Caesarstone (NASDAQ:CSTE) has been hoping to boost profitability by expanding its manufacturing base beyond Israel and into the key U.S. market. The initiative has had the opposite effect so far, though.

In earnings results announced this week, the company lowered its full-year profit outlook for the second straight quarter due to stubbornly high production expenses in its Richmond Hill, Georgia, plant.

More on that outlook in a moment. First, here's how the third-quarter results stacked up against the prior-year period:

 Metric

Q3 2017

Q3 2016

Year-Over-Year Change

Revenue

$155 million

$144 million

7%

Net income

$7.4 million

$22.8 million

(68%)

EPS

$0.19

$0.65

(71%)

Data source: Caesarstone. EPS = earnings per share.

What happened this quarter?

Revenue grew as strong gains in Europe and Canada offset another slowdown in the U.S. market. Several challenges combined to send earnings far lower, which pinched both gross and net profitability.

A living area that includes a kitchen island.

Image source: Getty Images.

Highlights of the quarter include:

  • The 7% overall revenue gain was driven by a 28% jump in the European market and a 14% increase in Canada. However, the U.S. segment continued to struggle, with growth slowing to a 6% pace from 8% in the second quarter. Ceasarstone started out the year with an 18% sales spike in that critical market.
  • Gross profit margin plunged to 32% of sales from 41% as manufacturing costs spiked 22%. Management blamed higher expenses from its U.S. plant, lower throughput in its more-efficient Israel factories, higher commodity prices, and hurricanes Irma and Harvey for the decrease.
  • Operating expenses rose, mainly due to one-time charges including a legal settlement. Backing out those items, operating costs ticked up to $33 million, or 21% or revenue, from $29 million, or 20% of revenue, in the prior-year period.
  • Operating margin dove to 7.1% of sales from 19.5%.
  • Adjusted earnings fell to $26 million from $37.5 million, which resulted in a margin of 16.5% compared to 26% last year.

What management had to say

Executives expressed disappointment in the results while staying optimistic that the profit challenges can be fixed. "We are somewhat pleased with our top line results for the third quarter," CEO Raanan Zilberman said in a press release.

"However," he continued, "challenges in manufacturing have yielded margins below our expectations. We believe we have already identified the main challenges and that they are addressable. We have commenced implementing countermeasures and we expect margin improvement over time."

Looking forward

Over the short term, executives are focused on improving throughput in Caesarstone's more efficient plants while working to get the Georgia factory up to their profitability standards. The slowing sales growth in the U.S. market, meanwhile, is something they hope to fix over time through better product design, higher marketing spending, and increased investments into their selling infrastructure.

Caesarstone's full-year sales forecast dipped slightly to a range of between $580 million and $590 million from the prior target of between $580 million and $595 million. The company lowered its adjusted earnings forecast for the second time this year, as they now expect to produce between $100 million and $105 million.

That prediction is far from the $123 million that they began the year targeting, and it reflects a more challenging operating environment on both the top and bottom lines.

 

Demitrios Kalogeropoulos has no position in any of the stocks mentioned. The Motley Fool recommends Caesarstone. The Motley Fool has a disclosure policy.