Business context and reporting period
Eltek Ltd. filed this Form 20-F for the fiscal year ended December 31, 2021. The Israel-based company manufactures custom printed circuit boards, including high-density, multilayer and flex-rigid boards, primarily for defense and aerospace, medical, industrial, telecom and contract electronics customers. Financial statements are in U.S. dollars and prepared under U.S. GAAP; the company’s functional currency is the NIS. The filing is an annual report, not a standalone Q4 filing.
Financial performance and position
| Metric | FY 2021 | FY 2020 |
|---|---|---|
| Revenue | $33.823 million | $36.707 million |
| Gross profit / margin | $6.897 million / 20.4% | $7.738 million / 21.1% |
| Operating income / margin | $1.949 million / 5.8% | $3.032 million / 8.3% |
| Income before tax | $1.502 million | $2.679 million |
| Net income | $5.039 million | $2.608 million |
| Operating cash flow | $3.875 million | $3.252 million |
| Cash and cash equivalents, year-end | $9.283 million | $4.735 million |
Revenue fell about 8%. Management attributed the decline mainly to shortages of a key raw material. Gross and operating margins also contracted. Net income rose despite lower operating profit, chiefly because the company recognized a $3.537 million income-tax benefit after releasing a valuation allowance on deferred tax assets. The benefit is a material, non-operating contributor to reported earnings.
For Q4 2021, revenue was $9.521 million, gross profit $1.956 million, operating income $623,000 and net income $3.836 million. The quarter included a $3.601 million income-tax benefit. The filing text does not provide a clear comparable Q4 2020 result in the presented quarterly table.
Operating cash flow increased year over year. Investing cash use was $1.647 million, primarily for production equipment and leasehold improvements; financing provided $2.124 million, including $3.063 million of long-term loan proceeds. Cash increased by $4.548 million during the year.
Year-end working capital was $13.3 million, versus a $9.1 million deficit in 2020. Bank debt, including current maturities, was approximately $4.629 million; the company also reported unused revolving credit lines of about $2.8 million. Bank loans and credit lines are secured by company assets. Operating lease liabilities totaled $9.117 million, reported separately from debt. The company was in compliance with its bank covenants at year-end.
Changes, outlook and material risks
- Backlog increased to approximately $10.0 million at December 31, 2021, from $6.8 million a year earlier; backlog covers orders scheduled for delivery within 12 months and is not necessarily predictive of future sales.
- Two affiliated customer groups accounted for 21.2% and 7.9% of 2021 revenue. Two suppliers represented 21% and 23% of raw-material purchases, respectively.
- A DuPont supply interruption involving Pyralux AP slowed production and delayed or prevented some shipments. Supply returned to normal capacity by year-end, but not all customers had approved substitute materials.
- The stronger NIS adversely affected results: management reported average NIS exchange-rate changes against the dollar and euro of approximately 6.2% and 2.5%, respectively, versus 2020. The company does not currently hedge currency exposure.
- Management expected approximately $2.4 million of 2022 capital expenditures, mainly for manufacturing capacity and technology upgrades, and anticipated available resources would meet liquidity needs through 2022. This outlook depends on operating cash flow, credit access, supplier financing and business conditions; financing may not be available on acceptable terms.
- Key risks include customer and supplier concentration, raw-material costs and availability, intense competition from lower-cost Asian producers, currency exposure, aging specialized machinery, volatile quarterly results, COVID-related disruption, and the need for future equipment investment. The company also identified its aging, unsupported ERP system as an operational and control risk.
- Environmental matters remain a contingency. Following inspections and hearings, Israeli regulators were considering fines related to alleged environmental and hazardous-materials violations; the company recorded a provision based on legal advice but stated that the eventual outcome and costs were uncertain. The company also faces employee injury and employment-related claims, including a former employee claim filed in March 2022 for $125,000. Other employee injury claims include approximately $121,000 sought by three employees and $1.7 million sought by two others; insurance coverage remains under review.
- A third-quarter 2021 cybersecurity incident was contained without disabling systems or a reported material operational impact. The company says it strengthened protections, but cannot assure that future incidents will be prevented.
- The company changed its stock-based compensation attribution method in Q4 2021. The filing describes retrospective application in one section and prospective application in the financial-statement note; it says the impact on periods before 2021 was immaterial. Clarification of the accounting treatment is warranted.
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 year-end; the auditor did not express an opinion on internal control effectiveness. The auditor identified inventory write-offs as a critical audit matter; 2021 excess and obsolete inventory write-offs were $530,000.
Most important facts for investors to verify
- How much of 2021 net income and Q4 earnings reflects the $3.537 million annual tax benefit, and whether the deferred tax assets are ultimately realizable.
- Whether key-material supply is reliable, customer approvals for alternative materials are complete, and the higher backlog converts into shipments and revenue.
- Customer and supplier concentration, raw-material price trends, and the impact of NIS movements on margins and cash flow.
- Liquidity and funding for planned 2022 capital spending, including bank covenant compliance, secured borrowing capacity and access to unused credit lines.
- The status and potential financial effect of environmental proceedings, employee claims, and the reported stock-compensation accounting-policy presentation inconsistency.