Eltek Ltd. — 2019 Form 20-F Summary
Reporting period: Fiscal year ended December 31, 2019. This is an annual report, not a standalone fourth-quarter filing; separate Q4 results are not provided. Financial statements are audited and prepared under U.S. GAAP, in U.S. dollars unless noted.
Business context
Eltek manufactures custom, technologically advanced printed circuit boards, including high-density, flex-rigid and multilayer boards. Its customers serve defense and aerospace, medical, industrial, telecom and networking markets. Manufacturing is based in Israel, with sales subsidiaries in the United States and Germany.
Key financial results
| Metric | 2019 | 2018 |
|---|---|---|
| Revenue | $34.794 million | $33.939 million |
| Gross profit / margin | $6.007 million / 17.3% | $2.597 million / 7.7% |
| Operating income (loss) / margin | $1.387 million / 4.0% | $(2.072) million / (6.1)% |
| Net income (loss) | $1.793 million | $(2.607) million |
| Net income (loss) per share | $0.48 | $(1.28) |
| Operating cash flow | $2.578 million | $(0.813) million |
| Cash and cash equivalents, year-end | $1.628 million | $0.992 million |
| Total assets / shareholders’ equity, year-end | $22.829 million / $6.269 million | $18.160 million / $0.882 million |
Revenue increased approximately 2.5% year over year. Management attributed the increase primarily to higher product prices. Cost of revenue fell to $28.787 million from $31.342 million, which management attributed to cost-saving measures. SG&A was $4.604 million, versus $4.669 million. Financial expense, net, was $440,000. Other income was $923,000, mainly from an insurance payment related to 2018 equipment damage. Without that item, reported pretax income would have been lower; the filing does not provide an adjusted earnings measure.
Liquidity, debt and capital
- Year-end working-capital deficit was approximately $1.2 million, compared with $5.3 million in 2018. The filing also states working capital excluding short-term related-party credit was $2.2 million; investors should reconcile these measures.
- Current liabilities included $2.120 million of short-term credit and current maturities of long-term debt, plus $3.472 million of short-term loans from the controlling shareholder’s group. Long-term debt excluding current maturities was $387,000. Bank facilities and other assets are secured by liens; substantially all assets are pledged as security for bank liabilities.
- In March–April 2019, a rights offering issued 2,351,701 shares for $3.4 million gross proceeds (approximately $3.292 million net). Proceeds were used in part to repay debt and otherwise for working capital and general corporate purposes. Shares outstanding increased from 2,028,552 at year-end 2018 to 4,380,268 at year-end 2019.
- Operating cash flow improved to $2.578 million, while investing cash outflow was $806,000 and financing cash outflow was $1.132 million. Financing cash flows included lower short-term bank credit, rights-offering proceeds, loan repayments and additional borrowing.
- Eltek was compliant with bank financial covenants at December 31, 2019; it had been out of compliance at December 31, 2018 and received a waiver. The company disclosed that failure to meet its 2020 plans could put covenant compliance at risk.
Changes, outlook and risks
- Eltek returned to annual profitability after losses in 2018 and 2017. Gross margin improved materially, reflecting cost reductions and modest revenue growth. The company still reported an accumulated deficit of approximately $19.7 million and a working-capital deficiency.
- Backlog was approximately $9.1 million at December 31, 2019, up from $7.0 million a year earlier. Management cautioned that backlog is not a reliable predictor of future sales and that a substantial portion may be cancelled without penalty.
- Management expected approximately $2.0 million of 2020 capital expenditures, primarily for manufacturing equipment and technology upgrades, subject to available financing. It anticipated that available resources would cover liquidity needs through 2020, but warned that this depended on operating performance, financing access, customer demand and other factors.
- As of March 31, 2020, the company reported approximately $2.2 million of cash and said COVID-19 had not materially affected operations, sales, collections or production to that date. It warned that the pandemic could disrupt customers, suppliers, production, demand and access to capital. A non-banking financial institution had put future activity under a $1.7 million facility on hold in March 2020.
- In April 2020, controlling shareholder Nistec committed to extend repayment of NIS 10 million of loans (approximately $2.8 million) until on or after May 1, 2021, and offered conditional financing support for another NIS 2 million due in May 2020. This support is important to liquidity and is related-party financing.
- Customer concentration is significant: two affiliated customer groups represented 19.5% and 11.5% of 2019 revenue. Two suppliers represented 26.5% and 23.5% of raw-material purchases, respectively.
- Other notable exposures include currency sensitivity (management estimated a 1% dollar devaluation against the NIS would reduce operating income by about $200,000), aging or unique manufacturing equipment, competitive pressure and raw-material costs. Environmental authorities issued warnings following a 2019 inspection; management believed the matter would be resolved, but no assurance was given. Employee injury and labor claims, and a disputed software-license audit request, are also disclosed.
- The company reported no material off-balance-sheet arrangements and no expected dividend in the foreseeable future. The auditor issued an unqualified opinion on the 2019 financial statements. Nasdaq continued to monitor the company’s shareholders’ equity compliance after the 2019 rights offering.
Investor verification priorities
- Confirm the sustainability of the 2019 margin recovery and profitability, including the effect of the $923,000 insurance-related other income.
- Reconcile the reported working-capital deficit with the stated $2.2 million working capital excluding related-party credit, and review near-term cash needs and debt maturities.
- Verify the terms, repayment extensions and availability of Nistec and bank/NBFI financing, including any covenant or collateral conditions.
- Assess whether the $9.1 million backlog converts to revenue, given customer concentration and cancellation terms.
- Track COVID-19 effects, the environmental warnings and claims, and the company’s ability to fund planned 2020 capital expenditures while maintaining Nasdaq listing compliance.