{"url_path":"/sec/eltk/10-k/2026/item-5","section_key":"item-5","section_title":"Item 5 OPERATING AND FINANCIAL REVIEW AND PROSPECTS","topic":"sec","document":{"doc_type":"20-F","doc_date":"2026-03-26","source_url":"https://www.sec.gov/Archives/edgar/data/1024672/0001178913-26-001768-index.html","accession_number":"0001178913-26-001768","cik":"0001024672","ticker":"ELTK","issuer_name":"ELTEK LTD","edgar_url":"https://www.sec.gov/Archives/edgar/data/1024672/0001178913-26-001768-index.html","primary_entity_key":"0001024672","primary_entity_name":"ELTEK LTD"},"word_count":3521,"has_tables":true,"body_markdown":"ITEM 5.\n\nOPERATING AND FINANCIAL REVIEW AND PROSPECTS\n\n \n\nA.          Operating Results\n\n \n\nThe following discussion of our results of\noperations should be read together with our consolidated financial statements and the related notes, which appear elsewhere in this annual\nreport. The following discussion contains forward-looking statements that reflect our current plans, estimates and beliefs and involve\nrisks and uncertainties.  Our actual results may differ materially from those discussed in the forward-looking statements. \nFactors that could cause or contribute to such differences include those discussed below and elsewhere in this annual report.\n\n \n\nOverview\n\n \n\nWe develop, manufacture, market and sell PCBs, including HDI multi-layered\nand flex-rigid boards for electronic devices. Our principal customers include manufacturers of medical equipment, defense and aerospace\nequipment, industrial equipment, and telecom and networking equipment, as well as contract electronic manufacturers. We have our principal\noffices and production facilities in Israel and a marketing subsidiary in the United States.\n\n \n\nOur consolidated financial statements appearing in this annual\nreport are prepared in dollars in accordance with U.S. GAAP.  Our functional currency is the NIS. The consolidated financial statements\nappearing in this annual report are translated into dollars at the representative rate of exchange under the current rate method. Under\nsuch method, the income statement and cash flows statement items for each year (or period) stated in this report are translated into dollars\nusing the average exchange rates in effect at each period presented, and assets and liabilities for each year (or period) are translated\nusing the exchange rate as of the balance sheet date (as published by the Bank of Israel), except for equity accounts, which are translated\nusing the rates in effect at the date of the transactions. All resulting exchange differences that do not affect our earnings are reported\nin the accumulated other comprehensive income as a separate component of shareholders’ equity.\n\n \n\nYear Ended December 31, 2025 Compared with\nYear Ended December 31, 2024\n\n \n\nRevenues.  Revenues\nincreased by 11% to $51.8 million in the year ended December 31, 2025, from $46.5 million in the year ended December 31, 2024. The increase\nin revenues is primarily attributable to increased demand for our products as well as the increased capacity achieved by the installation\nof new equipment.\n\n \n\nCost of Revenues. Cost\nof revenues increased by 21% to $43.8 million for the year ended December 31, 2025, from $36.2 million for the year ended December 31,\n2024. The increase in cost of revenues is attributable to the increase in revenues, increase in employee compensation costs, production\ninefficiencies resulting from the investment plan and the relocation of production lines to a new area within the plant, and the devaluation\nof the dollar against the NIS.\n\n \n\nGross Profit.  Gross\nprofit decreased by 23% to $8.0 million for the year ended December 31, 2025, from $10.3 million for the year ended December 31, 2024.\nGross profit as a percentage of revenues decreased to 15.4% for the year ended December 31, 2025, from 22.2% for the year ended December\n31, 2024. The decrease in gross profit margin is primarily attributable to increased employee compensation costs, production inefficiencies\nand the devaluation of the dollar against the NIS.\n\n \n\nSelling, General and Administrative\nExpenses. Selling, general and administrative expenses were $5.6 million in the year ended December 31, 2025, compared to $5.8\nmillion in the year ended December 31, 2024. The decrease in expenses is mainly attributable to a reduction in management fees and executive\nincentives.\n\n \n\nOperating Profit. We recorded\nan operating profit of $2.3 million in the year ended December 31, 2025, compared to an operating profit of $4.4 million in the year ended\nDecember 31, 2024. The decrease is primarily attributable to the decrease in gross profit.\n\n \n\nFinancial Expenses, Net.\nFinancial expenses, were $1.3 million in the year ended December 31, 2025 compared to $0.7 million of  financial income in the year\nended December 31, 2024. The financial expenses in 2025 was primarily attributable to the devaluation of the dollar against the NIS.\n\n \n\nIncome Tax Expense. Tax\nexpenses were $0.2 million in the year ended December 31, 2025 compared to $0.9 million in the year ended December 31, 2024, reflecting\nthe lower income in 2025.\n\n29\n\n \n\nYear Ended December 31, 2024 Compared with Year Ended December 31,\n2023\n\n \n\nPlease see Item 5A of our Form 20-F for the year ended December\n31, 2024, as amended, filed on April 8, 2025, for this comparison.\n\n \n\nImpact of Currency Fluctuations and Inflation\n\n \n\nOur revenues and expenses are denominated in the NIS, dollars and\nEuros. Due to the different proportions of currencies our revenues and expenses are denominated in, fluctuations in rates of exchange\nbetween NIS and other currencies may affect our operating results and financial condition. For example, the reported dollar amounts of\nour NIS denominated expenses are negatively impacted in case of a devaluation of the dollar and the Euro against the NIS.  The average\nexchange rate for the NIS against the dollar was approximately 6.7% lower in 2025 than 2024 and the average exchange rate of the NIS against\nthe Euro was 2.7% lower in 2025 than 2024 and in total, these changes had a negative impact on our operating results in 2025. The average\nexchange rate for the NIS against the dollar was approximately 0.73% higher in 2024 than 2023 and the average exchange rate of the NIS\nagainst the Euro was 0.4% higher in 2024 than 2023, and in total, these changes had a positive impact on our operating results in 2024.\n\n \n\nThe following table sets forth, for the periods indicated, devaluation\nor appreciation of the NIS against the most important currencies for our business, the Dollar and Euro, between December 31 each year\nand December 31 of the year before.\n\n \n\n \n \n\nYear Ended December 31,\n\n \n\n \n \n\n2025\n\n \n \n\n2024\n\n \n \n\n2023\n\n \n \n\n2022\n\n \n \n\n2021\n\n \n\nDollar\n\n \n \n\n(12.5)\n\n%\n\n \n \n\n0.6\n\n%\n\n \n \n\n3.0\n\n%\n\n \n \n\n13.17\n\n%\n\n \n \n\n(3.27)\n\n%\n\nEuro\n\n \n \n\n(1.3)\n\n%\n\n \n \n\n(5.4)\n\n%\n\n \n \n\n6.9\n\n%\n\n \n \n\n6.62\n\n%\n\n \n \n\n(10.76)\n\n%\n\nBecause exchange rates between the NIS and the dollar and Euro\nfluctuate continuously, exchange rate fluctuations, particularly larger periodic devaluations, may have an impact on our profitability\nand period-to-period comparisons of our results. We cannot assure you that in the future our results of operations may not be materially\nadversely affected by currency fluctuations.\n\n \n\nThe increase in inflation is due to many factors beyond\nour control, such as rising production and labor costs, changes in the Israeli and foreign governmental policy and regulations, and movements\nin exchange rates and interest rates. The Israeli national consumer price index, which is an indicator of the inflation, was 2.6%,\n3.2% and 3% in 2025, 2024 and 2023, respectively. Inflation rates may increase in the future. If inflation rates rise,\nthe costs of our business operations may become significantly higher than anticipated, and we may be unable to pass on such higher costs\nto consumers in amounts that are sufficient to cover those increasing operating costs. As a result, further inflationary pressures in\nIsrael, and worldwide, may have a material adverse effect on our business, financial condition and results of operations, as well as our\nliquidity and profitability.\n\n \n\nConditions in Israel\n\n \n\nWe are incorporated under the laws of, and our executive offices,\nprincipal production facilities and research and development facilities are located in, the State of Israel. See Item 3D. “Key Information\n– Risk Factors – Risks Relating to Our Operations in Israel” for a description of governmental, economic, fiscal, monetary\nor political polices or factors that have materially affected or could materially affect our operations.\n\n \n\nTrade Relations\n\n \n\nIsrael is a member of the United Nations, the International Monetary\nFund, the International Bank for Reconstruction and Development and the International Finance Corporation. Israel is a member of the World\nTrade Organization and is a signatory to the General Agreement on Tariffs and Trade. In addition, Israel has been granted preferences\nunder the Generalized System of Preferences from Australia and Canada.  These preferences allow Israel to export the products covered\nby such programs either duty-free or at reduced tariffs.  Israel is also a member of the Organization for Economic Co-operation and\nDevelopment, or the OECD, an international organization whose members are governments of mostly developed economies. The OECD’s\nmain goal is to promote policies that will improve the economic and social well-being of people around the world.\n\n30\n\n \n\nIsrael and the E.U. concluded a Free Trade Agreement in July 1975\nthat confers some advantages with respect to Israeli exports to most European countries and obligated Israel to lower its tariffs with\nrespect to imports from these countries over a number of years. In 1985, Israel and the United States entered into an agreement to establish\na Free Trade Area.  The Free Trade Area has eliminated all tariff and some non-tariff barriers on most trade between the two countries.\nOn January 1, 1993, an agreement between Israel and the European Free Trade Association, known as the EFTA, established a free-trade zone\nbetween Israel and the EFTA nations. In November 1995, Israel entered into a new agreement with the E.U., which includes a redefinition\nof rules of origin and other improvements, such as allowing Israel to become a member of the Research and Technology programs of the E.U.\nIn June 2014, Israel joined the E.U.’s Horizon 2020 Research and Innovation program. In recent years, Israel has established commercial\nand trade relations with a number of other nations, including Russia, China, India, and most recently, UAE, and other nations in Eastern\nEurope and Asia.\n\n \n\nEffective Corporate Tax Rate\n\n \n\nIsraeli companies are generally subject to income tax on their\ntaxable income under the Income Tax Ordinance, 5721-1961. The regular corporate tax rate in Israel has been 23% since 2018. However, our\nproduction facility qualifies as a “benefited enterprise” under the Law for the Encouragement of Capital Investments, 5719-1959,\nas amended. We may select a “preferred enterprise” status, which will allow us to be taxed at a rate of 16% on all of our\nincome. For additional information see Item 10E. “Additional Information – Taxation – Tax Benefits under the Law for\nthe Encouragement of Capital Investments, 5719-1959” and Note 18 to our consolidated financial statements.\n\n \n\nAs of December 31, 2025, we had $10.8 million in capital loss carry\nforwards, which can be offset against future capital gains in Israel without time limitation.  In Israel, we have received final\ntax assessments through the 1995 tax year. Tax assessments through the 2020 tax year are considered final due to the statute of limitations.\nOur U.S. subsidiary has not yet received any final tax assessments since its incorporation. The subsidiary is no longer subject to federal\nand state examinations for fiscal years before 2020.\n\n \n\nIn 2025, we recorded tax expenses of $0.2 million, mainly in respect\nof our operations in Israel. In 2024, we recorded tax expenses of $0.9 million, mainly in respect of our operations in Israel.\n\n \n\nB.          Liquidity and Capital Resources\n\n \n\nAs of December 31, 2025, we had $12.1 million in cash and cash\nequivalents and short-term bank deposits and working capital of $25.0 million compared to $17.2 million in cash and cash equivalents and\nworking capital of $25.8 million at December 31, 2024.\n\n \n\nHistorically, we have financed our operations through cash generated\nby operations, shareholder loans, long-term and short-term bank loans, borrowings under available credit facilities, proceeds from our\ninitial public offering in 1997 (approximately $5.8 million), proceeds of $4.2 million from an investment in our company by Nistec in\n2013, proceeds from rights offerings in March 2019 (approximately $2.5 million) and December 2020 (approximately $5.7 million) and proceeds\nfrom an underwritten public offering in February 2024 ($10 million, before deducting underwriting discounts and offering expenses ). We\nare using the net proceeds of the latest offering to strategically invest in the expansion of our production capabilities and for general\ncorporate purposes, including working capital.\n\n \n\nAs of December 31, 2025 we did not have any outstanding bank debt\nand had unused revolving lines of credit of approximately $2.7 million with Bank Hapoalim B.M. The credit line from Bank Hapoalim B.M\nis secured by specific pledge on certain assets, by a first priority charge on the rest of our now-owned or after-acquired assets and\nby a fixed pledge on goodwill (intangible assets) and insurance rights (rights to proceeds on insured assets in the event of damage).\nIn addition, the credit line prohibits us from selling or otherwise transferring any assets except in the ordinary course of business\nor from placing a lien on our assets without the bank’s consent. The credit facility may not remain available to us in the future.\n\n \n\nOur working capital requirements and cash flow provided by our\noperating and financing activities are likely to vary greatly from quarter to quarter, depending on the following factors: (i) the timing\nof orders and deliveries; (ii) net profit in the period; (iii) the purchase of new equipment; (iv) the build‑up of inventories;\n(v) the payment terms offered to our customers; and (vi) the payment terms offered by our suppliers.\n\n31\n\n \n\nCash Flows\n\n \n\nThe following table summarizes our cash flows for the periods presented:\n\n \n\nYear ended December 31,\n\n \n\n2025\n\n \n \n\n2024\n\n \n \n\n2023\n\n \n\n \n \n\n($ in thousands)\n\n \n\nNet cash provided by operating activities\n\n \n \n\n1,146\n\n \n \n \n\n4,540\n\n \n \n \n\n8,862\n\n \n\nNet cash used in investing activities\n\n \n \n\n(5,331\n\n)\n\n \n \n\n(15,871\n\n)\n\n \n \n\n(2,959\n\n)\n\nNet cash provided by (used in) financing activities\n\n \n \n\n(1,240\n\n)\n\n \n \n\n9,608\n\n \n \n \n\n(3,806\n\n)\n\nEffect of translation adjustments          \n\n \n \n\n331\n\n \n \n \n\n20\n\n \n \n \n\n(185\n\n)\n\nNet increase (decrease) in cash and cash equivalents\n\n \n \n\n(5,094\n\n)\n\n \n \n\n(1,703\n\n)\n\n \n \n\n1,912\n\n \n\nCash and cash equivalents at beginning of year\n\n \n \n\n7,575\n\n \n \n \n\n9,278\n\n \n \n \n\n7,366\n\n \n\nCash and cash equivalents at end of year\n\n \n \n\n2,481\n\n \n \n \n\n7,575\n\n \n \n \n\n9,278\n\n \n\nThe changes in assets and liabilities reflected in the cash flow\nstatement do not correspond exactly to the respective amounts in the balance sheets included with this annual report, mainly because our\nfunctional currency is the NIS and our reporting currency is the dollar.\n\n \n\nNet cash provided by operating activities was $1.1 million in the\nyear ended December 31, 2025. This amount was primarily attributable to our pre-tax income of $0.8 million, non-cash expenses in the amount\nof $4.0 million, less increases in working capital items of $3.7 million. Net cash provided by operating activities was $4.5 million in\nthe year ended December 31, 2024. This amount was primarily attributable to our pre-tax income of $5.1 million, depreciation of fixed\nassets of $1.5 million and a net increase in working capital items of $2.0 million. Net cash provided by operating activities was $8.9\nmillion in the year ended December 31, 2023. This amount was primarily attributable to our pre-tax income of $7.7 million, depreciation\nof fixed assets of $1.3 million and a net increase in working capital items of $0.5 million.\n\n \n\nNet cash used in investing activities was $5.4 million in the year\nended December 31, 2025, compared to $15.9 million in the year ended December 31, 2024, and $3.0 million in the year ended December 31,\n2023.  Net cash used in investing activities in each of the three years ended December 31, 2025 was primarily for the purchase of\nfixed assets for our production lines and leasehold improvements. In 2024 and 2023 it included also investment in short-term bank deposits\nin the amount of $6.4 million and $2.7 million respectively, and in 2023 a repayment from our insurance company in the amount of $2 million.\nIn 2025 it also included proceeds from short-term deposits in the amount of $0.5 million.\n\n \n\nNet cash used in financing activities was $1.2 million in the year\nended December 31, 2025, which was primarily attributable to dividend distribution. Net cash generated from financing activities was $9.6\nmillion in the year ended December 31, 2024, which was primarily attributable to the $9.3 million proceeds from a public offering \nof our ordinary shares. Net cash used in financing activities was $3.8 million in the year ended December 31, 2023, which was primarily\nattributable to the $3.3 repayment of long-term loans and dividend distribution of $1.3 million.\n\n \n\nCapital expenditures on a cash basis for the years ended December\n31, 2025, 2024 and 2023 were approximately $5.4 million, $9.5 million and $2.4 million, respectively. Our capital expenditures in such\nperiods mainly related to our investments in production and manufacturing equipment, and in leasehold improvements.\n\n \n\nWe expect to finance our 2026 operations from our cash flow from\noperations and cash balances. Although we anticipate that these capital resources will be adequate to satisfy our liquidity requirements\nthrough 2026, our liquidity could be negatively affected by the ongoing hostilities in our region, which could have an adverse effect\non the global markets and on our operations, shortage in raw materials, continued operational difficulties in our manufacturing and a\ndecrease in demand for our products, including the impact of changes in customer buying that may result from the general economic downturn,\nthe stability of the dollar/NIS exchange rate, our results of operations, our suppliers’ payment terms, our customers’ demand\nfor extending their payment terms and other factors detailed in Item 3D “Key Information - Risk Factors”.  If available\nliquidity is not sufficient to meet our operating as they come due, we would need to pursue alternative financing arrangements or reduce\nexpenditures to meet our cash requirements through 2026. Such additional financing may not be available to us or, if available, may not\nbe obtained on terms favorable to us, and there is no assurance that we would be able to reduce discretionary spending to provide the\nrequired liquidity.\n\n32\n\n \n\nC.          Research and Development, Patents and Licenses\n\n \n\nDuring December 2022, we received final approval from the Israel\nInnovation Authority (“IIA”) for a 40% participation in an approximately $800,000 one-year development program, which started\nin January 2023. The program was extended for an additional 20 months until September 2025. During 2025, the program was discontinued\ndue to a technological failure.\n\n \n\nD.          Trend Information\n\n \n\nOther than as disclosed elsewhere in this Annual Report, we are\nnot aware of any trends, uncertainties, demands, commitments or events for the year ended December 31, 2025 that are reasonably likely\nto have a material effect on our net revenues, income, profitability, liquidity or capital resources, or that would cause the disclosed\nfinancial information to be not necessarily indicative of future results of operations or financial condition.\n\nE.          Critical Accounting Estimates\n\n \n\nThe preparation of our consolidated financial statements and other\nfinancial information appearing in this Annual Report requires our management to make estimates and judgments that affect the reported\namounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We evaluate on an\non-going basis these estimates, mainly related to inventory, deferred tax assets and share based compensation expenses.\n\n \n\nWe base our estimates on our experience and on various assumptions\nthat we believe are reasonable under the circumstances. The results of our estimates form the basis for our management’s judgments\nabout the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these\nestimates under different assumptions or conditions, which could result in a decline in the trading price of our ordinary shares.\n\n \n\nIn addition to our results determined in accordance with GAAP,\nwe believe certain non-GAAP financial measures and key metrics may be useful in evaluating our operating performance. We sometimes in\nour filings present EBITDA, and intend to continue to present this non-GAAP financial measure and key performance metrics in future filings\nwith the SEC and other public statements. Any failure to accurately report and present our non-GAAP financial measures and key performance\nmetrics could cause investors to lose confidence in our reported financial and other information, which would likely have a negative effect\non the trading price of our ordinary shares.\n\n \n\nWe believe the following critical accounting policies affect our\nmore significant judgments and estimates used in the preparation of the financial information included in this annual report:\n\n \n\nInventory\n\n \n\nWe are required to state our inventories at the lower of cost or\nnet realizable value.  Cost is determined on the weighted average basis for raw materials.  For work in progress and finished\ngoods, the cost is determined based on calculation of accumulated actual direct and indirect costs. Net realizable value is the estimated\nselling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation.\n\n \n\nWe periodically evaluate the inventory quantities on hand relative\nto historical and projected sales volumes, current and historical selling prices and contractual obligations to maintain certain levels\nof parts. Based on these evaluations, inventory write-offs are provided to cover risks arising from slow-moving items, discontinued products,\nexcess inventories, market prices lower than cost and adjusted revenue forecasts. Any write-off is recognized in our consolidated statements\nof income as cost of revenues.\n\n \n\nThe process for evaluating these write-offs often requires us to\nmake subjective judgments and estimates concerning future sales potential at which such inventory will be sold in the normal course of\nbusiness. Incorrect estimates of future sales potential may cause actual results to differ from the estimates at the time such inventory\nis disposed of or sold. Given the significant assumptions required and the possibility that actual conditions will differ, we consider\nthe valuations to be a critical accounting estimate.\n\n \n\nRecently Issued Accounting Standards\n\n \n\nSee Note 2v to our 2025 consolidated financial statements.\n\n33"}