Caesarstone Ltd. — FY2018 Form 20-F
Reporting period: Fiscal year ended December 31, 2018; annual report filed March 14, 2019. The filing is an annual 20-F, not a quarterly filing. Financial figures are in U.S. dollars; amounts below are in millions unless noted. Fourth-quarter figures are unaudited.
Business context and reporting period
Caesarstone manufactures and sells engineered quartz surfaces, primarily for residential kitchen countertops, in approximately 45 countries. Its largest markets are the United States, Australia, Canada and Israel, together representing 88.5% of 2018 revenue. The company reported under U.S. GAAP.
Key financial metrics
| Metric | FY2018 | FY2017 | Change |
|---|---|---|---|
| Revenue | $575.9 | $588.1 | Down 2.1% |
| Gross profit / margin | $163.4 / 28.4% | $197.2 / 33.5% | Margin down 5.2 percentage points |
| Operating income / margin | $32.8 / 5.7% | $40.5 / 6.9% | Down 19.2% |
| Net income | $24.6 | $27.6 | Down 10.9% |
| Net income attributable to controlling interest | $24.4 | $26.2 | Down 6.9% |
| Basic and diluted EPS | $0.72 | $0.73 | Down $0.01 |
| Adjusted EBITDA | $75.2 | $100.4 | Down 25.1% |
| Adjusted net income attributable to controlling interest | $36.1 | $49.8 | Down 27.6% |
| Cash provided by operating activities | $14.7 | $61.0 | Down $46.3 |
| Capital expenditures | $21.0 | $22.7 | Down $1.7 |
At year-end, cash and cash equivalents were $93.6 million, compared with $138.7 million a year earlier; working capital was $238.8 million. Short-term bank credit was $7.6 million. The balance sheet also included current related-party and other loans of $2.9 million and long-term related-party loan and financing-leaseback liabilities of $7.1 million. Total liabilities were $150.4 million. Operating cash flow was affected by inventory growth and lower trade payables; inventory rose to $158.5 million from $132.9 million.
Q4 2018: Revenue was $142.9 million versus $148.1 million in Q4 2017; gross margin was 25.9% versus 31.3%. GAAP net income was $1.5 million, compared with a $6.0 million loss. Adjusted EBITDA was $17.8 million versus $21.0 million.
Material changes versus prior periods
- Annual revenue declined primarily because sales volume fell 2.0%; average selling prices were down 0.1%. On a constant-currency basis, revenue declined 1.9%.
- Gross margin fell from 33.5% to 28.4%, driven by higher raw-material costs, manufacturing costs and operational inefficiencies, partly offset by improved U.S. plant performance and favorable product and geographic mix.
- Operating cash flow fell to $14.7 million, with working-capital movements, including a $30.6 million inventory increase and a $16.2 million reduction in trade payables, weighing on cash generation.
- The company acquired the remaining 45% of Caesarstone Canada for approximately $20.1 million, bringing ownership to 100%. Financing cash outflows also included $20.3 million of dividends paid.
- Regional results were mixed: U.S. revenue declined 2.5%, Australia declined 4.7%, Israel declined 10.3%, and Canada grew 1.9%; Europe grew 20.1%, supported by direct U.K. distribution.
Outlook, commentary, risks and unusual items
- Management said it expects 2019 capital expenditures to remain around the level of recent years (2018: $21.0 million). It also expected to increase sourcing from third-party manufacturers (OEMs) in 2019. No specific revenue or earnings guidance is provided in the filing.
- Management stated that cash on hand, operating cash flow and available credit were expected to meet capital expenditure, working-capital and liquidity needs for at least the next 12 months. It noted that additional capital may be needed for longer-term needs and growth.
- Major operating risks include competition and lower-priced imports, exposure to housing renovation and construction cycles, raw-material price increases, currency movements, manufacturing efficiency and geographic concentration. IKEA accounted for approximately 9.6% of 2018 revenue; U.S. IKEA revenue declined 12.4%. The U.S. IKEA agreement runs through December 2020, while the Canadian agreement was being formally extended.
- Silica-related bodily injury claims are a significant contingency. The filing reports an estimated $33.9 million exposure for specified pending Israeli claims and unasserted NII claims, with $9.5 million in insurance receivables; management’s estimated net exposure was approximately $24.4 million. The insurer denied coverage for some or all damages in the Israeli putative class action. Claim counts differ across filing sections, so the precise scope should be checked against the notes.
- The proposed Israeli class-action settlement was approximately $2.4 million, subject to court approval. In February 2019, an arbitrator ruled for former South African distributor WOMAG on the merits; damages remained to be determined and Caesarstone planned to appeal. The filing does not provide a clear dollar amount for the resulting potential loss.
- Raw materials were approximately 40% of cost of revenues, excluding OEM products; quartz and polyester represented about 70% of raw-material costs. Approximately 65% of quartz was sourced from Turkey. The company also disclosed potential effects from U.S. antidumping and countervailing duty proceedings concerning Chinese quartz imports.
- Operating lease commitments totaled $96.4 million. The company stated that adopting the new lease accounting standard in 2019 was expected to add approximately $70–$80 million of lease liabilities and right-of-use assets to the balance sheet, without a material income-statement impact.
- Other unusual items included $8.9 million of 2018 legal settlements and loss-contingency expense, versus $24.8 million in 2017, which included the Kfar Giladi arbitration award. The award of approximately $13.9 million was paid in March 2018.
Important facts for investors to verify
- Reconcile the silica-claim counts, the $33.9 million accrued exposure, insurance recoverability and policy renewals or exclusions.
- Track the WOMAG arbitration appeal and damages phase, and court approval and implementation of the proposed class-action settlement.
- Assess whether gross-margin pressure and weak operating cash conversion improve, including inventory levels, manufacturing efficiency and raw-material costs.
- Monitor U.S. and Australian demand, IKEA sales and contract renewals, and the effect of Chinese-import duties and redirected competition.
- Confirm 2019 lease-accounting adoption, ongoing lease commitments, liquidity and capital spending against management’s stated expectations.
- Consider reliance on Turkish quartz suppliers, currency exposure, and related-party arrangements with Kibbutz Sdot-Yam.