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.
| Metric | FY 2017 | FY 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.