TAT Technologies Ltd. — 2018 Form 20-F Summary
Business context and reporting period. This is an audited annual report for the fiscal year ended December 31, 2018, not a standalone fourth-quarter filing. TAT provides aerospace and defense OEM products and maintenance, repair and overhaul (MRO) services through four segments: Gedera OEM, Limco heat-transfer MRO/OEM, Piedmont aviation-component MRO, and Turbochrome jet-engine-component overhaul and coating. Financial statements are prepared under U.S. GAAP in U.S. dollars.
Key financial results
Amounts below are in U.S. dollars; millions except per-share amounts and where noted.
| Metric | 2018 | 2017 |
|---|---|---|
| Revenue | $93.2 | $106.5 |
| Gross profit / margin | $8.4 / 9.0% | $20.4 / 19.2% |
| Operating income (loss) | ($5.6) | $5.3 |
| Net income (loss) | ($4.4) | $2.4 |
| Basic and diluted EPS | ($0.50) | $0.27 |
| Cash from operations | $2.1 | $2.5 |
| Capital expenditures | $4.3 | $3.5 |
| Cash and short-term deposits at year-end | $16.0 | $18.0 |
| Working capital | $62.8 | $67.0 |
| Total assets / shareholders’ equity | $103.3 / $84.3 | $112.0 / $88.6 |
Operating cash flow less capital expenditures was approximately negative $2.2 million. Cash and cash equivalents declined $1.6 million during 2018. The balance sheet reports $19.0 million of total liabilities, including current liabilities of $14.7 million and long-term liabilities of $4.3 million; it presents no separate interest-bearing debt balance. The company reported no 2018 dividend payment; it paid $3.0 million in 2017.
Revenue and segment performance
- Products revenue was $23.2 million, down from $36.1 million; services revenue was $70.0 million, little changed from $70.5 million.
- Gedera OEM revenue declined 20.9% to $24.7 million, mainly due to delayed order intake. Its segment gross loss was $0.9 million, compared with gross profit of $5.7 million in 2017.
- Limco heat-transfer MRO/OEM revenue declined 10.0% to $31.3 million, mainly on lower existing-customer maintenance demand. Segment gross profit fell to $3.7 million from $8.7 million.
- Piedmont aviation-component MRO revenue declined 1.6% to $32.5 million; segment gross profit was $3.9 million, compared with $4.0 million.
- Turbochrome revenue declined 11.9% to $9.7 million, mainly on lower demand; segment gross profit fell to $1.4 million from $1.9 million.
Material changes versus 2017
- Total revenue fell 12.5%, with decreases in all four segments. Management cited delayed OEM order intake and lower demand for maintenance, overhaul and coating services.
- Cost of revenue declined only 1.5% as revenue fell, pushing cost of revenue to 91.0% of sales from 80.8%. Management attributed segment margin pressure to lower sales, less favorable product mix, and higher labor and material costs.
- Operating results swung from $5.3 million of income to a $5.6 million loss; net results swung from $2.4 million of income to a $4.4 million loss. The 2018 tax benefit was $1.5 million, compared with $2.3 million of tax expense in 2017.
- Operating cash flow decreased from $2.5 million to $2.1 million. Capital expenditures increased to $4.3 million, principally for production equipment and building improvements.
- Accounts receivable declined to $19.3 million from $25.7 million, while inventory was essentially unchanged at $38.6 million.
Liquidity, outlook, risks and other notable items
- Management stated that current cash and expected operating cash flow should meet cash requirements for at least 12 months and fund planned capital expenditures. No specific revenue or earnings guidance was provided.
- Reported backlog at year-end comprised $47 million of purchase orders and $214 million of estimated potential sales under long-term agreements without purchase orders. The latter is not a customer purchase obligation and backlog may be delayed, reduced or cancelled.
- Contractual commitments included $8.3 million of operating lease payments and $9.5 million of purchase commitments, of which $10.1 million was due within one year. The company expected to recognize approximately $7.3 million of lease assets and liabilities upon adopting the new lease standard on January 1, 2019.
- A key customer/supplier relationship is uncertain: Piedmont’s Honeywell military APU repair agreement, which expired December 15, 2018, was extended through March 31, 2019, and the parties had not agreed on a further extension. The separate commercial agreement was due to expire December 15, 2019; extension prospects were uncertain.
- Principal risks include aerospace-market cyclicality and competitive pressure, dependence on key customers and suppliers, fixed-price contract cost overruns, inventory obsolescence, regulatory and export-license requirements, product liability, foreign-exchange exposure, and geopolitical and operational risks associated with Israel and international operations. Five customers represented approximately 18.2% of 2018 revenue; no single customer represented 10% or more.
- Other disclosed items: the combined warranty reserve was approximately $0.3 million; the company reported ongoing litigation in the ordinary course but the supplied filing text does not provide a clear quantified exposure. Management reported effective disclosure controls and internal control over financial reporting; the external auditor did not attest to internal-control effectiveness.
- Two executives left after year-end: the EVP of Technology and Engineering through February 2019 and Piedmont’s president through January 2019. The company said it had begun searches for replacements.
The independent auditor issued an unqualified opinion on the consolidated financial statements. Adoption of ASC 606 in 2018 had no balance-sheet or opening retained-earnings impact, and its current-period effect versus prior guidance was described as immaterial.
Important facts for investors to verify
- Whether OEM order intake and customer demand recovered after the 2018 declines, and whether margins improved from the sharp 2018 compression.
- Whether the Honeywell military and commercial APU repair arrangements were renewed, and the effect of any change on Piedmont’s revenue and parts access.
- How much of the $214 million estimated framework-agreement backlog converts into binding orders, revenue and cash receipts.
- Whether operating cash flow can sustainably cover capital expenditures and contractual commitments while preserving liquidity.
- The status and potential exposure of ordinary-course litigation, customer concentration, inventory valuation, and any material export, regulatory or foreign-exchange developments.