Caesarstone Sdot-Yam Ltd. — FY2013 Form 20-F
Reporting period: Fiscal year ended December 31, 2013. The filing is an annual report, not a standalone quarterly filing; it also reports unaudited fourth-quarter results. Figures below are in U.S. dollars unless otherwise noted.
Business context and reporting period
Caesarstone manufactures premium engineered-quartz surfaces, principally for residential kitchen countertops, and sells in more than 50 countries. The United States, Australia, Canada and Israel generated 85.4% of 2013 revenue. The company reported under U.S. GAAP and used the U.S. dollar as its functional currency from July 1, 2012.
Financial performance and liquidity
| Metric | FY2013 | FY2012 | Change / context |
|---|---|---|---|
| Revenue | $356.6 million | $296.6 million | Up 20.2%; sales volume rose 14.9%, with higher average selling prices partly offset by unfavorable currency movements. |
| Gross profit / margin | $162.1 million / 45.5% | $127.4 million / 43.0% | FY2013 margin was 44.5% excluding a one-time $3.5 million inventory-cost estimate credit. |
| Operating income / margin | $76.0 million / 21.3% | $50.0 million / 16.8% | FY2013 margin was 20.3% excluding the inventory credit. |
| Net income | $64.4 million | $40.4 million | Net income attributable to controlling interest was $63.3 million, versus $39.6 million. |
| Diluted EPS | $1.80 | $1.21 | Basic EPS was $1.83 versus $1.21. |
| Adjusted EBITDA | $91.7 million | $69.4 million | Non-GAAP measure; not a substitute for GAAP results or cash flow. |
| Operating cash flow | $75.7 million | $35.3 million | Capital expenditures were $27.4 million versus $13.5 million. |
| Cash, equivalents and short-term deposits | $92.2 million | $72.7 million | Includes $70.0 million of short-term deposits. |
| Working capital | $145.7 million | $117.7 million | Total assets were $377.6 million; total liabilities were $104.3 million. |
At year-end, short-term bank credit was $5.5 million, drawn in Canada. The balance sheet also included related-party long-term loans and financing leaseback obligations; the filing reports $12.3 million long-term and $2.6 million current related-party payables, including financing leaseback. The company said it had no debt from Israeli commercial banks. In 2013, investing activities used $54.1 million, including $26.3 million shifted into short-term bank deposits; financing activities used $26.5 million, including a $20.1 million dividend.
Fourth quarter: Revenue was $96.8 million, gross profit $41.6 million (43.0% margin), operating income $19.8 million and net income $17.0 million. Q4 2012 revenue was $76.2 million and net income was $11.0 million.
Material changes versus prior comparable periods
- Revenue grew 20.2% year over year, driven by volume growth and improved average selling prices. U.S. revenue rose to $123.4 million from $86.8 million; Canada revenue rose to $49.2 million from $40.3 million.
- Gross margin expanded to 45.5% from 43.0%, aided by product mix, scale and the new Super-Natural designs, as well as the $3.5 million inventory estimate credit. Management reported 44.5% excluding that credit.
- Operating expenses increased to $86.1 million from $77.4 million, including higher marketing and selling costs and $1.3 million of follow-on offering-related expenses within general and administrative costs.
- Net cash from operations more than doubled. Inventory and receivables increased, while accrued expenses and trade payables also supported operating cash flow.
- Capital spending increased as expansion projects advanced. The first phase of the fifth Bar-Lev production line became operational in Q4 2013.
Outlook, management commentary, risks and unusual items
- Capacity investment: Management expected the second phase of the Bar-Lev fifth line to be completed in Q2 2014. The planned Georgia facility was targeted to start its first production line in Q2 2015 and second in Q4 2015. Estimated investment was approximately $22 million in Israel and $100 million in the U.S.; actual cost and timing could differ. Management warned of temporary margin inefficiencies in 2014 and, more significantly, 2015.
- No specific revenue or earnings guidance: The filing gives no numerical sales or profit forecast. Management said cash and expected operating cash flows should cover capital expenditure, working capital and liquidity needs for at least the next 12 months. It estimated an effective tax rate of 12%–17% through 2014 and 16%–21% in 2015, subject to assumptions and tax-authority positions.
- Currency and input costs: The Australian and Canadian dollars weakened against the U.S. dollar in 2013, while NIS and euro strength raised costs. The Australian-dollar decline reduced 2013 operating income by an estimated $4.5 million year over year. Forward contracts were not designated for hedge accounting, so their gains and losses were recorded in finance expense. Turkish quartzite prices had increased in 2014 supply renewals; the company lacked long-term supply contracts for key raw materials.
- Silica-related litigation: The company disclosed 41 pending Israeli bodily-injury claims and estimated reasonably possible exposure of NIS 31.8 million (about $9.1 million) for 27 claims; it could not estimate exposure for the others. A separate April 2014 proposed class action alleged damages of NIS 216 million (about $62 million), plus unspecified damages. The company disputed the claims. Israeli product-liability coverage was scheduled to fall from $10 million to $5 million per claim and policy term from July 2014, with a higher deductible; coverage for the proposed class action was uncertain.
- Other litigation: In an arbitration dispute with Kfar Giladi/Microgil, the claimants sought NIS 232.8 million (about $67.1 million), while Caesarstone sought NIS 76.6 million (about $22.1 million). The arbitration was ongoing amid disputes over cancellation and court proceedings. In a separate South African distributor dispute, a court found in December 2013 that Caesarstone had not been entitled to terminate the agreement; the company appealed.
- Environmental and operating matters: Israeli regulators were investigating alleged styrene-emission exceedances at Sdot-Yam. Wastewater permits were temporary, sludge classification was disputed, and a cleanup reserve of approximately $0.6 million was recorded. Permits and compliance could affect operations or require additional spending.
- Unusual accounting item: A revised finished-goods costing method after ERP implementation produced a one-time $3.5 million reduction in cost of revenue. ERP startup issues had also contributed to delivery delays and a backlog, which management said was cleared by Q4.
- Other risks: Sales concentration in four markets, premium-price competition, reliance on Turkish quartzite and Breton equipment, seasonal demand, and Kibbutz Sdot-Yam’s controlling ownership and related-party arrangements could affect results. The company paid a $20.1 million dividend in December 2013 but had no declared ongoing dividend policy.
Most important facts for investors to verify
- Whether underlying gross margin and earnings growth persist after excluding the $3.5 million inventory estimate benefit and other non-GAAP adjustments.
- Actual construction costs, commissioning dates, utilization and margin effects for the Bar-Lev and Georgia capacity projects.
- Developments, insurance coverage and potential exposure in the silicosis claims and proposed class action, plus the Microgil arbitration and WOMAG appeal.
- Whether Turkish quartzite supply and raw-material pricing remain secure and whether currency movements or hedges materially affect operating results.
- Progress on Israeli environmental permits, styrene controls, wastewater disposal and sludge classification; and the terms and governance approvals of related-party arrangements with the controlling kibbutz.