TAT Technologies Ltd. — FY2013 Form 20-F
Reporting period: Fiscal year ended December 31, 2013. This is an annual report, not a standalone Q4 filing; it includes unaudited quarterly results. Figures are in U.S. dollars unless otherwise stated.
Business context
TAT supplies products and services to commercial and military aerospace and defense markets. Its continuing businesses at year-end were heat-management OEM products (Gedera), heat-transfer services and products (Limco), and aviation-component MRO (Piedmont). Electric-motion-systems subsidiary Bental was classified as held for sale and discontinued operations. On February 18, 2014, TAT agreed to sell its 70% Bental interest for $5.0 million; closing was expected in the following weeks.
Key financial results
| Metric | FY2013 | FY2012 | Change / context |
|---|---|---|---|
| Revenue | $79.6 million | $77.9 million | Up 2.1% |
| Products / services revenue | $34.4 million / $45.2 million | $36.3 million / $41.7 million | Product revenue fell; services grew |
| Gross profit / margin | $18.7 million / 23.5% | $19.4 million / 24.9% | Margin declined; lower-margin product mix cited |
| Operating income / margin | $5.3 million / 6.7% | $5.4 million / 6.9% | Down 1.3% |
| Income from continuing operations | $5.25 million | Loss of $0.57 million as presented in audited statements | 2012 included a $3.3 million FAvS impairment |
| Net income attributable to TAT shareholders | $2.82 million; $0.32 per share | Loss of $1.71 million; loss of $0.19 per share | Includes discontinued operations |
| Operating cash flow | $7.20 million | $5.89 million | Up from prior year |
| Capital expenditures | $2.24 million | $2.15 million | Primarily equipment and facility improvements |
FY2013 Q4 revenue was $21.20 million, gross profit $4.79 million, operating income $1.32 million, and net loss attributable to shareholders $0.69 million. The filing cautions that quarterly results are not necessarily indicative of future performance.
Balance sheet, cash flow and liquidity
- At December 31, 2013, cash and cash equivalents were $19.8 million and short-term bank deposits were $10.1 million. These amounts exclude $2.8 million of cash classified within Bental assets held for sale.
- Total assets were $108.9 million; total liabilities $21.4 million; and total equity $87.5 million. Reported working capital was $73.8 million.
- Debt was approximately $0.91 million, comprising $0.88 million of current long-term-loan maturities and $0.03 million of short-term bank credit; no continuing long-term loan balance remained. The company reported compliance with its loan covenants.
- Cash from operations of $7.2 million, investing cash inflow of $0.07 million, and financing cash outflow of $2.94 million contributed to a $4.85 million increase in cash and cash equivalents. Investing cash flow included $2.3 million released from restricted deposits.
- Management said available cash and expected operating cash flow were sufficient for at least 12 months. Contractual obligations totaled $7.9 million, including $4.0 million of purchase commitments, $3.0 million of operating leases and $0.88 million of debt obligations.
Changes, outlook and material items
- Revenue growth was led by Heat Transfer Services and Products, up 7.9% to $29.9 million. Heat-management OEM revenue was nearly flat at $31.1 million; aviation-component MRO revenue was also nearly flat at $22.4 million.
- Cost of revenue rose 4.0% to $60.9 million, faster than sales. Management attributed the weaker gross margin to lower-margin product mix across the continuing segments.
- Backlog, excluding discontinued operations, was $43.3 million at year-end, versus $52.7 million a year earlier. TAT expected approximately $27.9 million to be delivered in 2014 and $15.4 million in 2015 and thereafter.
- Management cited increased airline traffic and OEM aircraft backlog as supportive trends, but also anticipated MRO demand pressure from airline deferrals and inventory destocking, fuel-cost pressure on airlines, and continued weakness and budget constraints in defense markets. No numerical revenue or earnings guidance was provided.
- The Bental sale resulted in a $3.319 million impairment based on the agreed selling price. The financial statements report a $2.429 million discontinued-operations loss attributable to TAT shareholders for 2013.
- TAT recognized $1.025 million of income from its approximately 29.36% FAvS investment, compared with a $3.756 million loss in 2012, which included the $3.3 million impairment. Piedmont’s guarantee related to FAvS debt was released in March 2013.
- A factoring-company lawsuit seeks approximately $1.62 million from TAT, Bental and others. The company disputed the claim, considered material payment not probable, and recorded no provision. TAT also identified risks from aerospace certification requirements, customer concentration, sole-source suppliers, fixed-price contracts, inventory valuation, foreign exchange, Israeli political and security conditions, and environmental and product-liability exposure.
- Five customers represented 22.2% of FY2013 revenue. U.S. and Israeli government sales together represented approximately 4.2% of revenue. The NIS appreciated against the U.S. dollar by about 7% in 2013; TAT estimated a 1% dollar depreciation against the NIS would reduce operating income by approximately $150,000.
- After year-end, the board declared a $2.0 million dividend, or $0.23 per share, payable May 7, 2014. TAT reported effective disclosure controls and internal control over financial reporting at December 31, 2013.
Important facts for investors to verify
- Confirm closing and final proceeds from the Bental sale, and reconcile the $3.319 million sale impairment with the reported discontinued-operations loss and related non-controlling-interest amounts.
- Review the audited financial statements and MD&A for differing presentations of FY2012 continuing-operations income: the statements report a $0.57 million loss, while management also discusses $2.7 million of income excluding the FAvS impairment.
- Assess whether the lower year-end backlog and margin compression persisted, particularly in light of the stated MRO destocking and defense-market weakness.
- Check subsequent cash, debt, covenant and dividend disclosures, including the treatment of Bental’s held-for-sale balances and any remaining commitments or liabilities after disposal.
- Evaluate the lawsuit, customer and supplier concentration, fixed-price contract exposure, and sensitivity to NIS movements and changes in aerospace or defense demand.