Business context and reporting period
Eltek Ltd. filed this audited Form 20-F for the fiscal year ended December 31, 2017; it is an annual report, not a standalone 2017 Q4 filing. Eltek manufactures custom printed circuit boards, including complex multilayer and flex-rigid boards, for defense and aerospace, medical, industrial, telecom and other customers. The financial statements are prepared under U.S. GAAP and reported in U.S. dollars; the company’s functional currency is the Israeli shekel.
Key financial metrics
Amounts below are U.S. dollars unless stated otherwise.
| Metric | 2017 | 2016 |
|---|---|---|
| Revenue | $32.754 million | $37.065 million |
| Gross profit / margin | $1.327 million / 4.1% | $2.817 million / 7.6% |
| Operating income (loss) | ($3.418 million) | ($1.999 million) |
| Net income (loss) attributable to Eltek shareholders | ($3.775 million) | ($3.624 million) |
| Operating cash flow | ($3.444 million) | $0.165 million |
| Cash and cash equivalents at year-end | $0.887 million | $1.234 million |
| Total assets | $22.145 million | $20.145 million |
| Shareholders’ equity | $3.459 million | $6.634 million |
Cost of revenue was 95.9% of revenue, versus 92.4% in 2016. Current assets were $13.502 million and current liabilities $18.067 million, implying a $4.565 million working-capital deficit. The filing’s narrative separately cites a $3.7 million deficit. Year-end bank credit and current maturities of long-term debt were $7.063 million; short-term borrowing from controlling shareholder Nistec was $1.442 million; long-term debt excluding current maturities was $0.388 million. Most company assets were pledged to lenders.
Material changes versus the prior comparable period
- Revenue fell 11.7%. Management attributed the decline, excluding divested subsidiary Kubatronik, to manufacturing obstacles and lower demand, particularly from foreign customers.
- Gross profit fell 51.2% and margin declined 3.5 percentage points. Management cited lower revenue, fixed costs that could not be reduced proportionately, and adverse currency movements.
- Operating loss widened by approximately $1.4 million. Net loss was broadly similar to 2016, when a $1.2 million tax expense included a write-off of deferred tax assets; 2017 tax expense was $74,000.
- Operating cash flow shifted from positive $165,000 to negative $3.444 million, while financing provided $3.244 million, principally through increased bank credit and shareholder borrowing.
- Year-end equity fell to $3.459 million from $6.634 million. The company sold its Kubatronik interest in December 2016; reported 2017 comparisons therefore also reflect the absence of that subsidiary.
Outlook, risks and unusual items
- Management expected available resources—including operating cash flow, revolving credit, supplier financing and Nistec support—to be adequate through 2018, but warned that operational difficulties, weaker demand, currency movements and payment-term changes could undermine liquidity. No specific revenue or earnings guidance was provided.
- The company was in breach of bank financial covenants at year-end 2017. Waivers ran until publication of the June 30, 2018 statements at one bank and the December 31, 2018 statements at another; $911,000 of long-term bank debt was reclassified as short term. Management said continued covenant compliance during 2018 was doubtful.
- After year-end, Nistec provided a further NIS 4.0 million loan (about $1.1 million) and committed up to $2.5 million of additional financing. The commitment and loan terms are subject to stated conditions and approvals.
- The company planned approximately $2.1 million of 2018 capital expenditures, mainly for manufacturing equipment, subject to financing availability. It had invested approximately $980,000 in equipment and facilities over the preceding three years.
- Major risks include limited liquidity and financing availability, covenant breaches, aging and occasionally malfunctioning specialized machinery, intense lower-cost Asian competition, raw-material price increases and supplier concentration, customer concentration, and exposure to shekel-dollar/euro fluctuations. Management estimated that a 1% dollar depreciation against the shekel could reduce operating income by about $225,000; it reported no current hedging transactions.
- Environmental matters included a 2016 settlement with the municipal water company for NIS 200,000 (about $50,000) after wastewater claims; subsequent sampled discharges met standards. The company received an emissions permit in July 2017 but held only a temporary business permit through January 2019, with conditions that may be costly. Pending former-employee claims totaled approximately $1.0 million; a provision was recorded, and one claim was settled in April 2018 for an amount described as not significant.
- The ERP implementation was put on hold in the third quarter of 2017 for resource and cost-benefit reasons; the system was fully amortized. Management reported disclosure controls and internal control over financial reporting as effective. The independent auditor issued an unqualified opinion on the financial statements but did not audit internal control effectiveness.
Important facts for investors to verify
- Reconcile the working-capital deficit: the balance sheet figures imply $4.565 million, while the narrative states $3.7 million.
- Confirm the 2017 loss per share: the selected financial data reports ($1.48), while the audited statements report ($1.58); both reflect the reverse share split, but the filing does not explain the difference.
- Clarify the backlog comparison: the filing reports backlog of $9.1 million at December 31, 2017 versus $4.5 million a year earlier, yet a trend discussion describes backlog as having decreased.
- Track covenant waiver expiry, lender approvals, and actual availability and terms of Nistec’s committed financing.
- Assess whether order backlog converts to revenue: orders may be rescheduled or canceled, and the filing says backlog is not necessarily indicative of future sales.
- Monitor customer and supplier concentration, manufacturing reliability, 2018 capital spending, and conditions for renewal of the business permit.