TAT Technologies Ltd. — FY2019 Form 20-F Summary
Reporting period: Fiscal year ended December 31, 2019; this is an annual report, not a standalone Q4 filing. Financial statements are audited, prepared under U.S. GAAP, and presented in U.S. dollars. The filing was signed March 19, 2020.
Business context
TAT supplies products and maintenance, repair and overhaul (MRO) services to commercial and military aerospace and defense customers. Its four segments are heat-transfer and aviation-accessory OEM (Gedera), heat-transfer MRO and OEM (Limco), aviation-component MRO (Piedmont), and jet-engine-component overhaul and coating (Turbochrome). It reported 599 employees and more than 500 customers worldwide.
Financial performance and position
| Metric (USD millions, except per-share data and percentages) | FY2019 / Dec. 31, 2019 | FY2018 / Dec. 31, 2018 |
|---|---|---|
| Revenue | 102.0 | 93.2 |
| Gross profit / gross margin | 15.6 / 15.3% | 8.4 / 9.0% |
| Operating income (loss) / margin | 2.0 / 1.9% | (5.6) / (6.1)% |
| Net income (loss) | 0.8 | (4.4) |
| Basic and diluted EPS | $0.10 | $(0.50) |
| Cash from operating activities | 3.4 | 2.1 |
| Capital expenditures | 3.8 | 4.3 |
| Cash and cash equivalents | 16.0 | 16.0 |
| Working capital | 62.9 | 62.8 |
| Total assets / shareholders’ equity | 114.7 / 85.4 | 103.3 / 84.3 |
Revenue increased 9.5%. Aviation-component MRO grew 19.1% to $38.7 million; heat-transfer MRO/OEM rose 9.6% to $34.4 million; and OEM heat-transfer and aviation components rose 7.6% to $26.6 million. Jet-engine-component revenue declined 10.3% to $8.6 million, mainly due to lower demand.
Cost of revenue fell to 84.7% of revenue from 91.0%, lifting gross margin. Management attributed improvement in several segments to higher sales, lower indirect or material costs, and efficiency measures begun in late 2018. Segment operating income was $2.1 million for heat-transfer MRO/OEM and $1.6 million for aviation-component MRO; OEM and jet-engine overhaul/coating recorded operating losses of $1.0 million each.
Operating cash flow improved to $3.4 million. It was supported by higher payables and lower other current assets, but partly absorbed by a $5.4 million inventory increase and a $1.9 million increase in receivables. Investing cash use was $3.4 million, principally property and equipment purchases; financing cash flow was nil. Cash rose by $9,000 to $16.0 million.
The balance sheet reported no bank borrowings. Lease liabilities were $7.0 million ($1.3 million current and $5.7 million non-current), following adoption of ASC 842; adoption added $7.3 million of right-of-use assets and corresponding liabilities. Total liabilities were $29.3 million. The filing says cash and expected operating cash flow should cover requirements for at least 12 months from the financial-statement issuance date.
Material changes and unusual items
- FY2019 returned to profitability after the FY2018 operating and net losses; revenue, gross profit, operating cash flow, and working capital increased.
- Financial expense, net, rose to $0.5 million from $0.1 million; management attributed the increase mainly to adoption of the new lease accounting standard.
- ASC 842 brought operating lease assets and liabilities onto the balance sheet. FY2018 comparatives were not restated.
- No dividend was paid in 2019 or 2018; a $3.0 million dividend was paid in 2017.
Outlook, risks and contingencies
The filing provides no numerical revenue or earnings guidance. Management describes plans to grow OEM and MRO capabilities, win customers, expand geographically, improve cross-segment synergies, and consider complementary acquisitions. It also cautions that industry growth trends may not continue. The report identifies COVID-19 as a potential threat to travel, airline spending, demand, supply chains, and manufacturing; the duration and financial effect were uncertain at filing time.
- Customer concentration: five customers together represented 23.7% of 2019 revenue, versus 18.2% in 2018. No single customer represented 10% or more in any year presented.
- Government sales to the U.S. and Israeli governments were approximately 7.2% of 2019 revenue; U.S. government sales alone were 2.1%. Government contracts may be audited, modified, delayed, or terminated and can depend on appropriations and export approvals.
- Honeywell military and commercial APU repair agreements for Piedmont were due to expire June 30, 2020; the company reported that extension discussions were unresolved or uncertain.
- Inventory reached $43.9 million, up from $38.6 million. Management warns of obsolescence and write-down risk from forecast error, changing demand, and long supply lead times.
- Backlog comprised $44 million of purchase orders and an estimated $185 million under long-term agreements without binding customer purchase obligations; the company cautions that backlog may not indicate future sales.
- Contractual obligations totaled $21.3 million: $7.5 million of operating lease payments and $13.8 million of purchase commitments, mostly due within one year. The company also disclosed ordinary-course litigation, guarantees, and environmental, product-liability, regulatory, currency, supplier, and fixed-price-contract risks; it did not quantify a material litigation loss in the provided text.
Important facts for investors to verify
- Review the audited statements and segment disclosures, especially the causes and sustainability of the gross-margin recovery and the operating losses in OEM and jet-engine overhaul/coating.
- Track inventory growth, order conversion, receivable collection, and operating cash flow; confirm whether the $185 million of nonbinding frame-agreement estimates converts to orders.
- Check the status and commercial impact of Piedmont’s Honeywell authorizations and agreements after their June 2020 expiration dates.
- Assess COVID-19 effects on airline customers, demand, supply availability, and operations; the filing offered no quantified forecast.
- Note that management concluded internal controls were effective, but the auditor did not attest to internal-control effectiveness. Also reconcile presentation differences in the filing’s revenue tables: the audited statements report 2019 product revenue of $25.019 million, while selected financial data lists $24.959 million.