Eltek Ltd. — 2018 Form 20-F Summary
Reporting period: Fiscal year ended December 31, 2018. This is an annual report, not a standalone fourth-quarter filing. Financial statements are prepared under U.S. GAAP and reported in U.S. dollars; amounts below are in millions unless stated otherwise.
Business context
Eltek manufactures custom printed circuit boards, including high-density, multilayer and flex-rigid boards, primarily for defense and aerospace, medical, industrial and electronics customers. Its production is based in Israel, with sales subsidiaries in the United States and Germany. The company reported approximately 253 customers outside Israel and 154 in Israel during 2018; defense and aerospace represented 43.1% of production.
Financial performance and position
| Metric | 2018 | 2017 |
|---|---|---|
| Revenue | $33.939 | $32.754 |
| Gross profit / margin | $2.597 / 7.7% | $1.327 / 4.1% |
| Operating loss / margin | $(2.072) / (6.1)% | $(3.418) / (10.4)% |
| Net loss attributable to Eltek shareholders | $(2.607) | $(3.775) |
| Operating cash flow | $(0.813) | $(3.444) |
| Cash and cash equivalents at year-end | $0.992 | $0.887 |
| Working capital deficit | $5.314 | $4.565 |
| Total assets | $18.160 | $22.145 |
| Shareholders’ equity | $0.882 | $3.459 |
Revenue rose 3.4%, mainly on increased demand, particularly from international customers. Cost savings and higher sales helped double gross profit and narrow the operating and net losses. SG&A remained approximately $4.7 million. Financial expenses increased to $475,000 from $298,000, reflecting higher financial liabilities and currency effects. Gross margin remained thin, and the company continued to lose money and use cash in operations.
Year-end balance-sheet debt included $6.606 million of short-term credit and current maturities, $2.668 million of short-term related-party loans, and $0.308 million of long-term debt. Bank and other borrowings are secured by company assets. Net cash provided by financing activities was $1.527 million, supporting the year’s cash balance despite operating and investing outflows. Capital expenditures were $619,000.
Material changes and unusual items
- Backlog fell to approximately $7.0 million at December 31, 2018, from $9.1 million a year earlier; management attributed the decline mainly to lower demand. Orders may be canceled or rescheduled, so backlog is not assured revenue.
- The company was not compliant with bank financial covenants at year-end. Banks subsequently granted waivers; one bank adjusted its 2019 tests to require adjusted equity of at least $2.5 million and positive EBITDA. Management cautioned that covenant compliance in 2019 was uncertain.
- After year-end, a March–April 2019 rights offering raised $3.4 million gross through issuance of 2,351,701 shares. Proceeds were intended partly to repay a $840,000 Mizrahi Bank loan and a $530,000 Bank Leumi credit line, with the remainder for working capital and general purposes. The issuance increased outstanding shares from 2,028,552 at year-end to 4,380,268 by April 16, 2019.
- The controlling shareholder, Yitzhak Nissan, through Nistec-related entities, provided loans and guarantees. Nistec loans totaled NIS 12 million (about $3.3 million) in principal as of April 16, 2019. Following the rights offering, Nissan’s reported beneficial ownership rose to 69.9%.
- Water damage affected a major production machine in 2018. Eltek replaced it and received a $500,000 insurance advance; final recovery remained under negotiation.
- Employee-related lawsuits claimed approximately $900,000 in aggregate, and the company recorded a provision based on legal counsel’s assessment. Separate personal-injury claims were also pending, with insurance coverage under review.
Outlook, risks and contingencies
Management expected its business plans, rights-offering proceeds, available credit and Nistec commitments to fund operations for at least one year from approval of the financial statements, but stated that additional financing might be needed if operating cash generation was insufficient and could not be assured. The company planned approximately $1.2 million of 2019 capital expenditures, subject to financing availability. It gave no specific revenue or earnings guidance.
Key risks include continued losses and a $5.3 million working capital deficit, covenant compliance and refinancing needs, customer and supplier concentration, price competition from lower-cost Asian producers, raw-material cost increases, foreign-exchange exposure, aging or specialized machinery, and uncertain demand. The company estimated that a 1% weakening of the dollar against the NIS could reduce operating income by about $200,000; a 1% rise in raw-material costs would add approximately $317,000 to raw-material expense. Environmental permit conditions could entail costs or operating restrictions. Eltek reported that it had resolved a prior wastewater dispute in 2016 and obtained an emissions permit in 2017.
The independent auditor issued an unqualified opinion on the financial statements. Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2018; the auditor did not express an opinion on internal control. Management reported no material off-balance-sheet arrangements. Eltek has never paid cash dividends and does not expect to do so in the foreseeable future.
Most important facts for investors to verify
- Whether Eltek achieved the revised bank covenants for 2019 and whether credit facilities and Nistec support remained available on acceptable terms.
- How the $3.4 million rights-offering proceeds were applied, the resulting share count and dilution, and the company’s post-offering liquidity.
- Whether backlog stabilized and converted to shipments and cash, given the decline from $9.1 million to $7.0 million.
- The status and estimated exposure of employee claims, insurance recovery for the damaged equipment, and compliance costs under environmental and business permits.
- The working-capital figures: the audited balance sheets imply deficits of $5.314 million for 2018 and $4.565 million for 2017, while one narrative passage cites a different 2017 deficit; clarify the discrepancy.