TAT Technologies Ltd. — FY2022 Form 20-F
Reporting period: Fiscal year ended December 31, 2022. This is an annual report, not a standalone fourth-quarter filing. Financial statements are prepared under U.S. GAAP and amounts below are U.S. dollars unless stated otherwise.
Business context
TAT provides OEM products and maintenance, repair and overhaul (MRO) services to commercial and military aerospace and ground-defense markets. Its four operating segments cover heat-transfer OEM products, heat-transfer MRO, aviation-component MRO (including APUs and landing gear), and jet-engine-component overhaul and coating. It reported 471 employees at year-end and serves more than 500 customers.
Financial results and liquidity
| Metric | FY2022 | FY2021 |
|---|---|---|
| Revenue | $84.6 million | $78.0 million |
| Gross profit / margin | $15.9 million / 18.8% | $11.3 million / 14.5% |
| Operating loss | $1.8 million | $4.0 million |
| Net loss | $1.6 million | $3.6 million |
| Basic and diluted loss per share | $0.175 | $0.40 |
| Operating cash flow | $(4.9) million | $(2.3) million |
| Capital expenditures / investing cash flow | $16.1 million / $(16.1) million | $15.6 million / $(15.6) million |
| Cash and cash equivalents, balance sheet | $7.7 million | $12.9 million |
| Total loans and bank credit lines | $27.4 million | $12.7 million |
Revenue rose 8.4%. Services revenue increased to $59.1 million from $52.1 million; product revenue was $25.5 million versus $25.9 million. Gross margin improved as cost of revenue fell to 81.2% of sales from 85.5%. The company nevertheless remained loss-making at the operating and net levels. The 2022 net loss reflects $1.7 million of restructuring expense and increased selling and administrative costs, among other items.
Operating cash use worsened despite the higher gross profit, notably reflecting increases in inventory ($5.1 million) and receivables ($2.7 million). Cash used in investing was largely related to the restructuring and capacity investments. The company raised $16.7 million in long-term loans during 2022 and repaid $1.1 million. Balance-sheet current assets were $75.2 million and current liabilities $29.0 million at year-end.
The cash figures differ by presentation: the balance sheet reports $7.7 million of cash and cash equivalents; the cash-flow statement reports $8.0 million of cash and restricted cash combined. Management’s liquidity discussion cites approximately $8.0 million.
Changes versus the prior comparable year
- Revenue increased by $6.6 million, with growth in heat-transfer MRO, aviation-component MRO, and engine-component overhaul and coating. OEM heat-transfer and aviation-accessory revenue fell 15.8%.
- Gross margin improved by 4.3 percentage points. Management attributed the improvement in part to pricing, lower fixed costs from restructuring, and a $1.2 million U.S. Employee Retention Credit (ERC). Government assistance recognized in cost of sales was lower in the aviation-component MRO segment than in 2021.
- Operating loss narrowed by $2.3 million, while net loss narrowed by $2.0 million. General and administrative expense rose 19%, primarily due to headcount and recruiting costs, travel, and audit fees.
- Operating cash use increased by $2.6 million, while year-end cash and cash equivalents declined by $5.1 million. Loans and credit lines increased materially to support investment and operations.
- The company completed its restructuring, moving activity from Gedera to Tulsa and Kiryat Gat. The transfer included heat-exchange-core production capability to Limco in Tulsa.
Outlook, risks, contingencies, and unusual items
- Management outlook: Management said cash balances and anticipated operating cash flows should be sufficient for at least 12 months from issuance of the financial statements. It expects inflationary cost pressures to continue in 2023. The filing provides no specific revenue or earnings guidance.
- Backlog: At year-end, backlog included $62.4 million of purchase orders and an estimated $341 million under long-term agreements without committed purchase quantities. The latter is not firm customer demand and may be adjusted, delayed, or cancelled.
- Restructuring and investment: FY2022 restructuring expense was $1.7 million, including a forfeited guarantee and other costs. The company invested heavily in machinery, facilities, and manufacturing capabilities; Oklahoma incentives included grants, with $1.5 million received in 2022. The restructuring plan was reported complete.
- Government assistance: TAT recorded $1.2 million of ERC benefits in 2022 and reported a $2.0 million grant receivable at year-end, received in January 2023. A subsequent-events note also reports receipt of $2.4 million of U.S. ERC grants in January 2023; investors should reconcile these disclosures and amounts.
- Debt and covenants: Year-end loans totaled $21.3 million, with a further $6.1 million drawn under bank credit lines. U.S. subsidiary equipment secures certain loans. The company reported compliance with its credit-line financial covenants at year-end.
- Key risks: Customer concentration (five customers represented 26.4% of revenue); supplier dependence and supply-chain delays; labor, materials, and inflation costs; fixed-price contracts; aviation regulation and export approvals; inventory obsolescence; currency exposure to the Israeli shekel; geopolitical risks affecting Israel and Russia; and competition and technology changes.
- Russia-related exposure: Limco ceased sales to Russian customers under sanctions. TAT’s Russian joint venture stopped purchasing heat-exchange cores from Limco in 2022 and materially limited its MRO activity.
- Legal matters: Limco is defending a customer lawsuit and intends to file a counterclaim; management believes any loss beyond accrued liabilities would not be material. TAT is litigating with TAT Industries over a forfeited $750,000 Gedera lease guarantee and a counterclaim; the company said it could not estimate the litigation’s impact.
- Audit and controls: The auditor issued an unqualified opinion on the financial statements and identified inventory obsolescence valuation as a critical audit matter. Management concluded internal control over financial reporting was effective; the auditor did not attest to that assessment.
Important facts for investors to verify
- Reconcile the $7.7 million balance-sheet cash figure with the $8.0 million cash-and-restricted-cash figure in the cash-flow statement and liquidity discussion.
- Review the composition, aging, and reserve assumptions for the $45.8 million inventory balance; inventory valuation was the auditor’s critical audit matter, and inventory write-down expense rose to $1.3 million.
- Assess whether operating cash flow can improve as the restructuring and capacity investments transition into utilization, and whether the $341 million uncommitted backlog converts into orders.
- Confirm the amount, timing, and accounting treatment of ERC grants, including the $2.0 million year-end receivable and the subsequent $2.4 million receipt described in the notes.
- Track debt maturities, interest expense, collateral, and covenant headroom alongside the company’s liquidity and investment needs.
- Monitor the two disclosed legal disputes, customer and supplier concentration, and the effects of inflation, foreign exchange, and geopolitical developments on margins and demand.