TAT Technologies(TATT) - 2023 Q4 - Annual Report

Company Overview Introduction TAT Technologies provides thermal management and power/actuation solutions to the global aerospace and defense industries - The company's business is concentrated in two main areas: Thermal Management and Power and Actuation[19] - TAT operates through four distinct operational units: TAT Israel (OEM), Limco (Heat Transfer MRO & OEM), Piedmont (Aviation Components MRO), and Turbochrome (Jet Engine MRO)[19] - Key customers include prominent aerospace and defense entities such as Boeing, Embraer, Lockheed Martin, Collins, and the U.S. Armed Forces[20] - The company has faced challenges from the COVID-19 pandemic, supply chain shortages, inflation, and geopolitical conflicts, impacting operations and costs[27][30][31] - A 2021 restructuring plan relocated activities to improve operational efficiency and reduce costs[29] Key Information Risk Factors The company faces significant business, industry, and geopolitical risks, including customer concentration and regional instability - A significant portion of revenue comes from a few major customers, with the top five accounting for 28.46% of revenues in 2023[56] - The company depends on a limited number of suppliers for critical components, such as Honeywell for APU spare parts[62] - The company's principal shareholders, FIMI Funds, beneficially own 52% of outstanding shares, and substantial sales could depress the share price[92] - Significant operations in Israel expose the company to political, economic, and military risks, including the ongoing war with Hamas and Hezbollah[93][95][96] - The call-up of employees for military reserve duty since October 7, 2023, could adversely affect business operations[100] Information on the Company Business Overview The company's strategy focuses on enhancing OEM capabilities, expanding MRO services, and pursuing organic and inorganic growth - The company's business strategy includes enhancing OEM capabilities, expanding MRO services, increasing market share, creating synergy, and pursuing organic growth and M&A opportunities[141][148] - Piedmont has expanded into APU leasing and holds strategic 10-year MRO license agreements with Honeywell for key APU lines[132][134] - The company's backlog as of December 31, 2023, was $434 million, consisting of $85 million in firm orders and $349 million from long-term agreements[185][186] - The company faces intense competition in both OEM and MRO markets from larger, more resourceful competitors[188][191][193] - A strategic restructuring in 2021-2022 transferred heat exchanger manufacturing from Israel to the US to create a unified MRO/OEM center[151] Government Regulations Operations are subject to extensive regulation by global aviation, defense, environmental, and worker safety authorities - The aerospace industry is highly regulated, requiring certifications from bodies like the FAA, EASA, and U.S. Department of Defense[219] - Export of military and dual-use products from Israel requires permits from the Israeli Ministry of Defense, while U.S. subsidiaries are subject to U.S. export regulations[215][217] - Operations are subject to stringent environmental laws in both the U.S. and Israel governing the handling and disposal of hazardous substances[224] Property, Plants and Equipment The company operates from key owned and long-term leased facilities in Kiryat Gat, Israel, and several locations in the United States - The company completed a strategic transfer of activities to a facility in Kiryat Gat, Israel (leased until 2045) and its facility in Tulsa, Oklahoma[226] - Limco owns a 55,000 sq. ft. plant in Tulsa, OK, and leases multiple additional buildings[229][230] - Piedmont leases significant space in Greensboro, NC (~82,000 sq. ft.) and Kernersville, NC to support its MRO operations[232][233] Operating and Financial Review and Prospects Operating Results The company reported a significant revenue increase and a return to profitability in 2023, driven by growth across all segments Consolidated Operating Results (in thousands USD) | | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Total revenues | $113,794 | $84,556 | $77,973 | | Gross profit | $22,468 | $15,928 | $11,270 | | Operating income (loss) | $6,075 | $(1,775) | $(4,035) | | Net income (loss) | $4,672 | $(1,562) | $(3,562) | Revenues by Segment (in thousands USD) | Segment | 2023 | 2022 | % Change | | :--- | :--- | :--- | :--- | | OEM of heat transfer solutions & aviation accessories | $27,555 | $21,844 | 26.1% | | MRO services for heat transfer components & OEM | $32,995 | $24,796 | 33.1% | | MRO services for aviation components | $50,760 | $35,879 | 41.5% | | Overhaul and coating of jet engine components | $6,854 | $5,770 | 18.8% | | Total Revenues (after eliminations) | $113,794 | $84,556 | 34.5% | - Gross margin as a percentage of revenues increased to 19.7% in 2023 from 18.8% in 2022, due to higher revenue growth and better employee utilization[265][271] - The company achieved a net income of $4.7 million in 2023, compared to a net loss of $1.6 million in 2022, driven by strong revenue growth[263] Liquidity and Capital Resources Cash reserves more than doubled, bolstered by a $10 million private placement and improved operating cash flow - In December 2023, TAT completed a private placement of 1,158,600 Ordinary Shares, raising net proceeds of approximately $10.0 million[298] Cash and Cash Equivalents (in thousands USD) | | Dec 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Cash and cash equivalents | $16,942 | $8,026 | Summary of Cash Flows (in thousands USD) | | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | $2,255 | $(4,867) | $(2,269) | | Net cash used in investing activities | $(3,579) | $(16,120) | $(5,407) | | Net cash provided by financing activities | $10,240 | $15,798 | $7,652 | - Capital expenditures decreased significantly to $2.9 million in 2023 from $16.1 million in 2022, as restructuring investments were completed[304] Contractual Obligations The company has total contractual obligations of $27.7 million, with the majority due within one year Contractual Obligations as of December 31, 2023 (in thousands USD) | Contractual Obligations | Total | Less than 1 year | 1-3 Years | 3-5 Years | More than 5 years | | :--- | :--- | :--- | :--- | :--- | :--- | | Operating lease obligations | $2,730 | $1,033 | $1,147 | $550 | - | | Purchase commitments | $24,927 | $10,732 | $4,195 | - | - | | Total | $27,657 | $21,765 | $4,342 | $550 | - | Directors, Senior Management and Employees Directors and Senior Management The company is led by an experienced executive team and a five-member Board of Directors with diverse industry expertise - Key leadership includes Amos Malka (Chairman), Igal Zamir (CEO & President), and Ehud Ben-Yair (CFO)[324] - The Board of Directors is composed of five members, including two external directors and one independent director as required by Israeli law and NASDAQ rules[324][348] Compensation Total 2023 compensation for 11 directors and executives was approximately $2.24 million, including salary, bonuses, and equity Compensation of Five Most Highly Compensated Executives for 2023 (in thousands USD) | Name and Principal Position | Base Salary | Benefits and Perquisites | Variable Compensation | Equity-Based Compensation | Total | | :--- | :--- | :--- | :--- | :--- | :--- | | Igal Zamir, CEO and President | 350 | 116 | 174 | 11 | 651 | | Ehud Ben- Yair, CFO | 248 | 77 | 75 | 7 | 408 | | Jason Lewandowski, COO | 260 | 40 | - | 68 | 368 | | Lars Hebjerg, VP Sales | 187 | 24 | 65 | - | 276 | | Liron Topaz, GM TAT Israel | 161 | 70 | 12 | 17 | 260 | - Total compensation for all 11 directors and executive officers in 2023 was $2,202 thousand in salaries, fees, commissions, and bonuses, plus $41 thousand in other benefits[339] Board Practices Board practices are governed by Israeli law, with exemptions from certain NASDAQ rules due to its "controlled company" status - The company is a "controlled company" under NASDAQ rules because FIMI Funds beneficially own over 50% of voting shares, exempting it from certain independence requirements[394] - The Board has an Audit Committee and a Compensation Committee, both structured to comply with Israeli Companies Law[357][361] - The company has adopted a formal compensation policy for its executives and directors, requiring committee, board, and shareholder approval[375] - In 2023, the company adopted a Clawback Policy to recover excess incentive-based compensation following an accounting restatement[393] Employees As of year-end 2023, the company employed 540 people, primarily in manufacturing roles across the U.S. and Israel Employee Distribution as of Dec 31, 2023 | Category | Number of Employees | | :--- | :--- | | Manufacturing & Quality Control | 449 | | Engineering & R&D | 24 | | General & Admin, Sales & Marketing | 67 | | Total | 540 | - Geographically, 372 employees are based in the U.S. and 168 are in Israel[396] - New collective bargaining agreements for employees at TAT Israel and Turbochrome were signed in September 2022 and are effective until April 2025[397][398] Share Ownership The company maintains two stock option plans for executives, with 625,000 options outstanding at year-end 2023 - The company has two active stock option plans, the 2012 Plan and the 2022 Plan, with a combined pool of 1,530,000 ordinary shares[405][407] - As of December 31, 2023, there were 625,000 options outstanding at a weighted average exercise price of $7.31 per share[410] - Options generally vest over a 4-year period, with 25% vesting after the first year and the remainder vesting quarterly[408] Major Shareholders and Related Party Transactions Major Shareholders FIMI Funds is the controlling shareholder with 52% ownership, followed by Yelin Lapidot with 7% Major Shareholders as of December 31, 2023 | Name | Number of Ordinary Shares Beneficially Owned | Percentage of Ownership | | :--- | :--- | :--- | | FIMI Funds | 5,254,908 | 52% | | Yelin Lapidot | 704,406 | 7.00% | - A private placement in December 2023 involved the issuance of 1,158,600 new shares, representing approximately 11.5% of the company's post-issuance shares[415] Financial Information Consolidated Statements and Other Financial Information The company is involved in routine litigation and its dividend policy is governed by Israeli law based on profitability - The company is involved in ongoing litigation as part of its normal business operations[422] - Dividend distributions are determined by the board of directors and are limited by Israeli Companies Law based on retained earnings or recent profits[423][424] Additional Information Taxation The company benefits from reduced Israeli corporate tax rates under the 'Preferred Enterprise' regime - The general corporate tax rate in Israel is 23%; however, the company benefits from reduced rates as a 'Preferred Enterprise'[447][459] - TAT's main operations in Israel are taxed at a reduced rate of 16%, while its subsidiary Turbochrome is taxed at 7.5%[460] - U.S. subsidiaries are subject to a 21% federal statutory tax rate, in addition to state taxes[295] - Dividends paid from a 'Preferred Enterprise' are subject to a 20% withholding tax, which may be reduced by an applicable tax treaty[458] Controls and Procedures Controls and Procedures Management concluded that the company's disclosure controls, procedures, and internal controls over financial reporting were effective - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2023[526] - Based on the COSO 2013 framework, management concluded that the company's internal control over financial reporting was effective as of December 31, 2023[530] - The annual report does not include an attestation report from the independent auditor on internal controls, as permitted by SEC rules[531] Corporate Governance and Other Matters Principal Accountant Fees and Services Total fees paid to the independent auditor in 2023 were $413,444, primarily for audit services Fees Paid to Independent Public Accountant (in USD) | Services Rendered | 2023 | 2022 | | :--- | :--- | :--- | | Audit | $396,873 | $248,524 | | Tax | $19,571 | $23,262 | | Total | $413,444 | $271,786 | Cybersecurity The Audit Committee oversees cybersecurity risks, with no material incidents identified to date - The Audit Committee is responsible for overseeing cybersecurity risks[547] - The Chief Operating Officer is responsible for implementing cybersecurity protection measures[549] - As of the report date, no known cybersecurity threats or incidents have materially affected the company[549] Financial Statements Auditor's Report and Critical Audit Matters The auditor issued an unqualified opinion and identified the write-down of obsolete inventory as a critical audit matter - The auditor issued an unqualified opinion on the consolidated financial statements as of December 31, 2023[563] - A Critical Audit Matter was identified concerning the write-down of obsolete and unmarketable inventory due to significant management judgment required[567][569][570] Consolidated Financial Statements The financial statements reflect a strong 2023 with increased assets, higher revenue, and a return to net income Consolidated Balance Sheet Highlights (in thousands USD) | | Dec 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Total Current Assets | $94,326 | $75,150 | | Total Assets | $145,577 | $126,651 | | Total Current Liabilities | $39,311 | $28,990 | | Total Liabilities | $54,894 | $51,081 | | Total Shareholders' Equity | $90,683 | $75,570 | Consolidated Statement of Operations Highlights (in thousands USD) | | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Total Revenue | $113,794 | $84,556 | $77,973 | | Gross Profit | $22,468 | $15,928 | $11,270 | | Operating Income (Loss) | $6,075 | $(1,775) | $(4,035) | | Net Income (Loss) | $4,672 | $(1,562) | $(3,562) | Consolidated Statement of Cash Flows Highlights (in thousands USD) | | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Net Cash from Operating Activities | $2,255 | $(4,867) | $(2,269) | | Net Cash from Investing Activities | $(3,579) | $(16,120) | $(15,639) | | Net Cash from Financing Activities | $10,240 | $15,798 | $6,042 |