Ituran - 20-F annual report 2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

USE OF CERTAIN TERMS

FORWARD LOOKING STATEMENTS

Not applicable.

 

Not applicable.

 

The selected consolidated financial data below is provided under generally accepted accounting principles in the U.S. (U.S. GAAP). You should read the selected consolidated financial data presented in this Item together with Item 5 – Operating and Financial Review and Prospects and with our consolidated financial statements included elsewhere in this annual report.

Our selected consolidated statements of income data for the years ended December 31, 2020, 2021 and 2022 and our selected consolidated balance sheet data as of December 31, 2021 and 2022 have been derived from our consolidated financial statements included elsewhere in this report. The selected consolidated statements of income data for each of the years ended December 31, 2018 and 2019, and the selected consolidated balance sheet data as of December 31, 2018, 2019 and 2020, are derived from our audited consolidated financial statements not included in this report.

Consolidated Statements of Income Data

 

 

Other Data:

 

Not applicable.

Not applicable.

Revenues from our stolen vehicle recovery services, which we refer to as SVR services, (“SVR”) and automatic vehicle location (“AVL”) products, which we refer to as telematics products, are primarily dependent on our relationships with insurance companies and car manufactures in Israel. Insurance companies drive demand for our SVR services and telematics products by encouraging and, in some cases, requiring customers to subscribe to vehicle location services and purchase vehicle location products such as ours. In certain subsidiaries in Brazil and Argentina, insurance companies enter into written agreements to subscribe to our services and purchase or lease our products directly. Our inability to maintain our existing relationships or establish new relationships with insurance companies could adversely affect our revenues and growth potential. In some of the territories in which we operate, we have business relation with car manufacturers. Our inability to maintain our existing relationships or establish new relationships with car manufacturers companies could adversely affect our revenues and growth potential.

We depend on the practices of insurance companies in the markets in which we provide our SVR services and sell our telematics products. In Israel, insurance companies either mandate the use of SVR services and telematics products, or their equivalent, as a prerequisite for providing insurance coverage to owners of certain medium- and high-end vehicles or provide insurance premium discounts to encourage vehicle owners to subscribe to services and purchase products such as ours. In certain subsidiaries in Brazil and Argentina, insurance companies mainly lease our telematics products directly and subsequently require their customers to subscribe to our SVR services.

Therefore, we rely on insurance companies’ continued practice of:

If any of these policies or practices change, revenues from sales of our SVR services and telematics products could decline, which could adversely affect our revenues and growth potential.

Demand for our SVR services and telematics products depends primarily on prevailing or expected vehicle theft rates. Vehicle theft rates may decline as a result of various reasons, such as the availability of improved security systems, implementation of improved or more effective law enforcement measures, or improved economic or political conditions in markets that have high theft rates. If vehicle theft rates in any or all of our existing markets decline, or if insurance companies or our other customers believe that vehicle theft rates have declined or are expected to decline, demand for our SVR services and telematics products may decline.

Our SVR services and telematics products are primarily used to protect cars and are often installed before or immediately after their initial sale. Consequently, a reduction in sales of vehicles could reduce our addressable market for SVR services and telematics products. New vehicle sales may decline for various reasons, including an increase in new vehicle tariffs, taxes or gas prices. A decline in vehicle production levels or labor disputes affecting the automobile industry in the markets where we operate may also impact the volume of new vehicle sales. A decline in sales of new vehicles in the markets in which we provide our SVR services or sell our telematics products could result in reduced demand for such services and products.

The markets for our services and products are highly competitive. We compete primarily on the basis of the technological innovation, quality and price of our services and products. Our most competitive market is the telematics services market and the related telematics products market, due to the existence of a wide variety of competing services and products and alternative technologies that offer various levels of protection and tracking capabilities, including global positioning systems, or GPS, satellite- or network-based cellular systems and direction-finding homing technologies. Some of these competing services and products, such as certain GPS-based products, are installed in new cars by vehicle manufacturers prior to their initial sale, which effectively precludes us from competing for such subscribers in the SVR market. Furthermore, providers of competing services or products may extend their offerings to the locations in which we operate, or new competitors may enter the telematics services market. Our telematics products also compete with less sophisticated theft protection devices such as standard car alarms, immobilizers, steering wheel locks and homing devices, some of which may be significantly cheaper. Some of these competing products have greater brand recognition than our telematics products.

We are engaged in businesses characterized by rapid technological change and frequent new product developments and enhancements. The number of companies developing and marketing new telematics products has expanded considerably in recent years. The development of new or improved products, systems or technologies that compete with our telematics products, for both our SVR and fleet management services, may render our products and services less competitive and we may not be able to enhance our technology in a timely manner. In addition to the competition resulting from new products, systems or technologies, our future product enhancements may not adequately meet the requirements of the marketplace and may not achieve the broad market acceptance necessary to generate significant revenues. Any of the foregoing could cause a decline in our revenues and profitability.

Our telematics products identify the location of vehicles in which our products are installed. Following a notification of an unauthorized entry, or if we receive notification of the vehicle’s theft from a subscriber, we notify the relevant law enforcement agency of the location of the subscriber’s vehicle and generally rely on local law enforcement or governmental agencies to recover the stolen vehicle. We cannot control nor predict the response time of the relevant local law enforcement or other governmental agencies responsible for recovering stolen vehicles, nor that the stolen vehicles, once located, will be recovered at all. In the past, some stolen vehicles in which our telematics products were installed were not recovered on timely manner, from the time an unauthorized entry is confirmed or reported to the time the vehicle is recovered. To the extent that the relevant agencies do not effectively and timely respond to our calls and recover stolen vehicles, our recovery rates would likely diminish, which may, in turn, negatively impact customers’ perception of the usefulness of our SVR services and telematics products, adversely affecting our revenues.

The effectiveness of our telematics products is dependent, in part, on the inability of unauthorized persons to deactivate or otherwise alter the functioning of our telematics products or the vehicle anti-theft devices that work in conjunction with our telematics products. As sales of our telematics products increase, criminals in the markets in which we operate may become increasingly aware of our telematics products and may develop methods or technologies to detect, deactivate or disable our tracking devices or the vehicle anti-theft devices that work in conjunction with our telematics products. We believe that, as is the case with any product intended to prevent vehicle theft, over time, there may be an increased ability of unauthorized persons to detect, deactivate, disable or otherwise inhibit the effectiveness of our telematics products, although it is difficult to verify this fact. An increase in the ability of unauthorized persons to detect, deactivate, disable or otherwise inhibit the effectiveness of our telematics products could adversely affect demand for our products and our revenues.

We license from third parties some of the technology that we need in order to provide our SVR services and market and sell some of our telematics products. In the event that such licenses were to be terminated, or if such licenses were rendered unenforceable or invalid and we would not be able to license similar technology from other parties, it would require us, at a minimum, to obtain rights to a different technology and reconfigure our telematics products accordingly. In addition, some of the licenses we obtained from third parties are non-exclusive, which may enable other entities to obtain identical licenses from such third parties to operate in the places in which we conduct our business resulting in increased competition and could adversely affect our revenues.

Our SVR services business model and, consequently, our ability to provide our SVR services and sell our telematics products, relies on our ability to successfully identify markets in which:

 

The absence of such conditions, our inability to locate markets in which such conditions exist or the loss of any one of the above conditions in markets we currently serve could adversely affect our revenues generated in existing markets or our growth potential.

Our success depends upon the efforts and abilities of key management personnel, including our President and our Co-Chief Executive Officers. Loss of the services of one or more of such key personnel could adversely affect our ability to execute our business plan. In addition, we believe that our future success depends in part upon our ability to attract, retain and motivate qualified personnel necessary for the development of our business. If one or more members of our management team or other key technical personnel become unable or unwilling to continue in their present positions, and if additional key personnel cannot be hired and retained as needed, our business and prospects for growth could be adversely affected.

We outsource the manufacturing of a significant part of our telematics products to third parties. We use manufacturers for production of our telematics products and we do not maintain significant levels of inventories to support us in the event of an unexpected interruption in its manufacturing process. If our principal manufacturer or any of our other manufacturers is unable to or fails to manufacture our products in a timely manner, we may not be able to secure alternative manufacturing facilities without experiencing an interruption in the supply of our products or an increase in production costs. Any such interruption or increase in production costs could affect our ability to provide our telematics products in a timely and cost-effective manner, adversely impacting our revenues and profit margins.

We rely on two major suppliers to supply us with various products and software, one of them is our subsidiary. Each of these suppliers supply us with different type of products and software and act as single supplier of such products and services.

Termination of relations with one of our major suppliers would adversely affect our operations and revenues.

We and our third-party manufacturers use specialized quality assurance testing equipment in the production of our products. The replacement of any such equipment as a result of its failure or loss could result in a disruption of our production process or an increase in costs, which could adversely affect our results of operations.

The Israeli Ministry of Telecommunications has decided that from 2026 Generation 2.0 used by customers of Ituran in Israel will not be in operation. This is a general decision which applies to us too.In case such decision is not abolished or postponed, then we shall need to cooperate with another Israeli cellular company. Such cooperation may  cost us up to 4 Million USD per annum during the 3-5 years to follow.

There are no established industry standards in all of the businesses in which we sell our telematics products. For example, vehicle location devices may operate by employing various technologies, including network triangulation, GPS, satellite-based or network-based cellular or direction-finding homing systems. The development of industry standards that do not incorporate the technology we use may decrease or eliminate the demand for our services or products and we may not be able to develop new services and products that are in compliance with such new industry standards on a cost-effective basis. If industry standards develop and such standards do not incorporate our telematics products and we are unable to effectively adapt to such new standards, such development could harm our results of operations.

We anticipate future growth to be attributable to our business activities in new markets, particularly in developing countries, where we may encounter additional risks and challenges, such as longer payment cycles, potentially adverse tax consequences, potential difficulties in collecting receivables and potential difficulties in enforcing agreements or other rights in foreign legal systems. The challenges and risks of entering a new market may delay or preclude our ability to generate anticipated revenues and may impede our overall growth strategy.

Part of our business relies on signals from GPS/GPRS satellites built and maintained by third parties. If GPS/GPRS satellites become unavailable to us, or if the costs associated with using GPS/GPRS technology increase such that it is no longer feasible or cost-effective for us to use such technology, we will not be able to adequately provide our services. In addition, if one or more GPS/GPRS satellites malfunction, there could be a substantial delay before such satellites are repaired or replaced, if at all. The occurrence of any of the foregoing events could negatively impact our immediate and future revenues from, or growth of, our telematics services and adversely affect our results of operations.

Our telematics and SVR services, relies on the use of information technology which under a major cyber security breach, could harm our operations. We are using physical services, wireless transmitting stations, GPRS/GPS, and in lesser account cloud computing to provide our services. There are risks associated with storing and transmitting data, which due to cyber security breach may be corrupted, and the store data on remote servers may be destroyed, damaged, seized, or otherwise no longer accessible, which may temporary decrease our ability to deliver telematics and SVR services.

We implemented cyber security controls – which consists of three pillars: prevention, detection and response (data recovery in the event of a cyber breach). We perform an ongoing review of our systems and an annual external review of our cyber security controls and their implementation. However, such cyber security controls may not be able to prevent all unexpected weaknesses. In the event of a cyber-attack, we could experience the corruption or loss of data, misappropriation of assets or sensitive information, including customer information, or operational disruption. This could result in response costs and various financial loss and may subject us to litigation and cause damage to our reputation, for which we may not be covered under our current insurance policies and may lead to substantial loss of revenues.

Some of our employees in our subsidiaries in Brazil and Argentina are members of labor unions. If a labor dispute were to develop between us and our unionized employees, such employees could go on strike and we could suffer work stoppage for a significant period of time. A labor dispute can be difficult to resolve and may require us to seek arbitration for resolution, which arbitration can be time consuming, distracting to management, expensive and difficult to predict. The occurrence of a labor dispute with our unionized employees could delay or preclude altogether our ability to generate revenues in the markets where such employees are located.

Inflation and shortage of semiconductor supplies

In periods of shortages impacting the semiconductor industry during year 2022, we have placed and may continue to place non-cancellable inventory orders in advance of our historical lead times, and pay premiums and/or provide deposits to secure future supply and capacity. For example, while we previously placed orders with approximately six months’ lead time, we have begun placing orders at least twelve months in advance. Our inventory and purchase commitments reflect our demand expectations for our future quarters and long-term supply and capacity needs. However, we may not be able to accurately predict when such periods of shortage will end, nor do we know whether those inventory orders accurately address our current and future demand needs. These actions increased some of our product costs .If this shortage will sustain we may suffer same economic extra costs in the future.

During the year 2022, we have encountered growing inflation rates and growing interest rates in the main territories where we operate. This has caused additional costs to our financing and operations. This environment has a potential negative impact on our results,  as long as it sustains.

Regional or Global Health Pandemic

We are subject to litigation that could result in significant costs to us.

On July 13, 2015, we received a purported class action lawsuit which was filed against the Company in the District Court of Central Region in Tel-Aviv by one plaintiff who is a subscriber of the Company, alleging that the Company, which was declared a monopoly under the Israeli Antitrust Law, unlawfully abused its power as a monopoly and discriminated between its customers. The lawsuit is yet to be approved as a class action. The total amount claimed if the lawsuit is approved as a class action was estimated by the plaintiff to be approximately NIS 300 million (approximately USD 85.2 million). Based on an opinion of its legal counsels, the Company believes that the lawsuit lacks substantiation, and that the Company has good defence arguments in respect of claims made by the plaintiff and that the chances that the suit will not be approved as a class action lawsuit are more likely than not. While we cannot predict the outcome of this case, if we are not successful in defending our claim, we could be subject to significant costs, adversely affecting our results of operations.

For additional information on these lawsuits and for information concerning additional litigation proceedings, please refer to Item 8.A – “Consolidated financial Statements and other Financial Information” under the caption “Material Legal Proceedings” below.

The provision of our SVR services depends upon adequate network coverage for accurate tracking information. In Israel, we have installed 98 base sites that provide complete communications coverage in Israel. Similarly, we have communications coverage in Sao Paulo (121 sites), Rio (6 sites), Brazil and Buenos Aires, Argentina (37 sites). The installation and operation of most of our base sites require building permits from local or regional zoning authorities as well as a number of additional permits from governmental and regulatory authorities.

Currently most of our base sites in Israel and Brazil and some of our base sites in Argentina operate without local building permits or the equivalent. Although relevant authorities in Israel, Brazil and Argentina have not historically enforced penalties for non-compliance with certain permit regulations, following ongoing press coverage and actions by various public interest groups, relevant Israeli authorities have begun seeking enforcement of permit regulations, especially with respect to antennas constructed for cellular phone operators. Some possible enforcement measures include the closure or demolition of existing base sites or the imposition of limitation on the building of new base stations. Should these enforcement measures be imposed upon us in Israel, Brazil or Argentina, the extent, quality and capacity of our network coverage and, as a result, our ability to provide SVR services, may be adversely affected. In Israel we are in process of achieving compliance with the regulation of our base stations, such process can take several years.

The valuation of our assets and liabilities, our revenues received, and the related expenses incurred are not always denominated in the same currency. This lack of correlation between revenues and expenses exposes us to risks resulting from currency fluctuations. These currency fluctuations could have an adverse effect on our results of operations, such currency fluctuations take place in several countries in which we operate which affects our operation results in these countries. In addition, fluctuations in currencies may result in valuation adjustments in our assets and liabilities which could cause our results of operations to decline.

Our headquarters are located in Israel and most our key employees, officers and directors are residents of Israel. Accordingly, security, political and economic conditions in Israel directly affect our business. Over the past several decades, a number of armed conflicts have taken place between Israel and its Arab neighbours. During the recent years Israel was engaged in an armed conflicts with a militant group and political party who controls the Gaza Strip. These conflicts involved missile strikes against civilian targets in various parts of Israel, including areas in which our employees and some of our consultants are located, and negatively affected business conditions in Israel. Continued or increased hostilities, future armed conflicts, political developments in other states in the region or continued or increased terrorism could make it more difficult for us to conduct our operations in Israel, which could increase our costs and adversely affect our financial results.

Furthermore, there are number of countries, primarily in the Middle East, that still restrict business with Israel or Israeli companies and as a result our company is precluded from marketing its products in these countries. Restrictive laws or policies directed toward Israel or Israeli businesses could have an adverse effect on our ability to grow our business and our results of operations.

The Israeli government is currently pursuing extensive changes to Israel’s judicial system. This has sparked extensive political debate. In response to the foregoing developments, many individuals, organizations and institutions, both within and outside of Israel, have voiced concerns that the proposed changes may negatively impact the business environment in Israel, due to potential reluctance of foreign investors to invest or transact business in Israel, increased currency fluctuations, downgrades in credit rating, increased interest rates, increased volatility in securities markets, and other changes in macroeconomic conditions. To the extent that any of these negative developments occur, they may have an adverse effect on our business, our results of operations, or our ability to raise additional funds.

We have been declared a monopoly under the Israeli Economy competition Law (formerly known as Restrictive Trade Practices Law, 1988) (the “Israeli Antitrust Law”), in the market for the provision of systems for the location of vehicles. Under Israeli law, a monopoly is prohibited from taking certain actions, such as predatory pricing and the provision of loyalty discounts, which prohibitions do not apply to other companies. The Israeli antitrust authority (under its new name - Competition Authority) may further declare that we have abused our position in the market. Any such declaration in any suit in which it is claimed that we engage in anti-competitive conduct would serve as prima facie evidence that we are a monopoly or that we have engaged in anti-competitive behaviour. Furthermore, we may be ordered to take or refrain from taking certain actions, such as set maximum prices, in order to protect against unfair competition. If we breach certain provisions of the Israeli Antitrust Law, including as a monopoly, the Israeli Competition authority may also impose on us in an administrative procedure, financial sanctions in an amount of up to the lower of NIS 100 million (approximately US$28.4 million, according to the USD-NIS exchange rate, as of December 31, 2022) or 8% of our annual revenues for the last financial year prior to such breach. Restraints on our operations as a result of being considered a “monopoly” in Israel could adversely affect our ability to grow our business in Israel.

We are incorporated and headquartered in Israel. As a result, our executive officers and directors are non-residents of the United States and a substantial portion of our assets and the assets of these persons are located outside of the United States. Therefore, service of process upon any of these officers or directors may be difficult to effect in the United States. Furthermore, it may be difficult to enforce a judgment issued against us in the United States or any of such persons in both United States courts and other courts abroad.

Additionally, there is doubt as to the enforceability of civil liabilities under United States federal securities laws in actions originally instituted in Israel or in actions for the enforcement of a judgment obtained in the United States on the basis of civil liabilities in Israel.

We may be subject to Israeli corporate law which regulates mergers, requires tender offers for acquisitions of shares above specified thresholds, requires special approvals for transactions involving directors, officers or significant shareholders and regulates other matters that may be relevant to these types of transactions. In addition, our articles of association contain, among other things, provisions that may make it more difficult to acquire our company, such as classified board provisions and certain restrictions on the members of our board pursuant to regulatory requirements of the Israeli Ministry of Communication. Furthermore, Israeli tax considerations may make potential transaction structures involving the acquisition of our company unappealing to us or to some of our shareholders. See Item 10.B. – “Memorandum and Articles of Association” - “Our Corporate Practices under the Israeli Companies Law” under the caption “Approval of Transactions under Israeli law” and Item 10.E. – “Taxation” under the caption “Israeli Tax Considerations” for additional discussion of some anti-takeover effects of Israeli law. These provisions of Israeli law and our articles of association may delay, prevent or otherwise encumber a merger with, or an acquisition of, our company or any of our assets, which could have the effect of delaying or preventing a change in control of our company, even when the terms of such a transaction could be favourable to our shareholders.

We are incorporated under Israeli law. The rights and responsibilities of holders of our ordinary shares are governed by our memorandum of association, articles of association and by Israeli law. These rights and responsibilities differ in some respects from the rights and responsibilities of shareholders in typical US-based corporations. In particular, a shareholder of an Israeli company has a duty to act in good faith toward the company and other shareholders and to refrain from abusing his, her or its power in the company, including, among other things, in voting at the general meeting of shareholders on certain matters. Israeli corporate law has undergone extensive revisions in recent years and, as a result, there is little case law available to assist in understanding the implications of these provisions that govern shareholders’ actions, which may be interpreted to impose additional obligations on holders of our ordinary shares that are typically not imposed on shareholders of US-based corporations.

If we or our shareholders sell substantial amounts of our ordinary shares on the Nasdaq Global Select Market, the market price of our ordinary shares may decline.

The stock market in general, and the market price of our ordinary shares in particular, are subject to fluctuation, and changes in our share price may be unrelated to our operating performance. The market price of our ordinary shares has fluctuated in the past, and we expect it will continue to do so, as a result of a number of factors, including:

 

These factors and price fluctuations may materially and adversely affect the market price of our ordinary shares and result in substantial losses to our investors.

Moked Ituran Ltd. currently beneficially owns approximately 20.27% of our outstanding ordinary shares (not including treasury stock held by us). Other than applicable regulatory requirements under applicable law, Moked Ituran Ltd., is not prohibited from selling an interest in our company to a third party. In addition, our articles of association provide for a staggered board which may delay, prevent or deter a change in control. For additional information concerning our staggered board, see Item 6.A – Directors and Senior Management.

If, for any taxable year, our passive income or our assets that produce passive income exceed levels established by the Internal Revenue Code, we may be characterized as a passive foreign investment company, which we refer to as PFIC, for US federal income tax purposes. This characterization could result in adverse US tax consequences to our shareholders who are U.S. Holders. See Item 10.E. – “Taxation” under the caption “United States Tax Considerations” below, for more information about which shareholders may qualify as U.S. Holders. If we were classified as a PFIC, a U.S. Holder could be subject to increased tax liability upon the sale or other disposition of our ordinary shares or upon the receipt of amounts treated as “excess distributions.” Under such rules, the excess distribution and any gain would be allocated ratably over the U.S. Holder’s holding period for the ordinary shares and the amount allocated to the current taxable year and any taxable year prior to the first taxable year in which we were a PFIC would be taxed as ordinary income. The amount allocated to each of the other taxable years would be subject to tax at the highest marginal rate in effect for the applicable class of taxpayer for that year, and an interest charge for the deemed deferral benefit would be imposed on the resulting tax allocated to such other taxable years. In addition, U.S holders of shares in a PFIC may not receive a “step-up” in basis on shares acquired from a decedent. U.S. Holders should consult with their own U.S. tax advisors with respect to the United States tax consequences of investing in our ordinary shares as well as the specific application of the “excess distribution” and other rules discussed in this paragraph. For a discussion of how we might be characterized as a PFIC and related tax consequences, please see Item 10.E. – “Taxation” under the caption “United States Tax Considerations–Passive foreign investment company considerations”.

We may decide to raise additional funds through a public or private debt or equity financing to fund our operations or finance acquisitions. If we issue additional equity securities, the percentage of ownership of our shareholders will be reduced and the new equity securities may have rights superior to those of our ordinary shares, which may, in turn, adversely affect the value of our ordinary shares.

Current and future economic conditions could adversely affect consumer spending in the automobile industry, as such spending is often discretionary and may decline during economic downturns when consumers have less disposable income. Consequently, changes in general economic conditions resulting in a significant decrease in dealer automobile sales or in a tightening of credit in financial markets, such as the 2007 U.S. subprime mortgage crisis and resulting credit crunch, could adversely impact our future revenue and earnings. Such decreases could also affect the financial security of the automobile dealers and manufactures with whom we do business. The delayed payment from or closure of our larger dealer groups could affect our ability to collect on our receivables. Similar effects could result from local economic downturns in either one of our main markets of operations, i.e. Israel, Brazil, Mexico, Colombia, Ecuador and Argentina. Given the volatile nature of the current market disruption, we may not timely anticipate or manage such existing or new risks. Our failure to do so could materially and adversely affect our business, financial condition, results of operations and prospects.

Our legal name is Ituran Location and Control Ltd. and we were incorporated under the laws of the State of Israel on February 1994 as a subsidiary of Tadiran Ltd., an Israeli-based designer and manufacturer of telecommunications equipment, software and defence electronic systems, whose original business purpose was to adapt military-grade technologies for the civilian market.

We are mainly engaged in the area of Telematics services, consisting of stolen vehicle recovery, fleet management services, connected cars, UBI, and other tracking services. We also provide telematics products used in connection with our Telematics services and various other applications. We currently primarily provide our services as well as sell and lease our products in Israel, Brazil, Argentina, Mexico, Ecuador, Colombia, Canada and the United States .(and fleet management in other countries through distributors ).

In May 1998, we completed the initial public offering of our ordinary shares in Israel and our ordinary shares began trading on the Tel-Aviv Stock Exchange. In September 2005, we publicly offered our ordinary shares in the United States. On May 25, 2016 our shares were voluntarily delisted from the Tel Aviv stock exchange, and our ordinary shares are currently quoted only on Nasdaq under the symbol “ITRN”.

During the period of the years 2018-2021 we closed in two steps, the acquisition of whole  of the shares of Road Track Holding S.L, (following transaction name was changed to Ituran Spain Holdings S.L) a telematics company operating primarily in the Latin American region ("RTH Transaction"). The total cost of the RTH transaction was 103 Million USD – combination of shares and cash.

Principal Capital Expenditures

We had capital expenditures of $26.5 million in 2022, $ 16.6 million in 2021 and $ 10.2 million in 2020. We have financed our capital expenditures with cash generated from our operations.

Our capital expenditures in ,2022, 2021, and 2020 consisted primarily of acquisition of operational equipment for $ 16.7 $  million, 7.0 million, and $3.9 million, respectively.

We believe we are a leading provider of telematics services, consisting predominantly of stolen vehicle recovery, fleet management services and other tracking services as well as connected car and UBI (usage base insurance). We also provide telematics products used in connection with our telematics services. We currently primarily provide our services and sell and lease our products in Israel, Brazil, Argentina, Mexico, Ecuador, Colombia, United States, Canada and other regions through our distributers. We utilize technologies that enable precise and secure high-speed data transmission and analysis. Some of the technology underlying our products was originally developed for the Israeli Defence Forces in order to locate downed pilots.

We generate our revenues from subscription fees paid for our telematics services and from the sale and lease of our telematics products.

We describe below the principal markets in which we compete. For a breakdown of total revenues by category of activity and geographic market for each of the last three financial years, please see Item 5.A - Operating Results under the caption “Revenues”.

Telematics Services

In 2022,71.5% of our revenues were attributable to our telematics services. As of December 31, 2022, we provided our services in Israel, Brazil, and other countries to approximately, 738,000, 558,000, and 770,000 subscribers, respectively.

Following RTH Transaction we have direct agreements with 2 major car manufacturers and our products developed by RTH subsidiary are embedded in the cars or otherwise approved by the car manufacturer. This connection requires us to stand up for the highest car manufacturer automotive standards.

Stolen vehicle recovery services

Our stolen vehicle recovery and tracking services, which we refer to as SVR services, enable us to locate, track and recover stolen vehicles for our subscribers. Our customers include individual vehicle owners who subscribe to our services directly, car manufacturers and insurance companies that either require their customers to install a security system or offer their customers financial incentives to subscribe to SVR services such as ours. In certain countries, insurance companies directly subscribe to our SVR services on behalf of their customers.

Fleet management services

Value-added services

The locator services that we offer allow customers to protect valuable merchandise and equipment. We currently provide locator services in Israel, Brazil, Mexico, Colombia, Ecuador and Argentina. In addition, through a call center, we provide 24-hour on-demand navigation guidance, information and assistance to our customers. Such services include the provision of traffic reports, help with directions and information on the location gas stations, car repair shops, post offices, hospitals and other facilities. We offer our concierge services to our subscribers in Israel, Argentina, Ecuador, Colombia and Brazil.

"Connected Car"- The service platform includes a back office application, a telematics device installed in the vehicle, mobile apps for both IOS and Android and an interface using the car infotainment screen. Such services include information on car service history, information on some car systems, remote communication with the car in order to detect malfunctions, and to provide pre-emptive car maintenance alerts for both mechanical failures and operational issues such as a low tire pressure alert. The system also enables booking service appointments, both from the infotainment system interface in the system and from the user's mobile app and additional related operational, and marketing services, as well as information analysis. "Connected Car" is operating in Israel, Brazil, Colombia, Mexico, Argentina and Ecuador.

“Usage Based Insurance” (UBI) – we have developed a unique product (hardware and software) that measure and analyse the driving behaviour in a verity of aspects by the driver, which enables insurance companies to offer a tailor -made and personalized insurance policy. The UBI has already been implemented and marketed by the majority of the insurance companies in Israel.

“Auto Financing” - A strong second-hand car market in many of our geographies in Latin America, and new fintech start-ups as well as the banks enter this segment to provide the financing in this market. However, they need a provider of location-based and connected-car technology, such as Ituran, to monitor the car location and driver’s behaviour and thereby to decrease the risk of the loan pledged against the car.

In 2022, 28.5% of our revenues were attributable to the sale of our telematics products. Our telematics products employ short - and medium-range communication between two-way wireless modems and are used for various applications, including automatic vehicle location, which we refer to as telematics products.

Our telematics products enable the location and tracking of vehicles, as well as assets, and are used by us primarily to provide SVR and fleet management services to our customers. Each subscriber to our services has our telematics end-unit installed in his or her vehicle. Subscribers to services for locating equipment and merchandise will use our SMART and GPS/GPRS products.

Stolen vehicle recovery

Fleet management

Value-added services

The following table lists the key services and products that we currently sell or lease in different regions of the world:

 

In each of the above countries we maintain a control center, which is operated 24 hours a day, 365 days a year. The following is a short description of key operating statistics about our telematics services in the countries in which we operate (including through RTH subsidiaries):

In all of the abovementioned countries (except of Israel and Brazil), and others, we had approximately 770,000 subscribers as of December 31, 2022.

(A) Telematics services

Stolen vehicle recovery

Fleet management

Value-added services

(B) Telematics products

(A) Telematics services

Stolen vehicle recovery

We believe that we are a leading provider of telematics services in Israel, as we are deemed a monopoly in this field; however, we are unable to provide specific market share information in the markets of our operations for various reasons, including the broad range of services and products that compete in these markets, the non-existence of trade publications with respect to the products and services we offer in such markets and the lack of meaningful or accurate market research or data available to us.

Fleet Management

(B) Telematics products

Terrestrial network triangulation system does not require line of sight and the signals are not easily interrupted in densely populated or obstructed areas. Also, the signals are transmitted from the end-unit in the vehicle to a network of base stations. Therefore, in order to jam the system, receivers in each individual base station within range of the end-unit would have to be jammed, which is difficult to accomplish. Additionally, since the primary application of terrestrial network triangulation systems in the telematics industry is vehicle location and not continuous two-way communication, short bursts of data are sufficient for tracking purposes, which enable the network of base stations to be deployed at a much lower density in the coverage area than traditional network-based cellular base stations. Terrestrial network triangulation systems are capable of determining the precise location, and not just the general direction, of a vehicle at any moment in time. Furthermore, when connected with the existing theft protection system in the vehicle, terrestrial network triangulation systems automatically alert the control center when a vehicle is stolen and do not require that the vehicle be reported stolen, which can potentially reduce stolen vehicle recovery times to a few minutes. The main disadvantage of terrestrial network triangulation systems is the necessity to deploy a physical infrastructure, including the construction, development and deployment of a network of base stations and a control center and the need to address the various financial, legal and practical issues associated with such deployment. Any such deployment entails an investment of a sizable amount of money prior to the receipt of any revenues.

Environmental, Social and Governance (ESG) Practices

 Regulatory Environment

Bringg - On December 2013 the Company invested $1.4 million in Bringg delivery technologies Ltd. (formerly Overvyoo Ltd.), an Israeli start-up company developing solutions for the management of mobile/field workforce. On January and July, 2015, we invested additional amounts of $1.1 million and US$ 2 million, respectively. During the years 2015 - 2020, additional investors, which are not related to us, invested in Bringg a total amount of approximately $80 million, which reduced our capital share in Bringg. During 2021, Bringg, raised an additional $100 million, which sets Bringg’s valuation at $1 billion. Following such investment, we now hold 16.9% of Bringg’s share capital.

On June 2020 SaverOne have consummated public registration on the Israeli Stock Market (“TASE”) and thus its shares became equity investment with readily determinable fair value. We now hold approximately 3.2% of SaverOne’s share capital.

List of Significant Subsidiaries

 

In Guayaquil, Ecuador, we lease approximately 7,828 square feet for Warehouse for the amount of $ 30,000 annually. In Quito, Ecuador, we lease approximately 3,229 square feet for Warehouse for the amount of $ 11,700 annually. In Cuenca, Ecuador, we lease approximately 538 square feet for Warehouse for the amount of $ 3,521 annually. In Ibarra, Ecuador, we lease approximately 1,108 square feet for Corporate Office for the amount of $ 2,600 annually.

Not applicable

Introduction

Outlook

Geographical breakdown

Telematics services’ subscriber base

 

(1) All numbers provided are rounded, and therefore totals may be slightly different than the results obtained by adding the numbers provided.

Revenues

 

⁽¹⁾We attribute revenues to countries based on the location of the customer.

Telematics services segment

Telematics products segment

Cost of revenues

Telematics services segment

Telematics products segment

Operating expenses

Research and development

Selling and marketing

General and administrative

Operating Income

Telematics services segment

Telematics products segment

Financing expenses (income), net

Taxes on income

Critical Accounting Policies and Estimates

Revenue recognition

We apply ASC Topic 606, Revenue from Contracts with Customers (“ASC 606”) ”) to all contracts, using the modified retrospective method.

In accordance with ASC 606, we determine revenue recognition through the following five steps:

Contingencies

We and our subsidiaries are involved in certain legal proceedings that arise from time to time in the ordinary course of their business and in connection with certain agreements with third parties. Except for income tax contingencies, we records accruals for contingencies to the extent that the management concludes that the occurrence is probable and that the related liabilities are estimable. Legal expenses associated with contingencies are expensed as incurred.

Goodwill and intangible assets

Goodwill represents the excess of the purchase price over the fair value of the identifiable net assets acquired in business combinations accounted for in accordance with the "purchase method" and is allocated to reporting units at acquisition.  Goodwill is not amortized but rather tested for impairment at least annually in accordance with the provisions of ASC Topic 350, "Intangibles - Goodwill and Other".

We elected to perform the goodwill annual impairment test for its operating units as follows: the entire balance of goodwill (an amount of approximately $39.5 million (as of December 31, 2022) relates to four  different reporting units . is tested for impairments on December 31,each year or more often.

As required by ASC Topic 350, we choose either to perform a qualitative assessment whether the quantitative goodwill impairment test is necessary or proceeds directly to the quantitative goodwill impairment test. Such determination is made for each reporting unit on a stand-alone basis. The qualitative assessment includes various factors such as macroeconomic conditions, industry and market considerations, cost factors, overall financial performance, earnings multiples, gross margin and cash flows from operating activities and other relevant factors. When we choose to perform a qualitative assessment and determines that it is more likely than not (more than 50 percent likelihood) that the fair value of the reporting unit is less than its carrying value, then we proceed to the quantitative goodwill impairment test. If we determine otherwise, no further evaluation is necessary.

With respect to goodwill impairment tests performed before the adoption of ASU 2017-04 (which became effective for annual or any interim goodwill impairment tests in fiscal years beginning after December 15,2019), when we decided or were required to perform the quantitative goodwill impairment test, we firstly were required to compare the fair value of the reporting unit to its carrying value ("step 1"). If the fair value of the reporting unit exceeded the carrying value of the reporting unit net assets (including the goodwill allocated to such reporting unit), goodwill was considered not to be impaired, and no further testing was required. If the carrying value was determined to exceed the fair value of the reporting unit, then the implied fair value of goodwill was determined by subtracting the fair value of all the identifiable net assets from the fair value of the reporting unit. An impairment loss was recorded for the excess, if any, of the carrying value of the goodwill allocated to the reporting unit over its implied fair value ("step 2").

Commencing fiscal 2022,upon  the adoption of ASU 2017-04 (which eliminated Step 2 from the goodwill impairment, when we decide or are required to perform the quantitative goodwill impairment test, we compare the fair value of the reporting unit to its carrying value and an impairment charge is recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value, if any. In the performance of the quantitative analysis we apply assumptions that market participants would consider in determining the fair value of each reporting unit.

As of December 31, 2022, 2021 and 2020, we had four reporting units which include goodwill.

Telematics services:

Under the telematics services segment there are two reporting units with goodwill. For one of which (resulted from past acquisitions) with an allocated amount of approximately US$1.7 millions of goodwill, we performed a qualitative assessment as of December 31, 2022 and 2021, and concluded that the qualitative assessment did not result in a more likely than not indication of impairment, and therefore no further impairment testing was required, with respect to such units.

For the second reporting unit (resulted from RT acquisition) with an allocated amount of approximately US$ 32.2 million of goodwill (as of December 31, 2022), we performed the annual impairment test, as of December 31, 2022and reached to a conclusion that no impairment should be recorded at that point.

We have historically performed an annual goodwill assessment for such reporting unit as of June 30 of each year or more often if indicators of impairment are presented. following the second closing of the RT acquisition, we decided to change the date of its annual impairment assessment from June 30 to December 31.

We performed a qualitative assessment as of December 31, 2022 and concluded that the qualitative assessment did not result in a more likely than not indication of impairment, and therefore no further impairment testing was required, with respect to such units.

Telematics products:

Under the telematics products segment there are two reporting units with goodwill, for one of which (resulted from past acquisitions) with an allocated amount of approximately US$_2million of goodwill, we performed a qualitative assessment as of December 31, 2022 and 2021, and concluded that the qualitative assessment did not result in a more likely than not indication of impairment, and therefore no further impairment testing was required, with respect to such units.

For the second reporting unit (resulted from RT acquisition) with an allocated amount of approximately US$ 3.6 million of goodwill (as of December 31, 2022), we performed the annual impairment test, as of December 31, 2022 and reached to a conclusion that no impairment should be recorded at that point. We have historically performed an annual goodwill assessment as of June 30 of each year or more often if indicators of impairment are presented. following the second closing of the RT acquisition, we decided to change the date of its annual impairment assessment from June 30 to December 31. We performed a qualitative assessment as of December 31, 2022 and concluded that the qualitative assessment did not result in a more likely than not indication of impairment, and therefore no further impairment testing was required, with respect to such unit.

Results of Operations

The following table sets forth for the periods indicated selected items from our consolidated statements of income as a percentage of our total revenues.

 

Revenues

Cost of revenues

Operating expenses

Revenues

Total revenues increased from $245.6 million in 2020 to $270.9 million in 2021 or 10%. This increase consisted of an increase of $ 6.7 million from subscription fees from our telematics services and an increase of $ 18.6 million from sales of our telematics products.

Revenues in our telematics services segment increased by $ 6.7 million from $ 182.9 million in 2020 to $189.6 million in 2021, or 4 %. Mainly due to the Increase in 113,000 subscribers

Revenues in our telematics products segment increased from $ 62.7 million in 2020, to $81.2 million in 2021 or 29.5 %. This increase of $18.50 million is primarily due to an increase in sales, mainly in our business in Israel. This increase was also effected by a positive impact of exchange rate fluctuations of the NIS vs the USD in an amount of approximate $ 3.7 million.

Cost of revenues

Total cost of revenues increased from $ 129.1 million in 2020, to $143.0 million in 2021 or 11%. This increase consisted of an increase of $3.4 million in the telematics services segment and an increase of $10.9 million in the telematics product segment. As a percentage of total revenues, cost of revenues increased slightly from 52.5% to 52.8%.

Telematics services segment

Cost of revenues for our telematics services segment increased from $81.4 million in 2020, to $84.8 million in 2021 or 4 %. This increase was primarily due to the effect of exchange rate fluctuations in an amount of approximately $ 1.4 million and an increase in salary expenses of approximately $2.3 million. As a percentage of total revenues for this segment, cost of revenues increased from 44.5% in 2020 to 44.7% in 2021.

Cost of revenues for our telematics products segment increased from $ 48.7 million in 2020, to $ 59.6 million in 2021 or 22%. This increase was mainly due to the increase in our products’ sales. As a percentage of total revenues for this segment, cost of revenues decreased from 77.8 % in 2020, to 73.4% in 2021.

Operating expenses

Our research and development expenses increased from $ 12.8 million in 2020 to $ 14.1 million in 2021. As a percentage of total revenues, research and development expenses did not increase, and remain at 5.2 % in 2020 and in 2021.

Our selling and marketing expenses increased from $ 2.0 million in 2020 to $ 13.3 million in 2021. As a percentage of total revenues, selling and marketing expenses decreased slightly from 5.0 % in 2020 to 4.9 % in 2021.

General and administrative expenses decreased from $49.7 million in 2020, to $ 46.1 million in 2021 or 7%. The decrease was mainly due to the effect of allowance for doubtful accounts in amount of $4.2 million, the abovementioned were offset primarily due to an increase in salaries expenses in an amount of $0.8 million. As a percentage of total revenues, general and administrative expenses decreased from 20.2% in 2020 to 17.0% in 2021.

Impairment of goodwill

During 2021, we did not record any goodwill impairment loss.

Impairment of intangible assets and other expenses (income), net

During 2021 no intangible assets impairment loss was recorded. During 2020 the company recorded an intangible assets impairment loss in the amount of approximately US$ 3.7 million, respectively. The impairment was recorded in the consolidated statement of income under "Impairment of intangible assets and other expenses".

Operating income

Total operating income increased from $ 27.8 million in 2020, to $54.6 million in 2021 or 96 %. This increase of approximately $ 26.8 million was mainly due to the impairment loss in an amount of approximately $ 14.2 million record in 2020. The increase of approximately $ 12.6 million reflects an increase of $ 8.1 million in the operating income in the telematics service segment and an increase of $ 4.5 million in the operating income in the telematics products segment.

Operating income in our telematics services segment increased from $28.6 million in 2020 to $ 48.1 million in 2021, or 68 %. This increase was mainly attributed to the decrease in the impairment of goodwill and of impairment of intangible assets of $11.3 million and from the increase of our subscriber’s client base.

As a percentage of our telematics services segment revenues, operating income in our telematics services segment increased from 15.7 % in 2020 to 25 % in 2021.

Operating income (loss) in our telematics products segment increased from loss of $0.8 million in 2020 to income of $6.5 million in 2021. This increase in operating income was mainly attributed to the decrease in the impairment of goodwill and intangible assets of $2.8 million in. And from the increase of our gross revenues in our telematics products segment.

As a percentage of our telematics product segment revenues, operating losses in our telematics productrs segment increased from (1.3) % in 2020 to 8 % in 2021.

Financing income, net

Financing income, net, were $ 1.5 million in 2020 compared with an expense of $ 5.5 million in 2021.

The increase in the financing expense was mainly due to an increase in losses in respect of marketable securities in an amount of $2.4 million in 2021, compared to an increase of $ 4.3 million in 2020.

Income Tax

Income Tax expenses increase from $ 10.9 million in 2020, to $ 11.9 million in 2021 or 9%. As a percentage of income before tax, income tax expenses decreased from 37.4% in 2020 to 24.2% in 2021 primarily due to an (non- deductible for tax) impairment in goodwill and intangible assets related to RTH transaction in 2020 in an amount of $ 14.2 million, and no impairment in goodwill and intangible assets related to RTH transaction in 2021. Also, a (non-deductible for tax) gain in 2020 and losses in 2021 in respect of marketable securities value.

As a percentage from income before tax, exclude the impairment which mentioned above, income tax expenses decreased from 25.5% in 2020 to 24.2% in 2021.

Impact of Currency Fluctuations on Results of Operations, Liabilities and Assets

Although we report our consolidated financial statements in dollars, in 2020, 2021 and 2022, a portion of our revenues and direct expenses was derived in other currencies. For fiscal years 2020, 2021 and 2022 we derived approximately30.6 %26.6% and_24.8 % of our revenues in dollars and other currencies, 49.2 %,  52.0  % and 51.6 % in NIS, 20.2 %, 21.4% and 23.6 % in Brazilian Reals. In fiscal years 2020, 2021 and 2022, 29.0 %, 30.9 % and 28.1 % of our expenses were incurred in dollars and other currencies, 50.6 %, 52.3% and 53.4 % in NIS and 20.4%, 16.8%, and 18.5 % in Brazilian Reals.

Exchange differences upon conversion from our functional currency to dollars (presentation currency) are accumulated as a separate component of accumulated other comprehensive income under stockholders’ equity. In the year 2022, accumulated other comprehensive income decreased by $ 3.9 million. In the year 2021, accumulated other comprehensive income decreased by $ 2.9 million. In 2020, accumulated other comprehensive income decreased by $ 12.9 million.

The fluctuation of the other currencies in which we incur our expenses or generate revenues against the dollar has had the effect of increasing or decreasing (as applicable) reported revenues, cost of revenues and operating expenses in such foreign currencies when converted into dollars from period to period. The following table illustrates the effect of the changes in exchange rates on our revenues, gross profit and operating income for the periods indicated: