Eltek Ltd. — FY2013 Form 20-F Summary
Business and period. Eltek manufactures custom printed circuit boards, including high-density, flex-rigid and multilayer products, for defense and aerospace, medical, industrial and other electronics customers. This is an audited annual report for the fiscal year ended December 31, 2013, prepared under U.S. GAAP; it does not provide standalone fourth-quarter financial results.
Financial performance and position
Unless otherwise stated, amounts are U.S. dollars. Financial figures below are for FY2013 compared with FY2012.
| Metric | FY2013 | FY2012 | Change / context |
|---|---|---|---|
| Revenue | $50.235 million | $45.646 million | Up 10.0%, principally on stronger demand, especially from military customers |
| Gross profit / margin | $7.993 million / 15.9% | $7.810 million / 17.1% | Gross profit rose modestly; margin declined as costs grew faster than sales |
| Operating profit / margin | $1.271 million / 2.5% | $1.289 million / 2.8% | Nearly flat operating profit |
| Net profit | $3.781 million | $696,000 | Includes a $2.975 million income tax benefit, largely from releasing $2.540 million of deferred-tax valuation allowance |
| Net profit attributable to Eltek shareholders / diluted EPS | $3.823 million / $0.53 | $690,000 / $0.10 | FY2013 includes a $42,000 non-controlling-interest loss |
| Operating cash flow | $1.618 million | $4.772 million | Down, with higher receivables and inventory and a deferred-tax benefit adjustment among the drivers |
| Cash and cash equivalents | $2.514 million | $1.935 million | Up $579,000 year over year |
| Total assets / total equity | $31.454 million / $13.347 million | $23.449 million / $5.536 million | Equity increased substantially, principally following the share issuance and profits |
Capital spending cash outflow was $950,000; net cash used in investing activities was also $950,000. Net cash used in financing activities was $113,000, including $3.543 million of net share-issuance proceeds, offset by debt and equipment-credit repayments. Reported short-term credit and current maturities were $1.818 million, with $1.412 million of long-term debt excluding current maturities. The company said its $1.6 million revolving credit lines were fully utilized at year-end. Bank borrowings are secured by company assets.
Working capital was $1.997 million based on the audited balance-sheet current assets and liabilities; management’s liquidity discussion separately reports $2.5 million. This difference is not reconciled in the provided filing text and should be checked.
Material changes and operating developments
- Revenue recovered from FY2012’s 2.5% decline, which management attributed primarily to a temporary production-line problem. The 2013 increase was led by military demand.
- Cost of revenue rose 11.6%, faster than revenue, and gross margin fell from 17.1% to 15.9%. Management cited the stronger NIS against the dollar as increasing the dollar-reported value of NIS costs.
- SG&A increased 11.3% to $6.722 million, mainly due to currency translation of NIS expenses and directors’ fees connected with the Nistec investment. Net financial expense declined to $439,000 from $543,000.
- Nistec acquired control in November 2013 with a 50.5% stake. Eltek issued 3,532,655 shares to Nistec for $4.2 million; Nistec also bought existing shares from another holder. The issuance increased year-end shares outstanding to 10,142,762 from 6,610,107.
- Year-end order backlog was approximately $10.1 million, down from $14.9 million a year earlier. Orders may be cancelled, and management cautions that backlog is not a reliable predictor of future sales.
- Defense and aerospace accounted for 51.8% of production in 2013. One customer represented 18.4% of revenue. Non-Israeli customer sales were $22.2 million, or 44.3% of revenue.
Outlook, risks and contingencies
- Outlook and investment: No specific revenue or earnings guidance is provided. Management expected liquidity resources to be adequate through 2014, subject to operating performance and continued financing access. It planned approximately $5 million of 2014 capital expenditures, mainly for manufacturing equipment and capacity and technology upgrades, dependent on available funding. The company’s strategy emphasizes higher-end flex-rigid and specialty boards, with focus on defense and medical markets and efforts to expand in North America.
- Financing and covenants: The company was in compliance with its bank covenants at December 31, 2013. New Bank Hapoalim undertakings required adjusted equity of at least the greater of $4.5 million or 17% of consolidated assets and a 1.5 debt-service ratio. Additional financing is not committed; credit availability, covenant changes and asset liens are material considerations.
- Currency, input costs and rates: A 1% dollar depreciation against the NIS was estimated to reduce operating income by approximately $200,000. A 1% change in raw-material costs would change costs by approximately $160,000; a 1% interest-rate increase was estimated to add approximately $50,000 to financial expenses. The company reported difficulty obtaining bank credit lines for hedging.
- Environmental matter: Meitav requested NIS 962,186 (about $273,000), excluding VAT, for alleged industrial wastewater discharges based on 2013 sampling; a further potential request of about NIS 500,000 (about $142,000) was noted. Eltek disputes the sampling method and location and is considering appeal and treatment-facility discussions. Management believes it will owe no additional amount beyond provisions recorded; the balance sheet reports a $202,000 contingent-liability provision. A new business permit required following the change of control was still pending and may carry costly environmental conditions.
- Other exposures: Employee injury claims include two lawsuits seeking about $180,000 in aggregate, plus other reported claims, including one for $170,000; insurance coverage remained under review. A software supplier’s requested audit could lead to an intellectual-property dispute, with any potential liability unclear. The company also faces customer and supplier concentration, intense low-cost Asian competition, production and order volatility, and risks tied to Israel’s economic and security environment.
- Controls and audit: The independent auditor issued an unqualified opinion on the consolidated financial statements. Management concluded disclosure controls and internal control over financial reporting were effective as of December 31, 2013.
Important facts for investors to verify
- Reconcile the filing’s gross-profit figures: the selected financial data table shows $7.933 million, while the audited statements and results discussion show $7.993 million.
- Reconcile the $1.997 million working-capital calculation from audited balance-sheet values with management’s reported $2.5 million.
- Assess the sustainability of earnings excluding the unusually large deferred-tax benefit, and whether deferred tax assets can ultimately be realized from future taxable income.
- Track backlog conversion and customer demand, particularly the major customer’s 18.4% revenue share and the lower year-end backlog.
- Confirm the outcome and final financial exposure from the wastewater demand, any additional fees, and the pending business permit conditions.
- Monitor liquidity, fully utilized revolving lines, covenant compliance, and the financing plan for the planned 2014 capital expenditures.
- Evaluate the effects of Nistec’s control, the share issuance and dilution, and related management arrangements.