UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 20-F
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REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2019
OR
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to _____________
SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of event requiring this shell company report ………………..
Commission file number: 0-16050
TAT TECHNOLOGIES LTD.
(Exact name of Registrant as specified in its charter
and translation of Registrant’s name into English)
Israel
(Jurisdiction of incorporation or organization)
P.O. Box 80, Gedera 7075002, Israel
(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Title of each class
Ordinary Shares, NIS 0.90 Par Value
Trading Symbol
TATT
Name of each exchange on which registered
NASDAQ Global Market
Securities registered or to be registered pursuant to Section 12(g) of the Act: None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None
Indicate the number of outstanding shares of each of the issuer’s classes of capital or Common stock as of the close of the period covered by the annual report:
Ordinary Shares, par value NIS 0.90 per share…………… 8,874,696
(as of December 31, 2019)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes ☐ No ☒
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange
Act. (Check one):
Large accelerated filer ☐
Accelerated filer ☐
Non-accelerated filer ☒
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
U.S. GAAP ☒
International Financial Reporting Standards as issued by the International Accounting Standards Board ☐
Other ☐
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow:
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☒
Item 17 ☐ Item 18 ☐
INTRODUCTION
PART I
Item 1.
Item 2.
Item 3.
Item 4.
Item 4A.
Item 5
Item 6.
Item 7.
Item 8.
Item 9.
Item 10.
Identity of Directors, Senior Management and Advisers
Offer Statistics and Expected Timetable
Key Information
A. Selected Financial Data
B. Capitalization and Indebtedness
C. Reasons for the Offer and Use of Proceeds
D. Risk Factors
Information on the Company
A. Business Overview
B. Government Regulations
C. Property, Plants and Equipment
Unresolved Staff Comments
Operating and Financial Review and Prospects
A. Research and Development, Patents and Licenses
B. Trend Information
C. Off-Balance Sheet Arrangements
D. Tabular Disclosure of Contractual Obligations
Directors, Senior Management and Employees
A. Directors and Senior Management
B. Board Practices
C. Employees
D. Share Ownership
Major Shareholders and Related Party Transactions
A. Major Shareholders
B. Related Party Transactions
C. Interests of Experts and Counsel
Financial Information
A. Consolidated Statements and Other Financial Information
B. Significant Changes
The Offer and Listing
A. Offer and Listing Details
B. Plan of Distribution
C. Markets
D. Selling Shareholders
E. Dilution
F. Expense of the Issue
Additional Information
A. Share Capital
B. Memorandum and Articles of Association
C. Exchange Controls
D. Taxation
E. Dividends and Paying Agents
F. Statement by Experts
G. Documents on Display
H. Subsidiary Information
TABLE OF CONTENTS
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Item 11.
Item 12.
Quantitative and Qualitative Disclosures about Market Risk
Description of Securities Other than Equity Securities
PART II
Defaults, Dividend Arrearages and Delinquencies
Material Modifications to the Rights of Security Holders
Controls and Procedures
[Reserved]
Item 13.
Item 14.
Item 15.
Item 16.
Item 16A. Audit Committee Financial Expert
Item 16B.
Item 16C.
Item 16D. Exemptions from the Listing Standards for Audit Committee
Item 16E.
Item 16F. Change in Registrant’s Certifying Accountant.
Item 16G. Corporate Governance.
Code of Ethics
Principal Accountants Fees and Services
Purchase of Equity Securities By Issuer and Affiliated Purchases
PART III
Item 17.
Item 18.
Item 19.
Financial Statements
Financial Statements
Exhibits
iii
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130
130
130
131
131
133
133
133
134
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135
135
135
136
136
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INTRODUCTION
TAT Technologies Ltd. is a leading provider of solutions and services to the aerospace and defense industries, focused mainly on two product areas and services: Thermal Management and Power and
Actuation. The Company operates four business segments: (i) original equipment manufacturing (“OEM”) of heat transfer solutions and aviation accessories through its Gedera facility; (ii) maintenance repair and
overhaul (“MRO”) services for heat transfer components and OEM of heat transfer solutions through its Limco subsidiary; (iii) MRO services for aviation components through its Piedmont subsidiary; and (iv)
overhaul and coating of jet engine components through its Turbochrome subsidiary.
TAT targets the commercial aerospace (serving a wide range of types and sizes of commercial and business jets), military aerospace and ground defense sectors. TAT has a global presence with over 500
customers worldwide, including tier one players in their respective markets such as Boeing, Embraer, Lockheed Martin, United Technologies, Pratt & Whitney (a division of United Technologies), the U.S. Armed
Forces, and service centers of airlines such as KLM, Lufthansa and others. TAT enjoys a strong reputation among its customers for quality and service-oriented approach.
As a leading provider in its market, TAT’s business is supported by an extensive number of certifications, including from the American, European, British and Chinese civil aviation authorities, as well as
leading manufactures such as Boeing and Honeywell International.
TAT employs 599 people and operates in four locations: its largest facility and headquarters in Gedera, Israel (“Gedera”); Limco Airepair Inc. (“Limco”) in Tulsa, Oklahoma; Piedmont Aviation Component
Services LLC (“Piedmont”) in Greensboro, North Carolina; and Turbochrome Ltd. (“Turbochrome”) in Kiryat Gat, Israel.
Through its Gedera facility, TAT is an OEM of a broad range of heat transfer solutions, air conditioning systems and other cooling systems used in mechanical and electronic systems on board military
and commercial aircraft as well as in ground systems. The Gedera facility is also an OEM for a wide range of aviation accessories and provides limited MRO services for military and commercial customers, mainly
for aviation accessories. Gedera is a repair station certified by the Federal Aviation Administration (“FAA”).
Through its Limco subsidiary, TAT provides MRO services for airlines, air cargo carriers, maintenance service centers and the military, primarily for heat transfer components. Limco is a repair station
certified by the Federal Aviation Administration (“FAA”) and European Aviation Safety Agency ("EASA"). Limco is also an OEM of heat transfer solutions.
Through its Piedmont subsidiary, TAT provides MRO services for aviation components in the area of landing gears, APUs and Machining and Plating services (MPG). Piedmont is an FAA-certified repair
station and provides its services to airlines, air cargo carriers, maintenance service centers and, to a lesser extent, the military.
Through its Turbochrome subsidiary, TAT provides MRO services in the area of jet engine overhaul, which includes the overhaul and coating of jet engine components such as turbine vanes and blades,
fan blades, variable inlet guide vanes and afterburner flaps. Turbochrome is certified by the FAA and EASA.
In addition, TAT, through its Piedmont subsidiary, holds approximately 5% of the equity securities of First Aviation Services Inc.(“FAvS”).
On November 25, 2015, TAT signed an agreement with Russian-based Engineering Holding of Moscow (“Engineering”), to establish a new facility for the provision of MRO services for heat transfer
components. The new company, TAT-Engineering LLC, is based in Novosibirsk’s Tolmachevo airport. 51% of TAT-Engineering LLC's shares are held by TAT and the remaining 49% are held by Engineering. The
new entity was established in January 2016.
TAT’s ordinary shares are publicly traded on the NASDAQ Global Market (“NASDAQ”) under the symbol “TATT” and on the Tel Aviv Stock Exchange (“TASE”) under the symbol “TAT Tech”. As
used in this annual report, the terms “TAT”, “we,” “us,” and “our” mean TAT Technologies Ltd. and its subsidiaries, unless otherwise indicated.
2
TAT consolidated financial statements appearing in this annual report are prepared in U.S. dollars and in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”). All
references in this annual report to “dollars” or “$” are to U.S. dollars and all references in this annual report to “NIS” are to New Israeli Shekels.
Statements made in this annual report concerning the contents of any contract, agreement or other document are summaries of such contracts, agreements or documents and are not complete descriptions
of all of their terms. If we filed any of these documents as an exhibit to this annual report or to any previous filing with the Securities and Exchange Commission (“SEC”), you may read the document itself for a
complete recitation of its terms.
Except for the historical information contained in this annual report, the statements contained in this annual report are “forward-looking statements” within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995, as amended, with respect to our business, financial condition
and results of operations. Such forward-looking statements reflect our current view with respect to future events and financial results. Statements which use the terms “believe,” “expect,” “plan,” “intend,”
“estimate,” and similar expressions are intended to identify forward-looking statements. We remind readers that forward-looking statements are merely predictions and therefore inherently subject to uncertainties
and other factors and involve known and unknown risks that could cause the actual results, performance, levels of activity, our achievements, or industry results, to be materially different from any future results,
performance, levels of activity, our achievements expressed or implied by such forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak
only as of the date hereof. Except as required by applicable law, including the securities laws of the United States, we undertake no obligation to publicly release any update or revision to any forward-looking
statements to reflect new information, future events or circumstances, or otherwise after the date hereof. We have attempted to identify significant uncertainties and other factors affecting forward-looking
statements in the Risk Factors section that appears in Item 3D. “Key Information - Risk Factors.”
3
PART I
Item 1. Identity of Directors, Senior Management and Advisers
Not applicable.
Item 2. Offer Statistics and Expected Timetable
Not applicable.
Item 3. Key Information
A. Selected Financial Data
TAT’s selected historical information is derived from the audited consolidated financial statements of TAT as of December 31, 2019 and 2018 and for each of its fiscal years ended December 31, 2019, 2018
and 2017, which are included elsewhere in this annual report, and have been prepared in accordance with U.S. GAAP. The selected financial data as of December 31, 2017, 2016 and 2015 and for the years ended
December 31, 2016 and December 31, 2015 is derived from audited consolidated financial statements of TAT not included in this annual report, which have been prepared in accordance with U.S. GAAP.
The selected consolidated financial data set forth below should be read in conjunction with and are qualified by reference to Item 5, “Operating and Financial Review and Prospects,” and our consolidated
financial statements and notes thereto included elsewhere in this annual report.
4
2019
$
Income Statement Data:
Revenues:
Products
Services
Total revenues
Cost of revenues:
Products
Services
Total cost of revenues
Gross profit
Operating expenses:
Research and development, net
Selling and marketing
General and administrative
Other expenses (income)
Gain on bargain purchase
Operating income (loss) from continuing operations
Financial expenses, net
Income (loss) from continuing operations before taxes on income
Taxes on income (tax benefit)
Income (loss) from continuing operations after taxes on income (tax benefit)
Share in results of equity investment of affiliated companies
Net income (loss) from continuing operations
Net income (loss) attributable to TAT Technologies’ shareholders
Basic and diluted net income (loss) per share:
Net income (loss) from continuing operations per share attributable to controlling
interest
Weighted average number of shares used in computing:
Basic net income (loss) per share
Diluted net income (loss) per share
Cash dividend per share
$
$
$
2018
Year Ended December 31,
2017
(in thousands, except share and per share data)
2016
$
24,959
77,073
102,032
21,557
64,913
86,470
15,562
74
5,259
8,251
-
-
13,584
1,978
(451)
1,527
589
938
(132)
806
806
$
$
23,151
70,027
93,178
23,807
60,980
84,787
8,391
553
4,913
8,559
(4)
-
14,021
(5,630)
(102)
(5,732)
(1,464)
(4,268)
(140)
(4,408)
(4,408) $
$
36,053
70,474
106,527
28,096
57,987
86,083
20,444
731
4,974
9,409
53
-
15,167
5,277
(338)
4,939
2,333
2,606
(210)
2,396
2,396
$
2015
$
30,431
65,363
95,794
23,788
52,969
76,757
19,037
1,140
3,876
10,023
(138)
-
14,901
4,136
(154)
3,982
3,865
117
(55)
62
62
$
31,339
54,268
85,607
24,466
47,476
71,942
13,665
890
2,903
8,469
631
(4,833)
8,060
5,605
(349)
5,256
644
4,612
1,237
5,849
5,849
(0.5)
(0.5) $
8,864,885
8,864,885
-
$
0.27
0.27
$
8,848,028
8,909,072
0.34
$
0.01
0.01
$
8,828,444
8,830,764
0.34
$
0.66
0.66
8,808,344
8,810,689
-
0.1
0.1
$
8,874,696
8,874,696
-
$
5
Balance Sheet Data:
Working capital
Total assets
Long-term liabilities, excluding current maturities
Shareholders’ equity
B. Capitalization and Indebtedness
Not applicable.
C. Reasons for the Offer and Use of Proceeds
Not applicable.
D. Risk Factors
2019
2018
As of December 31,
2017
(in thousands)
2016
2015
$
$
62,934
114,675
8,601
85,370
$
$
62,778
103,287
4,312
84,294
$
$
67,042
111,995
5,742
88,574
$
$
66,683
111,977
5,083
88,652
$
$
70,813
109,583
3,322
91,424
Investing in our ordinary shares involves certain risks and uncertainties. You should carefully consider the risks and uncertainties described below before investing in our ordinary shares. Our
business, prospects, financial condition and results of operations could be adversely affected due to any of the following risks. In that case, the value of our ordinary shares could decline, and you could lose
all or part of your investment.
6
Risks Related to Our Business and Our Industry
The aerospace industry is subject to significant regulation and oversight, and TAT and its subsidiaries may incur significant fines, penalties and costs if TAT and its subsidiaries do not comply with these
regulations.
The aerospace industry is highly regulated in the United States and elsewhere. To manufacture, sell and service parts used in aircrafts, TAT and its subsidiaries must be certified or accepted by the FAA,
EASA, the United States Department of Defense and comparable agencies in other countries and by leading original equipment manufacturers (“OEMs”). If any of our material certifications, authorizations or
approvals are revoked or suspended, then the operations of TAT or its subsidiaries, as the case may be, will be significantly curtailed and TAT and its subsidiaries could be subjected to significant fines and
penalties. In the future, new and more demanding government regulations may be adopted or industry oversight may be increased. TAT and its subsidiaries may have to incur significant additional costs to
achieve compliance with new regulations or to reacquire a revoked or suspended license or approval, which could materially reduce profitability.
TAT competes with a number of established companies in all aspects of TAT’s business, many of which have significantly greater resources or capabilities than TAT.
TAT’s major competitors in the area of OEM heat transfer solutions and aviation accessories, are other OEMs who manufacture heat transfer solutions. These include:
(i)
(ii)
Manufacturers based in the United States, such as the Hughes-Treitler division of Ametek Inc., Boyd Corporation, , Collins Aerospace, Honeywell International, and Triumph Thermal Systems;
Manufacturers based in Europe such as HS Marston Aerospace Ltd., a subsidiary of Collins Aerospace, Secan and Liebherr-Aerospace Toulouse S.A.; and
(iii)
Manufacturers based in Asia such as Sumitomo Precision Products from Japan.
Many of TAT’s competitors are far larger, have substantially greater resources than TAT, including technical, financial, research and development, marketing and distribution capabilities, and enjoy
greater market recognition. These competitors may be able to achieve greater economies of scale and may be less vulnerable to price competition than TAT. In addition, some of those companies are considered to
be tier one suppliers offering customers a wider range of systems and products, in addition to heat transfer solutions, as a bundle. TAT may not be able to offer its products as part of integrated systems to the
same extent as its competitors or successfully develop or introduce new products that are more cost effective or offer better performance than those of its competitors. Failure to do so could adversely affect TAT’s
business, financial condition and results of operations.
7
TAT’s major competitors in the area of MRO services for heat transfer components are the service divisions of OEMs, including Honeywell-Lori, Honeywell Secan, Honeywell Singapore, Hamilton
Malaysia, Hamilton Maastricht, and Liebherr Aerospace Saline, in addition to the in-house maintenance services of various commercial airlines and other independent service providers, including Triumph
Accessory Services, Drake Air – Ametek, American Cooler Service – Aviation Technical Services, Lufthansa Technik and Elite Aerospace, a division of Meggitt.
TAT’s major competitors in the area of MRO services for aviation components, landing gears and APUs, are the service divisions of OEMs, the in-house maintenance services of various commercial
airlines and other independent service providers, including Standard Aero Group Inc., Aerotech International Inc., Honeywell International, AAR Corp., Safran, Liebherr, Turbine Aero, Hawker Pacific and APRO.
TAT’s major competitors in the area of overhaul and coating of jet engine components are the service divisions of OEMs, the in-house maintenance services of various commercial airlines and other
independent service providers, including Safran, General Electric, GKN, PAS MCT Japan and others. With respect to masking materials, TAT's major competitors are APV Coatings, Praxair, Saint-Gobain and
others.
Competition in the MRO market is based on price, quality, engineering solutions, breadth of services, and the ability to perform repairs and overhauls rapidly. A number of our competitors have inherent
competitive advantages. For example, we compete with the service divisions of large OEMs which are able to derive significant brand recognition from their OEM manufacturing activities. We also compete with the
in-house service divisions of large commercial airlines where there is a strong incentive for an airline to fully-utilize the services of its maintenance employees and facilities.
8
Further, TAT’s competitors may have additional competitive advantages, such as:
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• The ability to adapt faster to changes in customer requirements and industry conditions or trends;
• Greater access to capital;
• Stronger relationships with customers and suppliers;
• Greater name recognition;
• Access to superior technology and greater marketing resources;
• The ability to offer complete systems in addition to components; and
• The ability to bundle heat transfer components and solutions and other aircraft components.
If TAT is unable to overcome these competitive disadvantages, then TAT’s business, financial condition and results of operations would be adversely affected.
TAT derives a material share of its revenues from few major customers. If TAT loses any of these customers or they reduce the amount of business they do with TAT, TAT’s revenues may be seriously affected.
Five customers accounted for approximately 23.7%, 18.2% and 19.7% of TAT’s revenues for the years ended December 31, 2019, 2018 and 2017, respectively. TAT’s major customers may not maintain the
same volume of business with TAT in the future. If TAT loses any of these customers or they reduce the amount of business they do with TAT, TAT’s revenues may be seriously affected.
A part of the revenues of TAT and its subsidiaries are from contracts with the U.S. and Israeli governments and are subject to special risks. A loss of all, or a major portion, of these revenues from government
contracts could have a material adverse effect on TAT’s operations.
A portion of the revenues of TAT and its subsidiaries are from contracts with the U.S. and Israeli governments. Sales to the U.S. and Israeli governments accounted for approximately 7.2%, 4.1% and 5.4%
of TAT’s revenues on a consolidated basis for the years ended December 31, 2019, 2018 and 2017, respectively.
9
Business with the U.S. and Israeli governments, as well as with the governments of other countries, is subject to unique risks which do not exist when doing business with other private parties. These
risks include the ability of the governmental authorities to unilaterally:
=
• Suspend TAT or any of its subsidiaries from receiving new contracts pending resolution of alleged violations of procurement laws or regulations;
• Terminate existing contracts, with or without cause, at any time;
• Condition the receipt of new contracts on conditions which are beyond the control of TAT;
• Reduce the value of existing contracts;
• Audit the contract-related costs and fees of TAT and its subsidiaries, including allocated indirect costs; and
• Control or prohibit the export of products of TAT and its subsidiaries.
Also, military and defense budget cuts may result in reduced demand for the products and manufacturing services of TAT and its subsidiaries. Smaller budgets could result in reduction in the business
revenues of TAT and its subsidiaries.
If TAT and its subsidiaries do not receive the governmental approvals necessary for the export of their products, TAT’s revenues may decrease. Similarly, if TAT’s suppliers and partners do not receive their
government approvals necessary to export their products or designs to TAT, TAT’s revenues may decrease.
Under Israeli law, the export of certain products and know-how of TAT and its subsidiaries is subject to approval by the Israeli Ministry of Defense. Prior to initiating sales proposals for the export of
these products and know-how and to the actual shipment of such products or know-how, TAT and its subsidiaries must obtain permits from the Ministry of Defense. TAT and its subsidiaries may not be able to
receive in a timely manner, or at all, all the required permits for which they may apply in the future.
Similarly, many countries have laws according to which the export of certain military products, technical designs and spare parts require the prior approval of, or export license from, their governments.
This process also applies to our partners and suppliers. If TAT and its subsidiaries or its partners and suppliers are unable to receive all the required permits and/or licenses in a timely manner, or at all, TAT’s
revenues may decrease.
10
TAT depends on a limited number of suppliers of components for certain of its products and if TAT or any of its subsidiaries are unable to obtain these components when needed, they would experience
delays in manufacturing their products and TAT’s financial results could be adversely affected.
TAT relies on a limited number of key suppliers for parts for certain of its OEM activities and MRO services. Some of these suppliers are currently the sole source of one or more components upon which TAT is
dependent. For example, Honeywell International Inc. is a key supplier to TAT of APU spare parts and of certain other components used by TAT and its subsidiaries for OEM activities and in the provision of
MRO services. TAT's subsidiary, Piedmont, is a Honeywell licensed Authorized Repair Center for APUs under two separate agreements, for military and commercial applications. The military agreement with
Honeywell was extended until June 30, 2020. The parties have yet to reach an understanding on extending the agreement.
The commercial agreement with Honeywell is due to expire on June 30, 2020. At this stage, it is too early to estimate if such agreement will be extended.
Also, Piedmont is a provider of services on Safran and Liebherr Landing Gear systems, to do so, Piedmont is dependent on these OEM’s to provide parts and engineering support.
Suppliers of some of these components require TAT to place orders with significant lead time to assure supply in accordance with TAT’s requirements. A delay in the supply of these components can
significantly delay the delivery of our products and services. If TAT were to engage in a commercial dispute with or be unable to obtain adequate supplies of parts from these suppliers at commercially reasonable
prices or required lead time, TAT could experience delays in manufacturing and its financial results could be adversely affected. Increased costs associated with supplied materials or components could increase
TAT’s costs and reduce TAT’s profitability if TAT is unable to pass these cost increases on to its customers.
11
TAT may face increased costs and a reduced supply of raw materials. TAT may not be able to recoup future increases in the cost of raw materials required for its operations through price increases for its
products.
In recent years, the cost of raw materials and components used by TAT has fluctuated significantly due to market and industry conditions. TAT may not be able to recoup future increases in the cost of
raw materials or component cost through price increases for its products and services. If TAT is unable to obtain the raw materials required for its operation, TAT could experience delays or disruptions in the
provision of its services and its financial results could be adversely affected.
TAT’s future success depends on its ability to develop new offerings and technologies.
The markets we serve are characterized by rapid changes in technologies and evolving industry standards. In addition, some of our products are installed on, and some of our services are provided in
connection with, platforms that may have a limited life or become obsolete. Unless we develop new offerings or enhance our existing offerings we may be susceptible to loss of market share resulting from the
introduction of new or enhanced offerings by competitors. For example, revenues of the overhaul and coating of jet engine components segment from MRO services for the Pratt & Whitney JT8D jet engine
comprise a material portion of such segment’s total revenues. In recent years, the JT8D jet engine is being replaced with new engines in newer types of aircrafts that have been manufactured in recent years. If we
will not develop MRO offerings for newer types of jet engines, it will have a material adverse impact on the business and results of operations of the overhaul and coating of jet engine components segment. In
fiscal year 2019, the revenues of the overhaul and coating of jet engine components segment accounted for approximately 8.4% of TAT’s total revenues.
TAT may face significant risks in the management of its inventory, while failure to effectively manage its inventory levels may result in supply imbalances that could harm its business
We maintain an inventory of exchangeable units of heat transfer solutions, aviation accessories, aviation components, APUs, landing gears, engine blades and coating materials and other spare parts
related to our products and services in various locations, including with third party logistics providers. Due to the long lead time of our suppliers and manufacturing cycles, we need to forecast demand and commit
significant resources towards these inventories. As such, we are subject to significant risks in managing the inventory needs of our business, including estimates of the appropriate demand across our products.
Should actual market conditions differ from our estimates, our future results of operations could be materially adversely affected. In the future, we may be required to record write-downs of finished products and
materials on-hand as a result of future changes in our sales forecasts.
TAT’s backlog of projects under contract is subject to unexpected adjustments, delays in payments and cancellations.
Our backlog includes purchase orders received from our customers for our products or services and our estimation of the maximum potential revenues that are expected to be derived from frame agreements with
our customers. There is no legal obligation from the customer to purchase our products or services under those frame agreements. In addition, we use estimations to evaluate the potential revenue from these
agreements. From time to time, for reasons beyond our control, projects are delayed, scaled back, suspended or cancelled, or the customer delays making payments, which may adversely affect the revenue, profit
and cash flow that we ultimately receive from contracts reflected in our backlog.
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TAT faces special risks from international sales operations which may have a material adverse effect on TAT’s business, operating results and financial condition.
In the years ending December 31, 2019, 2018 and 2017, approximately 93%, 93% and 91% of TAT’s sales, respectively, resulted from TAT’s operations out of Israel. This revenue concentration is subject
to various risks, including:
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• Governmental embargoes or foreign trade restrictions;
• Changes in U.S. and foreign governmental regulations;
• Changes in foreign exchange rates;
• Tariffs;
• Other trade barriers;
• Political, economic and social instability; and
• Difficulties collecting accounts receivable.
Accordingly, TAT and its subsidiaries may encounter significant difficulties in connection with the sale of their products in international markets.
General business conditions are vulnerable to the effects of epidemics, such as the COVID-19 coronavirus, which could materially disrupt our business.
We are vulnerable to the global economic effects of epidemics and other public health crises, such as the novel strain of COVID-19 virus. Due to the recent outbreak of the COVID-19 virus, there has been a
substantial curtailment of global travel and business activities which could have an impact on airline spending and demand, and could negatively impact our sales if conditions worsen or extend for a prolonged
period of time. Supply chain and manufacturing disruptions could negatively impact our sales. If not resolved quickly, the impact of the epidemic could have a material adverse effect on our business.
TAT may engage in future acquisitions that could dilute TAT’s shareholders’ equity and harm TAT’s business, results of operations and financial condition.
TAT has pursued, and will continue to pursue, growth opportunities through organic growth as well as acquisition of businesses, products and technologies. For example, in October 2015, TAT
completed the acquisition of Turbochrome for approximately $3.5 million, and an additional earn-out payment of $ 0.5 million during 2016.
TAT is unable to predict whether or when any prospective acquisition will be completed. TAT may not be able to successfully identify suitable acquisition candidates, complete acquisitions, integrate the
acquired businesses into its operations, or expand into new markets. The process of integrating an acquired business may be prolonged due to unforeseen difficulties and may require a disproportionate amount of
TAT’s resources, including management attention. Furthermore, once integrated, acquisitions may not achieve comparable levels of revenues, profitability or productivity as TAT’s existing business or otherwise
perform as expected. The occurrence of any of these events could harm TAT’s business, financial condition or results of operations. Future acquisitions may require substantial capital resources, which may
require TAT to seek additional debt or equity financing.
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Future acquisitions by TAT could result in the following, any of which could materially harm TAT’s results of operations or the price of TAT’s ordinary shares:
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• Issuance of equity securities that would dilute TAT’s shareholders’ percentages of ownership;
• Large one-time write-offs;
• The incurrence of debt and contingent liabilities;
• Difficulties in the assimilation and integration of operations, personnel, technologies, products and information systems of the acquired companies;
• Diversion of management’s attention from other business activities and concerns;
• Contractual disputes;
• Risks of entering geographic and business markets in which TAT has no or only limited prior experience; and
• Potential loss of key employees of acquired organizations.
Our strategic partnerships and relationships carry inherent business risks.
We may participate in strategic partnerships and joint ventures in a number of countries. For example, in November 2015, we signed a joint venture agreement with Russian-based Engineering, to establish
a new facility for the provision of MRO services for heat transfer components in Russia and the Commonwealth of Independent States (“CIS”). The new company, TAT-Engineering LLC, is based in Novosibirsk’s
Tolmachevo airport.
Our actions with respect to these affiliated companies may be restricted to some degree by shareholder agreements entered into with our strategic partners. Our business, financial condition, results of
operations and prospects may be materially harmed if disagreements develop with our partners. Our ability to withdraw funds and dividends from these entities may depend on the consent of partners. If one of our
strategic partners becomes subject to investigation, sanctions or liability, TAT might be adversely affected. Furthermore, strategic partnerships in emerging markets are accompanied by risks inherent to those
markets, such as an increased probability of a partner defaulting on obligations or losing a partner with important insights in that region. Strategic partnerships in emerging markets are subject to greater risks than
strategic partnerships in more developed markets, including significant political, legal and economic risks and risks related to fluctuations in currencies. For example, the value of the Russian currency, has declined
significantly in response to political and economic issues since December 31, 2013, and may continue to decline. The significant depreciation of the Russian ruble against the U.S. dollar may negatively impact our
results of operations related to our joint venture in Russia.
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Rapid technological changes may adversely affect the market acceptance of TAT's products.
The aerospace and defense markets in which TAT competes are subject to technological changes, introduction of new products, changes in customer demands and evolving industry standards. For
example, new materials, new structures and 3D printing – a technology based on the principle of joining thin layers of materials, in horizontal cross-section, to build up a real, three-dimensional object from a digital
model – may enable the manufacturing of high-quality and new characterization heat exchangers in serial production with a better return of value. The future success of TAT will depend upon its ability to keep
pace with technological developments and to timely address the increasingly sophisticated needs of its customers by supporting existing and new technologies and by developing enhancements to its current
products and by introducing new ones.
TAT has fixed-price contracts with some of its customers and TAT bears the risk of costs in excess of its estimates. In addition, TAT may not be able to pass on increased costs to its customers.
TAT has entered into multi-year, fixed-price contracts with some of its MRO and OEM customers. Pursuant to these contracts, TAT realizes all the benefits or costs resulting from any increases or
decreases in the cost of providing services and products to these customers. Several of TAT’s contracts do not allow TAT to recover for increases in raw material prices, taxes or labor costs, while other contracts
may permit, to a limited extent, periodic price adjustments. Any increase in these costs could increase the cost of operating our business and reduce our profitability. Factors such as inaccurate pricing and
increases in the cost of labor, materials or overhead may result in cost over-runs and losses on those agreements. TAT may not succeed in obtaining customer approval to re-price a particular product and may not
be able to recoup previous losses resulting from incomplete or inaccurate engineering data. In addition, as costs increase, TAT may not be able to pass on such increased costs to other customers. This could
materially impact TAT’s profitability.
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TAT depends on its key executives; it may not be able to hire and retain additional key employees or successfully integrate new members of its team; the loss of key employees could have a material adverse
effect on TAT’s business.
TAT’s success depends to a large extent on the experience and expertise of its senior management. Any member of TAT’s senior management may choose to end his or her employment with TAT and
seek employment with others for any reason. The loss of the expertise of TAT’s senior management through death, disability or an employee’s decision to end his or her employment could have a material and
adverse effect on our business, financial condition and results of operations. TAT is not the beneficiary of life or disability insurance covering any of its senior management, key employees or other personnel.
TAT depends on its manufacturing and MRO facilities and any material damage to these facilities may adversely impact TAT’s operations.
TAT’s results of operations depend in large part on its ability to provide prompt and efficient service to its customers upon receipt of orders, either the manufacture and delivery of OEM products or the
provision of MRO services. As a result, any material disruption of TAT’s day-to-day operations could have a material adverse effect on its business, customer relations and profitability. TAT relies on its Gedera
and Kiryat Gat, Israel, Kernersville and Greensboro, North Carolina and Tulsa, Oklahoma facilities for the manufacture of its OEM products and provision of its MRO services. A war or terrorist act, fire, flood,
earthquake or other disaster or condition that significantly damaged or destroyed any of these facilities would have a material adverse effect on the operations of TAT.
TAT uses equipment that is not easily repaired or replaced, and therefore material equipment failures could cause TAT or its subsidiaries to be unable to meet quality or delivery expectations of its
customers.
Many of TAT’s service and manufacturing processes are dependent on equipment that is not easily repaired or replaced. As a result, unexpected equipment failures could result in production delays or
the manufacture of defective products. TAT’s ability to meet its customers’ expectations with respect to on-time delivery of repaired components or quality OEM products is critical. Failure by TAT to meet the
quality or delivery expectations of its customers could lead to the loss of one or more of its significant customers.
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TAT may fail to maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act of 2002.
The Sarbanes-Oxley Act of 2002 imposes certain duties on TAT and its executives and directors. TAT’s efforts to comply with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002 (“SOX”)
governing internal controls and procedures for financial reporting have resulted in increased general and administrative expenses and a diversion of management time and attention. TAT expects these efforts to
require the continued commitment of significant resources. TAT may identify material weaknesses or significant deficiencies in its assessments of its internal controls over financial reporting. Failure to maintain
effective internal controls over financial reporting could result in investigation or sanctions by regulatory authorities and could have a material adverse effect on TAT’s operating results, investor confidence in
TAT’s reported financial information and the market price of TAT’s ordinary shares. Our independent registered public accounting firm is not required to and has not performed an audit of our internal controls
over financial reporting as of December 31, 2019.
TAT has potential exposure to liabilities arising under environmental laws and regulations.
TAT’s business operations and facilities are subject to various federal, state, and local laws and regulations related to the environment, including, but not limited to, regulations that govern the discharge
of pollutants and hazardous substances into the air and water and the handling, storage and disposal of such materials. Compliance with such laws as they relate to the handling, storage and disposal of hazardous
substances is a significant obligation for TAT at each of its facilities. If it fails to comply with these and other environmental-related laws and regulations, TAT would be subject to serious consequences, including
fines and other sanctions, and limitations on its operations due to changes to, or revocations of, the environmental permits applicable to its facilities. The adoption of new laws and regulations, stricter enforcement
of existing laws and regulations, the discovery of previously unknown contamination or the imposition of new cleanup requirements could require TAT to incur costs and become subject to new or increased
liabilities that could increase TAT’s operating costs and adversely affect the manner in which we conduct our business.
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Under certain environmental laws, liability associated with an investigation or remediation of hazardous substances can arise from a broad range of properties, including properties currently or formerly
operated by TAT or any of its predecessors, as well as properties to which TAT sent hazardous substances or wastes for treatment, storage, or disposal. Costs and other obligations can arise from claims for toxic
torts, natural resource and other damages, as well as the investigation and clean-up of contamination at such properties. Under certain environmental laws, such liability may be imposed jointly and severally, so
TAT may be responsible for more than its proportionate share and may even be responsible for the entire liability at issue. The extent of any such liability can be difficult to predict.
TAT is exposed to potential liabilities arising from product liability and warranty claims.
TAT is exposed to potential liabilities for personal injury or death as a result of the failure of an aircraft component that was designed, manufactured, serviced or supplied by TAT. TAT believes that, in an
effort to improve operating margins, some customers have delayed the replacement of parts beyond their recommended lifetime, which may undermine aircraft safety and increase the risk of liability of TAT and its
subsidiaries.
If any of our products are defective, we could be required to redesign or recall those products or pay substantial damages or warranty claims. Such an event could result in significant expenses, disrupt
sales and damage our reputation and that of our products and services. There can be no assurance that TAT will not experience material product liability losses in the future, that it will not incur significant costs to
defend such claims, that, although TAT maintains product liability insurance, its insurance coverage will be adequate if claims were to arise or that it would be able to maintain insurance coverage in the future at an
acceptable cost. A successful claim brought against TAT or its subsidiaries in excess of its available insurance coverage may have a material adverse effect on TAT’s business.
In addition, contractual disputes over warranties can arise in the ordinary course of business. TAT may be subject to requests from customers for cost sharing or pricing adjustments as a part of their
commercial relationships, even though the customers had previously agreed to bear these risks.
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Significant disruptions of our information technology systems or breaches of our data security could adversely affect our business.
Our operations depend on the continued and secure functioning of our computer and communications systems and the protection of information stored in computer databases maintained by us, and in
certain circumstances, by third parties. Such systems and databases are subject to breach, damage, disruption or failure from, among other things, cyber-attacks and other unauthorized intrusions. In particular, we
may be targeted by experienced computer hackers who may attempt to penetrate our computer systems and misappropriate or compromise our confidential information or that of our customers. A significant
invasion, interruption, destruction or breakdown of our information technology, or IT, systems and/or infrastructure by persons with authorized or unauthorized access could negatively impact our business and
operations. We could also experience business interruption, information theft and/or reputational damage from cyber-attacks, which may compromise our systems and lead to data leakage either internally or at our
third-party providers. Both data that has been inputted into our main IT platform, which covers records of transactions, financial data and other data reflected in our results of operations, as well as data related to
our proprietary rights (such as research and development, and other intellectual property-related data), are subject to material cyber security risks. To date, we are not aware that we have experienced any loss of, or
disruption to, material information as a result of any such malware or cyber-attack.
TAT’s activity in Israel may be adversely affected by a change in the exchange rate of the NIS against the dollar. Because exchange rates between the NIS and the dollar fluctuate continuously, exchange
rate fluctuations, particularly larger periodic devaluations, may have an impact on TAT’s profitability and period to period comparisons of TAT’s results.
TAT’s financial statements are stated in dollars, while a portion of TAT’s expenses in Israel, primarily labor expenses, are incurred in NIS and a portion of its revenues are quoted in NIS and in Euro.
Additionally, certain assets, as well as a portion of TAT’s liabilities, are denominated in NIS. Because exchange rates between the NIS and the dollar fluctuate continuously, exchange rate fluctuations, particularly
larger periodic devaluations, may have an impact on TAT’s profitability and period to period comparisons of TAT’s results. TAT’s results may be adversely affected by the devaluation of the NIS in relation to the
dollar (or if such devaluation is on a lagging basis), if TAT’s revenues in NIS are higher than TAT’s expenses in NIS and/ or the value of TAT’s assets in NIS are higher than TAT’s liabilities in NIS. Alternatively,
TAT’s results may be adversely affected by an appreciation of the NIS in relation to the dollar (or if such appreciation is on a lagging basis), if TAT’s expenses in NIS are higher than TAT’s revenues in NIS and/or
TAT’s liabilities in NIS are higher than TAT’s assets in NIS. From time to time, we enter into hedging transactions to attempt to limit the impact of foreign currency fluctuations. However, the protection provided
by such hedging transactions may be partial and leave certain exchange rate-related losses and risks uncovered. Therefore, our business and profitability may be harmed by such exchange rate fluctuations.
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Risk Factors Related to Our Ordinary Shares
TAT’s share price has been volatile in the past and may decline in the future.
TAT’s ordinary shares have experienced significant market price and volume fluctuations in the past and may experience significant market price and volume fluctuations in the future, in response to
factors such as the following, some of which are beyond TAT’s control:
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• Quarterly variations in TAT’s operating results;
• Operating results that vary from the expectations of securities analysts and investors;
• Changes in expectations as to TAT’s future financial performance, including financial estimates by securities analysts and investors;
• Announcements of technological innovations or new products by TAT or TAT’s competitors;
• Announcements by TAT or TAT’s competitors of significant contracts, acquisitions, strategic partnerships, joint ventures or capital commitments;
• Announcements by third parties of significant claims or proceedings against us;
• Additions or departures of key personnel;
• Future sales of TAT’s ordinary shares (by our controlling shareholders or others);
• De-listing of TAT’s shares from NASDAQ and/or from the TASE;
• Stock market price and volume fluctuation;
• Legal proceedings against TAT’s controlling shareholders; and
• Regulatory actions by securities authorities which impacts TAT’s interaction with securities analysts and institutional investors.
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Equity stock markets can undergo extreme price and volume fluctuations. Market fluctuations, as well as political and economic conditions, such as a recession, interest rate or currency rate fluctuations
and political events or hostilities in or surrounding Israel, could adversely affect the market price of TAT’s ordinary shares.
In the past, securities class action litigation has often been brought against companies following periods of volatility in the market price of their securities. TAT may be the target of similar litigation in the
future. Securities litigation could result in substantial costs and divert management’s attention and resources both of which could have a material adverse effect on TAT’s business and results of operations.
Substantial future sales of TAT’s ordinary shares by TAT’s principal shareholders may depress TAT’s share price.
TAT’s principal shareholders, FIMI Israel Opportunity FIVE, Limited Partnership and FIMI Opportunity V, L.P. (“FIMI” or the “FIMI Funds”), beneficially own together 59.21% of TAT’s outstanding
shares. If FIMI sells a substantial number of TAT’s ordinary shares or if the perception exists that FIMI may sell a substantial number of TAT’s ordinary shares, the market price of TAT’s ordinary shares may fall.
Any substantial sales of TAT’s shares in the public market may also impede our ability to sell equity or equity-related securities in the future at a time, in a place and on terms TAT deems appropriate.
Risks Relating to Our Location in Israel
Because TAT has significant operations in Israel, TAT may be subject to political, economic and other conditions affecting Israel that could increase TAT’s operating expenses and disrupt TAT’s business.
TAT is incorporated under the laws of the State of Israel. TAT’s executive offices, its research and development facilities and main manufacturing plant are also located in Israel. As a result, political,
economic and military conditions affecting Israel directly influence TAT. Any major hostilities involving Israel, a full or partial mobilization of reserve forces of the Israeli army, the interruption or curtailment of
trade between Israel and its present trading partners, or a significant downturn in the economic or financial condition of Israel could have a material adverse effect on TAT’s business, financial condition and
results of operations.
Since its establishment in 1948, Israel and its Arab neighbors have engaged in a number of armed conflicts. A state of hostility, varying from time to time in intensity and degree, has led to security and
economic challenges for Israel. Major hostilities between Israel and its neighbors may hinder Israel’s international trade and lead to economic downturn. This, in turn, could have a material adverse effect on TAT’s
operations and business. In recent years, there has been an escalation in violence among Israel, Hamas (which controls the Gaza Strip), the Palestinian Authority (which controls in the West Bank) and other
groups, as well as extensive hostilities along Israel’s border with the Gaza Strip such as the missiles fired from the Gaza Strip into Israel during the summer of 2014. Ongoing violence between Israel and the
Palestinians as well as tension between Israel and its Arab neighbors and Iran may have a material adverse effect on TAT’s business, financial conditions and results of operations.
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Furthermore, there are a number of countries, primarily Arab and Muslim countries, that restrict or frown upon business with Israel or Israeli companies, and TAT is precluded from marketing its products
to these countries. Restrictive laws or policies directed towards Israel or Israeli companies may have an adverse impact on TAT’s operations, TAT’s financial results or the expansion of TAT’s business.
TAT’s results of operations may be negatively affected by the obligation of its personnel to perform military service.
Many of TAT’s employees and some of TAT’s directors and senior management based in Israel are obligated to perform annual reserve duty in the Israel Defense Forces (“IDF”) and may be called for
active duty under emergency circumstances at any time. If a military conflict or war arises, these individuals could be required to serve in the military for extended periods of time. TAT’s operations could be
disrupted by the absence of one or more of its senior management, key employees or a significant number of other employees for a significant period due to military service. Any such disruption in TAT’s
operations could adversely affect TAT’s business.
Your rights and responsibilities as a shareholder are governed by Israeli law and may differ in some respects from the rights and responsibilities of shareholders under U.S. law.
TAT is incorporated under Israeli law. The rights and responsibilities of holders of TAT’s ordinary shares are governed by TAT’s memorandum of association, articles of association and by Israeli law.
These rights and responsibilities differ in some respects from the rights and responsibilities of shareholders in typical U.S. corporations. In particular, each shareholder of an Israeli company has a duty to act in
good faith and in a customary manner in exercising his or her rights and fulfilling his or her obligations toward the company and other shareholders and to refrain from abusing his power in the company, including,
among other things, in voting at the general meeting of shareholders on certain matters. Israeli law provides that these duties are applicable in shareholder votes on, among other things, amendments to a
company’s articles of association, increases in a company’s authorized share capital, mergers and interested party transactions requiring shareholder approval. In addition, a controlling shareholder of an Israeli
company, or a shareholder who knows that he or she possesses the power to determine the outcome of a shareholder vote or who has the power to appoint or prevent the appointment of a director or officer in the
company, has a duty of fairness toward the company. However, Israeli law currently does not define the substance of this duty of fairness. Because Israeli corporate law has undergone extensive revision in recent
years, there is relatively little case law available to assist in understanding the implications of these provisions that govern shareholder behavior.
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Israeli law may delay, prevent or make difficult an acquisition of TAT, which could prevent a change of control and, therefore, depresses the price of TAT’s shares.
Israeli corporate law regulates mergers, requires tender offers for acquisitions of shares above specified thresholds, requires special approvals for transactions involving directors, officers or significant
shareholders and regulates other matters that may be relevant to these types of transactions. Furthermore, Israeli tax considerations may make potential transactions unappealing to TAT or to some of TAT’s
shareholders. These provisions of Israeli law may delay, prevent or make difficult an acquisition of TAT, which could prevent a change of control and therefore depress the price of TAT’s shares.
Investors and TAT’s shareholders generally may have difficulties enforcing a U.S. judgment against TAT, TAT’s executive officers and directors or asserting U.S. securities laws claims in Israel.
TAT is incorporated in Israel and the majority of TAT’s executive officers and directors reside outside the United States. Service of process upon them may be difficult to effect within the United States.
Furthermore, many of TAT’s assets and most of the assets of TAT’s executive officers and directors are located outside the United States. Therefore, a judgment obtained against TAT or certain of its executive
officers and directors in the United States, including one based on the civil liability provisions of the U.S. federal securities laws, may not be collectible in the United States and may not be enforced by an Israeli
court. It also may be difficult for you to assert U.S. securities law claims in original actions instituted in Israel. However, subject to certain time limitations and other conditions, Israeli courts may enforce final
judgments of U.S. courts for liquidated amounts in civil matters, including judgments based upon the civil liability provisions of those and similar acts.
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As a foreign private issuer whose shares are listed on NASDAQ, TAT may follow certain home country corporate governance practices instead of certain NASDAQ requirements.
As a foreign private issuer whose shares are listed on NASDAQ, TAT is permitted to follow certain home country corporate governance practices instead of certain requirements of the NASDAQ
Marketplace Rules. A foreign private issuer that elects to follow a home country practice instead of such requirements must submit to NASDAQ in advance a written statement from an independent counsel in
such issuer’s home country certifying that the issuer’s practices are not prohibited by the home country’s laws. In addition, a foreign private issuer must disclose in its annual reports filed with the SEC or on its
website each such requirement that it does not follow and describe the home country practice followed by the issuer instead of any such requirement. For example, Israel’s corporate governance or laws require
that TAT obtain shareholder approval for certain dilutive events, such as for the establishment or amendment of certain equity-based compensation plans, an issuance that will result in a change of control of TAT,
certain transactions other than a public offering involving issuances of a 20% or more interest in TAT and certain acquisitions of the stock or assets of another company, which are not required by NASDAQ.
Item 4. Information on the Company
History and Development of TAT
TAT was incorporated under the laws of the State of Israel in April 1985 under the name Galaxy Graphics Ltd. TAT changed its name to Galagraph Ltd. in August 1986 and to TAT Technologies Ltd. in
May 1992. TAT is a public limited liability company under the Israeli Companies Law 1999-5759, (“Israeli Companies Law”), and operates under this law and associated legislation. TAT’s registered offices and
principal place of business are located at Re’em Industrial Park, Neta Boulevard, Bnei Ayish, Gedera 70750002 Israel and its telephone number is +972-8-826-8500. TAT’s website is www.tat-technologies.com. The
information on TAT’S website is not incorporated by reference into this annual report.
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TAT was founded in 1985 to develop the computerized systems business of its then parent company, TAT Industries Ltd. (“TAT Industries”), a publicly-held Israeli corporation then engaged in the
manufacture and sale of aeronautical equipment. In December 1991, TAT acquired the heat exchange operations of TAT Industries and in 2000, TAT purchased the remaining operations of TAT Industries relating
to the manufacture and maintenance of aviation accessories and leased certain of its properties.
In March 1987, TAT completed the initial public offering of its securities in the United States. TAT was listed on the NASDAQ Global Market (then known as the NASDAQ National Market) from its initial
public offering until July 1998 when the listing of TAT’s ordinary shares was transferred to the NASDAQ Capital Market. On June 24, 2009, TAT’s ordinary shares resumed trading on the NASDAQ Global Market.
Since August 2005 TAT’s shares have been traded also on the TASE.
Today TAT is a provider of a variety of solutions and services to the commercial and military aerospace and ground defense industries through its Gedera facility, as well as through its subsidiaries, Limco
and Piedmont in the U.S. (Limco and Piedmont are held by TAT through Limco-Piedmont, Inc. (“Limco-Piedmont”)) and Turbochrome in Kiryat Gat, Israel.
In 1993, TAT acquired Limco Airepair, Inc. (“Limco”). Located in Tulsa, Oklahoma, Limco’s FAA-certified repair station provides MRO services for airlines, air cargo carriers, maintenance service centers
and the military, especially for heat transfer components. In addition to its MRO services, Limco is an OEM of heat transfer solutions for aircraft and system manufacturers and other selected related products.
In 2005, Limco acquired Piedmont, a company certified by the FAA to perform MRO services of APUs and landing gears. Located in Greensboro, North Carolina, Piedmont’s FAA-certified repair station
provides MRO services for airlines, air cargo carriers, maintenance service centers and the military, especially for landing gears and APUs.
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In July 2007, Limco-Piedmont completed an initial public offering of its common stock and Limco-Piedmont’s shares were listed on the NASDAQ Global Market (symbol: LIMC) until July 2, 2009, when
TAT acquired all of the publicly held shares of Limco-Piedmont (approximately 32% of Limco-Piedmont’s total shares) in a stock for stock merger. As a result of such merger, Limco-Piedmont again became a
wholly-owned subsidiary of TAT.
Following a series of transactions occurring between March 2008 and March 2009, TAT acquired 70% control of Bental Industries Ltd. In February 2014, TAT sold its entire interest in Bental Industries
Ltd to Bental Investments Agshah Ltd. for an aggregate consideration of $5 million.
On December 4, 2009, TAT, through its subsidiary Piedmont, signed an investment agreement with FAvS. According to the agreement, Piedmont was issued 288,334 shares of Class B common stock of
FAvS, representing 37% of FAvS' then share capital (total number of shares acquired was subsequently adjusted as result of a 1 for 20 reverse stock split) and $750,000 of FAvS preferred shares (entitled to cash
dividends at an annual rate of 12% payable quarterly or to additional preferred shares at an annual rate of 15%) in return for Piedmont's propeller and parts businesses.
On March 11, 2015, Piedmont sold 237,932 shares of Class B common stock of FAvS representing 23.18% of FAvS' share capital and its entire holdings (16,253) of FAvS' Series A preferred stock for an
insignificant amount. As of December 31, 2018, TAT owns approximately 5% of FAvS’ issued and outstanding share capital.
In October 2015, TAT acquired Turbochrome, a company certified by the FAA and EASA to perform overhaul and coating of jet engine components, including turbine vanes and blades and fan blades.
In November 2015, TAT entered into an agreement with Engineering to establish a new MRO facility in Russia. The new company, TAT-Engineering LLC, is based in Novosibirsk’s Tolmachevo airport
and is providing services of minor repair, overhaul and recore for heat transfer components in Russia and the CIS. According to the joint venture agreement, TAT owns 51% of TAT-Engineering's shares and the
remaining 49% are held by Engineering.
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A. Business Overview
Overview
TAT Technologies Ltd. is a leading provider of solutions and services to the commercial and military aerospace and ground defense industries focused mainly on two product areas and services: Thermal
Management and Power and Actuation. TAT operates under four segments: (i) OEM of heat transfer solutions and aviation accessories through its Gedera facility; (ii) MRO services for heat transfer components
and OEM of heat transfer solutions through its Limco subsidiary; (iii) MRO services for aviation components through its Piedmont subsidiary; and (iv) overhaul and coating of jet engine components through its
Turbochrome subsidiary.
TAT’s activities in the area of OEM of heat transfer solutions and aviation accessories through its Gedera facility primarily include the design, development and manufacture of (i) a broad range of heat
transfer solutions, such as pre-coolers heat exchangers and oil/fuel hydraulic heat exchangers, used in mechanical and electronic systems on board commercial, military and business aircraft; (ii) environmental
control and power electronics cooling systems installed on board aircraft and ground applications; and (iii) a variety of other mechanical aircraft accessories and systems such as pumps, valves, and turbine power
units.
TAT’s activities in the area of MRO and OEM of heat transfer solutions include the MRO of heat transfer components and to a lesser extent, the manufacturing of certain heat transfer solutions. TAT’s
Limco subsidiary operates an FAA-certified repair station, which provides heat transfer MRO services for airlines, air cargo carriers, maintenance service centers and the military.
TAT’s activities in the area of MRO services for aviation components include the MRO of APUs, landing gears and other aircraft components. TAT’s Piedmont subsidiary operates an FAA-certified
repair station, which provides aircraft component MRO services for airlines, air cargo carriers, maintenance service centers and the military.
TAT’s activities in the area of jet engine overhaul through its Turbochrome facility includes the overhaul and coating of jet engine components, including turbine vanes and blades, fan blades, variable
inlet guide vanes and afterburner flaps.
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OEM of Heat Transfer Solutions and Aviation Accessories (Gedera)
TAT is an OEM of heat transfer solutions and aviation accessories to the commercial and military aerospace and ground defense industries, primarily through its Gedera facility. The main OEM activity at
our Gedera facility is the design and manufacture of a comprehensive line of heat exchangers and cold plates. Heat transfer solutions facilitate removal and dissipation of heat generated during the operation of
mechanical and electronic systems. Gedera’s heat transfer solutions are generally integrated into complete cooling systems. Using proprietary technological expertise, we design each heat transfer product to meet
the specific space, power, performance and other needs of our customers. Gedera’s heat transfer solutions are marketed worldwide for applications in commercial and military aircraft and electronic systems, the
primary users of such equipment. Gedera’s customers include, Liebherr-Aerospace Toulouse S.A. (“Liebherr”), Boeing Aircraft Company (“Boeing”), Israel Aerospace Industries, (“IAI”), Cessna Aircraft Company
(“Cessna”), Pilatus Aircraft Ltd (“Pilatus”), Embraer Empresa Brasileira de Aeronáutica S.A. (“Embraer”), Eaton Aerospace LLC (“Eaton”), Parker Hannifin Corporation (“Parker”), Bell Helicopter, as well as the U.S.
Air Force, U.S. Army, and U.S. Navy and other air forces from around the world. Such supply contracts are generally long-term engagements that may have terms of ten years or more.
As part of its OEM activities, Gedera is also engaged in the design, development and manufacture of complete cooling systems. This product line principally includes cooling systems for electronic
systems (used in airborne military platforms) and ground cooling systems (used in military facilities, tents, vehicles and other military applications).
In addition, Gedera designs, develops and manufactures aviation flow control accessories. These accessories include components, such as valves and pumps. Customers for Gedera’s aviation accessories
include Lockheed Martin Corporation (“Lockheed Martin”), Boeing, Continental Motors (“Continental”), the Israel Air Force (“IAF”), IAI, Elbit Systems (“Elbit”), Rafael Advanced Defense Systems (“Rafael”), as
well as the U.S. Air Force and U.S. Navy and other air forces from around the world.
Gedera also provides limited MRO services to military customers, mainly for aviation accessories as well as for certain heat transfer solutions. Gedera currently overhauls emergency power units, hydrazine
tanks, jet fuel starters, cooling turbines and various valves for the F-16 fighter aircraft. In addition, Gedera overhauls anti-icing valves and starters for the Blackhawk and Apache helicopters. The customers for
Gedera’s MRO services include the IAF, IAI, various NATO countries, as well as the U.S. Air Force, U.S. Army and U.S. Navy.
Gedera relies on highly qualified personnel and strong engineering, development and manufacturing capabilities that enable it to support its customers from the early program development phase to
prototype delivery.
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TAT estimates the size of the markets in which Gedera operates to be significant based on the scope of development projects and purchasing processes of its customers. Many of the projects Gedera is
engaged in are lengthy and complex, which account for its long-term supplier relationships and the customer loyalty it enjoys. TAT plans to expand its Gedera operations in the OEM segment, among other things,
by increasing the scope of work with its existing strategic customers, establishing relationships with new customers, increasing its capabilities in complete systems/subsystems manufacturing, and by targeting
strategic territories with high commercial potential.
MRO Services for Heat Transfer Components and OEM of Heat Transfer Solutions (Limco)
Through its Limco subsidiary TAT provides MRO services and OEM services to the aerospace and ground defense industries in the field of heat transfer. Limco’s FAA-certified repair station provides
aircraft component MRO services for airlines, OEMs, air cargo carriers, maintenance service centers and the military. Limco is also certified by the EASA, the Civil Aviation Administration of Thailand (“DCA”), the
Civil Aviation Administration of Indonesia (“DGCA”), and the Civil Aviation Administration of China (“CAAC”). Limco has also recently attained NADCAP certification for dye penetrant testing, welding and heat
treating. Limco specializes in MRO services for components of aircraft, such as heat transfer components and ozone converters. Generally, manufacturer specifications, government regulations and military
maintenance regimens require that aircraft components undergo MRO servicing at regular intervals or as necessary. Aircraft heat transfer components typically require MRO services, including repairs and
installation of replacement units, after two to five years of service or sooner if required. Aircraft manufacturers typically provide warranties on new aircraft and their components and subsystems, which may range
from one to five years depending on the bargaining power of the purchaser. Warranty claims are generally the responsibility of the OEM during the warranty period. Limco’s business opportunity usually begins
upon the conclusion of the warranty period for these components and subsystems. Limco’s customers include major U.S. domestic and international airlines, air cargo carriers, maintenance service centers, OEMs
such as commercial and military aircraft manufacturers and defense contractors, and the U.S. Armed Forces (Army, Air Force, Navy and Coast Guard). MRO contracts with these types of customers are generally
long-term engagements and may have terms of one to five years or more.
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Limco enjoys a strong reputation among customers for its competitive pricing and fast turnaround time. It is recognized by leading OEMs of aerospace products to provide MRO services for their heat
transfer solutions. For example, Limco is a well-recognized Collins Aerospace (Hamilton Sundstrand) repair center, providing MRO services for many of its heat transfer solutions.
In addition to its MRO services, Limco also manufactures, on an OEM basis, heat transfer solutions used in commercial, regional, business and military aviation platforms. Customers for Limco’s heat
transfer solutions include Boeing, the Defense Supply Center, Parker Hannifin, Raytheon Company (“Raytheon”), BAE Systems, Bell Helicopter, Triumph Aerostructures, Vought Aircraft Division, Cobham plc,
Northrop Grumman Corporation and Gulfstream Aerospace Corporation.
TAT estimates the size of the markets in which Limco operates to be significant based on the number of aircraft requiring MRO services provided by Limco along with the customer loyalty Limco enjoys.
TAT plans to expand its Limco operations, among other things, by developing OEM and MRO capabilities for additional types of heat transfer products with significant commercial potential.
MRO Services for Aviation Components (Piedmont)
Through its subsidiary Piedmont, TAT provides MRO services for aviation components to the aerospace industry. Piedmont’s FAA- and EASA-certified repair station provides aircraft component MRO
services for commercial airlines, business jets, air cargo carriers, maintenance service providers as well as governments and military forces worldwide. Piedmont specializes in MRO services for aircraft components,
including APUs, landing gears and Machining and Plating services (MPG). Generally, manufacturer specifications, government regulations and military maintenance regimens require that aircraft components
undergo MRO servicing at regular intervals or as necessary. Aircraft components typically require MRO services, including repairs and installation of replacement units, after three to ten years of service or sooner
if required. Aircraft manufacturers typically provide warranties on new aircraft and their components and subsystems, which may range from one to five years. Warranty claims are generally the responsibility of
the OEM during the warranty period. Piedmont’s business opportunity usually begins upon the conclusion of the warranty period for these components and subsystems. Piedmont’s customers include U.S.
domestic and international airlines, air cargo carriers and maintenance service providers. MRO contracts with these types of customers are generally long-term engagements that may have terms of one to ten years
or more.
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Piedmont is licensed by Honeywell as an authorized repair center to provide MRO services for several types of its APU models. Piedmont has excellent working relationships with the major landing gear
manufacturers as well.
TAT estimates the size of the markets in which Piedmont operates to be significant based on the number of aircraft requiring MRO services provided by Piedmont. TAT plans to expand its Piedmont
operations in the MRO segment by using Piedmont’s experience and reputation to develop MRO capabilities for additional types of APU and landing gears applications as well as other aircraft
systems/components with significant commercial potential and by offering additional supplementary services such as machining, plating and grinding (“MPG”).
Piedmont’s extensive experience in the repair and overhaul of APUs and landing systems includes a comprehensive involvement in the industry supply chain. In addition to its MRO services, Piedmont is active
worldwide in the exchange, lease and individual component parts supply of its APU and landing gear products. Through a network of industry partners and well-known aerospace parts distributors, Piedmont’s
activity in the sale of parts is a robust element of its business. Piedmont’s quality systems are AS9110 and NADCAP for non-destructive testing.
Overhaul and Coating of Jet Engine Components (Turbochrome)
Through its subsidiary Turbochrome, TAT provides MRO services for jet engine components to the aerospace industry. Turbochrome’s FAA- and EASA-certified repair station provides its services
mainly to maintenance service centers, airlines and the military. Turbochrome specializes in MRO services for engine components such as turbine vanes and blades, compressor vanes and blades, fan blades and
after burner flaps. Generally, manufacturer specifications, government regulations and military maintenance regimens require that engine components undergo MRO servicing at regular intervals or as necessary.
Commercial engine components typically require MRO services after three to five years of service or sooner if required. Engine manufacturers typically provide warranties on new engines and their components
and subsystems, which may range from one to five years depending on the bargaining power of the purchaser. Warranty claims are generally the responsibility of the OEM during the warranty period.
Turbochrome’s business opportunity usually begins upon the conclusion of the warranty period for these components. Turbochrome’s customers include domestic and international airlines, maintenance service
centers and the military.
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Turbochrome also specializes in the manufacturing of coating powders (for pack cementation aluminide coatings) and masking materials (for the prevention of coating in defined areas) used in the aviation
industry. Turbochrome provides these materials to OEMs and to maintenance service centers.
TAT estimates the size of the markets in which Turbochrome operates to be significant based on the number of jet engines requiring MRO services provided by Turbochrome. Turbochrome plans to
expand its operations in the MRO segment by using Turbochrome’s experience and reputation to develop MRO capabilities for additional types of jet engine components with significant commercial potential.
Turbochrome’s quality system complies with ISO 9001 and AS9100, and with EASA part 145 and FAA FAR 145 for the civil parts.
TAT-Engineering LLC
In November 2015, we signed an agreement with Russian-based Engineering Holdings Ltd of Moscow (“Engineering”), to establish a new facility for the provision of MRO services for heat transfer
components. The new company, TAT-Engineering LLC, is based in Novosibirsk’s Tolmachevo airport. The new entity was established in January 2016 and is currently operating under FAA certifications and
obtained FAA high-level repair approvals. Current efforts are focused on marketing initiatives targeting the major Russian and CIS airlines and maintenance stations.
Business Strategy
TAT aims to be the trusted partner to its strategic customers, delivering differentiated products and services in selected, high barrier-to-entry, markets. This will enable TAT to develop the long-term high-value
relationships it strives to have with its customers to effectively complete and continue grow business and improve profitability. Currently, TAT’s focus is on two main markets: thermal management solutions and
services and Power and Actuation solutions and services.
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Execution of TAT’s strategy is based on the following principles:
• Enhancing OEM capabilities — capitalizing on our technical expertise, experience and reputation in the market of heat transfer solutions to expand the scope of our OEM offerings to new aircrafts or to
new platforms in the existing aircrafts.
•
•
•
Expand the scope of MRO services — leveraging our technical expertise, engineering resources and facilities to broaden MRO services to additional types of aircraft and additional aircraft systems,
subsystems and components while developing the required technical expertise to provide these additional MRO services.
Increasing market share — continuing aggressive marketing efforts to win new customers as well as to expand activities with existing customers, partly by focusing on cross selling opportunities
between our different businesses. As part of our efforts, we also intend to expand our marketing presence in existing territories, like the United States and Western Europe as well as new territories, where
TAT currently has a smaller presence and fewer customers, such as Eastern Europe, Latin America and Asia.
Effective synergy among group members — enhancing the synergies between our various businesses. For example, by supplying Limco with heat transfer components manufactured in Gedera, we enable
Limco to offer a superior product and more competitive pricing on its MRO services, thereby improving Limco's overall competitive position in the market.
• Organic growth and M&A — in addition to growing our existing businesses organically as detailed above, we intend to evaluate complementary acquisition opportunities.
Products and Services
OEM of Heat Transfer Solutions and Aviation Accessories
Through its Gedera facility, TAT manufactures a wide range of heat transfer solutions used on board aircraft, air conditioning systems, environmental control systems and cooling systems for electronics
for military use. These solutions are manufactured in compliance with all of the stringent quality assurance standards that apply to the manufacture of aircraft parts. Gedera’s quality system complies with ISO 9001,
AS9100, Boeing quality systems approval D6-82479 and FAR 21.303 (the FAA standard for Parts Manufacturer Approval) and NADCAP for non-destructive testing and welding.
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Heat Transfer Solutions
We manufacture a wide range of heat transfer solutions in our Gedera facility. Gedera specializes in the design and manufacture of highly efficient, compact and reliable heat transfer solutions that are
designed to meet stringent constraints such as size, weight and environmental conditions. Heat transfer solutions, such as heat exchangers and cold plates, are integral components of a wide variety of
environmental control, mechanical and engine systems, as well as a wide range of electronic systems. These systems generate heat during operation that must be removed and dissipated. Heat transfer solutions
facilitate the exchange of heat created through the operation of these systems by transmitting the heat from a hot medium (air, oil or other fluids) to a cold medium for disposal.
In the aerospace industry, there is a constant need for improvements in performance, weight, cost and reliability. In addition, as electronic systems become smaller and more densely packed, the need for
sophisticated and efficient heat transfer components used to provide the cooling functions becomes more critical. Using Gedera’s technological expertise, TAT believes it is well positioned to respond to these
industry demands through continued new product development and product improvements.
Gedera’s principal heat transfer solutions include heat exchangers and cold plates. Typically, air-to-air heat exchangers cool a jet engine’s bleed air which, when cooled, is then used in the aircraft’s air
conditioning, pressurization and pneumatic systems. The liquid-to-air heat exchangers cool liquids such as engine oil, hydraulic oil and others used in other systems.
Gedera provides a one-stop-shop for all types of heat transfer solutions. Gedera’s heat exchangers are generally priced between approximately $2,000 and $45,000 per unit. A significant portion of Gedera’s
heat transfer solutions are sold to customers in connection with the original manufacture or retrofitting of particular aircraft equipment. Gedera generally enters into long-term supply contracts with its customers,
which require Gedera to supply heat transfer products as part of a larger project.
Gedera also manufactures other heat transfer solutions, such as cooling chassis, heat sinks and cold plates (which may be air-to-air, liquid-to-air or liquid-to-liquid), to control and dispose heat emitted by
the operation of various electronic systems. Such products are currently utilized mainly in radar systems, avionics, electronic warfare systems and various pods for targeting, navigation and night vision.
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As a result of the specialized nature of the systems in which Gedera’s parts are included, spare and replacement parts for the original heat transfer solutions are also usually provided by Gedera.
Aviation Flow Control Accessories
Gedera is also engaged in the design, development, manufacture and MRO services for aviation flow control accessories. These accessories include components such as valves and pumps.
Cooling and Air Conditioning Systems
Gedera is also engaged in the design, development and manufacture of complete environmental control systems and cooling systems. This product line includes ground cooling systems mainly for military
applications such as mobile command and control units, command and control vehicles, armored vehicles, mobile broadcast units, mobile hospitals, etc. In addition, Gedera designs, develops and manufactures
power electronics cooling systems based on customer specifications, while providing a complete engineering solution in compliance with strict civil aviation standards. Gedera’s systems are used globally and are
tested under strict standards.
MRO Services for Heat Transfer Components and OEM of Heat Transfer Solutions
MRO Services for Heat Transfer Components
Through its Limco subsidiary in the U.S., TAT provides MRO services for heat transfer components. The demand for MRO services is driven by the size and age of the aircraft fleet (including new
aircrafts entering into service), aircraft utilization and regulations set OR promulgated by the FAA and other governmental authorities.
Due to the increased maintenance costs of their aging fleets many carriers are seeking ways to reduce costs, minimize down-time, increase aircraft reliability and extend time between overhauls. One way to
accomplish this goal is through the outsourcing of more of their maintenance and support functions to reliable third parties. Furthermore, we believe that commercial carriers making the decision to outsource their
MRO requirements are searching for MRO service providers with a wide-range of service capabilities. Such MRO service providers allow the carriers to concentrate their outsourcing of MRO services to a select
group of third party providers. The global military aircraft fleet also presents similar opportunities for MRO service providers. We believe that an aging military fleet and the increased use of upgrade programs
aimed at extending the useful life of military aircraft will provide continued MRO growth opportunities.
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Limco specializes in the repair and overhaul of heat transfer components. These components include heat exchangers, oil coolers, pre-coolers, reheaters, condensers, water separators, fuel heaters,
evaporators and ozone converters.
Limco is continually expanding its MRO capabilities based on market need and/or customer request. Limco’s capabilities include heat transfer components used in aircraft and systems manufactured by
Airbus, Boeing, Bombardier, Cessna, Embraer, Lockheed Martin, Fokker, Liebherr-Aerospace, Collins Aerospace, Honeywell Aerospace and others.
One of Limco’s operational strengths and competitive advantages is the close cooperation with TAT’s Gedera facility. Through Gedera’s core manufacturing capabilities and engineering expertise, Limco
enjoys a constant supply source of cores of the highest quality necessary in order to perform its MRO services for heat transfer components. In addition, Limco benefits from Gedera’s varied engineering and
development capabilities relevant to Limco’s services in the field of heat transfer components.
Limco performs MRO services at its repair station in Tulsa, Oklahoma which has ISO9001, AS9110 and AS9100 certification, NADCAP certification for dye penetrant testing, welding and heat treating,, and
is licensed to provide MRO services by the FAA and EASA, as well as by the civil aviation Administrations of Thailand, Indonesia and China.
Limco offers different or various MRO services for heat transfer components. If the damage is significant, Limco will remanufacture the unit, which generally entails replacing the core matrix of the
damaged or old heat transfer component in lieu of replacing the entire unit with a new one. Limco designs and develops these customized remanufactured units as a cost-effective alternative to new part
replacement. In the event of less severe damage, Limco will either overhaul or repair the unit as necessary. Re-manufactured units carry warranties which are often equal or better than those provided to new units.
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OEM Authorizations and Licenses
Limco believes that establishing and maintaining relationships with OEMs of aircraft systems and components is an important factor in achieving sustainable success as an independent MRO service
provider. OEMs grant independent MRO service providers authorization to perform repair and overhaul services on their behalf. OEMs generally grant very few authorizations and maintain tight controls over their
authorized MRO service providers in order to maintain high quality of service to their customers. Obtaining OEM authorization requires sophisticated technological capabilities, experience-based industry
knowledge and substantial capital investment. Furthermore, Limco believes that service providers that have OEM authorization gain a competitive advantage as they typically receive discounts on parts, technical
information and OEM warranty support. Limco is an independent MRO service provider that is a well-recognized repair center of Collins Aerospace (Hamilton Sundstrand), one of the largest heat transfer solutions
manufacturers in North America or in the United States.
OEM of Heat Transfer Solutions
In addition to its MRO services, Limco also acts as an OEM manufacturer of heat transfer solutions used mainly in military aircraft and other ground applications and to a lesser extent, in commercial,
regional and business aircraft. Limco specializes in the design and manufacture of highly efficient heat transfer solutions, which are designed to meet stringent constraints such as size, weight and applicable
environmental conditions. These units include heat exchangers, oil coolers, precoolers, reheaters, condensers, fuel heaters and evaporators.
Limco also manufactures demineralizer systems for U.S. Navy vessels, including ships and nuclear submarines. Limco currently offers tens of OEM parts to the aerospace and ground defense industries.
These parts are manufactured in compliance with the stringent quality assurance standards that apply to the manufacture of aircraft and military parts.
Limco’s quality systems are ISO9001, AS9110, AS9100 and NADCAP for non-destructive testing, welding and heat treating and FAR 21.303 (the FAA standard for Parts Manufacturer Approval).
MRO Services for Aviation Components
Through its Piedmont subsidiary, TAT provides MRO services for aviation components, including APUs and landing gear. As previously mentioned, the demand for MRO services is driven by the size
and age of the aircraft fleet, aircraft utilization and regulations by the FAA and other governmental authorities.
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Due to increased maintenance costs of their aging fleets many carriers are seeking ways to reduce costs, minimize down-time, increase aircraft reliability and extend time between overhauls. One way to
accomplish this goal is through the outsourcing of more of their maintenance and support functions to reliable third parties. Furthermore, we also believe that commercial carriers making the decision to outsource
their MRO requirements are searching for MRO service providers that offer a wide-range of service capabilities. These MRO service providers allow the carriers to concentrate their outsourcing of MRO services to
a select group of third party providers. The global military aircraft fleet also presents similar opportunities for MRO service providers. We believe that an aging military fleet and the increased use of upgrade
programs aimed at extending the useful life of aircrafts will provide continued MRO growth opportunities.
Piedmont specializes in the repair and overhaul of APUs and landing gears. APUs are relatively small, self-contained generators used to start jet engines, usually with compressed air, and to provide
electricity, hydraulic pressure and air conditioning while an aircraft is on the ground. In many aircraft, an APU can also provide electrical power during in-flight emergency situations. Landing gears are the
structure that support an aircraft on the ground and allow it to taxi, takeoff and land.
Piedmont performs MRO services at its repair station in Greensboro, North Carolina, which is licensed by the FAA and EASA. Piedmont specializes in providing comprehensive repair and overhaul
services for APU models manufactured by both Honeywell and Hamilton Sundstrand, two leading OEMs in the United States. In addition, Piedmont provides full repair, overhaul, machining, plating and grinding
services for landing gear systems for commercial and military aircraft. Piedmont has a long history in providing landing gear MRO services for regional airliners, including aircraft manufactured by Bombardier (CRJ
100/200/Dash8), the French-Italian ATR (42/72), Gulfstream (G4), Lockheed martin (P3/C130) and the Brazilian Embraer (E170/E190).
OEM Authorizations and Licenses
Piedmont believes that establishing and maintaining relationships with OEMs of aircraft systems and components is an important factor in achieving sustainable success as an independent MRO service
provider. OEMs grant independent MRO service providers authorizations or licenses to perform repair and overhaul services on the equipment they manufacture. OEMs generally grant few authorizations or
licenses and maintain tight controls over their authorized and licensed MRO service providers, in order to maintain high quality of service to their customers. Obtaining OEM authorizations requires sophisticated
technological capabilities, experience-based industry knowledge and substantial capital investment. Piedmont believes that service providers that have OEM authorizations and licenses gain a competitive
advantage as they typically receive discounts on parts, technical information, OEM warranty support and use of the OEM name in marketing. Piedmont is an authorized repair station licensed by Honeywell, the
largest manufacturer of APUs, for several of its APU models.
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Machining, Plating and Grinding, or MPG Services
Piedmont has extended its services to include the provision of MPG services, either as supplementary to its traditional MRO services or as stand-alone services. We believe that establishing and
maintaining customer relationships with our MPG shop is an important factor in achieving sustainable success as an independent MRO service provider and creates a competitive advantage.
Overhaul and Coating of Jet Engine Components
Through its subsidiary, Turbochrome, TAT provides MRO services for jet engine components to the aerospace industry. Turbochrome’s FAA- and EASA-certified repair station provides its services
mainly to maintenance service centers, airlines and the military. Turbochrome specializes in MRO services for engine components such as turbine vanes and blades, compressor vanes and blades, fan blades and
after burner flaps. Generally, manufacturer specifications, government regulations and military maintenance regimens require that engine components undergo MRO servicing at regular intervals or as necessary.
Commercial engine components typically require MRO services after three to five years of service or sooner if required. Engine manufacturers typically provide warranties on new engines and their components
and subsystems, which may range from one to five years depending on the bargaining power of the purchaser. Engine manufacturers may also offer extended warranty agreements for 10 to 15 years for the engines.
Warranty claims are generally the responsibility of the OEM during the warranty period. Turbochrome’s business opportunity usually begins upon the conclusion of the warranty period for these components.
Turbochrome offers its customers DER (Designated Engineering Representatives) and DOA (Design Organization Approval) repairs approved by the FAA and EASA. Turbochrome’s customers include U.S.
domestic and international airlines, maintenance service centers and the military.
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TAT estimates the size of the markets in which Turbochrome operates to be significant based on the number of jet engines requiring MRO services provided by Turbochrome. Turbochrome plans to
expand its operations in the MRO segment by using Turbochrome’s experience and reputation to develop MRO capabilities for additional types of jet engine components with significant commercial potential.
Turbochrome’s quality system complies with ISO 9001 and AS9100, and with EASA part 145, FAA FAR 145 for the civil parts, the Israel Laboratory Accreditation Authority under ISO/IEC 17025:20 and
NADCAP for 3 manufacturing procedures.
Manufacturing of masking and coating materials
Through its Turbochrome facility, TAT manufactures a wide range of masking and coating materials for the aviation industry. These products are manufactured in compliance with all of the stringent
quality assurance standards that apply to the maintenance of aircraft engine components.
Customers
General
TAT targets a broad range of customers within the commercial and military aerospace and ground defense industries. Our customers include commercial manufacturers of military equipment, commercial
airlines, aircraft manufacturers, military forces, the defense industry, and other manufacturers of electronic systems, aviation units and machinery in the United States, Europe, CIS, Asia, Latin America and Israel.
During 2019, TAT had revenues generated by more than 500 customers worldwide.
Major Customers
OEM Customers
TAT, primarily through its Gedera facility, sells its OEM solutions and systems to commercial and military aircraft manufacturers and defense contractors and to the U.S. and Israeli governments.
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Partial lists of OEM customers are set in the following table:
Aircraft manufacturers
System manufacturers/integrators and defense contractors
Boeing, Cessna, Pilatus, Embraer, Lockheed Martin, Honda Aircraft, Cirrus, IAI, Parker.
Liebherr, Thales, Rafael, Elbit, IAI, Lockheed Martin, Eaton Aerospace, Parker Hannifin Corporation,
Safran (Snecma).
The development projects and purchasing processes of many of TAT’s OEM customers are lengthy and complex and accordingly, with some customers, TAT enters into frame agreements that determine
certain legal conditions, but under which the customer is not obligated to purchase any quantity of products. Typically, customers issue purchase orders with the required supply quantity, price, lead times and
other related terms.
MRO Customers
TAT services MRO customers primarily through Limco, Piedmont and Turbochrome, including major U.S. domestic and international airlines, air cargo carriers, maintenance service centers, the U.S. Armed
Forces and other air forces from around the world.
TAT’s partial list of MRO customers is set forth in the following table:
U.S. Domestic and international airlines and air cargo carriers
Maintenance service centers
Governments and military air forces
Air France-KLM, FedEx, SAS, Swiss, EL AL, Delta Airlines, United, Air Canada Jazz, Republic
Airways, DHL, Austrian Airlines, TAM, Thai, Korean Air, Air India, Swiftair, Allegiant Air, Empire
Airlines, Mountain Air Cargo, Alliance Airlines, CAM – Cargo Aircraft Management, ASL airlines,
Virgin Australia.
Fokker, Honeywell International, Kellstrom Commercial, Aero Kool, Lufthansa Technik, UTAS-
Hamilton Sundstrand, SR Technics, Embraer, Evergreen Aviation Component Services, Turkish
Technic, Delta Tech Ops, ST Aerospace Engineering, , Gulfstream, IAI, Aerothrust, Summit Aviation,
Haeco Americas, Jet Engine Technologies, Turbine Engine Solution, Turbine Engine Center and
Cargolux.
U.S. Army, U.S. Air Force and U.S. Navy; Israeli Ministry of Defense, IAF; Belgium Air Force, Polish
Air Force, Portuguese Air Force
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Military Contracts
Sales to the U.S. government, our largest government customer, accounted for approximately 2.1% of TAT’s revenues for the year ended December 31, 2019, approximately 2.4% of our revenues for the
year ended December 31, 2018 and approximately 4.7% of our revenues for the year ended December 31, 2017.
Many of TAT’s military contracts are awarded on a competitive basis based on technical merit, personnel qualifications, experience and price. TAT also receives some contract awards involving special
technical capabilities on a negotiated, noncompetitive basis due to TAT’s technical capabilities.
TAT provides products under government contracts that usually require performance over a period of several months to several years. Long-term contracts for the U.S. military may be conditioned upon
continued availability of congressional appropriations. Variances between anticipated budget and congressional appropriations may result in a delay, modification of scope or termination of these contracts.
The vast majority of the governmental contracts to which TAT is party to are fixed-price contracts, some of which contain fixed-price escalation mechanism. Under these contracts, TAT agrees to perform
specific work for a fixed price and, accordingly, realizes the benefit or detriment to the extent that the actual cost of performing the work differs from the contract price. The allowable government contract costs and
fees of TAT are subject to audit and may result in non-reimbursement of some contract costs and fees. While governments reserve the right to conduct further audits, audits conducted for periods through fiscal
year 2019 have resulted in no material cost recovery disallowances for TAT.
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TAT’s eligibility to perform under its government contracts requires us to maintain adequate security measures. TAT has implemented security procedures that it believes adequately satisfies the
requirements of its current government contracts.
Backlog and Long-Term Agreements
Our backlog includes the following: (i) actual purchase orders, and (ii) the maximum estimated sales we expect to generate from long-term agreements for which we do not have actual purchase orders. It
should be noted that under these long-term agreements there is no legal obligation from the customer to purchase our products or services, yet typically our customers would not sign such an agreement unless
there is a specific business opportunity. As such, backlog information may not necessarily be indicative of future sales.
As of December 31, 2019, our backlog included: (i) outstanding purchase orders representing an aggregate amount of $44 million, and (ii) sales that we expect to generate from long-term agreements (the longest of
which is until 2033) for which we have not yet received actual purchase orders in an aggregate amount of $185 million.
Product and Service Warranties
TAT provides warranties for its products and services ranging from one to three years, depending on the nature of the specific product. To date, TAT’s warranty costs have not been substantial. As of
December 31, 2019, the combined warranty reserve for TAT was $0.3 million.
Competitive Environment
OEM of Heat Transfer Solutions and Aviation Accessories
The aerospace and defense OEM industries in general and specifically, the commercial and military aviation markets, are characterized by intense competition and the need to constantly be in the forefront
of technological innovations in order to be able to offer technologically-advanced and attractive products. Competition in these OEM markets is also based on price, quality and on time delivery. TAT estimates the
market size of heat transfer solutions to be significant based on the scope of development projects and purchasing processes of the potential customers. TAT estimates that there is a small number of competing
suppliers in the aerospace and defense OEM markets due to the high barriers to entry to these markets, which include the need for highly qualified and trained personnel, technologically advanced facilities and the
need to obtain appropriate governmental approvals. The nature of the projects in the commercial and military aviation OEM industry, which are often time consuming and complex, also require long-term supplier
relationships and customer loyalty in order to succeed.
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TAT’s competitors in the global OEM aerospace and defense industries can be divided into two main groups:
•
•
Complete system manufacturers that either independently or through subcontractors, design, develop and manufacture complete systems (such as a manufacturer of aircraft hydraulic systems) directly
for the platform manufacturer (i.e., for business jets). These companies will typically compete on bids for complete systems and/or projects where the components/products TAT develops are part of the
complete system. In such cases, it is very likely that these companies will subcontract to companies such as TAT the design and manufacturing of one or a few components in the system. Although
some of these companies have the capabilities to design and manufacture each standalone component in a complete system (i.e., a heat exchanger integrated in hydraulic systems) they usually do not
compete with TAT in projects where there is a specific requirement for a stand-alone component.
Component manufacturers, such as TAT, for which the design and manufacture of components (such as heat exchangers or other types of heat transfer solutions) is the main business (and which are
normally situated in the “value chain” one tier below the system manufacturers, such as a manufacturer of an aircraft’s hydraulic system and two tiers below the platform manufacturer, such as a
manufacturer of a new aircraft). These companies typically compete in projects where there is a specific requirement for a standalone aviation component (such as a heat exchanger or other types of heat
transfer solutions) and in tenders by manufacturers of complete systems or products for sub-contractors. Although some of the component manufacturers have the capabilities to design, develop and
manufacture a complete system (i.e., environmental control system for a business jet) for a certain platform, these companies usually do not compete on projects for complete systems in which their
manufactured component constitutes a small part of the complete system, mainly due to the high barriers to entry and to the difficulty to move up the “value chain” from a component supplier to a whole
system manufacturer.
44
The major competitors of TAT in the area of OEM of heat transfer solutions and aviation accessories include manufacturers in the United States such as the Hughes-Treitler division of Ametek, Lytron,
Niagara Thermal, Hamilton Sundstrand, Honeywell International and Triumph Thermal Systems; manufacturers based in Europe such as I.M.I. Marston, a subsidiary of Hamilton Sundstrand, Safran and Liebherr;
and manufacturers based in Asia such as Sumitomo Precision Products from Japan. These competitors may enjoy competitive advantages over Gedera, such as:
=
=
=
=
=
• The ability to adapt faster to changes in customer requirements and industry conditions or trends;
• Greater access to capital;
• Stronger relationships with customers and suppliers;
• Greater name recognition;
• Access to superior technology and greater marketing resources;
• Ability to offer complete systems in addition to components; and
• The ability to bundle heat transfer solutions and other aircraft components.
45
MRO Services for Heat Transfer Components
The market for MRO services in the field of heat transfer components is highly competitive. Competition in this market is based on price, turnaround time, quality and breadth of services. TAT’s global
competitors in the field of servicing heat transfer components can be divided into two main groups:
•
Service divisions of OEMs – generally, each OEM of products in the heat transfer solutions segment has the necessary capabilities to provide MRO services for products it designs and manufactures
throughout its lifetime, commencing with the initial warranty period and through the after-market period. Service divisions of OEMs may also acquire capabilities to service products of other OEMs to
further expand their MRO services.
• Service centers – which often provide MRO services for a broad range of components and systems. These service centers can be either the in-house maintenance services of commercial airlines or other
independent service providers, such as TAT or Limco.
For heat transfer MRO services, TAT’s major competitors are Triumph Thermal Systems, Lori Heat Transfer Center of Honeywell, Drake Air – Ametek, Liebherr-Aerospace, American Cooler Service, Hamilton
Malaysia, Lufthansa Technik, Meggitt (Elite) and others.
As an independent MRO service provider, Limco’s competitors have inherent competitive advantages. For example, Limco competes with the service divisions of large OEMs which in some cases have
design authority with respect to their OEM solutions and are able to derive significant pricing advantages from their OEM manufacturing activities. Limco also competes with the in-house service divisions of large
commercial airlines where there is a strong incentive for an airline to fully utilize the services of its maintenance employees and facilities. Further, Limco’s competitors may have additional competitive advantages,
such as:
• Ability to bundle heat transfer and other aircraft components;
• Access to greater marketing resources;
• Access to superior technology; and
• Greater resources which allows for better turnaround time.
MRO Services for Aviation Components
The market for MRO services in which Piedmont operates is highly competitive. Competition in this market is based on quality, price, turnaround time and breadth of services. Piedmont’s primary MRO
services competitors are the service divisions of OEMs, the in-house maintenance services of various commercial airlines and other independent service providers, such as TAT or Piedmont. For APU and landing
gear MRO services Piedmont’s major competitors are Standard Aero Group., Aerotech International, Honeywell International, Chase Aerospace, Professional Aviation, Messier-Dowty Aerospace (MD), AAR,
Hawker Pacific, APRO and others.
46
A number of Piedmont’s competitors have inherent competitive advantages. For example, Piedmont competes with the service divisions of large OEMs which in some cases have design authority with
respect to their OEM products and are able to derive significant brand recognition from their OEM manufacturing activities. Piedmont also competes with the in-house service divisions of large commercial airlines
where there is a strong incentive for an airline to fully utilize the services of its maintenance employees and facilities. Further, Piedmont’s competitors may have additional competitive advantages, such as:
• Better name recognition;
• Ability to bundle aviation and other aircraft components;
•
•
Stronger relationships with customers and suppliers;
Lower cost structure;
• Regional support near customers’ location;
• Access to greater marketing resources;
• Access to superior technology
• Greater access to capital; and
• Greater resources which allows for better turnaround time.
Overhaul and Coating of Jet Engine Components
The market for MRO services in which Turbochrome operates is highly competitive. Competition in this market is based on quality, price, level of service and turnaround time. Turbochrome’s primary
MRO services competitors are the service divisions of OEMs, the in-house maintenance services of various commercial airlines and other independent service providers, including Safran (Snecma), General Electric,
GKN, PAS, Chromalloy Southwest, MCT Japan and others. With respect to coating and masking materials, Turbochrome's competitor is APV Coatings.
47
A number of Turbochrome’s competitors have inherent competitive advantages. For example, Turbochrome competes with the service divisions of large OEMs which may have design authority with
respect to their OEM products and are able to derive significant brand recognition from their OEM manufacturing activities. Turbochrome also competes with the in-house service divisions of large commercial
airlines and there is a strong incentive for an airline to fully utilize the services of its maintenance employees and facilities. Further, Turbochrome’s competitors may have additional competitive advantages, such
as:
•
The ability to adapt faster to changes in customer requirements and industry conditions or trends;
• Better name recognition;
• Ability to bundle jet engine and other aircraft components;
•
•
Stronger relationships with customers, OEMs and suppliers;
Lower cost structure;
• Regional support near customers’ location;
• Access to greater marketing resources;
• Access to superior technology;
• Greater access to capital; and
• Greater resources which allows for better turnaround time
Competitive Strengths
We believe that TAT’s success can be attributed to several critical factors, including the following:
•
Engaging in active efforts to preserve its customer base in existing projects, while working to broaden and increase its involvement with such clients.
• Conducting marketing activities aimed at penetrating new geographical markets and winning new customers, while taking advantage of the unique knowledge and expertise that TAT and its subsidiaries
have gained in various areas.
•
Entering into additional related operating segments that will enable TAT and its subsidiaries to fulfill their growth potential.
48
•
•
•
•
•
•
Providing customers with the best value, including competitive prices, by tailoring comprehensive service packages that combine the design and planning of an OEM component, the manufacture of such
component, and the provision of maintenance services.
Extending MRO capabilities in order to establish a ‘one-stop-shop’ center for comprehensive MRO services for the types of aircraft Limco and/or Piedmont and/or Turbochrome target.
Enhancing our engineering capabilities in order to support customer needs related to new projects and in order to certify MRO services that differ from processes previously approved by the FAA, EASA
or other regulatory authorities. This allows shortening the long and complex approval process, streamlining the design and certification process and reducing costs.
Leveraging operational efficiencies to achieve shorter delivery times and reduce costs.
Investing in new technologies and manufacturing techniques in the heat transfer solutions product line.
Investing in innovations and improvements aimed at enhancing the quality and performance of our existing solutions and services as well as the development of new products in an effort to strengthen
our market position and enter into more advanced platforms.
Engineering
We believe that our engineering capabilities is a strategic core competency and key competitive advantage, which allows us to effectively compete in the market with companies which, in many cases,
have better name recognition and greater resources than we do. Our strong engineering capabilities enable us to meet our customers’ increasingly complex demands to deliver high-quality and cost-effective
solutions while maintaining efficient development cycles. These capabilities are based on proprietary technological expertise and know-how developed by highly-experienced multi-disciplinary teams over the
years. We believe that this proprietary knowledge coupled with our innovative and problem-solving approach allows us to provide our customers with an overall superior solution – in both manufacturing and
MRO services – in terms of quality, cost and turnaround time. Our strong engineering capabilities are a key factor in preserving customer loyalty as well as supporting our efforts to expand our services to new
areas of growth.
49
Gedera’s engineering staff has extensive knowledge and experience in designing heat transfer solutions. In general, Gedera has manufacturing capabilities for most heat transfer solutions. Gedera
manufactures the necessary tools, fixtures, test equipment and special jigs which are required to manufacture, assemble and test these products. Gedera developed proprietary design and analysis techniques
which assist in the mechanical and thermal design of its products. All of Gedera’s products are inspected and tested by trained inspectors using highly sophisticated test equipment in accordance with its customer
requirements.
Limco’s engineering department enhances its ability to provide its customers with high-end top-quality MRO services, supports the development of MRO services for new products with commercial
potential and supports its OEM activity. Limco’s engineering department employs certified mechanical and aerospace engineers. Limco’s multi-disciplinary team of engineers specializes in, among others, heat
transfer solutions and components and supports all processes of thermal and structural analysis, mechanical and metallurgical research and development for manufacturing design. Limco’s engineers have direct
experience with aerospace component repair and with obtaining supplemental type certificates from the FAA. Limco’s engineering department supports the development of new repairs capabilities that extend
beyond the limits of the component maintenance manual and utilizes DER to obtain the necessary FAA approvals.
Piedmont’s engineering department employs experienced mechanical and aerospace engineers with repair station and manufacturing experience in both engineering and quality. Piedmont also has an
FAA-certified DER on staff with delegations in Power plant (APUs) & Mechanical Systems and with special delegation to manage and approve repair specifications. In addition to developing quality major repairs,
Piedmont’s engineers have experience in obtaining supplemental type certificates and parts manufacturer approvals while working directly with the FAA Aircraft Certification Office.
Turbochrome’s engineering department enhances its ability to provide its customers with high-end top-quality MRO services. Turbochrome’s engineering department employs several certified mechanical
and metallurgical engineers. Turbochrome’s multi-disciplinary team of engineers specializes in, among other things, turbine components and supports all processes of thermal and structural analysis and
mechanical and metallurgical research and development. Turbochrome’s engineers have substantial experience with aerospace component repair and with obtaining DER and DOA certificates from the FAA and
EASA.
50
Research and Development
The technological developments in TAT’s markets drive the need to constantly examine the use of new materials and technologies in an effort to improve both the physical characteristics of the products
(size, weight), as well as their performance (optimal heat transfer, higher reliability and increased lifespan). TAT also develops new products and enhanced functionalities for its existing products based on
customer demands and in response to the competitive environment and market potential. TAT invests resources to attain such technological and product improvements in cooperation with its customers.
Source and Availability of Raw Materials and Spare Parts
TAT and its subsidiaries acquire most of the components for the manufacture of their products and provision of their services from a limited number of suppliers and subcontractors, the majority located
in Israel and the United States. Some of these suppliers are currently the sole source of one or more components upon which TAT and its subsidiaries are dependent. Since many of TAT's and its subsidiaries’
purchases require long lead times, a delay in the supply of an item can significantly delay the delivery of a product. Generally, TAT and its subsidiaries have not experienced significant difficulty in obtaining timely
deliveries of necessary components; however, if they are unable to obtain these components when needed, they would experience delays in manufacturing their products and their financial results could be
adversely affected.
The raw materials used in manufacturing programs are generally readily available metals and alloys. TAT and its subsidiaries have not had any significant difficulty in obtaining such materials in the past.
TAT and its subsidiaries select their suppliers primarily based on their ability to ensure that their parts are serviceable and traceable to OEM-approved sources, their delivery performance and their ability
to help reduce the total cost of procuring those parts. For quality control, cost and efficiency reasons, TAT and its subsidiaries generally purchase supplies only from vendors with who they have ongoing
relationships or who their customers have previously approved.
Authorizations from OEMs often require that TAT purchase component parts that are needed for its MRO services from the OEM or its designated distributors.
Wherever possible, TAT and its subsidiaries have made and continue to make an effort to qualify second sources or have identified alternate sources for many of their parts needs.
51
Israeli Export Policy
Exports of military related products are subject to the military export policy of the State of Israel. Currently the Israeli government encourages exports to approved customers, provided that such exports do
not run counter to Israeli policy or national security considerations. Gedera must obtain a permit prior to initiating a sales proposal and ultimately an export license for the transaction is required. Israeli law also
regulates the export of “dual use” items (items that are typically sold for civilian uses or purposes but that may also have military purposes).
While we have been successful in obtaining export permits in the past, we may not be able to obtain the necessary export permits or licenses in the future. In addition, governmental policy with respect to
military exports (or dual use items) may be altered.
U.S. Export Regulations
Export of defense products, military technical data and technical services by our U.S. subsidiaries to Israel and other countries is subject to applicable approvals by the U.S. government under the U.S.
International Traffic in Arms Regulations (“ITAR”). Such approvals are typically in the form of an export license or a technical assistance agreement (“TAA”). Other U.S. companies wishing to export defense
products or military-related services and technology to our Israeli and other non-U.S. entities are also required to obtain such export licenses and TAAs. An application for an export license or a TAA requires
disclosure of the intended end user and the use of the technology. Pursuant to recent export control reform initiatives in the United States, a greater part of our U.S. subsidiaries’ and our U.S. suppliers' activities
are becoming subject to control under the Export Administration Act "dual use" regulations. The U.S. government may deny an export authorization if it determines that a transaction is counter to U.S. policy or
national security.
52
Proprietary Rights
At the present time, TAT and its subsidiaries do not own any patents. TAT and its subsidiaries rely on laws protecting trade secrets, and consider such items proprietary; however, we believe that our
success depends less on the ownership of such proprietary rights than on our innovative skills, technical competences, marketing and engineering abilities. TAT and its subsidiaries have no material registered
trademarks.
B. Government Regulations
Aerospace and Safety Regulations
The commercial aerospace industry is highly regulated by the FAA in the United States, EASA in Europe, and other governmental authorities elsewhere in the world, while the military aerospace industry
is governed by military quality specifications established by the U.S. Department of Defense for the manufacturing and repair industries and ISO-9000. TAT is required to be certified by one or more of these
entities and, in some cases, by individual OEMs. TAT must also satisfy the requirements of its customers, including OEMs and airlines that are subject to FAA regulations and to evolving industry standards, and
provide these customers with products that comply with the government regulations applicable to commercial flight operations. TAT believes it currently satisfies or exceeds these FAA maintenance standards in
its repair and overhaul activities. Our active or operating repair stations in Israel and the United States are approved by the FAA (while TAT-Engineering, our joint venture in Russia, is currently pursuing such
certification or is currently in process of pursuing such certification). TAT also believes it currently satisfies all industry standards in its facilities.
TAT’s operations are also subject to a variety of worker and community safety laws including the Occupational Safety and Health Act of 1970, known as OSHA, which mandates general requirements for
safe workplaces for all U.S. employees. In addition, OSHA provides special procedures and measures for the handling of certain hazardous and toxic substances. TAT believes that its operations are in compliance
with OSHA’s requirements.
TAT believes that it is in material compliance with U.S., European and other governmental regulations affecting the aerospace and defense industries.
53
Israeli Regulations
TAT’s operations in Israel are subject to supervision by the Israeli Ministry of Defense and Civil Aviation Administration of Israel. Gedera is certified by the IAF and the Israeli Ministry of Defense for
both manufacturing and maintenance. Gedera is also licensed as a repair station for certain components by the Civil Aviation Administration of Israel. In addition, Gedera’s export of certain products and/or know-
how is subject to approval by the Defense Export Controls Agency (“DECA”) of the Israeli Ministry of Defense. DECA permits are required prior to submitting sales proposals with regard to such exports, as well
as for the actual export of such products.
Environmental Matters
TAT’s operations are subject to a number of stringent federal, state and local environmental laws in the United States and Israel, as well as to regulation set or promulgated by government agencies,
including the U.S. Environmental Protection Agency. Among other matters, these regulatory authorities impose requirements that regulate the emission, discharge, generation, management, transportation and
disposal of pollutants and hazardous substances. These authorities may require TAT to initiate actions to remediate the effects of hazardous substances which may be or have been released into the environment
and require TAT to obtain and maintain permits in connection with TAT’s operations. This extensive regulatory framework imposes significant compliance burdens and risks.
Although TAT seeks to maintain its operations and facilities in compliance with applicable environmental laws, there can be no assurance that TAT has no violations, or that change in such laws,
regulations or interpretations of such laws, will not require TAT to make significant additional expenditures to ensure compliance in the future. Currently, TAT does not believe that it will have to make material
capital expenditures for its operations to comply with environmental laws or regulations, or to incur material costs for environmental remediation during the 2019 fiscal year.
TAT has received no material third party environmental claims relating to its facilities, and TAT believes that it has all material licenses and certifications that are required in the jurisdictions in which it
operates.
C. Property, Plants and Equipment
The Gedera facility is located in Park Re’em near Gedera. This facility is approximately 348,000 square feet and houses TAT’s executive offices, Gedera’s research and development and manufacturing
operations. The land of this facility is leased by TAT Industries from the Israel Land Authority (“ILA”). Approximately 26,000 square feet of the facility are sub-leased to TAT from 1991 until 2020 and the lease
from the ILA is expected to expire in 2020. TAT sub-leases the remaining 322,000 square feet of the facility from TAT Industries pursuant to an agreement TAT entered into in connection with the purchase of the
operations relating to the manufacture of aviation accessories of TAT Industries in February 2000. The lease agreement expires at the end of 2024. In 2015, the rental fee was reviewed by a real estate appraiser who
determined that the rental fee would be $656 thousand per year with an additional incremental payment of 2% per year. Total rental payments TAT paid to TAT Industries during 2019, 2018 and 2017 were $787,
$767 and $740 thousand, respectively.
Limco owns and operates a 55,000 square feet manufacturing plant in Tulsa, Oklahoma which has historically supported all its business, including its aftermarket heat transfer component repair station.
This facility also has housed Limco’s administration, engineering, quality control and support services.
Limco also leases building #2, building #3, building #4, and building #5. Building #2 lease is effective from June 1, 2017 to May 31, 2022 and any time after March 31, 2019 lessee or lessor may terminate the
lease by giving lessee or lessor six months advance written notice. The rent for building #2 is $4,120 per month plus the annual percentage increase in the CPI-W. Building #3 lease expired on January 31, 2014,
however, the lease has renewed automatically from year to year since that date. Either party has the right to cancel the lease with 30 days’ advance notice prior to the annual expiration of the term. The rent for
building #3 is $1,505.58 per month plus the annual percentage increase in the CPI-W. Building #4 lease is effective from April 1, 2017 to March 31, 2030. The early termination option on Building #4 states that at
any time after March 31, 2019, the lessee or lessor may terminate the lease by giving the lessee or lessor 6 months advance written notice. The rent is $2,854.04 per month for building #4 plus the annual percentage
increase in the CPI-W. The lease on building #5 expires on March 31, 2030. Building #5 has an early termination option effective after March 31, 2019 with six months advance written notice. The rent is $4,100.00
per month for building #5 plus the annual percentage increase in the CPI-W.
54
In 2019, 2018 and 2017, the rental expense for this property was $144, $92 and $72 thousand, respectively, for each one of these years.
In the second half of 2015, Piedmont leased approximately 82,000 square feet in Greensboro, North Carolina, for its new landing gear component and overhaul repair station as well as the MPG operation.
The lease expires on June 30, 2025. In 2019, 2018 and 2017 the rental expense was $324 thousand, respectively, for each one of these years. In addition, Piedmont leases approximately 56,000 square feet space for its
facility in Kernersville, North Carolina to support its APU component and overhaul repair station. During 2018, Piedmont vacated the first floor of the facility while continuing to lease the second floor space,
approximately 28,000 square feet. In 2019, 2018 and 2017, the rental expense for this property was $42, $60 and $78 thousand, respectively. The lease expired in October 31, 2016, and is now extended month to
month.
Turbochrome operates a 135,000 square feet facility in Kiryat Gat, Israel, which supports all its business. The land on which the facility is located is leased from the ILA. The leasehold rights are for a
period ending in 2045 and are recorded in Turbochrome's name. Turbochrome paid the entire lease payments due until 2045 in a one-time payment (discounted to present value).
Item 4A. Unresolved Staff Comments
Not applicable.
Item 5. Operating and Financial Review and Prospects Operating Results
The following discussion of our results of operations should be read together with our consolidated financial statements and the related notes, which appear elsewhere in this annual report. The
following discussion contains forward-looking statements that reflect our current plans, estimates and beliefs and involve risks and uncertainties. Our actual results may differ materially from those discussed
in the forward-looking statements. Factors that could cause or contribute to such differences include those discussed below and elsewhere in this annual report.
55
Overview
TAT is reliant on the robustness of the commercial and military aerospace and ground defense industries. Any downturn in these industries could weaken demand for its solutions and services and
negatively impact its financial results. The commercial airline industry is cyclical and has historically been subject to fluctuations due to general economic and political conditions, such as fuel and labor costs,
price competition, downturns in the global economy and national and international events.
TAT’s cost of revenues for OEM operations and MRO services consists of component and material costs, direct labor costs, quality assurance costs, shipping expenses, royalties, overhead related to
manufacturing and depreciation of manufacturing equipment. TAT’s gross margin is affected by the proportion of its revenues generated from each of its operational segments.
The principal factors that affect the operating income of TAT’s four segments, in addition to their gross profit, is the expenditure on selling and marketing expenses and general and administrative
expenses. While TAT closely monitors its operating expenses to prevent unnecessary spending, we believe that these operating expenses may increase in the future in accordance with our plans to grow the
business.
TAT’s research and development expenses are related to new products and technologies or significant improvement of existing products and technologies.
TAT’s selling and marketing expenses are related to commission payments, compensation and related expenses of TAT’s sales teams, participation in trade shows, travel expenses, advertising expenses
and related costs for facilities and equipment.
TAT’s general and administrative expenses are related to compensation and related expenses for executive, finance and administrative personnel, professional fees such as legal, audit, SOX, internal audit,
other general corporate expenses and related costs for facilities and equipment.
56
Sources of Revenues
TAT, directly and through its subsidiaries, provides a variety of solutions and services to the commercial and military aerospace and ground defense industries, including:
(i)
(ii)
(iii)
(iv)
OEM of heat transfer solutions and aviation components, such as heat exchangers, pre-coolers and oil/fuel hydraulic coolers (through our Gedera facility);
MRO services for heat transfer components and OEM of heat transfer solutions (through our Limco subsidiary);
MRO services for aviation components (through our Piedmont subsidiary); and
Overhaul and coating of jet engine components (through our Turbochrome subsidiary).
TAT’s revenues from its four operational segments for the three years ended December 31, 2019 were as follows:
Revenues
OEM of heat transfer solutions and aviation components
MRO services for heat transfer components and OEM of
heat transfer solutions
MRO services for aviation components
Overhaul and coating of jet engine components
Eliminations
Total Revenues
$
2019
Revenues
in
Thousands
% of
Total
Revenues
Year Ended December 31,
2018
Revenues
in
Thousands
% of
Total
Revenues
2017
Revenues
in
Thousands
% of
Total
Revenues
$
26,589
26.1% $
24,707
26.5% $
31,237
34,433
38,687
8,610
(6,287)
102,032
33.7%
37.9%
8.4%
(6.2)%
100% $
57
31,344
32,487
9,697
(5,057)
93,178
33.6%
34.9%
10.4%
(5.4%)%
100% $
34,812
33,009
11,005
(3,536)
106,527
29.3%
32.7%
31.0%
10.3%
(3.3)%
100%
The following table reflects the geographic breakdown of TAT’s revenues for each of the three years ended December 31, 2019:
2019
Revenues
in
Thousands
% of
Total
Revenues
Years Ended December 31,
2018
2017
Revenues
in
Thousands
% of
Total
Revenues
Revenues
in
Thousands
% of
Total
Revenues
$
$
61,930
7,088
33,014
102,032
60.7% $
6.9%
32.4%
100.0% $
54,032
6,924
32,222
93,178
58.0% $
7.4%
34.6%
100.0% $
59,051
9,993
37,483
106,527
55.4%
9.4%
35.2%
100.0%
United States
Israel
Other
Total
Costs and Expenses
Cost of revenues. TAT’s cost of revenues for OEM operations and MRO services consist of component and material costs, direct labor costs, quality assurance costs, royalties, shipping expenses,
overhead related to manufacturing and depreciation of manufacturing equipment.
TAT’s gross margin was affected by the proportion of TAT’s revenues generated from OEM operations and MRO services in each of the reported years.
58
Research and development expenses, net. Research and development expenses, net are related to new products and technologies or to a significant improvement of products and technologies, net of
grants and participations received.
Selling and marketing expenses. Selling and marketing expenses consist primarily of commission payments, compensation and related expenses of TAT’s sales teams, participation in trade shows, travel
expenses, advertising expenses and related costs for facilities and equipment.
General and administrative expenses. General and administrative expenses consist of compensation and related expenses for executive, finance and administrative personnel, professional fees such as
legal, audit, SOX, internal audit, other general corporate expenses and related costs for facilities and equipment.
Other income (expense). Other income (expense) results from capital gain on sale of property and equipment and onetime expenses.
Financial income (expense), net. Financial income (expense), net consists of exchange rate and interest income or expense. Interest income or expense relates to the interest received from or paid to banks
and changes in the rate of the NIS or other currencies against the U.S. dollar.
Tax expense (income). Tax expense consists of Israeli and U.S. federal and state taxes on the income of TAT’s business and changes in deferred tax assets or liabilities.
Critical Accounting Policies and Estimates
TAT’s consolidated financial statements are prepared in accordance with U.S. GAAP. These accounting principles require management to make certain estimates, judgments and assumptions based upon
information available at the time that they are made, historical experience and various other factors that are believed to be reasonable under the circumstances. These estimates, judgments and assumptions can
affect the reported amounts of assets and liabilities as of the date of the financial statements, as well as the reported amounts of revenues and expenses during the periods presented. While all the accounting
policies impact the financial statements, certain policies may be viewed to be critical. These policies are those that are both most important to the portrayal of TAT’s financial condition and results of operations
and require management’s most difficult, subjective and complex judgments and estimates. Actual results could differ from those estimates.
59
In many cases, the accounting treatment of a particular transaction is specifically dictated by U.S. GAAP and does not require management’s judgment in its application. There are also areas in which
management’s judgment in selecting among available alternatives would not produce a materially different result. Management has reviewed these critical accounting policies and related disclosures with TAT’s
audit committee.
TAT’s management believes the significant accounting policies which affect management’s more significant judgments and estimates used in the preparation of TAT’s consolidated financial statements
and which are the most critical to aid in fully understanding and evaluating the reported financial results include the following:
•
•
•
Inventory valuation
Income taxes
Allowance for doubtful accounts
Inventory valuation
Inventories are stated at the lower of cost and net realizable value. Cost of raw material and parts is determined using the moving average basis. Cost of work in progress and finished products is
calculated based on actual costs and the capitalized production costs, mainly labor and overhead and is determined based on the average basis. TAT’s policy for valuation of inventory and commitments to
purchase inventory, including the determination of obsolete or excess inventory, requires it to perform a detailed assessment of inventory at each balance sheet date which includes a review of, among other
factors, an estimate of future demand for products within specific time frames, valuation of existing inventory, as well as product lifecycle and product development plans. The business environment in which TAT
operates, the wide range of products that TAT offers and the relatively short sales cycles TAT experiences, all contribute to the exercise of judgment relating to maintaining and writing-off of inventory levels. The
estimates of future demand that TAT uses in the valuation of inventory are the basis for its revenue forecast, which is also consistent with its short-term manufacturing plan. Inventory reserves are also provided
to cover risks arising from slow-moving items. Inventory management remains an area of management focus as TAT balances the need to maintain strategic inventory levels to ensure competitive lead times
against the risk of inventory obsolescence due to changing technology and customer requirements. TAT writes down obsolete or slow-moving inventory in an amount equal to the difference between the cost of
inventory and the net realizable value based upon assumptions about future demand, market conditions and sale forecasts.
If actual market conditions are less favorable than TAT anticipates, additional inventory write-downs may be required.
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Income Taxes
TAT operates within multiple tax jurisdictions and is subject to audits in these jurisdictions. These audits can involve complex issues, which may require an extended period of time to resolve. In
management’s opinion, adequate provisions for income taxes have been made for all years. Although management believes that its estimates are reasonable, no assurance can be given that the final tax outcome of
these issues will not be different than those reflected in its historical income tax provisions.
TAT uses the liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on temporary differences between the financial statement and tax
bases of assets and liabilities and net operating loss and credit carry forwards using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are established when it is more likely than not that some portion of the deferred tax
assets will not be realized. To the extent that TAT’s decisions and assumptions and historical reporting are determined not to be compliant with applicable tax laws, TAT may be subject to adjustments in its
reported income for tax purposes as well as interest and penalties.
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According to an acceptable interpretation that prescribes a minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. The interpretation also
provides guidance on de-recognition of tax positions, classification on the balance sheet, interest and penalties, accounting in interim periods, disclosure and transition. In addition, the interpretation requires
significant judgment with respect to determining what constitutes an individual tax position as well as assessing the outcome of each tax position. Changes in judgment as to recognition or measurement of tax
positions can materially affect the estimate of the effective tax rate and consequently, affect our operating results.
U.S. subsidiaries are taxed based on federal and state tax laws. The statutory tax rate for 2017 was 38%. Following the enactment of the Tax Cuts and Jobs Act (the“Act”) on December 22, 2017, the U.S.
federal corporate income tax rate was reduced to a flat rate of 21%. Other significant changes under the Act include, among others, a one-time repatriation tax on accumulated foreign earnings, a limitation of net
operating loss deduction to 80% of taxable income, and indefinite carryover of post-2017 net operating losses. The Act also repeals the corporate alternative minimum tax for tax years beginning after December 31,
2017. Losses generated prior to January 1, 2018 will still be subject to the 20-year carryforward limitation. Other potential impacts due to the Act include the repeal of the domestic manufacturing deduction,
modification of taxation of controlled foreign corporations, a base erosion anti-abuse tax, modification of interest expense limitation rules, modification of limitation on deductibility of excessive executive
compensation, and taxation of global intangible low-taxed income.
Allowances for Doubtful Accounts
TAT performs ongoing credit evaluations of its customers’ financial condition and requires collateral as deemed necessary. Allowances for doubtful accounts are maintained for estimated losses resulting
from the inability of TAT’s customers to make payments. In judging the adequacy of the allowance for doubtful accounts, TAT considers multiple factors including the aging of receivables, historical bad debt
experience and the general economic environment. Management applies considerable judgment in assessing the realization of receivables, including assessing the probability of collection and the current credit
worthiness of each customer. If the financial condition of TAT’s customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.
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Key Indicators
TAT’s management evaluates its performance by focusing on key performance indicators, which are revenues, sources of revenues, gross profit and operating income. These key performance indicators
are primarily affected by the competitive landscape in which TAT operates and its ability to meet the challenges posed.
The following table presents, for the periods indicated, information concerning TAT’s results of operations:
Revenues
OEM of heat transfer solutions and aviation components
MRO services for heat transfer components and OEM of heat transfer solutions
MRO services for aviation components
Overhaul and coating of jet engine components
Eliminations
Total revenues
Cost of revenues
OEM of heat transfer solutions and aviation components
MRO services for heat transfer components and OEM of heat transfer solutions
MRO services for aviation components
Overhaul and coating of jet engine components
Eliminations
Total cost of revenues
Gross profit
Research and development costs, net
Selling and marketing
General and administrative
Other expenses (income)
Operating income (loss)
Financial expense, net
Income (loss) before taxes on income (tax benefit)
Taxes on income (tax benefit)
income (loss) before equity investment
Share in results of affiliated company and impairment of share in affiliated companies
Net income (loss)
63
2019
Year Ended December 31
2018
(in thousands)
2017
$
$
$
26,589
34,433
38,687
8,610
(6,287)
102,032
23,998
27,852
33,337
7,751
(6,468)
86,470
15,562
74
5,259
8,251
-
13,584
1,978
(451)
1,527
589
938
(132)
806
$
$
24,707
31,344
32,487
9,697
(5,057)
93,178
25,612
27,659
28,561
8,298
(5,343)
84,787
8,391
553
4,913
8,559
(4)
14,021
(5,630)
(102)
(5,732)
(1,464)
(4,268)
(140)
(4,408) $
31,237
34,812
33,009
11,005
(3,536)
106,527
25,535
26,085
29,026
9,057
(3,620)
86,083
20,444
731
4,974
9,409
53
15,167
5,277
(338)
4,939
2,333
2,606
(210)
2,396
The following table presents, for the periods indicated, information concerning TAT’s results of operations as a percentage of revenues:
Revenues
OEM of heat transfer solutions and aviation components
MRO services for heat transfer components and OEM of heat transfer solutions
MRO services for aviation components
Overhaul and coating of jet engine components
Eliminations
Total revenues
Cost of revenues
OEM of heat transfer solutions and aviation components
MRO services for heat transfer components and OEM of heat transfer solutions
MRO services for aviation components
Overhaul and coating of jet engine components
Eliminations
Cost of revenues
Gross profit
Research and development costs, net
Selling and marketing
General and administrative
Other income
Operating income (loss)
Financial expense, net
Income (loss) before taxes on income (tax benefit)
Taxes on income (tax benefit)
income (loss) before equity investment
Share in results of affiliated company and impairment of share in affiliated companies
Net income (loss)
________________________
* Less than 0.1 percent
64
2019
Year Ended December 31,
2018
2017
26.1%
33.7
37.9
8.4
(6.2)
100
23.5
27.3
32.7
7.6
(6.3)
84.7
15.3
*
5.2
8.1
-
13.3
1.9
(0.4)
1.5
0.6
0.9
(0.1)
0.8%
26.5%
33.6
34.9
10.4
(5.4)
100
27.5
29.7
30.6
8.9
(5.7)
91
9
0.6
5.3
9.2
*
15.1
(6.1)
(0.1)
(6.2)
(1.6)
(4.6)
(0.1)
(4.7)%
29.3%
32.7
31.0
10.3
(3.3)
100
24.0
24.5
27.2
8.5
(3.4)
80.8
19.2
0.7
4.7
8.8
*
14.2
5.0
(0.3)
4.7
2.2
2.5
(0.2)
2.3%
Year ended December 31, 2019 compared with Year ended December 31, 2018
Revenues. Total revenues were $102 million for the twelve months ended December 31, 2019, compared to $93.2 million for the twelve months ended December 31, 2018, an increase of 9.5%. This reflects (i) the
increase in revenues in the OEM of heat transfer solutions and aviation accessories segment; (ii) the increase in revenues in the MRO services for heat transfer components and OEM of heat transfer solutions
segment; (iii) the increase in revenues in the MRO services for aviation components segment; and (iv) the decrease in revenue in the overhaul and coating of jet engine components segment.
Revenues from OEM of heat transfer solutions and aviation components. Revenues from this operating segment increased to $26.6 million for the year ended December 31, 2019 from $24.7 million for the year
ended December 31, 2018, an increase of 7.6%.
Revenues from MRO services for heat transfer components and OEM of heat transfer solutions. Revenues from the MRO services for heat transfer components and OEM of heat transfer solutions operating
segment increased to $34.4 million for the year ended December 31, 2019, from $31.4 million for the year ended December 31, 2018, an increase of 9.6%.
Revenues from MRO services for aviation components. Revenues from MRO services for aviation components operating segment increased to $38.7 million for the year ended December 31, 2019, from $32.5 million
for the year ended December 31, 2018, an increase of 19.1%.
Revenues from overhaul and coating of jet engine components. Revenues from overhaul and coating of jet engine components segment decreased to $8.7 million for the year ended December 31, 2019, from $9.7
million for the year ended December 31, 2018 a decrease of 10.3%, mainly due to lower demand for overhaul and coating of jet engine components.
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Cost of revenues. Cost of revenues was $86.5 million for the twelve months ended December 31, 2019, compared to $84.8 million for the twelve months ended December 31, 2018, an increase of 2%.
Cost of revenues as a percentage of revenues decreased to 84.7% for the twelve months ended December 31, 2019, from 91% for the twelve months ended December 31, 2018. This is primarily due to the
increase in revenue and decrease of indirect cost.
Cost of revenues for OEM of heat transfer solutions and aviation accessories. Cost of revenues for this operating segment was $24 million for the year ended December 31, 2019, compared to $25.6 million for the
year ended December 31, 2018. This was achieved due to the cost decrease and efficiency increase program started at the end of 2018.
Cost of revenues as a percentage of revenues in this segment decreased to 90.3% in the year ended December 31, 2019, from 103.7% for the year ended December 31, 2018. The decrease is primarily the result of
higher sales compared to 2018, decrease of costs of materials and decrease of indirect costs (especially indirect labor costs).
Cost of revenues for MRO services for heat transfer components and OEM of heat transfer solutions. Cost of revenues for the MRO services for heat transfer components and OEM of heat transfer solutions
operating segment increased to $27.9 million for the year ended December 31, 2019 from $27.7 million for the year ended December 31, 2018, an increase of 1%.
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Cost of revenues as a percentage of revenues in this segment decreased to 80.9% in the year ended December 31, 2019 from 88.2% for the year ended December 31, 2018. The decrease is primarily the result of
higher sales compared to 2018 and the decrease in direct labor costs.
Cost of revenues for MRO services for aviation components. Cost of revenues for MRO services for aviation components operating segment increased to $33.3 million for the year ended December 31, 2019 from
$28.6 million for the year ended December 31, 2018, an increase of 17%.
Cost of revenues as a percentage of revenues in this segment decreased to 86.2% in the year ended December 31, 2019 from 87.9% for the year ended December 31, 2018. The decrease is primarily the result of
higher sales compared to 2018 and a decrease in indirect costs (especially indirect labor costs).
Cost of revenues for overhaul and coating of jet engine components. Cost of revenues for the overhaul and coating of jet engine components segment decreased to $7.8 million for the year ended December 31,
2019 from $8.3 million for the year ended December 31, 2018. The decrease is primarily attributable to lower sales compared to 2018.
Cost of revenues as a percentage of revenues in this segment increased to 90% in the year ended December 31, 2019 from 82.3% in the year ended December 31, 2018. The increase is primarily the result of lower
sales compared to 2018 and a change in product mix in which more products with lower margins were sold during 2019.
Research and development, net. Research and development expenses were $0.1 million for the twelve months ended December 31, 2019, compared to $0.6 million for the twelve months ended December 31, 2018.
Research and development expenses as a percentage of revenues were less than 0.1% for the twelve months ended December 31, 2019 compared to 0.6% for the twelve months ended December 31, 2018.
Selling and marketing. Selling and marketing expenses were $5.3 million for the twelve months ended December 31, 2019, compared to $5.0 million for the twelve months ended December 31, 2018.
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Selling and marketing expenses as a percentage of revenues were 5.2% for the twelve months ended December 31, 2019, compared to 5.3% for the twelve months ended December 31, 2018, mainly due to the
increase in sales during 2019 compared to 2018.
General and administrative. General and administrative expenses were $8.3 million for the twelve months ended December 31, 2019, compared to $8.6 million for the twelve months ended December 31, 2018, a
decrease of 3.6%. The decrease in general and administrative expenses was mainly attributable to decrease in legal and professional expenses.
General and administrative expenses as a percentage of revenues were 8.1% for the twelve months ended December 31, 2019, compared to 9.2% for the twelve months ended December 31, 2018, mainly due to the
increase in sales during 2019 compared to 2018.
Financial expenses, net. Financial expenses, net for the twelve months ended December 31, 2019 were $0.5 million, compared to $0.1 million for the twelve months ended December 31, 2018. The increase was mainly
attributable to the adoption of the new lease accounting standard - ASC 842.
Taxes on income (tax benefit). Taxes on income for the twelve months ended December 31, 2019, amounted to $0.6 million, compared to $1.5 million tax benefit for the twelve months ended December 31, 2018.
Share in results of equity investment of affiliated companies. Share in results of equity investment of affiliated companies for the twelve months ended December 31, 2019, amounted to a loss of $ 0.1 million during
2019 with no significant change from the twelve months ended December 31, 2018.
Year ended December 31, 2018 compared with Year ended December 31, 2017
Please see Item 5 on Form 20-F for the Year ended December 31, 2018 filed on March 27, 2019 for this comparison.
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Conditions in Israel
TAT is incorporated under the laws of the State of Israel, and its principal executive offices and manufacturing and research and development facilities are located in Israel. See “RISK FACTORS” for a
description of governmental, economic, fiscal, monetary or political policies or factors that have materially affected or could materially affect TAT’s operations.
Trade Relations
Israel is a member of the United Nations, the International Monetary Fund, the International Bank for Reconstruction and Development and the International Finance Corporation. Israel is a member of the
World Trade Organization and is a signatory to the General Agreement on Tariffs and Trade. In addition, Israel has been granted preferences under the Generalized System of Preferences from the United States,
Australia, Canada and Japan. These preferences allow Israel to export the products covered by such programs either duty-free or at reduced tariffs.
Israel and the European Union Community, known now as the “European Union,” concluded a Free Trade Agreement in July 1975 that confers some advantages with respect to Israeli exports to most
European countries and obligates Israel to lower its tariffs with respect to imports from these countries over a number of years. In 1985, Israel and the United States entered into an agreement to establish a Free
Trade Area. The Free Trade Area has eliminated all tariff and some non-tariff barriers on most trade between the two countries. On January 1, 1993, an agreement between Israel and the European Free Trade
Association, known as the “EFTA,” established a free-trade zone between Israel and the EFTA nations. In November 1995, Israel entered into a new agreement with the European Union, which includes a
redefinition of rules of origin and other improvements, such as allowing Israel to become a member of the Research and Technology programs of the European Union. In recent years, Israel has established
commercial and trade relations with a number of other nations, including Russia, China, India, Turkey and other nations in Eastern Europe and the Asia-Pacific region.
69
Impact of Currency Fluctuation and of Inflation
TAT reports its financial results in dollars and receives payment primarily in dollars or dollar-linked NIS for all of its sales while it incurs a portion of its expenses, principally salaries and related personnel
expenses in Israel, in NIS. Additionally, certain assets, as well as a portion of its liabilities, are denominated in NIS. Therefore, the dollar cost of its operations is influenced by the extent to which any inflation in
Israel is offset on a lagging basis, or is not offset by the devaluation of the NIS in relation to the U.S. dollar. When the rate of inflation in Israel exceeds the rate of devaluation of the NIS against the U.S. dollar, the
dollar cost of operations in Israel increases. If the dollar cost of operations in Israel increases, its dollar-measured results of operations will be adversely affected. It is uncertain whether TAT will be materially and
adversely affected in the future if inflation in Israel exceeds the devaluation of the NIS against the dollar or if the timing of the devaluation lags behind inflation in Israel.
Because exchange rates between the NIS and the dollar fluctuate continuously, exchange rate fluctuations and especially larger periodic devaluations will have an impact on TAT’s profitability and
period-to-period comparisons of its results. The effects of foreign currency re-measurements are reported in TAT’s consolidated financial statements in current operations. Although TAT hedges a portion of its
exchange rate risk through the use of forward contracts and other derivative instruments, there is no certainty that future results of operations may not be materially adversely affected by currency fluctuations.
70
Corporate Tax Rate
Israeli companies are generally subject to corporate tax on their taxable income (including capital gains). The regular corporate tax rate for Israel was 24% for the year ended December 31, 2017 and 23% for
the year ended December 31, 2018 and December 31, 2019.
However, the rate is effectively reduced for income derived from Approved and Beneficiary Enterprises, as defined by the Law for the Encouragement of Capital Investments, 1959, as amended (the
"Investment Law"). Until December 31, 2010, TAT elected to participate in the alternative package of tax benefits for its current Approved and Beneficiary Enterprises. Pursuant to such law, the income derived
from those enterprises was exempt from Israeli corporate tax for a specified benefit period (except to the extent that dividends are distributed from tax exempt income generated from the Approved and Beneficiary
Enterprises or during the tax-exemption period other than upon liquidation) and subject to reduced corporate tax rates for an additional period.
Certain amendments to the Investment Law became effective in January 2011 (the “2011 Amendment”). Under the 2011 Amendment, income derived by ‘Preferred Companies’ from ‘Preferred
Enterprises’ (both as defined in the 2011 Amendment) would be subject to a uniform reduced corporate tax rate as opposed to the incentives that are limited to income from Approved or Beneficiary Enterprises
during their benefits period. According to the 2011 Amendment, the uniform tax rate on such income, referred to as ‘Preferred Income’, would be 10% in areas designated as Israel’s Development Zone A and 15%
elsewhere in Israel during 2011-2012, 7% and 12.5%, respectively, in 2013-2014, and 6% and 12%, respectively, thereafter. Dividends distributed from taxable income derived from Preferred Income would be subject
to a 15% tax (or lower, if so provided under an applicable tax treaty), which would generally be withheld by the distributing company. While a company may incur additional tax liability in the event of distribution
of dividends from tax exempt income generated from its Approved and Beneficiary Enterprises, no additional tax liability will be incurred by the company in the event of distribution of dividends from income taxed
in accordance with the 2011 Amendment.
71
Under the transitional provisions of the 2011 Amendment, TAT elected to irrevocably implement the 2011 Amendment with respect to its existing Approved and Beneficiary Enterprises while waiving
benefits provided under the legislation prior to the 2011 Amendment.
According to a more recent amendment which was announced in August 2013 and implemented in 2014, dividends paid out of income attributed to a Preferred Enterprise will be subject to a withholding tax
rate of 20% (instead of 15%). In addition, tax rates under the Preferred Enterprise were also raised effective as of January 1, 2014, to 9% in Zone A and 16% elsewhere (instead of the 6% and 12%, respectively) with
respect to Preferred Income as defined in the Investment law. In 2017, following the approval of the Israeli Budget Law for 2017 and 2018 (the “Budget Law”), the tax rate under a Preferred Enterprise with respect to
Preferred Income as defined in the Investment law, generated in a Development Zone A will drop effective as of January 1, 2017, to 7.5%, while the tax rate of Preferred Income derived elsewhere in Israel remains
16%.
Certain investment income derived by TAT from investments may not be regarded by the Israeli tax authorities as income from TAT’s Preferred Enterprise and consequently may be taxed at the regular
statutory rate in Israel.
Certain of TAT’s subsidiaries operate in and are subject to the tax laws of various other jurisdictions, primarily the United States. TAT’s U.S. subsidiaries are taxed based on federal and state tax laws.
The U.S. federal statutory flat tax rate for tax years 2018 and 2019 is 21%,
72
Recently Issued Accounting Standards
Recently adopted accounting pronouncements:
1. The Company adopted ASU No. 2016-02, Leases (Topic 842), on January 1, 2019 using the modified retrospective transition approach by applying the new standard to all leases existing at the date of
initial application. Results and disclosure requirements for reporting periods beginning after January 1, 2019 are presented under Topic 842, while prior period amounts have not been adjusted and
continue to be reported in accordance with its historical accounting under Topic 840.
The Company elected the package of practical expedients permitted under the transition guidance, which allowed to carryforward the Company’s historical lease classification, the Company’s assessment
on whether a contract was or contains a lease, and the Company’s initial direct costs for any leases that existed prior to January 1, 2019. The Company also elected to combine lease and non-lease
components and to keep leases with an initial term of 12 months or less off the balance sheet and recognize the associated lease payments in the consolidated statements of income on a straight-line basis
over the lease term.
Upon adoption, the new standard resulted in an increase of $7.3 million in operating lease ROU assets and corresponding liabilities on the Company’s consolidated balance sheet.
The weighted-average interest rate used to discount future lease payments was 4.84% for the assets in the USA and 4.5% for the Israeli assets.
2.
In August 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2017-12, Derivatives and Hedging (Topic 815), Targeted Improvements to
Accounting for Hedging Activities. Among other things, the guidance eliminated the requirement to separately measure and report hedge ineffectiveness and generally requires the entire change in the
fair value of a hedging instrument to be presented in the same income statement line as the hedged item. As ASU 2017-12 was effective for fiscal years beginning after December 15, 2018, the Company
adopted the ASU on January 1, 2019 with no material impact on the Company’s consolidated financial statements.
73
Accounting pronouncements issued but not yet adopted:
1.
2.
In June 2016, the FASB issued guidance on financial instruments. The guidance replaces the current incurred loss impairment methodology with a methodology that reflects expected credit losses and
requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The guidance will be effective for the fiscal year beginning on January 1, 2020,
including interim periods within that year. The new standard will not have a material effect on the Company's financial statements upon adoption.
In December 2019, the FASB issued ASU 2019-12, “Simplifying the Accounting for Income Taxes. (Topic 740)” ("the Update"). The amendments in this Update simplify the accounting for income taxes by
removing the following exceptions in ASC 740: 1. Exception to the incremental approach for intra-period tax allocation when there is a loss from continuing operations and income or a gain from other
items; 2. Exception to the requirement to recognize a deferred tax liability for equity method investments when a foreign subsidiary becomes an equity method investment; 3. Exception to the ability not to
recognize a deferred tax liability for a foreign subsidiary when a foreign equity method investment becomes a subsidiary;4. Exception to the general methodology for calculating income taxes in an interim
period when a year-to-date loss exceeds the anticipated loss for the year.
In addition, this Update also simplify the accounting for income taxes in certain topics as follows: 1. Requiring that an entity recognize a franchise tax (or similar tax) that is partially based on income as an
income-based tax and account for any incremental amount incurred as a non-income-based tax; 2. Requiring that an entity evaluate when a step up in the tax basis of goodwill should be considered part of
the business combination in which the book goodwill was originally recognized and when it should be considered a separate transaction;3. Specifying that an entity can elect (rather than required to)
allocate the consolidated amount of current and deferred tax expense to a legal entity that is not subject to tax in its separate financial statements;4. Requiring that an entity reflect the effect of an enacted
change in tax laws or rates in the annual effective tax rate computation in the interim period that includes the enactment date.
The amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. The Company is currently evaluating the effects of this
Update on its consolidated financial statements.
74
Liquidity and Capital Resources
As of December 31, 2019, TAT had cash and cash equivalents of $16 million with no significant change from December 31, 2018.
Capital expenditures for the years ended December 31, 2019, 2018 and 2017 were approximately $3.8 million, $4.3 million and $3.5 million, respectively. TAT funded these expenditures mainly from cash flows from
operations. TAT expects that its available cash and cash equivalents and cash flow generated from operations will be sufficient to fund its capital expenditures.
Management believes that anticipated cash flow from operations and its current cash balances will be sufficient to meet its cash requirements for at least 12 months from the financial statement issuance date.
TAT’s future capital requirements will depend on many factors, including its rate of revenue growth, the expansion of its selling and marketing activities, costs associated with expansion into new markets and the
timing of the introduction of new products and services.
Cash Flows
The following table summarizes TAT’s cash flows for the periods presented:
Net cash provided by operating activities
Net cash used in investing activities
Net cash provided by (used in) financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of the year
Cash and cash equivalents at end of the year
Year Ended December 31,
(in thousands)
2018
2017
2019
$
$
$
3,422
(3,413)
-
9
15,950
15,959
$
75
$
2,080
(3,841)
197
(1,564)
17,514
15,950
$
2,496
(3,559)
(2,856)
(3,919)
21,433
17,514
The net cash provided by operating activities for the year ended December 31, 2019, amounted to approximately $3.4 million, compared to net cash provided by operating activities of $2 million for the year
ended December 31, 2018 and net cash provided by operating activities of $2.5 million for the year ended December 31, 2017.
Net cash provided by operating activities for the year ended December 31, 2019 was principally derived from the following adjustments of non-cash line items: $0.8 million net income; an upwards
adjustment of $4.4 million for depreciation and amortization; an upward adjustment of $0.4 million for non cash finance expense; an upward adjustment of $2.5 million for decrease in other current assets and prepaid
expenses; an upward adjustment of $3.3 million for increase in trade account payable and an upward adjustment of $1 million for increase in accrued expenses. This was offset by a downward adjustment of $5.4
million for increase in inventory; a downward adjustment of $1.9 million for decrease in trade accounts receivable; a downward adjustment of $0.3 million for gain from derivatives; a downward adjustment of $0.9
million for decrease in liability in respect of employee rights upon retirement and a downward adjustment of $0.5 million for decrease in deferred income taxes, net.
Net cash provided by operating activities for the year ended December 31, 2018 was principally derived from the following adjustments of non-cash line items: an upwards adjustment of $4.2 million for
depreciation and amortization; an upward adjustment of $6.8 million for decrease in trade accounts receivable; an upward adjustment of $0.4 million for loss from derivatives; and an upward adjustment of $0.3
million for increase in share based compensation. This was offset by $4.5 million loss; a downward adjustment of $1.6 million for increase in other account receivables; a downward adjustment of $2 million for
decrease in accrued expenses; a downward adjustment of $1 million for decrease in trade accounts payable; and a downward adjustment of $0.6 million for decrease in liability in respect of employee rights upon
retirement.
76
Net cash provided by operating activities for the year ended December 31, 2017 was principally derived from $2.4 million of net income and from the following adjustments of non-cash line items: an
upwards adjustment of $3.9 million for depreciation and amortization; an upward adjustment of $0.6 million for increase in accounts payable; an upward adjustment of $0.4 million for deferred income tax, net; an
upward adjustment of $0.3 million for increase in provision for doubtful accounts; and an upward adjustment of $0.5 million for decrease in other accounts receivables. This was offset by a downward adjustment of
$4.5 million for increase in trade accounts receivable; a downward adjustment of $1.5 million for decrease in accrued expenses; and a downward adjustment of $0.5 million for gain from derivatives.
Net cash used in investing activities was approximately $3.4 million for the year ended December 31, 2019, compared to net cash used in investing activities of $3.9 million for the year ended December 31,
2018 and net cash provided by investing activities of $3.6 million for the year ended December 31, 2017.
Of the cash used in investing activities in the year ended December 31, 2019, approximately $3.4 million was used for purchase of property and equipment, primarily production equipment and building
improvements.
Of the cash used in investing activities in the year ended December 31, 2018, approximately $4.3 million was used for purchase of property and equipment, primarily production equipment and building
improvements. This was partially offset by maturities of short-term deposits in the amount of $0.5 million.
Of the cash used in investing activities in the year ended December 31, 2017, approximately $3.5 million was used for purchase of property and equipment, primarily production equipment and building
improvements and $0.4 million for investment in affiliated company. This was partially offset by maturities of short-term deposits in the amount of $0.5 million.
In the year ended December 31, 2018, the net cash provided by financing activities was primarily attributable to exercise of options.
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In the year ended December 31, 2017, the net cash used in financing activities was primarily attributable to a payment of $3.0 million of cash dividend to our shareholders.
A. Research and Development, Patents and Licenses
Not applicable.
B. Trend Information
In recent years, the aerospace industry in which we operate has been impacted by the increase in number of commercial and defense aircraft, increase in commercial passenger traffic and a corresponding
increase in airlines’ revenue. There is no assurance that these trends will continue in the future. Commercial carriers remain committed to their efforts to reduce cost of MRO activities and increase efficiencies.
We have also witnessed consolidation in the aerospace industry in recent years which has affected competition. This consolidation decreased the number of competitors but increased the relative size
and resources of our competitors. However, we believe in our ability to compete on the basis of our deep know-how, manufacturing expertise and long-term relationship with our customers.
C. Off-Balance Sheet Arrangements
We are not a party to any material off-balance sheet arrangements. In addition, we have no unconsolidated special purpose financing or partnership entities that are likely to create material contingent obligations.
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D. Tabular Disclosure of Contractual Obligations
The following table summarizes our minimum contractual obligations and commercial commitments as of December 31, 2019, and the effect we expect them to have on our liquidity and cash flow in future periods
Contractual Obligations
Operating lease obligations
Purchase commitments
Total
_________________
Payments due by Period
(Amounts in Thousands US$)
Total
Less than 1
year
1-3 Years
3-5 Years
More than
5 years
7,477
13,837
21,314
$
1,626
12,727
14,353
$
2,775
1,110
3,885
$
2,720
-
2,720
$
356
-
356
$
In addition, we have long-term liabilities for severance pay that are calculated pursuant to Israeli severance pay law generally based on the most recent salary of the employees multiplied by the number of years of
employment, as of the balance sheet date. Employees are entitled to one month’s salary for each year of employment or a portion thereof. As of December 31, 2019, our severance pay liability, net was $ 347
thousand.
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TAT expects to pay $1,026 thousand in future benefits to their employees during 2020 through 2029 upon their normal retirement age. The amount was determined based on the employee’s current salary rates and
the number of service years that will be accumulated upon the retirement date. These amounts do not include amounts that might be paid to employees that will cease working for the Israeli company before their
normal retirement age.
TAT also has the following guarantees as of December 31, 2019:
In order to secure TAT's liability to the Israeli customs, TAT provided a bank guarantee in the amount of $58 thousand. The guarantee is linked to the consumer price index and is valid until January 2021. In
addition, the Company provided a bank guarantee in the amount of $36 thousand. The guarantee is linked to the consumer price index and is valid until March 2021.In order to secure TAT's liability to the lessor of
its premises, TAT provided a bank guarantee in the amount of $790 thousand. The guarantee is linked to the consumer price index in Israel and is valid until July 2020.
Item 6. Directors, Senior Management and Employees
A. Directors and Senior Management
Set forth below are the name, age, principal position and a biographical description of each of our directors and executive officers, as of the date hereof:
Name
Amos Malka
Igal Zamir
Ehud Ben - Yair
Liron Reshef
Yair Raz
Eitan Shabtay
Ohad Milo
Dave Thomas
Greg Watson
Michael Chen
Ron Ben-Haim
Amiram Boehm
Avi Shani (1)(2)(3)(4)
Dafna Gruber (1)(3)(4)
Aviram Halevi (1)(2)(3)(4)
Position
Age
67
54
56
49
64
50
45
56
50
55
50
48
72
54
62
Chairman of the Board of Directors
Chief Executive Officer and President
Chief Financial Officer
EVP Human Resources
EVP Global Strategy
EVP Engineering and Technologies
President of Gedera
General Manager of Piedmont
General Manager of Limco
President of Turbochrome
Director
Director
External Director
Independent Director
External Director
(1) “Independent Director” under the applicable SEC and NASDAQ Marketplace Rules
(2) “External Director” as required by the Israeli Companies Law
(3) Member of the audit committee
(4) Member of the compensation committee
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Management
Mr. Igal Zamir was appointed TAT’s Chief Executive Officer and President in April 2016. Prior to joining TAT, from 2009 until 2013, Mr. Zamir served as President at Mapco Express, a wholly-owned subsidiary of
Delek US Holdings Inc., a NYSE-listed company which owns and operates 370 convenient stores and gas stations in the southeastern region of the United States. Prior to Mapco Express, from 2006 until 2009, Mr.
Zamir served as CEO of Metrolight, a provider of proprietary energy saving solutions in High Intensity Discharge (HID) lighting systems. From 1998 until 2004, Mr. Zamir served as CEO of Rostam, a leading
provider of private label feminine hygiene products. Mr. Zamir holds a B.Sc. in Industrial Engineering from Tel Aviv University and an MBA from Bar-Ilan University.
Mr. Ehud Ben-Yair was appointed as TAT's Chief Financial Officer in May 2018. Prior to joining TAT, Mr. Ben- Yair served as the Chief Financial Officer of SHL Telemedicine, a public company traded on the
Swiss stock exchange (SIX- SHLTN) engaging in the field of digital health. Between 2012-2016, Mr. Ben Yair has served as the Chief Financial Officer of Opgal Optronics, a subsidiary of Elbit Systems (NASDAQ –
ESLT), a company developing and manufacturing thermal imaging cameras for military and civilian aerospace markets. Prior to that, Mr. Ben- Yair has served for 8 years as the Chief Financial Officer of Orad Hi-
Tech Systems, a public company traded on the AIM and German stock exchange (OHT), a company developing, manufacturing and selling proprietary hardware to TV stations and broadcasters. Mr. Ben Yair is a
Certified Public Accountant and holds a B.A. in Economics and Accounting from the Ben-Gurion University in Israel.
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Ms. Liron Reshef was appointed as TAT’s EVP Human Resources in October 2018. Prior to joining TAT, from 2014 to 2018, Ms. Reshef served as VP Human Resources at Evogene, a bio-tech company, listed in
Tel Aviv and Nasdaq. From 2012 until 2013 Ms. Reshef served as Global HR Director for Frutarom, a leading global Israeli based company specializes food industry. From 2007 until 2012 Ms. Reshef served as a VP
Human Recourses in Solbar Industries, a company in the food and pharmaceutical industry (listed in Tel Aviv). Prior to that, Ms. Reshef served, for over 10 years, in executive Human Resources positions at
various hi-tech companies
Ms. Reshef holds a B.A. in Economics and Political Science from Bar-Ilan University and MBA -specialization in managing behavioral sciences from Ben-Gurion University.
Dr. Yair Raz was appointed as TAT's EVP Global Strategy since September 2019. In the years 2012-2019 Dr. Raz served as the President of Limco Airepair Inc., a subsidiary of TAT Technologies Ltd. His work
experience includes the following rolls: COO of Piedmont Aviation, VP Operation, GM and later CEO at Precision Components International (1995-2012), and Plant Manager at Blades Technology Limited (1991-
1994). Between 1983 to 1991 Dr. Raz had growing responsibility rolls as Lab, Quality and production manager. Dr. Raz holds a Bachelor of Science degree in Mechanical Engineering and Master of Science in
Materials from the Technion-Israel Institute of Technology and Doctorate in Philosophy Degree in Business Administration from La Salle University, Louisiana.
Mr. Eitan Shabtay was appointed as TAT’s EVP Engineering and Technologies in September 2019. Mr. Shabtay began his professional career in 1992 at the IDF and served for 15 years. In his final position there
he acted as Deputy Head of the Mechanical Research Department, tasked with developing innovative and complex systems that are at the forefront of technology. From 2006-07 Mr. Shabtay served as the VP R&D
of Pulsar, a start-up company developing a solution for Magnetic Pulse Welding (MPW). From 2008-09 he was the VP R&D of IQwind, a start-up company in the clean-tech field, developing a unique gearbox for
improving the efficiency of wind turbines.
From 2010-11 he served as VP Programs of Plasan Sasa. In his last position prior to joining TAT Technologies, Mr. Shabtay served as a senior R&D Manager in Elbit Systems and led the development of
multidisciplinary complex airborne commercial systems as well as a variety of electro-optical products and systems. Mr. Shabtay holds a B.Sc. In Mechanical Engineering (cum laude) from the Technion – Israel
Institute of Technology (1991), M.Sc. in Mechanical Engineering from Tel-Aviv University, Israel (1997) and MBA (summa cum laude) from Ben-Gurion University, Israel (2000).
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Mr. Ohad Milo was appointed President of TAT Gedera in October 2018. Before joining TAT, between 2012 and 2018, Mr. Milo served as CEO of 4 subsidiaries of IAI (Israeli Aerospace Industries) owned
Elbatech group. Prior to Elbatech, from 2010 until 2012, Mr. Milo served as CEO of TMC Systems, a start-up company owned by Pointer Telocation Ltd. (Nasdaq CM: PNTR).
Between 2000 and 2010, Mr. Milo held various management positions at Sanmina Corporation (Nasdaq CM: SANM), most recently as VP Sales and Account Management at Sanmina's subsidiary in Israel.
Mr. Milo holds a B.Sc. in Industrial Engineering from Tel Aviv University and an MBA from the Technion - Israeli Institute of Technology.
Mr. Dave Thomas was appointed General Manager of Piedmont in June 2019 after serving as Vice President of Operations and Supply Chain beginning August 2018. Before joining TAT, from 2017 to 2018, Mr.
Thomas served as Director North American Assembly at Volvo Trucks in VA. Prior to Volvo, between 2009 and 2017 Mr. Thomas served as Director Global Operational Excellence at B/ E Aerospace Inc.; as well
as, various executive level positions including Vice President Operations and General Manager at B/E Aerospace Mexico. Prior to that, between 2004 and 2009, Mr. Thomas served in Quality Management for
Toyota Motor Manufacturing Indiana. Prior 2004, Mr. Thomas held various management positions with Top Tier Automotive OEMs such as Lear, Gencorp, & Cooper Standard Automotive. Mr. Thomas holds an
M.B.A. in Management from Atlanta University and completed his Doctorate in Feb 2020. Mr. Thomas is also a Certified Lean Professional and Examiner from SME/SHINGO.
Mr. Greg Watson was appointed General Manager of Limco in September 2019. Prior to joining TAT, Greg served as a General Manager at UTC Aerospace Systems where he had full operational and fiscal
responsibility for two North American Word Wide Repair MRO facilities – Miramar, Florida and Santa Isabel, Puerto Rico. While at UTC, Greg also served as site director for divisions in the United States and
Canada. Greg has additional experience as the Director of Operations for a greenfield MRO project located in Queretaro, Mexico with Messier Services America. Greg began his career as an automotive mechanic
and quickly worked his way up as a valve technician and technical representative before transitioning to various senior leadership roles within the MRO environment. Mr. Watson holds an Executive Business
Administration degree from York University – Toronto, Canada and is working towards acquiring his MBA.
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Mr. Michael Chen was appointed President of Turbochrome in January 2018. Before joining TAT Technologies, between 2013 and 2017, Mr. Chen served as CEO of Seraphim Optronics Ltd. Prior to Seraphim, from
1999 until 2013, Mr. Chen held various management positions at Electro Optics ELOP Industries, a subsidiary of ELBIT System. Between 2007 and 2009, Mr. Chen served as VP Operations at Atlantium Ltd.
Between 1996 and 1999 Mr. Chen held engineering positions at ORLITE Industries Ltd. Mr. Chen holds a B.Sc. in Mechanical Engineering from Tel Aviv University and an MBA from Heriot-Watt University in
Edinburgh.
Directors
Mr. Amos Malka was elected as Chairman of our Board of Directors in June 2016. Mr. Malka is the founder and chairman of Nyotron Information Security Ltd., a privately-held cyber security provider and of Spire
Security Solutions Ltd., a security, intelligence and cyber security provider. From 2007 until 2015, Mr. Malka served as the chairman and CEO of Logic Industries Ltd. From 2007 until 2010, he also served as
chairman of Plasan Sasa LTD., an armored vehicle manufacturer. From 2005 until 2007, he served as the chairman of Albar, a leading company in the Israeli automobile sector. From 2002 until 2005, Mr. Malka served
as the CEO of Elul Technologies Ltd., Israel's largest aerospace and defense business development and consulting company. Mr. Malka retired from the IDF in 2002 at the rank of Major General, after 31 years of
service. He served as commander of the IDF Ground Forces Command, and later as Head of the Israeli Defense Intelligence, a post he held until his retirement in 2002. Mr. Malka holds B.A. in History from Tel Aviv
University, Israel. He also graduated from the IDF Staff & Command College and its National Defense Academy.
Mr. Ron Ben-Haim joined TAT’s Board of Directors in August 2013. Mr. Ben-Haim is a partner at FIMI Opportunity Fund since 2006. Mr. Ben Haim was previously with Compass Advisers, LLP, an investment
banking firm with offices in New York and Tel Aviv and with the Merrill Lynch Mergers & Acquisitions group in New York. Prior to Merrill Lynch, Mr. Ben-Haim worked at Teva Pharmaceutical Industries in
production management. Mr. Ben-Haim holds a B.Sc. in Industrial Engineering from Tel Aviv University and an MBA from New York University. In his capacity at FIMI, Mr. Ben-Haim currently serves on the
board of directors of Tadir-Gan Precision Products, Ltd., Inrom Construction, Ltd., Nirlat Paints, Ltd., Alony, Ltd., Hadera Paper Ltd., Magal Security Systems, Ltd., Polyram Plastic Industries, Ltd., Rivulis Irrigation,
Ltd., Oxygen and Argon Works, Ltd. and Overseas Commerce, Ltd.
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Mr. Amiram Boehm joined TAT's Board of Directors in June 2016. Mr. Boem is a partner at FIMI Opportunity Fund since 2006. Prior to joining FIMI, from 1999 until 2004, Mr. Boehm served as Head of Research at
Discount Capital Markets, the investment arm of Israel Discount Bank. In his capacity at FIMI, Mr. Boehm currently also serves as the Managing Partner and Chief Executive Officer of FITE GP (2004) as well as a
director of Ham-Let (Israel-Canada) Ltd., Hadera Paper Ltd., Rekah Pharmaceuticals Ltd., Pharm-up Ltd., Galam Ltd., Delekson Ltd. and DIMAR Ltd. Mr. Boehm previously served as a director of Magal S3 Security
Systems Ltd., Scope Metal Trading, Ltd., Inter Industries, Ltd., Global Wire Ltd. , Telkoor Telecom Ltd. and Solbar Industries Ltd. Mr. Boehm holds a B.A. in Economics and LL.B. from Tel Aviv University and a
Joint MBA from Northwestern University and Tel Aviv University.
Mr. Avi Shani joined TAT’s Board of Directors as an external director in 2008. In June 2017, Mr. Shani was re-elected to serve as an external director for another three-year term. From 2005 until 2008, Mr. Shani
served as the CEO of TCM Mobile Ltd. Prior to that, from 2000 until 2004, he served as Executive Vice President Investments and Chief Economist of IDB Development, a leading Israeli holding company,
responsible for the company’s new investments. Since 2012 until 2018 Mr. Shani served on the board of directors of Harel Sal and Ecommunity. Mr. Shani holds a B.A. in Economics and an MBA, both from Tel
Aviv University.
Ms. Dafna Gruber joined TAT’s Board of Directors as an external director in November 2013. Since February 2019 Ms. Gruber has been serving as chief financial officer of Aqua Security, a private company. from
2017 until 2018, Ms. Gruber served as chief financial officer of Landa Corporation Ltd., a private company. From 2015 until 2017, Ms. Gruber served as the chief financial officer of Clal Industries Ltd., a private
holding company. From 2007 until 2015, Ms. Gruber served as the CFO of NICE Ltd., a public company traded on NASDAQ and the TASE. From 1996 until April 2007, Ms. Gruber was part of Alvarion Ltd., a
company which traded on NASDAQ and the TASE, mostly as the company’s CFO. Ms. Gruber serves as an external director at Nova Measuring Systems Ltd., a public company traded on NASDAQ and the TASE
and Tufin Software Technologies Ltd. a public company traded on NYSE. Ms. Gruber is a Certified Public Accountant (Israel) and holds a Bachelor’s degree in Accounting and Economics from Tel Aviv
University, Israel.
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Mr. Aviram Halevi joined TAT’s Board of Directors as an external director in November 2013. In June 2016, Mr. Halevi was re-elected to serve as an external director for another three-year term. Mr. Halevi is the
founder and CEO of Intel System Ltd., a provider of business intelligence services. Prior to that, from 2007 until 2010, Mr. Halevi served as the CEO of Terrogence Ltd., a producer of intelligence data for commercial
markets. Mr. Halevi holds a B.Sc. in Geology from Queens College, CUNY, and an MBA from Tel Aviv University.
Compensation
The following table sets forth all compensation TAT paid to all of its directors and executive officers as a group for the year ended December 31, 2019.
All directors and executive officers as a group (17 executives)
Salaries, fees,
Commissions and
bonuses
(Amounts in
Thousands US$)
Other benefits
(Amounts in
Thousands US$)
$
2,333
$
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During the year ended December 31, 2019, TAT paid its directors (except for its active chairman of the Board of Directors, Mr. Amos Malka), the fixed medium amounts permitted by law to an external director
(within the meaning of the Israeli Companies Law) which was a per meeting attendance fee of NIS 2,585 (approximately $725), plus an annual fee of NIS 69,400 (approximately $19,473). Pursuant to its agreement with
Mr. Amos Malka, TAT's active chairman of the Board of Directors, TAT paid Mr. Malka a monthly fee of NIS 40,000 plus VAT. Mr. Malka had been previously granted options to purchase 50,000 ordinary shares
of TAT and is not currently entitled to receive any bonus.
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The table below sets forth the compensation paid to our five most highly compensated senior office holders (as defined in the Israeli Companies Law) during or with respect to the year ended December
31, 2019, in the disclosure format of Regulation 21 of the Israeli Securities Regulations (Periodic and Immediate Reports), 1970. We refer to the five individuals for whom disclosure is provided herein as our
“Covered Executives.”
For purposes of the table and the summary below, and in accordance with the above-mentioned securities regulations, “compensation” includes base salary, bonuses, equity-based compensation,
retirement or termination payments, benefits and perquisites such as car, phone and social benefits and any undertaking to provide such compensation.
Name and Principal Position(2)
Base Salary
Benefits and
Perquisites(3)
Variable
Compensation(4)
Equity-Based
Compensation(5)
Total
Information Regarding Covered Executives (1)
(Amounts in Thousands US$)
Igal Zamir, CEO and President
Ehud Ben- Yair, CFO
Ohad Milo, President of Gedera
Michael Chen, President of Turbochrome
Yair Raz, President of Limco
321
206
152
169
198
75
59
53
76
21
122
53
39
13
14
(19)
3
35
1
(4)
499
321
279
259
229
All amounts reported in the table are in terms of cost to TAT, as recorded in our financial statements.
(1
(2) Cash compensation amounts denominated in currencies other than the U.S. dollar were converted into U.S. dollars at the average conversion rate for the year ended December 31, 2019.
(3) Amounts reported in this column include benefits and perquisites, including those mandated by applicable law. Such benefits and perquisites may include, to the extent applicable to each executive,
payments, contributions and/or allocations for savings funds, pension, severance, vacation, car or car allowance, medical insurance and benefits, risk insurance (e.g., life, disability, accident),
convalescence pay, payments for social security, tax gross-up payments and other benefits and perquisites consistent with our guidelines.
(4) Amounts reported in this column refer to variable compensation such as commission, incentive and bonus payments as recorded in our financial statements for the year ended December 31, 2019.
(5) Amounts reported in this column represent the expense recorded in our financial statements for the year ended December 31, 2019 in connection with equity-based compensation granted to the Covered
Executive.
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B. Board Practices
Introduction
According to the Israeli Companies Law and our articles of association, the management of our business is vested in our board of directors. The board of directors may exercise all powers and may take all actions
that are not specifically granted to another organ in the Company (including our shareholders). Our executive officers are responsible for our day-to-day management. Our executive officers have individual
responsibilities established by our chief executive officer and board of directors.
Election of Directors
Our articles of association provide for a board of directors consisting of such number of directors as may be determined from time to time at a general meeting of shareholders, provided that it shall be no less than
two or more than eleven. Our board of directors is currently composed of six directors, including three independent directors, two of whom also qualify as external directors within the meaning of the Israeli
Companies Law.
Pursuant to our articles of association and in accordance with the Israeli Companies Law, our directors (except for the external directors) are elected at our annual general meeting of shareholders by a vote of the
holders of a majority of the voting power represented and voting at such meeting; in addition, directors (except for external directors) may be appointed by a vote of a majority of directors then in office. All our
directors (except for external directors) hold office until the annual general meeting of shareholders succeeding their election (provided that if no directors are elected at the annual general meeting, the directors in
office at the time such meeting was convened shall continue to hold their office) or until their earlier death, resignation, removal or other circumstances as set forth in the Israeli law. All the members of our board of
directors (except for external directors) may be re-elected upon completion of their term of office.
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The Israeli Companies Law requires the board of directors of a public company to determine a minimum number of directors with ‘‘accounting and financial expertise’’. Our board of directors determined,
accordingly, that at least two directors must have ‘‘accounting and financial expertise’’ as such term is defined by regulations promulgated under the Israeli Companies Law.
We are exempt from the requirements of the NASDAQ Marketplace Rules with regard to the nomination process of directors since we are a controlled company within the meaning of NASDAQ Marketplace Rule
5615(c)(2). See below in this Item 6. “Directors, Senior Management and Employees - Board Practices - NASDAQ Exemptions for a Controlled Company.”
External and Independent Directors
External Directors. Under the Israeli Companies Law, Israeli companies whose shares have been offered to the public or whose shares are listed in an authorized stock exchange (accordingly, such shares are
considered as held by "the public") are required to appoint at least two external directors who meet the independence criteria set by the Israeli Companies Law.
A person is qualified to serve as an external director only if he or she has “accounting and financial expertise” or “professional qualifications,” as such terms are defined by the Israeli Companies Regulations
(Conditions and Criteria for a Director Who Possesses Accounting Expertise and a Director Who Possesses Professional Competence), 2005. At least one of the external directors must have “accounting and
financial expertise.” Each of our external directors has “accounting and financial expertise.”
External directors are elected by a majority vote at a shareholders’ meeting. In addition to the majority vote, the shareholder approval of the election of an external director must satisfy either of two additional tests:
•
•
The majority includes at least a majority of the shares voted by shareholders other than controlling shareholders or shareholders who have a personal interest in the election of the external
directors (excluding a personal interest that is not related to a relationship with the controlling shareholders); or
The total number of shares held by non-controlling shareholders and disinterested shareholders that voted against the election of the external director does not exceed 2% of the aggregate
voting rights of the company.
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In general, external directors serve for a three-year term and may be re-elected to two additional three-year terms by one of the following mechanisms: (1) the board of directors proposes the re-election of the
nominee and the re-election is approved by the majority required for appointment of external directors for their initial term; or (2) a shareholder holding 1% or more of the company's voting rights proposes the re-
election of the nominee, and the re-election is approved by a majority of the votes cast by the shareholders of the company, excluding the votes of controlling shareholders or those who have a personal interest in
the nomination, provided that the aggregate votes cast in favor of the re-election by shareholders who are not controlling shareholders and do not have a personal interest in the nomination constitute more than
2% of the company's voting rights. Israeli companies listed on certain stock exchanges outside Israel, including The NASDAQ Global Market, such as our company, may appoint an external director for additional
terms of not more than three years subject to certain conditions. Such conditions include the determination by the audit committee and board of directors, that in view of the director's professional expertise and
special contribution to the company's board of directors and its committees, the appointment of the external director for an additional term is in the best interest of the company.
An external director may be removed from office at the initiative of the board of directors at a special general meeting of shareholders, if the board resolves that the statutory requirements for that person’s
appointment as external director no longer exist, or that the external director has violated his or her duty of loyalty to the company. The resolution of the special general meeting of shareholders regarding the
termination of office of an external director requires the same majority that is required for the election of an external director. The court may order the termination of the office of an external director on the same
grounds, following a motion filed by a director or a shareholder. If an external directorship becomes vacant and as a result there are fewer than two directors who serve as external directors in the company, the
board of directors is required under the Israeli Companies law to convene a shareholders meeting immediately to appoint a new external director.
Each committee of the board of directors that is authorized to exercise powers vested in the board of directors must include at least one external director and the audit committee must include all of the external
directors. An external director is entitled to compensation as provided in regulations adopted under the Israeli Companies Law and is otherwise prohibited from receiving any other compensation, directly or
indirectly, in connection with such service.
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Until the lapse of two years from termination of office, we may not engage an external director or his spouse or child, to serve as an office holder and cannot employ or receive services from these persons, either
directly or indirectly, including through a corporation controlled by that person; and with regards to a related person (to a such external director) as defined in the Israeli Companies law which is not a spouse or
child – until the lapse of one year from termination of office.
Independent Directors. As a controlled company, within the meaning of NASDAQ Marketplace Rule 5615(c)(2), we are exempt from the NASDAQ Marketplace Rule which requires that a majority of our board of
directors qualify as independent directors, within the meaning of the NASDAQ Marketplace Rules. See Item 6. “Directors, Senior Management and Employees - Board Practices - NASDAQ Exemptions for a
Controlled Company”.
Audit Committee
Under the Israeli Companies Law, the board of directors of any public company must establish an audit committee. In general, the audit committee must consist of at least three directors and must include
all of the external directors; furthermore, a majority of the audit committee members must comply with the director independence requirements prescribed by the Israeli Companies Law. The audit committee may not
include (i) the chairman of the board of directors, (ii) any director employed by the Company or by a controlling shareholder of the company (including a company which is controlled by the controlling
shareholder), (iii) any director providing services to the company or to a controlling shareholder of the company (including to a company which is controlled by the controlling shareholder) on an ongoing basis, or
(iv) a controlling shareholder or any of the controlling shareholder’s relatives.
In addition, the NASDAQ Marketplace Rules require us to establish an audit committee comprised of at least three members, all of whom must be independent directors, each of whom is financially literate
and satisfies the respective “independence” requirements of the SEC and NASDAQ and one of whom has accounting or related financial management expertise at senior levels within a company.
Our audit committee acts also as a committee for the review and the approval of our financial statements, and as such, assists our board of directors in overseeing the accounting and financial reporting
processes of our company and audits of our financial statements, including the integrity of our financial statements, compliance with legal and regulatory requirements, our independent registered public
accountants’ qualifications and independence, the performance of our internal audit function and independent registered public accountants, finding any defects in the business management of our company and
proposing to our board of directors ways to correct such defects, approving related-party (officers, directors, controlling shareholder, etc.) transactions with the company as required by Israeli law, examining the
scope of work and the payment to our independent auditors and such other duties as may be directed by our board of directors. The audit committee may consult from time to time with our independent auditors
and internal auditor with respect to matters involving financial reporting and internal accounting controls.
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Our audit committee consists of three members of our board of directors (including two external directors and one independent director) who satisfy the respective “independence” requirements of the
SEC, NASDAQ and Israeli law for audit committee members. Our board of directors has determined that each member of our audit committee qualifies as an audit committee financial expert, as defined by rules of
the SEC. The audit committee meets at least once each quarter.
Compensation Committee
Under the Israeli Companies Law, the board of directors of any public company must establish a compensation committee. The compensation committee must consist of at least three directors, include all
of the external directors (including one external director serving as the chair of the compensation committee), and a majority of the committee members must comply with the director independence requirements
prescribed by the Israeli Companies Law. Similar to the rules that apply to the audit committee, the compensation committee may not include the chairman of the board, or any director employed by us, by a
controlling shareholder or by any entity controlled by a controlling shareholder, or any director providing services to us, to a controlling shareholder or to any entity controlled by a controlling shareholder on a
regular basis, or any director whose primary income is dependent on a controlling shareholder, and may not include a controlling shareholder or any of its relatives. Individuals who are not permitted to be
compensation committee members may not participate in the committee’s meetings other than to present a particular issue; provided, however, that an employee that is not a controlling shareholder or relative may
participate in the committee’s discussions but not in any vote; other than the company’s legal counsel and corporate secretary who may participate in the committee’s discussions and votes if requested by the
committee.
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The compensation committee’s duties include recommending to the board of directors a compensation policy for executives and monitor its implementation, approve compensation terms of executive
officers, directors and employees affiliated with controlling shareholders, make recommendations to the board of directors regarding the issuance of equity incentive awards under our equity incentive plan and
exempt certain compensation arrangements from the requirement to obtain shareholder approval under the Israeli Companies Law. The compensation committee meets at least twice a year, with further meetings to
occur, or actions to be taken by unanimous written consent, when deemed necessary or desirable by the committee or its chairperson.
Our compensation committee consists of our two external directors and an independent director under the respective requirements of the SEC and NASDAQ and complies with the Israeli Companies Law
criteria for compensation committee members.
Internal Audit
The Israeli Companies Law requires the board of directors of a public company to appoint an internal auditor following a recommendation by the audit committee. The role of the internal auditor is to
examine, among other things, the company’s compliance with applicable law and orderly business practice. The internal auditor must meet certain statutory requirements of independence. Mr. Doron Cohen has
served as our internal auditor since December 24, 2008.
Directors’ Service Contracts
There are no arrangements or understandings between us and any of our subsidiaries, on the one hand, and any of our directors, on the other hand, providing for benefits upon termination of their
employment or service as directors of our company or any of our subsidiaries.
Chairman of the Board
Under the Israeli Companies Law, the general manager of a company (or a relative of the general manager) may not serve as the chairman of the board of directors, and the chairman of the board of
directors (or a relative of the chairman of the board of directors) may not serve as the general manager, unless approved by the shareholders by a special majority vote prescribed by the Israeli Companies Law. The
shareholder vote cannot authorize the appointment for a period of longer than three years, which period may be extended from time to time by the shareholders with a similar special majority vote. The chairman of
the board of directors shall not hold any other position with the company (except as general manager if approved in accordance with the above procedure) or in any entity controlled by the company, other than as
chairman of the board of directors of a controlled entity, and the company shall not delegate to the chairman duties that, directly or indirectly, make him or her subordinate to the general manager.
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Approval of Related Party Transactions under Israeli Law
Fiduciary Duties of Office Holders
The Israeli Companies Law codifies the fiduciary duties that “office holders,” including directors and executive officers, owe to a company. An office holder’s fiduciary duties consist of a duty of care and
a duty of loyalty. The duty of care requires an office holder to act at a level of care that a reasonable office holder in the same position would employ under the same circumstances. This includes the duty to utilize
reasonable means to obtain (i) information regarding the business feasibility of a given action brought for his approval or performed by him by virtue of his position and (ii) all other information of importance
pertaining to the foregoing actions. The duty of loyalty requires that an office holder acts in good faith and for the benefit of the company, including (i) avoiding any conflict of interest between the office holder’s
position in the company and any other position he holds or his personal affairs, (ii) avoiding any competition with the company’s business, (iii) avoiding exploiting any business opportunity of the company in
order to receive personal gain for the office holder or others, and (iv) disclosing to the company any information or documents relating to the company’s affairs that the office holder has received by virtue of his
position as an office holder.
Disclosure of Personal Interests of an Office Holder; Approval of Transactions with Office Holders
The Israeli Companies Law requires that an office holder promptly, and no later than the first board meeting at which such transaction is considered, disclose any personal interest that he or she may have
and all related material information known to him or her and any documents in their position, in connection with any existing or proposed transaction by us. An office holder who did not disclose his or her
personal interests will be deemed as breaching his or her fiduciary duties. In addition, if the transaction is an extraordinary transaction, that is, a transaction other than in the ordinary course of business or other
than in accordance with market terms, or likely to have a material impact on the company’s profitability, assets or liabilities, the office holder must also disclose any personal interest held by the office holder’s
spouse, sibling, parent, grandparent, child as well as sibling or parent of such person's spouse or the spouse of any of the above, or by any corporation in which the office holder or his relative (as defined in the
Israeli Companies Law) is a 5% or greater shareholder, director or general manager or in which he or she has the right to appoint at least one director or the general manager.
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Under the Israeli Companies Law, in general, all arrangements as to compensation of office holders who are not directors (other than the Chief Executive Officer) require the approval of the compensation
committee and the board of directors, including exculpation, insurance and indemnification of, or an undertaking to, indemnify an office holder who is not a director. The compensation of office holders who are
directors and compensation of the Chief Executive Officer must be approved by the compensation committee, board of directors and the general meeting of shareholders.
Some transactions, actions and arrangements involving an office holder (or a third party in which an office holder has an interest) must be approved by the board of directors or as otherwise provided for
in a company’s articles of association. If the transaction is an extraordinary transaction (which is defined as a transaction not in the ordinary course of business and for a material value) such a transaction must be
approved by the audit committee and by the board of directors itself, and under certain circumstances shareholder approval may be required. A director who has a personal interest in a transaction that is
considered at a meeting of the board of directors or the audit committee may not be present during the board of directors or audit committee discussions and may not vote on the transaction, unless the transaction
is not an extraordinary transaction or the majority of the members of the board or the audit committee have a personal interest, as the case may be. In the event the majority of the members of the board of directors
or the audit committee have a personal interest, then the approval of the general meeting of shareholders is also required.
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Disclosure of Personal Interests of a Controlling Shareholder; Approval of Transactions with Controlling Shareholders
The disclosure requirements that apply to an office holder also apply to a transaction in which a controlling shareholder of the company has a personal interest. The Israeli Companies Law provides that
an extraordinary transaction with a controlling shareholder or an extraordinary transaction with another person in whom the controlling shareholder has a personal interest or a transaction with a controlling
shareholder or his relative regarding terms of service and employment, must be approved by the audit committee (or the compensation committee, as the case may be), the board of directors and the shareholders
by a special majority, as follows. The shareholders’ approval must include the majority of shares voted at the meeting. In addition to the majority vote, the shareholder approval must satisfy either of two additional
tests:
•
•
The majority includes at least a majority of the shares voted by shareholders who have no personal interest in the transaction; or
The total number of shares held by disinterested shareholders that voted against the approval of the transaction does not exceed 2% of the aggregate voting rights of our company.
According to regulations promulgated under the Israeli Companies Law, certain extraordinary transactions between a public company and its controlling shareholder(s) do not require shareholder
approval. In addition, under such regulations, directors’ compensation and employment arrangements in a public company do not require the approval of the shareholders if both the audit committee and the board
of directors agree that such arrangements are solely for the benefit of the company or if the directors’ compensation does not exceed the maximum amount of compensation for external directors determined by
applicable regulations. Also, employment and compensation arrangements for an office holder that is a controlling shareholder of a public company do not require shareholder approval if certain criteria are met.
The foregoing exemptions from shareholder approval will not apply if one or more shareholders holding at least 1% of the issued and outstanding share capital of the company or of the company’s voting rights,
objects to the use of these exemptions provided that such objection is submitted to the company in writing not later than fourteen days from the date of the filing of a report regarding the adoption of such
resolution by the company. If such objection is duly and timely submitted, then the transaction or compensation arrangement of the directors will require shareholders’ approval as detailed above.
In addition, a private placement of securities that will (i) cause a person to become a controlling shareholder or (ii) increase the relative holdings of a shareholder that holds 5% or more of the company’s
outstanding share capital, or (iii) will cause any person to become, as a result of the issuance, a holder of more than 5% of the company’s outstanding share capital in a private placement in which 20% or more of
the company’s outstanding share capital prior to the placement are offered, the payment for which (in whole or in part) is not in cash or not under market terms, requires approval by the board of directors and the
shareholders of the company.
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Compensation of Executive Officers and Directors
In accordance with the Israeli Companies Law, we have adopted a compensation policy for our executive officers and directors. The purpose of the policy is to describe our overall compensation strategy
for our executive officers and directors and to provide guidelines for setting their compensation, as prescribed by the Israeli Companies Law. In accordance with the Israeli Companies Law, the policy must be
reviewed and readopted at least once every three years.
Approval of the compensation committee, the board of directors and our shareholders, in that order, is required for the adoption of the compensation policy. The shareholders’ approval must include the
majority of shares voted at the meeting. In addition to the majority vote, the shareholder approval must satisfy either of two additional tests:
•
•
The majority includes at least a majority of the shares voted by shareholders other than our controlling shareholders or shareholders who have a personal interest in the adoption of the
compensation policies; or
The total number of shares held by non-controlling shareholders and disinterested shareholders that voted against the adoption of the compensation policies does not exceed 2% of the
aggregate voting rights of our company.
Under the Israeli Companies Law, the compensation arrangements for officers (other than the Chief Executive Officer) who are not directors require the approval of the compensation committee and the
board of directors; provided, however, that if the compensation arrangement is not in compliance with our executive compensation policy, the arrangement may only be approved by the compensation committee
and the board of directors for special reasons to be noted, and the compensation arrangement shall also require a special shareholder approval. If the compensation arrangement is an immaterial amendment to an
existing compensation arrangement of an officer who is not a director and is in compliance with our executive compensation policy, the approval of the compensation committee is sufficient.
Arrangements regarding the compensation of the Chief Executive Officer and directors require the approval of the compensation committee, the board of directors and our shareholders, in that order. In
certain limited cases, the compensation of a new Chief Executive Officer who is not a director may be the approved without approval of the shareholders.
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Variable Cash Incentive
The compensation committee and board of directors may adopt, from time to time, a cash incentive plan, which will set forth for each executive certain targets which form such executives on target cash
payment (the “On Target Cash Plan”) and the rules or formula for calculation of the On Target Cash Plan payment once actual achievements are known.
The compensation committee and board of directors may include in the On Target Cash Plan predetermined thresholds and caps to correlate an executive’s On Target Cash Plan payments with actual achievements.
The actual payment of the annual On Target Cash Plan for the active chairman of the board of directors (the “Active Chairman”), the CEO and other executives in a given year shall be capped as determined by our
board of directors, but in no event shall exceed the ratio set forth in the table below.
The On Target Cash Plans may be composed based on a mix of (i) the company target; (ii) personal targets (KPIs); and (iii) personal evaluation. The weight to be assigned to each of the components per each of the
executives shall be as set forth in the table below.
Company Target
Personal KPIs
Personal Evaluation
Active Chairman
100%
NONE
NONE
CEO
75% - 100%
NONE
0%-25%
Other Executives
50%-100%
0%-30%
0%-20%
The company target shall be determined in accordance with all or part of pre-determined targets of the sales budget, gross profit, operating profit, EBITDA, net income and net cash from operating activities, all in
accordance with TAT’s annual budget. If a company target shall apply to a Chief Executive Officer or a President of a subsidiary, such target may be applied up to 100% with respect to the financial results of the
relevant subsidiary, and the remaining cash incentive with respect to the financial results of TAT and its subsidiaries on a consolidated basis.
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The board of directors may determine to exclude certain profits or loss items from the company target including, but not limited to, certain expenses related to acquisition of a new company, certain expenses related
to distribution of dividend, certain items of revenue or any other items per the board of directors’ sole discretion.
With regard to each one of the measurable targets, reference points shall be determined in terms of numerical values, so that compliance with the precise numerical target as determined in the On Target Cash Plan
shall constitute compliance with 100% of the target, and also, numerical values shall be determined which will constitute the lower threshold for compliance with the target. The actual rate of compliance with the
targets shall be calculated in accordance with the said reference points. Failure to comply with the minimum threshold of at least 75% of a specific target shall not entitle the executive to an On Target Cash Plan
payment in respect of the said target. In the event of compliance at a rate of 75% or more with a specific target, the annual On Target Cash Plan shall be calculated in accordance with a key (i.e. linear, steps, etc.)
which shall determine – in relation to the point of compliance with the target – the amount of the payment in terms of a percentage of the executive annual base salary, all as shall be set forth in the On Target Cash
Plan. In this respect, the compensation committee and the board of directors shall have the right to determine a higher (but not lower) entitlement threshold.
The annual cash incentive shall be paid to the executive in the following manner:
- 80% of the amount of the On Target Cash Plan payment will be paid following the approval of the financial statements of the relevant year by the board of directors.
- 20% of the amount of the On Target Cash Plan payment shall be deferred by one year, and shall be paid following the approval of the financial statements of such year (“Deferred Bonus”) by the board of
directors.
The executive's eligibility to the payment of the Deferred Bonus shall be subject to the following cumulative conditions: (i) TAT recorded a positive EBITDA for the following year; and (ii) TAT did not
terminate its engagement with the executive for cause.
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Indemnification and Insurance of Directors and Officers
Insurance of Office Holders
The Israeli Companies Law provides that a company may, if permitted by its articles of association, enter into a contract to insure an office holder for acts or omissions performed by the office holder in
such capacity for:
• Breach of his or her duty of care to the company or to another person;
• Breach of his or her duty of loyalty to the company, provided that the office holder acted in good faith and had reasonable cause to assume that his act would not prejudice the company’s interests;
• Monetary liability imposed upon the office holder in favor of another person;
• A monetary obligation imposed on the office holder in favor of another person who was injured by a violation, as this term is defined in section 52(54)(a)(1)(a) of the Israeli Securities Law, 1968 (“Israeli
Securities Law”); and
• Expenses expended by the office holder, including reasonable litigation expenses, and including attorney's fees, in respect of any proceeding under chapters 8-C, 8-D or 9-A of the Israeli Securities
Law or in respect to any monetary sanction.
Indemnification of Office Holders
The Israeli Companies Law provides that a company may, if permitted by its articles of association, indemnify an office holder for acts or omissions performed by the office holder in such capacity for:
• Monetary liability imposed on the office holder in favor of another person by any judgment, including a settlement or an arbitrator’s award approved by a court;
• Reasonable litigation expenses, including attorney’s fees, actually incurred by the office holder as a result of an investigation or proceeding instituted against him or her by a competent authority,
provided that such investigation or proceeding concluded without the filing of an indictment against the office holder or the imposition of any monetary liability in lieu of criminal proceedings, or
concluded without the filing of an indictment against the office holder and a monetary liability was imposed on the officer holder in lieu of criminal proceedings with respect to a criminal offense that
does not require proof of criminal intent;
• A monetary obligation imposed on the office holder in favor of another person who was injured by a violation, as this term is defined in section 52(54)(a)(1)(a) of the Israeli Securities Law;
• Expenses expended by the office holder, including reasonable litigation expenses, and including attorney's fees, in respect of any proceeding under chapters 8-C, 8-D or 9-A of the Israeli Securities
Law or in respect to any monetary sanction;
indemnify an office holder of the company.
• Reasonable litigation expenses, including attorneys’ fees, incurred by such office holder or which were imposed on him by a court, in proceedings the company instituted against the office holder or
that were instituted on the company’s behalf or by another person, or in a criminal charge from which the office holder was acquitted, or in a criminal proceeding in which the office holder was
convicted of a crime which does not require proof of criminal intent; or
• Any other liability, payment or expense which the company may indemnify its office holders under the Israeli Company Law, the Israeli Securities Law or other Israeli law.
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In accordance with the Israeli Companies Law, a company’s articles of association may permit the company to:
• Undertake in advance to indemnify an office holder, except that with respect to a financial liability imposed on the office holder by any judgment, settlement or court-approved arbitration award, the
undertaking must be limited to types of occurrences, which, in the opinion of the company’s board of directors, are, at the time of the undertaking, foreseeable due to the company’s activities and to an
amount or standard that the board of directors has determined is reasonable under the circumstances; and
• Undertake in advance to indemnify an office holder for reasonable litigation expenses, including attorney’s fees, actually incurred by the office holder as a result of an investigation or proceeding
instituted against him or her by a competent authority, provided that such investigation or proceeding concluded without the filing of an indictment against the office holder or the imposition of any
monetary liability in lieu of criminal proceedings, or concluded without the filing of an indictment against the office holder and a monetary liability was imposed on the officer holder in lieu of criminal
proceedings with respect to a criminal offense that does not require proof of criminal intent.
• Undertake in advance to indemnify an office holder for reasonable litigation expenses, including attorneys’ fees, incurred by such office holder or which were imposed on him by a court, in
proceedings the company instituted against the office holder or that were instituted on the company’s behalf or by another person, or in a criminal charge from which the office holder was acquitted, or
in a criminal proceeding in which the office holder was convicted of a crime which does not require proof of criminal intent.
• Retroactively indemnify an office holder of the company.
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Limitations on Exculpation, Insurance and Indemnification
The Israeli Companies Law provides that neither a provision of the articles of association permitting the company to enter into a contract to insure the liability of an office holder, nor a provision in the
articles of association or a resolution of the board of directors permitting the indemnification of an office holder, nor a provision in the articles of association exempting an office holder from duty to the company
shall be valid, where such insurance, indemnification or exemption relates to any of the following:
• Breach by the office holder of his duty of loyalty, except with respect to insurance coverage or indemnification if the office holder acted in good faith and had reasonable grounds to assume that the
act would not prejudice the company;
• Breach by the office holder of his duty of care if such breach was committed intentionally or recklessly, unless the breach was committed only negligently;
• Any act or omission committed with intent to derive an unlawful personal gain; and
• Any fine or forfeiture imposed on the office holder.
Pursuant to our articles of association, the total amount of indemnification that we will pay (in addition to amounts received from an insurance company, if any) to all officers of the company, in aggregate,
shall not exceed, in all circumstances, more than 25% of the company's shareholders equity as set forth in the company's recent consolidated financial statements prior to the date that the indemnity is paid. Our
articles of association include provisions which allow us to insure, indemnify and exempt our office holders, subject to the provisions of the Israeli Companies Law.
We maintain a directors’ and officers’ liability insurance policy with a per claim and aggregate coverage limit of $25 million, including legal costs incurred in Israel. In addition, our audit committee, board of
directors and shareholders resolved to indemnify our office holders, pursuant to a standard indemnification agreement that provides for indemnification of an office holder in an aggregate amount not to exceed
25% of our equity capital (net worth). To date, we have provided letters of indemnification to all of our officers and directors.
NASDAQ Exemptions for a Controlled Company
We are a controlled company within the meaning of NASDAQ Marketplace Rule 5615(c)(2), or Rule 5615(c)(2), because the FIMI Opportunity V, L.P. and FIMI Israel Opportunity FIVE, Limited Partnership
(the “FIMI Funds”) beneficially own more than 50% of our voting shares.
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Under Rule 5615(c)(2), a controlled company is exempt from the following requirements of NASDAQ Marketplace Rules 5605(b)(1), 5605(d) and 5605(e) that would otherwise require that:
• The majority of the company’s board of directors qualifies as independent directors, as defined under NASDAQ Marketplace Rules.
• The compensation of the chief financial officer and all other executive officers be determined, or recommended to the board of directors for determination, either by (i) a majority of the independent
directors or (ii) a compensation committee comprised solely of independent directors.
• Director nominees must be selected or recommended for the board of directors, either by (a) a majority of independent directors or (b) a nominations committee comprised solely of independent
directors.
We intend to continue to rely on these exemptions provided under Rule 5615(c)(2).
C. Employees
As of December 31, 2019, TAT and its subsidiaries employed 599 employees, of whom 501 were employed in manufacturing and quality control, 28 were employed in engineering and research and
development and 70 were employed in general & administration, sales and marketing. Of such employees, 269 were located in Israel and 330 were employed by Limco and Piedmont and located in the United States.
Employees in Israel are employed under collective or individual employment agreements. Senior employees in special positions and members of management are employed under individual agreements.
Collective bargaining agreements are signed for specified terms and are renewed from time to time. In July 26, 2017 we entered into a new collective bargaining agreement in Gedera with the Union which will be in
effect until March 31, 2020. Recently, there have been discussions between Gedera and the Union to renew the collective bargaining agreement as of April 1, 2020. The collective bargaining agreements govern
certain aspects of our employer-employee relations, such as termination procedures, annual salary increases, eligibility for certain compensation terms and employee welfare.
In Turbochrom, a new collective bargaining agreement with the Union was signed and will be effective as of April 1, 2020. The agreement replaces the previous agreement that was valid for a period of
three years.
Certain provisions of the collective bargaining agreements between the Histadrut (General Federation of Labor in Israel) and the Coordinating Bureau of Economic Organizations (including the
Manufacturers Association of Israel) are applicable to our Israeli employees by order of the Israeli Ministry of Economy and Industry. These provisions concern mainly the length of the workday, minimum daily
wages for professional workers, pension contributions, insurance for work-related accidents, procedures for terminating employees, determination of severance pay and other employment terms. We generally
provide our employees with benefits and working conditions exceeding the required minimums. Furthermore, under the collective bargaining agreements, the wages of most of our employees are linked to the CPI in
Israel, although the extent of the linkage is limited.
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In addition, Israeli law generally requires severance pay upon the retirement or death of an employee or termination of employment without due cause. Furthermore, Israeli employees and employers are
required to pay predetermined sums to the National Insurance Institute which is similar to the United States Social Security Administration. These payments amount to approximately 12% of wages, with the
employee contributing approximately 43% and the employer approximately 56%.
We currently also generally grant senior employees based in Israel participation in a particular insurance product called “management insurance”. Management insurance provides a combination of
savings plan, insurance and severance pay benefits to the employee, giving the employee a lump sum payment upon retirement (rather than receiving annuity payments) and securing his or her right to receive
severance pay, if legally entitled, upon termination of employment. In general, the employee contributes an amount equal to approximately 5% to 6% of his or her wage and the employer contributes an additional
amount of approximately 13-1/3% to 16% of such wage. Management insurance is not a legally mandated by Israeli law.
Limco-Piedmont sponsors a 401(K) QACA safe harbor profit sharing plan covering substantially all of its employees in the United States. The plan requires the employer to contribute a match which is
currently done on a payroll period basis, matching 100% of the first 2% and 50% of the next 3%. In addition, the plan allows for a discretionary qualified non-elective contribution for the plan year.
D. Share Ownership
Beneficial Ownership of Executive Officers and Directors
Except as set forth under ‘Stock Option Plans’ and in item 7A below, none of our directors and executive officers beneficially owns more than 1% of our outstanding shares.
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Stock Option Plans
In November 2011, our audit committee and board of directors approved a stock option plan (the “Plan”), which was subsequently approved by TAT’s shareholders, on June 28, 2012. According to the
Plan an aggregate of 980,000 options exercisable into up to 980,000 ordinary shares, 0.9 NIS par value, of TAT may be granted to certain members of our board of directors and certain senior executives at an
exercise price not less than the fair market value of the shares covered by the option on the date of grant. In general, the options vest over a period of 4 years as follows: 25% of the options vest upon the lapse of
12 months following the date of grant and the remaining 75% vest on a quarterly basis over the remaining 3-year period. In addition, certain options that were previously granted vest over a three-year period (one-
third each year) and the vesting of 50% of such options is subject, in addition, to certain minimum shareholders' equity during a period of 4 years from the date of grant. Pursuant to the Plan, any options that are
cancelled or not exercised within the option period determined in the relevant option agreement will become available for future grants. Our board of directors has elected to allot options to Israeli employees under
Israel’s capital gain tax treatment.
On August 30, 2018 the Company's compensation committee, followed by the Board of Directors, approved the amended and restated company's 2012 Plan. On October 4, 2018 the company's amended
and restated 2012 stock plan was approved at the annual general meeting of shareholders. As part of the company's 2012 Plan’s amendments it was determined that if the Company declares a cash dividend to its
shareholders, and the distribution date of such dividend will precede the exercise date of an Option, including for the avoidance of doubt, Options that have yet to become vested and Options which have been
granted prior to the adoption of such amendment to the Plan, the exercise price of the option shall be reduced in the amount equal to the cash dividend per share distributed by the Company.
As of December 31, 2019, options to purchase 591,459 ordinary shares were outstanding under the Plan, exercisable at an average exercise price of $7.53 per share.
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Item 7. Major Shareholders and Related Party Transactions
A. Major Shareholders
The following table sets forth certain information as of December 31, 2019, regarding the beneficial ownership by all shareholders known to us to own beneficially 5% or more of our ordinary shares:
Name
FIMI Funds (3)
Yelin Lapidot Holdings Management Ltd. (4)
Excellence and The Phoenix Holdings Ltd (5)
Number of
Ordinary Shares
Beneficially Owned
(1)
5,254,908
587,261
482,493
Percentage of
Ownership(2)
59.21%
6.62%
5.44%
(2)
(3)
(1) Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities. Ordinary shares relating to options and warrants
currently exercisable or exercisable within 60 days of the date of this table are deemed outstanding for computing the percentage of the person holding such securities but are not deemed outstanding for
computing the percentage of any other person. Except as indicated by footnote, and subject to community property laws where applicable, the persons named in the table above have sole voting and
investment power with respect to all shares shown as beneficially owned by them.
The percentages shown are based on 8,874,696 ordinary shares issued and outstanding as of December 31, 2019 (net of 274,473 dormant shares).
Based on a Schedule 13D filed on August 14, 2013, and on Schedule 13D/A filed on December 12, 2016, FIMI Funds, FIMI FIVE 2012 Ltd., Shira and Ishay Davidi Management Ltd. and Mr. Ishay Davidi
share voting and dispositive power with respect to the 5,254,908 ordinary shares held by the FIMI Funds. FIMI FIVE 2012 Ltd. is the managing general partner of the FIMI Funds. Shira and Ishay Davidi
Management Ltd. controls FIMI FIVE 2012 Ltd. Mr. Ishay Davidi controls the Shira and Ishay Davidi Management Ltd. and is the Chief Executive Officer of all the entities listed above. The principal
business address of each of the above entities and of Mr. Davidi is c/o FIMI FIVE 2012 Ltd., Electra Tower, 98 Yigal Alon St., Tel Aviv 6789141, Israel.
This information is based on information provided in the Schedule 13G/A filed with the SEC by Dov Yelin, Yair Lapidot and Yelin Lapidot Holdings Management Ltd. (collectively, “Yelin Lapidot”) on
February 10, 2020. The business address of Yelin Lapidot is 50 Dizengoff Street, Dizengoff Center, Gate 3, Top Tower, 13th floor, Tel Aviv 64332, Israel.
This information is based on information provided in the Schedule 13G/A filed with the SEC by Itshak Sharon (Tshuva), Delek Group Ltd. And The Phoenix Holdings Ltd. on February 18, 2020. The business
address of Itshak Sharon (Tshuva) and Delek Group Ltd. is 19 Abba Eban blvd, P.O.B. 2054, Herzliya, 4612001, Israel and the address of the Phoenix Holdings Ltd. is Derech Hashalom 53, Givataim, 53454,
Israel.
(5)
(4)
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Significant Changes in the Ownership of Major Shareholders
On October 2012 two lenders to TAT’s then controlling shareholders, KMN Industries and TAT Industries, filed separate petitions to the court to enforce liens granted to such lenders by each of the
controlling shareholders in certain collateral including KMN Industries’ holdings of an approximately 80% ownership interest in TAT Industries (which in turn owned approximately 43% of TAT's outstanding
share capital) and KMN Industries’ direct holdings in TAT (which represented approximately 10% of TAT's outstanding share capital).
On December 18, 2012, the court-appointed permanent receivers on behalf of the two lenders mentioned above for the purpose of jointly enforcing the liens granted to such lenders. On March 15, 2013, the
receivers of TAT’s shares announced a tender process for the sale of such shares.
On August 7, 2013, the court-appointed permanent receivers informed TAT that the FIMI Funds acquired 4,732,351 ordinary shares of TAT constituting 53.8% of TAT’s outstanding share capital as of
the transaction date, after receiving all required court approvals and the transfer of the consideration by the FIMI Funds to the receivers.
On December 12, 2016, FIMI Funds acquired an additional 522,557 ordinary shares of TAT constituting 5.7% of TAT’s outstanding share capital as of the transaction date.
Major Shareholders Voting Rights
Our major shareholders do not have different voting rights.
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Record Holders
Based on a review of the information provided to us by our transfer agent, as of December 31, 2019, there were 32 holders of record of our ordinary shares, of which 29 record holders holding less than
1.0% of our ordinary shares had registered addresses in the United States. These numbers are not representative of the number of beneficial holders of our shares nor is it representative of where such beneficial
holders reside since many of these ordinary shares were held by brokers or other nominees including CEDE & Co., the nominee for the Depositary Trust Company (the central depositary for the U.S. brokerage
community), which held approximately 69% of our outstanding ordinary shares as of such date.
B. Related Party Transactions
Transactions:
Income -
Sales to related-party company (*)
Cost and expenses -
Supplies from related party (*)
Balances:
Trade receivables and other receivables (*)
Trade payables and other payables (*)
(*) includes mainly transactions with affiliated companies.
C. Interests of Experts and Counsel
Not applicable.
Item 8. Financial Information
A. Consolidated Statements and Other Financial Information
See the consolidated financial statements, including the notes thereto, included in Item 18.
Legal Proceedings
2019
Year ended December 31,
2018
2017
$
$
596
$
552
$
1,251
$
59
$
December 31,
2019
2018
$
$
706
154
$
$
959
6
699
-
We are party to ongoing litigation in the ordinary course of business and other legal proceedings. For a discussion of these matters, see Note 11 to our consolidated financial statements included
elsewhere in this annual report.
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Dividend Distribution Policy
The Israeli Companies Law mandates that we can only distribute dividends from profits (as defined in the law), provided that there is no reasonable suspicion that the dividend distribution will prevent us
from meeting our existing and future expected obligations as they come due.
B. Significant Changes
Not applicable.
Item 9. The Offer and Listing
A. Offer and Listing Details
Not applicable.
B. Plan of Distribution
Not applicable.
C. Markets
Our ordinary shares are traded on NASDAQ under the symbol “TATT”. On August 16, 2005, we listed our shares for trade on the TASE as a dual listed company.
D. Selling Shareholders
Not applicable.
E. Dilution
Not applicable.
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F. Expense of the Issue
Not applicable.
Item 10. Additional Information
A. Share Capital
Not applicable.
B. Memorandum and Articles of Association
Set out below is a description of certain provisions of our memorandum of association, articles of association and of the Israeli Companies Law related to such provisions. This description is only a
summary and does not purport to be complete and is qualified by reference to the full text of the memorandum of association and articles of association, which are incorporated by reference as exhibits to this
annual report, and to Israeli law.
Purposes and Objects of the Company
We are a public company registered with the Israeli Companies Registry and have been assigned company number 52-0035791. Section 2 of our memorandum of association provides that we were
established for the purpose of engaging in the business of providing services of planning, development, consultation and instruction in the electronics field. In addition, the purpose of our company is to perform
various corporate activities permissible under Israeli law.
On February 1, 2000, the Israeli Companies Law came into effect and superseded most of the provisions of the Israeli Companies Ordinance (New Version), 5743-1983, except for certain provisions which
relate to liens, bankruptcy, dissolution and liquidation of companies. Under the Israeli Companies Law, various provisions, some of which are detailed below, overrule the current provisions of our articles of
association.
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Powers of the Directors
Under the provisions of the Israeli Companies Law which prevails over our articles of association in certain issues, a director cannot participate in a meeting nor vote on a proposal, arrangement or
contract in which he or she is materially interested except in cases where a majority of the directors are materially interested in the same transaction. In addition, our directors cannot vote on compensation to
themselves without the approval of our compensation committee and our shareholders at a general meeting, except for certain cases in which there is no need for the approval of the general meeting in accordance
with the regulations promulgated under the Israeli Companies Law. See Item 6. “Directors, Senior Management and Employees – Board Practices – Approval of Related Party Transactions Under Israeli Law.”
The authority of our directors to enter into borrowing arrangements on our behalf is not limited, except in the same manner as any other transaction by us.
Our articles of association do not impose any mandatory retirement or age-limit requirements on our directors and our directors are not required to own shares in our company in order to qualify to serve
as directors.
Rights Attached to Shares
Our authorized share capital consists of 13,000,000 ordinary shares of a nominal value of NIS 0.90 each. All outstanding ordinary shares are validly issued, fully paid and non-assessable.
Please refer to Exhibit 2.1 for Items 10.B.3, B.4, B.5, B.6, B.7, B.8, B.9 and B.10.
C. Exchange Controls
Israeli law and regulations do not impose any material foreign exchange restrictions on non-Israeli holders of our ordinary shares. In May 1998, a new “general permit” was issued under the Israeli
Currency Control Law, 1978, which removed most of the restrictions that previously existed under such law, and enabled Israeli citizens to freely invest outside of Israel and freely convert Israeli currency into non-
Israeli currencies.
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Non-residents of Israel who purchase our ordinary shares will be able to convert dividends, if any, thereon, and any amounts payable upon our dissolution, liquidation or winding up, as well as the
proceeds of any sale in Israel of our ordinary shares to an Israeli resident, into freely-repatriable dollars, at the exchange rate prevailing at the time of conversion, provided that the Israeli income tax has been
withheld (or paid) with respect to such amounts or an exemption has been obtained.
D. Taxation
The following is a discussion of Israeli and United States tax consequences material to our shareholders. To the extent that the discussion is based on new tax legislation which has not been subject to
judicial or administrative interpretation, the views expressed in the discussion might not be accepted by the tax authorities in question. The discussion is not intended, and should not be construed, as legal or
professional tax advice and does not exhaust all possible tax considerations.
You are urged to consult your own tax advisor as to the Israeli, United States and other tax consequences of the purchase, ownership and disposition of our ordinary shares, including, in particular, the effect of
any non-Israeli, state or local taxes.
Israeli Tax Considerations
The following is a summary of the principal Israeli tax laws applicable to us, of the Israeli Government programs from which we benefit and of the Income Tax Law (Inflationary Adjustments), 1985. This
section also contains a discussion of material Israeli tax consequences to our shareholders who are not residents or citizens of Israel. This summary does not discuss all aspects of Israeli tax law that may be
relevant to a particular investor in light of his or her personal investment circumstances, or to some types of investors subject to special treatment under Israeli law. Examples of investors subject to special
treatment under Israeli law include residents of Israel, traders in securities, or persons who own, directly or indirectly, 10% or more of our outstanding voting capital, all of whom are subject to special tax regimes
not covered in this discussion. Some parts of this discussion are based on new tax legislation that has not been subject to judicial or administrative interpretation. The discussion should not be construed as legal
or professional tax advice and does not cover all possible tax consequences.
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General Corporate Tax Structure
Israeli companies are generally subject to corporate tax on their taxable income at the rate of 23% in 2018 and thereafter. However, the effective tax rate payable by a company that derives income from an
Approved Enterprise, a Benefited Enterprise, a Preferred Enterprise or a Technology Enterprise may be considerably less. Capital Gain derived by an Israeli resident company and / or royalties for which no tax
clearance has been obtained from the ITA are subject to tax at the regular corporate tax rate (23% in 2018 and thereafter).
Tax Benefits under the Law for the Encouragement of Capital Investments, 1959
We have one capital investment program that has been granted “Approved Enterprise” status under the “Investment Law”, and one program that qualify as a “Benefited Enterprise” pursuant to an
amendment to the Investment Law that came into effect on April 1, 2005 (the “April 2005 amendment”). These programs were waived as part of the "Preferred Enterprise" which is part of the "2011 Amendment".
Prior to the April 2005 amendment, the Investment Law provided that capital investments in a production facility (or other eligible assets), may be designated as an Approved Enterprise upon prior
approval from the Investment Center of the Israel Ministry of Industry, Trade and Labor (the “Investment Center”).
The April 2005 amendment revised the criteria for investments qualified to receive tax benefits. An eligible investment program under that amendment provided for benefits as a Benefited Enterprise (rather
than the previous terminology of Approved Enterprise). Among other things, the April 2005 amendment provided tax benefits to both local and foreign investors. Companies that meet the specified criteria
received the tax benefits without need for prior approval and instead, a company was to claim the tax benefits offered by the Investment Law directly in its tax returns.
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The period of tax benefits for the then new beneficiary enterprise commences in the year that is the later of: (i) the year in which taxable income is first generated by a company, or (ii) a year selected by the
company for commencement, on the condition that the company meets certain provisions provided by the Investment Law. The amendment does not apply to investment programs approved prior to December 31,
2004 and applies only to new investment programs. We began to generate income under the provision of the new amendment as of the beginning of 2006.
After expiration of the initial tax exemption period, the company is eligible for what was considered then a reduced corporate tax rate of 10% to 25%, depending on the extent of foreign investment in the
company, for the following five to eight years, depending on the geographic location of the Benefited Enterprise within Israel. The benefits period was limited to 12 years from completion of the investment under
the approved plan or 14 years from the date of the approval, whichever is earlier. A company in which more than 25% of the shareholders are non-residents of Israel, defined under the Investment Law as a Foreign
Investors Company, may be eligible for benefits for an extended period of up to ten years.
If a company distributes dividends from tax-exempt Approved Enterprise and/or Benefited Enterprise income, the company will be taxed on the otherwise exempt income at the same reduced corporate tax
rate that applies to it after the initial exemption period. Distribution of dividends derived from Approved Enterprise and Benefited Enterprise income that was taxed at reduced rates, but not tax exempt, does not
result in additional tax consequences to the company. Shareholders who receive dividends derived from approved enterprise and Benefited Enterprise income were generally taxed at a rate of 15% which was
withheld and paid by the company paying the dividend, if the dividend was distributed during the benefits period or within the following 12 years.
The benefits available to an Approved Enterprise and Benefited Enterprise were conditioned upon terms stipulated in the Investment Law and the related regulations (which include making specified
investments in property and equipment, and financing a percentage of these investments with share capital), and, for an Approved Enterprise, the conditions contained in the certificate of approval from the
Investment Center. If we do not fulfill these conditions, in whole or in part, the benefits can be cancelled and we may be required to refund the amount of the benefits, linked to the CPI in Israel plus interest. We
believe that our Approved Enterprise and Benefited Enterprise programs were operated in compliance with all applicable conditions and criteria.
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We had derived a material portion of our operating income from our Approved Enterprise and Benefited Enterprise facilities. We were therefore eligible for a tax exemption for a limited period on
undistributed Approved Enterprise and Benefited Enterprise income. We intend to reinvest the entire amount of our tax-exempt income and not to distribute this income as a dividend
Until December 31, 2010, TAT and Turbochrome have elected to participate in the alternative package of tax benefits for their Approved and Benefited Enterprise under the law.
Pursuant to such Law, the income derived from those enterprises was exempted from Israeli corporate tax for a specified benefit period (except to the extent that dividends are distributed during the tax-
exemption period other than upon liquidation) and subject to reduced corporate tax rates for an additional period.
In the event of distribution of a dividend from income which was tax exempt as above, the company would have to pay a regular corporate tax rate in respect of the amount distributed.
Tax Benefits under the 2011 Amendment
Under the transitional provisions of the 2011 Amendment, the company elected to irrevocably implement the 2011 Amendment with respect to its existing Approved and Beneficiary Enterprises while
waiving benefits provided under the legislation prior to the 2011 Amendment.
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Dividends paid out of income attributed to a Preferred Enterprise will be subject to a withholding tax at the source at the rate of 20%, or such lower rate as may be provided in an applicable tax treaty.
However, if such dividends are paid to an Israeli company, no tax is required to be withheld (although, if the funds are subsequently distributed to individuals or to non-Israeli residents (individuals and
corporations), the withholding tax would apply).
As of January 1, 2014, a Preferred Company is entitled to a reduced corporate tax rate of 16% with respect to its income derived from its Preferred Enterprise, unless the Preferred Enterprise is located in
development area A, in which case the tax rate as of January 1, 2017 was 7.5% (our operations are currently not located in development area A). Income which is not derived from Preferred Enterprise is subject to
the regular corporate tax rate (24% in tax year 2017 and 23% as of January 1, 2018).
TAT is located in an area in Israel that is designated as elsewhere and as such is entitled to reduce tax rates of 16% (as of 2014).
Turbochrome is located in an area in Israel that is designated as Zone A and as such entitled to reduce tax rates of 7.5% (as of 2017).
Tax Benefits under the 2017 Amendment
An amendment to the Investment Law, which became effective as of January 1, 2017, provides new tax benefit to Preferred companies for two types of "Technology Enterprise", as described below, and is
in addition to the other existing tax beneficial programs under the Investment Law.
The new incentives regime will apply to "Preferred Technological Enterprises" that meet certain conditions, as detailed in the 2017 amendment. Preferred Technological Enterprises will be subject to a
corporate tax rate of 12% unless the Preferred Technological Enterprise is located in development zone A, in which case the rate will be 7.5% with respect to the portion of income derived from intellectual property
developed in Israel. The withholding tax on dividends from income derived from intellectual property of the Preferred Technological Enterprises will be 4% for dividends paid to a foreign parent company holding at
least 90% of the shares of the distributing company. For other dividend distributions, the withholding tax rate will be 20% (or a lower rate under a tax treaty, if applicable).
We cannot assure you that we will continue to qualify as an Industrial Company or that the benefits described above will be available to us in the future.
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Tax Benefits and Grants for Research and Development
Israeli tax law allows, under specific conditions, a tax deduction in the year incurred for expenditures, including capital expenditures, relating to scientific research and development projects, if the
expenditures are approved by the relevant Israeli government ministry, determined by the field of research, and the research and development is for the promotion of the company and is carried out by or on behalf
of the company seeking such deduction. Expenditures not so approved are deductible over a three-year period. However, expenditures from proceeds made available to us through government grants are not
deductible according to Israeli law.
Tax Benefits under the Law for the Encouragement of Industry (Taxes), 1969
According to the Law for the Encouragement of Industry (Taxes), 1969 (the “Industry Encouragement Law”), an ‘Industrial Company’ is an Israeli resident company, with at least 90% of the income of
which, in a given tax year, (exclusive of income from some government loans) is derived from an Industrial Enterprise owned by it and located in Israel or in the "Area", in accordance with the definition in the
section 3a of the Ordinance. An ‘Industrial Enterprise‘ is defined as an enterprise whose major activity in a given tax year is industrial production activity.
Under the Industry Encouragement Law, Industrial Companies are entitled to the following tax benefits:
• Amortization of purchases of acquired technology and patents over an eight-year period for tax purposes;
• Amortization of specified expenses incurred in connection with a public issuance of securities over a three-year period for tax purposes;
• Right to elect, under specified conditions, to file a consolidated tax return with additional related Israeli Industrial Companies; and
• Accelerated depreciation rates on equipment and buildings.
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Eligibility for benefits under the Industry Encouragement Law is not subject to receipt of prior approval from any governmental authority.
Special Provisions Relating to Taxation under Inflationary Conditions
The Income Tax Law (Inflationary Adjustments), 1985, referred to as the Inflationary Adjustments Law, attempts to overcome the problems presented to a traditional tax system by an economy undergoing
rapid inflation. The Inflationary Adjustments Law is highly complex.
On February 26, 2008, the Israeli Parliament (the Knesset) enacted the Income Tax Law (Inflationary Adjustments) (Amendment No. 20) (Restriction of Effective Period), 2008 (the “Inflationary Adjustments
Amendment”). In accordance with the Inflationary Adjustments Amendment, as of the 2008 tax year the provisions of the law are no longer apply, other than the transitional provisions intended at preventing
distortions in the tax calculations. In accordance with the Inflationary Adjustments Amendment, commencing the 2008 tax year, income for tax purposes is no longer be adjusted to a real (net of inflation)
measurement basis. Furthermore, the depreciation of inflation immune assets and carried forward tax losses are no longer linked to the CPI in Israel.
Taxation of Dividends Paid on our Ordinary Shares
Taxation of Israeli Shareholders
A distribution of dividends from income, which is not attributed to an Approved Enterprise/ Benefited Enterprise/ Preferred Enterprise to an Israeli resident individual, will generally be subject to Israeli
income tax, at the rate of 25%, or 30% (or based on the applicable tax treaty) for a recipient that is a "Controlling Shareholder" (within the meaning of the Israeli Income Tax Ordinance) at the time of distribution or
at any time during the 12-month period preceding such distribution.
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However, dividends distributed from taxable income accrued during the benefits period of a Benefited Enterprise, subject to certain time limitations, are generally subject to Israeli income tax at the reduced
rate of 15% (or based on the applicable tax treaty). Dividends paid out of income attributed to a Preferred Enterprise are generally subject to Israeli income tax at the source at the rate of 20% (or based on the
applicable tax treaty).
Generally, Israeli resident corporations are exempt from Israeli corporate tax on the receipt of dividends paid on shares of Israeli resident corporations and that the dividends was fully taxed in corporate tax
rate in Israel, unless the dividends are distributed from taxable income that has accrued during the benefits period of Approved Enterprise of Benefited Enterprise, in which case they are taxable at the rate of 15% (if
the distributing company did not elect until June 30, 2015 to irrevocably implement the 2011 Amendment with respect to its existing Approved and Beneficiary Enterprises).
3% surtax will apply with respect to individuals on top of the aforementioned tax rates when annual taxable income exceeds NIS 649,560 (with respect to 2019). The amount is updated every year.
It should be noted that we cannot assure you that we will designate the profits that are being distributed in a way that will reduce shareholders’ tax liability to those tax rates.
Taxation of Non-Israeli Shareholders
The Ordinance generally provides that a non-Israeli resident (either individual or corporation) is subject to, an Israeli income tax at the rate of 25%, or 30% if the recipient is a "Controlling Shareholder" at
the time of distribution or at any time during the 12-month period preceding such distribution, unless a different rate is provided in a treaty between Israel and the shareholder’s country of residence.
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As aforesaid, dividends derived from any of our income generated by an Approved Enterprise or Benefited Enterprise, are subject to withholding tax at a rate of 15%, and dividends derived from any of
our income generated by a Preferred Enterprise are subject to withholding tax at a rate of 20%.
It should be noted that 3% surtax will apply on individuals on top of the aforementioned tax rates when annual taxable income exceeds NIS 649,560 (with respect to 2019). The amount is updated every year.
Under the United States-Israel Tax Treaty, the maximum rate of tax withheld at source in Israel on dividends paid to a holder of our ordinary shares who is a U.S. resident (for purposes of the United States-
Israel Tax Treaty) is 25%. However, generally the maximum rate of withholding tax on dividends, not generated by Approved / Benefited / Preferred Enterprises, that are paid to a U.S. corporation holding at least
10% or more of our outstanding voting capital from the start of the tax year preceding the distribution of the dividend through (and including) the distribution of the dividends, is 12.5%, provided that no more than
25% of our gross income of such preceding year consists of certain types of dividends and interest if a certificate for a reduced withholding tax rate is obtained in advance from the Israeli Tax Authority.
Notwithstanding the foregoing, dividends distributed from income attributed to an Approved Enterprise, Benefited Enterprise or a Preferred Enterprise are subject to withholding tax rate of 15% for such a U.S.
corporation shareholder, provided that the condition related to our gross income for the previous year (as set forth in the previous sentence) is met.
The aforementioned rates under the United States-Israel Tax Treaty will not apply if the dividend income was derived through a permanent establishment of the U.S. resident in Israel.
When the amount of tax due is not fully withheld at source, such non-Israeli resident is obligated to file a tax return, report his or her Israeli income and pay the balance of the amount of tax due.
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Capital gains taxes applicable to non-Israeli shareholders
Capital gains from the sale of our ordinary shares by non-Israeli shareholders are exempt from Israeli taxation, provided that the capital gain is not derived from a permanent establishment in Israel
according to section 97(b2) to the Israeli income tax ordinance. In addition, the U.S.-Israel Tax Treaty exempts U.S. residents who hold less than 10% of our voting rights, and who held less than 10% of our voting
rights during the 12 months prior to a sale of their shares, from Israeli capital gains tax in connection with such sale.
United States Federal Income Tax Consequences
The following discussion summarizes the material U.S. federal income tax considerations generally applicable to the purchase, ownership and disposition of our ordinary shares. Unless otherwise
stated, this summary deals only with shareholders that are U.S. Holders (as defined below) who hold their ordinary shares as capital assets.
As used in this section, the term “U.S. Holder” means a beneficial owner of an ordinary share who is:
• An individual citizen or resident of the United States or an individual treated as a U.S. citizen or resident for U.S. federal income tax purposes;
• A corporation or other entity taxable as a corporation for U.S. federal income tax purposes created or organized in or under the laws of the United States, any State or the District of Columbia;
• An estate, the income of which is subject to U.S. federal income taxation regardless of its source; or
• Any trust if (A)(i) a court within the United States is able to exercise primary supervision over the administration of the trust and (ii) one or more United States persons have the authority to control all
substantial decisions of the trust, or (B) such trust validly elects to be treated as a United States person.
The term “Non-U.S. Holder” means a beneficial owner of an ordinary share that is an individual, corporation, estate or trust and is not a U.S. Holder. The tax consequences to a Non-U.S. Holder may differ
substantially from the tax consequences to a U.S. Holder. Certain aspects of U.S. federal income tax relevant to a Non-U.S. Holder are discussed below.
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This description is based on provisions of the U.S. Internal Revenue Code of 1986, as amended (the “Code”), existing and proposed U.S. Treasury regulations promulgated thereunder, administrative and
judicial interpretations thereof, and the U.S.-Israel Tax Treaty, each as in effect as of the date of this annual report. In addition, this description also relates to the Tax Cuts and Jobs Act (“TCJA”) signed into law
on December 22, 2017. These sources may change, possibly with retroactive effect, and are open to differing interpretations. This description does not discuss all aspects of U.S. federal income taxation that may be
applicable to investors in light of their particular circumstances or to investors who are subject to special treatment under U.S. federal income tax law, including:
• Insurance companies;
• Dealers in stocks, securities or currencies;
• Financial institutions and financial services entities;
• Real estate investment trusts;
• Regulated investment companies;
• Persons that receive ordinary shares in connection with the performance of services;
• Tax-exempt organizations;
• Persons that hold ordinary shares as part of a straddle or appreciated financial position or as part of a hedging, conversion or other integrated instrument;
• Persons who hold the ordinary shares through partnerships or other pass-through entities;
• Individual retirement and other tax-deferred accounts;
• Expatriates of the United States and certain former long-term residents of the United States;
• Persons liable for the alternative minimum tax;
• Persons having a “functional currency” other than the U.S. dollar; and
• Direct, indirect or constructive owners of 10% or more, by voting power or value, of our company.
If a partnership or an entity treated as a partnership for U.S. federal income tax purposes owns ordinary shares, the U.S. federal income tax treatment of a partner in such a partnership will generally depend
upon the status of the partner and the activities of the partnership. A partnership that owns ordinary shares and the partners in such partnership should consult their own tax advisors about the U.S. federal
income tax consequences of holding and disposing of ordinary shares.
This discussion does not consider the possible application of U.S. federal gift or estate tax or alternative minimum tax.
All investors are urged to consult their own tax advisors as to the particular tax consequences to them of an investment in our ordinary shares, including the effect and applicability of United States
federal, state, local and foreign income and other tax laws (including estate and gift tax laws) and tax treaties.
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Distributions Paid on the Ordinary Shares
Subject to the discussion below under “Passive Foreign Investment Company Considerations,” a U.S. Holder generally will be required to include in his or her gross income as ordinary dividend income
the amount of any distributions paid on the ordinary shares, including the amount of any Israeli taxes withheld, to the extent that those distributions are paid out of our current or accumulated earnings and profits,
as determined for U.S. federal income tax purposes. Subject to the discussion below under “Passive Foreign Investment Company Considerations,” distributions in excess of our earnings and profits will be applied
against and will reduce the U.S. Holder’s tax basis in its ordinary shares and, to the extent they exceed that tax basis, will be treated as gain from a sale or exchange of those ordinary shares. In some cases, our
dividends will not qualify for the dividends-received deduction applicable to U.S. corporations.
Dividends that we pay in NIS, including the amount of any Israeli taxes withheld therefrom, will be included in your income in a U.S. dollar amount calculated by reference to the exchange rate in effect on
the day such dividends are received, regardless of whether the payment is in fact converted into U.S. dollars. A U.S. Holder who receives payment in NIS and converts NIS into U.S. dollars at an exchange rate
other than the rate in effect on such day will have a foreign currency exchange gain or loss that would be treated as ordinary income or loss. U.S. Holders should consult their own tax advisors concerning the U.S.
tax consequences of acquiring, holding and disposing of NIS.
Subject to certain limitations, “qualified dividend income” received by a non-corporate U.S. Holder will generally be subject to taxation in the U.S at a lower rate than ordinary income. Distributions taxable
as dividends paid on the ordinary shares should qualify for lower tax rate provided that we are not a passive foreign investment company (as described below) for U.S. tax purposes and that either: (i) we are
entitled to benefits under the “U.S.-Israel Tax Treaty” or (ii) the ordinary shares are readily tradable on an established securities market in the United States and certain other requirements are met. We believe that
we are entitled to benefits under the U.S.-Israel Tax Treaty and that the ordinary shares currently will be readily tradable on an established securities market in the United States. However, no assurance can be
given that the ordinary shares will remain readily tradable. The rate reduction does not apply unless certain holding period requirements are satisfied. With respect to the ordinary shares, the U.S. Holder must have
held such shares for at least 61 days during the 121-day period beginning 60 days before the ex-dividend date. The rate reduction also does not apply to dividends received from passive foreign investment
companies, see discussion below, or in respect of certain hedged positions or in certain other situations. The legislation enacting the reduced tax rate contains special rules for computing the foreign tax credit
limitation of a taxpayer who receives dividends subject to the reduced tax rate. U.S. Holders of ordinary shares should consult their own tax advisors regarding the effect of these rules in their particular
circumstances.
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Subject to the discussion below under “Information Reporting and Back-up Withholding,” a Non-U.S. Holder generally will not be subject to U.S. federal income or withholding tax on dividends received
on ordinary shares unless that income is effectively connected with the conduct by that Non-U.S. Holder of a trade or business in the United States, in which case a corporate Non-U.S. Holder may also be subject
to the U.S. branch profits tax.
Foreign Tax Credit
Any dividend income resulting from distributions we pay to a U.S. Holder with respect to the ordinary shares generally may be treated as foreign source income for U.S. foreign tax credit limitation
purposes. For all taxable years ended until December 31, 2017, and subject to certain conditions and limitations, Israeli tax withheld on dividends may be deducted from taxable income or credited against a U.S.
Holder’s U.S. federal income tax liability. The limitation on foreign taxes eligible for credit is calculated separately with respect to specific classes of income. For this purpose, in general, any dividend that we
distribute should constitute “passive category income,” or, in the case of certain U.S. Holders, “general category income.”
Starting January 1, 2018, and with respect to our corporate U.S. Holders, the TCJA provides a 100% deduction for the foreign-source portion of dividends received after January 1, 2018 from “specified 10-
percent owned foreign corporations” by U.S. corporate holders, subject to a one-year holding period. No foreign tax credit, including Israeli withholding tax (or deduction for foreign taxes paid with respect to
qualifying dividends) would be permitted for foreign taxes paid or accrued with respect to a qualifying dividend. Deduction would be unavailable for “hybrid dividends.” The dividend received deduction enacted
under the TCJA may not apply to dividends from a passive foreign investment company.
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The rules relating to the determination of foreign source income and the foreign tax credit are complex, and the availability of a foreign tax credit depends on numerous factors. Each investor who is a U.S.
Holder should consult with its own tax advisor to determine whether its income with respect to the ordinary shares would be foreign source income and whether and to what extent that investor would be entitled
to a foreign tax credit.
Disposition of Ordinary Shares
Upon the sale or other disposition of ordinary shares, subject to the discussion below under “Passive Foreign Investment Company Considerations,” a U.S. Holder generally should recognize capital gain
or loss equal to the difference between the amount realized on the disposition and the holder’s adjusted tax basis in the ordinary shares. U.S. Holders should consult their own tax advisors with respect to the tax
consequences of the receipt of a currency other than U.S. dollars upon such sale or other disposition.
Gain or loss upon the disposition of the ordinary shares will be treated as long-term if, at the time of the sale or disposition, the ordinary shares were held for more than one year. The deductibility of
capital losses by a U.S. Holder is subject to limitations. In general, any gain or loss recognized by a U.S. Holder on the sale or other disposition of ordinary shares will be U.S. source income or loss for U.S. foreign
tax credit purposes. U.S. Holders should consult their own tax advisors concerning the source of income for U.S. foreign tax credit purposes and the effect of the U.S.-Israel Tax Treaty on the source of income.
Subject to the discussion below under “Information Reporting and Back-up Withholding,” a Non-U.S. Holder generally will not be subject to U.S. federal income or withholding tax on any gain realized on
the sale or exchange of ordinary shares unless:
• that gain is effectively connected with the conduct by the Non-U.S. Holder of a trade or business in the United States, and, if a tax treaty applies, is attributable to a permanent establishment or fixed
•
base of the Non-U.S. Holder in the United States; or
in the case of any gain realized by an individual Non-U.S. Holder, that holder is present in the United States for 183 days or more in the taxable year of the sale or exchange, and other conditions are
met.
Passive Foreign Investment Company Considerations
Special U.S. federal income tax rules apply to U.S. Holders owning shares of a passive foreign investment company. A non-U.S. corporation will be considered a passive foreign investment company for
any taxable year in which, after applying certain look-through rules, 75% or more of its gross income consists of specified types of passive income, or 50% or more of the average value of its assets consists of
assets that produce, or are held for the production of, passive income. For this purpose, passive income may include dividends, interest, royalties, rents, annuities and the excess of gains over losses from the
disposition of assets which produce passive income.
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If we were classified as a passive foreign investment company, a U.S. Holder could be subject to increased tax liability upon the sale or other disposition of ordinary shares or upon the receipt of amounts
treated as “excess distributions.” Under these rules, the excess distribution and any gain would be allocated ratably over the U.S. Holder’s holding period for the ordinary shares, and the amount allocated to the
current taxable year and any taxable year prior to the first taxable year in which we were a passive foreign investment company would be taxed as ordinary income. The amount allocated to each of the other taxable
years would be subject to tax at the highest marginal tax rate in effect for the applicable class of taxpayer for that year, and an interest charge for the deemed deferral benefit would be imposed on the resulting tax
allocated to such other taxable years. The tax liability with respect to the amount allocated to years prior to the year of the disposition, or “excess distribution,” cannot be offset by any net operating losses. In
addition, holders of shares in a passive foreign investment company may not receive a “step-up” in basis on shares acquired from a decedent. If we are a passive foreign investment company in any year, a U.S.
Holder would be required to file an annual return on IRS Form 8621 regarding distributions received with respect to ordinary shares and any gain realized on the disposition of ordinary shares.
Based on our current and projected income, assets and activities, we do not believe that we will be a passive foreign investment company for our current taxable year. However, because the determination
of whether we are a passive foreign investment company is based upon the composition of our income and assets from time to time, we cannot be certain that we will not be considered a passive foreign investment
company for the current taxable year or any future taxable year.
The passive foreign investment company tax consequences described above will not apply to a U.S. Holder if the U.S. Holder makes a timely election to treat us as a qualified electing fund (“QEF”). If a
U.S. Holder makes a timely QEF election, the U.S. Holder would be required to include in income for each taxable year its pro rata share of our ordinary earnings as ordinary income and its pro rata share of our net
capital gain as long-term capital gain, whether or not such amounts are actually distributed to the U.S. Holder. However, a U.S. Holder would not be eligible to make a QEF election unless we comply with certain
applicable information reporting requirements. We will provide U.S. Holders with the information needed to report income and gain under a QEF election should we become a passive foreign investment company.
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As an alternative to making a QEF election, a U.S. Holder of passive foreign investment company stock which is publicly traded may in certain circumstances avoid certain of the tax consequences
generally applicable to holders of a passive foreign investment company by electing to mark the stock to market annually and recognizing as ordinary income or loss each year an amount equal to the difference as
of the close of the taxable year between the fair market value of the passive foreign investment company stock and the U.S. Holder’s adjusted tax basis in the passive foreign investment company stock. Losses
would be allowed only to the extent of net mark-to-market gain previously included by the U.S. Holder under the election for prior taxable years. Income recognized and deductions allowed under the mark-to-market
provisions, as well as any gain or loss on the disposition of ordinary shares with respect to which the mark-to-market election is made, are generally treated as ordinary income or loss (except that loss is treated as
capital loss to the extent the loss exceeds the net mark-to-market gains, if any, that a U.S. Holder included in its income with respect to such ordinary shares in prior years). However, gain or loss from the
disposition of ordinary shares (as to which a “mark-to-market” election was made) in a year in which we are no longer a passive foreign investment company, will be capital gain or loss. The mark-to-market election
is available for so long as our ordinary shares constitute “marketable stock,” which includes stock of a passive foreign investment company that is “regularly traded” on a “qualified exchange or other market.”
Generally, a “qualified exchange or other market” includes a national securities exchange that is registered with the SEC or the national market system established pursuant to Section 11A of the Securities
Exchange Act of 1934. A class of stock that is traded on one or more qualified exchanges or other markets is “regularly traded” on an exchange or market for any calendar year during which that class of stock is
traded, other than in the minimized quantities, on at least 15 days during each calendar quarter. We believe that NASDAQ will constitute a qualified exchange or other market for this purpose. However, we cannot
be certain that our ordinary shares will continue to trade on NASDAQ or that the ordinary shares will be regularly traded for this purpose.
The rules applicable to owning shares of a passive foreign investment company are complex, and each holder who is a U.S. Holder should consult with its own tax advisor regarding the consequences of
investing in a passive foreign investment company.
127
Medicare Tax
Certain U.S. Holders that are individuals, estates or trusts may be subject to a 3.8% Medicare tax on all or a portion of their “net investment income,” which may include all or a portion of their dividend
income and net gains from the disposition of ordinary shares and warrants. Each U.S. Holder that is an individual, estate or trust is urged to consult its tax advisors regarding the applicability of the Medicare tax to
its income and gains in respect of its investment in our ordinary shares and warrants, including with respect to the eligibility to claim foreign tax credit against such tax.
Information Reporting and Backup Withholding
Payments in respect of ordinary shares may be subject to information reporting to the U.S. Internal Revenue Service (the “IRS”) and to U.S. backup withholding tax at a rate equal to the fourth lowest
income tax rate applicable to individuals (which, under current law, is 24%). Backup withholding will not apply, however, if you (i) are a corporation or come within certain exempt categories, and demonstrate the
fact when so required, or (ii) furnish a correct taxpayer identification number and make any other required certification. U.S. Holders who are required to establish their exempt status generally must provide such
certification on IRS Form W-9.
Backup withholding is not an additional tax. Amounts withheld under the backup withholding rules may be credited against a U.S. Holder’s U.S. tax liability, and a U.S. Holder may obtain a refund of any
excess amounts withheld under the backup withholding rules by filing the appropriate claim for refund with the IRS.
Any U.S. holder who holds 10% or more in vote or value of our ordinary shares will be subject to certain additional United States information reporting requirements.
U.S. Gift and Estate Tax
An individual U.S. Holder of ordinary shares will generally be subject to U.S. gift and estate taxes with respect to ordinary shares in the same manner and to the same extent as with respect to other types
of personal property.
128
E. Dividends and Paying Agents
Not applicable.
F. Statement by Experts
Not applicable.
G. Documents on Display
We are subject to the reporting requirements of the United States Securities Exchange Act of 1934, as amended, as applicable to “foreign private issuers” as defined in Rule 3b-4 under the Exchange Act,
and in accordance therewith, we file annual and interim reports and other information with the SEC.
As a foreign private issuer, we are exempt from certain provisions of the Exchange Act. Accordingly, our proxy solicitations are not subject to the disclosure and procedural requirements of Regulation
14A under the Exchange Act and transactions in our equity securities by our officers and directors are exempt from reporting and the “short-swing” profit recovery provisions contained in Section 16 of the
Exchange Act. In addition, we are not required under the Exchange Act to file periodic reports and financial statements as frequently or as promptly as United States companies whose securities are registered
under the Exchange Act. However, we make available on our website www.tat-technologies.com, our annual audited financial statements, which have been examined and reported on, with an opinion expressed by
an independent public accounting firm, and we intend to file reports with the SEC on Form 6-K containing unaudited financial information for the first three quarters of each fiscal year.
This annual report on Form 20-F and the exhibits thereto and any other document we file pursuant to the Exchange Act may be inspected without charge and copied at prescribed rates at the following
SEC public reference room at 100 F Street, N.E., Room 1580, Washington, D.C. 20549; and on the SEC website (http://www.sec.gov) and on our website www.tat-technologies.com. You may obtain information on
the operation of the SEC’s public reference room in Washington, D.C. by calling the SEC at 1-800-SEC-0330. The Exchange Act file number for our SEC filings is 0-16050.
In addition, since August 16, 2005, we are also listed on the TASE. From such date we submit copies of all our filings with the SEC to the ISA and TASE. Such copies can be retrieved electronically
through the TASE internet messaging system (www.maya.tase.co.il) and, in addition, through the MAGNA distribution site of the ISA (www.magna.isa.gov.il).
129
The documents concerning our company which are referred to in this annual report may also be inspected at our offices located at Re’em Industrial Park Neta, Boulevard Bnei Ayish, Gedera, Israel.
H. Subsidiary Information
Not applicable.
Item 11. Quantitative and Qualitative Disclosures about Market Risk
We do not own and have not issued any market risk sensitive instruments about which disclosure is required to be provided pursuant to this Item.
Effects of Currency Exchange Fluctuations
Our financial statements are stated in dollars, while a portion of our expenses, primarily labor expenses, is incurred in NIS and a part of our revenues are quoted in NIS. Additionally, certain assets, as well
as a portion of our liabilities, are denominated in NIS. As a result, our operations may be affected by fluctuations of the U.S. dollar/NIS exchange rate. We are hedging a portion of our exchange rate risk through
forward transactions and the use of other derivative instruments.
Item 12. Description of Securities Other than Equity Securities
Not Applicable.
Item 13. Defaults, Dividend Arrearages and Delinquencies
None.
PART II
130
Item 14. Material Modifications to the Rights of Security Holders
None.
Item 15. Controls and Procedures
(a) Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within
the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our chief executive officer and chief financial officer to allow timely decisions regarding
required disclosure. Our management, including our chief executive officer and chief financial officer, conducted an evaluation of our disclosure controls and procedures, as defined under Exchange Act Rule 13a-
15(e), as of the end of the period covered by this annual report on Form 20-F. Based upon that evaluation, our chief executive officer and chief financial officer have concluded that, as of such date, our disclosure
controls and procedures were effective.
131
(b) Management's Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over our financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f)
promulgated under the Exchange Act as a process designed by, or under the supervision of, the company’s principal executive and principal financial officers and effected by the company’s board of directors,
management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles and includes those policies and procedures that:
•
•
•
Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the company;
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts
and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use of disposition of the company’s assets that could have a material effect on the financial
statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk
that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2019. In making this assessment, our management used the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework (2013). Based on that assessment, our management concluded that as of December 31, 2019,
our internal control over financial reporting is effective.
(c) Attestation report of independent registered public accounting firm
This annual report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial report. Management’s report was not subject to
attestation by our independent registered public accounting firm pursuant to rules of the SEC that permit us to provide only management’s report in this annual report.
132
(d) Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting that occurred during the period covered by this annual report that has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
Item 16. [Reserved]
Item 16A. Audit Committee Financial Expert
Our board of directors has determined that each member of our audit committee each of whom also qualifies as independent director, meets the definition of an audit committee financial expert, as defined
by rules of the SEC. For a brief listing of the relevant experience of the member of our audit committee, see Item 6.A. “Directors, Senior Management and Employees — Directors and Senior Management.”
Item 16B. Code of Ethics
We have adopted a code of ethics that applies to our chief executive officer and all senior financial officers of our company, including the chief financial officer, chief accounting officer or controller, or
persons performing similar functions. The code of ethics is publicly available on our website at www.tat-technologies.com. Written copies are available upon request. If we make any substantive amendment to the
code of ethics or grant any waivers, including any implicit waiver, from a provision of the codes of ethics, we will disclose the nature of such amendment or waiver on our website.
133
Item 16C. Principal Accountant Fees and Services
Fees Paid to Independent Public Accountant
The following table sets forth, for each of the years indicated, the fees paid to our principal independent registered public accounting firm. All of such fees were pre-approved by our audit committee.
Services Rendered
Audit (1)
Tax (2)
Total
Year Ended December 31,
2018
2019
$
$
206,847
20,216
227,063
$
$
226,950
44,005
270,955
(1) Audit fees are for audit services for each of the years shown in the table, including fees associated with the annual audit and reviews of our quarterly financial results,
consultations on various accounting issues and audit services provided in connection with other statutory or regulatory filings.
(2) Tax fees relate to professional services rendered for tax compliance and tax advice. These services include assistance regarding international and Israeli taxation.
Pre-Approval Policies and Procedures
Our audit committee has adopted a policy and procedures for the pre-approval of audit and non-audit services rendered by our independent registered public accounting firm Kesselman & Kesselman, a
member of PricewaterhouseCoopers International Ltd. Pre-approval of an audit or non-audit service may be given as a general pre-approval, as part of the audit committee’s approval of the scope of the
engagement of our independent auditor, or on an individual basis. Any proposed services exceeding general pre-approved levels also require specific pre-approval by our audit committee. The policy prohibits
retention of the independent public accountants to perform the prohibited non-audit functions defined in Section 201 of the Sarbanes-Oxley Act or the rules of the SEC, and also requires the audit committee to
consider whether proposed services are compatible with the independence of the public accountants.
Item 16D. Exemptions from the Listing Standards for Audit Committee
Not Applicable.
134
Item 16E. Purchase of Equity Securities By The Issuer and Affiliated Purchasers
Not Applicable.
Item 16F. Change in Registrant’s Certifying Accountant.
Not Applicable.
Item 16G. Corporate Governance
The following are the significant ways in which our corporate governance practices differ from those followed by United States companies under Nasdaq rules:
Shareholder Approval. Although Nasdaq rules generally require shareholder approval of equity compensation plans and material amendments thereto, we follow Israeli Companies Law, which is to have
such plans and amendments approved only by the board of directors, unless such arrangements are for the compensation of directors, Chief Executive Officer or a transaction with the controlling shareholder, in
which case they also require the approval of the compensation committee and the shareholders.
In addition, rather than follow Nasdaq rules requiring shareholder approval for the issuance of securities in certain circumstances, we follow Israeli law, under which a private placement of securities
requires approval by our board of directors and shareholders if it will cause a person to become a controlling shareholder (generally presumed at 25% ownership) or if:
o
o
o
The securities issued amount to 20% or more of our outstanding voting rights before the issuance;
Some or all of the consideration is other than cash or listed securities or the transaction is not in accordance with market terms; and
The transaction will increase the relative holdings of a shareholder that holds 5% or more of our outstanding share capital or voting rights or that it will cause any person to become, as a result of the
issuance, a holder of more than 5% of our outstanding share capital or voting rights.
Annual Reports. While NASDAQ rules generally require that companies send an annual report to shareholders prior to the annual general meeting, we follow the generally accepted business practice for
companies in Israel. Specifically, we file annual reports on Form 20-F, which contain financial statements audited by an independent registered public accounting firm, electronically with the SEC and post a copy on
our website.
135
Item 17. Financial Statements
We have elected to furnish financial statements and related information specified in Item 18.
PART III
Item 18. Financial Statements
Consolidated Financial Statements of the Company
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Comprehensive Income
Consolidated Statements of Changes in Shareholders Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Item 19. Exhibits
The following exhibits are filed as a part of this Annual Report:
1.1 Memorandum of Association of the Registrant (1)
1.2 Articles of Association of the Registrant (filed herewith) (8)
2.1 Specimen Certificate for Ordinary Shares (1)
4.1 2012 Stock Option Plan (7)
F-2
F-3-F-4
F-5-F-6
F-7
F-8
F-9
F-11
4.2 Agreement dated February 10, 2000, by and between the Registrant and TAT Industries Ltd. (English summary translation) (2)
4.3
4.4
English translation of Share Sales Agreement, dated March 27, 2008, by and between the Registrant and Bental Investments Cooperative Agricultures Society Ltd. (5)
English translation of Shareholders’ Agreement, dated May 21, 2008, by and between the Registrant, Tat Industries Ltd. and Bental Investments Cooperative Agricultures Society Ltd. (5)
136
4.5
4.6
4.7
4.8
4.9
8
English translation of Amendment to the Share Sales and Options Agreement and the Shareholders’ Agreement, dated May 21, 2008, by and between the Registrant, Tat Industries Ltd. and Bental
Investments Cooperative Agricultures Society Ltd. (5)
English translation of Share Sales Agreement dated April 15, 2008, by and between the Registrant and Mivtach Shamir Investments (1993) Ltd. (5)
Agreement and Plan of Merger dated April 3, 2009 by and between the Registrant, Limco-Piedmont, Inc. and LIMCO Acquisition Company (4)
TAT's Executive and Directors Compensation Policy (8)
Form of Officers Indemnification Undertaking (8)
List of Subsidiaries of the Registrant
12.1
Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended
12.2
Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended
13.1
Certification of the Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
13.2
Certification of the Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
14.1
_________________
Consent of independent registered public accounting firm
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
Filed as an exhibit to the Registrant’s Annual Report on Form 20-F for the year ended December 31, 1992, and incorporated herein by reference.
Incorporated by reference to the Registrant’s Annual Report on Form 20-F for the year ended December 31, 1999, and incorporated herein by reference.
Incorporated by reference to the Registrant’s Annual Report on Form 20-F for the year ended December 31, 2006, and incorporated herein by reference.
Filed as an exhibit to the Registrant’s Registration Statement on Form F-4 filed on May 7, 2009 and incorporated herein by reference.
Filed as an exhibit to the Registrant’s Annual Report on Form 20-F for the year ended December 31, 2007, and incorporated herein by reference.
Filed as an exhibit to the Registrant’s Annual Report on Form 20-F for the year ended December 31, 2010, and incorporated herein by reference.
Filed as an exhibit to the Registrant’s Annual Report on Form 20-F for the year ended December 31, 2012, and incorporated herein by reference.
Filed as an exhibit to the Registrant’s Annual Report on Form 20-F for the year ended December 31, 2013, and incorporated herein by reference.
Filed as an exhibit to the Registrant’s Annual Report on Form 20-F for the year ended December 31, 2014, and incorporated herein by reference.
137
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.
SIGNATURES
Date: March 19, 2020
TAT TECHNOLOGIES LTD.
By:
/s/ Ehud Ben-Yair
Ehud Ben-Yair
Chief Financial Officer
(Principal Accounting Officer)
138
TAT TECHNOLOGIES LTD.
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2019
TAT TECHNOLOGIES LTD.
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2019
INDEX
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Comprehensive Income
Consolidated Statements of Changes in Shareholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Page
F-2
F-3-F-4
F-5-F-6
F-7
F-8
F-9-F10
F-11
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders and the board of directors of
TAT Technologies Ltd.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of TAT Technologies Ltd. and its subsidiaries (the "Company") as of December 31, 2019 and 2018, and the related consolidated statements of
operations, of comprehensive income, of changes in shareholders' equity and of cash flows for each of the three years in the period ended December 31, 2019, including the related notes (collectively referred to as
the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and
the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019 in conformity with accounting principles generally accepted in the United States of America.
Change in Accounting Principle
As discussed in Note 2(aa) to the consolidated financial statements, the Company changed the manner in which it accounts for leases in 2019.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company's consolidated financial statements based on our audits.
We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the
U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits of these consolidated financial statements in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance
about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of
the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those
risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles
used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Tel-Aviv, Israel
March 19, 2020
We have served as the Company's auditor since 2009.
/s/ Kesselman & Kesselman
Certified Public Accountants (lsr.)
A member firm of PricewaterhouseCoopers International Limited
Kesselman & Kesselman, Trade Tower, 25 Hamered Street, Tel-Aviv 6812508, Israel,
P.O Box 50005 Tel-Aviv 6150001 Telephone: +972 -3- 7954555, Fax:+972 -3- 7954556, www.pwc.com/il
F - 2
CONSOLIDATED BALANCE SHEETS
U.S dollars in thousands
ASSETS
CURRENT ASSETS:
Cash and cash equivalents
Accounts receivable, net
Inventory, net
Other current assets and prepaid expenses
Total current assets
NON-CURRENT ASSETS:
Investment in affiliates
Funds in respect of employee rights upon retirement
Deferred income taxes
Property, plant and equipment, net
Operating lease right of use assets
Intangible assets, net
Total non-current assets
Total assets
The accompanying notes are an integral part of the consolidated financial statements.
F - 3
TAT TECHNOLOGIES LTD.
December 31,
2019
2018
$
$
15,959
21,167
43,907
2,605
83,638
956
1,404
228
21,008
6,664
777
31,037
15,950
19,277
38,605
3,627
77,459
1,078
2,253
162
21,424
-
911
25,828
$
114,675
$
103,287
CONSOLIDATED BALANCE SHEETS
U.S dollars in thousands, except share data
LIABILITIES AND EQUITY
CURRENT LIABILITIES:
Accounts payable
Accrued expenses
Operating lease liabilities
Total current liabilities
NON CURRENT LIABILITIES:
Other long-term liabilities
Liability in respect of employee rights upon retirement
Deferred income taxes
Operating lease liabilities
Total non-current liabilities
COMMITMENTS AND CONTINGENT LIABILITIES (NOTE 10)
Total liabilities
EQUITY:
Ordinary shares of NIS 0.9 par value:
Authorized: 13,000,000 shares at December 31, 2019 and at December 31, 2018; Issued: 9,149,169 shares at December 31, 2019 and at December 31, 2018;
Outstanding: 8,874,696 shares at December 31, 2019 and at December 31, 2018
Additional paid-in capital
Treasury shares, at cost, 274,473 shares at December 31, 2019 and 2018
Accumulated other comprehensive income (loss)
Retained earnings
Total shareholders' equity
Total liabilities and shareholders' equity
The accompanying notes are an integral part of the consolidated financial statements.
F - 4
$
TAT TECHNOLOGIES LTD.
December 31,
2019
2018
$
11,981
7,393
1,330
20,704
62
1,751
1,100
5,688
8,601
8,270
6,411
-
14,681
180
2,648
1,484
-
4,312
29,305
18,993
2,809
65,573
(2,088)
26
19,050
85,370
2,809
65,535
(2,088)
(206)
18,244
84,294
$
114,675
$
103,287
CONSOLIDATED STATEMENTS OF OPERATIONS
U.S dollars in thousands
Revenue:
Products
Services
Cost of revenue:
Products
Services
Gross profit
Operating expenses:
Research and development, net
Selling and marketing
General and administrative
Other expenses (income)
Operating income (loss)
Financial expenses
Financial income
Income (loss) before taxes on income (tax benefit)
Taxes on income (tax benefit)
Income (loss) before share of equity investment
Share in results of equity investment of affiliated companies
TAT TECHNOLOGIES LTD.
Year ended December 31,
2019
2018
2017
$
$
25,019
77,013
102,032
$
23,151
70,027
93,178
36,053
70,474
106,527
21,557
64,913
86,470
15,562
74
5,259
8,251
-
13,584
1,978
(1,299)
848
1,527
589
938
(132)
23,807
60,980
84,787
8,391
553
4,913
8,559
(4)
14,021
(5,630)
(1,569)
1,467
(5,732)
(1,464)
(4,268)
(140)
28,096
57,987
86,083
20,444
731
4,974
9,409
53
15,167
5,277
(1,132)
794
4,939
2,333
2,606
(210)
2,396
Net income (loss)
$
806
$
(4,408)
$
The accompanying notes are an integral part of the consolidated financial statements.
F - 5
CONSOLIDATED STATEMENTS OF OPERATIONS
U.S dollars in thousands, except share and per share data
Net income (loss) per share basic and diluted
Weighted average number of shares outstanding:
Basic
Diluted
The accompanying notes are an integral part of the consolidated financial statements.
F - 6
TAT TECHNOLOGIES LTD. AND ITS SUBSIDIARIES
2019
Year ended December 31,
2018
2017
$
0.1
$
(0.5) $
0.27
8,874,696
8,874,696
8,864,885
8,864,885
8,848,028
8,909,072
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
U.S dollars in thousands
Net income (loss)
Other comprehensive income (loss), net
Net unrealized gains (losses) from derivatives
Reclassification adjustments for gains from derivatives included in net income
Total other comprehensive income (loss)
Total comprehensive income (loss)
The accompanying notes are an integral part of the consolidated financial statements.
F - 7
TAT TECHNOLOGIES LTD. AND ITS SUBSIDIARIES
2019
Year ended December 31,
2018
2017
$
806
$
(4,408) $
372
(140)
232
(672)
331
(341)
$
1,038
$
(4,749) $
2,396
(686)
894
208
2,604
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
U.S dollars in thousands, except share data
TAT TECHNOLOGIES LTD. AND ITS SUBSIDIARIES
Share capital
Number of shares
issued
Amount
Additional paid-in
capital
Accumulated
other comprehensive
income (loss)
Treasury shares
Retained earnings
Total equity
9,102,917
$
2,797
$
64,760
$
(73) $
(2,088) $
23,256
$
88,652
-
-
19,584
-
-
-
5
-
-
174
139
-
208
-
-
-
-
-
-
-
2,396
-
-
(3,000)
2,604
174
144
(3,000)
9,122,501
$
2,802
$
65,073
$
135
$
(2,088) $
22,652
$
88,574
-
-
26,668
-
-
7
-
272
190
(341)
-
-
-
-
-
(4,408)
-
-
9,149,169
$
2,809
$
65,535
$
(206) $
(2,088) $
18,244
$
-
-
-
-
-
38
232
-
-
-
806
-
9,149,169
$
2,809
$
65,573
$
26
$
(2,088)
19,050
$
(4,749)
272
197
84,294
1,038
38
85,370
BALANCE AT DECEMBER
31, 2017
CHANGES DURING THE YEAR
ENDED DECEMBER 31,
2017:
Comprehensive income
Share based compensation
Exercise of options
Dividend distributed
BALANCE AT DECEMBER 31,
2017
CHANGES DURING THE YEAR
ENDED DECEMBER 31,
2018:
Comprehensive income
Share based compensation
Exercise of options
BALANCE AT DECEMBER 31,
2018
CHANGES DURING THE YEAR
ENDED DECEMBER 31,
2019:
Comprehensive income
Share based compensation
BALANCE AT DECEMBER
31, 2019
The accompanying notes are an integral part of the consolidated financial statements.
F - 8
CONSOLIDATED STATEMENTS OF CASH FLOWS
U.S. dollars in thousands
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization
Loss on sale of property, plant and equipment
Loss (gain) from change in fair value of derivatives
Interest from short-term bank deposits and restricted deposits
Change in provision for doubtful accounts
Share in results of affiliated companies
Share based compensation
Exchange differences for lease liabilities
Liability in respect of employee rights upon retirement
Deferred income taxes, net
Changes in operating assets and liabilities:
Decrease (increase) in trade accounts receivable
Decrease (increase) in other current assets and prepaid expenses
Decrease (increase) in inventory
Increase (decrease) in trade accounts payable
Increase (decrease) in accrued expenses
Increase (decrease) in other long-term liabilities
Net cash provided by operating activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in affiliated company
Funds in respect of employee rights upon retirement
Proceeds from sale of property and equipment
Purchase of property and equipment
Maturities of short-term deposits
Net cash used in investing activities
The accompanying notes are an integral part of the consolidated financial statements.
F - 9
TAT TECHNOLOGIES LTD. AND ITS SUBSIDIARIES
2019
Year ended December 31,
2018
2017
$
806
$
(4,408) $
2,396
4,372
-
(311)
-
38
132
38
354
(897)
(450)
(1,928)
2,500
(5,388)
3,292
982
(118)
3,422
$
(10)
-
-
(3,403)
-
(3,413) $
4,185
-
382
-
(347)
140
272
-
(587)
(102)
6,814
(1,575)
161
(969)
(1,920)
34
2,080
$
(26)
(22)
7
(4,270)
470
(3,841) $
3,941
54
(490)
(6)
321
210
174
-
241
382
(4,493)
488
210
578
(1,505)
(5)
2,496
(383)
(156)
-
(3,520)
500
(3,559)
$
$
CONSOLIDATED STATEMENTS OF CASH FLOWS
U.S. dollars in thousands
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividend paid
Exercise of options
Net cash provided by (used in) financing activities
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR
CASH AND CASH EQUIVALENTS AT END OF YEAR
SUPPLEMENTARY INFORMATION ON INVESTING ACTIVITIES NOT INVOLVING CASH FLOW:
Purchase of property, plant and equipment on credit
Supplemental disclosure of cash flow information:
Interest paid
Income taxes received (paid), net
The accompanying notes are an integral part of the consolidated financial statements.
F - 10
TAT TECHNOLOGIES LTD. AND ITS SUBSIDIARIES
2019
Year ended December 31,
2018
2017
-
-
-
9
15,950
-
197
197
(1,564)
17,514
15,959
$
15,950
$
(3,000)
144
(2,856)
(3,919)
21,433
17,514
942
$
523
$
632
(28) $
673
$
(10) $
(1,087) $
(35)
(2,397)
$
$
$
$
TAT TECHNOLOGIES LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
NOTE 1 -
GENERAL
a.
b.
c.
TAT Technologies Ltd., (“TAT” or the “Company”) an Israeli corporation, incorporated in 1985, is a leading provider of solutions and services to the aerospace and defense industries,
focused mainly on the following four segments: (i) original equipment manufacturing (“OEM”) of heat transfer solutions and aviation accessories through our Gedera facility; (ii) MRO
services for heat transfer components and OEM of heat transfer solutions through our Limco subsidiary; (iii) MRO services for aviation components through our Piedmont subsidiary; and (iv)
overhaul and coating of jet engine components through our Turbochrome subsidiary. TAT targets the commercial aerospace (serving a wide range of types and sizes of commercial and
business jets), military aerospace and ground defense sectors. TAT’s shares are listed on both the NASDAQ (TATT) and Tel-Aviv Stock Exchange.
TAT has the following wholly-owned subsidiaries: Limco-Piedmont Inc. (“Limco-Piedmont”), and Turbochrome Ltd. (“Turbochrome”). Additionally, the Company holds 51% of TAT-
Engineering LLC (“TAT-Engineering”), hereinafter collectively referred to as the “Group”.
On November 25, 2015, the Company signed an agreement with Russian-based Engineering Holding of Moscow (“Engineering”), to establish a new facility for the provision of services for
heat transfer products. The new company, TAT-Engineering LLC, is based in Novosibirsk’s Tolmachevo airport. TAT-Engineering, LLC shall provide services for heat transfer products. 51%
of TAT-Engineering LLC's shares are held by TAT and the remaining 49% are held by Engineering. The accounting treatment of the joint venture is based on the equity method due to
variable participating rights granted to Engineering. The new entity was established in January 2016.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
a.
Basis of Presentation
The Group's financial statements have been prepared in accordance with generally accepted accounting principles in the United States ("U.S. GAAP").
b.
Use of estimates in the preparation of financial statement
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclose the nature of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting years.
Actual results could differ from those estimates.
As applicable to these financial statements, the most significant estimates and assumptions relate to: recoverability of inventory, provision for doubtful accounts and income taxes.
F - 11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
NOTE 2 -
SIGNIFICANT ACCOUNTING POLICIES (CONT)
c.
Functional currency
TAT TECHNOLOGIES LTD. AND ITS SUBSIDIARIES
The majority of the revenues of each subsidiary in the Group are generated in U.S. dollars ("dollars") and a substantial portion of the costs of each subsidiary in the Group are incurred in
dollars. Accordingly, the dollar is the currency of the primary economic environment in which the Group operates and accordingly its functional and reporting currency is the dollar.
Transactions and balances originally denominated in dollars are presented at their original amounts. Balances in currencies other than the U.S. dollar are translated into dollars using historical
and current exchange rates for non-monetary and monetary balances, respectively. For non-dollar transactions and other items in the statements of income (indicated below), the following
exchange rates are used: (i) for transactions – exchange rates at transaction dates or average rates; and (ii) for other items (derived from non-monetary balance sheet items such as depreciation
and amortization, etc.) – historical exchange rates. Currency transaction gains and losses are carried to financial income or expenses, as appropriate.
d.
Principles of consolidation
The consolidated financial statements include the accounts of TAT and its subsidiaries.
Intercompany balances and transactions, including profits from intercompany sales not yet realized outside the Group, have been eliminated upon consolidation.
e.
Cash and Cash equivalents
All highly liquid investments, which include short-term bank deposits, that are not restricted as to withdrawal or use, and short-term debentures, the period to maturity of which do not exceed
three months at the time of investment, are considered to be cash equivalents.
f.
Short-term bank deposits
Bank deposits with maturities of more than three months but less than one year are included in short-term deposits. Such short-term deposits bear interest at an average annual rate of
approximately 0.6% in 2017.
F - 12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
NOTE 2 -
SIGNIFICANT ACCOUNTING POLICIES (CONT)
g.
Accounts receivable, net
TAT TECHNOLOGIES LTD. AND ITS SUBSIDIARIES
The Group’s accounts receivable balances are due from customers primarily in the airline and defense industries. Credit is extended based on evaluation of a customer’s financial condition and
generally, collateral is not required. Trade accounts receivable from sales of services and products are typically due from customers within 30 - 90 days. Trade accounts receivable balances are
stated at amounts due from customers net of a provision for doubtful accounts. Accounts outstanding longer than their original contractual payment terms are considered past due. The Group
determines its allowance by considering a number of factors, including the length of time accounts receivable are past due, the Group’s previous loss history from such customers, the
customer’s current ability to pay its obligation to TAT and the condition of the general economy and the industry as a whole. The Group writes-off accounts receivable when they become
uncollectible. Payments subsequently received on such receivables are credited against earnings. The provision for doubtful accounts is determined with respect to specific debts that are
doubtful of collection.
h.
Inventory
Inventory is measured at the lower of cost and net realizable value.
Inventories include raw materials, parts, work in progress and finished products.
Cost of raw material and parts is determined using the “moving average” basis. Cost of work in progress and finished products is calculated based on actual costs. Capitalized production
costs components, mainly labor and overhead, are determined on average basis over the production period.
If actual market prices are less favorable than those projected by management, inventory write-downs may be required. Once written-down, a new lower cost basis for that inventory is
established.
Since the Group sells products and services related to airplane accessories for airplanes that can be in service for 20 to 50 years, it must keep a supply of such products and parts on hand
while the airplanes are in use. The Group writes down its inventory for estimated obsolescence and unmarketable inventory equal to the difference between the cost of inventory and estimated
market value based upon assumptions for future demand and market conditions.
F - 13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
NOTE 2 -
SIGNIFICANT ACCOUNTING POLICIES (CONT)
i.
Property, plant and equipment
TAT TECHNOLOGIES LTD. AND ITS SUBSIDIARIES
Property, plant and equipment are stated at cost, after deduction of the related investment grants, net of accumulated depreciation. Depreciation is calculated using the straight-line method
over the estimated useful lives of the assets, as follows:
Buildings and leasehold improvements
Machinery and equipment
Motor vehicles
Office furniture and equipment
Software
Years
7 - 39
3 - 17
6 - 7
3 - 17
3-5
Leasehold improvements are included in buildings and amortized using the straight line method over the period of the lease contract, or the estimated useful life of the asset, whichever is
shorter.
j.
Grants from Israel Innovation Authority (IIA):
Grants received from the IIA for approved research and development projects are recognized at the time the Company is entitled to such grants, on the basis of the costs incurred and included
as a deduction from research and development expenses. Due the fact that the Company is defined as a "Traditional Industry Company", under the IIA regulations, the majority of grants are
non-royalty bearing.
k.
Investment in affiliates and share in results of equity investment of affiliated companies
Investment in which the Group exercises significant influence and which is not considered a subsidiary ("affiliate") is accounted for using the equity method, whereby the Group recognizes its
proportionate share of the affiliated company's net income or loss after the date of investment. See Note 5.
The Group reviews those investments for impairment whenever events indicate the carrying amount may not be recoverable. See Note 1(c).
Transactions between the Group and the affiliate are eliminated on consolidation. Profits or losses are eliminated only on assets still remaining on the books of the Group or the affiliate.
F - 14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
NOTE 2 -
SIGNIFICANT ACCOUNTING POLICIES (CONT)
l.
Leases
TAT TECHNOLOGIES LTD. AND ITS SUBSIDIARIES
On January 1, 2019 the Company adopted ASU No. 2016-02, Leases (Topic 842), The Company determines if an arrangement is a lease at inception. Balances related to operating leases are
included in operating lease right-of-use (“ROU”) assets and operating lease liabilities in the consolidated balance sheets.
ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease.
Operating lease ROU assets and liabilities are recognized as of the commencement date based on the present value of lease payments over the lease term. The Company’s lease terms may
include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. The discount rate for the lease is the rate implicit in the lease unless
that rate cannot be readily determined. As the Company’s leases do not provide an implicit rate, the Company’s uses its estimated incremental borrowing rate based on the information
available at the commencement date in determining the present value of lease payments. Lease expense for lease payments is recognized on a straight-line basis over the lease term (see also
note 2aa).
m.
Identified intangible assets
Identifiable intangible assets are comprised of definite lived intangible assets - customer relationships, which are amortized using the straight-line method over their estimated period of useful
life as determined by identifying the period in which substantially all of the cash flows are expected to be generated. Amortization of customer relationships is recorded under selling and
marketing expenses.
n.
Impairment of long-lived assets
Long-lived assets, including property, plant and equipment, operating lease right of use assets and definite life intangible assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of the assets (or asset group) may not be recoverable. In the event that the sum of the expected future cash flows (undiscounted and without
interest charges) of the long-lived assets (or asset group) is less than the carrying amount of such assets, an impairment charge would be recognized and the assets (or asset group) would be
written down to their estimated fair values (see also notes 5 and 6).
o.
Treasury Shares
Company shares held by the Company are presented as a reduction of equity at their cost to the Company. The treasury shares have no rights.
F - 15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
NOTE 2 -
SIGNIFICANT ACCOUNTING POLICIES (CONT)
p.
Revenue recognition
TAT TECHNOLOGIES LTD. AND ITS SUBSIDIARIES
The Group generates its revenues from the sale of OEM products and systems, providing MRO services (remanufacture, maintenance, repair and overhaul services and long - term service
contracts) and parts services.
In May 2014, FASB issued Accounting Standards Update "Revenue from Contracts with Customers" (Topic 606). To determine revenue recognition for arrangements that an entity determines
are within the scope of Topic 606, the entity performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine
the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the performance obligation is satisfied.
Other major provisions include capitalization of certain contract costs, consideration of the time value of money in the transaction price, and allowing estimates of variable consideration to be
recognized before contingencies are resolved in certain circumstances.
The guidance permitted the use of either a retrospective or cumulative effect transition method. The Company has implemented the new standard on its effective date (January 1, 2018) to
uncompleted contracts as of that date, in accordance with the transitional directive which allows recognition of the cumulative effect of the initial application as an adjustment to the opening
balance of retained earnings as of January 1, 2018. The adoption of ASC 606 did not impact the Company’s balance sheet or opening balance of retained earnings.
F - 16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT)
p.
Revenue recognition (cont)
TAT TECHNOLOGIES LTD. AND ITS SUBSIDIARIES
The Company has adopted the following exemptions and accounting policies:
a. The Company has chosen to account for shipping as a fulfillment costs, in cases in which the shipping occurs after the customer has obtained control of a good.
b. The Company has chosen not to adjust the promised amount of consideration for the effects of a significant financing component, in cases in which the Company expects, at contract
inception, that the period between when the Company transfers a promised good or service to the customer and when the customer pays for that good or service will be one year or less.
c. The Company has chosen to present all sales taxes collected from customers on a net basis.
Prior to January 1, 2018 and before the adoption of ASC 606, revenues from multi-year, fixed price contracts for OEM customers were recognized when a product was shipped (and title passed)
to the customer.
After the adoption of ASC 606, the group recognizes revenues from the sale of OEM products when it satisfies a performance obligation, i.e. when or as the customer obtains control upon
product shipment. The Group does not grant a right of return.
Prior to January 1, 2018 and before the adoption of ASC 606, revenues from MRO services were generally recognized when services were completed. In cases in which contracts required
exchanging a defective landing gear for a restored gear, the non-refundable minimum amounts from these contracts were recognized on the exchange date (delivery of the product has
occurred), and any additional amounts billed to the customer for excess hours of repair, were recognized when the customer approved the price for these additional services.
After the adoption of ASC 606, the Group recognizes revenues from MRO services over time as it satisfies its performance obligations. The Group satisfies its performance, according to
required milestones.
F - 17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT)
q.
Warranty costs
TAT TECHNOLOGIES LTD. AND ITS SUBSIDIARIES
The Group provides warranties for its products and services ranging from one to three years, which vary with respect to each contract and in accordance with the nature of each specific
product. According to past experience, most of the warranty costs incur during the first year of the contract.
The Group estimates the costs that may be incurred under its warranty and records a liability in the amount of such costs at the time revenue is recognized. The Group periodically assesses
the adequacy of its recorded warranty liabilities and adjusts the amounts as necessary.
r.
Research and development
Research and development costs, net of grants, are charged to expenses as incurred.
s.
Fair value measurement
The Group measures fair value and discloses fair value measurements for financial assets and liabilities. Fair value is based on the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants at the measurement date.
The accounting standard establishes a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three broad levels, which are described below:
Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for identical assets or liabilities. The fair value hierarchy gives the highest priority to Level 1
inputs.
Level 2: Observable prices that are based on inputs not quoted on active markets, but corroborated by market data or active market data for similar but not identical assets or liabilities.
F - 18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT)
s.
Fair value measurement (cont)
TAT TECHNOLOGIES LTD. AND ITS SUBSIDIARIES
Level 3: Unobservable inputs are used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs.
In determining fair value, the Group utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible and considers
credit risk in its assessment of fair value.
t.
Concentrations of credit risk
Financial instruments that potentially subject the Group to concentrations of credit risk consist principally of cash and cash equivalents, derivatives and accounts receivable.
Cash and cash equivalents are deposited with major banks in Israel and the United States. Such deposits in the United States may be in excess of insured limits and are not insured in other
jurisdictions. Management believes that the financial institutions that hold the Group's cash and cash equivalents are financially sound. Accordingly, minimal credit risk exists with respect to
these financial instruments.
The Group's accounts receivable are derived mainly from sales to customers in the United States, Israel and Europe. The Group generally does not require collateral; however, in certain
circumstances the Group may require letters of credit. Management believes that credit risks relating to accounts receivable are minimal since the majority of the Group's customers are world-
leading manufacturers of aviation systems and aircrafts, international airlines, governments and air-forces, and world-leading manufacturers and integrators of defense and ground systems. In
addition, the Group has relatively a large number of customers with wide geographic spread which mitigates the credit risk. The Group performs ongoing credit evaluation of its customers'
financial condition.
u.
Income taxes
Income taxes are accounted for in accordance with ASC 740 "Income Taxes". This statement prescribes the use of the asset and liability method, whereby deferred tax assets and liabilities
account balances are determined based on temporary differences between financial reporting and tax basis of assets and liabilities and for tax loss carry-forwards. Deferred taxes are measured
using the enacted laws and tax rates that will be in effect when the differences are expected to reverse. The Group provides a valuation allowance, if necessary, to reduce deferred tax assets to
their estimated realizable value, see note 13(h).
Taxes which would apply in the event of disposal of investments in foreign subsidiaries have not been taken into account in computing the deferred taxes, when the Group’s intention is to
hold, and not to realize the investments.
Taxes which would apply in the event of distribution of earnings from foreign subsidiaries of the Company, have been taken into account in computing the deferred taxes, when there is a
possibility of future distribution of earnings from such foreign subsidiaries.
F - 19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT)
u.
Income taxes (cont.)
TAT TECHNOLOGIES LTD. AND ITS SUBSIDIARIES
The Group did not provide for deferred taxes attributable to dividend distribution out of retained tax-exempt earnings from "Approved/Benefited Enterprise" plans (see note 13(a)), since it
intends to permanently reinvest them and has no intention to declare dividends out of such tax exempt income in the foreseeable future. Management considers such retained earnings to be
essentially permanent in duration. The payment of dividend in 2017 and 2016 was paid from foreign subsidiaries earnings of the Company and earnings from regular income of the Israeli
company, respectively.
Results for tax purposes for TAT’s Israeli subsidiaries are measured and reflected in NIS.
As explained in (c) above, the consolidated financial statements are measured and presented in U.S. dollars. In accordance with ASC 740, TAT has not provided deferred income taxes on the
differences resulting from changes in exchange rate and indexation.
The Group follows a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of
available evidence indicates that it is more likely than not that the position will be sustained on audit. The second step is to measure the tax benefit as the largest amount that is more than 50%
likely of being realized upon ultimate resolution. The Group’s policy is to include interest and penalties related to unrecognized tax benefits within financial income (expense). Such liabilities
are classified as long-term, unless the liability is expected to be resolved within twelve months from the balance sheet date.
v.
Earnings per share
Basic earnings (loss) per share are computed by dividing net income (loss) by the weighted average number of shares of the Company's Ordinary Shares, par value NIS 0.9 per share
outstanding for each period.
Diluted earnings (loss) per share are calculated by dividing the net income by the fully-diluted weighted-average number of ordinary shares outstanding during each period. Potentially dilutive
shares include outstanding options granted to employees and directors, using the treasury stock method.
w.
Share-based compensation
The Group applies ASC 718 "Stock Based Compensation" with respect to employees and directors’ options, which requires awards classified as equity awards to be accounted for using the
grant-date fair value method. The fair value of share-based awards is estimated using the Black-Scholes valuation model, the payment transaction is recognized as expense over the requisite
service period, net of estimated forfeitures. The Company estimates forfeitures based on historical experience and anticipated future conditions.
F - 20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
NOTE 2 -
SIGNIFICANT ACCOUNTING POLICIES (CONT)
w.
Share-based compensation (cont)
TAT TECHNOLOGIES LTD. AND ITS SUBSIDIARIES
The Group recognizes compensation cost for an award with only service conditions that has a graded vesting schedule using the accelerated method over the requisite service period for the
entire award.
x.
Comprehensive income (loss)
Comprehensive income in 2019, 2018 and 2017 includes, in addition to net income or loss, gains and losses of derivatives (net of related taxes where applicable).
Reclassification adjustments for gain or loss of derivatives are included in the relevant line item in the statement of income. See also note 2 (z).
F - 21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT)
y.
Contingencies
TAT TECHNOLOGIES LTD. AND ITS SUBSIDIARIES
Certain conditions may exist as of the date the financial statements are issued, which may result in a loss to the Group but which will only be resolved when one or more future events occur or
fail to occur. The Group’s management assesses such contingent liabilities and estimated legal fees, if any, and accrues for these costs. Such assessment inherently involves an exercise of
judgment. In assessing loss contingencies related to legal proceedings that are pending against the Group or unasserted claims that may result in such proceedings, the Group’s management
evaluates the perceived merits of any legal proceedings or unasserted claims as well as the perceived merits of the amount of relief sought or expected to be sought.
Management applies the guidance in ASC 450-20-25 when assessing losses resulting from contingencies. If the assessment of a contingency indicates that it is probable that a material loss
has been incurred and the amount of the liability can be estimated, then the estimated liability is recorded as accrued expenses in the Company’s financial statements. If the assessment
indicates that a potential material loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, together with
an estimate of the range of possible loss if determinable and material are disclosed.
Loss contingencies considered to be remote by management are generally not disclosed unless they involve guarantees, in which case the guarantee would be disclosed.
z.
Derivatives and hedging
The Company carries out transactions involving foreign currency exchange derivative financial instruments. The transactions are designed to hedge the Company’s exposure in currencies
other than the U.S. dollar. The Company recognizes derivative instruments as either assets or liabilities and measures those instruments at fair value. For derivative instruments that are
designated and qualify as a cash-flow hedge, the effective portion of the gain or loss on the derivative instrument is reported as a component of other comprehensive income and reclassified
into earnings in the same line item associated with the anticipated transaction in the same period or periods during which the hedged transaction affects earnings. The ineffective portion of a
derivative designated as a cash flow hedge is recognized in "financial expense (income), net". If a derivative does not meet the definition of a cash flow hedge, the changes in the fair value are
included in "financial expense (income), net".
After the adoption of ASU 2017-12, the main effect is that the overall influence of the hedging appears under the same line of the hedged item and not under "financial expense (income), net".
F - 22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT)
z. Derivatives and hedging (cont.)
TAT TECHNOLOGIES LTD. AND ITS SUBSIDIARIES
For derivative instruments that qualify for hedge accounting, the cash flows associated with these derivatives are reported in the consolidated statements of cash flows consistently with the
classification of the cash flows from the underlying hedged items that these derivatives are hedging.
aa.
Recently Issued Accounting Principles:
Recently adopted accounting pronouncements:
1) The Company adopted ASU No. 2016-02, Leases (Topic 842), on January 1, 2019 using the modified retrospective transition approach by applying the new standard to all leases existing at
the date of initial application. Results and disclosure requirements for reporting periods beginning after January 1, 2019 are presented under Topic 842, while prior period amounts have not
been adjusted and continue to be reported in accordance with its historical accounting under Topic 840.
The Company elected the package of practical expedients permitted under the transition guidance, which allowed to carryforward the Company’s historical lease classification, the
Company’s assessment on whether a contract was or contains a lease, and the Company’s initial direct costs for any leases that existed prior to January 1, 2019. The Company also elected
to combine lease and non-lease components and to keep leases with an initial term of 12 months or less off the balance sheet and recognize the associated lease payments in the
consolidated statements of income on a straight-line basis over the lease term.
Upon adoption, the new standard resulted in an increase of $7.3 million in operating lease ROU assets and corresponding liabilities on the Company’s consolidated balance sheet.
The weighted-average interest rate used to discount future lease payments was 4.84% for the assets in the USA and 4.5% for the Israeli assets.
2)
In August 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2017-12, Derivatives and Hedging (Topic 815), Targeted
Improvements to Accounting for Hedging Activities. Among other things, the guidance eliminated the requirement to separately measure and report hedge ineffectiveness and generally
requires the entire change in the fair value of a hedging instrument to be presented in the same income statement line as the hedged item. As ASU 2017-12 was effective for fiscal years
beginning after December 15, 2018, the Company adopted the ASU on January 1, 2019 with no material impact on the Company’s consolidated financial statements.
F - 23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT)
Accounting pronouncements issued but not yet adopted:
TAT TECHNOLOGIES LTD. AND ITS SUBSIDIARIES
(1)
(2)
In June 2016, the FASB issued guidance on financial instruments. The guidance replaces the current incurred loss impairment methodology with a methodology that reflects expected
credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The guidance will be effective for the fiscal year
beginning on January 1, 2020, including interim periods within that year. The new standard will not have a material effect on the Company's financial statements upon adoption.
In December 2019, the FASB issued ASU 2019-12, “Simplifying the Accounting for Income Taxes. (Topic 740)” ("the Update"). The amendments in this Update simplify the accounting for
income taxes by removing the following exceptions in ASC 740: 1. Exception to the incremental approach for intra-period tax allocation when there is a loss from continuing operations and
income or a gain from other items; 2. Exception to the requirement to recognize a deferred tax liability for equity method investments when a foreign subsidiary becomes an equity method
investment; 3. Exception to the ability not to recognize a deferred tax liability for a foreign subsidiary when a foreign equity method investment becomes a subsidiary;4. Exception to the
general methodology for calculating income taxes in an interim period when a year-to-date loss exceeds the anticipated loss for the year.
In addition, this Update also simplify the accounting for income taxes in certain topics as follows: 1. Requiring that an entity recognize a franchise tax (or similar tax) that is partially based
on income as an income-based tax and account for any incremental amount incurred as a non-income-based tax; 2. Requiring that an entity evaluate when a step up in the tax basis of
goodwill should be considered part of the business combination in which the book goodwill was originally recognized and when it should be considered a separate transaction;3.
Specifying that an entity can elect (rather than required to) allocate the consolidated amount of current and deferred tax expense to a legal entity that is not subject to tax in its separate
financial statements;4. Requiring that an entity reflect the effect of an enacted change in tax laws or rates in the annual effective tax rate computation in the interim period that includes the
enactment date.
The amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. The Company is currently evaluating the
effects of this Update on its consolidated financial statements.
F - 24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
NOTE 3 - FAIR VALUE MEASUREMENT
Recurring Fair Value Measurements
TAT TECHNOLOGIES LTD. AND ITS SUBSIDIARIES
The Group measures fair value and discloses fair value measurements for financial assets and liabilities. Fair value is based on the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants at the measurement date.
The Company's financial assets and liabilities measured at fair value on a recurring basis, consisted of the following types of instruments:
Assets:
Derivative financial instruments
Assets:
Derivative financial instruments
a.
Derivative financial instruments:
Level 1
Level 2
Level 3
Total
December 31, 2019
-
$
27
-
$
27
Level 1
Level 2
Level 3
Total
December 31, 2018
-
$
210
-
$
210
The company hedges the foreign currency risk arising from probable forecasted Israeli Shekel ("ILS") expenses as part of its risk management policy. The risk management objective is to
hedge the foreign currency exchange rate fluctuations associated with ILS denominated forecasted probable expenses according to the company's hedging policy. The majority of the ILS
exposure arises from expected related salary expenses. The Company enters into contracts for derivative financial instruments forward contracts in order to execute its policy. Such derivatives
are recognized at fair value. The fair value of forward contracts is calculated as the difference between the forward rate on valuation date and the forward rate on the original forward contract,
multiplied by the transaction's notional amount. At the inception of a hedge relationship, the Company formally designates and documents the hedge relationship to which the Company
wishes to apply hedge accounting and the risk management objective and strategy for undertaking the hedge. The hedge effectiveness is assessed at the end of each reporting period.
The effective portion of the gain or loss on the hedging instrument is recognized as other comprehensive income (loss), while any ineffective portion is recognized immediately in profit or loss
through finance income (expenses), net.
The effective portion is determined by looking into changes in spot exchange rate.
The change in fair value attributable to changes other than those due to fluctuations in the spot exchange rate are excluded from the assessment of hedge effectiveness and are recognized in
the statement of income under financial expenses-net.
F - 25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
NOTE 3 - FAIR VALUE MEASUREMENT (CONT)
TAT TECHNOLOGIES LTD. AND ITS SUBSIDIARIES
For derivative instruments that are designated and qualify as a cash-flow hedge, the gain or loss on the derivative instrument is reported as a component of other comprehensive income and
reclassified into earnings in the same line item associated with the anticipated transaction in the same period or periods during which the hedged transaction affects earnings.
For derivative instruments that qualify for hedge accounting, the cash flows associated with these derivatives are reported in the consolidated statements of cash flows consistently with the
classification of the cash flows from the underlying hedged items that these derivatives are hedging.
As of December 31, 2019 and 2018, the Company has open forward contracts with a notional total amount of $1,017 and $10,332, respectively. As of December 31, 2019, the company has open
call options and open put options with a notional total amount of $3,781 and $3,957, respectively.
The carrying amounts of financial instruments include cash and cash equivalents, short-term bank deposits, accounts receivable, accounts payable and accrued liabilities approximate fair
value because of their short maturities.
NOTE 4 -
INVENTORY
Inventory is composed of the following:
Raw materials and components
Work in progress
Spare parts
Finished goods
Total inventory (**)
December 31,
2019
2018
$
$
13,296
11,735
18,272
604
$
43,907
$
10,758
7,297
19,557
993
38,605
(**) The total amount of Rotables included in the company spare parts inventory for the years ended December 31, 2019 and 2018 were $8,886 and $8,284, respectively.
Slow inventory expenses amounted to $147, $691 and $964 for the years ended December 31, 2019, 2018 and 2017, respectively.
The company maintains a wide range of exchangeable units and other spare parts related to its products and services in various locations. Due to the long lead time of its suppliers and manufacturing
cycles, the company needs to forecast demand and commit significant resources towards these inventories. As such, the Company is subject to significant risks including excess inventory no longer
relevant.
F - 26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
NOTE 5 - INVESTMENT IN AFFILIATES
On November 25, 2015, the Company signed an agreement with Russian-based Engineering Holding of Moscow (“Engineering”), to establish a new facility for the provision of services for heat
transfer products. The new company, TAT-Engineering LLC, is based in Novosibirsk’s Tolmachevo airport. TAT-Engineering, LLC shall provide services for heat transfer products. 51% of TAT-
Engineering LLC's shares are held by TAT and the remaining 49% are held by Engineering. The accounting treatment of the joint venture is based on the equity method due to variable participating
rights granted to Engineering. The new entity was established in January 2016.
Summarized financial information of TAT-Engineering LLC:
TAT TECHNOLOGIES LTD. AND ITS SUBSIDIARIES
Balance sheets:
Current assets
Non-current assets
Current liabilities
Non-current liabilities
Statements of operation:
Revenues
Gross loss
Loss from continuing operations
Net losses attributable to the Company
NOTE 6 - PROPERTY, PLANT AND EQUIPMENT, NET
Composition of assets, grouped by major classifications, is as follows:
Cost:
Land and buildings
Machinery and equipment
Motor vehicles
Office furniture and equipment
Software
Less: Accumulated depreciation
Depreciated cost
December 31,
2019
2018
$
466
$
1,383
1,040
-
2019
Year ended December 31,
2018
2017
$
$
877
(228)
(291)
(132)
$
1,534
(154)
(266)
(140)
919
1,436
1,254
-
604
(216)
(412)
(210)
December 31,
2019
2018
$
$
$
14,863
52,872
410
1,811
1,420
71,376
50,368
21,008
$
13,077
51,017
410
1,802
1,248
67,554
46,130
21,424
Depreciation expenses amounted to $4,238, $4,051 and $3,807 for the years ended December 31, 2019, 2018 and 2017, respectively.
F - 27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
NOTE 7 - LEASES
Lease commitments:
TAT TECHNOLOGIES LTD. AND ITS SUBSIDIARIES
Limco-Piedmont leases some of its operating and office facilities for various terms under long-term, non-cancelable operating lease agreements. The leases expire at various dates through
2029. Certain leases contain renewal options as defined in the agreements.
During 2019, Limco leased a new building (building #5) for its operation. The lease on building #5 expires on March 31, 2030. Building #5 has an early termination option effective after March
31, 2019 with six months advance written notice. The rent is $4,100 per month for building #5 plus the annual percentage increase in the CPI-W.
Lease expense totaled $510, $494 and $474 for the years ended December 31, 2019, 2018, and 2017 respectively.
TAT leases its factory from TAT Industries until the end of 2024. Lease expense totaled $787, $767 and $740 for the years ended December 31, 2019, 2018, and 2017 respectively.
The Company entered into several three-year leases for vehicles. The current monthly lease fees aggregate approximately $40.
The lease cost was as follows:
Operating lease expenses
Supplemental cash flow information related to leases was as follows:
Operating cash flows from operating leases
F - 28
Year ended
December 31, 2019
1,297
Year ended
December 31, 2019
354
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
NOTE 7 – LEASES (CONT)
Supplemental information for amounts included in the measurement of lease liabilities are as follows:
TAT TECHNOLOGIES LTD. AND ITS SUBSIDIARIES
Operating Leases
Operating lease right-of-use assets
Current operating lease liabilities
Non-current operating lease liabilities
Total operating lease liabilities
Weighted Average Remaining Lease Term
Operating leases - Israel
Operating leases – United States
Operating leases - Israel
Operating leases – United States
As of December 31, 2019, the maturities of lease liabilities were as follows:
Year
2020
2021
2022
2023
2024 and after
Total lease payments
Less imputed interest
Total
F - 29
December 31,
2019
6,664
1,330
5,688
7,018
5 years
6 years
4.5%
4.84%
1,626
1,461
1,314
1,250
1,827
7,478
(460)
7,018
Amount
$
$
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
NOTE 7 – LEASES (CONT)
As of December 31, 2018, the minimum lease payments of the Company, were as follows:
Year
2019
2020
2021
2022
2023 and after
Total
NOTE 8 - INTANGIBLE ASSETS
Intangible assets:
Customer relationships
Cost
Accumulated amortization
Amortized cost
NOTE 9 - ACCRUED EXPENSES
Employees and payroll accruals
Accrued expenses
Authorities
Advances from customers
Warranty provision
Accrued royalties and rebate sales commissions
Other
TAT TECHNOLOGIES LTD. AND ITS SUBSIDIARIES
Amount
1,551
1,488
1,330
1,224
2,719
8,312
$
$
December 31,
2019
2018
$
$
$
1,342
(565)
777
$
$
December 31,
2019
2018
$
3,332
937
810
513
235
1,517
49
1,342
(431)
911
2,869
840
677
483
285
966
291
6,411
F - 30
$
7,393
$
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
NOTE 10 - RELATED PARTIES’ TRANSACTIONS AND BALANCES
Transactions:
Income -
Sales to related-party company (*)
Cost and expenses -
Supplies from related party (*)
Balances:
Trade receivables and other receivables (*)
Trade payables and other payables (*)
(*) includes mainly transactions with affiliated companies.
NOTE 11 - LONG-TERM EMPLOYEE-RELATED OBLIGATIONS
Severance pay:
TAT TECHNOLOGIES LTD. AND ITS SUBSIDIARIES
2019
Year ended December 31,
2018
2017
$
$
596
$
552
$
1,251
$
59
$
December 31,
2019
2018
$
$
706
154
$
$
959
6
699
-
The Company and its Israeli subsidiary are required to make severance payments upon dismissal of an employee or upon termination of employment in certain circumstances. The severance payment
liability to the employees (based upon length of service and the latest monthly salary - one month’s salary for each year employed) is recorded on the Company’s balance sheet under “Liability for
employee rights upon retirement.” The liability is recorded as if it were payable at each balance sheet date on an undiscounted basis.
According to Section 14 of the Israeli Severance Pay Law, the Israeli company’s liability for certain employees, according to their employment agreements, make regular deposits with certain
insurance companies for accounts controlled by each applicable employee in order to secure the employee’s retirement benefit obligation. The Company and its Israeli subsidiary are fully relieved
from any severance pay liability with respect to each such employee after it makes the payments on behalf of the employee. The liability accrued in respect of these employees and the amounts
funded, as of the respective agreement dates, are not reflected in the Company balance sheet, as the amounts funded are not under the control and management of the Company and the pension or
severance pay risks have been irrevocably transferred to the applicable insurance companies (the “Contribution Plan”).
F - 31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
NOTE 11 - LONG-TERM EMPLOYEE-RELATED OBLIGATIONS (CONT)
TAT TECHNOLOGIES LTD. AND ITS SUBSIDIARIES
With regard to the employees that are not under the “Contribution Plan”, the liability is funded in part from the purchase of insurance policies or by the establishment of pension funds with
dedicated deposits in the funds. The amounts used to fund these liabilities are included in the balance sheets under “Funds in respect of employee rights upon retirement.” These policies are the
Company’s assets.
Severance pay (cont.):
In the years ended December 31, 2019, 2018 and 2017 the Company deposited $1,096, $968 and $910 respectively, with pension funds and insurance companies in connection with its severance
payment obligations.
Limco-Piedmont sponsors a 401(K) safe harbor profit sharing plan covering substantially all of its employees. The plan requires the employer to contribute a match which is currently done on a
payroll period basis, matching 100% of the first 2% and 50% of all salary deferrals made up to the next 3%. In addition, the plan allows for a discretionary qualified non-elective contribution for the
plan year. Contributions to the plan by Limco-Piedmont were $406, $385 and $350 for the years ended December 31, 2019, 2018 and 2017, respectively.
The Group expects to contribute approximately $1,208 in 2020 to the pension funds and insurance companies in respect of their severance and pension pay obligations.
The amounts of severance payments, actually paid to retired employees, by TAT were $689, $400 and $96 for the years ended December 31, 2019, 2018 and 2017.
TAT expects to pay $1,026 in future benefits to their employees during 2020 through 2029 upon their normal retirement age. The amount was determined based on the employee’s current salary rates
and the number of service years that will be accumulated upon the retirement date. These amounts do not include amounts that might be paid to employees that will cease working for the Israeli
company before their normal retirement age.
Year
2020
2021
2022
2023
2024
Thereafter (through 2029)
Total
F - 32
Amount
341
55
9
147
48
426
1,026
$
$
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
NOTE 12 - COMMITMENTS AND CONTINGENT LIABILITIES
a.
Commissions arrangements:
TAT TECHNOLOGIES LTD. AND ITS SUBSIDIARIES
The Group is committed to pay marketing commissions ranging 1% to 10% to sale agents of total sales contracts. Commission expenses were $679, $411 and $664 for the years ended
December 31, 2019, 2018 and 2017, respectively. The commissions were recorded as part of the selling and marketing expenses.
b.
Royalty commitments:
(1) TAT is committed to pay royalties to third parties, ranging from 12% to 17% of sales of products developed by the third parties. Royalty expenses were $42, $148 and $25 for the years
ended December 31, 2019, 2018 and 2017, respectively. The royalties were recorded as part of the cost of revenues.
(2) Piedmont is committed to pay royalties to a third party, ranging 5% to 13% of sales of products purchased from the third party. That third party is the exclusive manufacturer of the
products for which Piedmont provides MRO services.
In addition, Piedmont is committed to pay another third party royalties of 20%, on parts reclaimed to use in MRO services or sold to our customers when they are manufactured by the
third party. Royalty expenses were $2,310, $1,689 and $1,885 for the years ended December 31, 2019, 2018 and 2017, respectively. The royalties were recorded as part of the cost of
revenues.
c.
Guarantees:
(1)
(2)
In order to secure TAT's liability to the Israeli customs, the Company provided a bank guarantee in the amount of $58. The guarantee is linked to the consumer price index and is valid until
January 2021. In addition, the Company provided a bank guarantee in the amount of $36. The guarantee is linked to the consumer price index and is valid until March 2021.
In order to secure TAT's liability to the lessor of its premises, the Company provided a bank guarantee in the amount of $790. The guarantee is linked to the consumer price index in Israel
and is valid until July 2020.
F - 33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
NOTE 13 - SHAREHOLDERS' EQUITY
TAT TECHNOLOGIES LTD. AND ITS SUBSIDIARIES
a.
TAT's Ordinary shares confer upon their holders voting rights, the right to receive dividends, if declared, and any amounts payable upon the dissolution, liquidation or winding up of the
affairs of TAT.
TAT's Treasure shares have no rights.
b.
Stock option plans:
Following the approval of TAT's Audit Committee and Board of Directors, on June 28, 2012, the Company’s shareholders approved the 2012 stock option plan (the “2012 Plan”) to grant up to
380,000 options to purchase Ordinary shares, 0.9 NIS par value, of the Company to senior executives and certain members of the Board of Directors, at an exercise price as determined in the
stock option plan. The option pool was increased in 2016 by 300,000 to an aggregate option pool of 680,000 options following the approvals of the Company's Audit Committee, Board of
Directors and shareholders. In general, the Options vest over a period of 4 years as follows: 25% of the Options vest upon the lapse of 12 months following the date of grant and the remaining
75% vest on a quarterly basis over the remaining 3-year period. In addition, certain Options that were previously granted vest over a three-year period (one-third each year) and the vesting of
50% of such Options is subject, in addition, to certain minimum shareholders' equity during a period of 4 years from the grant date. The grant of options to Israeli employees under the Plan is
subject to the terms stipulated by Sections 102 and 102A of the Israeli Income Tax Ordinance. Each option grant is subject to the track chosen by the Company, either Section 102 or Section
102A of the Israeli Income Tax Ordinance, and pursuant to the terms thereof, the Company is not allowed to claim as an expense for tax purposes the amounts credited to employees as
benefits, including amounts recorded as salary benefits in the Company’s accounts, in respect of options granted to employees under the Plan, with the exception of the work income benefit
component, if any, determined on grant date. For nonemployees and for non-Israeli employees, the share option plan is subject to Section 3(i) of the Israeli Income Tax Ordinance.
F - 34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
NOTE 13 - SHAREHOLDERS' EQUITY (CONT)
b.
Stock option plans (cont.):
TAT TECHNOLOGIES LTD. AND ITS SUBSIDIARIES
On August 30, 2018 the Company's compensation committee, followed by the Board of Directors, approved the amended and restated company's 2012 Plan. On October 4, 2018 the company's
amended and restated 2012 stock plan was approved at the annual general meeting of shareholders.
As part of the company's 2012 Plan’s amendments it was determined that if the Company declares a cash dividend to its shareholders, and the distribution date of such dividend will precede
the exercise date of an Option, including for the avoidance of doubt, Options that have yet to become vested and Options which have been granted prior to the adoption of such amendment
to the plan, the exercise price of the Option shall be reduced in the amount equal to the cash dividend per share distributed by the Company. The result of the modification was an incremental
cost of $74 in the financial statement for 2018.
During 2018 the option pool was increased by 300,000 to an aggregate option pool of 980,000 options following the approvals of the Company's Audit Committee, Board of Directors and
shareholders of the company.
(1) On March 6, 2017, pursuant to the 2012 Plan, TAT’s Board of Directors approved the grant of 30,000 Options, at an exercise price of $8.9 per share, to senior executive.
(2) On August 10, 2017, pursuant to the 2012 Plan, TAT’s Board of Directors approved the grant of 45,000 Options, at an exercise price of $11.39 per share, to senior executive.
(3) On October 30, 2017, pursuant to the 2012 Plan, TAT’s Board of Directors approved the grant of 80,000 Options, at an exercise price of $11.54 per share, to senior executives, which were
granted on January 2, 2018.
(4) On February 6, 2018, pursuant to the 2012 Plan, TAT’s Board of Directors approved the grant of 3,893 Options, at an exercise price of $11.11 per share, to senior executives.
F - 35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
NOTE 13 - SHAREHOLDERS' EQUITY (CONT)
b.
Stock option plans (cont.):
TAT TECHNOLOGIES LTD. AND ITS SUBSIDIARIES
(5) On February 28, 2018, pursuant to the 2012 Plan, TAT’s Board of Directors approved the grant of 50,000 Options, at an exercise price of $10.74 per share, to senior executive.
(6) On May 13, 2018, pursuant to the 2012 Plan, TAT’s Board of Directors approved the grant of 70,000 Options, at an exercise price of $9.12 per share, to senior executive.
(7) On November 22, 2018, pursuant to the 2012 Plan, TAT’s Board of Directors approved the grant of 70,000 Options, at an exercise price of $7.35 per share, to senior executives.
(8) On August 29, 2019, pursuant to the 2012 Plan, TAT’s Board of Directors approved the grant of 70,000 Options, at an exercise price of $5.65 per share, to senior executives.
(9) On September 22, 2019, pursuant to the 2012 Plan, TAT’s Board of Directors approved the grant of 50,000 Options, at an exercise price of $5.32 per share, to senior executive.
(10) On September 26, 2019, pursuant to the 2012 Plan, TAT’s Board of Directors approved the grant of 50,000 Options, at an exercise price of $5.26 per share, to senior executive.
The fair value of the Company’s stock options granted under the 2012 plan for the years ended December 31, 2019, 2018 and 2017 was estimated using the following assumptions:
Expected stock price volatility
Expected option life (in years)
Risk free interest rate
Dividend yield
2019
2018
2017
34.2% – 36.8%
3.5-5
1.44% – 1.63%
0%
32.6% – 40.8%
3.5-5.5
1.71% – 2.87%
0% - 5%
33.3% – 40.5%
4 – 5.5
1.49% – 1.81%
5%
The Company uses the Black-Scholes option pricing model to determine the weighted average fair value of options. The volatility factor used in the Black-Scholes option pricing model is
based on historical stock price fluctuations. The expected term of options is based on the simplified method. The Company is able to use the simplified method as the options qualify as
“plain vanilla” options as defined by ASC 718-10-S99 and since the Company does not have sufficient historical exercise data to provide a reasonable basis to estimate expected term.
Expected dividend yield is based upon historical and projected dividend activity and the risk-free interest rate assumption is based on observed interest rates appropriate for the expected
term of the stock options granted. Following the company's amended and restated 2012 stock plan related to the adjustment of the exercise price in respect of dividend distribution, the
dividend yield was amended to 0%.
F - 36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
NOTE 13 - SHAREHOLDERS' EQUITY (CONT)
b.
Stock option plans (cont.):
(11) The following table is a summary of the activity of TAT's Stock Option plan:
TAT TECHNOLOGIES LTD. AND ITS SUBSIDIARIES
Year ended December 31,
2019
Year ended December 31,
2018
Year ended December 31,
2017
Number
of
options
Weighted
average
exercise
price
Number
of
options
Weighted
average
exercise
price
Number
of
options
Weighted
average
exercise
price
Outstanding at the beginning of the year
Granted
Forfeited
Exercised
Outstanding at the end of the year
Exercisable at the end of the year
$
548,267
170,000
(126,808)
-
591,459
264,389
$
9.03
5.44
11.19
-
7.53
7.74
$
365,000
273,893
(63,958)
(26,668)
548,267
$
163,438
$
8.53
9.70
9.85
7.15
9.03
8.34
$
330,000
75,000
(20,417)
(19,583)
365,000
$
120,417
$
7.97
10.39
7.47
7.3
8.53
7.95
The weighted-average grant-date fair value of options granted was $1.35 in 2019, $1.83 in 2018 and $1.74 in 2017. The aggregate intrinsic value for the options outstanding as of December
31, 2019, 2018 and 2017 was $0, $737 and $332, respectively.
As of December 31, 2019 total unrecognized compensation cost was $230 and is expected to be recognized over a weighted-average period of 1.08 years.
c.
Dividends
On May 17, 2017, TAT’s Board declared a cash dividend in the total amount of $3 million (approximately NIS 10.8 million), or $0.34 per share (approximately NIS 1.2 per share), for all of the
shareholders of TAT. The dividend was paid on June 21, 2017 to shareholders of record on June 7, 2017.
F - 37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
NOTE 14 - EARNINGS PER SHARE (“EPS”)
TAT TECHNOLOGIES LTD. AND ITS SUBSIDIARIES
Basic and diluted earnings per share are based on the weighted average number of ordinary shares outstanding. Diluted EPS is based on those shares used in basic EPS plus shares that would have
been outstanding assuming issuance of ordinary shares for all dilutive potential ordinary shares outstanding.
Numerator for EPS:
Net income (loss)
Denominator for EPS:
Weighted average shares outstanding – basic
Dilutive shares
Weighted average shares outstanding – diluted
EPS:
Basic and diluted
2019
Year ended December 31,
2018
2017
$
806
$
(4,408) $
2,396
8,874,696
-
8,874,696
8,864,885
-
8,864,885
8,848,028
61,044
8,909,072
$
0.1
$
(0.5) $
0.27
Diluted income per share does not include 482,282, 306,151 and 105,000 options, for the years ended December 31, 2019, 2018 and 2017 respectively because the options are anti-dilutive.
Dilutive shares are calculated using the treasury stock method and include dilutive shares from share-based employee compensation plans.
F - 38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
NOTE 15 - TAXES ON INCOME
TAT TECHNOLOGIES LTD. AND ITS SUBSIDIARIES
a.
Tax benefits under the Law for the Encouragement of Capital Investments, 1959 ("the Law"):
Until December 31, 2010, TAT and Turbochrome has elected to participate in the alternative package of tax benefits for its approved and benefited enterprise under the law.
Pursuant to such Law, the income derived from those enterprises will be exempt from Israeli corporate tax for a specified benefit period (except to the extent that dividends are distributed
during the tax-exemption period other than upon liquidation) and subject to reduced corporate tax rates for an additional period.
In the event of distribution of a dividend from income which was tax exempt as above, the company would have to pay a regular corporate tax rate in respect of the amount distributed.
Preferred Enterprises
Additional amendments to the Law became effective in January 2011 (the “2011 Amendment”). Under the 2011 Amendment, income derived by ‘Preferred Companies’ from ‘Preferred
Enterprises’ (both as defined in the 2011 Amendment) would be subject to a uniform rate of corporate tax as opposed to the incentives that are limited to income from Approved or Benefiting
Enterprises during their benefits period. According to the 2011 Amendment, the uniform tax rate on such income, referred to as ‘Preferred Income’, would be 10% in areas in Israel that are
designated as Development Zone A and 15% elsewhere in Israel during 2011-2012, 7% and 12.5%, respectively, in 2013-2014, and 6% and 12%, respectively, thereafter. Dividends distributed
from taxable income derived from Preferred Enterprise would be subject to a 15% tax (or lower, if so provided under an applicable tax treaty), which would generally be withheld by the
distributing company .While the Company may incur additional tax liability in the event of distribution of dividends from tax exempt income generated from its Approved and Benefiting
Enterprises, no additional tax liability will be incurred by the Company in the event of distribution of dividends from income taxed in accordance with the 2011 Amendment.
Under the transitional provisions of the 2011 Amendment, the Company elected to irrevocably implement the 2011 Amendment, commencing 2011 and thereafter, and be regarded as a
"Preferred Enterprise" with respect to its existing Approved and Benefited Enterprises while waiving benefits provided under the legislation prior to the 2011 Amendment.
F - 39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
NOTE 15 - TAXES ON INCOME (CONT)
TAT TECHNOLOGIES LTD. AND ITS SUBSIDIARIES
a.
Tax benefits under the Law for the Encouragement of Capital Investments, 1959 ("the Law") (cont.):
Under a recent amendment, announced in August 2013, beginning in 2014, dividends paid out of income attributed to a Preferred Enterprise will be subject to a withholding tax rate of 20%
(instead of 15%). In addition, tax rates under the Preferred Enterprise were also raised effective as of January 1, 2014 to 9% in Zone A and 16% elsewhere (instead of the 6% and 12%,
respectively).
The uniform tax rate for Development Zone A, as of January 1, 2017, is 7.5% (as part of changes enacted in Amendment 73).
TAT is located in an area in Israel that is designated as elsewhere and as such entitled to reduce tax rates of 15% during 2011-2012, 12.5% in 2013, and 16% in 2014 and thereafter.
Turbochrome is located in an area in Israel that is designated as Zone A and as such entitled to reduce tax rates of 10% during 2011-2012, 7% in 2013, and 9% in 2014, 2015 and 2016, and 7.5%
in 2017 and thereafter.
b.
Corporate tax rate in Israel
In January 2016, the Law for the Amendment of the Income Tax Ordinance (No.216) was published, enacting a reduction of corporate tax rate beginning in 2016 and thereafter, from 26.5% to
25%. In December 2016, additional legislation was enacted, reducing the corporate tax rate to 24% for 2017 and to 23% for 2018 and thereafter. There is no impact on the financial statements of
the Company as a result of the changes in the Israeli corporate tax rate.
Capital gain is subject to capital gain tax according to corporate tax rate in the year which the assets are sold.
c.
U.S. subsidiaries
U.S. subsidiaries are taxed based on federal and state tax laws. The Federal statutory tax rate for 2019 was 21% plus 3%-6% for state taxes.
F - 40
TAT TECHNOLOGIES LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
NOTE 15 - TAXES ON INCOME (CONT)
d.
Tax assessments
TAT’s income tax assessments are considered final through 2014.
Turbochrome income tax assessments are considered final through 2014.
Limco-Piedmont income tax assessments are considered final through 2015.
e.
Income tax reconciliation:
A reconciliation of the theoretical tax expense assuming all income is taxed at the statutory rate to taxes on income (tax benefit) as reported in the statements of income:
Income (loss) before taxes on income (tax benefit) as reported in the statements of income
$
1,527
$
(5,732) $
4,939
Statutory tax rate in Israel
Theoretical taxes on income (tax benefit)
23%
23%
24%
$
351
$
(1,318) $
1,185
2019
Year ended December 31,
2018
2017
Increase (decrease) in taxes on income resulting from:
Tax adjustment for foreign subsidiaries subject to a different tax rate
Reduced tax rate on income derived from "Preferred Enterprises" plans
Earnings from foreign subsidiaries (1)
Valuation allowance for exchange rates differences on deferred taxes not recorded on capital losses
Change in tax rate
Tax in respect of prior years
Temporary differences for which no deferred taxes were recorded
Permanent differences
Other adjustments
(26)
305
91
(125)
-
-
(55)
55
(7)
Taxes on income as reported in the statements of income
$
589
$
(9)
421
(338)
(42)
-
(481)
8
245
50
(1,464) $
518
(111)
371
8
414
7
-
(104)
45
2,333
(1) During 2019, 2018 and 2017, the Company recorded an accrual that related to a tax liability due to actual distribution of earnings from foreign subsidiaries of the Company and due to the
possibility of future distribution of earnings from such foreign subsidiaries.
F - 41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
NOTE 15 - TAXES ON INCOME (CONT)
f.
Income (loss) before taxes on income (tax benefit) is comprised as follows:
Domestic (Israel)
Foreign (United States)
g.
Taxes on income (tax benefit) included in the statements of income:
Current:
Domestic (Israel)
Foreign (United States)
Deferred:
Domestic (Israel)
Foreign (United States)
Previous years:
Foreign (United States)
TAT TECHNOLOGIES LTD. AND ITS SUBSIDIARIES
$
$
$
2019
Year ended December 31,
2018
2017
(2,586) $
4,113
(5,261) $
(471)
1,527
$
(5,732) $
2019
Year ended December 31,
2018
2017
$
-
139
139
(355)
805
450
-
-
$
-
(881)
(881)
(813)
711
(102)
(481)
(481)
1,337
3,602
4,939
431
1,937
2,368
210
(252)
(42)
7
7
$
589
$
(1,464) $
2,333
F - 42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
NOTE 15 - TAXES ON INCOME (CONT)
h.
Deferred income taxes:
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for
income tax purposes. Significant components of TAT's deferred tax liabilities and assets are as follows:
December 31,
2019
2018
TAT TECHNOLOGIES LTD. AND ITS SUBSIDIARIES
Deferred tax assets:
Provision for doubtful accounts
Provisions for employee benefits
Inventory
Intangible assets
Capital tax losses carryforward
Net operating losses carryforward
Other
Deferred tax assets, before valuation allowance
Valuation allowance
Deferred tax assets, net
Deferred tax liabilities:
Property, plant and equipment and intangible assets
Earnings from foreign subsidiaries (1)
Other temporary differences deferred tax liabilities
Deferred tax liabilities
Net
$
$
$
$
$
$
67
470
964
42
3,500
1,669
96
6,808
(3,500)
3,308
$
$
(2,159)
(1,953)
(68)
(4,180) $
(872) $
59
267
975
100
3,375
1,102
288
6,166
(3,375)
2,791
(2,085)
(1,862)
(166)
(4,113)
(1,322)
(1) The Company record an accrual that related to a deferred tax liability due to the possibility of future distribution of earnings from foreign subsidiaries of the Company.
F - 43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
NOTE 15 - TAXES ON INCOME (CONT)
h.
Deferred income taxes (cont.):
The following table summarizes the changes in the valuation allowance for deferred tax assets:
TAT TECHNOLOGIES LTD. AND ITS SUBSIDIARIES
Balance, December 31, 2016
Additions during the year
Balance, December 31,2017
Deductions during the year
Balance, December 31,2018
Additions during the year
Balance, December 31,2019
3,409
8
3,417
(42)
3,375
125
3,500
$
$
Valuation allowance are mainly related to (i) U.S. subsidiary for which valuation allowance was provided in respect of deferred tax assets resulting from carryforward of State tax losses in the
amount of $ 1,519. That amount is expected to expire gradually starting from 2024 and (ii) Capital losses attributed to the Company in the amount of $ 1,502.
TAT does not intend to distribute tax-exempt earnings deriving from its Approved Enterprise aggregating approximately $1,936 as of December 31, 2019, and accordingly, no deferred tax
liability has been established related to these earnings. If such tax-exempt income is distributed, it would be taxed at the reduced corporate tax rate applicable to such profits (23%) and an
income tax liability of up to approximately $445 would be incurred as of December 31, 2019.
F - 44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
NOTE 16 -
SEGMENT INFORMATION
a.
Segment Activities Disclosure:
TAT TECHNOLOGIES LTD. AND ITS SUBSIDIARIES
TAT operates under four segments: (i) Original equipment manufacturing (“OEM”) of heat transfer solutions and aviation accessories through its Gedera facility; (ii) MRO services for heat
transfer components and OEM of heat transfer solutions through its Limco subsidiary; (iii) MRO services for aviation components through its Piedmont subsidiary; and (iv) Overhaul and
coating of jet engine components through its Turbochrome subsidiary.
-
OEM of heat transfer solutions and aviation accessories primarily include the design, development and manufacture of (i) broad range of heat transfer solutions, such as pre-coolers heat
exchangers and oil/fuel hydraulic heat exchangers, used in mechanical and electronic systems on board commercial, military and business aircraft; (ii) environmental control and power
electronics cooling systems installed on board aircraft in and ground applications; and (iii) a variety of other mechanical aircraft accessories and systems such as pumps, valves, and
turbine power units.
- MRO Services for heat transfer components and OEM of heat transfer solutions primarily include the MRO of heat transfer components and to a lesser extent, the manufacturing of
certain heat transfer solutions. TAT’s Limco subsidiary operates an FAA-certified repair station, which provides heat transfer MRO services for airlines, air cargo carriers, maintenance
service centers and the military.
- MRO services for aviation components include the MRO of APUs, landing gears and other aircraft components. TAT’s Piedmont subsidiary operates an FAA-certified repair station,
which provides aircraft component MRO services for airlines, air cargo carriers, maintenance service centers and the military.
-
TAT’s activities in the area of overhaul and coating of jet engine components includes the overhaul and coating of jet engine components, including turbine vanes and blades, fan
blades, variable inlet guide vanes and afterburner flaps.
The Group’s chief operating decision-maker (CEO of the Company) evaluates performance, makes operating decisions and allocates resources based on financial data, consistent with the
presentation in the accompanying financial statements. CODM reviews revenue, gross profit, operating income and the following assets: Cash, accounts receivable and inventory.
F - 45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
NOTE 16 -
SEGMENT INFORMATION (CONT)
b.
Segments statement operations disclosure:
TAT TECHNOLOGIES LTD. AND ITS SUBSIDIARIES
The following financial information is the information that management uses for analyzing the segment results. The figures are presented in consolidated method as presented to management.
The following financial information is a summary of the operating income of each operational segment:
Year ended December 31, 2019
OEM of Heat
Transfer
Solutions and
Aviation
Accessories
MRO Services for
heat transfer
components and
OEM of heat
transfer solutions
MRO services for
Aviation
Components
Overhaul and
coating of jet
engine
components
Elimination of
inter-company
sales
Consolidated
Revenues
Sale of products and services
Intersegment revenues
Total revenues
Cost of revenues
Gross profit
Research and development
Selling and marketing
General and administrative
Operating income (loss)
Financial expenses, net
Income before taxes on income
$
$
20,552
6,037
26,589
23,998
2,591
58
1,530
1,978
$
34,183
250
34,433
27,852
6,581
83
1,638
2,734
$
38,687
-
38,687
33,337
5,350
7
1,334
2,408
8,610
-
8,610
7,751
859
(74)
757
1,131
(6,287)
(6,287)
(6,468)
181
-
-
-
$
-
$
$
(975) $
2,126
$
1,601
$
(955) $
181
$
F - 46
102,032
-
102,032
86,470
15,562
74
5,259
8,251
1,978
451
1,527
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
NOTE 16 - SEGMENT INFORMATION (CONT)
b.
Segments statement operations disclosure (cont.)
TAT TECHNOLOGIES LTD. AND ITS SUBSIDIARIES
Revenues
Sale of products and services
Intersegment revenues
Total revenues
Cost of revenues
Gross profit (loss)
Research and development
Selling and marketing
General and administrative
Other income
Operating income (loss)
Financial expenses, net
Loss before taxes on income
Year ended December 31, 2018
OEM of Heat
Transfer
Solutions and
Aviation
Accessories
MRO Services for
heat transfer
components and
OEM of heat
transfer solutions
MRO services for
Aviation
Components
Overhaul and
coating of jet
engine
components
Elimination of
inter-company
sales
Consolidated
$
$
20,065
4,642
24,707
25,612
(905)
287
1,512
2,384
(2)
$
30,929
415
31,344
27,659
3,685
98
1,660
2,375
-
$
32,487
-
32,487
28,561
3,926
-
1,324
2,631
(2)
9,697
-
9,697
8,298
1,399
168
417
1,169
-
$
-
$
(5,057)
(5,057)
(5,343)
286
-
-
-
-
$
(5,086) $
(448) $
(27) $
(355) $
286
$
93,178
-
93,178
84,787
8,391
553
4,913
8,559
(4)
(5,630)
102
(5,732)
F - 47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
NOTE 16 -
SEGMENT INFORMATION (CONT)
b.
Segments statement operations disclosure (cont.)
TAT TECHNOLOGIES LTD. AND ITS SUBSIDIARIES
Revenues
Sale of products and services
Intersegment revenues
Total revenues
Cost of revenues
Gross profit
Research and development
Selling and marketing
General and administrative
Other expenses
Operating income (loss)
Financial expenses, net
Income before taxes on income
Year ended December 31, 2017
OEM of Heat
Transfer
Solutions and
Aviation
Accessories
MRO Services for
heat transfer
components and
OEM of heat
transfer solutions
MRO services for
Aviation
Components
Overhaul and
coating of jet
engine
components
Elimination of
inter-company
sales
Consolidated
$
$
27,898
3,339
31,237
25,535
5,702
398
1,968
2,072
-
$
34,615
197
34,812
26,085
8,727
169
1,358
3,182
-
33,009
-
33,009
29,026
3,983
-
1,213
3,049
53
$
$
11,005
-
11,005
9,057
1,948
164
435
1,106
-
-
$
(3,536)
(3,536)
(3,620)
84
-
-
-
-
$
1,264
$
4,018
$
(332) $
243
$
84
$
106,527
-
106,527
86,083
20,444
731
4,974
9,409
53
5,277
338
4,939
F - 48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
NOTE 16 -
SEGMENT INFORMATION (CONT)
TAT TECHNOLOGIES LTD. AND ITS SUBSIDIARIES
c.
The following financial information identifies the assets, depreciation and amortization, and capital expenditures to segments:
Year ended December 31, 2019
OEM of Heat
Transfer
Solutions and
Aviation
Accessories
MRO Services for
heat transfer
components and
OEM of heat
transfer solutions
MRO services for
Aviation
Components
Overhaul and
coating of jet
engine
components
Amounts not
allocated to
segments
Consolidated
Total assets
Depreciation and amortization
Expenditure for segment assets
29,149
1,601
1,600
31,031
1,031
1,180
34,264
786
803
10,194
954
239
10,037
-
-
114,675
4,372
3,822
Year ended December 31, 2018
OEM of Heat
Transfer
Solutions and
Aviation
Accessories
MRO Services for
heat transfer
components and
OEM of heat
transfer solutions
MRO services for
Aviation
Components
Overhaul and
coating of jet
engine
components
Amounts not
allocated to
segments
Consolidated
Total assets
Depreciation and amortization
Expenditure for segment assets
26,171
1,476
2,665
33,794
1,044
588
27,687
705
764
11,100
960
144
4,535
-
-
103,287
4,185
4,161
Year ended December 31, 2017
OEM of Heat
Transfer
Solutions and
Aviation
Accessories
MRO Services for
heat transfer
components and
OEM of heat
transfer solutions
MRO services for
Aviation
Components
Overhaul and
coating of jet
engine
components
Amounts not
allocated to
segments
Consolidated
Total assets
Depreciation and amortization
Expenditure for segment assets
29,411
1,299
1,769
35,067
1,029
866
27,276
653
847
11,915
960
402
8,326
-
-
111,995
3,941
3,884
F - 49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
NOTE 17 - ENTITY-WIDE DISCLOSURE
a.
Total revenues - by geographical location were attributed according to customer residential country as follows:
Sale of products
Israel
United States
Other
Sale of Services
Israel
United States
Other
b.
Total long-lived assets - by geographical location were as follows:
Israel
United States
Total
c.
Major Customers
No single customer accounted for 10% or more of Group's total net revenue in any year presented.
F - 50
TAT TECHNOLOGIES LTD. AND ITS SUBSIDIARIES
2019
Total revenues
Year ended December 31,
2018
Total revenues
2017
Total revenues
3,464
14,181
7,374
25,019
$
$
2,893
13,013
7,245
23,151
$
$
6,289
19,004
10,760
36,053
2019
Total revenues
Year ended December 31,
2018
Total revenues
2017
Total revenues
3,624
47,749
25,640
77,013
$
$
4,031
41,019
24,977
70,027
$
$
3,704
40,047
26,723
70,474
$
$
$
$
December 31,
2019
2018
$
$
16,318
11,354
27,672
$
$
12,894
8,530
21,424
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
NOTE 18 - SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS INFORMATION
Balance, as of December 31, 2016
Additions
Deductions
Balance, as of December 31, 2017
Additions
Deductions
Balance, as of December 31, 2018
Additions
Deductions
Balance, as of December 31, 2019
F - 51
TAT TECHNOLOGIES LTD. AND ITS SUBSIDIARIES
Warranty
provision
Provision for
doubtful Accounts
338
154
(186)
306
214
(235)
$
285
115
(165)
235
$
302
361
(40)
623
135
(482)
276
84
(46)
314
$
$
Exhibit 2.1
Description of the rights of each class of securities registered under Section 12 of the Securities Exchange Act
of 1934
Rights Attached to Ordinary Shares
Dividend rights. Holders of our ordinary shares are entitled to the full amount of any cash or share dividend subsequently declared. The board of directors may declare dividends in accordance with the
provisions of the Israeli Companies Law as mentioned above. See Item 8.A. “Financial Information – Consolidated and Other Financial Information – Dividend Distribution Policy”. If after one year a dividend has
been declared and it is still unclaimed, the board of directors is entitled to invest or utilize the unclaimed amount of dividend in any manner to our benefit until it is claimed. We are not obligated to pay interest or
linkage differentials on an unclaimed dividend.
Voting rights. Holders of ordinary shares have one vote for each ordinary share held on all matters submitted to a vote of shareholders. Such voting rights may be affected by the grant of any special
voting rights to the holders of a class of shares with preferential rights that may be authorized in the future.
The quorum required for any meeting of shareholders consists of at least two shareholders present in person or represented by proxy who hold or represent, in the aggregate, at least one-third of the
voting rights of the issued share capital. A meeting adjourned for lack of a quorum generally is adjourned to the same day in the following week at the same time and place or any time and place as the directors
designate in a notice to the shareholders. At the reconvened meeting, the required quorum consists of any two members present in person or by proxy.
Under our articles of association, any resolution, including resolutions amending our memorandum of association or articles of association, winding-up, authorization of a class of shares with special
rights, or other changes as specified in our articles of association, requires approval of the holders of a majority of the voting rights represented at the meeting, in person, by proxy or by written ballot, and voting
thereon.
Pursuant to the Israeli Companies Law and our articles of association, our directors (other than external directors) are elected at our annual general meeting of shareholders by a vote of the holders of a
majority of the voting power represented and voting at such meeting and hold office until the next annual general meeting of shareholders and until their successors have been elected. All the members of our
board of directors (except the external directors) may be re-elected upon completion of their term of office. For information regarding the election of external directors, see Item 6. “Directors, Senior Management and
Employees – Board Practices — Election of Directors.”
Rights to share in our company’s profits. Our shareholders have the right to share in our profits distributed as a dividend and any other permitted distribution.
Rights to share in surplus in the event of liquidation. In the event of our liquidation, after satisfaction of liabilities to creditors, our assets will be distributed to the holders of ordinary shares in proportion
to the nominal value of their holdings. This right may be affected by the grant of preferential dividend or distribution rights to the holders of a class of shares with preferential rights that may be authorized in the
future.
Liability to capital calls by our company. Under our memorandum of association and the Israeli Companies Law, the liability of our shareholders is limited to the par value of the shares held by them.
Limitations on any existing or prospective major shareholder. See Item 6. “Directors and Senior Management –Board Practices - Approval of Related Party Transactions Under Israeli Law.”
Changing Rights Attached to Shares
According to our articles of association, in order to change the rights attached to any class of shares, unless otherwise provided by the terms of the class, such change must be adopted by a general
meeting of the shareholders and by a separate general meeting of the holders of the affected class with a majority of the voting rights represented at the meeting, in person, by proxy or by written ballot, and voting
thereon.
Annual and Extraordinary Meetings
Under the Israeli Companies Law a company must convene an annual meeting of shareholders at least once every calendar year and within fifteen months of the last annual meeting. The agenda of the
annual meeting includes discussing the financial statements and the report of the board of directors and may also include the appointment of directors and independent auditors as well as other issues. Depending
on the matter to be voted upon, notice of at least 21 days or 35 days prior to the date of the meeting is required. Our board of directors may, at its discretion, convene additional meetings as “special general
meetings”. With respect to “special general meetings" notice of at least 35 days prior to the date of the meeting is required. In addition, the board of directors must convene a special general meeting upon (1) the
demand of two of the directors or 25% of the nominated directors; and (2) one or more shareholders having at least 5% of the outstanding share capital and at least 1% of the voting power in the company, or one
or more shareholders having at least 5% of the voting power in the company.
Limitations on the Rights to Own Securities in Our Company
Neither our memorandum of association or our articles of association nor the laws of the State of Israel restrict in any way the ownership or voting of shares by non-residents, except with respect to
subjects of countries which are in a state of war with Israel.
Provisions Restricting Change in Control of Our Company
The Israeli Companies Law requires that mergers between Israeli companies be approved by the board of directors and general meeting of shareholders of both parties to the merger transaction. The
approval of the board of directors of both companies is subject to such boards’ confirmations that there is no reasonable doubt that after the merger the surviving company will be able to fulfill its obligations
towards its creditors. Each company must notify its creditors about the contemplated merger. Under the Israeli Companies Law, our articles of association are deemed to include a requirement that such merger be
approved by an extraordinary resolution of the shareholders, as explained above. The approval of the merger by the general meetings of shareholders of the companies is also subject to additional approval
requirements as specified in the Israeli Companies Law and regulations promulgated thereunder. See also Item 6. “Directors, Senior Management and Employees – Board Practices – Approval of Related Party
Transactions Under Israeli Law.”
Disclosure of Shareholders Ownership
The Israeli Securities Law, 5728-1968 and regulations promulgated thereunder contain various provisions regarding the ownership threshold above which shareholders must disclose their share
ownership. However, these provisions do not apply to companies, such as ours, whose shares are publicly traded in Israel as well on NASDAQ. We are required pursuant to the Israel Securities Law (“ISA”) and
the regulations promulgated thereunder to submit to the Israeli Securities Authority and the TASE, through a public immediate report, among other things, all information that we receive from our shareholders
regarding their shareholdings in our company, provided that such information was published or is required to be published under applicable foreign law.
Changes in Our Capital
The board of directors has the right to issue shares. Changes in our capital are subject to the approval of the shareholders at a general meeting by a majority of the voting rights represented at the meeting,
in person, by proxy or by written ballot, and voting thereon.
There are no restrictions on the rights of non-resident or foreign shareholders to hold or vote our ordinary shares.
We own the following significant subsidiaries:
1. Limco-Piedmont Inc., a 100%-owned Delaware subsidiary.
2. Limco Airepair Inc., a wholly-owned Delaware subsidiary of Limco-Piedmont Inc.
3. Piedmont Aviation Component Services LLC, a North Carolina limited liability company, wholly-owned subsidiary of Limco-Piedmont Inc.
4. Turbochrome Ltd., a wholly-owned Israel subsidiary.
List of Subsidiaries of the Registrant
Exhibit 8
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
Pursuant to Rule 13a-14(a) and 15d-14(a)
Under the Securities Exchange Act of 1934, as Amended
Exhibit 12.1
I, Igal Zamir, certify that:
1. I have reviewed this annual report on Form 20-F of TAT Technologies Ltd.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13(a)-15(e) and 15d-15(e)) and internal control
over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant,
including its consolidated Subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to
materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the
registrant’s board of directors (or persons performing the equivalent function):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process,
summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: March 19, 2020
/s/ Igal Zamir
Igal Zamir
Chief Executive Officer
* The originally executed copy of this Certification will be maintained at the Company’s offices and will be made available for inspection upon request.
CERTIFICATION OF CHIEF FINANCIAL OFFICER
Pursuant to Rule 13a-14(a) and 15d-14(a)
Under the Securities Exchange Act of 1934, as Amended
Exhibit 12.2
I, Ehud Ben-Yair, certify that:
1. I have reviewed this annual report on Form 20-F of TAT Technologies Ltd.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13(a)-15(e) and 15d-15(e)) and internal control
over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant,
including its consolidated Subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to
materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the
registrant’s board of directors (or persons performing the equivalent function):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process,
summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: March 19, 2020
/s/ Ehud Ben-Yair
Ehud Ben-Yair
Chief Financial Officer (Principal Accounting Officer)
* The originally executed copy of this Certification will be maintained at the Company’s offices and will be made available for inspection upon request.
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 13.1
In connection with the Annual Report of TAT Technologies Ltd. (the “Company”) on Form 20-F for the period ending December 31, 2019 as filed with the Securities and Exchange Commission on the date hereof
(the “Report”), I, Igal Zamir, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.
/s/ Igal Zamir
Igal Zamir
Chief Executive Officer
Date: March 19, 2020
* The originally executed copy of this Certification will be maintained at the Company’s offices and will be made available for inspection upon request.
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 13.2
In connection with the Annual Report of TAT Technologies Ltd. (the “Company”) on Form 20-F for the period ending December 31, 2019, as filed with the Securities and Exchange Commission on the date hereof
(the “Report”), I, Ehud Ben- Yair, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.
/s/ Ehud Ben-Yair
Ehud Ben-Yair
Chief Financial Officer (Principal Accounting Officer)
Date: March 19, 2020
*
The originally executed copy of this Certification will be maintained at the Company’s offices and will be made available for inspection upon request.
Exhibit 14.1
We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 333-219031 and 333-228345) of TAT Technologies Ltd. of our report dated March 19, 2020
relating to the financial statements, which appears in this Form 20-F.
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Tel-Aviv, Israel
March 19, 2020
/s/ Kesselman & Kesselman
Certified Public Accountants (Isr.)
A member firm of PricewaterhouseCoopers International Limited
Kesselman & Kesselman, Trade Tower, 25 Hamered Street, Tel-Aviv 6812508, Israel,
P.O Box 50oo5 Tel-Aviv 6150001 Telephone: +972 -3- 7954555, Fax:+972 -3- 7954556, www.pwc.com/il