Caesarstone(US:CSTE)2024-03-05 16:00PART I Key Information This section outlines significant business, operational, legal, shareholder, and geopolitical risks that could adversely affect the company's financial condition and operations Risk Factors The company faces substantial risks from economic downturns, operational challenges, significant silicosis litigation, evolving silica regulations, geopolitical instability, and intense competition - Sales are highly dependent on home renovation and new construction sectors, with 60%-70% of revenue in key markets linked to residential renovations and remodeling32 - Increasing reliance on third-party production partners (PBPs) in Asia and Europe introduces risks related to IP retention, quality control, and logistics50 - Significant litigation risk from silicosis-related bodily injury claims exists, with 172 pending lawsuits globally and an estimated total exposure of $25.7 million for claims in Israel and Australia as of December 31, 20239192 - Regulatory changes, including Australia's ban on engineered stone containing crystalline silica starting July 1, 2024, pose a material threat to the company's second-largest market9979 2023 Revenue Breakdown by Currency | Currency | Percentage of Revenue | | :--- | :--- | | U.S. Dollar | 49.3% | | Australian Dollar | 18.8% | | Canadian Dollar | 13.4% | | Euro | 6.4% | | New Israeli Shekel (NIS) | 3.9% | 2023 Raw Material Cost Composition | Raw Material | Percentage of Total Raw Material Cost | | :--- | :--- | | Minerals (Quartz, etc.) | 38.2% | | Polyester | 31.6% | Information on the Company This section details Caesarstone's corporate history, global multi-material surface operations, organizational structure, and physical assets, covering product lines, distribution, R&D, manufacturing, and competitive landscape History and Development of the Company Founded in Israel in 1987 and listed on Nasdaq in 2012, Caesarstone expanded globally through acquisitions and underwent significant manufacturing restructuring in 2023 - The company was founded in 1987 in Israel and listed on the Nasdaq Global Select Market in March 2012201202 - Strategic acquisitions include a majority stake in Lioli (India-based porcelain producer) in October 2020 and Omicron (U.S. stone supplier) in December 2020202 - In 2023, the company restructured its manufacturing network, ceasing operations at its Sdot Yam, Israel, and Richmond Hill, GA, USA, facilities203 Capital Expenditures (USD Million) | Year | Capital Expenditures (USD Million) | | :--- | :--- | | 2023 | $11.2 | | 2022 | $17.8 | | 2021 | $31.5 | Business Overview Caesarstone operates in the global countertop industry, focusing on engineered quartz and porcelain for kitchen surfaces, utilizing a multi-channel distribution strategy and emphasizing innovation and brand marketing Quartz Penetration in Key Markets (by volume) | Region | 2022 | 2020 | 2016 | | :--- | :--- | :--- | :--- | | United States | 21% | 20% | 14% | | Australia | 48% | 47% | 45% | | Canada | 27% | 28% | 24% | | Israel | 53% | 67% | 87% | 2023 Financial Highlights (USD in thousands) | Metric | Value (USD in thousands) | | :--- | :--- | | Revenue | $565,200 | | Net Loss (attributable to controlling interest) | $(107,700) | | Adjusted EBITDA Loss | $(9,400) | | Adjusted Net Loss (attributable to controlling interest) | $(46,400) | - The company's four largest markets (United States, Australia, Canada, Israel) accounted for 84.2% of total revenues in 2023219 - In 2023, products sourced from third-party Production Business Partners (PBPs) accounted for approximately 22.4% of revenues, with plans for further increase in 2024248 Organizational Structure Caesarstone Ltd. is an Israeli company with six wholly-owned direct subsidiaries globally and a majority interest in an Indian subsidiary, operating under a regional structure - Caesarstone Ltd. is an Israeli company with wholly-owned subsidiaries in Australia, Singapore, UK, Canada, Sweden, and the USA280 - The company holds a majority, consolidating interest in Lioli, located in India280 Property, Plants and Equipment As of December 31, 2023, Caesarstone's key facilities include headquarters and R&D in Caesarea, manufacturing in Bar-Lev, Israel, and Morbi, India, with the Richmond Hill, GA facility closed as part of restructuring - The company's main manufacturing facilities are located in Bar-Lev, Israel, and Morbi, India282 - The Richmond Hill, Georgia, manufacturing facility closed in mid-January 2024 as part of a restructuring plan, expected to generate approximately $20 million in annual savings286 - The company's Israeli facilities, including headquarters and the Bar-Lev plant, are on land leased from Kibbutz Sdot-Yam under long-term agreements283286 Operating and Financial Review and Prospects This section analyzes Caesarstone's financial performance, covering operating results, revenue by geography, cost of revenues, margins, operating expenses, liquidity, capital resources, debt, capital expenditures, R&D, and critical accounting estimates Operating Results In 2023, Caesarstone's revenue decreased by 18.2% to $565.2 million, gross margin contracted to 16.3%, and the company reported a net loss of $108.2 million due to lower sales volume and increased costs Key Financial Metrics (USD in thousands) | Metric | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Revenues | $565,231 | $690,806 | $643,892 | | Gross Profit | $91,939 | $163,245 | $171,498 | | Gross Margin | 16.3% | 23.6% | 26.6% | | Operating Income (Loss) | $(88,028) | $(58,687) | $27,429 | | Net Income (Loss) | $(108,240) | $(56,366) | $17,889 | Revenue by Geographic Region (USD in thousands) | Region | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | United States | $271,647 | $342,293 | $305,353 | | Canada | $75,462 | $93,377 | $84,467 | | Australia | $106,223 | $116,284 | $118,714 | | EMEA | $59,908 | $63,320 | $60,836 | | Israel | $22,747 | $36,444 | $39,430 | | Asia | $25,959 | $34,607 | $30,390 | | Latin America | $3,285 | $4,481 | $4,702 | | Total | $565,231 | $690,806 | $643,892 | - The 2023 gross margin decrease was primarily due to increased manufacturing costs from lower capacity utilization, higher logistics costs per unit, and higher raw material prices332333 - The company recorded pre-tax non-cash impairment charges of $47.9 million in 2023 and $71.3 million in 2022 related to goodwill and long-lived assets, triggered by market capitalization declines and macroeconomic conditions338 Liquidity and Capital Resources As of December 31, 2023, the company had $91.1 million in cash, with net cash from operating activities at $66.5 million in 2023, and management expects sufficient liquidity for the next twelve months despite material lease and purchase obligations Cash Flow Summary (USD in thousands) | Cash Flow Activity | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | $66,529 | $(23,311) | $20,684 | | Net cash used in investing activities | $(40,526) | $(7,285) | $(34,885) | | Net cash (used in) provided by financing activities | $(23,779) | $9,156 | $(25,254) | - The significant increase in cash from operating activities in 2023 was mainly due to lower inventory levels, reduced raw material and shipping costs, and the Sdot Yam plant closure impact355 - As of December 31, 2023, the company had material cash requirements including $138.1 million in lease obligations and $18.6 million in purchase obligations349350 - As of December 31, 2023, outstanding bank credits and debts totaled $5.1 million, all payable within 12 months351 Critical Accounting Estimates This section details critical accounting estimates including revenue recognition, lease accounting, credit loss allowance, inventory valuation, impairment of goodwill and long-lived assets, and provisions for silicosis-related legal claims - The company's allowance for credit losses was $12.2 million as of December 31, 2023, determined by evaluating individual customer receivables, financial conditions, and credit history386 - Inventory provisions for slow-moving or obsolete items increased to $27.4 million as of December 31, 2023, from $21.7 million in 2022387 - In 2023, the company recorded significant impairment charges on long-lived assets totaling $27.5 million for Richmond Hill, $1.0 million for Sdot Yam, and $16.6 million for the Sdot Yam right-of-use asset due to plant closures393385 - The company's goodwill was fully impaired in 2022 with a charge of $44.8 million, and the balance remained at $0 as of December 31, 2023389845 - Accounting for legal contingencies, particularly product liability claims, is a critical estimate, with accruals recorded when a loss is probable and estimable396 Directors, Senior Management and Employees This section provides comprehensive information on the company's executive officers, directors, their compensation, board practices, committee structures, employee numbers, labor relations, and share ownership of key personnel and major shareholders Directors and Senior Management The company's leadership includes executive officers and a nine-member board of directors, chaired by Dr. Ariel Halperin, with Yosef (Yos) Shiran as CEO since March 2022, adhering to Nasdaq and Israeli law requirements for independent and external directors - Yosef (Yos) Shiran was re-appointed as Chief Executive Officer in March 2022407 - The Board of Directors consists of nine members, chaired by Dr. Ariel Halperin, with five directors considered independent under Nasdaq rules405460 - The board includes two external directors, Nurit Benjamini and Lily Ayalon, as required by Israeli Companies Law, both possessing financial and accounting expertise460469 Compensation In 2023, aggregate compensation for executive officers was $6.5 million, with CEO Yos Shiran receiving a monthly salary of NIS 214,000, a potential annual cash bonus up to $1.2 million, and a significant stock option grant - Aggregate compensation for current executive officers in 2023 was $6.5 million429 - CEO Yos Shiran was granted options to purchase 1,000,000 ordinary shares, vesting over four years, with an exercise price of $4.68431 2023 Compensation for Top 5 Covered Executives (USD) | Name and Principal Position | Salary (USD) | Bonus (USD) | Equity-Based Compensation (USD) | Total (USD) | | :--- | :--- | :--- | :--- | :--- | | Yos Shiran (CEO) | 781,776 | 600,000 | 368,247 | 1,755,123 | | Ken Williams (President, Americas) | 405,731 | 62,387 | 29,511 | 499,851 | | Nahum Trost (CFO) | 292,661 | 42,358 | 76,088 | 457,295 | | Erez Margalit (VP R&D) | 318,312 | 42,358 | 45,277 | 454,910 | | David Cullen (MD, APAC) | 375,731 | 32,255 | 31,697 | 452,924 | Board Practices As a foreign private issuer, Caesarstone follows Israeli corporate governance for shareholder meeting quorums, maintains a nine-member board with independent directors, and operates Audit, Nominating, and Compensation Committees adhering to both Israeli and Nasdaq requirements - The company utilizes the "home country practice exemption" for Nasdaq's shareholder meeting quorum, setting its quorum at 25% of voting power for board-initiated meetings, instead of the Nasdaq-required 33 1/3%458164 - The company has an Audit Committee, Nominating Committee, and Compensation Committee, each composed entirely of independent directors489499500 - Israeli Companies Law mandates specific composition and duties for the Audit and Compensation committees, requiring all external directors to be members and constitute a majority490502 - The company adopted a formal compensation policy, re-approved by shareholders in October 2023, governing compensation for all executive officers and directors as required by Israeli law506 Employees As of December 31, 2023, Caesarstone had 1,813 employees globally, a decrease due to restructuring and the Sdot Yam facility closure, with satisfactory employee relations and no history of work stoppages Global Workforce by Category (as of Dec 31) | Department | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Manufacturing and operations | 1,080 | 1,339 | 1,397 | | Research and development | 19 | 17 | 24 | | Sales, marketing, service and support | 533 | 557 | 651 | | Management and administration | 181 | 198 | 200 | | Total | 1,813 | 2,111 | 2,272 | - The global workforce decreased by 298 employees in 2023, primarily due to the company's restructuring plan and the closure of the Sdot Yam facility535 Major Shareholders and Related Party Transactions This section details the company's ownership structure, with Kibbutz Sdot-Yam and Tene Investment as controlling shareholders (40.6% combined), and outlines extensive related party transactions, including $10.2 million paid to Kibbutz Sdot-Yam in 2023 Major Shareholders As of March 1, 2024, Kibbutz Sdot-Yam and Tene Investment are joint controlling shareholders with a combined 40.6% stake, alongside other major shareholders like The Phoenix Holdings Ltd. (11.4%) and Global Alpha Capital Management Ltd. (8.6%) Major Shareholders (as of March 1, 2024) | Name of Beneficial Owner | Percentage of Shares Beneficially Held | | :--- | :--- | | Mifalei Sdot-Yam Agricultural Cooperative Society Ltd. | 40.6% | | Tene Investment in Projects 2016, L.P. | 40.6% | | The Phoenix Holdings Ltd. | 11.4% | | Global Alpha Capital Management Ltd. | 8.6% | - Kibbutz Sdot-Yam and Tene are joint controlling shareholders with a combined 40.6% stake due to a shareholders' voting agreement551554 Related Party Transactions Caesarstone has extensive related party transactions, primarily with Kibbutz Sdot-Yam, including land use, manpower, and services agreements totaling $10.2 million in 2023, and a management services agreement with Tene for NIS 750,000 annually Payments to Kibbutz Sdot-Yam (excluding VAT) | Year | Amount (USD Million) | | :--- | :--- | | 2023 | $10.2 | | 2022 | $11.3 | | 2021 | $11.0 | - Key agreements with Kibbutz Sdot-Yam include land use for Sdot-Yam and Bar-Lev facilities, a manpower agreement, and a general services agreement559 - In 2021, lease fees for Sdot-Yam and Bar-Lev facilities increased to NIS 18.6 million and NIS 8.1 million annually, respectively, following an independent appraisal566 - The company has a management services agreement with Tene for Executive Chairman services and business development advice, with an annual fee of NIS 750,000582584 Financial Information This section addresses the company's legal proceedings, primarily 172 pending silicosis lawsuits with an estimated $25.7 million exposure, and its dividend policy, which allows for up to 50% of net income but saw no distributions in 2023 Legal Proceedings The company faces significant legal challenges from 172 pending silicosis-related bodily injury claims globally as of December 31, 2023, with an estimated $25.7 million exposure in Israel and Australia, and limited insurance coverage for new Australian cases since September 2020 - As of December 31, 2023, the company was subject to 172 pending lawsuits globally related to occupational illnesses, primarily silicosis593 - The estimated total exposure for pending claims in Israel and Australia is approximately $25.7 million597 - The company has product liability insurance, but its Australian policy ceased coverage for newly diagnosed silicosis-related claims as of September 2020, potentially increasing future uninsured liabilities95 Dividends Caesarstone's dividend policy allows for a quarterly cash dividend of up to 50% of year-to-date net income, with the last dividend of $0.25 per share paid in Q3 2022, and no dividends distributed in 2023 - The company's dividend policy allows for a quarterly cash dividend of up to 50% of year-to-date reported net income attributable to controlling interest601 - No dividends were distributed during 2023; the last dividend paid was $0.25 per share in the third quarter of 2022601 Additional Information This section covers corporate and legal details, including articles of association, material related-party contracts, absence of Israeli exchange controls, and a detailed summary of Israeli and U.S. federal income tax considerations for the company and its shareholders Taxation The company's complex tax situation includes Israel's standard 23% corporate tax rate and a reduced 7.5% 'Preferred Enterprise' rate for its Bar-Lev facility, with detailed Israeli and U.S. federal income tax implications for shareholders, including PFIC risk analysis - The standard corporate tax rate in Israel is 23%, but the company benefits from a reduced rate of 7.5% on income from its 'Preferred Enterprise' facility in Bar-Lev622632634 - Dividends paid to Israeli individuals from a 'Preferred Enterprise' are subject to a 20% withholding tax, while non-Israeli residents generally face a 25% rate, potentially reduced by tax treaties633647649 - The company does not believe it was a Passive Foreign Investment Company (PFIC) for the 2023 taxable year, noting this status is an annual factual determination not guaranteed for future years668 Quantitative and Qualitative Disclosures About Market Risk The company faces significant market risks from foreign currency fluctuations, particularly the NIS and AUD, with a 10% NIS decrease increasing 2023 operating income by $7.5 million, and a 10% AUD decrease decreasing it by $7.1 million, partially hedged by forward contracts Revenue by Currency | Currency | 2023 Revenue % | 2022 Revenue % | 2021 Revenue % | | :--- | :--- | :--- | :--- | | Australian Dollar | 18.8% | 16.8% | 18.4% | | Canadian Dollar | 13.4% | 13.5% | 13.1% | - The company has significant exposure to the NIS and AUD; a 10% decrease in NIS vs. USD would have increased 2023 operating income by $7.5 million, while a 10% decrease in AUD vs. USD would have decreased it by $7.1 million687689 - As of December 31, 2023, the company held foreign currency forward contracts with a total notional value of $21.2 million to hedge its exposure69338 Controls and Procedures Management concluded that the company's disclosure controls and internal control over financial reporting were effective as of December 31, 2023, with an unqualified audit report from the independent registered public accounting firm - Management concluded that as of December 31, 2023, the company's disclosure controls and procedures were effective702 - Management assessed internal control over financial reporting based on the COSO 2013 framework and concluded it was effective as of December 31, 2023704 - The independent registered public accounting firm issued an unqualified audit report on the effectiveness of the company's internal control over financial reporting705 Governance and Other Disclosures This section covers governance and compliance, including audit committee financial experts, a Code of Ethics, $1.077 million in principal accountant fees in 2023, Israeli corporate governance practices for quorums, and a NIST-based cybersecurity risk management program with no material incidents identified Principal Accountant Fees (USD in thousands) | Fee Category | 2023 | 2022 | | :--- | :--- | :--- | | Audit fees | $954 | $743 | | Audit-related fees | $58 | $1 | | Tax fees | $44 | $82 | | All other fees | $21 | $193 | | Total | $1,077 | $1,019 | - The company has implemented a cybersecurity risk management program based on the NIST framework, with oversight provided by the Audit Committee725726729 - The company has not identified any cybersecurity risks or prior incidents that have materially affected or are reasonably likely to materially affect its business, operations, or financial condition728 PART III Financial Statements This section presents the audited consolidated financial statements for Caesarstone Ltd. and its subsidiaries as of December 31, 2023, prepared under U.S. GAAP, including balance sheets, income statements, cash flows, and comprehensive notes Consolidated Balance Sheet Highlights (As of Dec 31, USD in thousands) | Account | 2023 | 2022 | | :--- | :--- | :--- | | Total Assets | $579,855 | $752,981 | | Cash and cash equivalents | $54,623 | $52,081 | | Inventories | $136,446 | $238,232 | | Property, plant and equipment, net | $123,480 | $169,292 | | Total Liabilities | $257,007 | $324,032 | | Total Equity | $315,059 | $421,046 | Consolidated Income Statement Highlights (Year Ended Dec 31, USD in thousands) | Account | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Revenues | $565,231 | $690,806 | $643,892 | | Gross Profit | $91,939 | $163,245 | $171,498 | | Operating Loss | $(88,028) | $(58,687) | $27,429 (Income) | | Net Loss | $(108,240) | $(56,366) | $17,889 (Income) | | Basic and Diluted EPS | $(3.13) | $(1.66) | $0.51 | Consolidated Cash Flow Highlights (Year Ended Dec 31, USD in thousands) | Account | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Net cash from operating activities | $66,529 | $(23,311) | $20,684 | | Net cash used in investing activities | $(40,526) | $(7,285) | $(34,885) | | Net cash from (used in) financing activities | $(23,779) | $9,156 | $(25,254) |