Eltek ASA - Report 2nd quarter 2007

Thursday, 16. August 2007 08:33



The acquisition by Eltek Energy AS of Valere Power Inc. was finalized
and consolidated with effect from 1 June, 2007. The merger between
Eltek and Nera in 2006 was reflected in the Balance Sheet Statement
at 30 September, 2006, and included in the consolidated Income
Statement from 1 October, 2006. The figures reported below describe
the second quarter 2007 and the second quarter 2006 (in brackets).
Explicit notice has been made where the reference is to pro forma
figures for the second quarter 2006, 2006 or the first quarter 2007.
Pro forma figures are prepared under the assumption that the current
activities of Nera and Valere Power were consolidated as of 1
January, 2006.


(NOK million) Reported Pro forma

2Q '07 2Q 1H 1H 2006 2Q 2Q 2006
'06 '07 '06 '07 '06
Order entry 1,127 657 2,296 1,263 2,941 1,263 1,370 5,146

Revenue 1,124 632 2,112 1,231 3,121 1,206 1,230 5,048
Gross Profit 266 160 490 773 286 1,174
318 283
Gross margin 23.6 25.4 23.2 24.8 23.7
(%) 25.8 23.0 23.3

EBITDA before
non-recurring 74 65 114 148 310 72 65 309
costs

Depreciation & -47 -12 -81 -71 -71 -66 -273
amortization -21
EBIT before
non-recurring 27 53 33 127 239 1 -2 37
costs
Non-recurring - - -50
costs -5 -
EBIT 27 53 28 189
127
Pre-tax profit 15 47 157
5 121
Net profit -9 33 -29 107
after tax 87

EBIT before
amortization of
PPA related
to the Valere
Power
acquisition 38 39


Note: Pro forma calculations exclude non-recurring costs in all
periods, and are prepared under the assumption that the current
activities of Nera and Valere Power Inc. were consolidated as of 1
January, 2006. Reported EBIT includes amortization of PPA with NOK 21
million in 2Q 2007 and NOK 10 million in 1Q 2007.


Structural developments
Eltek in April announced the acquisition of Valere Power Inc. by
Eltek Energy, which changes name to Eltek Valere. The new company
becomes a leading player in the global telecom power market, with
strong market positions in all main regions. The acquisition will in
particular strengthen the market position in the globally largest
market - the US- and in the globally fastest growing market - India.

The acquisition of Valere Power is consolidated in the Income
Statement from 1 June, 2007, and the acquisition is fully recognized
in the Balance Sheet as at 30 June, 2007.

The payment for the acquisition was a combination of cash and shares
in Eltek Valere and in Eltek Valere Holding which is a US subsidiary
of Eltek Valere. Following the acquisition, Eltek ASA owns 90.9
percent of Eltek Valere, which in turn owns 90.1 percent of Eltek
Valere Holding.

Headed by former Valere Power CEO Andy Marsh, Eltek Valere has
already initiated an organizational consolidation. In the Americas,
the operations of Eltek Energy LLC are being integrated into Valere
Power, which is headquartered in Richardson, Texas. Outside of the
US, the operations of Valere Power are being integrated into the
existing organization structures of Eltek Energy.

The integration of the two organizations is a key element of the cost
synergy program, and Eltek Valere expects to charge the Income
Statement for the third quarter 2007 with restructuring costs of
approximately USD 7 million to cover office lease, severance pay and
stay-on bonuses, mainly related to the closure of the Crystal Lake,
Chicago facilities.

The acquisition of Valere Power is expected to generate annual cost
synergies of approximately USD 15 million and be EPS accretive for
Eltek ASA shareholders from 2008 (before amortization of Purchase
Price Allocation, PPA).

Separately, Nera Networks finalized the relocation of production from
Bergen to Slovakia during the second quarter. This was one of the key
elements in the restructuring plan announced in 2006. Most of the
costs related with this restructuring were charged to the Income
Statement in the fourth quarter 2006, although the Income Statement
for the first and second quarters of 2007 have also been negatively
affected by some additional non-recurring operational costs related
to the relocation of production.

Key financials - quarterly

Reported Group figures
The Eltek Group reported revenue of NOK 1,124 million in the second
quarter 2007, compared to NOK 632 million in the second quarter 2006
and NOK 988 million in the first quarter 2007.

Gross profit was NOK 266 million (160), gross margin was 23.6 percent
(25.4), and the reported operating costs were NOK 239 million in the
quarter (107). Reported EBITDA was NOK 74 million (65) and reported
EBIT NOK 27 million (53).

This compares to an EBITDA of NOK 35 million and an EBIT of NOK 1
million in the previous quarter, including restructuring costs of NOK
5 million.

Purchase Price Allocation (PPA) related to the acquisition of Valere
Power has not been performed and amortization of PPA is preliminary
estimated to approximately NOK 11 million for the second quarter
(June 2007). Total amortization of PPA amounts to NOK 21 million in
the second quarter 2007 compared with NOK 10 million in the previous
quarter. Excluding the estimated amortization of PPA related to the
acquisition of Valere Power of NOK 11 million, EBIT for the second
quarter was NOK 38 million.

Net financial items amounted to NOK -11 million (-6) in the second
quarter, which was on par with the previous quarter..

Reported profit before tax was NOK 15.4 million in the second quarter
(46.7), which compares to a loss before tax of NOK 10.2 million in
the first quarter 2007.

The reported figures for the second quarter include Valere Power with
effect from 1 June, 2007.

Pro forma Group figures
On a pro forma basis - including Valere Power for the full quarter,
revenue amounted to NOK 1,206 million in the second quarter 2007. Pro
forma EBITDA was NOK 72 million and pro forma EBIT NOK 1 million,
before non-recurring costs. This includes estimated amortization of
excess values (Purchase Price Allocation, PPA) of NOK 44 million.

Non-recurring costs of NOK 81 million are described in more detail
under Eltek Valere below and are fully accounted for in the Balance
Sheet statement for the Eltek Group per 30 June.

Including non-recurring items, the pro forma EBIT was NOK -80
million.

Segment information
The Eltek Group reports on three business areas; Eltek Valere, Nera
Networks and NeraTel, as well as on the reporting area Corporate,
which comprises the administrative functions on Group level.

Eltek Valere comprises the operational activities in former Eltek
Energy and Valere Power Inc., and is consolidated on a 100 percent
basis. In ownership terms, Eltek ASA owns 90.9 of Eltek Valere AS,
which in turn owns 90.1 percent of Eltek Energy Holding Inc. The
latter comprises the combined operations of Valere Power Inc. and
Eltek Energy LLC in the Americas. The remainder of Eltek Valere AS
and Eltek Energy Holding Inc is owned by the former shareholders of
Valere Power Inc.

Nera Networks is a pure transmission business, whereas Nera
Telecommunications (NeraTel) comprises transmission activities as
well as infocomm/network activities and a satellite communications
operation. Both areas are consolidated on a 100 percent basis.
However, NeraTel is 50.1 percent owned by Eltek ASA and separately
listed on the Singapore Stock Exchange.


Eltek Valere

+-------------------------------------------------------------------+
| | 2Q '07 | 2Q '06 | 2006 | 1Q '07 |
|--------------------------------+--------+--------+-------+--------|
| Order entry | 739 | 657 | 2,589 | 651 |
|--------------------------------+--------+--------+-------+--------|
| | | | | |
|--------------------------------+--------+--------+-------+--------|
| Revenue | 727 | 632 | 2,585 | 597 |
|--------------------------------+--------+--------+-------+--------|
| Gross profit | 181 | 160 | 661 | 146 |
|--------------------------------+--------+--------+-------+--------|
| Gross margin | 25.0 | 25.4 | 25.6 | 24.4 |
|--------------------------------+--------+--------+-------+--------|
| Divestment gain | - | - | 22 | - |
|--------------------------------+--------+--------+-------+--------|
| EBITDA bef. non-recurring | 70 | 72 | 326 | 51 |
| costs | | | | |
|--------------------------------+--------+--------+-------+--------|
| Depr. and amort. | -28 | -12 | -52 | -16 |
|--------------------------------+--------+--------+-------+--------|
| EBIT bef. restruct. | 42 | 61 | 274 | 35 |
|--------------------------------+--------+--------+-------+--------|
| Restructuring cost | - | - | - | -5 |
|--------------------------------+--------+--------+-------+--------|
| EBIT | 42 | 61 | 274 | 30 |
+-------------------------------------------------------------------+

Note: Valere Power included with effect from 1 June, 2007. EBIT for
2Q 2007 includes amortization of PPA with NOK 11 million.

Revenue
Eltek Valere reported revenue of NOK 727 million in the second
quarter 2007 (632), an increase of 22 percent from NOK 597 million in
the previous quarter.

Revenue in Valere Power was skewed towards the end of the quarter and
amounted to NOK 76 million from 1 June, 2007. Adjusted for Valere
Power, revenue increased by 3 percent year-on-year and by 9 percent
quarter on quarter.

EMEA accounted for 46 percent of reported revenue, whereas Asia
Pacific and the Americas accounted for 33 percent and 21 percent,
respectively.

Revenue in the Americas was NOK 151 million, which was an increase of
24 percent from the second quarter 2006 and 29 percent above the
previous quarter. The consolidation of Valere Power's June revenue
more than compensated for declining revenue for 'old' Eltek Energy.

US revenue was negatively impacted by delayed spending and a weaker
market position in the wireless segment. However, revenue development
is stronger in the wireline broadband market, where Valere Power
holds a strong position.

Revenue in Asia Pacific was NOK 243 million, which was an increase of
41 percent from the second quarter last year and 45 percent above the
previous quarter. The growth is mainly driven by India, which is the
fastest growing market globally. Revenue in India was further
supported by the acquisition of Valere Power, and overall revenue for
Eltek Valere in India was in excess of NOK 120 million in the
quarter.

Revenue in EMEA was NOK 332 million, which was a decline of 2 percent
from the second quarter 2006 but an increase of 7 percent from the
first quarter 2007.

Africa contributed positively to growth in the quarter, whereas
revenue in both Europe and Middle East was virtually unchanged from
the previous quarter. The acquisition of Valere Power has very
limited effect on the EMEA operations.

Gross margin
The reported second quarter gross margin of 25.0 percent (25.4)
compares with 24.4 percent in the previous quarter.

The quarter-on-quarter improvement is primarily a reflection of
higher volumes, which reduced fixed overhead costs in relative terms.

The consolidation of Valere Power for June had a moderate adverse
effect on the reported gross margin in the second quarter.

Operating costs
Eltek Valere had operating costs of NOK 128 million (107) (excluding
amortization of PPA), which compares with NOK 111 million (excluding
restructuring cost) for Eltek Energy in the first quarter 2007. The
increase from last year can primarily be explained by acquisitions
and the establishment of new offices over the past year. Operating
costs attributable to Valere Power amounted to NOK 12 million on a
reported basis.

Operating profit
Eltek Valere achieved EBITDA of NOK 70 million (72), and EBIT of NOK
42 million (61) in the second quarter. This compares with an EBITDA
of NOK 46 million and an EBIT of NOK 30 million in the previous
quarter, including restructuring charges of 5 million.

The second quarter EBIT includes preliminary estimated amortization
of excess value (Purchase Price Allocation, PPA) of NOK 11 million
related to the Valere Power acquisition.

Order entry and market development
Eltek Valere recorded new orders of NOK 739 million in the second
quarter 2007 (657), which compares to NOK 657 million in the previous
quarter. Valere Power accounted for NOK 39 million of the order
entries.

Compared to the previous quarter, order entry increased in all areas,
although the consolidation of Valere Power in particular supported
order entry in the US and India.

The order backlog stood at NOK 597 million at the end of the second
quarter (444), up from NOK 476 million at the end of the first
quarter 2007. NOK 463 million of the order backlog was for delivery
within 90 days (391).

Eltek Valere - pro forma figures
Pro forma revenue for Eltek Valere -including Valere Power for the
whole period- was NOK 809 million for the second quarter 2007.

Pro forma order entry was NOK 875 million in the second quarter 2007.

Adjusted for non-recurring items, pro forma gross margin was 24.9
percent in the second quarter 2007, and pro forma operating costs NOK
185 million. Pro forma EBITDA was NOK 68 million and pro forma EBIT
NOK 16 million in the second quarter 2007.

The pro forma EBIT includes preliminary estimated amortization of
excess value (Purchase Price Allocation, PPA) of NOK 34 million.

Eltek Valere has charged the pro forma Income Statement for the
second quarter 2007 with non-recurring items of NOK 81 million. NOK
39 million of the charges refer to payments to Valere Power
employees, related to the acquisition. These payments were reflected
in estimated net debt of Valere Power at the time of the acquisition.
The remaining charges of NOK 42 million refer to revaluation of
assets and liabilities concerning inventories, account receivables,
other assets and warranty provisions in Valere Power.

The charges are fully reflected in the opening balance statement for
Eltek Valere and the Eltek Group as of 30 June, 2007.

Restructuring plans
As a part of the integration of Eltek Energy and Valere Power, Eltek
Energy's US operations will be moved from the current premises in
Chicago to Valere Power's facilities in Richardson, Texas, which will
become the headquarters of Eltek Valere.

Outside of the Americas, Valere Power's existing operations will be
integrated into Eltek Energy's existing organization.

The restructuring plan requires cash expenses and provisions related
to the moving process, termination of office leases in Crystal Lake,
Chicago, and severance pay and stay-on bonuses.

The restructuring costs are expected to amount to approximately USD 7
million, which will be charged to the Income Statement for the third
quarter 2007.

The integration of the two organizations is a key element in the
synergy program which is expected to yield cost reductions of
approximately USD 15 million annually.

Nera Networks

+-----------------------------------------------------+
| | 2Q '07 | 2Q '06 | 2006 | 1Q '07 |
|------------------+--------+--------+-------+--------|
| Order entry | 319 | 447 | 1,529 | 288 |
|------------------+--------+--------+-------+--------|
| | | | | |
|------------------+--------+--------+-------+--------|
| Revenue | 310 | 356 | 1,378 | 312 |
|------------------+--------+--------+-------+--------|
| Gross profit | 45 | 59 | 233 | 43 |
|------------------+--------+--------+-------+--------|
| Gross margin | 14.3 | 16.6 | 16.9 | 13.8 |
|------------------+--------+--------+-------+--------|
| EBITDA | -4 | -11 | -43 | -17 |
|------------------+--------+--------+-------+--------|
| Depr. and amort. | -12 | -12 | -48 | -12 |
|------------------+--------+--------+-------+--------|
| EBIT | -16 | -23 | -91 | -28 |
+-----------------------------------------------------+

Note: Figures for 2006 are pro forma, excluding non-recurring costs.

Revenue
Nera Networks reported revenue of NOK 310 million in the second
quarter of 2007 (356), which were marginally lower than in the
previous quarter.
EMEA accounted for NOK 133 million, or 43 percent of revenue, whereas
revenue in Americas was NOK 104 million, or 34 percent. Asia Pacific
accounted for the remaining NOK 73 million, or 24 percent.

Compared to the previous quarter, these figures reflect unchanged
revenue of NOK 133 million in EMEA, and a revenue growth of 11
percent to NOK 104 million in the Americas. Revenue in Asia Pacific
declined by 13 percent to NOK 73 million compared to the first
quarter 2007.

The move of production from Norway to Slovakia was finalized late in
June, when the last of the production lines for the Evolution radio
was transferred.

Production of Evolution radios increased by 61 percent compared to
the previous quarter, which was somewhat less than expected. This
primarily reflects technical difficulties reducing deliveries from a
core components supplier. Capacity utilization is expected to
increase in Slovakia as the production stability is expected to
improve further in the coming quarters.

Gross margin
Gross margin in Nera Networks was 14.3 percent in the second first
quarter 2007 (16.6), compared to 13.8 percent in the previous
quarter.

As in the first quarter of the year, overall manufacturing overhead
cost remained high in relative terms, due to the low revenue level.

Cost of goods sold was negatively affected by costs of NOK 7 million
relating to the move of production from Bergen to Slovakia, which was
in line with previous communication. Similar costs amounted to NOK 9
million in the previous quarter. The costs primarily reflect training
of Slovakian personnel and ramp-up of production in Slovakia.

Improvement in cost of goods sold is a key element in the
restructuring program for the transmission activities, and the gross
margin is expected to benefit from increased volumes going forward.

Operating costs
Nera Networks had operating costs of NOK 60 million in the second
quarter 2007, compared to NOK 82 million on a pro forma level in the
second quarter 2006 and NOK 71 million in the previous quarter.

This declining trend in operating costs is in tune with the expected
effect of the restructuring program.

Operating profit
Nera Networks reported an EBITDA-loss of NOK 4 million (-11), and an
EBIT loss of NOK -16 million (-23) in the second quarter 2007. The
historical figures are pro forma.

In the first quarter 2007 Nera Networks reported EBITDA of NOK -17
million and an EBIT of NOK -28 million.

Order entry - market development
Nera Networks recorded new orders of NOK 319 million in the second
quarter 2007 (447), which was an increase of 11 percent from NOK 288
million in the previous quarter.

The higher quarter-on-quarter order entry is a reflection of
gradually improving production capabilities during the second
quarter. The market conditions are generally healthy, and Nera
Networks should increasingly benefit from this as the production
capacity is expected to improve further going forward.

The Americas accounted for roughly 40 percent of new orders, with
Asia Pacific and EMEA each at roughly 30 percent.

The order backlog stood at NOK 508 million at the end of the second
quarter 2007 (595), up from NOK 499 million at the end of the first
quarter. NOK 221 million was for delivery within 90 days.

NeraTel

+----------------------------------------------------+
| | 2Q '07 | 2Q '06 | 2006 | 1Q '07 |
|------------------+--------+--------+------+--------|
| Order entry | 114 | 205 | 667 | 292 |
|------------------+--------+--------+------+--------|
| | | | | |
|------------------+--------+--------+------+--------|
| Revenue | 163 | 138 | 629 | 157 |
|------------------+--------+--------+------+--------|
| Gross profit | 40 | 29 | 135 | 36 |
|------------------+--------+--------+------+--------|
| Gross margin | 24.4 | 21.1 | 21.5 | 22.9 |
|------------------+--------+--------+------+--------|
| EBITDA | 17 | 10 | 52 | 14 |
|------------------+--------+--------+------+--------|
| Depr. and amort. | -6 | -7 | -27 | -6 |
|------------------+--------+--------+------+--------|
| EBIT | 11 | 3 | 24 | 7 |
+----------------------------------------------------+

Note: Figures for 2006 are pro forma. EBIT includes quarterly
amortization of PPA with NOK 5 million.

NeraTel reported revenue of NOK 163 million in the second quarter
2007 (138), which was an increase of 4 percent from NOK 157 million
in the previous quarter.

The reported gross margin of 24.4 percent (21.1) also compares
favourably with the 22.9 percent reported for the first quarter 2007.

EBITDA was NOK 17 million (10) in the second quarter 2007, and EBIT
NOK 11 million (3). Historical figures are pro forma. This compares
with EBITDA of NOK 14 million and EBIT of NOK 6 million in the
previous quarter.

Order entry was NOK 114 million (205), compared to a high level of
NOK 292 million in the previous quarter.

Order backlog declined to NOK 345 million from NOK 429 million at the
end of the previous quarter. The backlog has been adjusted for
cancellation of an order of NOK 40 million received in the fourth
quarter 2006. The order was dependent on a joint venture in which
NeraTel decided not to participate.

NeraTel is a separately listed company on the Singapore Stock
Exchange. The company presented its interim results for the second
quarter 2007 on Thursday 2 August. For further information, please
see www.neratel.com.sg.

Corporate
Corporate costs amounted to NOK 10 million in the second quarter
2007, compared to NOK 8 million in both the second quarter 2006 (pro
forma) and in the first quarter 2007.

Balance sheet
The changes in the consolidated Balance Sheet from 30 June 2006 (in
brackets) primarily relate to the merger of former Nera into Eltek
and the acquisition of Valere Power.

Total assets were NOK 5,601 million (2,242) at 30 June 2007, compared
with NOK 4,786 million at the end of 2006.

Equity was NOK 2,554 million (976) at 30 June, corresponding to an
equity ratio of 45.6 percent (43.5).

Eltek had a gross cash position of NOK 397 million (327) at the end
of the second quarter, and a net debt position of NOK 613 million. At
the end of the previous quarter the company had a net cash position
of NOK 27 million, and the increased debt primarily reflects the
financing of the acquisition of Valere Power.

Cash Flow Statement
Cash flow from operation was NOK 21 million in the second quarter
2007 (-66). Net cash flow from investment activities was NOK -598
million (-329), which includes acquisitions of NOK 499 million,
capitalized R&D of NOK 44 million and other investments of NOK 55
million. Net cash flow from financing was NOK 371 million (300).
Total net cash flow was NOK
-206 million (-94) in the second quarter 2007.

Outlook
The Eltek Group continues to expand with the acquisition of Valere
Power, which increases the company's scale and adds further growth
opportunities in the telecom power market.

Based on order entry and projects in the pipeline, Eltek Valere
expects to continue growing revenue in the third quarter.

Eltek Valere is expected to incur restructuring costs of
approximately USD 7 million in the third quarter, related to the
integration of Eltek Energy and Valere Power. This is a key element
in the synergy program which is expected to generate annual cost
savings of approximately USD 15 million.

Nera Networks has completed the transfer of production from Bergen to
Slovakia and will remain focused on improving delivery capabilities.
With a lower cost base, Nera Networks should increasingly benefit
from an overall healthy transmission market development in the second
half of the year. The overriding target of regaining profitability
during 2007 remains intact.

Drammen, 15 August 2007
The Board of Directors, Eltek ASA



--- End of Message ---

Eltek ASA
PO Box 2340 Strømsø Drammen Norway

ISIN: NO0003109407;
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