TAT Technologies(TATT) - 2024 Q4 - Annual Report

Introduction TAT Technologies Ltd. provides aerospace and defense solutions, including thermal management, power, actuation, and MRO services, operating through four units and facing macroeconomic and geopolitical challenges - TAT operates through four main business units: TAT Israel (OEM), Limco (Heat Transfer MRO/OEM), Piedmont (APU & Landing Gear MRO), and Turbochrome (Jet Engine MRO)[19] - The company serves major clients such as Boeing, Embraer, Lockheed Martin, Collins, the U.S. Armed Forces, and various airlines[20] - As of December 31, 2024, TAT employed 634 people across its facilities in Israel and the United States[21] - The company faces negative impacts from macroeconomic conditions, including inflation, rising interest rates, and supply chain pressures, which are expected to continue into 2025[28] - Geopolitical events, particularly the conflicts involving Russia/Ukraine and Israel/Hamas, have increased global economic uncertainty[29] PART I Item 3. Key Information This section details significant investment risks, including high industry regulation, intense competition, customer concentration, reliance on government contracts, and geopolitical instability affecting Israeli operations Risk Factors Key risks include intense competition, customer concentration, reliance on government contracts, share price volatility, and significant geopolitical instability impacting Israeli operations - Five major customers accounted for approximately 29.9% of TAT's revenues in 2024, with a single MRO customer representing 12.8% of total revenues[54] - Sales to the U.S. and Israeli governments constituted 12.4% of revenues in 2024, up from 8.3% in 2023 and 6.3% in 2022[56] - The company depends on a limited number of suppliers, such as Honeywell for APU spare parts, and has a ten-year agreement with Honeywell for commercial MRO applications[61] - The ongoing war in Israel and related hostilities with Hamas, Hezbollah, and Iran pose a significant risk to the company's business, operations, and employee availability due to military reserve duties[102][105][112] - The company's principal shareholder, FIMI Funds, beneficially owns approximately 26.6% of outstanding shares, and substantial sales by FIMI could depress the share price[101] Item 4. Information on the Company This section provides a comprehensive overview of TAT Technologies, detailing its history, corporate development, business operations across four segments, strategy, customers, and regulatory environment Business Overview TAT operates in four segments, focusing on enhancing OEM capabilities, expanding MRO services, and increasing market share, with a significant backlog of $42 million in purchase orders and $429 million from long-term agreements - The company's business strategy focuses on enhancing OEM capabilities, expanding MRO services, increasing market share, creating synergy among group members, and pursuing both organic growth and M&A[171][174] - Piedmont has strategic agreements with Honeywell for a 10-year license to MRO key APU lines for Boeing (B777, B737) and Airbus (A320 family) platforms[161] - In June 2020, Turbochrome decided to discontinue its JT8D engine blades reconditioning activity to focus on newer engine types; this activity became immaterial by 2023[169] Backlog as of December 31, 2024 | Backlog Component | Amount (in millions) | | :--- | :--- | | Outstanding Purchase Orders | $42 | | Estimated Sales from Long-Term Agreements | $429 | - The joint venture in Russia, TAT-Engineering LLC, has materially limited its MRO services due to sanctions preventing it from purchasing heat-exchange cores from its US subsidiary, Limco[170] Government Regulations The company's operations are subject to extensive regulations, including military export permits in Israel, U.S. ITAR, aerospace certifications (FAA, EASA), worker safety laws, and environmental regulations - Export of military-related products from Israel requires permits from the Israeli Ministry of Defense[257] - U.S. subsidiaries' export of defense products and technical data is subject to U.S. government approvals under ITAR[259] - The company must maintain certifications from aerospace authorities like the FAA and EASA to manufacture, sell, and service aircraft parts[260] Organizational Structure TAT Technologies Ltd. is an Israeli company with two wholly-owned subsidiaries: Limco-Piedmont Inc. and Turbochrome Ltd - The company has two wholly-owned subsidiaries, Limco-Piedmont Inc. and Turbochrome Ltd., and holds a 51% stake in the joint venture TAT-Engineering LLC[271][662] Property, Plants and Equipment The company operates from key facilities including a leased 138,000 sq. ft. plant in Kiryat Gat, Israel, an owned 55,000 sq. ft. plant in Tulsa, Oklahoma, and leased facilities in North Carolina - The company completed the transfer of its heat exchanger activity from Gedera, Israel to facilities in Tulsa, Oklahoma and Kiryat Gat, Israel in 2022[272] - Key facilities include a leased 138,000 sq. ft. plant in Kiryat Gat, Israel; an owned 55,000 sq. ft. plant in Tulsa, OK; and leased facilities in Greensboro and Kernersville, NC[272][274][277] Operating and Financial Review and Prospects This section analyzes TAT's financial performance, showing 2024 revenue growth to $152.1 million, improved profitability, and a decrease in cash to $7.4 million due to increased working capital needs Results of Operations TAT's 2024 total revenues grew 33.7% to $152.1 million, with all segments contributing to growth, leading to improved gross profit margin and increased operating and net income Consolidated Results of Operations (in thousands) | Metric | 2024 | 2023 | 2022 | | :--- | :--- | :--- | :--- | | Total Revenues | $152,116 | $113,794 | $84,556 | | Gross Profit | $33,014 | $22,468 | $15,928 | | Operating Income (Loss) | $12,502 | $6,075 | $(1,775) | | Net Income (Loss) | $11,167 | $4,672 | $(1,562) | Revenues by Segment (in thousands) | Segment | 2024 | 2023 | 2022 | | :--- | :--- | :--- | :--- | | OEM of heat transfer solutions | $36,466 | $27,555 | $21,844 | | MRO services for heat transfer | $43,863 | $32,995 | $24,796 | | MRO services for aviation components | $67,475 | $50,760 | $35,879 | | Overhaul and coating of jet engine | $7,392 | $6,854 | $5,770 | Revenues by Geography (in thousands) | Geography | 2024 | 2023 | 2022 | | :--- | :--- | :--- | :--- | | United States | $104,326 | $81,999 | $56,570 | | Israel | $7,868 | $7,697 | $7,162 | | Other | $39,922 | $24,098 | $20,824 | Liquidity and Capital Resources As of Dec 31, 2024, cash decreased to $7.4 million due to increased working capital, despite a $10 million private placement, with net cash used in operating activities at $5.8 million - In September 2024, TAT completed a private placement, raising net proceeds of approximately NIS 36.5 million (approx. $10 million)[344][773] Cash and Cash Equivalents | Date | Amount (in millions) | | :--- | :--- | | Dec 31, 2024 | $7.4 | | Dec 31, 2023 | $16.9 | Cash Flow Summary (in millions) | Cash Flow Activity | 2024 | 2023 | 2022 | | :--- | :--- | :--- | :--- | | Net Cash from Operating Activities | $(5.8) | $2.3 | $(4.9) | | Net Cash from Investing Activities | $(3.9) | $(3.6) | $(16.1) | | Net Cash from Financing Activities | $0.2 | $10.2 | $15.8 | - The decrease in cash was primarily due to an increase in working capital, including a $17.1 million increase in inventory and a $9.7 million increase in trade accounts receivable[346][355] Tabular Disclosure of Contractual Obligations As of December 31, 2024, total contractual obligations are $40.5 million, comprising $2.3 million in operating leases and $38.2 million in purchase commitments, with most due within one year Contractual Obligations as of Dec 31, 2024 (in thousands) | Contractual Obligations | Total | Less than 1 year | 1-3 Years | 3-5 Years | More than 5 years | | :--- | :--- | :--- | :--- | :--- | :--- | | Operating lease obligations | $2,285 | $939 | $916 | $276 | $154 | | Purchase commitments | $38,219 | $33,578 | $4,241 | $400 | - | | Total | $40,504 | $34,517 | $5,157 | $676 | $154 | Item 6. Directors, Senior Management and Employees This section details the company's leadership, compensation practices, board structure, and employee base, including total compensation of $3.575 million for directors and executives in 2024 Compensation of Directors and Executive Officers Total compensation for all directors and executive officers in 2024 was approximately $3.575 million, with CEO Igal Zamir receiving $835,000 and CFO Ehud Ben-Yair receiving $702,000 Total Compensation for Directors & Executive Officers (2024) | Compensation Type | Amount (in thousands US$) | | :--- | :--- | | Salaries, fees, Commissions and bonuses | $3,467 | | Other benefits | $108 | | Total | $3,575 | Compensation of 5 Most Highly Compensated Executives (2024, in thousands US$) | Name and Principal Position | Base Salary | Benefits & Perquisites | Variable Compensation | Equity-Based Compensation | Total | | :--- | :--- | :--- | :--- | :--- | :--- | | Igal Zamir, CEO and President | 339 | 130 | 346 | 20 | 835 | | Ehud Ben- Yair, CFO | 324 | 57 | 225 | 96 | 702 | | Jason Lewandowski, COO | 267 | 22 | 152 | 31 | 472 | | Liron Topaz, GM TAT Israel | 156 | 71 | 68 | 37 | 328 | | Lars Hebjerg, VP Sales | 221 | 23 | 62 | 37 | 323 | Employees As of December 31, 2024, TAT employed 634 people across Israel and the United States, with collective bargaining agreements in place for Israeli employees until March 2028 - As of December 31, 2024, the company employed 634 people, with 194 in Israel and 440 in the United States[450] - Collective bargaining agreements are in place for employees at TAT Israel and Turbochrome, with new agreements signed in early 2025 effective until March 31, 2028[451][452] Item 7. Major Shareholders and Related Party Transactions This section details the company's ownership structure, with FIMI Funds (26.6%), MEITAV INVESTMENT HOUSE LTD. (14.0%), and Y.D. More Investments Ltd. (11.1%) as major shareholders as of December 31, 2024 Major Shareholders as of December 31, 2024 | Name | Percentage of Ownership | | :--- | :--- | | FIMI Funds | 26.6% | | MEITAV INVESTMENT HOUSE LTD. | 14.0% | | Y.D. More Investments Ltd. | 11.1% | - In September 2024, FIMI Funds sold a significant portion of its holdings, reducing its beneficial ownership to approximately 26.6%[475] - As of December 31, 2024, there were 23 holders of record, with CEDE & Co. (nominee for the DTC) holding approximately 74% of outstanding ordinary shares on behalf of beneficial owners[477] Item 8. Financial Information This section refers to consolidated financial statements, notes ongoing litigation, and describes the company's dividend distribution policy, allowing dividends from retained earnings or recent profits - The company's dividend policy allows the board of directors to declare dividends limited to the greater of retained earnings or earnings from the previous two years, without requiring shareholder approval[483][484] Item 10. Additional Information This section covers corporate and legal details, including an increase in authorized share capital to 15,000,000 shares, articles of association, and material Israeli and U.S. tax considerations - In March 2025, shareholders approved an increase in authorized share capital to 15,000,000 ordinary shares[493] - The company benefits from reduced Israeli tax rates under the 'Preferred Enterprise' regime, with a rate of 7.5% for its operations in Development Zone A[526][527][528] - For U.S. tax purposes, the company believes it is not a Passive Foreign Investment Company (PFIC) for the current taxable year, but this is subject to annual review[572] Item 12. Quantitative and Qualitative Disclosures about Market Risk The company's primary market risk is currency exchange fluctuation, particularly between the U.S. dollar and Israeli New Shekel, which it mitigates using derivative instruments - The company is exposed to currency exchange risk as its reporting currency is the U.S. dollar, while some expenses (primarily Israeli labor) are in NIS[592] PART II Item 16. Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2024, with the Audit Committee overseeing cybersecurity risks and a formal insider trading policy in place - Management concluded that the company's disclosure controls and procedures, and its internal control over financial reporting, were effective as of December 31, 2024[598][602] - The company follows Israeli home country practice instead of certain NASDAQ rules regarding shareholder approval for equity compensation plans[613] - The Audit Committee is responsible for overseeing cybersecurity risks, and the company has implemented security measures to address these threats; to date, no material cybersecurity incidents have been identified[620][622] Principal Accountant Fees (in US$) | Services Rendered | 2024 | 2023 | | :--- | :--- | :--- | | Audit | $323,321 | $396,873 | | Tax | $16,000 | $19,571 | | Total | $339,321 | $413,444 | PART III Item 18. Financial Statements This section presents the complete consolidated financial statements for TAT Technologies Ltd. as of December 31, 2024, prepared under U.S. GAAP, including the auditor's report and detailed financial statements Report of Independent Registered Public Accounting Firm The independent auditor issued an unqualified opinion on the consolidated financial statements, identifying the write-down of obsolete and unmarketable inventory as a Critical Audit Matter due to significant management judgment - The auditor identified the write-down of obsolete and unmarketable inventory as a Critical Audit Matter[640] - The primary reason for this determination was the significant management judgment required for assumptions about future demand, market conditions, and sales forecasts, which led to a high degree of auditor subjectivity and effort[642] Consolidated Financial Statements Consolidated financial statements show total assets of $163.4 million, driven by increased inventory, with shareholders' equity growing to $112.0 million and net income reaching $11.2 million in 2024 Consolidated Balance Sheet Highlights (in thousands) | Account | Dec 31, 2024 | Dec 31, 2023 | | :--- | :--- | :--- | | Total Assets | $163,362 | $145,577 | | Inventory | $68,540 | $51,280 | | Total Liabilities | $51,393 | $54,894 | | Total Shareholders' Equity | $111,969 | $90,683 | Consolidated Statement of Operations Highlights (in thousands) | Account | 2024 | 2023 | 2022 | | :--- | :--- | :--- | :--- | | Total Revenue | $152,116 | $113,794 | $84,556 | | Gross Profit | $33,014 | $22,468 | $15,928 | | Net Income (Loss) | $11,167 | $4,672 | $(1,562) | Earnings Per Share | EPS Type | 2024 | 2023 | 2022 | | :--- | :--- | :--- | :--- | | Basic | $1.08 | $0.52 | $(0.175) | | Diluted | $1.00 | $0.51 | $(0.175) |