TAT’s revenues from its four operational segments for the three years ended December 31, 20172019 were as follows:
The following table reflects the geographic breakdown of TAT’s revenues for each of the three years ended December 31, 2017:2019:
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.
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.
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:
Revenue Recognition
TAT 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.
Revenues from the sale of products are recognized when persuasive evidence of an arrangement exists, all risks and benefits are passed, provided the collection of the resulting receivable is reasonably assured, the price is fixed or determinable and no significant obligation exists. The Group does not grant a right of return.
Revenues from multi-year, fixed price contractsAllowance for OEM customers are recognized when a product is shipped (and title passed) to the customer.doubtful accounts
Revenues from MRO services are generally recognized when services are completed. In cases in which contracts require exchanging a defective landing gear for a restored gear, the non-refundable minimum amounts from these contracts are recognized on the exchange date (delivery of the product has occurred), and any additional amounts billed to the customer for excess hours of repair, are recognized when the customer approve the price for these additional services.
Revenues from maintenance contracts are recognized over the contract period in proportion to the costs expected to be incurred in performing services under the contract. The Group estimates the costs that are expected to be incurred based on its historical experience. The costs incurred related to the maintenance contracts are not incurred on a straight-line basis, as the timing to provide the maintenance services is dependent on when parts under these contracts require maintenance. Therefore, the Group accrues revenue as costs are incurred. These contracts are reviewed on a timely basis and adjusted (if required) based on total expected cost.
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.
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.
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 2016 and 2015 was 38%.
On December 22, 2017, Following the enactment of the Tax Cuts and Jobs Act (the“Act”Act”) was enacted into law. The new legislation represents fundamental and dramatic modifications toon December 22, 2017, the U.S. tax system. The Act contains several key tax provisions that will impact the Company's U.S. subsidiaries, including the reduction of the maximum U.S. federal corporate income tax rate from 35%was reduced to a flat rate of 21%, effective January 1, 2018.. 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 and the alternative minimum tax.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.
U.S. GAAP requires that the impact of tax legislation be recognized in the period in which the law was enacted. The Company revalued its valuation allowance and deferred tax assets at the statutory 21% rate that will be in effect in 2018 and forward. The Company has made reasonable estimates of the effects on its deferred tax balances and reduced the deferred tax assets by $414 for the year ended December 31, 2017 due to the change in the statutory tax rate. The provisional impact of this rate change was recorded in the fourth quarter of 2017. The Act had no impact on the valuation allowance assessment of the U.S. subsidiaries.
Because of the complexity of the new intangible income rules, Global Intangible Low-Taxed Income (GILTI) and Foreign Derived Intangible Income (FDII) tax rules, the Company continues to evaluate these provisions of the Act and the application of ASC 740, Income Taxes. Under U.S. GAAP, the Company is allowed to make an accounting policy choice of either (1) treating taxes due or receivable on future U.S. inclusions/deductions in taxable income related to GILTI and FDII as a current-period expense/benefit when incurred (the “period cost method”) or (2) factoring such amounts into the Company's measurement of its deferred taxes (the “deferred method”). The Company's selection of an accounting policy with respect to the new GILTI/FDII tax rules will depend, in part, on analyzing its global income to determine whether it expects to have future U.S. inclusions or deductions in taxable income related to GILTI/FDII and, if so, what the impact is expected to be. Whether the Company expects to have future U.S. inclusions or deductions in taxable income related to GILTI/FDII depends not only on the Company's current structure and estimated future results of global operations, but also its intent and ability to modify its structure. The Company is currently in the process of analyzing its structure and, as a result, is not yet able to reasonably estimate the effect of these provisions of the Act. Therefore, the Company has not made any adjustments related to potential GILTI or FDII tax impact in its financial statements and has not made a policy decision regarding whether to record deferred tax on GILTI/FDII.
The tax impacts discussed above represent provisional amounts and the Company's current best estimates. The SEC issued SAB 118 which provides guidance on the accounting for the tax effects of the Act. In accordance with this guidance, any material adjustments recorded to the provisional amounts will be disclosed in a 2018 reporting period by the fourth quarter of 2018. The provisional amounts incorporate assumptions made based upon the Company's current interpretation of the Act and may change as the Company reviews the interpretations and assumptions, receives implementation guidance from the Internal Revenue Service, and assesses any actions it may take based on the Act.
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.
Acquisitions and Other Intangible Assets
We accounted for the Turbochrome acquisition using the acquisition method of accounting in accordance with U.S. GAAP accounting rules for business combinations, which requires that the assets acquired and liabilities assumed be recorded at the date of acquisition at their respective fair values. Any excess of the purchase price over the estimated fair values of net assets acquired, including identified intangible assets, is recorded as goodwill. If the estimated fair value of the net assets acquired exceeds the purchase price, the resulting bargain purchase is recognized as a gain in the consolidated statement of operations.
The valuations and useful life assumptions are based on information available on or about the acquisition date and are based on expectations and assumptions that are considered reasonable by management.
Management determined the estimated fair values of the intangible assets with the assistance of third-party experts. The judgments made in determining estimated fair values assigned to assets acquired and liabilities assumed, as well as asset lives, can materially impact our results of operations.
The bargain purchase gain from the acquisition of Turbochrome was primarily based on the fair market value of certain property, plant and equipment, certain replacement costs, and management’s expectation regarding its ability to increase the services that can be provided to Turbochrome's existing customers and to its own customers.
The acquisition of Turbochrome was funded through cash on hand and an earn-out payment (up to $2 million). The earn-out payment was based on the actual revenues of Turbochrome during the calendar years 2015 and 2016. TAT has paid $0.5 million for the earn-out payment.
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:
| | Year Ended December 31 | | | Year Ended December 31 | |
| | 2017 | | | 2016 | | | 2015 | | | 2019 | | | 2018 | | | 2017 | |
| | (in thousands) | | | (in thousands) | |
Revenues | | | | | | | | | | | | | | | | | | |
OEM of heat transfer solutions and aviation components | | $ | 31,237 | | | $ | 28,255 | | | $ | 27,351 | | | $ | 26,589 | | | $ | 24,707 | | | $ | 31,237 | |
MRO services for heat transfer components and OEM of heat transfer solutions | | | 34,812 | | | | 32,429 | | | | 31,001 | | | 34,433 | | | 31,344 | | | 34,812 | |
MRO services for aviation components | | | 33,009 | | | | 31,630 | | | | 29,665 | | | 38,687 | | | 32,487 | | | 33,009 | |
Overhaul and coating of jet engine components | | | 11,005 | | | | 9,209 | | | | 1,905 | | | 8,610 | | | 9,697 | | | 11,005 | |
Eliminations | | | (3,536 | ) | | | (5,729 | ) | | | (4,315 | ) | | | (6,287 | ) | | | (5,057 | ) | | | (3,536 | ) |
Total revenues | | | 106,527 | | | | 95,794 | | | | 85,607 | | | | 102,032 | | | | 93,178 | | | | 106,527 | |
Cost of revenues | | | | | | | | | | | | | | | | | | | | | |
OEM of heat transfer solutions and aviation components | | | 25,535 | | | | 24,028 | | | | 23,887 | | | 23,998 | | | 25,612 | | | 25,535 | |
MRO services for heat transfer components and OEM of heat transfer solutions | | | 26,085 | | | | 23,440 | | | | 22,541 | | | 27,852 | | | 27,659 | | | 26,085 | |
MRO services for aviation components | | | 29,026 | | | | 27,423 | | | | 28,474 | | | 33,337 | | | 28,561 | | | 29,026 | |
Overhaul and coating of jet engine components | | | 9,057 | | | | 7,610 | | | | 1,485 | | | 7,751 | | | 8,298 | | | 9,057 | |
Eliminations | | | (3,620 | ) | | | (5,744 | ) | | | (4,445 | ) | | | (6,468 | ) | | | (5,343 | ) | | | (3,620 | ) |
Total cost of revenues | | | 86,083 | | | | 76,757 | | | | 71,942 | | | 86,470 | | | 84,787 | | | 86,083 | |
Gross profit | | | 20,444 | | | | 19,037 | | | | 13,665 | | | | 15,562 | | | | 8,391 | | | | 20,444 | |
Research and development costs, net | | | 731 | | | | 1,140 | | | | 890 | | | 74 | | | 553 | | | 731 | |
Selling and marketing | | | 4,974 | | | | 3,876 | | | | 2,903 | | | 5,259 | | | 4,913 | | | 4,974 | |
General and administrative | | | 9,409 | | | | 10,023 | | | | 8,469 | | | 8,251 | | | 8,559 | | | 9,409 | |
Other expenses (income) | | | 53 | | | | (138 | ) | | | 631 | | | | - | | | | (4 | ) | | | 53 | |
Gain on bargain purchase | | | - | | | | - | | | | (4,833 | ) | |
| | | 15,167 | | | | 14,901 | | | | 8,060 | | | | 13,584 | | | | 14,021 | | | | 15,167 | |
Operating income | | | 5,277 | | | | 4,136 | | | | 5,605 | | |
Operating income (loss) | | | 1,978 | | | (5,630 | ) | | 5,277 | |
Financial expense, net | | | (338 | ) | | | (154 | ) | | | (349 | ) | | | (451 | ) | | | (102 | ) | | | (338 | ) |
Income before taxes on income | | | 4,939 | | | | 3,982 | | | | 5,256 | | |
Taxes on income | | | 2,333 | | | | 3,865 | | | | 644 | | |
Net income after taxes on income | | | 2,606 | | | | 117 | | | | 4,612 | | |
Income (loss) before taxes on income (tax benefit) | | | 1,527 | | | (5,732 | ) | | 4,939 | |
Taxes on income (tax benefit) | | | | 589 | | | | (1,464 | ) | | | 2,333 | |
income (loss) before equity investment | | | 938 | | | (4,268 | ) | | 2,606 | |
Share in results of affiliated company and impairment of share in affiliated companies | | | (210 | ) | | | (55 | ) | | | 1,237 | | | | (132 | ) | | | (140 | ) | | | (210 | ) |
Net income | | $ | 2,396 | | | $ | 62 | | | $ | 5,849 | | |
Net income (loss) | | | $ | 806 | | | $ | (4,408 | ) | | $ | 2,396 | |
The following table presents, for the periods indicated, information concerning TAT’s results of operations as a percentage of revenues:
| | Year Ended December 31, | |
| | 2017 | | | 2016 | | | 2015 | |
Revenues | | | | | | | | | |
OEM of heat transfer solutions and aviation components | | | 29.3 | % | | | 29.5 | % | | | 31.9 | % |
MRO services for heat transfer components and OEM of heat transfer solutions | | | 32.7 | | | | 33.9 | | | | 36.2 | |
MRO services for aviation components | | | 31.0 | | | | 33.0 | | | | 34.7 | |
Overhaul and coating of jet engine components | | | 10.3 | | | | 9.6 | | | | 2.2 | |
Eliminations | | | (3.3 | ) | | | (6 | ) | | | (5 | ) |
Total revenues | | | 100 | | | | 100 | | | | 100 | |
Cost of revenues | | | | | | | | | | | | |
OEM of heat transfer solutions and aviation components | | | 24.0 | | | | 25.1 | | | | 27.9 | |
MRO services for heat transfer components and OEM of heat transfer solutions | | | 24.5 | | | | 24.5 | | | | 26.3 | |
MRO services for aviation components | | | 27.2 | | | | 28.6 | | | | 33.3 | |
Overhaul and coating of jet engine components | | | 8.5 | | | | 7.9 | | | | 1.7 | |
Eliminations | | | (3.4 | ) | | | (6 | ) | | | (5.1 | ) |
Cost of revenues | | | 80.8 | | | | 80.1 | | | | 84 | |
Gross profit | | | 19.2 | | | | 19.9 | | | | 15.9 | |
Research and development costs, net | | | 0.7 | | | | 1.2 | | | | 1 | |
Selling and marketing | | | 4.7 | | | | 4 | | | | 3.4 | |
General and administrative | | | 8.8 | | | | 10.5 | | | | 9.9 | |
Other income | | | * | | | | (0.1 | ) | | | 0.7 | |
Gain on bargain purchase | | | - | | | | - | | | | (5.6 | ) |
| | | 14.2 | | | | 15.6 | | | | 9.4 | |
Operating income | | | 5.0 | | | | 4.3 | | | | 6.5 | |
Financial expense, net | | | (0.3 | ) | | | (0.2 | ) | | | (0.4 | ) |
Income before taxes on income | | | 4.7 | | | | 4.1 | | | | 6.1 | |
Taxes on income | | | 2.2 | | | | 4.0 | | | | 0.8 | |
Net income after taxes on income | | | 2.5 | | | | 0.1 | | | | 5.3 | |
Share in results of affiliated company and impairment of share in affiliated companies | | | (0.2 | ) | | | * | | | | 1.4 | |
Net income | | | 2.3 | % | | | 0.1 | % | | | 6.7 | % |
| | Year Ended December 31, | |
| | 2019 | | | 2018 | | | 2017 | |
Revenues | | | | | | | | | |
OEM of heat transfer solutions and aviation components | | | 26.1 | % | | | 26.5 | % | | | 29.3 | % |
MRO services for heat transfer components and OEM of heat transfer solutions | | | 33.7 | | | | 33.6 | | | | 32.7 | |
MRO services for aviation components | | | 37.9 | | | | 34.9 | | | | 31.0 | |
Overhaul and coating of jet engine components | | | 8.4 | | | | 10.4 | | | | 10.3 | |
Eliminations | | | (6.2 | ) | | | (5.4 | ) | | | (3.3 | ) |
Total revenues | | | 100 | | | | 100 | | | | 100 | |
Cost of revenues | | | | | | | | | | | | |
OEM of heat transfer solutions and aviation components | | | 23.5 | | | | 27.5 | | | | 24.0 | |
MRO services for heat transfer components and OEM of heat transfer solutions | | | 27.3 | | | | 29.7 | | | | 24.5 | |
MRO services for aviation components | | | 32.7 | | | | 30.6 | | | | 27.2 | |
Overhaul and coating of jet engine components | | | 7.6 | | | | 8.9 | | | | 8.5 | |
Eliminations | | | (6.3 | ) | | | (5.7 | ) | | | (3.4 | ) |
Cost of revenues | | | 84.7 | | | | 91 | | | | 80.8 | |
Gross profit | | | 15.3 | | | | 9 | | | | 19.2 | |
Research and development costs, net | | | * | | | | 0.6 | | | | 0.7 | |
Selling and marketing | | | 5.2 | | | | 5.3 | | | | 4.7 | |
General and administrative | | | 8.1 | | | | 9.2 | | | | 8.8 | |
Other income | | | - | | | | * | | | | * | |
| | | 13.3 | | | | 15.1 | | | | 14.2 | |
Operating income (loss) | | | 1.9 | | | | (6.1 | ) | | | 5.0 | |
Financial expense, net | | | (0.4 | ) | | | (0.1 | ) | | | (0.3 | ) |
Income (loss) before taxes on income (tax benefit) | | | 1.5 | | | | (6.2 | ) | | | 4.7 | |
Taxes on income (tax benefit) | | | 0.6 | | | | (1.6 | ) | | | 2.2 | |
income (loss) before equity investment | | | 0.9 | | | | (4.6 | ) | | | 2.5 | |
Share in results of affiliated company and impairment of share in affiliated companies | | | (0.1 | ) | | | (0.1 | ) | | | (0.2 | ) |
Net income (loss) | | | 0.8 | % | | | (4.7 | )% | | | 2.3 | % |
________________________
* Less than 0.1 percent
Year ended December 31, 20172019 compared with Year ended December 31, 20162018
Revenues. Total revenues were $106.5$102 million for the twelve months ended December 31, 2017,2019, compared to $95.8$93.2 million for the twelve months ended December 31, 2016,2018, an increase of 11.2% all of which was organic growth9.5%. 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 increasedecrease in 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 $31.2$26.6 million for the year ended December 31, 20172019 from $28.3$24.7 million for the year ended December 31, 2016,2018, an increase of 10.6% mainly due to increase in sales of heat transfer solutions.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 $34.8$34.4 million for the year ended December 31, 2017,2019, from $32.4$31.4 million for the year ended December 31, 2016,2018, an increase of 7.3%, mainly due to higher demand for MRO services for heat transfer components and OEM of heat transfer solutions.9.6%.
Revenues from MRO services for aviation components. Revenues from MRO services for aviation components operating segment increased to $33.0$38.7 million for the year ended December 31, 2017,2019, from $31.6$32.5 million for the year ended December 31, 2016,2018, an increase of 4.4%, mainly due to higher demand for MRO services for aviation components.19.1%.
Revenues from overhaul and coating of jet engine components. Revenues from overhaul and coating of jet engine components segment increaseddecreased to $11.0$8.7 million for the year ended December 31, 2017,2019, from $9.2$9.7 million for the year ended December 31, 2016 an increase2018 a decrease of 19.5%10.3%, mainly due to higherlower demand for overhaul and coating of jet engine components.
Cost of revenues. Cost of revenues was $86.0$86.5 million for the twelve months ended December 31, 2017,2019, compared to the $76.8$84.8 million for the twelve months ended December 31, 2016,2018, an increase of 12.2%. This is primarily attributable to the increase in revenue2%.
Cost of revenues as a percentage of revenues was 80.8%decreased to 84.7% for the twelve months ended December 31, 2017, compared to 80.1%2019, from 91% for the twelve months ended December 31, 2016.2018. 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 increased to $25.5was $24 million for the year ended December 31, 2017, from $24.02019, compared to $25.6 million for the year ended December 31, 2016, an2018. This was achieved due to the cost decrease and efficiency increase program started at the end of 6.3%. The increase is primarily attributable to higher sales compared to 2016.2018.
Cost of revenues as a percentage of revenues in this segment decreased to 81.7%90.3% in the year ended December 31, 2017,2019, from 85.0%103.7% for the year ended December 31, 2016.2018. The decrease is primarily the result of a change in product mix in which more products with higher margins being sold during 2017.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 $26.1$27.9 million for the year ended December 31, 20172019 from $23.4$27.7 million for the year ended December 31, 2016,2018, an increase of 11.3%1%. The increase is primarily attributable to higher sales compared to 2016.
Cost of revenues as a percentage of revenues in this segment increaseddecreased to 74.9%80.9% in the year ended December 31, 20172019 from 72.3%88.2% for the year ended December 31, 2016.2018. The increasedecrease is primarily the result of a changehigher sales compared to 2018 and the decrease in product mix in which more products with lower margins being sold during 2017.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 $29.0$33.3 million for the year ended December 31, 20172019 from $27.4$28.6 million for the year ended December 31, 2016,2018, an increase of 5.8%17%. The increase is primarily attributable to higher sales compared to 2016.
Cost of revenues as a percentage of revenues in this segment increaseddecreased to 87.9%86.2% in the year ended December 31, 20172019 from 86.7%87.9% for the year ended December 31, 2016.2018. The increasedecrease is primarily the result of higher sales compared to 2018 and a changedecrease in product mix in which more products with lower margins being sold during 2017.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 increaseddecreased to $9.1$7.8 million for the year ended December 31, 20172019 from $7.6$8.3 million for the year ended December 31, 2016.2018. The increasedecrease is primarily attributable to higherlower sales compared to 2016.2018.
Cost of revenues as a percentage of revenues in this segment decreasedincreased to 90% in the year ended December 31, 2019 from 82.3% in the year ended December 31, 2017 from 82.6% in the year ended December 31, 2016.2018. The decreaseincrease is primarily the result of lower sales compared to 2018 and a change in product mix in which more products with higherlower margins beingwere sold during 2017.2019.
Research and development, net. Research and development expenses were $0.7$0.1 million for the twelve months ended December 31, 2017,2019, compared to $1.1$0.6 million for the twelve months ended December 31, 2016, a decrease of 35.9%.2018.
Research and development expenses as a percentage of revenues were 0.7%less than 0.1% for the twelve months ended December 31, 20172019 compared to 1.2%0.6% for the twelve months ended December 31, 2016. TAT expects to invest in the future additional resources in research and development activities, and accordingly will continue to incur and record additional research and development expenses in the coming years.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, 2017, compared to $3.9 million for the twelve months ended December 31, 2016, an increase of 28.3% mainly due to an increase in labor and direct expenses.2018.
Selling and marketing expenses as a percentage of revenues were 4.7%5.2% for the twelve months ended December 31, 2017,2019, compared to 4.0%5.3% for the twelve months ended December 31, 2016. TAT expects2018, mainly due to invest additional resourcesthe increase in selling and marketing activities in the coming years.sales during 2019 compared to 2018.
General and administrative. General and administrative expenses were $9.4$8.3 million for the twelve months ended December 31, 2017,2019, compared to $10.0$8.6 million for the twelve months ended December 31, 2016,2018, a decrease of 6.1%3.6%. The decrease in general and administrative expenses was mainly attributable to decrease in laborlegal and directprofessional expenses.
General and administrative expenses as a percentage of revenues were 8.8%8.1% for the twelve months ended December 31, 2017,2019, compared to 10.6%9.2% for the twelve months ended December 31, 2016.
Other expenses (income). Other expenses was $0.1 million for2018, mainly due to the twelve months ended December 31, 2017,increase in sales during 2019 compared to an income of $0.1 million for the twelve months ended December 31, 2016. Other expenses in 2017 are mainly attributed to the sale of fixed assets and other income in 2016 is mainly attributable to acquisition expenses related to the Turbochrome acquisition.2018.
Financial expenses, net. Financial expenses, net for the twelve months ended December 31, 20172019 were $0.3$0.5 million, compared to $0.2$0.1 million for the twelve months ended December 31, 2016.2018. 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, 2017,2019, amounted to $2.3$0.6 million, compared to $3.9$1.5 million tax benefit for the twelve months ended December 31, 2016. The decrease is mainly attributed to the fact that 2016 includes a deferred tax liability of $2.7 million in 2016 resulting from actual distribution of earnings from TAT’s U.S.-based subsidiaries and the possibility of future distribution of earnings from such U.S. subsidiaries. 2017 is including an adjustment for deferred tax assets of $0.4 million (expenses) related to The U.S. Tax Cuts and Jobs Act (the Tax Act) that was enacted on December 22, 2017 and introduces significant changes to U.S. income tax law. Effective in 2018, the Tax Act reduces the U.S. statutory tax rate from 35% to 21%.
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, 2017,2019, amounted to a loss of $ 0.20.1 million during 2017 compared to $0.1 million for2019 with no significant change from the twelve months ended December 31, 2016.2018.
Year ended December 31, 20162018 compared with Year ended December 31, 20152017
Revenues. Total revenues were $95.8 millionPlease see Item 5 on Form 20-F for the twelve monthsYear ended December 31, 2016, compared to $85.6 million2018 filed on March 27, 2019 for the twelve months ended December 31, 2015, an increase of 12%, 8.5% of which was derived from the consolidation of Turbochrome and 3.5% was derived from organic growth. 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) full year consolidation for the first time in 2016 of the overhaul and coating of jet engine components segment.
Revenues from OEM of heat transfer solutions and aviation components. Revenues from the OEM of heat transfer solutions and aviation components operating segment increased to $28.3 million for the year ended December 31, 2016 from $27.4 million for the year ended December 31, 2015, an increase of 3% mainly due to increase in sales of aviation accessories.
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 $32.4 million for the year ended December 31, 2016, from $31 million for the year ended December 31, 2015, an increase of 5%, mainly due to higher demand for heat transfer solutions and services.
Revenues from MRO services for aviation components. Revenues from MRO services for aviation components operating segment increased to $31.6 million for the year ended December 31, 2016, from $29.7 million for the year ended December 31, 2015, an increase of 6%, mainly due to higher demand for MRO services for aviation components.
this comparison.
Revenues from overhaul and coating of jet engine components. Revenues from overhaul and coating of jet engine components segment increased to $9.2 million for the year ended December 31, 2016, from $1.9 million for the period as of October 19, 2015 until December 31, 2015. 2015 was the first time that this segment was consolidated following the acquisition of Turbochrome by TAT and 2016 was the first full-year consolidation of this segment.
Cost of revenues. Cost of revenues was $76.8 million for the twelve months ended December 31, 2016, compared to the $71.9 million for the twelve months ended December 31, 2015, an increase of 7%. This is primarily attributable to the first full-year consolidation in 2016 of the overhaul and coating of jet engine components segment.
Cost of revenues as a percentage of revenues was 80.1% for the twelve months ended December 31, 2016, compared to 84% for the twelve months ended December 31, 2015. This is primarily attributable to a decrease in the cost of revenue in the MRO services for aviation components segment (due to a periodic assessment of long-term projects during 2015).
Cost of revenues for OEM of heat transfer solutions and aviation accessories. Cost of revenues for the OEM of heat transfer solutions and aviation accessories operating segment increased to $24.0 million for the year ended December 31, 2016, from $23.9 million for the year ended December 31, 2015, an increase of 0.6%.
Cost of revenues as a percentage of revenues in this segment decreased to 85% in the year ended December 31, 2016, from 87.3% for the year ended December 31, 2015. The decrease is primarily as a result of product mix with high margin sold during the year 2016.
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 $23.4 million for the year ended December 31, 2016 from $22.5 million for the year ended December 31, 2015, an increase of 4%. The increase is primarily attributable to higher sales compared to 2015.
Cost of revenues as a percentage of revenues in this segment decreased to 72.3% in the year ended December 31, 2016 from 72.7% for the year ended December 31, 2015.
Cost of revenues for MRO services for aviation components. Cost of revenues for MRO services for aviation components operating segment decreased to $27.4 million for the year ended December 31, 2016 from $28.5 million for the year ended December 31, 2015, a decrease of 3.7%. This decrease is primarily attributed to the decrease in labor expenses and as a result of cost cutting measures implemented by the segment during 2016.
Cost of revenues as a percentage of revenues in this segment decreased to 86.7% in the year ended December 31, 2016 from 96% for the year ended December 31, 2015. The decrease is primarily attributable to: (i) a periodic assessment completed in 2015 of long-term projects after which we updated our estimates for expected profits to be earned from several long-term contracts. This assessment resulted in a decrease in revenues for the year ended December 31, 2015 in an amount of $2.1, while the accrued cost of revenue was not changed. (ii) The impact of cost cutting measures during 2016.
Cost of revenues for overhaul and coating of jet engine components. Cost of revenues for the overhaul and coating of jet engine components segment increased to $7.6 million for the year ended December 31, 2016 from $1.5 million for the period from October 19, 2015 until December 31, 2015.
Cost of revenues as a percentage of revenues in this segment increased to 83% in the year ended December 31, 2016 from 78% in the period from October 19, 2015 until December 31, 2015. 2015 was the first time this segment was consolidated following the acquisition of Turbochrome by the TAT and 2016 was first full-year consolidation of this segment.
Research and development, net. Research and development expenses were $1.1 million for the twelve months ended December 31, 2016, compared to $0.9 million for the twelve months ended December 31, 2015, an increase of 28.1%.
Research and development expenses as a percentage of revenues were 1.2% for the twelve months ended December 31, 2016 compared to 1.0% for the twelve months ended December 31, 2015. TAT expects to invest additional resources in research and development activities, and accordingly will continue to incur and record additional research and development expenses in the coming years.
Selling and marketing. Selling and marketing expenses were $3.9 million for the twelve months ended December 31, 2016, compared to $2.9 million for the twelve months ended December 31, 2015, an increase of 34.5% mainly due to the first full-year consolidation in 2016 of the overhaul and coating of jet engine components segment, as well as an increase in labor and direct expenses.
Selling and marketing expenses as a percentage of revenues were 4.0% for the twelve months ended December 31, 2016, compared to 3.4% for the twelve months ended December 31, 2015. TAT expects to invest additional resources in selling and marketing activities in the coming years.
General and administrative. General and administrative expenses were $10.0 million for the twelve months ended December 31, 2016, compared to $8.5 million for the twelve months ended December 31, 2015, an increase of 18.4%. The increase in general and administrative expenses was mainly attributable to the first full-year consolidation in 2016 of the overhaul and coating of jet engine components segment.
General and administrative expenses as a percentage of revenues were 10.5% for the twelve months ended December 31, 2016, compared to 9.9% for the twelve months ended December 31, 2015.
Other expenses (income). Other income was $ 0.1 million for the twelve months ended December 31, 2016, compared to an expense of $0.6 million for the twelve months ended December 31, 2015. Other expenses and income are mainly attributable to acquisition expenses related to the Turbochrome acquisition.
Gain on bargain purchase. For the twelve months ended December 31, 2015, TAT reported a gain on bargain purchase of $4.8 million. The gain on bargain purchase from the acquisition of Turbochrome is a result of the excess of the estimated fair value of certain assets and liabilities acquired over the purchase price of Turbochrome.
Financial expenses, net. Financial expenses, net for the twelve months ended December 31, 2016 were $0.2 million, compared to $0.3 million for the twelve months ended December 31, 2015. The decrease is primarily attributable to hedging transactions entered into by TAT in order to reduce its currency risk from expenses paid in NIS.
Taxes on income.Taxes on income for the twelve months ended December 31, 2016, amounted to $3.9 million (effective tax rate of 98%), compared to $0.6 million (effective tax rate of 11%) for the twelve months ended December 31, 2015. The increase is mainly attributed to the fact that the gain from the bargain purchase of $4.8 million which was recognized in 2015 is not taxable while 2016 includes a deferred tax liability of $2.7 million resulting from actual distribution of earnings from TAT’s U.S.-based subsidiaries and the possibility of future distribution of earnings from such U.S. subsidiaries.
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, 2016, amounted to loss of $ 0.1 million compared to a profit of $1.2 million for the twelve months ended December 31, 2015. In 2015, TAT recognized an income of $1.2 million mainly from the sale of 237,932 shares of Class B common stock of FAvS and its entire holdings (16,253) of FAvS' Series A preferred stock.
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.
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.
The following table presents information about the rate of inflation in Israel, the rate of devaluation (appreciation) of the NIS against the U.S. dollar, and the rate of inflation of Israel adjusted for the devaluation:
Year ended December 31, | | Israeli inflation rate % | | | NIS appreciation (devaluation) to the US dollar rate % | | | Israeli inflation adjusted for appreciation (devaluation) % | |
2004 | | | 1.2 | | | | 1.6 | | | | 2.8 | |
2005 | | | 2.4 | | | | (6.8 | ) | | | (4.4 | ) |
2006 | | | (0.1 | ) | | | 8.2 | | | | 8.1 | |
2007 | | | 3.4 | | | | 9.0 | | | | 12.4 | |
2008 | | | 3.8 | | | | 1.1 | | | | 4.9 | |
2009 | | | 3.9 | | | | 0.7 | | | | 4.6 | |
2010 | | | 2.7 | | | | 6.4 | | | | 9.1 | |
2011 | | | 2.2 | | | | (7.7 | ) | | | (5.5 | ) |
2012 | | | 1.4 | | | | 2.3 | | | | 3.7 | |
2013 | | | 2.0 | | | | 7.5 | | | | 9.5 | |
2014 | | | (0.2 | ) | | | 12 | | | | 11.8 | |
2015 | | | (0.1 | ) | | | 0.3 | | | | 0.2 | |
2016 | | | (0.2 | ) | | | (1.5 | ) | | | (1.7 | ) |
2017 | | | 0.6 | | | | (9.8 | ) | | | (9.2 | ) |
The devaluation of the NIS in relation to the U.S. dollar has the effect of reducing the U.S. dollar amount of any of its expenses or liabilities which are payable in NIS, unless these expenses or payables are linked to the U.S. dollar. Such a devaluation also has the effect of decreasing the U.S. dollar value of any asset which consists of NIS or receivables payable in NIS, unless the receivables are linked to the U.S. dollar. Conversely, any increase in the value of the NIS in relation to the U.S. dollar has the effect of increasing the U.S. dollar value of any unlinked NIS assets and the U.S. dollar amounts of any unlinked NIS liabilities and expenses. During 2014, the NIS appreciated against the U.S. dollar by 12%. During 2015, the exchange rates between the NIS and the U.S. dollar did not changed materially. During 2016, the NIS appreciated against the U.S dollar by 1.5%. This trend continued through the end of June 2017, during which the NIS appreciated against the U.S dollar by an additional 9%. From the end of June 2017 until August 2017, the NIS depreciated against the U.S dollar by 3%. From August 2017 until the end of 2017, the NIS appreciated against the U.S dollar by 3.5%. Through the end of February 2018, the exchange rates between the NIS and the U.S dollar did not change materially.
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.
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 25%24% for the year ended December 31, 20132017 and 26.5%23% for the yearsyear ended December 31, 20142018 and 2015. In 2016, the regular corporate tax rate was 25%. In 2017 and 2018 the regular corporate tax rate will be reduced to 24% and 23%, respectively.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 current 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. As with dividendsDividends distributed from taxable income derived from Approved or Beneficiary Enterprises during the applicable benefits period, dividends distributed 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.
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 Approved and Beneficiary EnterprisesPreferred 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 tax of TAT’s U.S. subsidiaries was 38% in each of the years ended December 31, 2017, 2016 and 2015.
The U.S. Tax Cuts and Jobs Act (the Tax Act) was enacted on December 22, 2017 and introduces significant changes to U.S. income tax law. Effective in 2018, the Tax Act reduces the U.S. statutoryflat tax rate from 35% tofor tax years 2018 and 2019 is 21%.,
Recently Issued Accounting Standards
Recently adopted accounting pronouncements:
| (1)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 November 2016,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 oneliminated the treatment of restricted cashrequirement to separately measure and report hedge ineffectiveness and generally requires the entire change in the statementsfair value of cash flows. Amounts generally describeda hedging instrument to be presented in the same income statement line as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The guidance will behedged item. As ASU 2017-12 was effective for fiscal years beginning after December 15, 2018, the fiscal year beginningCompany adopted the ASU on January 1, 2018, including interim periods within that year (early adoption is permitted). The Company does not anticipate a2019 with no material impact on itsthe Company’s consolidated financial statements. |
| (2) | In October 2016, the FASB issued guidance on income taxes on intra-entity transfers. The guidance eliminates the exception to the recognition requirements under the standard for intra-entity transfers of an asset other than inventory. As a result, an entity should recognize the income tax consequences when the transfer of assets other than inventory occurs. The guidance will be effective for the fiscal year beginning on January 1, 2018, including interim periods within that year (early adoption is permitted). The Company does not anticipate a material impact on its consolidated financial statements. |
Accounting pronouncements issued but not yet adopted:
| (3)1. | In August 2016, the FASB issued guidance on statements of cash flows. The guidance addresses eight specific issues: debt prepayment or debt extinguishment costs; settlement of certain debt instruments; contingent consideration payments made after a business combination; proceeds from the settlement of insurance claims; proceeds from the settlement of corporate-owned life insurance policies; distributions received from equity method investees; beneficial interest in securitization transactions; separately identifiable cash flows and application of predominance principle. The guidance will be effective for the fiscal year beginning on January 1, 2018, including interim periods within that year (early adoption is permitted). The Company does not anticipate a material impact on its consolidated financial statements. |
| (4) | 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 Company is currently evaluatingnew standard will not have a material effect on the potential effect of the guidance on its consolidatedCompany's financial statements.statements upon adoption. |
| (5)2. | In February 2016,December 2019, the FASB which sets outissued ASU 2019-12, “Simplifying the principlesAccounting 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 recognition, measurement, presentation and disclosure of leasesyear.
In addition, this Update also simplify the accounting for both parties to a contract (i.e. lessees and lessors). The new standard requires lessees to apply a dual approach, classifying leasesincome taxes in certain topics as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight line basis over the term of the lease, respectively. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less may be accounted for similar to existing guidance for operating leases today. ASC 842 supersedes the previous leases standard, ASC 840 Leases. The standard is effective on January 1, 2019, with early adoption permitted. The Company is in the process of evaluating the impact of this new guidance on its financial statements. |
| (6) | In May 2014, FASB issued Accounting Standards Update "Revenue from Contracts with Customers." ASU 2014-09 will supersede most current revenue recognition guidance, including industry-specific guidance. The underlying principle isfollows: 1. Requiring that an entity will recognize revenue upona 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 transfertax basis of goods or services to customers in an amount that the entity expects togoodwill should be entitled to in exchange for those goods or services. The guidance provides a five-step analysis of transactions to determine when and how revenue is recognized. Other major provisions include capitalization of certain contract costs, considerationconsidered part of the time valuebusiness 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 moneycurrent 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 transaction price, and allowing estimates of variable consideration to be recognized before contingencies are resolved in certain circumstances. |
The guidance also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity’s contracts with customers. The guidance is effective for the interim and annual periods beginning on or after December 15, 2017 (early adoption is permitted in annual periods beginning after December 15, 2016). The guidance permits the use of either a retrospective or cumulative effect transition method. The Company intends to apply 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 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.
The Company examined the expected effects of the application of the new standard and it does not anticipate a material impact on its consolidated financial statements
| (7) | In August 2017, the FASB issued Accounting Standard Update which targets improvements to accounting for hedging activities which amends and simplifies existing guidance in order to allow companies to more accurately present the economic effects of risk management activitiesannual effective tax rate computation in the financial statements. interim period that includes the enactment date.
The guidance isamendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, and interim periods within those fiscal years.2020. The Company is in the process ofcurrently evaluating the impacteffects of this new guidanceUpdate on its consolidated financial statementsstatements. |
Liquidity and Capital Resources
As of December 31, 2017,2019, TAT had cash and cash equivalents and short-term bank deposits of $18$16 million compared with cash and cash equivalents and short-term bank deposits of $22.4 million as ofno significant change from December 31, 2016.2018.
Capital expenditures for the years ended December 31, 2017, 20162019, 2018 and 20152017 were approximately $3.5$3.8 million, $5.7$4.3 million and $3.3$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.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:
| | Year Ended December 31, | |
| | (in thousands) | |
| | 2019 | | | 2018 | | | 2017 | |
Net cash provided by operating activities | | $ | 3,422 | | | $ | 2,080 | | | $ | 2,496 | |
Net cash used in investing activities | | | (3,413 | ) | | | (3,841 | ) | | | (3,559 | ) |
Net cash provided by (used in) financing activities | | | - | | | | 197 | | | | (2,856 | ) |
Net increase (decrease) in cash and cash equivalents | | | 9 | | | | (1,564 | ) | | | (3,919 | ) |
Cash and cash equivalents at beginning of the year | | | 15,950 | | | | 17,514 | | | | 21,433 | |
Cash and cash equivalents at end of the year | | $ | 15,959 | | | $ | 15,950 | | | $ | 17,514 | |
| | Year Ended December 31, | |
| | (in thousands) | |
| | 2017 | | | 2016 | | | 2015 | |
Net cash provided by operating activities | | $ | 2,496 | | | $ | 5,521 | | | $ | 733 | |
Net cash provided by (used in) investing activities | | | (3,559 | ) | | | 594 | | | | (4,470 | ) |
Net cash used in financing activities | | | (2,856 | ) | | | (3,370 | ) | | | (469 | ) |
Net increase (decrease) in cash and cash equivalents | | | (3,919 | ) | | | 2,745 | | | | (4,206 | ) |
Cash and cash equivalents at beginning of the year | | | 21,433 | | | | 18,688 | | | | 22,894 | |
Cash and cash equivalents at end of the year | | $ | 17,514 | | | $ | 21,433 | | | $ | 18,688 | |
75
The net cash provided by operating activities for the year ended December 31, 2017,2019, amounted to approximately $2.5$3.4 million, compared to net cash provided by operating activities of $5.5$2 million for the year ended December 31, 20162018 and net cash provided by operating activities of $0.7$2.5 million for the year ended December 31, 2015.2017.
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.
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 provided by operating activities for the year ended December 31, 2016 was principally derived from $0.1 million of net income and from the following adjustments of non-cash line items: an upwards adjustment of $3.6 million for depreciation and amortization; an upward adjustment of $2.5 million for increase in other accounts payable and accrued expenses; an upward adjustment of $1.7 million for deferred income tax, net; an upward adjustment of $1.5 million for decrease in other accounts receivables; and an upward adjustment of $1.2 million for increase in trade accounts payable. This was offset by a downward adjustment of $2.4 million for increase in trade accounts receivable; and a downward adjustment of $2.7 million for increase in inventory.
Net cash provided by operating activities for the year ended December 31, 2015 was principally derived from $5.8 million of net income and from the following adjustments of non-cash line items: an upward adjustment of $2.8 million for depreciation and amortization; an upward adjustment of $0.5 million for increase in other accounts payable and accrued expenses; and an upward adjustment of $0.4 million for increase in trade accounts payable. This was offset by a downward adjustment of $1.2 million for share in results and sale of equity investment of affiliated company; a downward adjustment of $2.4 million for increase in trade accounts receivable; a downward adjustment of $0.6 million for increase in inventory; and a downward adjustment of $4.8 million for onetime gain on bargain purchase.
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, compared to net2017.
Of the cash provided byused in investing activities of $0.6 million forin the year ended December 31, 20162019, approximately $3.4 million was used for purchase of property and netequipment, primarily production equipment and building improvements.
Of the cash used in investing activities of approximately $4.5 million forin the year ended December 31, 2015.2018, 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$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.
Of the cash provided by investing activities inIn the year ended December 31, 2016, approximately $7.2 million was provided from maturities of short-term deposits. This was partially offset by2018, the purchase of property and equipment, primarily production equipment and building improvements, in an amount of approximately $5.7 million and $ 0.9 million from investment in affiliated company.
Of thenet cash provided by investing activities in the year ended December 31, 2015 approximately $3.3 million was used for the purchase of property and equipment, primarily production equipment and building improvements, $8.1 million was used for investment in short-term deposit and $1.8 million was used for an acquisition of a subsidiary (net of cash acquired). This was offset by $5.1 million from maturities of short-term deposits and $3.6 million from proceeds from the sale of an equity investment in an affiliated company.
Net cash used in financing activities was approximately $2.9 million for the year ended December 31, 2017, comparedprimarily attributable to net cash used in financing activitiesexercise of approximately $3.4 million for the year ended December 31, 2016 and net cash used in financing activities of approximately $0.5 million for the year ended December 31, 2015.options.
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.
In the year ended December 31, 2016, the net cash used in financing activities was primarily attributable to a payment of $3.0 million of cash dividend to our shareholders.
In the year ended December 31, 2015, the net cash used in financing activities was primarily attributable to repayments of $0.5 million of short-term loans.
A. Research and Development, Patents and Licenses
Not applicable.
In recent years, the aerospace industry in which we operate has been impacted by the increase in number of commercial and defense aircraft, increase in commercial passenger traffic and a corresponding increase in airlines’ revenue. There is no assurance that these trends will continue in the future. Commercial carriers remain committed to their efforts to reduce cost of MRO activities and increase efficiencies.
We have also witnessed consolidation in the aerospace industry in recent years which has affected competition. This consolidation decreased the number of competitors but increased the relative size and resources of our competitors. However, we believe in our ability to compete on the basis of our deep know-how, manufacturing expertise and long-term relationship with our customers.
C. Off-Balance Sheet Arrangements
We are not a party to any material off-balance sheet arrangements. In addition, we have no unconsolidated special purpose financing or partnership entities that are likely to create material contingent obligations.
D. Tabular Disclosure of Contractual Obligations
The following table summarizes our minimum contractual obligations and commercial commitments as of December 31, 2017,2019, and the effect we expect them to have on our liquidity and cash flow in future periods
Contractual Obligations | | Payments due by Period (Amounts in Thousands US$) | | | Payments due by Period (Amounts in Thousands US$) | |
| | Total | | | Less than 1 year | | | 1-3 Years | | | 3-5 Years | | | More than 5 years | | | Total | | | Less than 1 year | | | 1-3 Years | | | 3-5 Years | | | More than 5 years | |
Operating lease obligations | | | 9,043 | | | | 1,422 | | | | 2,556 | | | | 2,415 | | | | 2,650 | | | | 7,477 | | | | 1,626 | | | | 2,775 | | | | 2,720 | | | | 356 | |
Purchase commitments | | | 4,037 | | | | 4,037 | | | | | | | | | | | | | | | | 13,837 | | | | 12,727 | | | | 1,110 | | | | - | | | | - | |
Total | | $ | 13,080 | | | $ | 5,459 | | | $ | 2,556 | | | $ | 2,415 | | | $ | 2,650 | | | $ | 21,314 | | | $ | 14,353 | | | $ | 3,885 | | | $ | 2,720 | | | $ | 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, 2017,2019, our severance pay liability, net was $ 456347 thousand.
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, 2017:
| · | In order to secure TAT's liability to the Israeli customs, TAT provided a bank guarantee in the amount of $183 thousand. The guarantee is linked to the consumer price index and is valid until January 2019. |
| · | In order to secure TAT's liability to the lessor of its premises, TAT provided a bank guarantee in the amount of $741 thousand. The guarantee is linked to the consumer price index in Israel and is valid until June 2018. |
| · | In order to secure TAT's liability for warranty to a costumer, the Company provided a bank guarantee in the amount of $40 thousand. The guarantee is valid until April 2021. |
2019:
In order to secure Turbochrome'sTAT's liability to the MinistryIsraeli customs, TAT provided a bank guarantee in the amount of Defense,$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 $11$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 | | Age | | Position | |
Amos Malka | | 6567 | | Chairman of the Board of Directors | |
Igal Zamir | | 5254 | | Chief Executive Officer and President | |
Guy Nathanzon (*)Ehud Ben - Yair | | 4556 | | Chief Financial Officer | |
Liron Topaz | | 36 | | EVP Sales and Marketing |
Orly Dolev | | 55 | | EVP Human Resources |
Dan DoronReshef | | 49 | | EVP Engineering |
Jeff LambertHuman Resources | | 39 | | President of Piedmont |
Yair Raz | | 6264 | | EVP Global Strategy | |
Eitan Shabtay | | 50 | | EVP Engineering and Technologies | |
Ohad Milo | | 45 | | President of Gedera | |
Dave Thomas | | 56 | | General Manager of Piedmont | |
Greg Watson | | 50 | | General Manager of Limco | |
Michael Chen | | 5355 | | President of Turbochrome | |
Ron Ben-Haim | | 50 | | Director | |
Amiram Boehm | | 48 | | Director |
Amiram Boehm | | 46 | | Director |
Avi Shani (1)(2)(3)(4) | | 7072 | | External Director | |
Dafna Gruber (1)(3)(4) | | 5354 | | Independent Director | |
Aviram Halevi (1)(2)(3)(4) | | 6062 | | External Director | |
(1) “Independent“Independent Director” under the applicable SEC and NASDAQ Marketplace Rules
(2) “External“External Director” as required by the Israeli Companies Law
(3) Member of the audit committee
(4) Member of the compensation committee
(*) Mr. Nathanzon has recently notified the Company that he is resigning his position as CFO to pursue other opportunities. Mr. Nathanzon will be employed by the Company until May 2018. The Company has initiated a search process for a new CFO.
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. Guy NathanzonEhud Ben-Yair was appointed as TAT's Chief Financial Officer in May 2015.2018. 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, from 2011 until 2015, Mr. NathanzonBen- Yair has served for 8 years as the CFOChief Financial Officer of Altair Semiconductor Ltd,Orad Hi-Tech Systems, a provider of semiconductors to 4G mobile devices manufacturers. Prior to Altair Semiconductor, from 2001 until 2011, Mr. Nathanzon served aspublic company traded on the CFO of Provigent Inc.AIM and German stock exchange (OHT), a provider of semiconductorscompany developing, manufacturing and selling proprietary hardware to microwave systems manufacturers, which was acquired by Broadcom (NASDAQ: Broadcom). Prior to Provident, from 2000 until 2001,TV stations and broadcasters. Mr. Nathanzon served as controller at ActionBase Ltd. Prior to ActionBase, from 1997 until 2000. Mr. Nathanzon was a senior auditor with the Israeli branch of PriceWaterhouseCoopers. Mr. NathanzonBen Yair is a Certified Public Accountant (Israel), and holds a B.A. in Economics and Accounting (with honors), a Masterfrom the Ben-Gurion University in Business Administration and LL.B., all from Tel Aviv University.
Mr. Nathanzon has recently notified the Company that he is resigning his position as CFO to pursue other opportunities. Mr. Nathanzon will be employed by the Company until May 2018. The Company has initiated a search process for a new CFO
Israel.
Mr.Ms. Liron TopazReshef was appointed TAT's EVP Sales and Marketing in February 2017. Prior to joining TAT, from 2002 to 2016, Mr. Topaz was with AL Group, a global company specializing in the manufacturing of filters for the automotive industry, serving in various marketing and business development positions with growing responsibilities, most recently as their VP of Marketing & Business Development. Mr. Topaz holds a B.A. in Management and Economics from the Open University of Israel.
Ms. Orly Dolev was appointed as TAT’s EVP Human Resources in August 2016. Prior to joining TAT, from 2011 to 2016, Ms. Dolev served as a Senior Human Resources Business Partner at Logic Industries, a public safety and security company. Prior to that, from 2009 until 2011, Ms. Dolev served as Human Resources Director at SkyVision Global Networks, a global communications service provider, offering solutions over satellite and fiber optic systems. Ms, Dolev holds a B.A. in Political Sciences and Sociology from Tel Aviv University, an M.A. in Organizational Management from the University of Phoenix, and a Certificate in Human Resources Management from UCLA.
Mr. Dan Doron was appointed TAT’s EVP Technology and Engineering in MarchOctober 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. DoronEitan 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 Chemicals,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).
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 multi-national manufacturing concern that develops, producesstart-up company owned by Pointer Telocation Ltd. (Nasdaq CM: PNTR).
Between 2000 and markets fertilizers, metals and other special-purpose chemical products,2010, Mr. Milo held various management positions at Sanmina Corporation (Nasdaq CM: SANM), most recently as VP CAPEX. Prior to Israel Chemicals, between 1997Sales and 2014, Account Management at Sanmina's subsidiary in Israel.
Mr. Doron held various management and engineering positions at Intel Israel. Mr. Doron retired from the IDF in 1997 at the rank of Lieutenant-Colonel after 11 years of service in the Armored Corps. Mr. Doron served in various field command roles as well as commanded over a unit responsible for electro-optic and fire control weapons development within the Armored Corps. Mr. DoronMilo holds a B.Sc. in MechanicalIndustrial Engineering from Ben GurionTel Aviv University and has completed graduate work in Mechanical Engineering at Tel Aviv University.
an MBA from the Technion - Israeli Institute of Technology.
Mr. Jeff LambertDave Thomas was appointed PresidentGeneral Manager of Piedmont in JanuaryJune 2019 after serving as Vice President of Operations and Supply Chain beginning August 2018. Before joining TAT, from 20162017 to 2018, Mr. Thomas served as Director North American Assembly at Volvo Trucks in VA. Prior to Volvo, between 2009 and 2017 Mr. LambertThomas 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 Rockwell Collins - Interiors Systems: Composite Operations inB/E Aerospace Mexico. Prior to that, between 20142004 and 2016,2009, Mr. LambertThomas served in Quality Management for Toyota Motor Manufacturing Indiana. Prior 2004, Mr. Thomas held various management positions with Top Tier Automotive OEMs such as Business Unit Director at B/E Aerospace - Interior Structures: GalleysLear, Gencorp, & Cooper Standard Automotive. Mr. Thomas holds an M.B.A. in the Philippines. Prior to B/E Aerospace, between 2012Management from Atlanta University and 2014,completed his Doctorate in Feb 2020. Mr. Lambert served asThomas is also a Certified Lean Professional and Examiner from SME/SHINGO.
Mr. Greg Watson was appointed General Manager of Customer Service MROLimco in September 2019. Prior to joining TAT, Greg served as a General Manager at United Technologies - UTC Aerospace Systems. From 2000 until 2012,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. Lambert held various managementWatson holds an Executive Business Administration degree from York University – Toronto, Canada and engineering positions at Goodrich Corporation. Mr. Lambert holds a B.S. in Industrial Engineering from Colorado State University-Pueblo.is working towards acquiring his MBA.
Mr. Michael Chenwas 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.
Dr. Yair Raz was appointed President of Limco in November 2012, after serving as Chief Operating Officer of Piedmont for 7 months. Prior to that, from 1995 until 2012, Dr. Raz was with of Precision Components International (“PCI”), a Pratt & Whitney and Blades Technology International (“BTI”) joint venture in the United States which specialized in the manufacturing of blades for jet engines, first as VP Operations and subsequently as its CEO. Between 1983 and 1995, Dr. Raz held various management positions at Blades Technology Limited, a BTI subsidiary in Israel, most recently as Plant Manager overseeing the operations of six different facilities. Dr. Raz holds a B.Sc. degree in Mechanical Engineering and M.Sc. degree in Material Science from the Technicon – Israel Institute of Technology and an External PhD in Business Administration from La Salle University in Louisiana.
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-Haimjoined 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.
Mr. Amiram Boehmjoined 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 currently servesserved 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 Gruberjoined TAT’s Board of Directors as an external director in November 2013. Since September 2017,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 October 2015 until September 2017, Ms. Gruber served as the chief financial officer of Clal Industries Ltd., a private holding company. From April 2007 until April 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 systemsSystems Ltd., a public company traded on NASDAQ and the TASE Clal Biotechnologyand Tufin Software Technologies Ltd., a public company traded on the TASE and several private companies held by Clal industries Ltd.NYSE. Ms. Gruber is a Certified Public Accountant (Israel) and holds a Bachelor’s degree in Accounting and Economics from Tel Aviv University, Israel.
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, 2017.2019.
| | | Salaries, fees, Commissions and bonuses (Amounts in Thousands US$) | | | | Other benefits (Amounts in Thousands US$) | |
All directors and executive officers as a group (15 persons) | | $ | 2,529 | | | $ | 111 | |
| | Salaries, fees,
Commissions and bonuses
(Amounts in Thousands US$) | | | Other benefits
(Amounts in Thousands US$) | |
All directors and executive officers as a group (17 executives) | | $ | 2,333 | | | $ | 117 | |
During the year ended December 31, 2017,2019, 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 2,6202,585 (approximately $756)$725), plus an annual fee of NIS 70,38069,400 (approximately $20,300)$19,473). Pursuant to its agreement with Mr. Amos Malka, TAT's active chairman of the Board of Directors, TAT payspaid Mr. Malka a monthly fee of NIS 50,00040,000 plus VAT. Mr. Malka had been previously granted options to purchase 50,000 ordinary shares of TAT and is not currently entitled to receive any bonus.
The table below sets forth the compensation paid to our five most highly compensated senior office holders (as defined in the Israeli Companies Law) during or with respect to the year ended December 31, 2017,2019, in the disclosure format of Regulation 21 of the Israeli Securities Regulations (Periodic and Immediate Reports), 1970. We refer to the five individuals for whom disclosure is provided herein as our “Covered Executives.”
For purposes of the table and the summary below, and in accordance with the above-mentioned securities regulations, “compensation” includes base salary, bonuses, equity-based compensation, retirement or termination payments, benefits and perquisites such as car, phone and social benefits and any undertaking to provide such compensation.
Information Regarding Covered Executives (1) (Amounts in Thousands US$) | |
Name and Principal Position(2) | | Base Salary | | | Benefits and Perquisites(3) | | | Variable Compensation(4) | | | Equity-Based Compensation(5) | | | Total | |
Igal Zamir, CEO and President | | | 321 | | | | 75 | | | | 122 | | | | (19 | ) | | | 499 | |
Ehud Ben- Yair, CFO | | | 206 | | | | 59 | | | | 53 | | | | 3 | | | | 321 | |
Ohad Milo, President of Gedera | | | 152 | | | | 53 | | | | 39 | | | | 35 | | | | 279 | |
Michael Chen, President of Turbochrome | | | 169 | | | | 76 | | | | 13 | | | | 1 | | | | 259 | |
Yair Raz, President of Limco | | | 198 | | | | 21 | | | | 14 | | | | (4 | ) | | | 229 | |
Information Regarding Covered Executives (1) | |
(Amounts in Thousands US$) | |
Name and Principal Position(2) | | Base Salary | | | Benefits and Perquisites(3) | | | Variable Compensation(4) | | | Equity-Based Compensation(5) | | | Total | |
Igal Zamir, CEO and President | | | 317 | | | | 88 | | | | 137 | | | | 63 | | | | 605 | |
Yair Raz, President of Limco | | | 213 | | | | 13 | | | | - | | | | 26 | | | | 252 | |
Guy Nathanzon, CFO | | | 172 | | | | 48 | | | | 49 | | | | 10 | | | | 279 | |
Motty Katz, former President of Turbochrome | | | 111 | | | | 85 | | | | 43 | | | | 9 | | | | 248 | |
Tamir Ziv, former EVP of Engineering & Technology | | | 136 | | | | 61 | | | | 38 | | | | - | | | | 235 | |
(1)(1 | All amounts reported in the table are in terms of cost to TAT, as recorded in our financial statements. |
(2) | All executive officers listed in the table are or were full-time employees during 2017. 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, 2017.2019. |
(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, 2017.2019. |
(5) | Amounts reported in this column represent the expense recorded in our financial statements for the year ended December 31, 20172019 in connection with equity-based compensation granted to the Covered Executive. |
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.
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 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. |
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.
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.
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.
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.
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.
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.
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.
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 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. |
106The 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.
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 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. |
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.
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 executive'sexecutives 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”“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.
| Active Chairman | CEO | Other Executives |
Company Target | 100% | 75% - 100% | 50%-100% |
Personal KPIs | NONE | NONE | 0%-30% |
Personal Evaluation | NONE | 0%-25% | 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.
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.
Mr Igal Zamir’s On Target Cash Plan payment for fiscal year 2017 was determined in its entirety by the Company Target. Mr. Zamir achieved 83.0% of the Company Target (out of 100%), as set forth in the table below:
| | Reference points | | | Actual achieved | |
Company Target | | | 100 | % | | | 83.0 | % |
Revenue | | | 20 | % | | | 20.5 | % |
Gross profit | | | 15 | % | | | 14.7 | % |
EBITDA | | | 50 | % | | | 47.8 | % |
Operating cash flow | | | 15 | % | | | 0 | % |
Total | | | 100 | % | | | 83.0 | % |
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. |
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:
| •
| | · | 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. |
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. |
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.shares. 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, 2017,2019, TAT and its subsidiaries employed 634599 employees, of whom 543501 were employed in manufacturing and quality control, 2428 were employed in engineering and research and development and 6770 were employed in general & administration, sales and marketing. Of such employees, 323269 were located in Israel and 311330 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. TheRecently, there have been discussions between Gedera and the Union to renew the collective bargaining agreement in Turbochrome is in effect untilas 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. By law, in the event that a new collective bargaining agreement is not signed, the terms of the original agreement are extended for an unlimited period, unless one party gives notice to the other of its termination. As at the date of this annual report, no notice of cancellation had been given for either of the collective bargaining agreements currently in effect at TAT. As of the date of this report, we were engaged in negotiations with another workers union to form
In Turbochrom, a new collective bargaining agreement with respect to our employees in Gedera. 114
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. 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. 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 680,000980,000 options exercisable into up to 680,000980,000 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, 2017,2019, options to purchase 331,042591,459 ordinary shares were outstanding under the Plan, exercisable at an average exercise price of $9$7.53 per share. During 2017 total of 19,584 options were exercised.
Item 7. Major Shareholders and Related Party Transactions
A. Major Shareholders
The following table sets forth certain information as of JanuaryDecember 31, 2018,2019, regarding the beneficial ownership by all shareholders known to us to own beneficially 5% or more of our ordinary shares:
Name | | Number of Ordinary Shares Beneficially Owned(1) | | | Percentage of Ownership(2) | | FIMI Funds (3) | | | 5,254,908 | | | | 59.4 | % | Yelin Lapidot Holdings Management Ltd. (4) | | | 563,729 | | | | 6.4 | % |
| | Number of Ordinary Shares Beneficially Owned(1) | | | Percentage of Ownership(2) | | FIMI Funds (3) | | | 5,254,908 | | | | 59.21 | % | Yelin Lapidot Holdings Management Ltd. (4) | | | 587,261 | | | | 6.62 | % | Excellence and The Phoenix Holdings Ltd (5) | | | 482,493 | | | | 5.44 | % | | | | | | | | | |
(1) | (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. |
| (2) | The percentages shown are based on 8,848,0288,874,696 ordinary shares issued and outstanding as of JanuaryDecember 31, 20182019 (net of 274,473 dormant shares). |
| (3) | 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. |
| (4) | 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 January 31, 2018.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. | (5) | 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. |
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. Record Holders
Based on a review of the information provided to us by our transfer agent, as of December 31, 2017,2019, there were 3632 holders of record of our ordinary shares, of which 3329 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
Not applicable.Transactions:
| | Year ended December 31, | | | | 2019 | | | 2018 | | | 2017 | | | | | | | | | | | | Income - | | | | | | | | | | Sales to related-party company (*) | | $ | 596 | | | $ | 1,251 | | | $ | 959 | | Cost and expenses - | | | | | | | | | | | | | Supplies from related party (*) | | $ | 552 | | | $ | 59 | | | $ | 6 | |
Balances:
| | December 31, | | | | 2019 | | | 2018 | | | | | | | | | Trade receivables and other receivables (*) | | $ | 706 | | | $ | 699 | | Trade payables and other payables (*) | | $ | 154 | | | $ | - | |
(*) 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
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. 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
Annual Stock Information
The following table sets forth, for each of the years indicated, the high and low sales prices of our ordinary shares on NASDAQ and the TASE (in dollars and NIS, respectively):
| | NASDAQ (1) | | | Tel Aviv Stock Exchange (2) | | | | High | | | Low | | | High | | | Low | | Fiscal Year Ended December 31, 2004 | | | 9.80 | | | | 6.21 | | | | — | | | | — | | Fiscal Year Ended December 31, 2005 | | | 9.35 | | | | 5.25 | | | | 35.50 | | | | 29.70 | | Fiscal Year Ended December 31, 2006 | | | 19.52 | | | | 5.92 | | | | 82.10 | | | | 30.25 | | Fiscal Year Ended December 31, 2007 | | | 28.18 | | | | 11.37 | | | | 116.70 | | | | 47.68 | | Fiscal Year Ended December 31, 2008 | | | 12.24 | | | | 3.62 | | | | 53.00 | | | | 15.52 | | Fiscal Year Ended December 31, 2009 | | | 9.13 | | | | 3.95 | | | | 33.90 | | | | 16.53 | | Fiscal Year Ended December 31, 2010 | | | 9.38 | | | | 5.19 | | | | 37.36 | | | | 18.30 | | Fiscal Year Ended December 31, 2011 | | | 6.32 | | | | 4.20 | | | | 22.19 | | | | 15.68 | | Fiscal Year Ended December 31, 2012 | | | 6.05 | | | | 3.64 | | | | 23.42 | | | | 14.81 | | Fiscal Year Ended December 31, 2013 | | | 8.05 | | | | 5.58 | | | | 28.93 | | | | 20.60 | | Fiscal Year Ended December 31, 2014 | | | 8.54 | | | | 5.85 | | | | 30.13 | | | | 23.28 | | Fiscal Year Ended December 31, 2015 | | | 7.76 | | | | 6.11 | | | | 29.65 | | | | 24.26 | | Fiscal Year Ended December 31, 2016 | | | 8.95 | | | | 6.4 | | | | 33.75 | | | | 26.01 | | Fiscal Year Ended December 31, 2017 | | | 12.4 | | | | 7.8 | | | | 43.29 | | | | 28.62 | |
| (1) | On June 24, 2009 TAT’s ordinary shares began trading on the NASDAQ Global Market. |
| (2) | TAT’s ordinary shares began trading on the TASE in August 2005. |
Quarterly Stock Information
The following table sets forth, for each of the full financial quarters in the two most recent full financial years and any subsequent period, the high and low sales prices of our ordinary shares on NASDAQ and the TASE (in dollars and NIS, respectively):
| | NASDAQ | | | Tel Aviv Stock Exchange | | | | High | | | Low | | | High | | | Low | | 2016 | | | | | | | | | | | | | First Quarter | | | 7.45 | | | | 6.4 | | | | 28.1 | | | | 26.62 | | Second Quarter | | | 7.39 | | | | 6.64 | | | | 27.89 | | | | 26.52 | | Third Quarter | | | 8.95 | | | | 6.64 | | | | 33.75 | | | | 27.51 | | Fourth Quarter | | | 8.9 | | | | 6.65 | | | | 33.42 | | | | 26.01 | | | | | | | | | | | | | | | | | | | 2017 | | | | | | | | | | | | | | | | | First Quarter | | | 9.8 | | | | 7.75 | | | | 35.56 | | | | 28.62 | | Second Quarter | | | 12.4 | | | | 9.3 | | | | 43.29 | | | | 34.48 | | Third Quarter | | | 11.25 | | | | 10.25 | | | | 40.88 | | | | 36.15 | | Fourth Quarter | | | 11.5 | | | | 10.2 | | | | 40.12 | | | | 35.58 | | | | | | | | | | | | | | | | | | | 2018 | | | | | | | | | | | | | | | | | First Quarter | | | 11.05 | | | | 8.7 | | | | 31.99 | | | | 38.19 | |
Monthly Stock Information
The following table sets forth, for the most recent six months, the high and low sales prices of our ordinary shares on the NASDAQ and the TASE (in dollars and NIS, respectively):
| | NASDAQ | | | Tel Aviv Stock Exchange | | | | High | | | Low | | | High | | | Low | | October 2017 | | | 11.5 | | | | 10.6 | | | | 40.12 | | | | 37.89 | | November 2017 | | | 11.21 | | | | 10.25 | | | | 39.05 | | | | 36.30 | | December 2017 | | | 10.95 | | | | 10.2 | | | | 38.36 | | | | 35.58 | | January 2018 | | | 11.05 | | | | 10.3 | | | | 38.19 | | | | 35.65 | | February 2018 | | | 10.5 | | | | 9.4 | | | | 36.23 | | | | 34.01 | | March 2018 | | | 8.7 | | | | 10.2 | | | | 31.99 | | | | 35.12 | |
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.
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. 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 10,000,00013,000,000 ordinary shares of a nominal value of NIS 0.90 each. All outstanding ordinary shares are validly issued, fully paid and non-assessable. The rights attached Please refer to the ordinary shares are as follows:
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 – ConsolidatedExhibit 2.1 for Items 10.B.3, B.4, B.5, B.6, B.7, B.8, B.9 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. See this Item 10B. “Additional Information – Memorandum and Articles of Association – Rights Attached to Shares – Dividend rights.”
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. See Item 10B. “Additional Information - Memorandum and Articles of Association - Rights Attached to Shares - Voting Rights.”
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.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. 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.
General Corporate Tax Structure Israeli companies are generally subject to corporate tax on their taxable income at the rate of 24% in 2017 and 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 (24% in 2017 and 23%(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 Law for the Encouragement of Capital Investments, 1959, 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" mentioned below..
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”“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.
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,,.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 arewere generally taxed at a rate of 15%, which iswas withheld and paid by the company paying the dividend, if the dividend iswas 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, but we cannot assure you that they will continue to do so. criteria.
We havehad 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 will be exemptwas 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. 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).
AAs 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 will beas 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 15% during 2011-2012, 12.5% in 2013, and 16% in 2014 and thereafter.(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 10% during 2011-2012, 7% in 2013, and 9% in 2014, 2015 and 2016.7.5% (as of 2017).
Tax Benefits under the 2017 Amendment
An amendment to the Investment Law, or the 2017 amendment, which became effective as of January 1, 2017, provides new tax benefit to Preferred companies for two types of "Technology Enterprise", as described below, anand 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 such enterprisesincome 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, which would entail the loss of the benefits that relate to this status. future. 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“Industry Encouragement Law”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. |
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, the effective period of the Inflationary Adjustments Law will cease at the end of the 2007 tax year and as of the 2008 tax year the provisions of the law shallare 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 willis no longer be adjusted to a real (net of inflation) measurement basis. Furthermore, the depreciation of inflation immune assets and carried forward tax losses willare no longer be 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 individuals,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. 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. 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. 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. 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:
| ·• | 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.
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. 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 willmay be treated as foreign source income for U.S. foreign tax credit limitation purposes. SubjectFor 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 generally willshould 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. 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 willshould 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 includesmay include dividends, interest, royalties, rents, annuities and the excess of gains over losses from the disposition of assets which produce passive income. 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 ana 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. 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.
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 28%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. 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). 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. During 2014 the NIS appreciated against the U.S. dollar by 12%. During 2015 the exchange rates between the NIS and the U.S. dollar did not changed materially. During 2016 the NIS appreciated against the U.S dollar by 1.5%. This trend continued through the end of June 2017, during which the NIS appreciated against the U.S dollar by an additional 9%. From the end of June 2017 until August 2017 the NIS depreciated against the U.S dollar by 3%. From August 2018 until the end of 2017 the NIS appreciated against the U.S dollar by 3.5%. Through the end of February 2018 the exchange rates between the NIS and the U.S dollar did not changed materially. We estimate that a devaluation of 1% of the U.S. dollar against the NIS would result in a decrease of approximately $ 213 thousands in our operating income. 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.
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.
| (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; |
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 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. |
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, 2017.2019. 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, 2017,2019, 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 temporary rules of the SEC that permit us to provide only management’s report in this annual report.
| (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 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.”
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.
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.
| | Year Ended December 31, | | | Year Ended December 31, | | Services Rendered | | 2017 | | | | 2016 | | | 2019 | | | 2018 | | Audit (1) | | $ | 219,000 | | | $ | 231,000 | | | $ | 206,847 | | | $ | 226,950 | | Tax (2) | | | 78,000 | | | | 98,000 | | | | 20,216 | | | | 44,005 | | Total | | $ | 297,000 | | | $ | 329,000 | | | $ | 227,063 | | | $ | 270,955 | |
(1) | (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. 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 | The securities issued amount to 20% or more of our outstanding voting rights before the issuance; |
| o | Some or all of the consideration is other than cash or listed securities or the transaction is not in accordance with market terms; and |
| o | 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.
Item 17. Financial Statements
We have elected to furnish financial statements and related information specified in Item 18.
Item 18.Financial Statements
| | | | Consolidated Financial Statements of the Company | | | | Report of Independent Registered Public Accounting Firm | F-2 | Consolidated Balance Sheets | F-3-F-4 | Consolidated Statements of Operations | F-5-F-6 | Consolidated Statements of Comprehensive Income | F-7 | Consolidated Statements of Changes in Shareholders'Shareholders Equity | F-8 | Consolidated Statements of Cash Flows | F-9-F10F-9 | Notes to Consolidated Financial Statements | F-11 |
The following exhibits are filed as a part of this Annual Report:
1.1 | 1.1 Memorandum of Association of the Registrant (1) |
2.1 | 2.1 Specimen Certificate for Ordinary Shares (1) |
4.2 | Agreement dated February 10, 2000, by and between the Registrant and TAT Industries Ltd. (English summary translation) (2) |
4.2 Agreement dated February 10, 2000, by and between the Registrant and TAT Industries Ltd. (English summary translation) (2)
(1) | 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. |
(2) | 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. |
(3) | 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. |
(4) | Filed as an exhibit to the Registrant’s Registration Statement on Form F-4 filed on May 7, 2009 and incorporated herein by reference. |
(5) | 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. |
(6) | 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. |
(7) | 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. |
(8) | 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. |
(8)(9) | 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. |
SIGNATURES 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. | TAT TECHNOLOGIES LTD. | | | | | By: | /s/ Guy NathanzonEhud Ben-Yair | | | Guy NathanzonEhud Ben-Yair | | | Chief Financial Officer (Principal Accounting Officer) | | | | Date: April 24, 2018March 19, 2020 | | |
TAT TECHNOLOGIES LTD.
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2019
TAT TECHNOLOGIES LTD.
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2017 TAT TECHNOLOGIES LTD.
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 20172019
INDEX
| 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, 20172019 and 2016,2018, 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, 2017,2019, 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, 20172019 and 2016,2018, and the results of theirits operations and theirits cash flows for each of the three years in the period ended December 31, 20172019 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 and board of directors.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”)(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 | /s/ Kesselman & Kesselman | March 19, 2020 | Certified Public Accountants (lsr.) | | A member firm of PricewaterhouseCoopers International Limited |
We have served as the Company's auditor since 2009.
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
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT)
| aa.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".
| bb. | Recently Issued Accounting Principles: |
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". | (1) | In November 2016, the Financial Accounting Standards Board (“FASB”) issued guidance on the treatment of restricted cash in the statements of cash flows. Amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The guidance will be effective for the fiscal year beginning on January 1, 2018, including interim periods within that year (early adoption is permitted). The Company does not anticipate a material impact on its consolidated financial statements. |
| (2) | In October 2016, the FASB issued guidance on income taxes on intra-entity transfers. The guidance eliminates the exception to the recognition requirements under the standard for intra-entity transfers of an asset other than inventory. As a result, an entity should recognize the income tax consequences when the transfer of assets other than inventory occurs. The guidance will be effective for the fiscal year beginning on January 1, 2018, including interim periods within that year (early adoption is permitted). The Company does not anticipate a material impact on its consolidated financial statements. |
| (3) | In August 2016, the FASB issued guidance on statements of cash flows. The guidance addresses eight specific issues: debt prepayment or debt extinguishment costs; settlement of certain debt instruments; contingent consideration payments made after a business combination; proceeds from the settlement of insurance claims; proceeds from the settlement of corporate-owned life insurance policies; distributions received from equity method investees; beneficial interest in securitization transactions; separately identifiable cash flows and application of predominance principle. The guidance will be effective for the fiscal year beginning on January 1, 2018, including interim periods within that year (early adoption is permitted). The Company does not anticipate a material impact on its consolidated financial statements. |
TAT TECHNOLOGIES LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT)
z. Derivatives and hedging (cont.)
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.
| bb.aa. | Recently Issued Accounting Principles (cont.):Principles: |
Recently adopted accounting pronouncements:
| (4)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. |
TAT TECHNOLOGIES LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT)
Accounting pronouncements issued but not yet adopted:
| (1) | 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 Company is currently evaluating the potential effect of the guidance on its consolidated financial statements. |
| (5) | In February 2016, the FASB which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e. lessees and lessors). The new standard requires lessees to applywill not have a dual approach, classifying leases as either finance or operating leases basedmaterial effect on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight line basis over the term of the lease, respectively. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less may be accounted for similar to existing guidance for operating leases today. ASC 842 supersedes the previous leases standard, ASC 840 Leases. The standard is effective on January 1, 2019, with early adoption permitted. The Company is in the process of evaluating the impact of this new guidance on itsCompany's financial statements. | statements upon adoption.
| (6) | In August 2017, the FASB issued Accounting Standard Update which targets improvements to accounting for hedging activities which amends and simplifies existing guidance in order to allow companies to more accurately present the economic effects of risk management activities in the financial statements. The guidance is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. The Company is in the process of evaluating the impact of this new guidance on its financial statements. |
| (2) | 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.
TAT TECHNOLOGIES LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT)
| bb. | Recently Issued Accounting Principles (cont.): |
| (7) | In May 2014, FASB issued Accounting Standards Update "Revenue from Contracts with Customers." ASU 2014-09 will supersede most current revenue recognition guidance, including industry-specific guidance. The underlying principle is that an entity will recognize revenue upon the transfer of goods or services to customers in an amount that the entity expects to be entitled to in exchange for those goods or services. The guidance provides a five-step analysis of transactions to determine when and how revenue is recognized. 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 also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity’s contracts with customers. The guidance is effective for the interim and annual periods beginning on or after December 15, 2017 (early adoption is permitted in annual periods beginning after December 15, 2016). The guidance permits the use of either a retrospective or cumulative effect transition method. The Company intends to apply 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 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. |
The Company examined the expected effects of the application of the new standard and it does not anticipate a material impact on its consolidated financial statements.
TAT TECHNOLOGIES LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
NOTE 3 - BUSINESS COMBINATION AND INVESTMENT IN AN AFFILIATED COMPANY
| 1. | In August, 2015 the company entered into a definitive agreement to acquire Turbochrome Ltd. |
On October 19, 2015, the company completed the share acquisition for approximately $3,500 (subject to certain price adjustments). The acquisition was funded through cash on hand. TAT was obligated to pay additional amounts of up to $2,000 in the event that Turbochrome Ltd. meets certain annual revenue targets in 2015 and 2016 (See Note 11 (g) for additional information regarding the contingent consideration associated with this acquisition). The earn-out payment was based on the actual revenues of Turbochrome during the calendar years 2015 and 2016. The Company has paid $ 0.5 million for the earn-out payment.
Turbochrome Ltd., located in Israel, specializes in overhaul and coating of jet engine components, including turbine vanes and blades, fan blades, variable inlet guide vanes, afterburner flaps and other components.
In connection with the acquisition, the company recognized a bargain purchase gain of $4.8 million in the consolidated statement of operations for the year ended December 31, 2015. The bargain purchase gain was primarily related to the fair market value of certain property, plant and equipment, in relation to replacement costs, and to the Company's expectation regarding its ability to increase the services that can be provided to Turbochrome's existing customers and to its own customers.
As part of the purchase agreement the company assumed a committed to continue the engagement with Turbochrome’s CEO for 12 months from the day of closing. In December 2015, the company decided to terminate this employment agreement. The total termination expenses the company included in the financial statements for 2015 were in the amount of approximately $300.
Turbochrome Ltd. results of operations and balance sheet were included in Company's consolidated financial statements commencing October 19, 2015.
TAT TECHNOLOGIES LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
NOTE 3 - | BUSINESS COMBINATION AND INVESTMENT IN AN AFFILIATED COMPANY (CONT) |
| 2. | Under the acquisition method of accounting, the total purchase price is allocated to the net tangible and intangible assets of Turbochrome, based on their fair values at the acquisition date. |
The table below summarizes the fair value of assets acquired, liabilities assumed, intangible assets and resulting bargain purchase in Turbochrome –
Asset | | Fair value | | Cash and cash equivalents | | $ | 1,164 | | Inventories | | | 616 | | Other current assets | | | 2,169 | | Property, plant and equipment | | | 6,825 | | Identifiable intangible assets - | | | | | Customers relationships | | | 1,342 | | Current liabilities | | | (2,857 | ) | Deferred Taxes | | | (271 | ) | Accrued severance pay | | | (15 | ) | Net Identifiable assets acquired | | | 8,973 | | Gain from bargain purchase | | | (4,833 | ) | Total consideration (including contingent consideration in amount of $640) | | $ | 4,140 | |
An amount of $1,342 of the purchase price was allocated to customer relationships.
As part of the acquisition, the Company acquired all existing customers of Turbochrome. Customer’s relationship is amortized over a period of 10 years.
Total transactions costs were approximately $303 and were recognized in earnings as other expenses.
TAT TECHNOLOGIES LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
NOTE 3 - | BUSINESS COMBINATION AND INVESTMENT IN AN AFFILIATED COMPANY (CONT) |
The actual Turbochrome Ltd. net sales and net income included in the Company's consolidated statements of operations and comprehensive income for the year ended December 31, 2015 (for the period from October 19, 2015 acquisition date through December 31 ,2015) are as follows:
| | | | Actual Turbochrome results of operations included in the consolidated results of operations: | | | | Revenue | | | 1,905 | | Net loss attributable by Turbochrome | | | (163 | ) |
| 3. | Below are certain unaudited pro forma condensed consolidated statements of operations data for the year ended December 31, 2015, as if the acquisition of Turbochrome Ltd. had occurred at the beginning of the year 2014, after giving effect to purchase accounting adjustments. Including amortization of identifiable intangible assets and the gain on bargain purchase. The gain on bargain purchase and transaction costs were included in net income for the year ended December 31, 2014. |
This unaudited pro forma financial information is not necessarily indicative of the combined results that would have been attained as if the acquisition takes place at the beginning of 2014 nor is it necessarily indicative of future results.
| | Year ended December 31 | | | | 2015 | | Revenue | | | 92,230 | | Net income | | | 801 | | Earnings per share: | | | | | Basic and Diluted | | | 0.09 | |
As of December 31, 2017 and 2016, the company has 4.9% of First Aviation Services ordinary shares, a provider of repair and overhaul, rotables management and related engineering services to the aviation industry worldwide.
On March 11, 2015, Piedmont Aviation Component Services, LLC, an indirect subsidiary of TAT, entered into an agreement to sell 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. The purchase price for the Class B Shares was $8.40 per Class B Shares, for an aggregate purchase price of $1,999, and the purchase price for the Series A Preferred stock was $100 per Preferred Share, for an aggregate purchase price of $1,625. The total gain from the sale of FAvS' stock was $1,198. After the transaction the company owns 4.9% of FAvS’ ($169 at cost basis). From March 11, 2015 FAVS' investment is based on the cost method.
TAT TECHNOLOGIES LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
NOTE 43 - FAIR VALUE MEASUREMENT
Recurring Fair Value Measurements
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:
| | December 31, 2017 | | | December 31, 2019 | | | | Level 1 | | | Level 2 | | | Level 3 | | | Total | | | Level 1 | | | Level 2 | | | Level 3 | | | Total | | Assets: | | | | | | | | | | | | | | | | | | | | | | | | | Derivative financial instruments | | $ | - | | | $ | 159 | | | $ | - | | | $ | 159 | | | | | | | | | | | | | | | | | |
| | December 31, 2016 | | | December 31, 2018 | | | | Level 1 | | | Level 2 | | | Level 3 | | | Total | | | Level 1 | | | Level 2 | | | Level 3 | | | Total | | Liabilities: | | | | | | | | | | | | | | Assets: | | | | | | | | | | | | | | Derivative financial instruments | | $ | - | | | $ | 74 | | | $ | - | | | $ | 74 | | | | | | | | | | | | | | | | | |
| a. | Derivative financial instruments: |
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 companyCompany 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. Amounts
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.
TAT TECHNOLOGIES LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
NOTE 3 - FAIR VALUE MEASUREMENT (CONT)
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 (loss) areand reclassified to profitinto earnings in the same line item associated with the anticipated transaction in the same period or loss whenperiods during which the hedged transaction affects profit or loss, such as when the hedged expense is recognized. If the forecast expense is no longer expected to occur, amounts previously recognized in equity are reclassified to profit or loss. If the hedging instrument expires or is sold, terminated or exercised, or if its designation as a hedge is revoked, amounts previously recognized in equity remain in equity until the forecast expense occurs.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, 20172019 and 2016,2018, the companyCompany has open forward contracts with a notional total amount of $8,101$1,017 and $12,399,$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.
TAT TECHNOLOGIES LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
NOTE 4 - FAIR VALUE MEASUREMENT (CONT)
| b. | Contingent consideration: |
The contingent consideration liability in the acquisition of Turbochrome shares was computed on expected revenue to be generated by Turbochrome using a binomial tree model income approach.
The fair value of the contingent liability as of December 31, 2015 was estimated using the following assumptions:
| | 2015 | | | | | | Volatility | | | 16.6 | % | Expected life (in years) | | | 1.25 | | Risk free interest rate | | | 0.08 | % |
The following table summarizes the activity for those financial assets and liabilities where fair value measurements are estimated utilizing Level 3 inputs.
| | December 31, | | | | 2016 | | | 2015 | | | | | | | | | Fair value at the beginning of the period | | $ | 640 | | | $ | - | | Additional resulting from Turbochrome acquisition | | | - | | | | 640 | | Adjustments to the provision resulting from Turbochrome acquisition | | | (640 | ) | | | - | | Fair value at the end of the period | | $ | - | | | $ | 640 | |
TAT TECHNOLOGIES LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
Inventory is composed of the following:
| | December 31, | | | December 31, | | | | 2017 | | | 2016 | | | 2019 | | | 2018 | | | | | | | | | | | | | | | Raw materials and components | | $ | 9,428 | | | $ | 10,715 | | | $ | 13,296 | | | $ | 10,758 | | Work in progress | | | 21,875 | | | | 21,618 | | | 11,735 | | | 7,297 | | Spare parts | | | 6,584 | | | | 5,743 | | | 18,272 | | | 19,557 | | Finished goods | | | 743 | | | | 1,193 | | | | 604 | | | | 993 | | | | | | | | | | | | | | | | | Total inventory (*) | | $ | 38,630 | | | $ | 39,269 | | | Total inventory (**) | | | $ | 43,907 | | | $ | 38,605 | |
(**) The total amount of Rotables included in the company spare parts inventory for the years ended December 31, 20172019 and 20162018 were $8,615$8,886 and $8,345,$8,284, respectively.
Slow inventory expenses amounted to $964, $1,138$147, $691 and $440$964 for the years ended December 31, 2019, 2018 and 2017, 2016 and 2015, 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 companyCompany is subject to significant risks including excess inventory no longer relevant.
TAT TECHNOLOGIES LTD. AND ITS SUBSIDIARIES
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:
| | | | | | | | | | | Balance sheets: | | | | | | | Current assets | | | | | | | | | Non-current assets | | | | | | | 1,436 | | Current liabilities | | | | | | | | | Non-current liabilities | | | | | | | | |
| | Year ended December 31, | | | | 2019 | | | 2018 | | | 2017 | | 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:
| | December 31, | | | December 31, | | | | 2017 | | | 2016 | | | 2019 | | | 2018 | | Cost: | | | | | | | | | | | | | Land and buildings | | $ | 12,385 | | | $ | 11,966 | | | $ | 14,863 | | | $ | 13,077 | | Machinery and equipment | | | 48,848 | | | | 46,129 | | | 52,872 | | | 51,017 | | Motor vehicles | | | 472 | | | | 362 | | | 410 | | | 410 | | Office furniture and equipment | | | 2,039 | | | | 1,926 | | | 1,811 | | | 1,802 | | Software | | | 1,419 | | | | 1,354 | | | | 1,420 | | | | 1,248 | | | | | 65,163 | | | | 61,737 | | | 71,376 | | | 67,554 | | | | | | | | | | | | | | | | | Less: Accumulated depreciation | | | 43,842 | | | | 40,439 | | | | 50,368 | | | | 46,130 | | Depreciated cost | | $ | 21,321 | | | $ | 21,298 | | | $ | 21,008 | | | $ | 21,424 | |
Depreciation expenses amounted to $3,807, $3,501$4,238, $4,051 and $2,753$3,807 for the years ended December 31, 2017, 20162019, 2018 and 2015,2017, respectively.
TAT TECHNOLOGIES LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
NOTE 7 - LEASES
Lease commitments:
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:
| | Year ended December 31, 2019 | | Operating lease expenses | | | | |
Supplemental cash flow information related to leases was as follows:
| | Year ended December 31, 2019 | | Operating cash flows from operating leases | | | | |
TAT TECHNOLOGIES LTD. AND ITS SUBSIDIARIES
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:
| | | | Operating Leases | | | | Operating lease right-of-use assets | | | | | | | | | | Current operating lease liabilities | | | 1,330 | | 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:
| | | | 2020 | | $ | 1,626 | | 2021 | | | 1,461 | | 2022 | | | 1,314 | | 2023 | | | 1,250 | | 2024 and after | | | | | Total lease payments | | | 7,478 | | Less imputed interest | | | | | Total | | | | |
TAT TECHNOLOGIES LTD. AND ITS SUBSIDIARIES
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:
| | | | 2019 | | $ | 1,551 | | 2020 | | | 1,488 | | 2021 | | | 1,330 | | 2022 | | | 1,224 | | | | | | | Total | | | | |
NOTE 78 - INTANGIBLE ASSETS
Intangible assets:
| | December 31, | | | | | | | 2017 | | | 2016 | | | | | | | | Customer relationships | | | | | | | | | | | | | Cost | | $ | 1,342 | | | $ | 1,342 | | | $ | 1,342 | | | $ | 1,342 | | Accumulated amortization | | | (297 | ) | | | (163 | ) | | | | | | | | | Amortized cost | | $ | 1,045 | | | $ | 1,179 | | | | | | | | | |
NOTE 8 - OTHER BALANCE SHEETS SUPPLEMENTAL INFORMATION
Accrued expenses:
| | December 31, | | | | 2017 | | | 2016 | | | | | | | | | Employees and payroll accruals | | $ | 3,814 | | | $ | 3,386 | | Accrued expenses | | | 711 | | | | 838 | | Authorities | | | 957 | | | | 1,722 | | Advances from customers | | | 863 | | | | 1,861 | | Deferred income | | | 254 | | | | 441 | | Warranty provision | | | 306 | | | | 338 | | Accrued royalties | | | 1,180 | | | | 1,176 | | Other | | | 246 | | | | 74 | | | | | | | | | | | | | $ | 8,331 | | | $ | 9,836 | |
NOTE 9 - TRANSACTIONS WITH RELATED PARTIES Transactions with related parties:ACCRUED EXPENSES
| | Year ended December 31, | | | | 2017 | | | 2016 | | | 2015 | | | | | | | | | | | | Compensation and benefits to senior management, including benefit component of option grants | | $ | 1,615 | | | $ | 1,464 | | | $ | 1,236 | | Number of individuals to which this benefit related | | | 5 | | | | 5 | | | | 5 | | Compensation and benefits to the chairman of the Board | | $ | 167 | | | $ | 167 | | | $ | 173 | | Number of individuals to which this benefit related | | | 1 | | | | 1 | | | | 1 | | Compensation and benefits to directors | | $ | 150 | | | $ | 161 | | | $ | 161 | | Number of individuals to which this benefit related | | | 5 | | | | 6 | | | | 5 | |
| | December 31, | | | | 2019 | | | 2018 | | | | | | | | | Employees and payroll accruals | | $ | 3,332 | | | $ | 2,869 | | Accrued expenses | | | 937 | | | | 840 | | Authorities | | | 810 | | | | 677 | | Advances from customers | | | 513 | | | | 483 | | Warranty provision | | | 235 | | | | 285 | | Accrued royalties and rebate sales commissions | | | 1,517 | | | | 966 | | Other | | | 49 | | | | 291 | | | | | | | | | | | | | $ | 7,393 | | | $ | 6,411 | |
TAT TECHNOLOGIES LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
NOTE 10 - RELATED PARTIES’ TRANSACTIONS AND BALANCES
Transactions:
| | Year ended December 31, | | | | 2019 | | | 2018 | | | 2017 | | | | | | | | | | | | Income - | | | | | | | | | | Sales to related-party company (*) | | $ | 596 | | | $ | 1,251 | | | $ | 959 | | Cost and expenses - | | | | | | | | | | | | | Supplies from related party (*) | | $ | 552 | | | $ | 59 | | | $ | 6 | |
Balances:
| | December 31, | | | | 2019 | | | 2018 | | | | | | | | | Trade receivables and other receivables (*) | | $ | 706 | | | $ | 699 | | Trade payables and other payables (*) | | $ | 154 | | | $ | - | |
(*) includes mainly transactions with affiliated companies.
NOTE 1011 - | LONG-TERM EMPLOYEE-RELATED OBLIGATIONS |
Severance pay:
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”).
TAT TECHNOLOGIES LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
NOTE 11 - | LONG-TERM EMPLOYEE-RELATED OBLIGATIONS (CONT) |
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.
TAT TECHNOLOGIES LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
NOTE 10 - | LONG-TERM EMPLOYEE-RELATED OBLIGATIONS (CONT) |
Severance pay (cont.):
In the years ended December 31, 20172019, 2018 and 2016,2017 the Company deposited $252$1,096, $968 and $228,$910 respectively, with pension funds and insurance companies in connection with its severance payment obligations.
The amounts of severance payment expenses for the Israeli companies were $910, $777 and $554 for the years ended December 31, 2017, 2016 and 2015, respectively.
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 three percent.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 $350, $344$406, $385 and $261$350 for the years ended December 31, 2017, 20162019, 2018 and 2015,2017, respectively.
The Group expects to contribute approximately $900$1,208 in 20182020 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 $96, $230$689, $400 and $166$96 for the years ended December 31, 2017, 20162019, 2018 and 2015.2017.
TAT expects to pay $2,346$1,026 in future benefits to their employees during 20182020 through 20272029 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 | | Amount | | | | | 2018 | | $ | 1,142 | | | 2019 | | | 267 | | | 2020 | | | 54 | | | $ | 341 | | 2021 | | | 54 | | | | 55 | | 2022 | | | 13 | | | | 9 | | Thereafter (through 2027) | | | 816 | | | | | $ | 2,346 | | | 2023 | | | | 147 | | 2024 | | | | 48 | | Thereafter (through 2029) | | | | | | Total | | | | | |
TAT TECHNOLOGIES LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
NOTE 1112 - COMMITMENTS AND CONTINGENT LIABILITIES
| a. | Commissions arrangements: |
The Group is committed to pay marketing commissions ranging 1% to 10% to sale agents of total sales contracts. Commission expenses were $664, $774$679, $411 and $678$664 for the years ended December 31, 2017, 20162019, 2018 and 2015,2017, respectively. The commissions were recorded as part of the selling and marketing expenses.
| (1) | TAT is committed to pay royalties to third parties, through 2017, ranging from 12% to 17% of sales of products developed by the third parties. Royalty expenses were $25, $216$42, $148 and $273$25 for the years ended December 31, 2017, 20162019, 2018 and 2015,2017, respectively. The royalties were recorded as part of the cost of revenues. |
| (2) | Limco-PiedmontPiedmont 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 Limco-PiedmontPiedmont provides MRO services. In addition, Limco-Piedmont is committed to pay said 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 $1,885, $1,561 and $1,248 for the years ended December 31, 2017, 2016 and 2015, respectively. The royalties were recorded as part of the cost of revenues. |
Limco-Piedmont leases someIn addition, Piedmont is committed to pay another third party royalties of its operating20%, 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 office facilities for various terms under long-term, non-cancelable operating lease agreements. The leases expire at various dates through 2025. Certain leases contain renewal options as defined in the agreements. Lease expense totaled $460, $454 and $419$1,885 for the years ended December 31, 2019, 2018 and 2017, 2016, and 2015 respectively. The royalties were recorded as part of the cost of revenues.
TAT leases its factory from TAT Industries until the end of 2024. Lease expense totaled $740, $681 and $667 for the years ended December 31, 2017, 2016, and 2015 respectively.
As of December 31, 2017, future minimum rental payments under non-cancelable operating leases are as follows:
Year | | Amount | | 2018 | | $ | 1,146 | | 2019 | | | 1,137 | | 2020 | | | 1,161 | | 2021 | | | 1,193 | | 2022 and after | | | 3,861 | | Total | | $ | 8,498 | |
TAT TECHNOLOGIES LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
NOTE 11 - COMMITMENTS AND CONTINGENT LIABILITIES (CONT)
| d.c. | Legal claims contingencies:Guarantees: |
TAT is aware that in 2016 and 2017, two cases were filed in Kansas federal court naming TAT and others as defendants. Both plaintiffs allege property damage resulting from failed precoolers for an aggregate amount of approximately $900. TAT intends to vigorously defend against these claims. TAT maintains insurance that it expects will be sufficient to address any potential judgment, settlement or litigation costs associated with these cases. Further, TAT does not believe the outcome of these matters will have a significant effect on its financial position or profitability.
| (1) | In order to secure TAT's liability to the Israeli customs, the Company provided a bank guarantee in the amount of $183.$58. The guarantee is linked to the consumer price index and is valid until Jan 2019.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. |
| (2) | In order to secure the TAT's liability to the lessor of its premises, the Company provided a bank guarantee in the amount of $741.$790. The guarantee is linked to the consumer price index in Israel and is valid until June 2018.July 2020. |
| (3) | In order to secure TAT's liability for warranty to a costumer, the Company provided a bank guarantee in the amount of $40. The guarantee is valid until April 2021. |
| (4) | In order to secure Turbochrome liability to the Ministry of Defense, the Company provided a bank guarantee in the amount of $11. |
The Company entered into several three-year leases for vehicles. The current monthly lease fees aggregate approximately $32. The expected lease payments for the years ending December 31, 2018, 2019 and 2020 are approximately $246, $148 and $49, respectively.
| g. | Contingent consideration |
On October 19, 2015, the company acquired 100% of Turbochrome Ltd. shares for approximately US$ 3.5 million (subject to certain price adjustments). The acquisition was funded through cash on hand and an earn-out payment (up to $2 million). The earn-out Payment was based on the actual revenues of Turbochrome during the calendar years 2015 and 2016. The contingent consideration liability was computed on expected revenue to be generated by the acquired company using a binomial tree model income approach. The Company reassessed the fair value of the contingent consideration on a quarterly basis and recorded any applicable adjustments to earnings in the period they were determined. The adjustments were classified as other income.
TAT TECHNOLOGIES LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands NOTE 11 - COMMITMENTS AND CONTINGENT LIABILITIES (CONT)
| g. | Contingent consideration (cont) |
According to the results of Turbochrome for the year 2015, Turbochrome met the revenue target for 2015 and, subject to the terms of the share purchase agreement, TAT paid to Chromalloy American LLC (the previous shareholder of Turbochrome), $500 as an earn out payment with respect to fiscal year 2015 revenues, in 2016.
According to the results of Turbochrome for the year 2016, Turbochrome did not meet the revenue target set forth in the share purchase agreement, and therefore, pursuant to the terms of such agreement, TAT is not required to pay Chromalloy American LLC any earn out payment with respect to fiscal year 2016 revenues or for the accumulated revenue for the years 2016 and 2015, thus the remaining liability of $140 was reversed to other income.
NOTE 1213 - SHAREHOLDERS' EQUITY
| 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.
| (1) | 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. |
TAT TECHNOLOGIES LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
NOTE 1213 - SHAREHOLDERS' EQUITY (CONT)
| b. | Stock option plans (cont)(cont.): |
| (2) | On July 1, 2015, pursuant to the 2012 Plan, TAT’s Board of Directors approved the grant of 80,000 Options, at an exercise price of $7.15 per share, to senior executives. | 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.
| (3) | On October 1, 2015, pursuant to the 2012 Plan, TAT’s Board of Directors approved the grant of 40,000 Options, at an exercise price of $7.15 per share, to senior executives. | 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.
| (4) | On March 29, 2016, pursuant to the 2012 Plan, TAT’s Board of Directors approved the grant of 40,000 Options, at an exercise price of $7.63 per share, to senior executives. | 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.
| (5) | On June 23, 2016, pursuant to the 2012 Plan, TAT’s Shares Holders meeting approved the grant of 100,000 Options, at an exercise price of $7.54 per share, to senior executives. |
| (6)(1) | On November 3, 2016, pursuant to the 2012 Plan, TAT’s Shares Holders meeting approved the grant of 50,000 Options, at an exercise price of $7.34 per share, to the chairman of the board. |
| (7) | On December 28, 2016, pursuant to the 2012 Plan, TAT’s Board of Directors approved the grant of 60,000 Options, at an exercise price of $10 per share, to senior executives. |
| (8) | 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 executives.executive. |
| (9)(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 executives.executive. |
| (10)(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. |
TAT TECHNOLOGIES LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
NOTE 1213 - SHAREHOLDERS' EQUITY (CONT)
| b. | Stock option plans (cont)(cont.): |
| (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, 2017, 20162019, 2018 and 20152017 was estimated using the following assumptions:
| | 2017 | | 2016 | | 2015 | | 2019 | | 2018 | | 2017 | | | | | | | | | | | | | | Expected stock price volatility | | 33.3% – 40.5% | | 37.7% – 40.3% | | 35.07% – 38.97% | | 34.2% – 36.8% | | 32.6% – 40.8% | | 33.3% – 40.5% | Expected option life (in years) | | 4 – 5.5 | | 3 – 5.5 | | 3 – 4 | | 3.5-5 | | 3.5-5.5 | | 4 – 5.5 | Risk free interest rate | | 1.49% – 1.81% | | 0.92% – 1.79% | | 0.92% – 1.39% | | 1.44% – 1.63% | | 1.71% – 2.87% | | 1.49% – 1.81% | Dividend yield | | 5% | | 5% | | 5% | | 0% | | 0% - 5% | | 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%.
TAT TECHNOLOGIES LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
NOTE 1213 - SHAREHOLDERS' EQUITY (CONT)
| b. | Stock option plans (cont.): |
| (11) | The following table is a summary of the activity of TAT's Stock Option plan: |
| | Year ended December 31, | | | Year ended December 31, | | | Year ended December 31, | | | Year ended December 31, | | | Year ended December 31, | | | Year ended December 31, | | | | 2017 | | | 2016 | | | 2015 | | | | | | 2018 | | | 2017 | | | | Number of options | | | Weighted average exercise price | | | Number of options | | | Weighted average exercise price | | | Number of options | | | Weighted average exercise price | | | Number of | | | 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 | | | 330,000 | | | $ | 7.97 | | | | 277,500 | | | $ | 7.60 | | | | 235,000 | | | $ | 8.28 | | | 548,267 | | | $ | 9.03 | | | 365,000 | | | $ | 8.53 | | | 330,000 | | | $ | 7.97 | | Granted | | | 75,000 | | | | 10.39 | | | | 250,000 | | | | 8.10 | | | | 120,000 | | | | 7.15 | | | 170,000 | | | 5.44 | | | 273,893 | | | 9.70 | | | 75,000 | | | 10.39 | | Forfeited | | | (54,375 | ) | | | 8.35 | | | | (177,400 | ) | | | 7.56 | | | | (77,500 | ) | | | 8.67 | | | (126,808 | ) | | 11.19 | | | (63,958 | ) | | 9.85 | | | (20,417 | ) | | 7.47 | | Exercised | | | (19,583 | ) | | | 7.3 | | | | (20,100 | ) | | | 6.50 | | | | - | | | | - | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Outstanding at the end of the year | | | 331,042 | | | $ | 9.03 | | | | 330,000 | | | $ | 7.97 | | | | 277,500 | | | $ | 7.60 | | | | 591,459 | | | | | | | | 548,267 | | | | | | | | 365,000 | | | $ | 8.53 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Exercisable at the end of the year | | | 120,417 | | | $ | 7.95 | | | | 20,000 | | | $ | 7.15 | | | | 30,000 | | | $ | 6.50 | | | | 264,389 | | | | | | | | 163,438 | | | | | | | | 120,417 | | | | | |
The weighted-average grant-date fair value of options granted was $1.35 in 2019, $1.83 in 2018 and $1.74 in 2017, $1.42 in 2016 and $1.25 in 2015.2017. The aggregate intrinsic value for the options outstanding as of December 31, 2019, 2018 and 2017 2016was $0, $737 and 2015 was $737, $332, and $27, respectively.
As of December 31, 20172019 total unrecognized compensation cost was $335$230 and is expected to be recognized over a weighted-average period of 1.18 years. 1.08 years.
| (1) | On June 28, 2016, TAT’s Board declared a cash dividend in the total amount of $3 million (approximately NIS 11.5 million), or $0.34 per share (approximately NIS 1.3 per share), for all of the shareholders of TAT. The dividend was paid on August 9, 2016 to shareholders of record on July 28, 2016. |
| (2) | 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. |
TAT TECHNOLOGIES LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
NOTE 1314 - EARNINGS PER SHARE (“EPS”)
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.
| | Year ended December 31, | | | | | | | 2017 | | | 2016 | | | 2015 | | | | | | | | | | | Numerator for EPS: | | | | | | | | | | | | | | | | | | | Net income | | $ | 2,396 | | | $ | 62 | | | $ | 5,849 | | | Net income (loss) | | | | | | | | | | | | | | Denominator for EPS: | | | | | | | | | | | | | | | | | | | | | | Weighted average shares outstanding – basic | | | 8,848,028 | | | | 8,828,444 | | | | 8,808,344 | | | 8,874,696 | | | 8,864,885 | | | 8,848,028 | | Dilutive shares | | | | | | | 2,320 | | | | 2,345 | | | | | | | | | | | | | | Weighted average shares outstanding – diluted | | | 8,909,072 | | | | 8,830,764 | | | | 8,810,689 | | | | | | | | | | | | | | EPS: | | | | | | | | | | | | | | | | | | | | | | Basic and diluted | | $ | 0.27 | | | $ | 0.01 | | | $ | 0.66 | | | $ | 0.1 | | | $ | (0.5 | ) | | $ | 0.27 | |
Diluted income per share does not include 105,000, 220,000482,282, 306,151 and 295,000105,000 options, for the years ended December 31, 2017, 20162019, 2018 and 20152017 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.
TAT TECHNOLOGIES LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
NOTE 1415 - | TAXES ON INCOME |
| 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 current 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. As with dividends thereafter. Dividends distributed from taxable income derived from an Approved or Benefited Enterprises during the applicable benefits period, dividends distributed from Preferred IncomeEnterprise would be subject to a 20%15% tax (or lower, if so provided under an applicable tax treaty), which would generally be withheld by the distributing company. Whilecompany .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.
TAT TECHNOLOGIES LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
NOTE 14-15 - | TAXES ON INCOME (CONT) |
| 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. 2016, and 7.5% in 2017 and thereafter.
The uniform tax rate for Development Zone A, as of January 1, 2017, is 7.5% (as part of changes enacted in Amendment 73).
| b. | Corporate tax rate in Israel |
The income of the Israeli companies is taxed in Israel at the regular corporate tax rates which were 26.5% for 2014 and 2015.
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.
U.S. subsidiaries are taxed based on federal and state tax laws. The Federal statutory tax rate for 2017, 2016 and 20152019 was 38%. On December 22, 2017, the Tax Cuts and Jobs Act (the"Act") was enacted into law. The new legislation represents fundamental and dramatic modifications to the U.S. tax system. The Act contains several key tax provisions that will impact the Company's U.S. subsidiaries, including the reduction of the maximum U.S. federal corporate income tax rate from 35% to 21%, effective January 1, 2018. The Company has made reasonable estimates of the effects on its deferred tax balances and reduced the deferred tax assets by $414 plus 3%-6% for the year ended December 31, 2017 due to the change in the statutory tax rate. The Act had no impact on the valuation allowance assessment of the U.S. subsidiaries.
Because of the complexity of the new intangible income rules, Global Intangible Low-Taxed Income (GILTI) and Foreign Derived Intangible Income (FDII) tax rules, the Company continues to evaluate these provisions of the Act and the application of ASC 740, Income Taxes. Under U.S. GAAP, the Company is allowed to make an accounting policy choice of either (1) treating taxes due or receivable on future U.S. inclusions/deductions in taxable income related to GILTI and FDII as a current-period expense/benefit when incurred (the “period cost method”) or (2) factoring such amounts into the Company's measurement of its deferred taxes (the “deferred method”). The Company's selection of an accounting policy with respect to the new GILTI/FDII tax rules will depend, in part, on analyzing its global income to determine whether it expects to have future U.S. inclusions or deductions in taxable income related to GILTI/FDII and, if so, what the impact is expected to be. Whether the Company expects to have future U.S. inclusions or deductions in taxable income related to GILTI/FDII depends not only on the Company's current structure and estimated future results of global operations, but also its intent and ability to modify its structure. The Company is currently in the process of analyzing its structure and, as a result, is not yet able to reasonably estimate the effect of these provisions of the Act. Therefore, the Company has not made any adjustments related to potential GILTI or FDII tax impact in its financial statements and has not made a policy decision regarding whether to record deferred tax on GILTI/FDII.
The tax impacts discussed above represent provisional amounts and the Company's current best estimates. The SEC issued SAB 118 which provides guidance on the accounting for the tax effects of the Act. In accordance with this guidance, any material adjustments recorded to the provisional amounts will be disclosed in a 2018 reporting period by the fourth quarter of 2018.
state taxes.
TAT TECHNOLOGIES LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
NOTE 14-15 - | TAXES ON INCOME (CONT) |
TAT’s income tax assessments are considered final through 2015.2014.
Turbochrome income tax assessments are considered final through 2013.2014.
Limco-Piedmont income tax assessments are considered final through 2012. 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:
| | Year ended December 31, | | | | | | | 2017 | | | 2016 | | | 2015 | | | | | | | | | | | Income before taxes on income as reported in the statements of income | | $ | 4,939 | | | $ | 3,982 | | | $ | 5,256 | | | 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 | | | 24 | % | | | 25 | % | | | 26.5 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Theoretical taxes on income | | $ | 1,185 | | | $ | 996 | | | $ | 1,393 | | | Theoretical taxes on income (tax benefit) | | | $ | 351 | | | $ | (1,318 | ) | | $ | 1,185 | | | | | | | | | | | | | | | | | | | | | | | | Increase (decrease) in taxes on income resulting from: | | | | | | | | | | | | | | | | | | | | | | Tax adjustment for foreign subsidiaries subject to a different tax rate | | | 518 | | | | 618 | | | | 224 | | | (26 | ) | | (9 | ) | | 518 | | Reduced tax rate on income derived from "Preferred Enterprises" plans | | | (111 | ) | | | 75 | | | | 146 | | | 305 | | | 421 | | | (111 | ) | Exempt income (Bargain purchase) | | | - | | | | - | | | | (1,281 | ) | | Earnings from foreign subsidiaries (1) | | | 371 | | | | 2,685 | | | | - | | | 91 | | | (338 | ) | | 371 | | Valuation allowance | | | 8 | | | | (40 | ) | | | (75 | ) | | Valuation allowance for exchange rates differences on deferred taxes not recorded on capital losses | | | (125 | ) | | (42 | ) | | 8 | | Change in tax rate | | | 414 | | | | - | | | | - | | | - | | | - | | | 414 | | Tax in respect of prior years | | | 7 | | | | (151 | ) | | | (12 | ) | | - | | | (481 | ) | | 7 | | Temporary differences for which no deferred taxes were recorded | | | (55 | ) | | 8 | | | - | | Permanent differences | | | 55 | | | 245 | | | (104 | ) | Other adjustments | | | 45 | | | | (200 | ) | | | 130 | | | | | | | | | | | | | | Permanent differences | | | (104 | ) | | | (118 | ) | | | 119 | | | Taxes on income as reported in the statements of income | | $ | 2,333 | | | $ | 3,865 | | | $ | 644 | | | | | | | | | | | | | |
| (1) | During 20172019, 2018 and 2016,2017, 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. |
TAT TECHNOLOGIES LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
NOTE 1415 - | TAXES ON INCOME (CONT) |
| f. | Income (loss) before taxes on income (tax benefit) is comprised as follows: |
| | Year ended December 31, | | | Year ended December 31, | | | | 2017 | | | 2016 | | | 2015 | | | 2019 | | | 2018 | | | 2017 | | | | | | | | | | | | | | | | | | | | | Domestic (Israel) | | $ | 1,337 | | | $ | (650 | ) | | $ | 3,840 | | | $ | (2,586 | ) | | $ | (5,261 | ) | | $ | 1,337 | | Foreign (United States) | | | 3,602 | | | | 4,632 | | | | 1,416 | | | | 4,113 | | | | (471 | ) | | | 3,602 | | | | | | | | | | | | | | | | | | | | | | | | | | $ | 4,939 | | | $ | 3,982 | | | $ | 5,256 | | | $ | 1,527 | | | $ | (5,732 | ) | | $ | 4,939 | |
| g. | Taxes on income (tax benefit) included in the statements of income: |
| | Year ended December 31, | | | Year ended December 31, | | | | 2017 | | | 2016 | | | 2015 | | | 2019 | | | 2018 | | | 2017 | | Current: | | | | | | | | | | | | | | | | | | | Domestic (Israel) | | $ | 431 | | | $ | 334 | | | $ | 225 | | | $ | - | | | $ | - | | | $ | 431 | | Foreign (United States) | | | 1,937 | | | | 1,792 | | | | 452 | | | | 139 | | | | (881 | ) | | | 1,937 | | | | | | | | | | | | | | | | | | | | | | | | | | | 2,368 | | | | 2,126 | | | | 677 | | | | 139 | | | | (881 | ) | | | 2,368 | | Deferred: | | | | | | | | | | | | | | | | | | | | | | Domestic (Israel) | | | 210 | | | | 2,135 | | | | (170 | ) | | (355 | ) | | (813 | ) | | 210 | | Foreign (United States) | | | (252 | ) | | | (245 | ) | | | 149 | | | | | | | | 711 | | | | (252 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | (42 | ) | | | 1,890 | | | | (21 | ) | | | 450 | | | | (102 | ) | | | (42 | ) | Previous years: | | | | | | | | | | | | | | | | | | | | | | Foreign (United States) | | | 7 | | | | (151 | ) | | | (12 | ) | | | - | | | | (481 | ) | | | 7 | | | | | | | | | | | | | | | | | | | | | | | | | | | 7 | | | | (151 | ) | | | (12 | ) | | | - | | | | (481 | ) | | | 7 | | | | | | | | | | | | | | | | | | | | | | | | | | $ | 2,333 | | | $ | 3,865 | | | $ | 644 | | | $ | 589 | | | $ | (1,464 | ) | | $ | 2,333 | |
TAT TECHNOLOGIES LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands NOTE 1415 - TAXES ON INCOME (CONT)
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, | | | | | | | 2017 | | | 2016 | | | | | | | | Deferred tax assets: | | | | | | | | | | | | | Provision for doubtful accounts | | $ | 160 | | | $ | 102 | | | $ | 67 | | | $ | 59 | | Unrealized gains | | | 124 | | | | 138 | | | Provisions for employee benefits | | | 369 | | | | 476 | | | 470 | | | 267 | | Inventory | | | 1,397 | | | | 1,608 | | | 964 | | | 975 | | Goodwill and intangible assets | | | 156 | | | | 360 | | | Tax credits carryforward | | | 75 | | | | 347 | | | Capital and state tax losses carryforward | | | 3,417 | | | | 3,409 | | | Intangible assets | | | 42 | | | 100 | | Capital tax losses carryforward | | | 3,500 | | | 3,375 | | Net operating losses carryforward | | | 509 | | | | 817 | | | 1,669 | | | 1,102 | | Other | | | 246 | | | | 237 | | | | | | | | | | Deferred tax assets, before valuation allowance | | $ | 6,453 | | | $ | 7,494 | | | $ | 6,808 | | | $ | 6,166 | | Valuation allowance | | | (3,417 | ) | | | (3,409 | ) | | | | | | | | | Deferred tax assets, net | | $ | 3,036 | | | $ | 4,085 | | | $ | 3,308 | | | $ | 2,791 | | | | | | | | | | | | | | | | | Deferred tax liabilities: | | | | | | | | | | | | | | | Property, plant and equipment and intangible assets | | | (2,120 | ) | | | (2,643 | ) | | (2,159 | ) | | (2,085 | ) | Earnings from foreign subsidiaries (1) | | | (2,200 | ) | | | (2,259 | ) | | (1,953 | ) | | (1,862 | ) | Other temporary differences deferred tax liabilities | | | (140 | ) | | | (225 | ) | | | | | | | | | Deferred tax liabilities | | $ | (4,460 | ) | | $ | (5,127 | ) | | $ | (4,180 | ) | | $ | (4,113 | ) | | | | | | | | | | | | | | | | Net | | $ | (1,424 | ) | | $ | (1,042 | ) | | $ | (872 | ) | | $ | (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.Company. |
TAT TECHNOLOGIES LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
NOTE 1415 - | TAXES ON INCOME (CONT) |
| h. | Deferred income taxes (cont.): |
The following table summarizes the changes in the valuation allowance for deferred tax assets:
Balance, December 31, 2016 | | | 3,409 | | Additions during the year | | | | | Balance, December 31,2017 | | | 3,417 | | Deductions during the year | | | | | Balance, December 31,2018 | | $ | 3,375 | | Additions during the year | | | | | Balance, December 31,2019 | | $ | 3,500 | |
Balance, December 31, 2014 | | $ | 3,574 | | Deductions during the year | | | (125 | ) | Balance, December 31,2015 | | | 3,449 | | | | | | | Deductions during the year | | | (40 | ) | Balance, December 31,2016 | | | 3,409 | | | | | | | Additions during the year | | | 8 | | Balance, December 31,2017 | | $ | 3,417 | |
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 $ 1,431.1,519. That amount is expected to expire gradually starting from 2024 and (ii) Capital losses attributed to the companyCompany in the amount of $ 1,495.1,502.
TAT does not intend to distribute tax-exempt earnings deriving from its Approved Enterprise aggregating approximately $1,936 as of December 31, 2017,2019, 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, 2017.2019.
TAT TECHNOLOGIES LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
NOTE 1516 - | SEGMENT INFORMATION |
| a. | Segment Activities Disclosure: |
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 (see note 3). This operating segment started operating in 2015 with the Turbochrome acquisition. See note 3.flaps. |
The Group'sGroup’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.
NOTE 1516 - | SEGMENT INFORMATION (CONT) |
| b. | Segments statement operations disclosure: |
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, 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 | | Revenues | | | | | | | | | | | | | | | | | | | Sale of products and services | | $ | 27,898 | | | $ | 34,615 | | | $ | 33,009 | | | $ | 11,005 | | | $ | - | | | $ | 106,527 | | Intersegment revenues | | | 3,339 | | | | 197 | | | | - | | | | - | | | | (3,536 | ) | | | - | | Total revenues | | | 31,237 | | | | 34,812 | | | | 33,009 | | | | 11,005 | | | | (3,536 | ) | | | 106,527 | | | | | | | | | | | | | | | | | | | | | | | | | | | Cost of revenues | | | 25,535 | | | | 26,085 | | | | 29,026 | | | | 9,057 | | | | (3,620 | ) | | | 86,083 | | Gross profit | | | 5,702 | | | | 8,727 | | | | 3,983 | | | | 1,948 | | | | 84 | | | | 20,444 | | | | | | | | | | | | | | | | | | | | | | | | | | | Research and development | | | 398 | | | | 169 | | | | - | | | | 164 | | | | - | | | | 731 | | Selling and marketing | | | 1,968 | | | | 1,358 | | | | 1,213 | | | | 435 | | | | - | | | | 4,974 | | General and administrative | | | 2,072 | | | | 3,182 | | | | 3,049 | | | | 1,106 | | | | - | | | | 9,409 | | Other expenses | | | - | | | | - | | | | 53 | | | | - | | | | - | | | | 53 | | Operating income (loss) | | $ | 1,264 | | | $ | 4,018 | | | $ | (332 | ) | | $ | 243 | | | $ | 84 | | | $ | 5,277 | | Financial expenses, net | | | | | | | | | | | | | | | | | | | | | | | 338 | | Income before taxes on income | | | | | | | | | | | | | | | | | | | | | | | 4,939 | |
| | 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 | | | | | Revenues | | | | | | | | | | | | | | | | | | | Sale of products and services | | $ | 20,552 | | | $ | 34,183 | | | $ | 38,687 | | | $ | 8,610 | | | $ | - | | | $ | 102,032 | | Intersegment revenues | | | | | | | | | | | | | | | | | | | | | | | | | Total revenues | | | 26,589 | | | | 34,433 | | | | 38,687 | | | | 8,610 | | | | (6,287 | ) | | | 102,032 | | | | | | | | | | | | | | | | | | | | | | | | | | | Cost of revenues | | | | | | | | | | | | | | | | | | | | | | | | | Gross profit | | | | | | | | | | | | | | | | | | | 181 | | | | 15,562 | | | | | | | | | | | | | | | | | | | | | | | | | | | Research and development | | | 58 | | | | 83 | | | | 7 | | | | (74 | ) | | | - | | | | 74 | | Selling and marketing | | | 1,530 | | | | 1,638 | | | | 1,334 | | | | 757 | | | | - | | | | 5,259 | | General and administrative | | | 1,978 | | | | 2,734 | | | | 2,408 | | | | 1,131 | | | | - | | | | 8,251 | | Operating income (loss) | | | | | | | | | | | | | | | | | | | | | | | | | Financial expenses, net | | | | | | | | | | | | | | | | | | | | | | | 451 | | Income before taxes on income | | | | | | | | | | | | | | | | | | | | | | | 1,527 | |
TAT TECHNOLOGIES LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
NOTE 1516 - SEGMENT INFORMATION (CONT)
| b. | Segments statement operations disclosure (cont.) |
| | Year ended December 31, 2016 | | | | | 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 | | | Other | | | Elimination of inter-company sales | | | Consolidated | | | 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 | | | | | Revenues | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Sale of products and services | | $ | 23,515 | | | $ | 31,440 | | | $ | 31,630 | | | $ | 9,209 | | | $ | - | | | $ | - | | | $ | 95,794 | | | $ | 20,065 | | | $ | 30,929 | | | $ | 32,487 | | | $ | 9,697 | | | $ | - | | | $ | 93,178 | | Intersegment revenues | | | 4,740 | | | | 989 | | | | - | | | | - | | | | - | | | | (5,729 | ) | | | - | | | | | | | | | | | | | | | | | | | | | | | | | | Total revenues | | | 28,255 | | | | 32,429 | | | | 31,630 | | | | 9,209 | | | | | | | | (5,729 | ) | | | 95,794 | | | 24,707 | | | 31,344 | | | 32,487 | | | 9,697 | | | (5,057 | ) | | 93,178 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Cost of revenues | | | 24,028 | | | | 23,440 | | | | 27,423 | | | | 7,610 | | | | - | | | | (5,744 | ) | | | 76,757 | | | | | | | | | | | | | | | | | | | | | | | | | | Gross profit | | | 4,227 | | | | 8,989 | | | | 4,207 | | | | 1,599 | | | | - | | | | 15 | | | | 19,037 | | | Gross profit (loss) | | | | | | | | | | | | | | | | | | | | 286 | | | | 8,391 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Research and development | | | 758 | | | | 210 | | | | 29 | | | | 143 | | | | - | | | | - | | | | 1,140 | | | 287 | | | 98 | | | - | | | 168 | | | - | | | 553 | | Selling and marketing | | | 1,544 | | | | 1,105 | | | | 792 | | | | 435 | | | | - | | | | - | | | | 3,876 | | | 1,512 | | | 1,660 | | | 1,324 | | | 417 | | | - | | | 4,913 | | General and administrative | | | 2,539 | | | | 2,915 | | | | 3,473 | | | | 1,096 | | | | - | | | | - | | | | 10,023 | | | 2,384 | | | 2,375 | | | 2,631 | | | 1,169 | | | - | | | 8,559 | | Other expenses (income) | | | - | | | | - | | | | - | | | | - | | | | (138 | ) | | | - | | | | (138 | ) | | Other income | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Operating income (loss) | | $ | (614 | ) | | $ | 4,759 | | | $ | (87 | ) | | $ | (75 | ) | | $ | 138 | | | $ | 15 | | | $ | 4,136 | | | | | | | | | | | | | | | | | | | | | | | | | | Financial expenses, net | | | | | | | | | | | | | | | | | | | | | | | | | | | 154 | | | | | | | | | | | | | | | | | | | 102 | | Income before taxes on income | | | | | | | | | | | | | | | | | | | | | | | | | | | 3,982 | | | Loss before taxes on income | | | | | | | | | | | | | | | | | | (5,732 | ) |
TAT TECHNOLOGIES LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
NOTE 1516 - | SEGMENT INFORMATION (CONT) |
| b. | Segments statement operations disclosure (cont.) |
| | Year ended December 31, 2015 | | | | | 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 | | | Other | | | Elimination of inter-company sales | | | Consolidated | | | 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 | | | | | Revenues | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Sale of products and services | | $ | 23,511 | | | $ | 30,526 | | | $ | 29,665 | | | $ | 1,905 | | | $ | - | | | $ | - | | | $ | 85,607 | | | $ | 27,898 | | | $ | 34,615 | | | $ | 33,009 | | | $ | 11,005 | | | $ | - | | | $ | 106,527 | | Intersegment revenues | | | 3,840 | | | | 475 | | | | - | | | | - | | | | - | | | | (4,315 | ) | | | - | | | | | | | | | | | | | | | | | | | | | | | | | | Total revenues | | | 27,351 | | | | 31,001 | | | | 29,665 | | | | 1,905 | | | | - | | | | (4,315 | ) | | | 85,607 | | | 31,237 | | | 34,812 | | | 33,009 | | | 11,005 | | | (3,536 | ) | | 106,527 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Cost of revenues | | | 23,887 | | | | 22,541 | | | | 28,474 | | | | 1,485 | | | | - | | | | (4,445 | ) | | | 71,942 | | | | | | | | | | | | | | | | | | | | | | | | | | Gross profit | | | 3,464 | | | | 8,460 | | | | 1,191 | | | | 420 | | | | - | | | | 130 | | | | 13,665 | | | | | | | | | | | | | | | | | | | | 84 | | | | 20,444 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Research and development | | | 619 | | | | 264 | | | | - | | | | 7 | | | | - | | | | - | | | | 890 | | | 398 | | | 169 | | | - | | | 164 | | | - | | | 731 | | Selling and marketing | | | 1,270 | | | | 961 | | | | 608 | | | | 64 | | | | - | | | | - | | | | 2,903 | | | 1,968 | | | 1,358 | | | 1,213 | | | 435 | | | - | | | 4,974 | | General and administrative | | | 1,880 | | | | 3,000 | | | | 3,303 | | | | 286 | | | | - | | | | - | | | | 8,469 | | | 2,072 | | | 3,182 | | | 3,049 | | | 1,106 | | | - | | | 9,409 | | Other expenses | | | - | | | | - | | | | - | | | | - | | | | 631 | | | | - | | | | 631 | | | | | | | | | | | | | | | | | | | | | | | | | | Gain on bargain purchase | | | - | | | | - | | | | - | | | | - | | | | (4,833 | ) | | | - | | | | (4,833 | ) | | | | | | | | | | | | | | | | | | | | | | Operating income (loss) | | $ | (305 | ) | | $ | 4,235 | | | $ | (2,720 | ) | | $ | 63 | | | $ | (4,202 | ) | | $ | 130 | | | $ | 5,605 | | | | | | | | | | | | | | | | | | | | | | | | | | Financial expenses, net | | | | | | | | | | | | | | | | | | | | | | | | | | | 349 | | | | | | | | | | | | | | | | | | | 338 | | Income before taxes on income | | | | | | | | | | | | | | | | | | | | | | | | | | | 5,256 | | | | | | | | | | | | | | | | | | 4,939 | |
TAT TECHNOLOGIES LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
NOTE 15 - | SEGMENT INFORMATION (CONT) |
| c. | The following financial information identifies the assets, depreciation and amortization, and capital expenditures to segments: |
| | 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 | | | 29,411 | | | | 35,067 | | | | 27,276 | | | | 11,915 | | | | 8,326 | | | | 111,995 | | Depreciation and amortization | | | 1,299 | | | | 1,029 | | | | 653 | | | | 960 | | | | - | | | | 3,941 | | Expenditure for segment assets | | | 1,769 | | | | 866 | | | | 847 | | | | 402 | | | | - | | | | 3,884 | |
| | Year ended December 31, 2016 | | | | 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 | | | 28,885 | | | | 34,729 | | | | 27,246 | | | | 11,616 | | | | 9,500 | | | | 111,976 | | Depreciation and amortization | | | 1,199 | | | | 898 | | | | 542 | | | | 997 | | | | - | | | | 3,636 | | Expenditure for segment assets | | | 1,437 | | | | 1,266 | | | | 2,686 | | | | 505 | | | | - | | | | 5,894 | |
| | Year ended December 31, 2015 | | | | | | | | OEM of Heat Transfer Solutions and Aviation Accessories | | | MRO Services for heat transfer components and OEM of heat transfer solutions | | | MRO services for Aviation C omponents | | | Overhaul and coating of jet engine components | | | Consolidated | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Depreciation and amortization | | | 1,127 | | | | 789 | | | | 669 | | | | 196 | | | | 2,781 | | | | | | Expenditure for segment assets | | | 1,075 | | | | 1,400 | | | | 821 | | | | 51 | | | | 3,347 | | | | | |
NOTE 16 - | SEGMENT INFORMATION (CONT) |
| 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 | | | | | | | | | | | | | | | | | | | | | | | | Total assets | | | | | | | 31,031 | | | | 34,264 | | | | 10,194 | | | | 10,037 | | | | | | Depreciation and amortization | | | 1,601 | | | | 1,031 | | | | 786 | | | | 954 | | | | - | | | | 4,372 | | Expenditure for segment assets | | | 1,600 | | | | 1,180 | | | | 803 | | | | 239 | | | | - | | | | 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 | | | | | | | | | | | | | | | | | | | | | | | | Total assets | | | 26,171 | | | | 33,794 | | | | 27,687 | | | | 11,100 | | | | 4,535 | | | | 103,287 | | Depreciation and amortization | | | 1,476 | | | | 1,044 | | | | 705 | | | | 960 | | | | - | | | | 4,185 | | Expenditure for segment assets | | | 2,665 | | | | 588 | | | | 764 | | | | 144 | | | | - | | | | 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 | | | | | | | | | | | | | | | | | | | | | | | | Total assets | | | 29,411 | | | | 35,067 | | | | 27,276 | | | | 11,915 | | | | 8,326 | | | | 111,995 | | Depreciation and amortization | | | 1,299 | | | | 1,029 | | | | 653 | | | | 960 | | | | - | | | | 3,941 | | Expenditure for segment assets | | | 1,769 | | | | 866 | | | | 847 | | | | 402 | | | | - | | | | 3,884 | |
NOTE 1617 - | ENTITY-WIDE DISCLOSURE |
| a. | Total revenues - by geographical location were attributed according to costumercustomer residential country as follows: |
| | Year ended December 31, | | | | | | | 2017 | | | 2016 | | | 2015 | | | | | | | | | | | | | Total revenues | | | Total revenues | | | Total revenues | | | | | | | | | | | Sale of products | | | | | | | | | | | | | | | | | | | Israel | | $ | 6,289 | | | $ | 5,005 | | | $ | 4,102 | | | $ | 3,464 | | | $ | 2,893 | | | $ | 6,289 | | United states | | | 19,004 | | | | 18,350 | | | | 20,013 | | | United States | | | 14,181 | | | 13,013 | | | 19,004 | | Other | | | 10,760 | | | | 7,076 | | | | 7,224 | | | | | | | | | | | | | | | | $ | 36,053 | | | $ | 30,431 | | | $ | 31,339 | | | | | | | | | | | | | |
| | Year ended December 31, | | | | | | | 2017 | | | 2016 | | | 2015 | | | | | | | | | | | | | Total revenues | | | Total revenues | | | Total revenues | | | | | | | | | | | Sale of Services | | | | | | | | | | | | | | | | | | | Israel | | $ | 3,704 | | | $ | 2,665 | | | $ | 814 | | | $ | 3,624 | | | $ | 4,031 | | | $ | 3,704 | | United states | | | 40,047 | | | | 39,596 | | | | 32,738 | | | | | | 47,749 | | | 41,019 | | | 40,047 | | Other | | | 26,723 | | | | 23,102 | | | | 20,716 | | | | | | | | | | | | | | | | $ | 70,474 | | | $ | 65,363 | | | $ | 54,268 | | | | | | | | | | | | | |
| b. | Total long-lived assets - by geographical location were as follows: |
| | December 31, | | | | | | | 2017 | | | 2016 | | | | | | | | | | | | | | | | | | | | | Israel | | $ | 12,395 | | | $ | 12,349 | | | $ | 16,318 | | | $ | 12,894 | | United states | | | 8,926 | | | | 8,949 | | | United States | | | | 11,354 | | | | 8,530 | | Total | | $ | 21,321 | | | $ | 21,298 | | | $ | 27,672 | | | $ | 21,424 | |
No single customer accounted for 10% or more of Group's total net revenue in any year presented.
TAT TECHNOLOGIES LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
NOTE 1718 - SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS INFORMATION
| | Warranty provision | | | Provision for doubtful Accounts | | | Warranty provision | | | Provision for doubtful Accounts | | | | | | | | | | Balance, as of December 31, 2014 | | $ | 251 | | | $ | 125 | | | Additions | | | 294 | | | | 206 | | | Deductions | | | (221 | ) | | | - | | | | | | | | | | | | | Balance, as of December 31, 2015 | | | 324 | | | | 331 | | | Additions | | | 216 | | | | 112 | | | Deductions | | | (202 | ) | | | (141 | ) | | | | | | | | | | | | | | | | | Balance, as of December 31, 2016 | | | 338 | | | | 302 | | | 338 | | | 302 | | Additions | | | 154 | | | | 361 | | | 154 | | | 361 | | Deductions | | | (186 | ) | | | (40 | ) | | | (186 | ) | | | (40 | ) | | | | | | | | | | | | | | | | Balance, as of December 31, 2017 | | $ | 306 | | | $ | 623 | | | 306 | | | 623 | | Additions | | | 214 | | | 135 | | Deductions | | | | (235 | ) | | | (482 | ) | | | | | | | | | Balance, as of December 31, 2018 | | | $ | 285 | | | $ | 276 | | Additions | | | 115 | | | 84 | | Deductions | | | | (165 | ) | | | (46 | ) | | | | | | | | | Balance, as of December 31, 2019 | | | $ | 235 | | | $ | 314 | |
NOTE 18
F - SUBSEQUENT EVENTS 51
| (1) | On February 6, 2018, subsequent to the balance sheet date, TAT’s board of directors approved the grant of 3,893 options, at an exercise price of $11.1 per share, to senior executives. |
| (2) | On February 28, 2018, subsequent to the balance sheet date, TAT’s board of directors approved the grant of 50,000 options, at an exercise price of $10.74 per share, to senior executives. |
| |