Eltek Ltd. — FY 2015 Form 20-F
Reporting period: Fiscal year ended December 31, 2015. This is an annual report, not a standalone fourth-quarter filing; the provided filing text does not give separate Q4 results. Financial statements are in U.S. dollars and prepared under U.S. GAAP. Eltek manufactures custom printed circuit boards (PCBs), including high-density, flex-rigid and multilayer products, for defense and aerospace, medical, industrial and other electronics customers.
Financial performance and position
| Metric | FY 2015 | FY 2014 |
|---|---|---|
| Revenue | $41.35 million | $46.63 million |
| Gross profit / margin | $6.55 million / 15.8% | $6.02 million / 12.9% |
| Operating profit (loss) / margin | $1.50 million / 3.6% | $(0.90) million / (1.9)% |
| Net profit (loss) | $1.03 million | $(2.86) million |
| Net profit (loss) attributable to Eltek shareholders | $1.04 million; $0.10 per share | $(2.67) million; $(0.26) per share |
| Operating cash flow | $1.72 million | $0.08 million |
| Cash and cash equivalents at year-end | $1.04 million | $1.13 million |
| Working capital | $1.98 million | $(0.07) million |
| Total assets / total equity | $25.42 million / $10.24 million | $26.27 million / $9.22 million |
Gross margin improved as manufacturing costs fell and SG&A was reduced. FY 2015 investing cash outflow was $0.87 million and financing cash outflow was $1.07 million; cash declined by $0.09 million. Balance-sheet short-term credit and current maturities were $1.28 million, and long-term debt was $2.91 million. The company reported $4.20 million of long-term debt obligations in its contractual-obligations disclosure, including current maturities. Borrowings are secured by company assets. Eltek reported compliance with bank financial covenants at year-end.
Material changes versus prior period
- Revenue fell 11.3% from 2014, primarily due to lower demand, especially from military customers.
- Cost of revenue declined faster than sales, lifting gross profit by 8.7% and gross margin by 2.9 percentage points.
- SG&A fell 26.7% to $4.96 million, which, alongside improved manufacturing costs, helped return operating results to profit.
- Net results improved from a $2.86 million loss to $1.03 million profit. The comparison is affected by the 2014 $1.63 million tax expense, including a reduction in deferred tax assets; 2013 had a $2.98 million tax benefit.
- Operating cash flow rose to $1.72 million from $0.08 million, while cash remained near $1 million. Working capital moved from a small deficit to a positive $1.98 million.
- Backlog increased to approximately $6.5 million at year-end from $5.7 million, but orders may be rescheduled or cancelled.
Outlook, management commentary and risks
- Management expected approximately $2.3 million of 2016 capital expenditures, principally for manufacturing equipment and technology upgrades in Israel and Germany. Planned funding sources were operating cash flow, bank borrowing and supplier credit; availability and terms were not assured.
- Management anticipated that available resources would be adequate for liquidity needs through 2016, while warning that lower demand, customer payment extensions, currency movements or financing constraints could require alternative financing or spending reductions. No specific revenue or earnings guidance was provided.
- Customer concentration remains significant: a group of ten affiliated companies accounted for 17.9% of 2015 revenue. A single supplier represented 17.9% of raw-material costs.
- Kubatronik, the German subsidiary, continued to incur losses. Eltek funded $258,000 of its operating losses in 2015, and Kubatronik owed Eltek approximately $1.1 million at year-end.
- Currency exposure is material. Management estimated that a 1% devaluation of the dollar against the NIS would reduce operating income by approximately $200,000. Currency movements overall had a positive effect on 2015 results; the company said it was not then engaged in hedging transactions in its risk-factor discussion, while the financial-statement notes disclose use of forward contracts and options for some exposures.
- Environmental matters are a key contingency. Meitav demanded NIS 3.8 million (about $980,000), excluding VAT, for alleged wastewater violations. A new treatment facility was completed in December 2015 and a January 2016 sample indicated compliance; Eltek was seeking rescission or reduction of the demand. The company also had not received a required new business permit and was notified that its emissions-permit application was incomplete and that it was in breach of cited Israeli laws; it committed to submit an amended application by April 2016.
- Other disclosed claims include former-employee suits seeking approximately $1.0 million in aggregate, personal-injury claims, and a software supplier’s asserted intellectual-property concerns; the potential exposure on the software matter was not clear in the filing.
- Key business risks include intense competition and lower-cost Asian manufacturers, volatile quarterly orders, dependence on major customers and suppliers, covenant and financing risks, environmental compliance, and political and security conditions in Israel. The company reported no material off-balance-sheet arrangements.
Important facts for investors to verify
- Whether the improved gross margin and operating profitability can persist despite continuing revenue declines and weaker military-customer demand.
- Whether the wastewater-fee demand will be rescinded or reduced, and the status and cost of required environmental and business permits.
- Liquidity and funding for the planned 2016 capital expenditures, debt maturities, and continued covenant compliance.
- Kubatronik’s path to profitability and recoverability of its intercompany debt.
- Customer and supplier concentration, backlog conversion and cancellation risk, and actual exposure to currency movements.
- The filing reports effective management assessment of internal controls and an unqualified audit opinion on the financial statements; investors may wish to review the audited statements and notes for contingencies, debt terms and tax-asset assumptions.