TAT Technologies Ltd. — FY2016 Form 20-F
Reporting period: Fiscal year ended December 31, 2016. This is an annual report, not a standalone fourth-quarter filing; the supplied filing text does not provide clear Q4-only financial results. Figures below are in U.S. dollars unless stated otherwise.
Business context
TAT provides aerospace and defense OEM products and maintenance, repair and overhaul (MRO) services through four business areas: heat-transfer and aviation-accessory manufacturing, heat-transfer MRO, aviation-component MRO, and jet-engine component overhaul and coating. Turbochrome, acquired in October 2015, was included for a full year in 2016. The company reported 623 employees and more than 500 customers.
Financial performance and liquidity
| Metric | FY2016 | FY2015 |
|---|---|---|
| Revenue | $95.8 million | $85.6 million |
| Gross profit / gross margin | $19.0 million / 19.9% | $13.7 million / 15.9% |
| Operating income / operating margin | $4.1 million / 4.3% | $5.6 million / 6.5% |
| Net income / diluted EPS | $0.06 million / $0.01 | $5.85 million / $0.66 |
| Cash from operating activities | $5.5 million | $0.7 million |
| Capital expenditures | $5.7 million | $3.3 million |
| Cash and short-term deposits at year-end | $22.4 million | $26.8 million |
| Working capital | $66.7 million | $70.8 million |
| Total assets / shareholders’ equity | $112.0 million / $88.7 million | $109.6 million / $91.4 million |
Revenue increased 12%; management attributed about 8.5 percentage points to Turbochrome consolidation and 3.5 points to organic growth. All three legacy segments grew: OEM heat-transfer and aviation components revenue rose 3% to $28.3 million; heat-transfer MRO/OEM rose 5% to $32.4 million; and aviation-component MRO rose 6% to $31.6 million. Turbochrome contributed $9.2 million for the full year.
Gross margin improved mainly as aviation-component MRO costs fell following cost reductions and a 2015 long-term project estimate adjustment. Operating income nevertheless declined as operating expenses increased and 2015 included a $4.8 million Turbochrome bargain-purchase gain. The effective tax rate rose to approximately 98% in 2016, principally reflecting a $2.7 million deferred tax charge related to actual and possible distributions of earnings from U.S. subsidiaries. Net income fell sharply as a result.
Operating cash flow improved, but capital spending exceeded it by approximately $0.2 million. Investing cash flow was $0.6 million; financing cash use was $3.4 million, including a $3.0 million dividend and a $0.5 million Turbochrome earn-out payment. The balance sheet presents no loans payable at year-end; total liabilities were $23.3 million, including $18.2 million current liabilities and $5.1 million non-current liabilities. Management said existing cash and expected operating cash flow should meet requirements for at least 12 months.
Material changes and unusual items
- Turbochrome moved from partial-year consolidation in 2015 to full-year consolidation in 2016; its 2015 acquisition generated the $4.8 million bargain-purchase gain.
- Aviation-component MRO costs declined 3.7%, and the segment’s cost of revenue fell from 96% to 86.7% of segment revenue, reflecting cost reductions and the prior-year project estimate adjustment.
- Inventory increased to $39.3 million from $36.7 million, while receivables rose to $21.6 million from $19.2 million.
- Capital expenditures increased to $5.7 million. The company paid a $3.0 million dividend, or $0.34 per share.
- The remaining $0.14 million Turbochrome contingent consideration was reversed after the acquired business missed its 2016 revenue target; no further earn-out was due under the stated terms.
Outlook, risks and contingencies
No specific revenue or earnings guidance is provided. Management expects additional investment in research and development and selling and marketing, and cites growth plans in OEM capabilities, MRO services, customer cross-selling and new markets. The company’s backlog at year-end comprised $33 million of purchase orders and $170 million of estimated potential sales under long-term agreements; those agreements generally do not obligate customers to purchase.
Key risks include dependence on aerospace demand and a limited number of suppliers; fixed-price contract and inventory-estimation exposure; regulatory, certification and export-license requirements; currency exposure, especially NIS costs; competition; and political or operational disruption in Israel. Five customers collectively represented approximately 20.2% of revenue. U.S. and Israeli government sales represented approximately 6.9% of revenue. The Russian heat-transfer MRO joint venture was ramping up and carries partner, currency and geopolitical risks.
TAT disclosed an unserved 2016 Kansas federal case alleging property damage from failed precoolers; the company said it was monitoring the matter. It also reported ordinary-course litigation, without a clear quantified exposure in the supplied text. Contractual obligations included $9.3 million of operating leases and $1.7 million of purchase commitments. Management assessed disclosure controls and internal control over financial reporting as effective; the auditor did not attest to internal controls.
Most important facts for investors to verify
- Whether operating profitability and cash generation can be sustained, particularly given 2016 operating income of $4.1 million versus net income of only $0.06 million.
- The nature, cash impact and potential recurrence of the deferred tax charge associated with U.S. subsidiary earnings and distributions.
- How much of the $170 million agreement-based backlog converts into orders, revenue and cash, and on what timeline.
- Inventory quality, receivable collection and working-capital needs as the business grows.
- The status and potential exposure of the precooler litigation, and whether product-liability insurance is adequate.
- Capital allocation, including dividend sustainability, planned capital spending and the Russian joint venture’s progress.