Quartz surface manufacturer Caesarstone (NASDAQ:CSTE) announced first-quarter earnings results this week that were marked by significant challenges on both its top and bottom lines. Sales growth slowed to a halt and profitability collapsed as the company struggled to efficiently produce and distribute its products. The issues led management to lower its full-year outlook while suspending its recently instituted dividend.

More on that falling 2018 outlook in a moment. First, here's how the latest results stacked up against the prior-year period:

 Metric

Q1 2018

Q1 2017

Year-Over-Year Change

Revenue

$136 million

$136 million

N/A

Net income

$1.5 million

$11.3 million

(87%)

Earnings per share

$0.05

$0.31

(84%)

Data source: Caesarstone's financial filings.

What happened this quarter?

After accelerating last quarter, sales gains hit a wall, with each of the company's three biggest markets reporting flat results or modest declines. That growth challenge was coupled with major manufacturing and distribution problems that sent gross profit margin plummeting.

A quartz counter.

Image source: Getty Images.

Highlights of the quarter include:

  • Sales were flat after rising 10% last quarter. The U.S. market, an important piece of Caesarstone's growth plan, reported a slight revenue drop. Demand challenges were broad-based, with Australia reporting lower results, too, as the Canada market expanded by less than 5%.
  • Gross profit margin dropped to 25% of sales from 36% a year ago. Management blamed several issues for the slump, including manufacturing challenges in its Israel plants, inventory and distribution problems in the U.S., and rising raw material costs.
  • Operating expenses dipped slightly, but not by enough to offset the drop in gross profits. As a result, operating income fell to $1.4 million from $15 million in the year-ago period.
  • Reduced tax expenses helped Caesarstone avoid booking a loss for the period. However, operating cash flow worsened to a $21 million outflow.

What management had to say

Executives weren't satisfied with their performance. "Our first-quarter results fell short of our expectations," interim CEO Yair Averbuch said in a press release. "We are working with urgency and purpose to improve execution and resume growth."

That recovery plan involves a focus on returning to sales and profitability gains in the core U.S. market, management said. As for the manufacturing and distribution challenges that hurt results this quarter, the company said these problems have been addressed and shouldn't impact future quarters.

Looking forward

Caesarstone lowered its 2018 outlook on both the top and bottom lines. Executives now see sales coming in between $590 million and $610 million, down from the prior target of $612 million to $632 million. At the midpoint of the updated guidance range, the forecast implies just a 2% uptick from 2017's results.

Adjusted earnings should now land between $74 million and $82 million, which would mark a significant drop from last year's $100 million profit.

Finally, management stated that it would not be paying a dividend in the second quarter. Back in February, executives instituted what they described as a recurring dividend policy that, at between $0.10 per share and $0.15 per share, wouldn't threaten funding for Caesarstone's capital needs. The recent growth and profitability challenges changed that calculation, though, so management has decided to preserve its cash for internal use.

 

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