TAT Technologies Ltd. — FY 2017 Form 20-F
Reporting period: Fiscal year ended December 31, 2017. This is an annual report, not a standalone fourth-quarter earnings release; the filing does not provide separate Q4 results. Financial statements are audited and prepared under U.S. GAAP. Amounts below are in U.S. dollars unless stated otherwise.
Business context
TAT supplies aerospace and defense customers through four segments: heat-transfer and aviation-accessory OEM manufacturing (Gedera); heat-transfer MRO and OEM (Limco); aviation-component MRO, including APUs and landing gear (Piedmont); and jet-engine component overhaul and coating (Turbochrome). The company reported more than 500 customers and 634 employees.
Financial performance and liquidity
| Metric | FY 2017 | FY 2016 | Change / context |
|---|---|---|---|
| Revenue | $106.5m | $95.8m | Up 11.2%; management described growth as organic |
| Gross profit / margin | $20.4m / 19.2% | $19.0m / 19.9% | Profit up 7.4%; margin down about 0.7 percentage points |
| Operating income / margin | $5.3m / 5.0% | $4.1m / 4.3% | Operating income up 27.6% |
| Net income / diluted EPS | $2.4m / $0.27 | $0.06m / $0.01 | Improved, partly reflecting lower tax expense |
| Cash from operations | $2.5m | $5.5m | Down $3.0m; higher receivables and lower accrued expenses were significant cash uses |
| Capital expenditures | $3.5m | $5.7m | FY 2017 operating cash flow was below capex |
| Cash and short-term deposits | $18.0m | $22.4m | Cash and cash equivalents alone were $17.5m, down from $21.4m |
| Working capital | $67.0m | $66.7m | Current assets $84.7m; current liabilities $17.7m |
| Total assets / equity | $112.0m / $88.6m | $112.0m / $88.7m | Near-flat year over year |
Total liabilities were $23.4m, including $5.7m of non-current liabilities, principally employee-benefit and deferred-tax liabilities. The balance sheet lists no borrowings; the filing does not separately present a conventional net-debt measure. The company paid a $3.0m dividend, or $0.34 per share, in 2017. Cash and cash equivalents declined by $3.9m during the year.
Material changes versus FY 2016
- Revenue increased in all four segments: Gedera OEM to $31.2m (+10.6%); Limco heat-transfer MRO/OEM to $34.8m (+7.3%); Piedmont aviation-component MRO to $33.0m (+4.4%); and Turbochrome to $11.0m (+19.5%).
- Gross margin narrowed as consolidated cost of revenue rose to 80.8% of revenue from 80.1%. Product mix helped Gedera and Turbochrome, while mix pressured the Limco and Piedmont segments.
- Selling and marketing expense rose 28.3% to $5.0m; R&D declined 35.9% to $0.7m; G&A declined 6.1% to $9.4m.
- Income-tax expense fell to $2.3m from $3.9m. FY 2016 included a $2.7m deferred tax liability associated with actual and potential distributions of earnings from U.S. subsidiaries. FY 2017 included a $0.4m deferred-tax-asset reduction related to the U.S. Tax Cuts and Jobs Act.
- Cash generation weakened despite higher earnings: operating cash flow fell to $2.5m from $5.5m, with trade receivables increasing by $4.5m as a use of cash.
Outlook, risks, and unusual items
- Management stated that existing cash and expected operating cash flow should cover requirements for at least 12 months. It anticipated further investment in R&D and sales and marketing, but provided no quantified revenue or earnings guidance.
- Reported backlog at year-end comprised $32.5m of purchase orders and $222m of estimated potential sales under long-term agreements. The latter is not legally binding customer demand, and backlog may be delayed, reduced, or cancelled.
- Five customers represented approximately 19.7% of 2017 revenue. Government sales were about 5.4% of revenue; U.S. government sales alone were 4.7%. The business also faces dependence on certain sole-source suppliers, fixed-price contract cost risk, inventory-obsolescence risk, and certification and export-approval requirements.
- About 91% of sales were attributed to operations out of Israel. The company cited exposure to regional instability, export controls, and foreign-exchange movements. It estimated that a 1% U.S. dollar devaluation against the NIS would reduce operating income by approximately $213,000; it hedges part of its currency exposure.
- Two Kansas federal cases filed in 2016 and 2017 allege property damage from failed precoolers, with aggregate claimed damages of approximately $0.9m. TAT intends to defend the cases and expects insurance to be sufficient; management did not expect a significant effect on financial position or profitability.
- The company reported no material off-balance-sheet arrangements. Contractual obligations included $9.0m of operating leases and $4.0m of purchase commitments; $5.5m was due within one year. Management reported no material environmental remediation spending expected for FY 2018.
- The U.S. tax-law impact was provisional; the company had not yet estimated potential GILTI/FDII effects or selected an accounting policy for those provisions. Management assessed disclosure controls and internal control over financial reporting as effective, but the auditor did not attest to internal-control effectiveness.
Key facts for investors to verify
- Whether receivables growth and weaker operating cash flow reverse, and whether cash generation can sustainably fund capital spending and dividends.
- Backlog conversion, especially the $222m estimated under nonbinding framework agreements, and the durability of the reported organic growth.
- Segment-level profitability: Piedmont reported a FY 2017 operating loss of $0.3m despite higher segment revenue.
- Customer and supplier concentration, fixed-price contract performance, and inventory valuation; inventory was $38.6m and the company recorded $1.0m of slow-inventory expense in 2017.
- Resolution and insurance coverage for the precooler litigation, and any material updates to U.S. tax-law estimates.
- Leadership transition: the CFO planned to leave by May 2018, and the company had begun a replacement search.