Mendelson Infrastructures in the first quarter: gross margin improved, operating proof did not
Mendelson opened 2026 with a 6.3% revenue decline and a higher gross margin of 29%, but rising operating costs pulled operating profit lower. Operating cash flow was strong mainly because working capital was released, while Be'er Sheva and the dividend now test cash discipline.
Mendelson Infrastructures did not open 2026 with a broken quarter, but it also did not deliver clear operating proof. Revenue fell 6.3% to NIS 238.0 million and net profit attributable to shareholders fell 20.6% to NIS 7.6 million, while gross margin improved to 29% thanks to better trade terms and a stronger shekel against the dollar. The problem is that the improvement stopped before operating profit: selling, marketing, general and administrative expenses rose while revenue declined, and consolidated operating profit fell to NIS 14.3 million. Operating cash flow looked stronger at NIS 35.4 million, but it relied heavily on lower receivables and inventory, the same working-capital discipline that was already the key checkpoint after 2025. The quarter also closes part of the Be'er Sheva question, because the land purchase was completed, but the investment already appears in cash flow before any operating contribution is visible. The current read is mixed: the business can still defend gross margin and cash when demand is hit, but 2026 needs to prove that better trade terms can also become recurring operating profit, not just a temporary balance-sheet release.
The business is still a working-capital distributor, not only a pipe seller
The group distributes and manufactures flow-control products, sanitation products, fire-suppression systems, air-conditioning products, metals and steel. But its economics are better described as a broad distribution model built on available inventory, customer credit, supplier credit and logistics infrastructure. When revenue declines, the question is not only how much less was sold. The real test is whether the balance sheet releases cash with the decline or keeps absorbing it.
In the previous annual analysis, the checkpoint was whether infrastructure would keep carrying the group and whether the working-capital improvement would hold in 2026. In the working-capital analysis, the test was sharper: would the next growth phase push receivables and inventory back up, or would the company keep discipline as activity changed? The first quarter gives a partial answer. Receivables fell from NIS 420.5 million at the end of 2025 to NIS 391.0 million at the end of March, and inventory fell from NIS 267.6 million to NIS 263.7 million. On the other side, trade payables fell from NIS 202.1 million to NIS 190.6 million, so part of the cash released from customers and inventory was offset by less supplier financing.
The important point is that the company did not finance growth this quarter. It managed a decline in volume. That reduces immediate cash-flow risk, but it does not prove that the model will remain light on cash when demand returns. In a quarter with lower sales, it is easier to release receivables and inventory. The harder test comes in the next reports: recovering sales without a renewed rise in receivables and inventory.
Gross margin improved, but storage and logistics costs absorbed the benefit
The positive number in the quarter is gross margin. Gross profit barely moved, at NIS 69.0 million versus NIS 69.9 million in the comparable quarter, even though revenue fell by NIS 15.9 million. Gross margin therefore rose from 27.5% to 29.0%. Management attributes the improvement to better trade terms and a weaker dollar against the shekel, which fits the economics of an importer and distributor: when foreign-currency purchasing costs decline or procurement terms improve, some of the benefit can stay inside the group.
But the benefit did not reach operating profit. Selling and marketing expenses rose to NIS 41.3 million, and general and administrative expenses rose to NIS 13.5 million. Together, those two lines rose by about NIS 2.7 million while revenue declined. The company explains the increase mainly through higher labor, storage and logistics costs. That changes the read of the gross-margin improvement: gross profit quality looks better, but the cost base of the distribution platform remains heavy, so operating profit fell from NIS 17.8 million to NIS 14.3 million.
The segment split shows why this quarter is not only a "security-event decline." Construction and plumbing held up and even grew slightly, infrastructure declined but remained more profitable than the average, and industry and air-conditioning took the main hit.
| Segment | Q1 2026 revenue | Change vs. Q1 2025 | Attributed operating profit | Operating margin | What it means |
|---|---|---|---|---|---|
| Construction and plumbing | NIS 120.3 million | 2.7% | NIS 6.0 million | 5.0% | Revenue held up, but this remains a relatively low-margin segment |
| Infrastructure | NIS 67.9 million | 5.5%- | NIS 6.1 million | 9.0% | The higher-quality engine weakened, though it still carries a higher margin |
| Industry and air-conditioning | NIS 50.2 million | 23.0%- | NIS 3.0 million | 6.0% | Lower projects and activity made this the main source of profit erosion |
This is the proof layer that was missing after 2025. Then, infrastructure looked like the quality anchor. In the first quarter it is still a relative margin anchor, but not a growth anchor. If industry and air-conditioning do not return to a better activity pace, and infrastructure profitability does not stabilize, better trade terms will not be enough to change the group's operating profit.
NIS 35 million of cash flow does not mean all the cash is free
Operating cash flow was NIS 35.4 million, compared with NIS 28.0 million in the comparable quarter. On the surface, this balances the profit decline. In practice, it is important to separate recurring cash generation from the quarter's all-in cash picture.
Operating cash flow was built from NIS 8.7 million of net profit, NIS 13.0 million of non-cash adjustments and NIS 17.6 million of working-capital release, offset by NIS 3.9 million of net tax payments. The working-capital release came mainly from a NIS 29.5 million decline in receivables and a NIS 3.9 million decline in inventory, against an NIS 11.5 million decline in payables and a NIS 3.4 million rise in other receivables. This is a good picture of balance-sheet discipline, but it does not necessarily represent the cash the business will produce if sales begin to rise again.
On an all-in cash basis, the quarter barely increased cash. Operating cash flow of NIS 35.4 million funded NIS 18.2 million of investment cash outflow, mainly NIS 19.6 million invested in fixed assets, and NIS 17.9 million of financing cash outflow that included debt repayments, lease payments, interest and a dividend to minority interests. The result was a small NIS 0.7 million decline in cash to NIS 16.1 million at the end of March, before the NIS 20.0 million shareholder dividend that was paid after the balance-sheet date.
This is where Be'er Sheva matters. The purchase of about 10 dunams was completed on January 27, 2026, and ownership was registered on March 1. It advances the southern distribution footprint, but for shareholders it is currently capital out before visible contribution to revenue, service or efficiency. At the same time, the board declared a NIS 20 million dividend that was paid on April 9. The dividend is not unusual relative to accumulated earnings, but it makes the next quarters a discipline test: the company needs to keep investing, repay debt and leases, and maintain enough cash while operating profit is still weaker.
The next quarters will show whether this is margin improvement or only a defensive quarter
Management attributes part of the revenue decline to Operation "Shaagat HaAri" and its effect on activity in Israel. At the same time, the general note describes the impact on the company's results as not material by the approval date of the financial statements. The quarter may therefore be temporary, but the company itself does not frame it as damage that explains the whole picture. If industry and air-conditioning return to projects and infrastructure stabilizes, the gross-margin improvement and lower finance costs can support earnings. If not, the security-event explanation will become less convincing and the discussion will move quickly to the cost base.
The positive side is that the debt structure continues to ease. Bank credit and loans fell to about NIS 73.4 million, compared with NIS 80.8 million at the end of 2025, and net finance expenses fell to NIS 2.4 million. The group also complies with its financial covenants. That reduces balance-sheet pressure and leaves more room to judge the operating business itself. The yellow flag is that financial improvement is not enough if every gross-margin gain is absorbed by storage, logistics and labor costs.
In the next reports, the market is likely to test whether gross margin around 29% repeats, whether operating expenses decline relative to revenue, and whether receivables and inventory remain controlled as sales recover. Be'er Sheva adds a separate test: whether it starts to look like a service and footprint improvement, not only another capital use. The first quarter strengthens the company's balance-sheet management, but weakens the operating proof. For the read to improve, the next reports need to show that the better gross margin reaches operating profit, and that cash is not generated only by a temporary decline in balance-sheet items.
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