia, Canada and Israel, our four largest markets, accounted for 44.7%, 22.1%, 14.2% and 7.9% of our revenues in 2015, respectively. 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”.
 
We have direct sales channels in the United States, Australia, Canada, Israel and Singapore. We generate the majority of our revenues in the United States from direct distribution of our products throughout the country. In Australia, we generate the substantial majority of our business from direct distribution. In Israel, we distribute our products directly to several local distributors who in turn sell primarily to fabricators. We sell our products in Canada through a joint venture in which we hold a 55% interest. We also sell our products directly in Singapore. In our remaining markets, we distribute our products through third-party distributors. In each of our markets, fabricators typically sell our products to end consumers, contractors, developers and builders who are generally advised by architects and designers regarding the use of our products. Our strategy is to generate demand from all levels in our product supply chain.
 
 
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We experienced annual compound revenue growth of 18.4% between 2013 and 2015, driven mainly by the continued quartz penetration, the improvement in our product offering and the partnership with IKEA in the United States and Canada. Significant negative exchange rate fluctuations slowed down our growth, primarily during 2015.  From 2013 to 2015, our gross profit margins decreased from 45.5% to 40.1%, adjusted EBITDA margins decreased from 25.7% to 25.2%, and adjusted net income decreased from 17.9% to 16.8% over the same period. We attribute the decrease in margins mainly to significant negative exchange rate fluctuations in both years and the start-up costs and inefficiencies related to the opening of our U.S. manufacturing facility in 2015.
 
Our strategy is to continue to be a global market leader of surfaces and quartz surface products, in particular. We continue to invest in developing our premium brand worldwide and to further expand our differentiated product offering. We intend to continue to expand our sales network by further penetrating our existing markets as well as entering new markets. We believe that a significant portion of our future growth will come from continued penetration of our U.S. market, particularly with the additional manufacturing capacity in our U.S. facility, which began operations during 2015—as well as from our markets in Australia and Canada. We believe our expansion into new markets that exhibit an existing demand for stone products and stone installation capabilities will contribute to our future growth in the long term. We believe there may be consolidation in the quartz surface industry in the future and to remain competitive in the long term, we will need to grow our business both organically and through the acquisition of third-party distributors, manufacturers and/or raw material suppliers and/or the expansion of our product offering.
 
Factors impacting our results of operations 
 
We consider the following factors to be important in analyzing our results of operations:
 
 
Our sales are impacted by home renovation and remodeling and new residential construction, and to a lesser extent, commercial construction. We estimate that approximately 60% of our revenue is related to renovation and remodeling activities in the United States, Australia and Canada, while 25% to 35% is related to new residential construction. Spending in each of these sectors declined significantly in 2008 compared to 2007 in most of the markets in which we operate and, to date, many of these markets, including the United States, Australia, Canada and especially Europe, recovered only to a certain degree. U.S. housing completions recovered, growing 21.7% from 2009 to 2015 but are still 35.7% below 2007 levels (according to the National Association of Home Builders). Home renovation and remodeling spending, however, is estimated to recover by 21.0% from its recent bottom in 2010 and is up only 3.5% from its 2007 level (according to the Joint Center for Housing Studies, Harvard University). In Australia, housing completions recovered completely from their 2008 low and reached a new peak after increasing 13.6% during the first nine months of 2015 compared with the same period in 2014, reversing an aggregate 7.4% decrease between 2010 and 2012 (according to HIA- the Housing Industry Association). Home renovation and remodeling spending in Australia, however, were estimated to grow by 3.9% in 2015 and are still 6.0% below their 2007 level. Housing completions in Canada grew by 7.2% in 2015 but are still 6.9% below 2007 level (according to Statistics Canada). Home renovation and remodeling spending in Canada grew every year consistently since 2007 in an annual range of growth between 2.5% and 5% until 2013. In 2014 growth accelerated to 7.4% and during the first nine months of 2015, spending grew 4.1% compared to the same period in 2014. Despite the global downturn since 2008, prevailing weak economic conditions in Europe and mixed economic conditions in the United States, Australia and Canada as described above, we experienced compound annual revenue growth of 18.2% between 2007 and 2015 through increased penetration of quartz in kitchen countertop applications, market share gains in some of our key markets, and an increase in average selling prices associated with our establishment of new direct distribution channels and the expansion of our differentiated product offering. In 2013, our revenue increased in all regions, with the most significant growth in sales in the United States, growing by over 40% leveraging our increased distribution footprint, the successful introduction of the Supernatural collection, supported by a positive housing market. In 2014, our revenues increased in all regions except Israel. The most significant growth in sales occurred in the United States, where revenues increased by 50.4%, in part due to the continued quartz recognition, the collaboration with IKEA, improved product offerings, and a positive-trending housing market. Significant growth was achieved also in Australia and Canada, which grew 27.4% and 26.2%, respectively, on a constant currency basis. In 2015, our revenues increased by 11.6% with a major negative exchange rate impact. On a constant currency basis our revenue increased by 22.1% and occurred in all regions. The growth was primarily driven by continued demand in the United States, the Company's largest market, with Canada and Australia delivering the highest growth rates on a constant currency basis.
 
 
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Our gross profit margins have decreased from a level of 45.5% in 2013 to 40.1% in 2015, despite a significant improvement in product offering and scale benefits. This margin erosion reflects a major deterioration in foreign exchange rates, start-up costs and inefficiencies related to the introduction of new capacity in Israel and in the United States and the increase in business through IKEA, which carries significantly lower gross margins due to fabrication and installation components, which we provide through third party fabricators.
 
 
Our operating income margins were 19.3% in 2015, 21.2% in 2014 and 21.3% in 2013. The decrease in 2015 was primarily driven by start-up costs and inefficiencies related to the introduction of new capacity in the United States, our $4.7 million legal settlement and loss contingencies expense mentioned below and negative exchange rates fluctuations. IKEA business, despite having lower gross margin, is in line with our operating income margins.
 
 
In 2005, we commenced operations with a third manufacturing line at a new manufacturing facility in the Bar-Lev Industrial Park in northern Israel. We subsequently established a fourth production line in 2007 with the addition of a second production line at our Bar-Lev manufacturing facility. The operation of the fifth production line in the Bar-Lev manufacturing facility included two phases and was completed in the second quarter of 2014. The first production line in the new U.S. facility started operations in the second quarter of 2015 and the second production line started operations in the fourth quarter of 2015. Our investments related to the fifth production line at our Bar-Lev manufacturing facility was $25 million and the investment related to the production capacity increase in the United States is estimated to be approximately $130 million.
 
 
As an increasing portion of our products are sold through direct channels, 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 on our adjusted EBITDA, adjusted net income and net income of a change in revenues is magnified. We believe that the third quarter tends to exhibit higher sales volumes than other quarters because demand for quartz surface products is generally higher during the summer months in the northern hemisphere with the effort to complete new construction and renovation projects before the new school year. Conversely, the first quarter is impacted by the winter slowdown in the northern hemisphere in the construction industry and depending on the date of the spring holiday in Israel in a particular year, the first or second quarter is impacted by a reduction in sales in Israel due to such holiday. 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 from the onset of winter in the northern hemisphere.
 
 
We conduct business in multiple countries in North America, South America, Europe, Asia-Pacific, Australia and the Middle East and as a result, we are exposed to risks associated with fluctuations in currency exchange rates between the U.S. dollar and certain other currencies in which we conduct business. A significant portion of our revenues is generated in U.S dollar, and to a lesser extent the Australian dollar, the Canadian dollar, the euro and the new Israeli shekel. In 2015, 46.0% of our revenues were denominated in U.S. dollars, 22.1% in Australian dollars, 14.2% in Canadian dollars, 9.8% in euros and 7.9% in NIS. As a result, devaluations of the Australian dollars, and to a lesser extent, the Canadian dollar relative to the U.S. dollar may unfavorably impact our profitability. Our expenses are largely denominated in U.S. dollars, NIS and euro, with a smaller portion in the 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 impact our profitability. We attempt to limit our exposure to foreign currency fluctuations through forward and option contracts, which, except for U.S. dollar/NIS forward contracts, are not designated as hedging accounting instruments under ASC 815, Derivatives and Hedging. As of December 31, 2015, we had outstanding contracts with a notional amount of $187.0 million. These transactions were for a period of up to 12 months. The fair value of these foreign currency derivative contracts was $0.6 million, which is included in current assets and current liabilities, at December 31, 2015. For further discussion of our foreign currency derivative contracts, see “ITEM 11: Quantitative and Qualitative Disclosures About Market Risk.”
 
 
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Components of statements of income 
 
Revenues
 
We derive our revenues from sales of quartz surfaces, mostly to fabricators in our direct markets and to third-party distributors in our indirect markets. In the United States, Australia, Canada and Singapore the initial purchasers of our products are primarily fabricators. In Israel, the purchasers are local distributors who in turn sell to fabricators. In the United States, we also sell our products to a small number of sub-distributors, stone resellers as well as to IKEA. We consider Israel to be a direct market due to the warranty we provide to end-consumers, our local fabricator technical instruction programs and our local sales and marketing activities. The purchasers of our products in our other markets are our third-party distributors who in turn sell to sub-distributors and fabricators. Our direct sales accounted for 89.5%, 88.2% and 87.0%, for the years ended December 31, 2015, 2014, and 2013, respectively.

We recognize revenues upon sales to an initial purchaser when persuasive evidence of an agreement exists, delivery of the product has occurred, the fee is fixed or determinable and collection is probable. Delivery occurs when title is transferred under the applicable international commerce terms, or Incoterms, to the purchaser.
 
The warranties that we provide vary by market. In our indirect markets, we provide all of our distributors with a limited direct manufacturing defect warranty. In all of our indirect markets, distributors are responsible for providing warranty coverage to end-customers. In Australia, Canada, the United States 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, which increases our cost of revenues. Historically, warranty claims expenses have been low, accounting for approximately 0.4% of our total goods sold in 2015.
 
The following table sets forth the geographic breakdown of our revenues during the periods indicated:

   
Year ended December 31,
 
   
2015
   
2014
   
2013
 
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
    44.7 %   $ 223,341       41.5 %   $ 185,583       34.6 %   $ 123,399  
Australia
    22.1       110,290       24.0       107,539       25.2       89,894  
Canada
    14.2       70,739       12.9       57,898       13.8       49,214  
Israel
    7.9       39,645       9.2       41,286       11.8       42,024  
Europe
    4.8       23,949       5.2       23,109       6.4       22,973  
Rest of world
    6.3       31,551       7.2       31,987       8.2       29,050  
Total
    100.0 %   $ 499,515       100.0 %   $ 447,402       100.0 %   $ 356,554  
 
Revenues in the United States increased 42.2% in 2013, leveraging continued quartz conversion, successful introduction of our super natural collection, and positive housing trends. Our U.S. revenues increased by 50.4% in 2014, despite a milder housing market improvement, leveraging continued quartz conversion, increased portion of our wider Supernatural collection along with major growth in our business with IKEA, which also includes a significant portion of fabrication and installation component. In 2015, U.S. revenues increased by 20.3%, mainly reflecting a single-digit growth rate in IKEA business, following temporary cancellation of their relevant quarterly promotional events, which generate a significant portion of our sales through IKEA. Growth rate was also affected by a significantly milder U.S. housing market improvement. Revenues in Australia grew by 2.6% in 2015 after a 19.6% growth in 2014. On a constant currency basis, revenues in Australia grew by 24.0% and 27.4% in 2015 and 2014, respectively, leveraging continued quartz penetration, an improved product offering, price increases to partially offset the exchange rate deterioration and healthy housing market. In Canada, we continued our strong growth. Revenues grew 22.2% in 2015, representing a 41.2% increase on a constant-currency basis compared to 17.6% growth, 26.2% on a constant-currency basis in 2014. Growth rate acceleration was primarily driven by IKEA ramp-up.  Revenues in Israel declined by 4.0% and 1.8% in 2015 and 2014, respectively. On a constant-currency basis, revenues recovered to grow 5.3% in 2015 after a decrease by 3.8% in 2014 due to a weak housing market. The rate of revenue growth in Israel is generally less than other regions given the significant and longer standing penetration of quartz and our large countertop market share. Revenues in Europe grew by 3.6% and 0.6% in 2015 and 2014, respectively. However, on a constant-currency basis, growth in 2015 was 23.6% compared to 0.8% in 2014. Despite this growth, revenues in Europe are still 26.7% below 2007 record, reflecting challenging macroeconomic conditions in Europe, that have not fully recovered. Our revenues for the rest of the world declined by 1.4% in 2015 and increased by 10.1% in 2014. On a constant-currency-basis, growth was 13.9% and 10.4% in 2015 and 2014, respectively.
 
 
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We did not have any customer in 2015, 2014 and 2013 that accounted for more than 10% of our revenues.
 
Some of our initial engagements with distributors are pursuant to an agreement or terms of sale, as applicable, granting that distributor one year of exclusivity in consideration for meeting minimum sales targets. After the initial one-year period, we may enter into a distribution agreement for a multi-year period. However, in the majority of cases, we continue to operate on the basis of an agreement or terms of sale, or without any operative agreement. Some distributors operate on nonexclusive terms of sale agreements or entirely without agreements but rather on a purchase order basis. In all cases, we only supply our products to distributors upon the receipt of a purchase order from the distributor.

Cost of revenues and gross profit margin
 
Approximately 43% 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.  Our raw materials costs are also impacted by changes in foreign exchange rates. Our principal raw materials, quartz and polyester, jointly accounted for approximately 71% of our total raw material cost in 2015. The balance of our cost of revenues consists primarily of manufacturing costs and related overhead. Cost of revenues in our direct distribution channels also includes the cost of delivery from our manufacturing facilities to our warehouses, warehouse operational costs, as well as additional delivery costs associated with the shipment of our products to customer sites in certain markets. In the case of our indirect distribution channels, we bear the cost of delivery to the Israeli seaport and our distributors bear the cost of delivery from the seaport to their warehouses.
 
One of our principal raw materials, quartz, is acquired from quartz manufacturers primarily in Turkey, India, Portugal and Israel. Our products incorporate a number of types of quartz, including quartzite, quartz and other dry minerals. In 2015, approximately 71% of our total quartz was from four suppliers in Turkey, with the major part acquired from Mikroman (which accounted for approximately 41% of total import from Turkey, and approximately 29% of our total quartz in 2015) and Polat (which accounted for approximately 36% of total import from Turkey and approximately 25% of our total quartz in 2015). Our current supply arrangement with Mikroman is memorialized in an unsigned draft letter agreement which is being finalized as of the date of this report, while our arrangement with Polat is set forth in a letter agreement We typically transact business with our other suppliers on an annual framework agreement basis, under which we execute purchase order from time to time.
 
Prior to the manufacturing process, boulder quartz and processed crushed quartz must be processed into finer grades of fractions, granules and powder. Until January 2012, we received quartz processing services from our quartz suppliers and from Microgil, a third-party processor in Israel, although our quartz suppliers now exclusively perform this service for us. Quartz accounted for approximately 35% of our raw materials cost in 2015. Accordingly, our cost of sales and overall results of operations are impacted significantly by fluctuations in quartz prices. In 2011 and 2012, our cost of quartz was relatively stable. From 2013 to 2015, we  experienced selective price increases from our Turkish quartz suppliers, such that the average cost of quartz supplied to our facilities in Israel increased by approximately 3% and 4% in 2013 and 2014, respectively, and decreased by approximately 1.5% in 2015. This latest reduction was related to an approximately 16% devaluation of the euro compared to the U.S. dollar in 2015 on an annual average basis, which affected the cost of purchasing quartz from non-Turkish European suppliers. Quartz imported for our U.S. manufacturing facility involves higher transportation costs, therefore our total average quartz costs increased by approximately 1.3% in 2015. Any future increases in quartz costs may adversely impact our margins and net income.
 
 
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We acquire polyester on a purchase order basis with several suppliers outside of Israel based on our projected needs for the subsequent one to three months. 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 their prices, which generally correlate with oil prices. In 2010, average polyester cost increased by approximately 9%, despite an approximately 20% increase of the cost denominated in euro, given a stronger NIS (our functional currency during this period) compared to the euro. In 2011, there was a further increase of approximately 12%, both in NIS and in euro. During 2012 through 2014, average polyester costs stabilized with up to 2% deviations in euro and up to 5% in U.S. dollar (our reporting currency since July 1, 2012). In 2015, average polyester costs decreased by approximately 27%, of which approximately 12% was due to a change in our costs denominated in euros, and the rest related to an approximately 16% weakening of the euro compared to the U.S. dollar on an average annual basis. Any future increases in polyester 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 than if we distributed our products directly. However, in several markets we distribute directly, including the United States, Australia and Canada. 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 of our research and development costs as incurred. Our research and development expenses were partially offset through 2013 by financing through grants from the OCS of the Ministry of Economy of the State of Israel. We recognized such participation grants at the time at which we were entitled to such grants on the basis of the costs incurred and included those grants as a deduction from research and development expenses. This OCS program ended during 2013.
 
The Israeli law under which OCS grants were made requires royalty payments and limited our ability to manufacture products, or transfer technologies developed using these grants outside of Israel. If we were to seek approval to manufacture products, or transfer technologies developed using these grants, outside of Israel, we could be subject to additional royalty requirements or be required to pay certain redemption fees. If we were to violate these restrictions, we could be required to refund any grants previously received, together with interest and penalties, and may be subject to criminal charges. We believe the ongoing construction of a new production facility in the United States will not subject us to any royalty payment obligations or require us to refund any grants because our OCS grants financed our development of a product that has not been commercialized yet and are not planned to be manufactured at the U.S. production facility. In addition, based on OCS statements, we believe that our OCS funding is exempted from royalty payment obligations. Our development project operated under the OCS funding arrangement began in August 2009. During the period between August 2009 and March 2013, we recognized OCS funding of $0.7 million.
 
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. As we had invested significantly in 2011 and 2012 in building our acquired direct distribution channels in the U.S. and Canadian markets, marketing and selling expenses in general, and advertising expenses in particular, increased in both absolute and percentage terms in both years, when we increase the number of sales and marketing professionals and expand our marketing activities. In 2013, 2014 and 2015, our absolute spending increased but decreased as a percentage of revenues.
 
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.”
 
We expect our general and administrative expenses to increase in absolute dollars as we continue to increase our direct distribution operations in the United States and Canada, incur additional costs related to the growth of our business,  expand our a production facility in the United States, generate expenses related to maintaining and improving further our ERP system and incur legal expenses associated with our open lawsuits.
 
 
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Legal settlements and loss contingencies, net
 
Legal settlements and loss contingencies, net were first recorded in 2015 and consist of expenses related to settlements expenses and estimated exposure not covered by the Company's insurance applicable to individual silicosis claims.
 
Finance expenses, net
 
Finance expenses, net, consist primarily of, bank and credit card fees, borrowing costs, losses on derivative instruments 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. Our bank interest expenses have decreased since 2011 as we paid our commercial debt, while our bank charges and credit card fees increased due to our increased business volume. Interest income increased as we accumulated cash generated by our March 2012 IPO and on-going cash flow and decreased in 2015 and 2014 given our reduced deposit balances, our increased capital expenditures and the 2014 and 2013 dividend payouts. However, the main reason for the year-over-year reduction in finance expenses between 2013 and 2014 was higher net income related to the impact of exchange rates on our derivatives and net monetary assets and liabilities re-valuation, given that unfavorable exchange rate fluctuations were higher in 2014 than in 2013. In 2015, net gains related to exchange rate fluctuation were similar to 2014 and the increase in finance expenses, net, were mostly related to the increase of our business volume and lower interest income.
 
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 14.8% in 2015, 14.6% in 2014 and 13.8% in 2013.
 
The standard corporate tax rate for Israeli companies was 25% in 2012 and 2013, increased to 26.5% in 2014 and 2015, and reduced back to 25% in 2016 onward. Our non-Israeli subsidiaries are taxed according to the tax laws in their respective country of organization.
 
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, as follows: 2011-2012—10%, 2013-2014—7%, and 2015 and thereafter—6%. Subsequently, on August 5, 2013, the 2014 and onwards tax bracket was increased by the Knesset to 9%. For the portion related to the Kibbutz Sdot-Yam facility, this status provides us with a reduced flat corporate tax rate, which applies to the industrial enterprise’s entire preferred income, as follows: 2011-2012—15%, 2013-2014—12.5%, and 2015 and onwards—12%. Subsequently, on August 5, 2013, the 2014 and onwards tax bracket was increased by the Knesset to 16%.
 
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.”
 
We have entered into a transfer pricing arrangement that establishes transfer prices for our inter-company operations.
 
Because of our multi-jurisdictional operations, we apply significant judgment to determine our consolidated income tax position. We estimate our effective tax rate for the coming years based on our planned future financial results in existing and new markets and the key factors affecting our tax liability, particularly our transfer pricing policy. Accordingly, we estimate that our effective tax rate will increase to a range between 16% and 20% of our income before income tax in 2016 increasing further in 2017, when we expect to conduct significant manufacturing operations in the United States. In the long-term, we anticipate that our effective tax rate will further increase as the portion of our income attributed to the United States manufacturing and to the distribution subsidiaries grows. We cannot provide any assurance that our plans will be realized and that our assumptions with regard to the key elements affecting tax rates will be accepted by the tax authorities. Therefore, our actual effective tax rate may be higher than our estimate.
 
 
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Net income attributable to non-controlling interest
 
In October 2010, we closed a transaction for the establishment of a joint venture with our former third-party distributor in Eastern Canada, Canadian Quartz Holdings Inc. (“Ciot”). Ciot acquired a 45% ownership interest in the new subsidiary, Caesarstone Canada Inc., and 45% of Caesarstone Canada Inc.’s net income is attributed to Ciot.
 
Other factors impacting our results of operations
 
Payment of compensation and grant of options upon the pricing of the IPO
 
Following the IPO in March 2012, we granted certain of our key employees, including our executive officers, options to purchase 1,505,200 ordinary shares with an exercise price equal to the IPO price per share of $11.00 and additional options to purchase 40,000 ordinary shares with an exercise price of $15.84. During 2015 we granted options to purchase 360,000 of our ordinary shares to our CEO vesting through December 31, 2018 and with an exercise price of $41.37, and options to purchase 424,000 of our ordinary shares to certain other employees vesting through April 1, 2020 and with an average exercise price of $34.99. In addition, during 2015 we granted also 55,100 RSUs to certain other employees with a weighted average fair value of $35.04 and vesting through April 1, 2020. We recorded share-based compensation expenses related to the above grants of $2.6 million in 2015, $1.2 million in 2014, $2.5 million in 2013 and will record $9.7 million over a weighted average period of 1.4 years.
 
Agreements with Kibbutz Sdot-Yam
 
We are party to a series of agreements with our largest shareholder, Kibbutz Sdot-Yam, which govern different aspects of our relationship. Pursuant to these agreements, in consideration for using facilities leased to us or for services provided by Kibbutz Sdot-Yam, we paid to the Kibbutz an aggregate of $11.1 million in 2015, $12.2 million in 2014, and $10.8 million in 2013 (excluding VAT). The decrease in the amount paid in 2015 compared to 2014 is mainly as a result of exchange rate differences.
 
Certain of our prior agreements with Kibbutz Sdot-Yam were terminated in March 2012 and, other than with respect to our former management services agreement, which was not renewed, a new set of agreements became effective in March 2012. The new agreements provide for similar services to those that were previously provided to us by Kibbutz Sdot-Yam, except that following the closing of our IPO as disclosed in “ITEM 7: Major Shareholders and Related Party Transactions—Related Party Transactions—Relationship and agreements with Kibbutz Sdot-Yam—Land purchase agreement and leaseback”, we agreed to Kibbutz Sdot-Yam acquiring from us our rights in the lands and facilities of the Bar-Lev Industrial Center, (the “Bar-Lev Grounds”) in consideration for NIS 43.7 million ($10.9 million). Following the completion of the transfer in September 2012, Kibbutz Sdot-Yam agreed to permit us to use the Bar-Lev Grounds for a period of ten years thereafter. Our right to use the Bar-Lev Grounds will be automatically renewed unless we give two years prior notice, for a ten-year term in consideration for an annual fee of NIS 4.1 million ($1.2 million) to be linked to increases in the Israeli consumer price index, which may be updated by an appraiser. See “ITEM 7.B: Major Shareholders and Related Party Transactions—Related Party Transactions.”
 
Interest expense related to this agreement was $0.6 million in 2015.
 
 
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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,
 
   
2015
   
2014
   
2013
 
   
Amount
   
% of Revenue
   
Amount
   
% of Revenue
   
Amount
   
% of Revenue
 
   
(in thousands of U.S. dollars)
 
Consolidated Income Statement Data:
                                   
Revenues:                                                      
  $ 499,515       100.0 %   $ 447,402       100.0 %   $ 356,554       100.0 %
Cost of revenues                                                      
    299,290       59.9       257,751       57.6       194,436       54.5  
Gross profit                                                      
    200,225       40.1       189,651       42.4       162,118       45.5  
Operating expenses:
                                               
Research and development, net
    3,052       0.6       2,628       0.6       2,002       0.6  
Marketing and selling
    59,521       11.9       55,870       12.5       51,209       14.4  
General and administrative
    36,612       7.3       36,111       8.1       32,904       9.2  
Legal settlements and loss contingencies, net
    4,654       0.9       -       -       -       -  
Total operating expenses
    103,839       20.8       94,609       21.2       86,115       24.2  
Operating income                                                      
    96,386       19.3       95,042       21.2       76,003       21.3  
Finance expenses, net                                                      
    3,085       0.6       1,045       0.2       1,314       0.4  
Income before taxes on income
    93,301       18.7       93,997       21.0       74,689       20.9  
Taxes on income                                                      
    13,843       2.8       13,738       3.1       10,336       2.9  
Net income                                                      
  $ 79,458       15.9 %   $ 80,259       17.9 %   $ 64,353       18.0 %
Net income attributable to non-controlling interest
    1,692       <