Caesarstone(CSTE) - 2022 Q4 - Annual Report

PART I Key Information This section outlines Caesarstone's significant economic, operational, legal, and strategic risks, including macroeconomic downturns and silicosis claims Risk Factors The company faces diverse risks including adverse global economic conditions, sector downturns, raw material volatility, supply chain issues, intense competition, and significant silicosis litigation - Adverse global conditions, including macroeconomic slowdowns, geopolitical instability (such as the Russia-Ukraine conflict), inflation, and rising interest rates, negatively impact the company's financial results by increasing material and shipping costs and potentially disrupting the supply chain[26][27] - The company's sales are highly dependent on the home renovation, remodeling, and new residential construction sectors. Economic downturns, high inflation, and rising interest rates have eroded consumer confidence and demand, impacting revenues and margins, leading to a workforce reduction of approximately 9% in 2022[29][30][31] - The company faces significant legal and financial risk from numerous lawsuits related to silicosis, a lung disease linked to exposure to respirable crystalline silica (RCS) from its products. As of December 31, 2022, there were 163 pending lawsuits globally, with an estimated total exposure of approximately $36 million for claims in Israel and Australia[97][99] - Changes in laws and regulations regarding RCS exposure, particularly in Australia, pose a significant threat. A major Australian union is calling for a ban on engineered stone products by July 2024, which could lead to a major loss of market share and materially harm financial results[105][107] - Due to lower market capitalization, higher interest rates, and a global market slowdown, the company conducted impairment testing and recorded significant non-cash impairment charges in fiscal year 2022, totaling $44.8 million for goodwill and $26.4 million for long-lived assets[62][63] - The company's controlling shareholders, Kibbutz Sdot-Yam and Tene Investment, collectively own approximately 40.7% of shares and have a voting agreement, giving them significant influence over corporate matters. This concentration of ownership and relationships with the Kibbutz for land leases and services create potential conflicts of interest[152][175] Information on the Company Caesarstone, founded in 1987, is a multi-material countertop producer with global operations, diverse products, and four manufacturing facilities - On March 16, 2023, Mr. Yos Shiran was appointed as the new Chief Executive Officer, replacing Yuval Dagim. Mr. Shiran previously served as the company's CEO from January 2009 to August 2016[227][470] Capital Expenditures (2020-2022) | Year | Capital Expenditures (in millions USD) | | :--- | :--- | | 2022 | $17.8 | | 2021 | $31.5 | | 2020 | $19.8 | History and Development of the Company Founded in 1987, Caesarstone expanded globally through acquisitions, diversifying into multi-material countertops and listing on Nasdaq in 2012 - The company has expanded its direct distribution network through strategic acquisitions of its former distributors in Australia, Canada, the U.S., Singapore, and most recently Sweden in July 2022[225] - Caesarstone diversified its product portfolio by acquiring a majority stake in Lioli, an India-based porcelain slab producer, in October 2020, and Omicron, a U.S.-based stone supplier, in December 2020[225] Business Overview Caesarstone designs and sells engineered quartz, natural stone, and porcelain countertops globally, with key markets in the U.S., Australia, Canada, and Israel Revenue by Geographic Market (2022) | Region | % of 2022 Revenue | | :--- | :--- | | United States | 49.5% | | Australia (incl. NZ) | 16.8% | | Canada | 13.5% | | Israel | 5.3% | | Total Key Markets | 85.2% | - The company's product portfolio includes engineered quartz collections (Classico, Supernatural, Metropolitan, Outdoor) and porcelain products. It also resells natural stone and ancillary products following the Omicron acquisition[240][241][243] - Caesarstone utilizes a dual distribution model: direct sales channels in key markets like the U.S., Australia, and Canada, and a network of third-party distributors in over 45 other countries. Sales to third-party distributors accounted for approximately 10% of revenues in 2022[246][250] - The company sources a significant portion of its products from third-party OEMs. In 2022, products produced by third parties accounted for approximately 21% of revenues, with plans to increase these purchases in 2023[276] - The company's manufacturing facilities are subject to extensive environmental, health, and safety regulations in Israel, the U.S., and India, with ongoing compliance issues related to styrene and dust emissions at its Israeli plants[288][290][293] Organizational Structure Caesarstone Ltd. operates globally through wholly-owned subsidiaries and a regional structure covering North America, APAC, EMEA, and Israel - The company operates under a regional structure comprising North America, APAC, EMEA, and Israel, established in 2019[314] - Caesarstone Ltd. has wholly-owned subsidiaries in key markets including the USA, Canada, Australia, UK, Singapore, and Sweden, and a majority-owned subsidiary in India (Lioli)[313] Property, Plants and Equipment As of December 31, 2022, Caesarstone operates four manufacturing facilities in Israel, the U.S., and India, with Israeli sites on leased land Key Manufacturing Facilities | Location | Purpose | Ownership/Lease Status | | :--- | :--- | :--- | | Kibbutz Sdot-Yam, Israel | Headquarters, manufacturing, R&D | Land Use Agreement | | Bar-Lev Industrial Park, Israel | Manufacturing facility | Land Use Agreement & Ownership | | Richmond Hill, Georgia, USA | Manufacturing facility | Ownership | | Morbi, Gujarat, India | Manufacturing facility | Ownership | Operating and Financial Review and Prospects In 2022, Caesarstone's revenue grew to $690.8 million, but a net loss of $57.1 million resulted from a $71.3 million impairment charge and declining gross margins Key Financial Metrics (2021 vs. 2022) | Metric (in millions USD) | 2022 | 2021 | Change | | :--- | :--- | :--- | :--- | | Revenues | $690.8 | $643.9 | +7.3% | | Gross Profit | $163.2 | $171.5 | -4.8% | | Gross Margin | 23.6% | 26.6% | -3.0 p.p. | | Operating Income (Loss) | ($58.7) | $27.4 | N/A | | Net Income (Loss) Attributable to Controlling Interest | ($57.1) | $19.0 | N/A | | Adjusted EBITDA | $51.9 | $68.2 | -23.9% | - The company recorded a significant pre-tax non-cash impairment charge of $71.3 million in 2022, consisting of $44.8 million for goodwill and $26.4 million for long-lived assets, driven by lower market capitalization, higher interest rates, and a market slowdown[348][349][378] - Gross margin decreased to 23.6% in 2022 from 26.6% in 2021, primarily due to higher raw material costs (polyester and quartz), increased shipping prices, and unfavorable exchange rates, which were only partially offset by selling price increases[373] - Net cash used in operating activities was $23.3 million in 2022, a significant decrease from the $20.7 million provided by operations in 2021. This was mainly due to a decrease in trade payables and higher inventory levels[407][409] Directors, Senior Management and Employees This section details Caesarstone's board, executive management, compensation, governance practices, and employee breakdown as of March 2023 - As of March 15, 2023, the board consists of nine directors. Effective March 16, 2023, Yosef (Yos) Shiran was appointed CEO, replacing Yuval Dagim[467][470] 2022 Compensation for Top 5 Covered Executives | Name and Principal Position | Total Compensation (USD) | | :--- | :--- | | Yuval Dagim, CEO | $1,009,020 | | Ken Williams, President Americas | $574,233 | | Nahum Trost, CFO | $505,884 | | Amir Reske, MD EMEA | $487,623 | | David Cullen, MD APAC | $474,089 | - As of December 31, 2022, the company had 2,111 employees globally, a decrease from 2,272 in 2021, primarily due to restructuring efforts. The largest group of employees (1,339) is in manufacturing and operations[614] - The company has adopted a 2020 Share Incentive Plan. As of March 10, 2023, 2,113,715 ordinary shares remained available for future grants under this plan[518] Major Shareholders and Related Party Transactions This section details Caesarstone's ownership structure, with Kibbutz Sdot-Yam and Tene as major shareholders, and significant related-party transactions - As of March 10, 2023, Kibbutz Sdot-Yam and Tene Investment in Projects 2016, L.P. are the major shareholders, each beneficially owning 40.7% of the company's shares due to a voting agreement[624][631][632] - The company has extensive related-party transactions with Kibbutz Sdot-Yam, including land use agreements for its Sdot-Yam and Bar-Lev facilities, a manpower agreement for labor services, and a services agreement for operational needs. Payments to the Kibbutz for these services totaled $11.3 million in 2022[365][640] - In November 2021, the company entered into a management services agreement with Tene, providing for the services of the Executive Chairman of the Board (Dr. Ariel Halperin) and another director for an aggregate annual fee of NIS 870,000[508][665] Financial Information This section details Caesarstone's legal proceedings, primarily silicosis claims with $36.0 million estimated exposure, and its dividend policy Consolidated Financial Statements and Other Financial Information This sub-section details Caesarstone's significant legal proceedings, primarily 163 pending silicosis lawsuits with an estimated $36.0 million exposure - As of December 31, 2022, the company was subject to 163 pending lawsuits globally (99 in Israel, 56 in Australia, 8 in the U.S.) related to silicosis claims[677] - The company's total estimated exposure for all pending silicosis-related lawsuits in Israel and Australia was approximately $36.0 million as of year-end 2022[685] - A class action lawsuit in Israel was settled, and in 2022 the company paid approximately $2.9 million to fund safety-related expenses and plaintiff's compensation without admission of liability[684] - The company's dividend policy provides for a quarterly cash dividend of up to 50% of year-to-date net income. A dividend of $0.25 per share was distributed in the third quarter of 2022[689] Additional Information This section covers corporate details, material contracts, exchange controls, and extensive taxation information for Israeli and U.S. shareholders - The company's Israeli facilities have "Preferred Enterprise" status, which provides tax benefits. The corporate tax rate for the Bar-Lev facility is 7.5%, and for the Sdot-Yam facility is 16%, compared to the standard Israeli corporate rate of 23%[356][725][728] - For U.S. Holders, the company does not believe it was a Passive Foreign Investment Company (PFIC) for the 2022 taxable year and does not expect to be one for 2023, but this is a factual determination made annually and is subject to change[766] - Dividends paid to non-Israeli residents are generally subject to a 25% or 30% withholding tax, which may be reduced to 20% if distributed from a "Preferred Enterprise" or further reduced by an applicable tax treaty[747][749] Quantitative and Qualitative Disclosures About Market Risk This section details Caesarstone's market risks, primarily foreign currency fluctuations, and its use of forward contracts to hedge exposure Foreign Exchange Rate Sensitivity (2022) | Currency Change vs. USD | Impact on Operating Income (in millions USD) | | :--- | :--- | | 10% decrease in AUD | -$6.3 | | 10% decrease in CAD | -$5.0 | | 10% decrease in NIS | +$10.9 | | 10% decrease in EUR | +$2.3 | - The company uses forward contracts to hedge against foreign currency risk. As of December 31, 2022, the total notional value of its foreign currency hedge portfolio was $54.5 million[791][793] PART II Controls and Procedures As of December 31, 2022, management and auditors concluded that Caesarstone's disclosure controls and internal control over financial reporting were effective - Management concluded that as of December 31, 2022, the company's disclosure controls and procedures were effective[802] - Management assessed the internal control over financial reporting using the COSO 2013 framework and concluded it was effective as of December 31, 2022. This was attested to by the independent registered public accounting firm[803][804] PART III Financial Statements This section presents Caesarstone's audited consolidated financial statements for 2022, with an unqualified audit opinion highlighting silicosis claims and asset impairment as critical matters Report of Independent Registered Public Accounting Firm The auditor issued an unqualified opinion on Caesarstone's 2022 financial statements, identifying silicosis claims and asset impairment as critical audit matters - The auditor identified the provision for bodily injury claims related to silica dust as a critical audit matter due to the significant estimation uncertainty in determining the $36 million liability[845] - The impairment of goodwill and long-lived assets was also deemed a critical audit matter because of the complex and highly judgmental nature of estimating the fair value of the reporting unit and asset groups, which is sensitive to assumptions about future market conditions, growth rates, and discount rates[847] Consolidated Financial Statements Caesarstone's 2022 consolidated financial statements show decreased assets and equity, a $56.4 million net loss due to impairment, and negative operating cash flow Consolidated Balance Sheet Highlights (in thousands USD) | Account | Dec 31, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Cash and cash equivalents | $52,081 | $74,315 | | Inventories | $238,232 | $204,725 | | Property, plant and equipment, net | $169,292 | $221,150 | | Goodwill | $0 | $45,800 | | Total Assets | $752,981 | $867,653 | | Total Liabilities | $324,032 | $365,489 | | Total Equity | $421,046 | $494,295 | Consolidated Statement of Income Highlights (in thousands USD) | Account | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Revenues | $690,806 | $643,892 | $486,412 | | Gross Profit | $163,245 | $171,498 | $133,942 | | Goodwill and long lived assets impairment charges | $71,258 | $0 | $0 | | Operating Income (Loss) | ($58,687) | $27,429 | $22,521 | | Net Income (Loss) | ($56,366) | $17,889 | $7,622 | | Basic and Diluted EPS | ($1.66) | $0.51 | $0.21 | Consolidated Statement of Cash Flows Highlights (in thousands USD) | Account | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Net cash (used in) provided by operating activities | ($23,311) | $20,684 | $47,618 | | Net cash used in investing activities | ($7,285) | ($34,885) | ($68,305) | | Net cash provided (used) by financing activities | $9,156 | ($25,254) | ($6,084) |