Caesarstone Ltd. annual report, Q4 FY2017

Caesarstone Ltd. — FY 2017 Form 20-F

Business context and reporting period. This is the audited annual report for the fiscal year ended December 31, 2017, prepared under U.S. GAAP; it is not a standalone quarterly filing. Caesarstone manufactures branded engineered-quartz surfaces, primarily for residential countertops, and sells in about 50 countries. Its largest markets were the U.S., Australia (including New Zealand), Canada and Israel, together representing 89.3% of revenue.

Key financial metrics

Amounts are U.S. dollars; figures are in millions except per-share data.

MetricFY 2017FY 2016
Revenue$588.1$538.5
Gross profit / margin$197.2 / 33.5%$212.5 / 39.5%
Operating income / margin$40.5 / 6.9%$92.8 / 17.2%
Net income$27.6$76.5
Net income attributable to controlling interest$26.2$74.6
Diluted EPS$0.73$2.08
Adjusted EBITDA (non-GAAP)$100.4$130.3
Cash from operations$61.0$101.5
  • Cash and liquidity: Cash, cash equivalents and short-term deposits were $138.7 million at year-end, versus $106.3 million. Working capital was $250.5 million, versus $217.0 million; current assets were $378.0 million and current liabilities $127.5 million.
  • Debt: Short-term bank credit was $4.2 million, down from $8.5 million. The company also reported related-party and other loans, plus a financing leaseback liability; the filing reports $9.6 million for the leaseback arrangement, including current and long-term portions.
  • Investment and assets: Capital expenditures were $22.7 million, compared with $22.9 million in 2016. Total assets were $653.0 million and shareholders’ equity $469.9 million.

Material changes versus comparable periods

  • Annual revenue rose 9.2% reported (7.4% at constant currency), supported by higher sales volume, fabrication and installation revenue, currency effects and product mix. U.S. and Canadian revenue grew 10.2% and 12.0% on a constant-currency basis; Australian growth slowed to 2.1% constant currency.
  • Gross margin fell 5.9 percentage points to 33.5%. Management cited manufacturing inefficiencies and lower throughput, higher raw-material costs, greater Richmond Hill production, and a larger share of lower-margin fabrication and installation work.
  • Operating income declined 56%; net income attributable to controlling interest fell 65%. Operating expenses increased, including legal settlements and loss contingencies of $24.8 million, versus $5.9 million in 2016.
  • Operating cash flow decreased by $40.5 million, primarily reflecting lower net income and a $27.8 million inventory increase. Cash used in investing was $22.8 million; financing activities used $6.3 million, including bank-credit repayment.
  • Q4 2017: Revenue was $148.1 million, up from $135.0 million in Q4 2016. Gross margin was 31.3%, compared with 38.1%; operating loss was $4.9 million versus operating income of $19.1 million, and net loss was $6.0 million versus net income of $15.3 million. Q4 included $17.0 million of legal settlements and loss contingencies, primarily related to the Kfar Giladi arbitration.

Outlook, commentary, risks and unusual items

  • Management said cash on hand, operating cash flow and available credit were expected to cover capital expenditure, working-capital and liquidity needs for at least the next 12 months. It anticipated 2018 capital spending would remain well below the peak U.S. plant expansion years; no specific revenue or earnings guidance was provided.
  • The company expected to increase purchases from third-party slab manufacturers in 2018. It also continued to target growth in the U.S. and Canada and had commenced direct U.K. distribution in 2017.
  • Raw-material inflation was a significant pressure: 2017 average polyester cost rose about 21%, quartz cost rose 10.6%, and titanium-dioxide pigment cost rose about 33%. Management cautioned that passing cost increases on to customers may be difficult.
  • Silica-related litigation is a major contingency. At year-end, 105 Israeli bodily-injury claims were pending; the company estimated gross exposure of about $33.0 million and recorded insurance receivables of $12.4 million. Coverage and ultimate outcomes remain uncertain; the insurer disputed coverage for some or all of the putative class-action damages. A proposed $2.6 million class-action settlement remained subject to court approval.
  • The January 2018 Kfar Giladi arbitration judgment required payment of approximately $13.9 million; the amount was recorded in 2017. Other notable risks include production inefficiencies, reliance on a concentrated customer and geographic base, currency movements, competition, and regulatory requirements relating to silica dust and plant permits.
  • In February 2018, the company declared a special dividend of $0.29 per share and adopted an intended quarterly dividend range of $0.10–$0.15 per share, subject to board approval and a cap linked to reported income. These are subsequent events, not FY 2017 dividends.

Important facts for investors to verify

  • Reconcile the $24.8 million 2017 legal-contingency expense, including the $13.9 million arbitration charge, with accrued liabilities, insurance receivables and future cash payments.
  • Track gross-margin recovery and manufacturing throughput at the U.S. and Israeli plants, as well as the costs and quality of increased OEM sourcing.
  • Review inventory growth and cash conversion: inventory rose to $132.9 million, while operating cash flow fell to $61.0 million.
  • Monitor the number, reserve adequacy, insurance coverage and settlement status of silica-related claims, including the proposed class-action settlement.
  • Assess customer and market concentration, especially the customer representing approximately 11% of 2017 revenue and the terms and renewal of IKEA arrangements.
  • Confirm actual 2018 dividend payments, capital spending and liquidity against the company’s stated intentions; the filing provides no numerical operating forecast.