Caesarstone Ltd. — FY2019 Form 20-F
Reporting period: Fiscal year ended December 31, 2019. This is an annual report, not a standalone Q4 filing; quarterly figures below are unaudited. Financial amounts are in U.S. dollars unless stated otherwise. Caesarstone develops and sells engineered quartz surfaces, principally for residential countertops.
Financial results and liquidity
| Metric | FY2019 | FY2018 |
|---|---|---|
| Revenue | $546.0 million | $575.9 million |
| Gross profit / margin | $148.6 million / 27.2% | $163.4 million / 28.4% |
| Operating income / margin | $24.7 million / 4.5% | $32.8 million / 5.7% |
| Net income | $12.9 million | $24.6 million |
| Net income per share, basic and diluted | $0.37 | $0.72 |
| Adjusted EBITDA (non-GAAP) | $69.0 million | $75.2 million |
| Cash from operating activities | $83.0 million | $14.7 million |
| Capital expenditures | $23.6 million | $21.0 million |
- At year-end, cash and cash equivalents were $139.4 million; working capital was $248.0 million. The company reported no commercial-bank debt outstanding. Related-party loans and financing liabilities remained, including $7.9 million classified as long-term.
- Adoption of lease accounting added $72.0 million of operating lease right-of-use assets and $76.0 million of lease liabilities. Total liabilities increased to $226.1 million from $150.4 million, principally reflecting lease recognition.
- Operating cash flow improved chiefly because inventory fell by $35.3 million, following a $30.6 million increase in 2018. Cash flow therefore benefited materially from working-capital movements.
Q4 and changes versus prior periods
In Q4 2019, revenue was $133.9 million, gross profit $35.0 million (26.1% margin), operating income $0.5 million and net loss $0.3 million. Q4 2018 revenue was $142.9 million, gross profit $37.1 million (25.9% margin), operating income $4.0 million and net income $1.5 million. Q4 2019 adjusted EBITDA was $15.7 million versus $17.8 million a year earlier.
- Full-year revenue declined 5.2%; management attributed the decrease to lower sales volume, unfavorable currency translation and lower average selling prices. On a constant-currency basis, revenue fell 3.0%.
- Revenue fell 17.5% in Australia and 13.7% in Canada; the U.S. grew 4.7%. Management cited softer housing markets and stronger low-cost competition, especially in Australia and Canada.
- Gross margin contracted 120 basis points. Management cited lower factory utilization and fixed-cost absorption, lower selling prices and adverse currency effects, partly offset by improved geographic mix, lower raw-material costs and supply-chain efficiencies.
- Operating expenses declined 5.1%, helped by North American restructuring and cost savings, but legal settlements and loss-contingency expense rose to $12.4 million from $8.9 million.
Outlook, risks and unusual items
- The filing provides no numerical earnings or revenue guidance. Management expected 2020 capital expenditures to increase versus recent years and was considering a greater use of third-party manufacturing. Home Depot-branded sales began in Q4 2019; definitive terms were still being finalized. New IKEA agreements were also under negotiation.
- COVID-19 had no effect on FY2019 results, but the filing, dated March 23, 2020, warned of possible demand and operating disruption and stated that the financial impact could not then be reasonably estimated. Management also flagged possible goodwill impairment if business conditions or the share price indicated impairment.
- Silica-related litigation is a major contingency. The company accrued approximately $39.2 million for Israeli claims and related unasserted claims; it reported $9.5 million in insurance receivables. Australian claims were not yet estimable. A proposed Israeli class-action settlement of about $2.6 million remained subject to court approval, with the State Attorney General objecting.
- WOMAG arbitration had ruled against the company on the merits in 2019; the damages amount remained unresolved, and the company said its reserve was adequate. Separately, Israeli tax authorities sought approximately $11 million plus interest and penalties, alleging the 2016 share repurchase should be treated as a dividend. The company said it would contest the claim and assessed the loss probability as remote.
- Revenue concentration remains high: the U.S., Australia, Canada and Israel generated 88.5% of FY2019 revenue. IKEA represented approximately 9.2% of revenue, and its sales declined during the year.
- Other key exposures include competition and trade duties, currency fluctuations, raw-material sourcing concentration in Turkey, health and safety regulation, and dependence on leases and services involving controlling shareholder Kibbutz Sdot-Yam. The company reported effective disclosure controls and internal control over financial reporting; auditors issued unqualified opinions.
Important facts for investors to verify
- Whether the Q4 and full-year margin declines persist, and how much the operating-cash-flow increase reflects sustainable earnings versus inventory reduction.
- Developments in silica litigation, the proposed class settlement, insurance recoveries and the still-unquantified Australian claims.
- Resolution and potential cash exposure of the WOMAG arbitration and the tax authority’s share-repurchase assessment.
- Final commercial terms and performance of the IKEA and Home Depot relationships, and trends in the concentrated Australian and Canadian markets.
- COVID-19 effects on demand, production, supply, liquidity and goodwill valuation, plus the outcome of 2020 lease, permit and capital-spending commitments.