Eltek .(US:ELTK)2020-04-27 20:03PART I Key Information Eltek's key financial data and significant business, stock, and Israeli operational risks are summarized, highlighting its return to profitability in 2019 Selected Financial Data The company presents selected consolidated financial data, showing a return to net profit of $1.8 million in 2019 after prior losses Consolidated Statement of Operations Data (in thousands, except per share data) | Year ended December 31, | 2019 | 2018 | 2017 | 2016 | 2015 | | :--- | :--- | :--- | :--- | :--- | :--- | | Revenues | $34,794 | $33,939 | $32,754 | $37,065 | $41,350 | | Gross profit | $6,007 | $2,597 | $1,327 | $2,817 | $6,548 | | Operating profit (loss) | $1,387 | $(2,072) | $(3,418) | $(1,999) | $1,497 | | Net profit (loss) | $1,793 | $(2,607) | $(3,775) | $(3,725) | $1,026 | | Basic and diluted net profit (loss) per share | $0.48 | $(1.28) | $(1.58) | $(1.82) | $0.51 | Consolidated Balance Sheets Data (in thousands) | As of December 31, | 2019 | 2018 | 2017 | 2016 | 2015 | | :--- | :--- | :--- | :--- | :--- | :--- | | Working capital (deficit) | $(1,248) | $(5,314) | $(4,565) | $(93) | $1,982 | | Total assets | $22,829 | $18,160 | $22,145 | $20,145 | $25,419 | | Total shareholders' equity | $6,269 | $882 | $3,459 | $6,634 | $10,335 | Risk Factors The company identifies numerous business, share, and Israeli operational risks, including a history of losses and geopolitical instability - The company has an accumulated deficit of approximately $19.7 million since inception and may require additional capital; a rights offering in April 2019 raised net proceeds of approximately $3.2 million2931 - The COVID-19 pandemic poses a significant risk, potentially affecting customer operations, supply chains, revenue, and profit margins3649 - Significant customer concentration exists, with one affiliated group accounting for 19.5% of 2019 revenues and another for 11.5%40 - The company faces NASDAQ delisting risks due to past non-compliance with minimum bid price and stockholders' equity requirements, though compliance was regained in March 2019124126127 - Chairman Yitzhak Nissan beneficially owns 65.4% of outstanding ordinary shares, granting significant influence over shareholder votes and corporate transactions123 - Operations in Israel expose the company to risks from regional political, economic, and military instability, potentially disrupting business conditions136137 Information on the Company Eltek's corporate history, business, structure, and assets are detailed, highlighting its specialization in high-end custom PCBs for defense and medical industries History and Development of the Company Eltek, incorporated in Israel in 1970, manufactures advanced custom PCBs, is controlled by Nistec, and plans $2.0 million in 2020 capital expenditures - The company, incorporated in Israel in 1970, specializes in manufacturing technologically advanced custom-made PCBs163164 - Nistec acquired a controlling stake in November 2013; Mr. Yitzhak Nissan's beneficial ownership was 69.9% after a March 2019 rights offering, later reduced to 65.4%168170219 - The company plans approximately $2.0 million in 2020 capital expenditures, following a $1.7 million investment over the past three years, to expand manufacturing capacity and upgrade technology171 Business Overview Eltek operates in the competitive high-end PCB industry, serving defense, aerospace, and medical markets, with its order backlog increasing to $9.1 million in 2019 Revenue by Industry (as % of production) | Industry | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | Defense and Aerospace | 55.2% | 43.1% | 48.0% | | Medical Equipment | 9.5% | 9.5% | 14.3% | | Industrial Equipment | 2.1% | 6.0% | 4.2% | | Distributors, CEMs, Others | 33.2% | 41.4% | 33.6% | - The company focuses on high-end PCBs, including flex-rigid boards, targeting defense and medical industries, holding ITAR, AS 9100, and Nadcap certifications198 - The global PCB industry is highly fragmented and competitive, with Eltek competing against Israeli, Southeast Asian, European, and North American firms202 - The company's order backlog increased from approximately $7.0 million at year-end 2018 to $9.1 million at year-end 2019204 - The company faces environmental regulatory scrutiny, having received March 2019 warnings from the Israeli Ministry of Environmental Protection regarding alleged breaches of environmental laws211 Organizational Structure Eltek has wholly-owned sales subsidiaries in the US and Europe and is controlled by Nistec Golan Ltd., with Mr. Yitzhak Nissan's beneficial ownership at 65.4% - Eltek has wholly-owned subsidiaries in the USA (Eltek USA Inc.) and Germany (Eltek Europe GmbH) for sales and marketing in North America and Europe215 - Nistec Ltd. transferred its ownership to Nistec Golan Ltd. in December 2018, both controlled by Mr. Yitzhak Nissan217 - Following a March 2019 rights offering and a May 2019 share sale, Mr. Nissan's beneficial ownership in the company is 65.4%219 Property, Plants and Equipment The company's main operations are in a leased 90,000 square foot facility in Petach Tikva, Israel, with a U.S. subsidiary leasing office space - The company's principal 90,000 square foot facilities are leased in Petach Tikva, Israel, with the lease expiring in February 2022220 - The U.S. subsidiary leases approximately 938 square feet of office space in New Hampshire, with the lease extending through February 2024221 Operating and Financial Review and Prospects Management discusses Eltek's financial condition and operations, highlighting 2.7% revenue growth and a shift to $1.4 million operating profit in 2019 Operating Results In 2019, Eltek's revenues grew 2.7% to $34.8 million, with cost reductions leading to a 131% gross profit increase and a shift to $1.4 million operating profit Year-over-Year Performance Comparison (2019 vs. 2018, in millions) | Metric | 2019 ($ millions) | 2018 ($ millions) | Change ($ millions) | % Change | | :--- | :--- | :--- | :--- | :--- | | Revenues | $34.8 | $33.9 | +$0.9 | +2.7% | | Cost of Revenues | $28.8 | $31.3 | -$2.5 | -8.0% | | Gross Profit | $6.0 | $2.6 | +$3.4 | +131% | | Operating Profit (Loss) | $1.4 | $(2.1) | +$3.5 | N/A | - The 2019 operating profit improvement was primarily due to cost savings and a slight increase in revenues251 - Other income of $923,000 in 2019 was primarily from an insurance claim payment for 2018 manufacturing machine damage253 - The COVID-19 outbreak, beginning in late 2019, could adversely affect the global economy and company operations, though not materially impacting operations as of the report date241242 Liquidity and Capital Resources The company's liquidity improved in 2019, with cash increasing to $1.6 million and the working capital deficit narrowing, largely due to a $3.4 million rights offering - A March 2019 rights offering raised gross proceeds of $3.4 million, used for debt reduction and working capital281311 Cash Flow Summary (in thousands) | Year ended December 31, | 2019 (in thousands) | 2018 (in thousands) | 2017 (in thousands) | | :--- | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | $2,578 | $(813) | $(3,444) | | Net cash used in investing activities | $(806) | $(619) | $(275) | | Net cash provided by (used in) financing activities | $(1,132) | $1,527 | $3,244 | - As of December 31, 2019, the company had loans payable to Nistec totaling NIS 12 million (approximately $3.5 million), with renegotiated and extended repayment terms300304 - The company was in compliance with bank covenants as of December 31, 2019, following a waiver for 2018 non-compliance297 Contractual Obligations As of December 31, 2019, the company had total contractual obligations of approximately $10.0 million, with $7.6 million due within one year Contractual Obligations as of December 31, 2019 (in thousands) | Obligation Type | Total (in thousands) | Less than 1 year (in thousands) | 2-3 years (in thousands) | 4-5 years (in thousands) | More than 5 years (in thousands) | | :--- | :--- | :--- | :--- | :--- | :--- | | Short-term bank credit | $2,120 | $2,120 | - | - | - | | Long-term debt obligations | $863 | $477 | $290 | $96 | - | | Operating lease | $2,060 | $953 | $1,079 | $28 | - | | Other contractual obligations | $1,233 | $616 | $480 | $137 | - | | Total | $10,004 | $7,563 | $1,860 | $267 | $314 | Directors, Senior Management and Employees This section details the company's leadership, compensation, board structure, and employee base, noting total compensation for directors and officers was approximately $1.85 million in 2019 Directors and Senior Management The company's board comprises seven directors, chaired by controlling shareholder Yitzhak Nissan, with the executive team led by CEO Eli Yaffe and CFO Alon Mualem - The Board of Directors is chaired by Yitzhak Nissan, the company's controlling shareholder319320 - The executive management team is led by Chief Executive Officer Eli Yaffe and Chief Financial Officer Alon Mualem327328 Compensation Total compensation for all 14 directors and executive officers in 2019 was approximately $1.5 million in salaries and fees, plus $347,000 in benefits - Total compensation for all 14 directors and executive officers in 2019 was $1.5 million in salaries and fees, plus $347,000 in pension and other benefits336337 Compensation of Five Most Highly Compensated Officers (2019) | Name of Officer | Position | Total Compensation (USD) | | :--- | :--- | :--- | | Yitzhak Nissan | Chairman of the Board | $302,988 | | Eli Yaffe | Chief Executive Officer | $578,042 | | Alon Mualem | Chief Financial Officer | $244,473 | | Yitzhak Zemach | VP Operations | $188,585 | | Shmuel Wider | Former VP Sales and Marketing | $158,854 | Board Practices The company's seven-member board includes two external directors serving on Audit and Compensation Committees, adhering to Israeli corporate governance practices - Israeli law requires the company to appoint at least two external directors, currently Gad Dovev and Ilana Lurie349351 - The Audit Committee comprises three independent members: Gad Dovev (Chairman), Mordechai Marmorstein, and Ilana Lurie368 - The Compensation Committee consists of Ilana Lurie, Gad Dovev, and Mordechai Marmorstein; a new compensation policy was approved on December 5, 2019370372 - The company has indemnification agreements with directors and officers, with an aggregate limit of the greater of 25% of net equity or $3 million390750 Employees As of December 31, 2019, Eltek employed 283 full-time employees in Israel and 3 in the U.S., with most Israeli employees in manufacturing services Employee Headcount by Year-End | Location | Dec 31, 2019 | Dec 31, 2018 | Dec 31, 2017 | | :--- | :--- | :--- | :--- | | Israel | 283 | 316 | 329 | | USA | 3 | 4 | 4 | - The majority of employees in Israel (217 out of 283) are engaged in manufacturing services395 - The company's employees in Israel are not currently unionized, following significant resignations from Histadrut membership in 2012400 Share Ownership As of April 24, 2020, Chairman Yitzhak Nissan beneficially owned 65.4% of outstanding shares, with 123,519 options outstanding - As of April 24, 2020, Chairman Yitzhak Nissan beneficially owned 2,862,523 ordinary shares, representing 65.4% of outstanding shares407408 - All executive officers and directors as a group (14 persons) beneficially owned 2,899,413 shares, or 65.6% of the company407 - Under the 2018 Share Incentive Plan, 123,519 options were outstanding as of December 31, 2019, with a weighted average exercise price of $4.65 per share412 Major Shareholders and Related Party Transactions This section details major shareholders and related party transactions, noting Nistec Golan Ltd. and Chairman Yitzhak Nissan hold a 65.4% controlling stake Major Shareholders As of April 24, 2020, major shareholders include Nistec Golan Ltd. (62.4%) and Chairman Yitzhak Nissan (3.0%), totaling 65.4% beneficial ownership Major Shareholders (as of April 24, 2020) | Name | Number of Shares | Percentage of Ownership | | :--- | :--- | :--- | | Nistec Golan Ltd. | 2,731,783 | 62.4% | | Yitzhak Nissan | 130,740 | 3.0% | | XDOOD LLC | 228,230 | 5.21% | - Nistec Golan Ltd. is controlled by Yitzhak Nissan, resulting in his total beneficial ownership of 65.4%415 Related Party Transactions The company engages in multiple related party transactions with controlling shareholder Nistec and Chairman Yitzhak Nissan, including a management agreement for NIS 90,000 monthly - The company has a Management Agreement with Nistec, renewed in December 2019, paying a monthly fee of NIS 90,000 (approximately $26,000) for Chairman Yitzhak Nissan's services425426428 - Nistec has provided significant financial support, including loans totaling NIS 10 million (approximately $2.9 million) as of December 2019, with renegotiated terms434 - The company has established procedures for arm's-length transactions with Nistec, including PCB purchases by Nistec and the company's acquisition of soldering and assembly services from Nistec431821822 Financial Information This section covers legal proceedings, noting Eltek is involved in employee lawsuits with aggregate claims exceeding $2.2 million, and the company's dividend policy - The company is involved in several employee lawsuits alleging personal injuries and seeking compensation, with specified claims totaling approximately $1.7 million and other claims unspecified442758759 - The company has never declared or paid cash dividends and intends to retain future earnings to finance operations and business expansion445 Additional Information This section details corporate governance, articles of association, and material tax considerations, including Israeli corporate tax and U.S. federal income tax consequences Memorandum and Articles of Association The company's purpose is to develop and sell circuits, with director powers and shareholder meeting quorums governed by Israeli Companies Law - The company's purpose is to develop, manufacture, and deal in printed, multi-layer, flexible, and integrated circuits457 - A shareholders meeting quorum requires at least two shareholders holding or representing at least one-third of the issued share capital's voting rights461 Taxation The company is subject to Israeli corporate tax, potentially at reduced rates, and U.S. holders face tax implications, with a notable risk of PFIC classification - The standard Israeli corporate tax rate for 2019 is 23%, but the company may be eligible for reduced rates (e.g., 16%) as a "Preferred Enterprise" under the Law for the Encouragement of Capital Investments467786795 - As of December 31, 2019, the company had approximately $24.1 million in tax operating loss carryforwards and $9.0 million in capital loss carryforwards in Israel, usable against future income without time limitation274799 - U.S. holders face the risk of the company being classified as a Passive Foreign Investment Company (PFIC), leading to adverse U.S. federal income tax consequences, including higher tax rates on gains and distributions133526 Quantitative and Qualitative Disclosures About Market Risks The company faces market risks including foreign currency, commodity price, and interest rate risks, with a 1% dollar devaluation against the NIS potentially decreasing operating income by $200,000 - The company is exposed to foreign currency risk from dollar, NIS, and Euro denominations; a hypothetical 1% U.S. dollar devaluation against the NIS would decrease operating income by approximately $200,000542 - The company faces commodity price risk, with 2019 raw material costs at $9.7 million; a 1% change in these costs would impact cost of revenues by approximately $325,000544 - Interest rate risk primarily relates to short-term credit lines and loans; a hypothetical 1% interest rate increase would raise annual financial expenses by approximately $65,000546 PART II Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of the report period end and December 31, 2018 - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of the fiscal year-end552 - Management assessed internal control over financial reporting using the COSO framework, concluding it was effective as of December 31, 2018556 Corporate Governance and Other Items This section details corporate governance, including an audit committee financial expert, a code of ethics, $126,320 in 2019 accountant fees, and adherence to Israeli home country practices - The Board of Directors has determined that Mr. Gad Dovev, an external director, qualifies as an audit committee financial expert558 Principal Accountant Fees (in thousands) | Service Type | 2019 (in thousands) | 2018 (in thousands) | 2017 (in thousands) | | :--- | :--- | :--- | :--- | | Audit Fees | $85.0 | $85.0 | $82.0 | | Audit Related Fees | $33.7 | $55.0 | - | | Tax Fees | - | - | $3.0 | | All other Fees | $7.6 | $6.7 | $13.5 | | Total | $126.3 | $146.7 | $98.5 | - As a foreign private issuer, the company follows Israeli home country practices instead of certain NASDAQ corporate governance rules regarding board independence, director nominations, and shareholder meeting quorums567568571 Financial Statements This section presents the company's audited consolidated financial statements for the fiscal year ended December 31, 2019, prepared in accordance with U.S. GAAP - The report includes audited consolidated financial statements for Eltek Ltd. and its subsidiaries as of December 31, 2019 and 2018, and for the three years ended December 31, 2019582 - The financial statements were prepared in conformity with U.S. generally accepted accounting principles (U.S. GAAP)582 - The company adopted the new lease accounting standard (ASU No. 2016-02, Topic 842) in 2019, recognizing right-of-use assets and lease liabilities on the balance sheet583