Caesarstone Ltd. — FY2016 Form 20-F
Reporting period: Fiscal year ended December 31, 2016. The filing is an annual report, not a standalone Q4 filing; quarterly figures below are from its unaudited quarterly data. Financial statements are prepared under U.S. GAAP and received an unqualified audit opinion.
Business context and reporting period
Caesarstone manufactures branded engineered-quartz surfaces, primarily for residential kitchen countertops, selling in more than 50 countries. The United States, Australia, Canada and Israel generated 89.5% of 2016 revenue. The company operates manufacturing facilities in Israel and Georgia; its U.S. facility’s two production lines began operating in 2015.
Financial performance and liquidity
| Metric | FY2016 | FY2015 |
|---|---|---|
| Revenue | $538.5 million | $499.5 million |
| Gross profit / margin | $212.5 million / 39.5% | $200.2 million / 40.1% |
| Operating income / margin | $92.8 million / 17.3% | $96.4 million / 19.3% |
| Net income | $76.5 million | $79.5 million |
| Net income attributable to controlling interest | $74.6 million | $77.8 million |
| Basic / diluted EPS | $2.08 / $2.08 | $2.21 / $2.19 |
| Adjusted EBITDA (non-GAAP) | $130.3 million | $125.7 million |
| Operating cash flow | $101.5 million | $85.7 million |
| Capital expenditures | $22.9 million | $76.5 million |
At year-end, cash and cash equivalents were $106.3 million; working capital was $217.0 million. Short-term bank credit was $8.5 million, with $8.5 million of an available $12.1 million of short-term credit lines utilized. The company also reported an $8.1 million long-term related-party loan and financing-leaseback liability. Total liabilities were $134.1 million.
In Q4 2016, revenue was $135.0 million, up 6.0% year over year. Gross profit was $51.4 million and gross margin 38.1%, versus $48.2 million and 37.9% in Q4 2015. Operating income declined to $19.1 million from $22.6 million, and net income to $15.3 million from $19.4 million. Adjusted EBITDA was $30.0 million versus $30.4 million. Quarterly cash flow is not clearly provided in the filing text.
Material changes versus prior periods
- Annual revenue increased 7.8%; on a constant-currency basis, growth was 8.4%. Sales volume rose 7.3%, with higher differentiated-product mix also contributing.
- U.S. revenue declined 0.3%, partly reflecting lower IKEA sales amid changes to promotional events. Canada and Australia grew 21.2% and 18.7%, respectively, in reported dollars.
- Gross margin declined 60 basis points. Management attributed about 260 basis points of pressure to Richmond Hill production inefficiencies, partly offset by lower raw-material costs and improved product mix.
- Operating income and controlling-interest net income fell despite higher revenue, reflecting lower margins, higher selling and administrative costs, and silicosis-related legal expense.
- Operating cash flow rose, while capital spending fell as the major U.S. facility investment was largely completed. Financing cash flow included $39.4 million of share repurchases; the program repurchased 1.1 million shares and ended in August 2016.
Outlook, commentary, risks and unusual items
- No numerical revenue or earnings guidance is provided. Management expected 2017 capital expenditures to remain significantly below the 2014 and 2015 levels; timing of any further capacity expansion was undetermined. It said U.S. plant efficiency should improve over time.
- The company began direct U.K. sales in January 2017. U.S. and Canadian IKEA agreements run through December 2017; renewal, terms and resulting sales are not assured. U.S. Lowe’s sales began in Q1 2017 under an agreement effective through May 2017, with automatic annual renewal unless terminated.
- Silica-related injury claims are a significant contingency. At December 31, 2016, the company accrued $17.7 million for pending Israeli claims and recorded $7.5 million in insurance receivables; management estimated net exposure of about $10.2 million. The insurer denied coverage for some or all damages sought in the putative Israeli class action, whose alleged claim is about $56 million before unspecified additional damages.
- In December 2016, Israeli safety orders temporarily restricted certain production processes over alleged silica dust, styrene and acetone exposure. The orders were rescinded in January 2017 after updated monitoring results; further enforcement remains possible. The Bar-Lev business license was due for renewal in March 2017, and management expected an extension.
- Quartz supply is concentrated: about 68% of 2016 quartz came from four Turkish suppliers, with two suppliers representing approximately 27% and 25% of total quartz consumption. Raw-material price changes, currency movements and supplier disruption could pressure costs and margins.
- A separate arbitration with Kfar Giladi/Microgil involves a $60.5 million claim against the company and a $19.9 million counterclaim. The company recorded no provision, assessed loss as reasonably possible, and said it could not estimate a loss range; a decision was expected by September 2017.
- The securities class action in the United States reached an agreement in principle to settle in January 2017, subject to final documents and court approval; insurers agreed to pay the settlement and related expenses. The company recorded a provision and corresponding receivable.
- Management stated it believed cash, operating cash flow and available borrowing capacity would cover capital and working-capital needs for at least 12 months. The company has no declared dividend policy and paid no parent-company dividend in 2016.
Investor verification priorities
- Track Richmond Hill plant throughput, yield, unit costs and progress toward restoring gross margins.
- Confirm IKEA agreement renewals and assess the durability of U.S. sales and new Lowe’s channel contribution.
- Monitor silicosis claim filings, class-action certification, insurance coverage and changes to the accrued net exposure.
- Review the Microgil arbitration outcome, any potential loss range and the status of the WOMAG claim and reserve.
- Check renewal of Israeli operating licenses and permits, compliance with exposure standards, and any related production restrictions or costs.
- Assess Turkish quartz supplier continuity, raw-material pricing, foreign-exchange hedging and the company’s ability to pass cost increases through to customers.
- Reconcile reported GAAP results with adjusted EBITDA and adjusted net income, which are non-GAAP measures, and evaluate the effect of the 2016 buyback on cash and per-share results.