TAT Technologies Ltd. — FY2015 Form 20-F
Reporting period: Fiscal year ended December 31, 2015; audited U.S. GAAP financial statements. The filing is an annual report, not a quarterly report. Amounts below are in U.S. dollars unless noted.
Business context
TAT provides aerospace and defense OEM products and maintenance, repair and overhaul (MRO) services through four segments: heat-transfer OEM, heat-transfer services, aviation-component MRO (including landing gear and APUs), and jet-engine-component overhaul and coating. The fourth segment entered the consolidated results following the October 19, 2015 acquisition of Turbochrome.
Key financial metrics
| Metric | FY2015 | FY2014 |
|---|---|---|
| Revenue | $85.6 million | $80.7 million |
| Gross profit / gross margin | $13.7 million / 15.9% | $16.2 million / 20.1% |
| Operating income | $5.6 million | $3.8 million |
| Net income attributable to shareholders | $5.8 million | $1.4 million |
| Diluted earnings per share | $0.66 | $0.16 |
| Cash from operating activities | $0.7 million | $(1.5) million |
| Cash and cash equivalents | $18.7 million | $22.9 million |
| Short-term bank deposits | $8.1 million | $5.1 million |
| Working capital | $70.8 million | $70.8 million |
| Total assets / shareholders’ equity | $109.6 million / $91.4 million | $99.2 million / $85.5 million |
Revenue increased 6.0%. Services revenue rose to $54.3 million from $49.4 million, while product revenue was essentially flat at $31.3 million. Cost of revenue grew 11.5%, faster than sales. The filing reports $3.3 million of capital expenditures. Cash and short-term deposits totaled $26.8 million at year-end, versus $28.0 million a year earlier. The balance sheet lists no bank borrowings among current or long-term liabilities; liabilities were primarily payables, accruals and employee-related obligations.
Material changes versus prior year
- Gross margin fell to 15.9% from 20.1%, principally reflecting higher costs in aviation-component MRO and less favorable OEM product mix.
- Aviation-component MRO revenue rose 7.0% to $29.7 million, but its cost of revenue increased faster, and the segment reported a $2.7 million operating loss versus $0.6 million operating income in 2014.
- Heat-transfer services revenue increased 2.1% to $31.0 million; lower material costs helped improve segment operating income to $4.2 million from $3.5 million.
- OEM heat-transfer and aviation-component revenue declined 3.0% to $27.4 million; the segment reported an operating loss of $0.3 million, compared with a $0.1 million loss in 2014.
- Reported operating income includes a $4.8 million noncash bargain-purchase gain on Turbochrome. Excluding that gain, operating income was approximately $0.8 million; this is a simple calculation, not a company-reported non-GAAP measure.
- Net income also included $1.2 million of income associated mainly with selling part of TAT’s FAvS investment. TAT retained 4.9% of FAvS after the sale.
- Operating cash flow improved from an outflow in 2014 but remained modest despite reported net income; receivables and inventory increased during 2015.
Outlook, risks and unusual items
- Management said current cash and expected operating cash flow should cover requirements for at least 12 months. It expects to increase spending on R&D and selling and marketing; the filing provides no quantified earnings or revenue guidance.
- Management revised estimates on several long-term aviation-component MRO contracts. The assessment reduced 2015 revenue by approximately $2.1 million and net income by approximately $1.4 million; the accrued costs were not correspondingly reduced.
- Turbochrome was acquired for approximately $3.5 million, with contingent additional consideration of up to $2.0 million based on 2015 and 2016 revenue targets. The filing says the 2015 target was met and identifies a $0.5 million earn-out related to 2015; the year-end fair value of total contingent consideration was $0.64 million. Turbochrome contributed $1.9 million in revenue and a $0.16 million net loss from acquisition through year-end. The acquisition generated approximately $0.3 million of transaction costs and $0.3 million of termination expenses for its former CEO.
- Republic Airways, a Piedmont customer, filed for Chapter 11 bankruptcy in February 2016. Receivables were approximately $1.09 million at December 31, 2015 and approximately $0.31 million at April 11, 2016; TAT was assessing the impact on its maintenance support agreement.
- Five customers accounted for approximately 20.1% of 2015 revenue; no single customer accounted for 10% or more. Sales outside Israel were approximately 94% of revenue. The company cites customer concentration, international and government-contract exposure, certification requirements, supplier dependence, fixed-price contract risks, inventory forecasting, and political and currency risks.
- TAT estimated that a 1% U.S. dollar devaluation against the NIS would reduce operating income by approximately $220,000. The Russian heat-transfer joint venture, in which TAT holds 51%, was established in January 2016 and had no 2015 operating activity.
- The company reported effective disclosure controls and management-assessed internal control over financial reporting as effective; the external auditor did not attest to internal-control effectiveness. Prior-period statements were revised for expense and deferred-tax classifications; management said the errors did not materially misstate previously issued statements.
Most important facts to verify
- How much of FY2015 earnings is repeatable after excluding the Turbochrome bargain-purchase gain and FAvS-related income?
- Whether MRO contract estimates, margins and cost controls improve, especially in aviation-component MRO.
- Collection of remaining Republic Airways receivables and any effects on Piedmont’s customer agreement.
- The final Turbochrome purchase-price allocation, earn-out payments and post-acquisition operating performance.
- Whether the $184 million of estimated long-term-agreement backlog converts to orders; those agreements do not legally require customers to purchase.
- Future operating cash generation, receivables and inventory trends, and the company’s ability to fund planned spending while maintaining liquidity.
- Any developments in certifications, key-supplier availability, currency exposure, government demand or the Russian joint venture.