20-F 1 zk1618367.htm 20-F zk1618367.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
 
FORM 20-F
 
o
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
 
OR
 
 
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2014
 
OR
 
 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to _____________
 
o
SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
Date of event requiring this shell company report ………………..
 
Commission file number: 0-16050
 
TAT TECHNOLOGIES LTD.
(Exact name of Registrant as specified in its charter
and translation of Registrant’s name into English)
 
Israel
(Jurisdiction of incorporation or organization)
 
P.O. Box 80, Gedera 70750, Israel
(Address of principal executive offices)
 
Securities registered or to be registered pursuant to Section 12(b) of the Act:
 
Title of each class
Name of each exchange on which registered
   
Ordinary Shares, NIS 0.90 Par Value
NASDAQ Global Market
 
Securities registered or to be registered pursuant to Section 12(g) of the Act: None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None
Indicate the number of outstanding shares of each of the issuer’s classes of capital or Common stock as of the close of the period covered by the annual report:
 
Ordinary Shares, par value NIS 0.90 per share…………… 8,808,344
(as of December 31, 2015)
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
 
Yes o No x
 
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
 
Yes o No x
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
 
Yes x No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer o
Accelerated filer o
Non-accelerated filer x
 
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
 
U.S. GAAP x
International Financial Reporting Standards as issued by the International
Accounting Standards Board o
Other o
 
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow:
 
Item 17 o Item 18 o
 
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
Yes o No x

 
 

 
 
TABLE OF CONTENTS
 
Page
 
1
 
4
4
4
4
 
A.  Selected Financial Data
4
 
B.   Capitalization and Indebtedness
6
 
C.   Reasons for the Offer and Use of Proceeds
6
 
D.   Risk Factors
6
23
 
A.  Business Overview
26
 
B.   Government Regulations
51
 
C.   Organizational Structure
52
 
D.   Property, Plants and Equipment
52
54
54
 
A.  Research and Development, Patents and Licenses
85
 
B.   Trend Information
85
 
C.   Off-Balance Sheet Arrangements
86
 
D.   Tabular Disclosure of Contractual Obligations
86
87
 
A.  Directors and Senior Management
87
 
B.   Board Practices
93
 
C.   Employees
108
 
D.  Share Ownership
109
110
 
A.  Major Shareholders
110
 
B.   Related Party Transactions
112
 
C.   Interests of Experts and Counsel
112
112
 
A.  Consolidated Statements and Other Financial Information
112
 
B.   Significant Changes
113
114
 
A.  Offer and Listing Details
114
 
B.   Plan of Distribution
116
 
C.   Markets
116
 
D.   Selling Shareholders
116
 
E.   Dilution
116
 
F.   Expense of the Issue
116
116
 
A.  Share Capital
116
 
B.   Memorandum and Articles of Association
117
 
C.   Material Contracts
121
 
D.   Exchange Controls
122
 
E.   Taxation
136
 
F.   Dividends and Paying Agents
136
 
G.   Statement by Experts
136
 
H.   Documents on Display
137
 
 
ii

 
 
I.    Subsidiary Information
137
137
137
 
138
138
138
138
140
140
140
141
142
142
142
142
 
143
143
143
143
 
 
iii

 
INTRODUCTION
 
TAT Technologies Ltd. provides a range of services and products to the commercial and military aerospace and ground defense sectors through our Gedera facility in Israel, or Gedera, and through our subsidiary in the U.S., Limco-Piedmont Inc., or Limco-Piedmont. Limco-Piedmont operates through Limco Airepair Inc., or Limco, and through Piedmont Aviation Component Services LLC, or Piedmont. We also operate in Israel through our wholly-owned subsidiary, Turbochrome Ltd., or Turbochrome.

As of December 31, 2015, we operate under four segments:  (i) original equipment manufacturing or “OEM” of heat transfer products and aviation accessories through our Gedera facility; (ii) heat transfer services and products through our Limco subsidiary; (iii) maintenance, repair and overhaul or “MRO” services for aviation components through our Piedmont subsidiary; and (iv) overhaul and coating of jet engine components through our Turbochrome subsidiary.

Through our Gedera facility, we are an OEM of a broad range of heat transfer components, air conditioning systems and other cooling systems used in mechanical and electronic systems on board military and commercial aircraft as well as on ground systems. The Gedera facility is also an OEM for a wide range of aviation accessories and provides limited MRO services for military and commercial customers, mainly for aviation accessories as well as for certain heat transfer components.

Through our Limco subsidiary, we provide heat transfer services and products to the aerospace industry. Limco is an FAA (Federal Aviation Administration) certified repair station and provides aircraft MRO services and products for airlines, air cargo carriers, maintenance service centers and the military, primarily for heat transfer products.
 
Through our Piedmont subsidiary, we provide MRO services for aviation components in the area of landing gear and auxiliary power units (APU). Piedmont is an FAA certified repair station and provides its services to airlines, air cargo carriers, maintenance service centers and, to a lesser extent, to the military.
 
 
1

 
Through our Turbochrome subsidiary, we provide MRO services in the area of jet engine overhaul, which includes the overhaul and coating of jet engine components such as turbine vanes and blades, fan blades, variable inlet guide vanes and afterburner flaps. Turbochrome is certified by the FAA and EASA (European Aviation Safety Agency).

In addition, TAT, through its Piedmont subsidiary, holds approximately 4.9% of the equity securities of First Aviation Services Inc., or FAvS.

On November 25, 2015, the company signed an agreement with Engineering Holding of Moscow, Russia, or Engineering, to establish a new facility for the provision of services with respect to heat transfer products. The new company, TAT-Engineering LLC, will be based in Novosibirsk’s Tolmachevo airport. TAT - Engineering, LLC shall provide services for heat transfer products. According to the agreement, 51% of the 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 participant rights granted to Engineering. The new entity was established on January 2016, therefore there is no activity related to TAT-Engineering LLC in 2015.

Our ordinary shares are publicly traded on the NASDAQ Global Market under the symbol “TATT” and on the Tel Aviv Stock Exchange under the symbol “TAT Tech”.  As used in this annual report, the terms “TAT”, “we”, “us” and “our” mean TAT Technologies Ltd. and its subsidiaries, unless otherwise indicated.

Our consolidated financial statements appearing in this annual report are prepared in U.S. dollars and in accordance with generally accepted accounting principles in the United States, or U.S. GAAP.  All references in this annual report to “dollars” or “$” are to U.S. dollars and all references in this annual report to “NIS” are to New Israeli Shekels.
 
2

 

Statements made in this annual report concerning the contents of any contract, agreement or other document are summaries of such contracts, agreements or documents and are not complete descriptions of all of their terms.  If we filed any of these documents as an exhibit to this annual report or to any previous filing with the Securities and Exchange Commission, you may read the document itself for a complete recitation of its terms.
 
Except for the historical information contained in this annual report, the statements contained in this annual report are “forward looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995, as amended, with respect to our business, financial condition and results of operations.  Such forward-looking statements reflect our current view with respect to future events and financial results.  Statements which use the terms “believe”, “expect”, “plan”, “intend”, “estimate”, and similar expressions are intended to identify forward-looking statements.  We remind readers that forward-looking statements are merely predictions and therefore inherently subject to uncertainties and other factors and involve known and unknown risks that could cause the actual results, performance, levels of activity, or our achievements, or industry results, to be materially different from any future results, performance, levels of activity, or our achievements expressed or implied by such forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof.  Except as required by applicable law, including the securities laws of the United States, we undertake no obligation to publicly release any update or revision to any forward looking statements to reflect new information, future events or circumstances, or otherwise after the date hereof.  We have attempted to identify significant uncertainties and other factors affecting forward-looking statements in the Risk Factors section that appears in Item 3D. “Key Information - Risk Factors”.
 
 
3

 
 
PART I
 
Item 1.                      Identity of Directors, Senior Management and Advisers
 
Not applicable.
 
Item 2.                      Offer Statistics and Expected Timetable
 
Not applicable.
 
Item 3.                      Key Information
 
A.              Selected Financial Data
 
TAT’s selected historical information is derived from the audited consolidated financial statements of TAT as of December 31, 2015 and 2014 and for each of its fiscal years ended December 31, 2015, 2014 and 2013, which are included elsewhere in this annual report, and have been prepared in accordance with U.S. GAAP. The selected financial data as of December 31, 2013, 2012 and 2011 and for the years ended December 31, 2012 and December 31, 2011 is derived from audited consolidated financial statements of TAT not included in this annual report, which have been prepared in accordance with U.S. GAAP.
 
The selected consolidated financial data set forth below should be read in conjunction with and are qualified by reference to Item 5, “Operating and Financial Review and Prospects”, and our consolidated financial statements and notes thereto included elsewhere in this annual report.

 
4

 
Income Statement Data:
 
   
Year Ended December 31,
 
   
2015
   
2014
   
2013
   
2012
   
2011
 
   
(in thousands, except share and per share data)
 
Revenues:
             
 
   
 
   
 
 
Products
 
$
31,339    
$
31,363    
$
34,364    
$
36,263    
$
36,837  
Services
    54,268       49,363       45,187       41,652       36,902  
Total revenues
    85,607       80,726       79,551       77,915       73,739  
Cost of revenues:
                                       
Products
    24,466       23,616       25,143       25,494       25,185  
Services
    47,476       40,906       36,600       33,977       32,375  
Write down of inventory and impairment charges of  long lived assets
    -       -       -       -       5,465  
Total cost of revenues
    71,942       64,522       61,743       59,471       63,025  
Gross profit
    13,665       16,204       17,808       18,444       10,714  
Operating expenses:
                                       
Research and development, net
    890       1,070       713       995       455  
Selling and marketing
    2,903       3,203       3,150       2,899       2,819  
General and administrative
    8,469       8,123       8,668       9,178       8,598  
    Other expenses (income)
    631       (11 )     (20 )     (13 )     (190 )
    Gain on bargain purchase
    (4,833 )     -       -       -       -  
      8,060       12,385       12,511       13,059       11,682  
Operating income (loss) from continuing operations
    5,605       3,819       5,297       5,385       (968 )
Financial expenses, net
    (349 )     (1,294 )     (50 )     (106 )     (420 )
Gain from dilution of interests in affiliated company
    -       -       -       -       240  
Income (loss) from continuing operations before taxes on income
    5,256       2,525       5,247       5,279       (1,148 )
Taxes on income (tax benefit)
    644       1,360       1,041       2,090       (335 )
Income (loss) from continuing operations after taxes on income
    4,612       1,165       4,206       3,189       (813 )
Share in results of affiliated company
    1,237       267       1,025       (3,756 )     331  
Net income (loss) from continuing operations
    5,849       1,432       5,231       (567 )     (482 )
Net income (loss) from discontinued operations, net of tax
    -       -       (2,429 )     (1,147 )     (548 )
Net income (loss) attributable to TAT Technologies’ shareholders
 
$
5,849    
$
1,432    
$
2,802    
$
(1,714 )  
$
(1,030 )
Basic and diluted net income (loss)  per share
                                       
Net income (loss) from continuing operations per share attributable to controlling interest
    0.66       0.16       0.60       (0.06 )     (0.05 )
Discontinued operations attributable to controlling interest
    -       -       (0.28 )     (0.13 )     (0.07 )
   
$
0.66    
$
0.16    
$
0.32    
$
(0.19 )  
$
(0.12 )
Weighted average number of shares used in computing
                                       
Basic net income (loss) per share
    8,808,344       8,805,495       8,799,237       8,808,075       8,815,003  
Diluted net income (loss) per share
    8,810,689       8,826,542       8,808,920       8,808,075       8,815,003  
Cash dividend per share
 
$
-    
$
0.23    
$
-    
$
0.28    
$
-  

Balance Sheet Data:
 
 
 
As of December 31,
 
   
2015
   
2014
   
2013
   
2012
   
2011
 
   
(in thousands)
 
Working capital
  $ 70,813     $ 70,775     $ 73,905     $ 71,521     $ 70,756  
Total assets
    109,583       99,176       108,951       109,033       115,409  
Long-term liabilities, excluding current maturities
    3,322       2,689       4,256       6,421       9,333  
Shareholders’ equity
  $ 91,424     $ 85,541     $ 85,640     $ 82,324     $ 86,461  
 
 
5

 
 
B.              Capitalization and Indebtedness
 
Not applicable.
 
C.              Reasons for the Offer and Use of Proceeds
 
Not applicable.

D.              Risk Factors
 
Investing in our ordinary shares involves certain risks and uncertainties. You should carefully consider the risks and uncertainties described below before investing in our ordinary shares. Our business, prospects, financial condition and results of operations could be adversely affected due to any of the following risks. In that case, the value of our ordinary shares could decline, and you could lose all or part of your investment.
 
Risks Related to Our Business and Our Industry
 
The aerospace industry is subject to significant government regulation and oversight, and TAT and its subsidiaries may incur significant additional costs to comply with these regulations.
 
The aerospace industry is highly regulated in the United States and in other countries. TAT and its subsidiaries must be certified or accepted by the FAA, the United States Department of Defense, the European Aviation Safety Agency, or EASA, and similar agencies in foreign countries and by individual original equipment manufacturers, or OEMs, in order to manufacture, sell and service parts used in aircrafts. If any of the material certifications, authorizations or approvals of TAT or its subsidiaries are revoked or suspended, then the operations of TAT or its subsidiaries, as the case may be, will be significantly curtailed and TAT and its subsidiaries could be subjected to significant fines and penalties. In the future, new and more demanding government regulations may be adopted or industry oversight may be increased. TAT and its subsidiaries may have to incur significant additional costs to achieve compliance with new regulations or to reacquire a revoked or suspended license or approval, which could materially reduce profitability.

 
6

 

TAT competes with a number of established companies in all aspects of TAT’s business, many of which have significantly greater resources or capabilities than TAT.
 
For the OEM of heat Transfer Solutions and Aviation Components, and Heat Transfer Products, TAT’s major competitors are other OEMs who manufacture heat transfer components. These include, manufacturers based in the U.S. such as the Hughes-Treitler division of Ametek Inc., Lytron Inc., Niagara Thermal, Hamilton Sundstrand, Honeywell International, Stewart Warner South Wind Corp. and Triumph Thermal Systems, manufacturers based in Europe such as I.M.I. Marston Ltd., a subsidiary of Hamilton Sundstrand, Secan, Behr and Liebherr-Aerospace Toulouse S.A., and manufacturers based in Asia such as Sumitomo Precision Products from Japan. Many of TAT’s competitors are far larger, have substantially greater resources, including technical, financial, research and development, marketing and distribution capabilities than TAT, and enjoy greater market recognition. These competitors may be able to achieve greater economies of scale and may be less vulnerable to price competition than TAT.  TAT may not be able to offer its products as part of integrated systems to the same extent as its competitors or successfully develop or introduce new products that are more cost effective or offer better performance than those of its competitors. Failure to do so could adversely affect TAT’s business, financial condition and results of operations.
 
For the Heat Transfer Services, TAT’s major competitors are the service divisions of OEMs, the in-house maintenance services of a number of commercial airlines and other independent service providers, including Triumph Accessories (Triumph Corporation), LORI Heat Transfer Center of Honeywell (Tulsa, Oklahoma), SECAN (France),Drake Air – Ametek (Tulsa, Oklahoma), American Cooler Service, Hamilton Malaysia, Lufthansa Technik and Elite.
 
For the MRO Services for Aviation Components, in the field of landing gear and auxiliary power units (APU), TAT’s major competitors are the service divisions of OEMs, the in-house maintenance services of a number of commercial airlines and other independent service providers, including Standard Aero Group Inc., Aerotech International Inc., Honeywell International, AAR Corp., Messier- Bugatti-Dowty, Hawker Pacific and APRO.
 
For the overhaul and coating of jet engine components, TAT’s major competitors are the service divisions of OEMs, the in-house maintenance services of a number of commercial airlines and other independent service providers. With respect to Fan Blades, Turbochrome's major competitors are Snecma, General Electric, GKN and PAS. With respect to JT8D, Turbochrome's major competitors are Chromalloy Southwest and MCT Japan. With respect to materials, Turbochrome's major competitor is APV Coatings.
 
 
7

 
Competition in the MRO and services market is based on price, quality, engineered solutions, ability to provide a broad range of services, and the ability to perform repairs and overhauls rapidly. A number of our competitors have inherent competitive advantages. For example, we compete with the service divisions of large OEMs which are able to derive significant brand recognition from their OEM manufacturing activities. We also compete with the in-house service divisions of large commercial airlines and there is a strong incentive for an airline to fully-utilize the services of its maintenance employees and facilities.
 
Further, TAT’s competitors may have additional competitive advantages, such as:
 
  
·      The ability to adapt more quickly to changes in customer requirements and industry conditions or trends;
  
·      Greater access to capital;
  
·      Stronger relationships with customers and suppliers;
  
·      Greater name recognition; and
  
·      Access to superior technology and marketing resources.

If TAT is unable to overcome these competitive disadvantages, then TAT’s business, financial condition and results of operations would be adversely affected.
 
TAT derives a material part of its revenues from several major customers. If TAT loses any of these customers or they reduce the amount of business they do with TAT, TAT’s revenues may be seriously affected.
 
Five customers accounted for approximately 20.11%, 18.6% and 22.2% of TAT’s revenues for the years ended December 31, 2015, 2014 and 2013, respectively. TAT’s major customers may not maintain the same volume of business with TAT in the future. If TAT loses any of these customers or they reduce the amount of business they do with TAT, TAT’s revenues may be seriously affected.

 
8

 
A part of the revenues of TAT and its subsidiaries are from contracts with the U.S. and Israeli governments and are subject to special risks. A loss of all, or a major portion, of the revenues of TAT or any of its subsidiaries from government contracts could have a material adverse effect on TAT’s operations.
 
A portion of the revenues of TAT and its subsidiaries are from contracts with the U.S. and Israeli governments. Sales to the U.S. and Israeli governments accounted for approximately 5.5%, 6.8% and 4.2% of TAT’s revenues on a consolidated basis for the years ended December 31, 2015, 2014 and 2013, respectively.
 
Business with the U.S. and Israeli governments, as well as with the governments of other countries, is subject to risks which are not as relevant in business with private parties. These risks include the ability of the governmental authorities to unilaterally:
 
 
·
Suspend TAT or any of its subsidiaries from receiving new contracts pending resolution of alleged violations of procurement laws or regulations;
 
·
Terminate existing contracts, with or without cause, at any time;
 
·
Condition the receipt of new contracts on conditions which are beyond the control of TAT;
 
·
Reduce the value of existing contracts;
 
·
Audit the contract-related costs and fees of TAT and its subsidiaries, including allocated indirect costs; and
 
·
Control or prohibit the export of the products of TAT and its subsidiaries.
 
A decision by a governmental authority to take any or all of the actions listed above could materially reduce the sales and profitability of TAT and its subsidiaries. Most of the U.S. Government contracts of TAT and its subsidiaries can be terminated by the U.S. Government either for its convenience or if TAT or any of its subsidiaries defaults by failing to perform under the contract. Termination for convenience provisions generally provide only for the recovery of costs incurred or committed, settlement expenses and profit on the work completed by TAT and its subsidiaries prior to termination.
 
Declines in military/defense budgets may result in reduced demand for the products and manufacturing services of TAT and its subsidiaries. Any decline could result in reduction in the business revenues of TAT and its subsidiaries and adversely affect their business, results of operations and financial condition.

 
9

 
If TAT and its subsidiaries do not receive the governmental approvals necessary for the export of their products, TAT’s revenues may decrease. Similarly if TAT’s suppliers and partners do not receive their government approvals necessary to export their products or designs to TAT, TAT’s revenues may decrease.
 
Under Israeli law, the export of certain of the products and know-how of TAT and its subsidiaries are subject to approval by the Israeli Ministry of Defense. To initiate sales proposals with regard to exports of the products and know-how of TAT and its subsidiaries and to export such products or know-how, TAT and its subsidiaries must obtain permits from the Ministry of Defense. TAT and its subsidiaries may not be able to receive in a timely manner, or at all, all the required permits for which it may apply in the future.
 
Similarly, under foreign laws the export of certain military products, technical designs and spare parts require the prior approval of, or export license from, such foreign governments. In order to maintain the third party production, certain co-development activities and procurements required for the performance of certain contracts, TAT and its subsidiaries must receive detailed technical designs, products or product parts’ samples from its strategic partners or suppliers. TAT and its subsidiaries may not be able to receive all the required permits and/or licenses in a timely manner, or at all and consequently, TAT’s revenues may decrease.

TAT depends on a limited number of suppliers of components for certain of its products and if TAT or any of its subsidiaries is unable to obtain these components when needed, they would experience delays in manufacturing their products and TAT’s financial results could be adversely affected.
 
TAT relies on a limited number of key suppliers for parts for certain of its OEM and MRO services. Certain of these suppliers are currently the sole source of one or more components upon which TAT is dependent. For example, Honeywell International Inc. is a key supplier to TAT of APU spare parts and of certain other components used by TAT and its subsidiaries in the production of products and in the provision of MRO services. Suppliers of some of these components require TAT to place orders with significant lead-time to assure supply in accordance with TAT’s requirements. If TAT were to engage in a commercial dispute with or be unable to obtain adequate supplies of parts from these suppliers at commercially reasonable prices or required lead time, TAT’s operations could be interrupted. Increased costs associated with supplied materials or components could increase TAT’s costs and reduce TAT’s profitability if TAT is unable to pass these cost increases on to its customers.
 
 
10

 
TAT may face increased costs and a reduced supply of raw materials. TAT may not be able to recoup future increases in the cost of raw materials costs for its operations through price increases for its products.
 
In recent years, the cost of raw materials and components used by TAT has fluctuated significantly due to market and industry conditions. TAT may not be able to recoup future increases in the cost of raw materials and components costs through price increases for its products.
 
TAT may face significant risks in the management of its inventory, and failure to effectively manage its inventory levels may result in supply imbalances that could harm its business
 
In connection with our OEM and MRO operations, we maintain an inventory of exchangeable units of heat transfer solutions, aviation components, heat transfer products, APUs, landing gears, engine blades and coating materials and other spare parts related to our products in various locations, including with third party logistics providers. Due to the long-lead time of our suppliers and manufacturing cycles, we need to make forecasts of demand and commit significant resources towards these inventories. As such, we are subject to significant risks in managing the inventory needs of our business during the year, including estimates of the appropriate demand across our models. Should actual market conditions differ from our estimates, our future results of operations could be materially adversely affected. In the future, we may be required to record write-downs of finished products and materials on-hand as a result of future changes in our sales forecasts.
 
Our backlog of projects under contract is subject to unexpected adjustments, delays in payments and cancellations.
 
Our backlog includes purchase orders received from our customers for our products or services and our estimation of the maximal potential revenues that are expected to be derived from frame agreements with our customers. There is no legal obligation from the customer to purchase our products or services under those frame agreements. In addition, we use estimations to evaluate the potential revenue from these agreements. From time to time, for reasons beyond our control, projects are delayed, scaled back, stopped or cancelled, or the customer delays making payments, which may adversely affect the revenue, profit and cash flow that we ultimately receive from contracts reflected in our backlog.
 
 
11

 
TAT faces special risks from international sales operations which may have a material adverse effect on TAT’s business, operating results and financial condition.
 
In the years ending December 31, 2015, 2014 and 2013, approximately 94%, 93% and 91.4% of TAT’s sales, respectively, resulted from TAT’s international operations (out of Israel). This source of revenue is subject to various risks, including:
 
  
·      Governmental embargoes or foreign trade restrictions;
  
·      Changes in U.S. and foreign governmental regulations;
  
·      Changes in foreign exchange rates;
  
·      Tariffs;
  
·      Other trade barriers;
 
·      Political, economic and social instability; and
  
·      Difficulties collecting accounts receivable. For example, on February 25, 2016, Republic Airways Holdings Inc., a customer of Piedmont, announced that it and certain of its subsidiaries have filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code. The Company and Piedmont are currently assessing the implications of Republic's voluntary petition for bankruptcy on the maintenance support agreement with Republic. As of the date hereof, there are outstanding receivables from Republic of several hundred thousand U.S. dollars.
 
Accordingly, TAT and its subsidiaries may encounter significant difficulties in connection with the sale of their products in international markets.

TAT may engage in future acquisitions that could dilute TAT’s shareholders’ equity and harm TAT’s business, results of operations and financial condition.
 
TAT has pursued, and will continue to pursue, growth opportunities through internal development and acquisition of complementary businesses, products and technologies. In October 2015, TAT completed the acquisition of Turbochrome Ltd. for approximately $3.5 million. In addition, TAT may pay an earn-out, capped at $2 million, in the event that Turbochrome meets certain annual revenue targets in 2015 and 2016.
 
TAT is unable to predict whether or when any prospective acquisition will be completed. The process of integrating an acquired business may be prolonged due to unforeseen difficulties and may require a disproportionate amount of TAT’s resources and management’s attention. TAT may not be able to successfully identify suitable acquisition candidates, complete acquisitions, integrate acquired businesses into its operations, or expand into new markets. Further, once integrated, acquisitions may not achieve comparable levels of revenues, profitability or productivity as TAT’s existing business or otherwise perform as expected. The occurrence of any of these events could harm TAT’s business, financial condition or results of operations. Future acquisitions may require substantial capital resources, which may require TAT to seek additional debt or equity financing.
 
 
12

 
Future acquisitions by TAT could result in the following, any of which could materially harm TAT’s results of operations or the price of TAT’s ordinary shares:
 
 
·
Issuance of equity securities that would dilute TAT’s shareholders’ percentages of ownership;
 
·
Large one-time write-offs;
 
·
The incurrence of debt and contingent liabilities;
 
· 
Difficulties in the assimilation and integration of operations, personnel, technologies, products and information systems of the acquired companies;
 
·
Diversion of management’s attention from other business concerns;
 
·
Contractual disputes;
 
· 
Risks of entering geographic and business markets in which TAT has no or only limited prior experience; and
 
·
Potential loss of key employees of acquired organizations.

Our strategic partnerships and relationships carry inherent business risks.
 
We may participate in strategic partnerships and joint ventures in a number of countries. For example, on November 25, 2015, the company signed a joint venture agreement with Engineering Holding of Moscow, Russia, or Engineering, to establish a new facility for the provision of services with respect to heat transfer products and services. The new company, TAT-Engineering LLC, will be based in Novosibirsk’s Tolmachevo airport.
 
 
13

 
Our actions with respect to these affiliated companies may be restricted to some degree by shareholders agreements entered into with our strategic partners. Our business, financial condition, results of operations and prospects may be materially harmed if disagreements develop with our partners. Our ability to withdraw funds and dividends from these entities may depend on the consent of partners. If one of our strategic partners becomes subject to investigation, sanctions or liability, TAT might be adversely affected. Furthermore, strategic partnerships in emerging markets are accompanied by risks inherent to those markets, such as an increased possibility of a partner defaulting on obligations, or losing a partner with important insights in that region. Strategic partnerships in emerging markets are subject to greater risks than strategic partnerships in more developed markets, including significant political, legal and economic risks and risks related to fluctuations in currencies. The value of the Russian currency, for example, has declined significantly in response to political and economic issues since December 31, 2013, and may continue to decline. The significant depreciation of the Russian ruble against the U.S. dollar may negatively impact our results of operations related to the joint venture in Russia.

Rapid technological changes may adversely affect the market acceptance of the products of TAT.
 
The aerospace and defense markets in which TAT competes are subject to technological changes, introduction of new products, change in customer demands and evolving industry standards. The future success of TAT will depend upon its ability to keep pace with technological developments and to timely address the increasingly sophisticated needs of its customers by supporting existing and new technologies and by developing and introducing enhancements to its current products and new products. TAT may not be able to successfully develop and market enhancements to its products that will respond to technological change, evolving industry standards or customer requirements. TAT may experience difficulties that could delay or prevent the successful development, introduction and sale of such enhancements; and such enhancements may not meet the requirements of the market or achieve any significant degrees of market acceptance. If release dates of any new products or enhancements of TAT are delayed, or if when released, they fail to achieve market acceptance, TAT’s business, operating results and financial condition would be materially adversely affected.

TAT has fixed-price contracts with some of its customers and TAT bears the risk of costs in excess of its estimates. In addition, TAT may not be able to pass on increased costs to its customers.
 
TAT has entered into multi-year, fixed-price contracts with some of its MRO and OEM customers. Pursuant to these contracts, TAT realizes all the benefits or costs resulting from any increases or decreases in the cost of providing services to these customers. Several of TAT’s contracts do not permit TAT to recover for increases in raw material prices, taxes or labor costs and other contracts may permit, to a limited extent, periodic price adjustments. Any increase in these costs could increase the cost of operating the business of TAT and reduce its profitability. Factors such as inaccurate pricing and increases in the cost of labor, materials or overhead may result in cost over-runs and losses on those agreements. TAT may not succeed in obtaining the agreement of a customer to re-price a particular product, and may not be able to recoup previous losses resulting from incomplete or inaccurate engineering data. In addition, as costs increase, TAT may not be able to pass on such increased costs to its other customers. This could materially Impact TAT’s profitability.

 
14

 
TAT depends on its key executives, and may not be able to hire and retain additional key employees or successfully integrate new members of its team and the loss of key employees could have a material adverse effect on TAT’s business.
 
TAT’s success will depend largely on its continued reliance on the experience and expertise of its senior management. Any of the senior managers of TAT may terminate his or her employment with TAT and seek employment with others who may seek his or her expertise. The loss of the expertise of senior management of TAT through death, disability or termination of employment would have a material and adverse effect on TAT’s business, financial condition and results of operations. TAT is not the beneficiary of life or disability insurance covering any of the executives, key employees or other personnel of TAT. At the end of April 2016 Itsik Maaravi will step down from his position as TAT's CEO and will be replaced by Igal Zamir.
 
TAT depends on its manufacturing and MRO facilities and any material damage to these facilities may adversely impact TAT’s operations.
 
TAT believes that its results of operations will be dependent in large part upon its ability to manufacture and deliver OEM products and to provide MRO services promptly upon receipt of orders and to provide prompt and efficient service to its customers. As a result, any material disruption of TAT’s day-to-day operations could have a material adverse effect on its business, customer relations and profitability. TAT relies on its Gedera and Kiryat Gat, Israel, Kernersville and Winston-Salem, North Carolina and Tulsa, Oklahoma facilities for the production of its OEM products and provision of its MRO services. A war, fire, flood, earthquake or other disaster or condition that significantly damaged or destroyed any of these facilities would have a material adverse effect on the operations of TAT.

 
15

 
TAT uses equipment that is not easily repaired or replaced, and therefore material equipment failures could cause TAT or its subsidiaries to be unable to meet quality or delivery expectations of its customers.
 
Many of the service and manufacturing processes of TAT are dependent on equipment that is not easily repaired or replaced. As a result, unexpected equipment failures could result in production delays or the manufacture of defective products. The ability of TAT to meet the expectations of its customers with respect to on-time delivery of repaired components or quality OEM products is critical. The failure by TAT to meet the quality or delivery expectations of its customers could lead to the loss of one or more of its significant customers.
 
TAT may fail to maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act of 2002.
 
The Sarbanes-Oxley Act of 2002 imposes certain duties on TAT and TAT’s executives and directors. TAT’s efforts to comply with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002 governing internal controls and procedures for financial reporting have resulted in increased general and administrative expense and a diversion of management time and attention, and TAT expects these efforts to require the continued commitment of significant resources. TAT may identify material weaknesses or significant deficiencies in its assessments of its internal control over financial reporting. Failure to maintain effective internal control over financial reporting could result in investigation or sanctions by regulatory authorities and could have a material adverse effect on TAT’s operating results, investor confidence in TAT’s reported financial information and the market price of TAT’s ordinary shares. Our independent registered public accounting firm is not required to and has not performed an audit of our internal control over financial reporting as of December 31, 2015.

TAT has potential exposure to liabilities arising under environmental laws and regulations.
 
The business operations and facilities of TAT are subject to a number of federal, state, and local laws and regulations that govern the discharge of pollutants and hazardous substances into the air and water as well as the handling, storage and disposal of such materials and other environmental matters. Compliance with such laws as they relate to the handling, storage and disposal of hazardous substances is a significant obligation for TAT at each of its facilities. TAT would be subject to serious consequences, including fines and other sanctions, and limitations on the operations of TAT due to changes to, or revocations of, the environmental permits applicable to its facilities if it fails to comply. The adoption of new laws and regulations, stricter enforcement of existing laws and regulations, the discovery of previously unknown contamination or the imposition of new cleanup requirements could require TAT to incur costs and become subject to new or increased liabilities that could increase the operating costs of TAT and adversely affect the manner in which TAT conducts its business.
 
 
16

 
Under certain environmental laws, liability associated with investigation or remediation of hazardous substances can arise at a broad range of properties, including properties currently or formerly operated by TAT or any of its predecessors, as well as properties to which TAT sent hazardous substances or wastes for treatment, storage, or disposal. Costs and other obligations can arise from claims for toxic torts, natural resource and other damages, as well as the investigation and clean-up of contamination at such properties. Under certain environmental laws, such liability may be imposed jointly and severally, so TAT may be responsible for more than its proportionate share and may even be responsible for the entire liability at issue. The extent of any such liability can be difficult to predict.

TAT is exposed to potential liabilities arising from product liability and warranty claims.
 
TAT’s operations expose TAT to potential liabilities for personal injury or death as a result of the failure of an aircraft component that has been designed, manufactured, serviced or supplied by TAT. TAT believes that, in an effort to improve operating margins, some customers have delayed the replacement of parts beyond their recommended lifetime, which may undermine aircraft safety and increase the risk of liability of TAT and its subsidiaries.

If any of our products are defective, we could be required to redesign or recall those products or pay substantial damages or warranty claims. Such an event could result in significant expenses, disrupt sales and affect our reputation and that of our products. There can be no assurance that TAT will not experience any material product liability losses in the future, that it will not incur significant costs to defend such claims, that, although TAT maintains a product liability insurance policy, its insurance coverage will be adequate if claims were to arise or that it would be able to maintain insurance coverage in the future at an acceptable cost. A successful claim brought against TAT or its subsidiaries in excess of its available insurance coverage may have a material adverse effect on TAT’s business.
 
17

 
In addition, contractual disputes over warranties can arise in the ordinary course of business. TAT may be subject to requests for cost sharing or pricing adjustments from its customers as a part of its commercial relationships with them, even though they have agreed to bear these risks.

The activity in Israel of TAT may be adversely affected by a change in the exchange rate of the NIS against the dollar. Because exchange rates between the NIS and the dollar fluctuate continuously, exchange rate fluctuations, particularly larger periodic devaluations, may have an impact on TAT’s profitability and period to period comparisons of TAT’s results.
 
TAT’s financial statements are stated in dollars, while a portion of the expenses in Israel of TAT, primarily labor expenses, are incurred in NIS and a portion of TAT’s revenues are quoted in NIS and in Euro. Additionally, certain assets, as well as a portion of TAT’s liabilities, are denominated by NIS. Because exchange rates between the NIS and the dollar fluctuate continuously, exchange rate fluctuations, particularly larger periodic devaluations, may have an impact on TAT’s profitability and period to period comparisons of TAT’s results. TAT’s results may be adversely affected by the devaluation of the NIS in relation to the dollar (or if such devaluation is on lagging basis), if TAT’s revenues in NIS are higher than TAT’s expenses in NIS and/or the amount of TAT’s assets in NIS are higher than TAT’s liabilities in NIS. Alternatively, TAT’s results may be adversely affected by an appreciation of the NIS in relation to the dollar (or if such appreciation is on a lagging basis), if the amount of TAT’s expenses in NIS are higher than the amount of TAT’s revenues in NIS and/or the amount of TAT’s liabilities in NIS are higher than TAT’s assets in NIS. From time to time, we enter into hedging transactions to attempt to limit the impact of foreign currency fluctuations. However, the protection provided by such hedging transactions may be partial and leave certain exchange rate-related losses and risks uncovered. Therefore, our business and profitability may be harmed by such exchange rate fluctuations.

 
18

 
Risk Factors Related to Our Ordinary Shares
 
TAT’s share price has been volatile in the past and may decline in the future.
 
TAT’s ordinary shares have experienced significant market price and volume fluctuations in the past and may experience significant market price and volume fluctuations in the future, in response to factors such as the following, some of which are beyond TAT’s control:
 
 
·
Quarterly variations in TAT’s operating results;
 
·
Operating results that vary from the expectations of securities analysts and investors;
 
· 
Changes in expectations as to TAT’s future financial performance, including financial estimates by securities analysts and investors;
 
·
Announcements of technological innovations or new products by TAT or TAT’s competitors;
 
· 
Announcements by TAT or TAT’s competitors of significant contracts, acquisitions, strategic partnerships, joint ventures or capital commitments;
 
·
Announcements by third parties of significant claims or proceedings against us;
 
·
Additions or departures of key personnel
 
·
Future sales of TAT’s ordinary shares;
 
·
De-listing of TAT’s shares from the NASDAQ Global Market and/or from the Tel Aviv Stock Exchange;
 
·
Stock market price and volume fluctuation; and
 
·
Legal proceedings against TAT’s controlling shareholders

Domestic and international stock markets often experience extreme price and volume fluctuations. Market fluctuations, as well as general political and economic conditions, such as a recession or interest rate or currency rate fluctuations or political events or hostilities in or surrounding Israel, could adversely affect the market price of TAT’s ordinary shares.
 
In the past, securities class action litigation has often been brought against companies following periods of volatility in the market price of its securities. TAT may in the future be the target of similar litigation. Securities litigation could result in substantial costs and divert management’s attention and resources both of which could have a material adverse effect on TAT’s business and results of operations.

 
19

 
Substantial future sales of TAT’s ordinary shares by TAT’s principal shareholders may depress TAT’s share price.
 
TAT’s principal shareholders, FIMI Israel Opportunity FIVE, Limited Partnership and FIMI Opportunity V, L.P., or the FIMI Funds, beneficially own together 53.7% of TAT’s outstanding shares. If FIMI shall sell a substantial number of TAT’s ordinary shares or if the perception that TAT’s principal shareholders may sell a substantial number of TAT’s ordinary shares exists, the market price of TAT’s ordinary shares may fall. Any substantial sales of TAT’s shares in the public market also might make it more difficult for TAT to sell equity or equity-related securities in the future at a time, in a place and on terms TAT deems appropriate.

Risks Relating to Our Location in Israel
 
Because TAT has significant operations in Israel, TAT may be subject to political, economic and other conditions affecting Israel that could increase TAT’s operating expenses and disrupt TAT’s business.
 
TAT is incorporated under the laws of the state of Israel, and TAT’s executive offices, manufacturing plant and research and development facilities are located in the State of Israel. As a result, political, economic and military conditions affecting Israel directly influence TAT. Any major hostilities involving Israel, a full or partial mobilization of the reserve forces of the Israeli army, the interruption or curtailment of trade between Israel and its present trading partners, or a significant downturn in the economic or financial condition of Israel could have a material adverse effect on TAT’s business, financial condition and results of operations.
 
Since the establishment of the State of Israel in 1948, Israel and its Arab neighbors have engaged in a number of armed conflicts. A state of hostility, varying from time to time in intensity and degree, has led to security and economic problems for Israel. Major hostilities between Israel and its neighbors may hinder Israel’s international trade and lead to economic downturn. This, in turn, could have a material adverse effect on TAT’s operations and business. In recent years, there was an escalation in violence among Israel, Hamas, the Palestinian Authority and other groups, as well as an escalation in terrorist attacks since October 2015 and extensive hostilities along Israel’s border with the Gaza Strip such as the missiles fired from the Gaza Strip into Israel during July-August 2014. Ongoing violence between Israel and the Palestinians as well as tension between Israel and its Arab neighbors and Iran may have a material adverse effect on TAT’s business, financial conditions and results of operations.
 
 
20

 
Furthermore, there are a number of countries, primarily in the Middle East, that restrict business with Israel or Israeli companies, and TAT is precluded from marketing its products to these countries. Restrictive laws or policies directed towards Israel or Israeli businesses may have an adverse impact on TAT’s operations, TAT’s financial results or the expansion of TAT’s business.

TAT’s results of operations may be negatively affected by the obligation of its personnel to perform military service.
 
Many of TAT’s employees and some of TAT’s directors and officers in Israel are obligated to perform annual reserve duty in the Israel Defense Forces and may be called for active duty under emergency circumstances at any time. If a military conflict or war arises, these individuals could be required to serve in the military for extended periods of time. TAT’s operations could be disrupted by the absence for a significant period of one or more of TAT’s executive officers or key employees or a significant number of other employees due to military service. Any disruption in TAT’s operations could adversely affect TAT’s business.

Your rights and responsibilities as a shareholder will be governed by Israeli law and differ in some respects from the rights and responsibilities of shareholders under U.S. law.
 
TAT is incorporated under Israeli law. The rights and responsibilities of holders of TAT’s ordinary shares are governed by TAT’s memorandum of association, articles of association and by Israeli law. These rights and responsibilities differ in some respects from the rights and responsibilities of shareholders in typical U.S. corporations. In particular, each shareholder of an Israeli company has a duty to act in good faith and in a customary manner in exercising his or her rights and fulfilling his or her obligations toward the company and other shareholders and to refrain from abusing his power in the company, including, among other things, in voting at the general meeting of shareholders on certain matters. Israeli law provides that these duties are applicable in shareholder votes on, among other things, amendments to a company’s articles of association, increases in a company’s authorized share capital, mergers and interested party transactions requiring shareholder approval. In addition, a controlling shareholder of an Israeli company, or a shareholder who knows that he or she possesses the power to determine the outcome of a shareholder vote or who has the power to appoint or prevent the appointment of a director or officer in the company, has a duty of fairness toward the company. However, Israeli law currently does not define the substance of this duty of fairness. Because Israeli corporate law has undergone extensive revision in recent years, there is relatively little case law available to assist in understanding the implications of these provisions that govern shareholder behavior.

 
21

 
Israeli law may delay, prevent or make difficult an acquisition of TAT, which could prevent a change of control and, therefore, depresses the price of TAT’s shares.
 
Israeli corporate law regulates mergers, requires tender offers for acquisitions of shares above specified thresholds, requires special approvals for transactions involving directors, officers or significant shareholders and regulates other matters that may be relevant to these types of transactions. Furthermore, Israeli tax considerations may make potential transactions unappealing to TAT or to some of TAT’s shareholders. These provisions of Israeli law may delay, prevent or make difficult an acquisition of TAT, which could prevent a change of control and therefore depress the price of TAT’s shares.

Investors and TAT’s shareholders generally may have difficulties enforcing a U.S. judgment against TAT, TAT’s executive officers and directors or asserting U.S. securities laws claims in Israel.
 
TAT is incorporated in Israel and the majority of TAT’s executive officers and directors reside outside the United States. Service of process upon them may be difficult to effect within the United States. Furthermore, many of TAT’s assets and most of the assets of TAT’s executive officers and directors are located outside the United States. Therefore, a judgment obtained against TAT or certain of its executive officers and directors in the United States, including one based on the civil liability provisions of the U.S. federal securities laws, may not be collectible in the United States and may not be enforced by an Israeli court. It also may be difficult for you to assert U.S. securities law claims in original actions instituted in Israel. However, subject to certain time limitations and other conditions, Israeli courts may enforce final judgments of United States courts for liquidated amounts in civil matters, including judgments based upon the civil liability provisions of those and similar acts.

 
22

 
As a foreign private issuer whose shares are listed on the NASDAQ Global Market, TAT may follow certain home country corporate governance practices instead of certain NASDAQ requirements.
 
As a foreign private issuer whose shares are listed on the NASDAQ Global Market, TAT is permitted to follow certain home country corporate governance practices instead of certain requirements of the NASDAQ Marketplace Rules. A foreign private issuer that elects to follow a home country practice instead of such requirements must submit to NASDAQ in advance a written statement from an independent counsel in such issuer’s home country certifying that the issuer’s practices are not prohibited by the home country’s laws. In addition, a foreign private issuer must disclose in its annual reports filed with the Securities and Exchange Commission or on its website each such requirement that it does not follow and describe the home country practice followed by the issuer instead of any such requirement. As a foreign private issuer listed on The NASDAQ Global Market, TAT may follow TAT’s home country law, instead of the NASDAQ Marketplace Rules, which require that TAT obtain shareholder approval for certain dilutive events, such as for the establishment or amendment of certain equity based compensation plans, an issuance that will result in a change of control of TAT, certain transactions other than a public offering involving issuances of a 20% or more interest in TAT and certain acquisitions of the stock or assets of another company.

Item 4.                 Information on the Company
 
History and Development of TAT
 
TAT was incorporated under the laws of the State of Israel in April 1985 under the name Galaxy Graphics Ltd. TAT changed its name to Galagraph Ltd. in August 1986 and to TAT Technologies Ltd. in May 1992. TAT is a public limited liability company under the Israeli Companies Law 1999-5759, or the Israeli Companies Law, and operates under this law and associated legislation. TAT’s registered offices and principal place of business are located at Re’em Industrial Park, Neta Boulevard, Bnei Ayish, Gedera 70750, Israel and its telephone number is +972-8-8268-500. TAT’s address on the Internet is www.tat-technologies.com. The information on TAT’S website is not incorporated by reference into this annual report.
 
 
23

 
TAT was founded in 1985 to develop the computerized systems business of its then parent company, TAT Industries Ltd. (or TAT Industries), a publicly - held Israeli corporation then engaged in the manufacture and sale of aeronautical equipment. In December 1991, TAT acquired the heat exchange operations of TAT Industries and in 2000, TAT purchased the remaining operations of TAT Industries relating to the manufacture and maintenance of aviation accessories and leased certain of its properties.
 
In March 1987, TAT completed the initial public offering of its securities in the United States. TAT was listed on the NASDAQ Global Market (then known as the NASDAQ National Market) from its initial public offering until July 1998 when the listing of TAT’s ordinary shares was transferred to the NASDAQ Capital Market. On June 24, 2009 TAT’s ordinary shares resumed trading on the NASDAQ Global Market. Since August 2005 TAT’s shares have been traded also on the Tel Aviv Stock Exchange (TASE).
 
TAT is a provider of a variety of services and products to the commercial and military aerospace and defense industries through its Gedera facility, as well as through its subsidiaries, Limco and Piedmont in the U.S (Limco and Piedmont are held by TAT through Limco-Piedmont Inc. (“Limco-Piedmont”)) and Turbochrome Ltd. in Kiryat Gat, Israel.
 
In 1993, TAT acquired Limco air repair, INC (“Limco”). Limco provides heat transfer services and products to the aerospace industry. Limco’s Federal Aviation Administration, or FAA, certified repair station (located in Oklahoma) provides MRO services for airlines, air cargo carriers, maintenance service centers and the military, especially for heat transfer products. In addition to its MRO services, Limco is an OEM of heat transfer solutions for aircraft and system manufacturers and other selected related products.
 
In 2005, Limco acquired Piedmont Aviation Component Services, LLC (“Piedmont”), a company certified by the FAA to perform maintenance, repair and overhaul services of APUs and landing gears. Piedmont’s  FAA - certified repair station (located in North Carolina) provides MRO services for airlines, air cargo carriers, maintenance service centers and the military, especially for landing gear and auxiliary power units (APU).
 
In July 2007, Limco-Piedmont completed an initial public offering of its shares of Common stock and Limco-Piedmont’s shares were listed on the NASDAQ Global Market (symbol: LIMC) until July 2, 2009, when TAT acquired all of the publicly held shares of Limco-Piedmont (approximately 32% of Limco-Piedmont’s total shares) in a stock for stock merger.  As a result of such merger, Limco-Piedmont again became a wholly-owned subsidiary of TAT.
 
 
24

 
Following a series of transactions occurring between March 2008 and March 2009, TAT acquired 70% control of Bental Industries Ltd. In February 2014, TAT sold its entire interest in Bental Industries Ltd to Bental Investments Agshah Ltd. for an aggregate consideration of $5 million.

On December 4, 2009, the Company, through its subsidiary Piedmont, signed an investment agreement with FAvS. According to the agreement, Piedmont was issued 288,334 shares of Class B Common stock of First Aviation Services Inc., or FAvS, representing 37% of FAvS' then share capital (total number of shares acquired is adjusted as result of a 1 for 20 reverse stock split) and $ 750 thousand of FAvS Preferred shares (entitlement to cash dividends at an annual rate of 12% payable quarterly or to additional Preferred shares at an annual rate of 15%) in return for Piedmont's propeller and parts businesses.
 
On March 11, 2015, Piedmont 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 is $8.40 per Class B Shares, for an aggregate purchase price of $1,999, and the purchase price for the Series A Preferred stock is $100 per Preferred Share, for an aggregate purchase price of $1,625. The total gain from the sale of FAvS' stock is $1,395. The company owns 5% of FAvS’ after the transaction.

In October 2015, TAT acquired Turbochrome Ltd. (“Turbochrome”), a company certified by the FAA and EASA to perform overhaul and coating of jet engine components, including turbine vanes and blades and fan blades.
 
In November 2015, TAT entered into an agreement with Engineering Holding of Moscow, Russia, to establish a new maintenance facility for heat exchangers in Russia. The new company, TAT-Engineering LLC, is based in Novosibirsk’s Tolmachevo airport. TAT - Engineering LLC shall provide services of minor repair, overhaul and recore for heat transfer products. According to the joint venture agreement, TAT owns 51% of TAT-Engineering's  shares and the remaining 49% are held by Engineering Holding of Moscow.

 
25

 
 
A.           Business Overview
 
Overview
 
TAT Technologies Ltd. is a leading provider of services and products to the commercial and military aerospace and ground defense industries. TAT operates under four segments:  (i) original equipment manufacturing or “OEM” of heat transfer solutions and aviation components (ii) heat transfer services and products (iii) maintenance, repair and overhaul or “MRO” services for aviation components, especially in the area of landing gear and auxiliary power units (APU), and (iv) overhaul and coating of jet engine components.
 
TAT’s activities in the area of OEM of heat transfer solutions and aviation components primarily include the design, development and manufacture of (i) broad range of heat transfer products, such as pre-coolers heat exchangers and oil/fuel hydraulic  heat exchangers, used in mechanical and electronic systems on-board commercial, military and business aircraft; (ii) environmental control and power electronics cooling systems installed on board aircraft and ground applications; and (iii) a variety of other electronic and mechanical aircraft accessories and systems such as pumps, valves, and turbine power units.
 
TAT’s activities in the area of heat transfer services and products include the maintenance, repair and overhaul of heat transfer equipment and to a lesser extent, the manufacturing of certain heat transfer products. TAT’s Limco subsidiary operates FAA certified repair station, which provides heat transfer MRO services and products for airlines, air cargo carriers, maintenance service centers and the military.
 
TAT’s activities in the area of MRO services for aviation components include the maintenance, repair and overhaul of auxiliary power units (APUs), landing gear and other aircraft components. TAT’s Piedmont subsidiary operates an FAA certified repair station, which provides aircraft component MRO services for airlines, air cargo carriers, maintenance service centers and the military.
 
TAT’s activities in the area of jet engine overhaul includes the overhaul and coating of jet engine components, including turbine vanes and blades, fan blades, variable inlet guide vanes and afterburner flaps.

 
26

 

OEM of Heat Transfer Solutions and Aviation Component
 
TAT is an OEM of Heat Transfer Solutions and Aviation Components to the aerospace and defense industries, primarily through its Gedera facility. The main OEM activity of Gedera is the design and manufacture of a comprehensive line of heat exchangers and cold plates, or heat transfer products. Heat transfer products facilitate removal and dissipation of heat generated during the operation of mechanical and electronic systems. Gedera’s heat transfer products are generally integrated into complete cooling systems. Using Gedera’s technological expertise, Gedera designs each of its heat transfer products to meet the specific space, power, performance and other needs of its customers. Gedera’s heat transfer products are marketed worldwide for applications in commercial and military aircraft and electronic systems, the primary users of such equipment. Gedera’s customers include Liebherr-Aerospace Toulouse S.A., or Liebherr, Boeing Aircraft Company, or Boeing, Israel Aerospace Industries, or IAI, Cessna Aircraft Company, or Cessna, Pilatus Aircraft Ltd, or Pilatus, Embraer Empresa Brasileira de Aeronáutica S.A., or Embraer, Eaton Aerospace LLC, or Eaton, Parker Hannifin Corporation, or Parker, as well as the United States Air Force, United States Army, and Navy. Such supply contracts are generally long term engagements that may have terms of ten years or more.
 
As part of its OEM activities, Gedera is also engaged in the design, development and manufacture of complete cooling systems. This product line principally includes cooling systems for electronic systems (used in airborne military platforms) and ground cooling systems (used in military facilities, tents, vehicles and other military applications).
 
In addition, Gedera designs, develops and manufactures aviation and flow control accessories. These accessories include components, such as valves and pumps. Customers for Gedera’s aviation accessories include Lockheed-Martin Corp, Continental Motors, the Israeli Air Force, IAI, Elbit Systems, or Elbit, Rafael Advanced Defense Systems, or Rafael, as well as the United States Air Force and Navy.
 
 
27

 
Gedera also provides limited MRO services for military customers, mainly for aviation accessories as well as for certain heat transfer products. Gedera currently overhauls emergency power units, hydrazine tanks, jet fuel starters, cooling turbines and various valves for the F-16 aircraft. In addition, Gedera overhauls anti-icing valves and starters for the Blackhawk and Apache helicopters. The customers for Gedera’s MRO services include the Israel Air Force, IAI, various NATO countries, as well as the United States Air Force, United States Army and Navy.
 
Gedera relies on highly qualified personnel and strong engineering, development and manufacturing capabilities that enable it to support its customers from the early program development phase to prototype delivery.
 
TAT estimates the size of the markets in which Gedera operates to be significant based on the scope of development projects and purchasing processes of its customers. Many of the projects Gedera is engaged in are lengthy and complex, which account for its long term supplier relationships and the customer loyalty it enjoys. TAT plans to expand its Gedera operations in the OEM segment, among other things, by transitioning from components manufacture to complete systems/sub systems manufacture, and by targeting strategic territories with high commercial potential.

Heat Transfer Services and Products
 
Through its subsidiary, Limco, TAT provides services and products to the aerospace industry in the field of heat transfer. Limco’s FAA certified repair station provides aircraft component MRO services for airlines, air cargo carriers, maintenance service centers and the military. Limco is also certified by the European Aviation Safety Agency (EASA), the Civil Aviation Administration of Thailand (DCA), the Civil Aviation Administration of Indonesia (DGCA), the Civil Aviation Administration of Brazil (ANAC) and recently by the Civil Aviation Administration of China (CAAC). Limco has also recently achieved NADCAP certification for non-destructive testing. Limco specializes in MRO services for components of aircraft, such as heat transfer products and ozone converters. Generally, manufacturer specifications, government regulations and military maintenance regimens require that aircraft components undergo MRO servicing at regular intervals or as necessary. Aircraft heat exchangers typically require MRO services, including repairs and installation of replacement units, after three to five years of service or sooner if required. Aircraft manufacturers typically provide warranties on new aircraft and their components and subsystems, which may range from one to five years depending on the bargaining power of the purchaser. Warranty claims are generally the responsibility of the OEM during the warranty period. Limco’s business opportunity usually begins upon the conclusion of the warranty period for these components and subsystems. Limco’s customers include major US domestic and international airlines, air cargo carriers, maintenance service centers, OEMs such as commercial and military aircraft manufacturers and defense contractors, and the U.S. government (Army, Air Force, Navy and Coast Guard). Such customers typically enter into MRO contracts with Limco which are generally long term engagements that may have terms of one to five years or more.
 
 
28

 
Limco is recognized by leading OEMs of aerospace products to provide MRO services for their systems. For example, Limco is a well-recognized UTC Aerospace Systems )Hamilton Sundstrand) repair center, providing MRO services for many of its heat transfer products. Limco’s repair station is certified by the FAA and EASA
.
In addition to its MRO services, Limco also manufactures heat transfer products used in commercial, regional, business and military aviation platforms, on an OEM basis. Customers for Limco’s heat transfer products include the U.S. Army, U.S. Air Force, Navy, Raytheon, Boeing, Bell Helicopter, Vought Aircraft, Enstrom Helicopter, Cobham, Lockheed Martin, Northrop Grumman and Gulfstream.
 
Limco relies on highly qualified personnel with strong manufacturing, engineering and development capabilities that enable it to provide excellent MRO services while supporting customers’ specifications in the development of their new products and systems.
 
TAT estimates the size of the markets in which Limco operates to be significant based on the number of aircraft requiring MRO services provided by Limco along with the customer loyalty Limco enjoys. TAT plans to expand its Limco operations in the MRO segment, among other things, by developing MRO capabilities for additional types of heat transfer products with significant commercial potential.

MRO Services for Aviation Components
 
Through its subsidiary, Piedmont Aviation, TAT provides MRO services for aviation components to the aerospace industry. Piedmont’s FAA and EASA certified repair station provides aircraft component MRO services for commercial airlines, air cargo carriers, maintenance service providers and to government and military operators worldwide. Piedmont specializes in MRO services for components of aircraft, including Auxiliary Power Units (APUs) and landing gears. Generally, manufacturer specifications, government regulations and military maintenance regimens require that aircraft components undergo MRO servicing at regular intervals or as necessary. Aircraft components typically require MRO services, including repairs and installation of replacement units, after three to ten years of service or sooner if required. Aircraft manufacturers typically provide warranties on new aircraft and their components and subsystems, which may range from one to five years. Warranty claims are generally the responsibility of the OEM during the warranty period.  Piedmont’s business opportunity usually begins upon the conclusion of the warranty period for these components and subsystems. Piedmont’s customers include domestic and international airlines, air cargo carriers and maintenance service providers. Such customers typically enter into MRO contracts with Piedmont which are generally long term engagements that may have terms of one to ten years or more.
 
 
29

 
Piedmont is licensed by Honeywell as an authorized repair center, to provide MRO services for several of its APU models. Piedmont has excellent working relationships with the major landing gear manufacturers as well.
 
Piedmont relies on highly qualified personnel with strong manufacturing, engineering and development capabilities that enable it to provide excellent MRO services.
 
TAT estimates the size of the markets in which Piedmont operates to be significant based on the number of aircraft requiring MRO services provided by Piedmont. TAT plans to expand its Piedmont operations in the MRO segment, by using Piedmont’s experience and reputation to develop MRO capabilities for additional types of APU and landing gear applications as well as other aircraft systems/components with significant commercial potential and by offering additional supplementary services such as machining, plating and grinding, or MPG.
 
The extensive experience of Piedmont Aviation in the repair and overhaul of APU and landing systems includes a comprehensive involvement in the industry supply chain. In addition to the MRO services provided by Piedmont, the company is active worldwide in the exchange, lease and individual component parts supply of its APU and landing gear products. Through its own network of industry partners and through well-known aerospace parts distributors, Piedmont’s activity in the sale of parts is a robust element of the overall enterprise.

Overhaul and Coating of Jet Engine Components
 
Through its subsidiary, Turbochrome, TAT provides MRO services for jet engine components to the aerospace industry. Turbochrome’s FAA and EASA certified repair station provides its services mainly to maintenance service centers, airlines and the military. Turbochrome specializes in MRO services for engine components such as turbine vanes and blades, compressor vanes and blades, fan blades and after burner flaps. Generally, manufacturer specifications, government regulations and military maintenance regimens require that engine components undergo MRO servicing at regular intervals or as necessary. Commercial engine components typically require MRO services after three to five years of service or sooner if required. Engine manufacturers typically provide warranties on new engines and their components and subsystems, which may range from one to five years depending on the bargaining power of the purchaser. Warranty claims are generally the responsibility of the OEM during the warranty period.  Turbochrome’s business opportunity usually begins upon the conclusion of the warranty period for these components. Turbochrome’s customers include domestic and international airlines, maintenance service centers and the military.
 
 
30

 
Turbochrome also specializes in the manufactured of coating powders for pack cementation aluminide coatings and masking materials to prevent coating in defined areas. These materials are used in the aviation industry. Turbochrome provides such materials to OEMs and to maintenance service centers.
 
Turbochrome relies on highly qualified personnel with strong repair, engineering and development capabilities that enable it to provide excellent MRO services.
 
TAT estimates the size of the markets in which Turbochrome operates to be significant based on the number of jet engines requiring MRO services provided by Turbochrome. Turbochrome plans to expand its operations in the MRO segment by using Turbochrome’s experience and reputation to develop MRO capabilities for additional types of jet engine components with significant commercial potential.

Business Strategy
 
TAT’s principal strategy is as follows:
 
·  
Enhancing OEM Capabilities — TAT’s goal through Gedera and Limco is to capitalize on its technical expertise, experience and reputation in the markets of heat transfer solutions to expand the scope of its OEM offerings for the commercial and defense industries. TAT also intends to continue the transition from the development and manufacture of single components to the development and manufacture of complete systems.
 
·  
Expand the scope of MRO services - TAT’s goal is to use its technical expertise, engineering resources and facilities to provide MRO services for additional types of aircraft and additional aircraft systems, subsystems and components and intends to develop the required technical expertise to provide these additional MRO services.
 
 
31

 
·  
Increasing Market Share — TAT plans to continue its aggressive marketing efforts for new customers as well as to expand its activities with its flagship customers. As part of TAT’s efforts to achieve greater penetration in international markets, TAT intends to expand its marketing presence in existing territories, like the U.S. and Western Europe and new territories, where TAT currently has a smaller business volume, such as Eastern Europe, South America and Asia.
 
·  
Effective synergy among group members — TAT plans to enhance the synergies between its various businesses by, among other things, using Gedera’s OEM design capabilities to provide Limco enhanced capabilities to repair heat transfer products, enabling Limco to compete more effectively in the industry and by supplying to Limco heat transfer components which should enable Limco to reduce prices on its MRO services.
 
·  
Organic growth and M&A — In addition to growing the existing businesses of Gedera and Limco, TAT also believes that additional acquisition opportunities exist that will complement its OEM and MRO businesses. In October 2015, TAT acquired the entire share capital of Turbochrome Ltd., which provides MRO services for jet engine components. TAT will continue to pursue targeted complementary business acquisitions, which will broaden the scope and depth of its OEM and MRO operations and increase its market share.
 
Products and Services
 
OEM of Heat Transfer Solutions and Aviation Components
 
Through its Gedera facility, TAT manufactures a wide range of heat transfer products used onboard aircraft, air conditioning systems, environmental control systems and cooling systems for electronics for military use. These products/systems are manufactured in compliance with all of the stringent quality assurance standards that apply to the manufacture of aircraft parts. Gedera’s quality system complies with ISO 9001, AS9100, Boeing quality systems approval D6-82479 and FAR 21.303 (the FAA standard for Parts Manufacturer Approval).
 
 
32

 
Heat Transfer Products
 
Gedera manufactures a wide range of heat transfer products. Gedera specializes in the design and manufacture of highly efficient, compact and reliable heat transfer products that are designed to meet stringent constraints such as size, weight and environmental conditions. Heat transfer products, such as heat exchangers and cold plates, are integral components of a wide variety of environmental control, mechanical and engine systems, as well as a wide range of electronic systems. These systems generate heat during operation that must be removed and dissipated. Heat transfer products facilitate the exchange of heat created through the operation of these systems by transmitting the heat from a hot medium (air, oil or other fluids) to a cold medium for disposal.
 
In the aerospace industry, there is a constant need for improvements in performance, weight, cost and reliability. In addition, as electronic systems become smaller and more densely packed, the need for sophisticated and efficient heat transfer components used to provide the cooling functions becomes more critical. Using Gedera’s technological expertise, TAT believes it is well positioned to respond to these industry demands through continued new product development and product improvements.
 
Gedera’s principal heat transfer products include heat exchangers and cold plates. Typically, air-to-air heat exchangers cool a jet engine’s bleed air which, when cooled, is then used in the aircraft’s air conditioning, pressurization and pneumatic systems. The liquid-to-air heat exchangers cool liquids such as engine oil, hydraulic oil and others used in other systems.
 
Gedera provides a one stop shop for all of the different types of heat transfer products. Gedera’s heat exchangers are generally sold for between $2,000 and $40,000 per unit. A significant portion of Gedera’s heat transfer products are sold to customers in connection with the original manufacture or retrofitting of particular aircraft equipment. Gedera generally enters into long-term supply contracts with its customers, which require Gedera to supply heat transfer products as part of a larger project.
 
Gedera also manufactures other heat transfer equipment, such as cooling chassis, heat sinks and cold walls (which may be air-to-air, liquid-to-air or liquid-to-liquid), to control and dispose heat emitted by the operation of various electronic systems. Such products are currently utilized mainly in radar systems, avionics, electronic warfare systems and various pods for targeting, navigation and night vision.
 
 
33

 
Gedera’s customers for heat transfer products/systems include: Liebherr, Boeing, IAI, Cessna, Bell Helicopter, Raytheon Aircraft Company, as well as the United States Air Force and Navy. As a result of the specialized nature of the systems in which Gedera’s parts are included, spare and replacement parts for the original heat transfer products/systems are usually provided by Gedera.
 
Aviation and Flow Control Accessories
 
Gedera is also engaged in the design, development and manufacture of aviation and flow control accessories. These accessories include components such as valves and pumps. Gedera’s customers for the design, development and manufacture of aviation and flow control accessories include Lockheed-Martin, Boeing, Continental, the Israel Air Force, IAI, Rafael as well as the U.S. Air Force and Navy.
 
Cooling and Air-Conditioning Systems
 
Gedera is also engaged in the design, development and manufacture of complete environmental control systems and cooling systems. This product line includes ground cooling systems used in military facilities, tents, vehicles and other military applications. It also includes Vapor Cycle air conditioning systems (or ECS — Environmental Cooling Systems) used in light aircraft. Gedera offers mobile cooling and air conditioning solutions for military applications such as mobile command and control units, command and control vehicles, armored vehicles, mobile broadcast units, mobile hospitals, etc. In addition, Gedera designs, develops and manufactures power electronics cooling systems based on customer specifications, while providing a complete engineering solution in compliance with strict civil aviation standards. Gedera’s systems are used in Israel and abroad and are tested under strict standards.

 
34

 
Heat Transfer Services and Products
 
MRO Services for Heat Transfer Products
 
Through its Limco subsidiary in the U.S., TAT provides MRO services for heat transfer products. The demand for MRO services is driven by the size and age of the aircraft fleet, aircraft utilization and regulations by the FAA and other governmental authorities.
 
Due to the increased maintenance costs of their aging fleets many carriers are seeking ways to reduce costs, minimize down-time, increase aircraft reliability and extend time between overhauls. One of the ways they are accomplishing these goals is through the outsourcing of more of their maintenance and support functions to reliable third parties. Limco also believes that commercial carriers who have made the decision to outsource their MRO requirements are searching for MRO service providers with a wide-range of service capabilities. These MRO service providers allow the carriers to concentrate their outsourcing of MRO services to a select group of third party providers. The global military aircraft fleet also presents similar opportunities for MRO service providers. Limco believes that an aging military fleet and the increased use of upgrade programs aimed at extending the useful life of aircraft will provide continued MRO growth opportunities.
 
Piedmont specializes in the repair and overhaul of APUs and landing gear. APUs are relatively small, self-contained generators used to start jet engines, usually with compressed air, and to provide electricity, hydraulic pressure and air conditioning while an aircraft is on the ground. In many aircraft, an APU can also provide electrical power during in-flight emergency situations. Landing gears are the structure that support an aircraft on the ground and allow it to taxi, takeoff and land.
 
 Piedmont performs MRO services at its repair station in North Carolina, which is licensed by the FAA and EASA and also certified to AS9001 standards. Piedmont specializes in providing comprehensive repair and overhaul services for APU models manufactured by both Honeywell and Hamilton Sundstrand. In addition, Piedmont provides full repair, overhaul, machining, plating and grinding services for landing gear systems for commercial and military aircraft. The company has a rich history in providing landing gear MRO services for regional airliners, including aircraft manufactured by Bombardier (CRJ 100/200/Dash8), the French-Italian ATR (42/72), and the Brazilian Embraer (E170/E190).
 
 
35

 
 
OEM Authorizations and Licenses
 
Limco believes that establishing and maintaining relationships with OEMs of aircraft systems and components is an important factor in achieving sustainable success as an independent MRO service provider. OEMs grant participants in the overhaul and repair services market authorization to perform repair and overhaul services on their behalf. OEMs maintain tight controls over their authorized MRO service providers, in order to maintain high quality of service to their customers, and generally grant very few authorizations. Obtaining OEM authorizations requires sophisticated technological capabilities, experience-based industry knowledge and substantial capital investment. Limco believes that service providers that have received OEM authorization gain a competitive advantage because they typically receive discounts on parts, technical information and OEM warranty support. Limco is an independent MRO service provider that is a well-recognized repair center of UTC Aerospace Systems (Hamilton Sundstrand), one of the largest heat transfer equipment manufacturers of heat transfer equipment in North America.
 
OEM Capabilities
 
In addition to its MRO services, Limco also acts as an OEM manufacturer of heat transfer products used mainly in military aircraft and also in commercial, regional and business aircraft. Limco specializes in the design and manufacturing of highly efficient heat transfer components, which are designed to meet stringent constraints such as size, weight and applicable environmental conditions. These units include heat exchangers, oil coolers, precoolers, reheaters, condensers, fuel heaters and evaporators.
 
Limco also manufactures demineralizer systems for U.S. naval vessels including ships and nuclear submarines. Limco currently offers approximately 80 OEM parts to the aerospace industry. These parts are manufactured in compliance with the stringent quality assurance standards that apply to the manufacture of aircraft parts.
 
 
36

 
Limco’s quality systems are ISO9001, AS9110, AS9100 and NADCAP for non-destructive testing certified and FAR 21.303 (the FAA standard for Parts Manufacturer Approval).

MRO Services for Aviation Components
 
Through its Piedmont subsidiary in the U.S., TAT provides MRO services for aviation components, APUs and landing gear. As previously mentioned, the demand for MRO services is driven by the size and age of the aircraft fleet, aircraft utilization and regulations by the FAA and other governmental authorities.
 
Due to increased maintenance costs of their aging fleets many carriers are seeking ways to reduce costs, minimize down-time, increase aircraft reliability and extend time between overhauls. One of the ways they are accomplishing these goals is through the outsourcing of more of their maintenance and support functions to reliable third parties. Piedmont also believes that commercial carriers who have made the decision to outsource their MRO requirements are searching for MRO service providers with a wide-range of service capabilities. These MRO service providers allow the carriers to concentrate their outsourcing of MRO services to a select group of third party providers. The global military aircraft fleet also presents similar opportunities for MRO service providers. Piedmont believes that an aging military fleet and the increased use of upgrade programs aimed at extending the useful life of aircraft will provide continued MRO growth opportunities.
 
Piedmont specializes in the repair and overhaul of APUs and landing gear. APUs are relatively small, self-contained generators used to start jet engines, usually with compressed air, and to provide electricity, hydraulic pressure and air conditioning while an aircraft is on the ground. In many aircraft, an APU can also provide electrical power during in-flight emergency situations. Landing gears are the structure that support an aircraft on the ground and allow it to taxi, takeoff and land.
 
 Piedmont performs MRO services at its repair station in North Carolina, which is AS9001 certified and licensed by the FAA and EASA to provide MRO services.
 
 
37

 
Piedmont specializes in providing MRO services for APU models manufactured primarily by Honeywell, and in providing MRO services for landing gear for regional aircraft manufactured by Bombardier Canadair Regional Jet (CRJ 100/200), ATR (42/72), Embraer (E170) and Bombardier Dash 8.
 
OEM Authorizations and Licenses
 
Piedmont believes that establishing and maintaining relationships with OEMs of aircraft systems and components is an important factor in achieving sustainable success as an independent MRO service provider. OEMs grant participants in the overhaul and repair services market authorizations or licenses to perform repair and overhaul services on the equipment they manufacture. OEMs maintain tight controls over their authorized and licensed MRO service providers, in order to maintain high quality of service to their customers, and generally grant few authorizations or licenses. Obtaining OEM authorizations requires sophisticated technological capabilities, experience-based industry knowledge and substantial capital investment. Piedmont believes that service providers that have received OEM authorizations and licenses gain a competitive advantage because they typically receive discounts on parts, technical information, OEM warranty support and use of the OEM name in marketing. Piedmont is an authorized repair station licensed by Honeywell, the largest manufacturer of APUs, for several of its APU models.
 
Machining, Plating and Grinding, or MPG Services
 
Piedmont extended the provision of MPG services, either as supplementary to its traditional MRO services or as stand-alone services. Piedmont believes that establishing and maintaining relationships with customers to its MPG shop is an important factor in achieving sustainable success as an independent MRO service provider and creates a competitive advantage.

Customers
 
General
 
TAT targets both the commercial and defense markets for aviation and ground applications. Our customers include commercial manufacturers of military equipment, commercial airlines, aircraft manufacturers, military forces, defense industries, and other manufacturers of electronic systems, aviation units and machinery in the U.S., Europe, Asia, South America and Israel. During 2015 TAT had revenues generated by more than 500 customers worldwide.
 
 
38

 
Major Customers
 
OEM Customers
 
TAT, primarily through its Gedera facility, sells its OEM products and systems to commercial and military aircraft manufacturers and defense contractors and to the U.S. and Israeli governments.

Partial lists of OEM customers are set in the following table:
 
Aircraft manufacturers
Boeing Aircraft Company, Cessna Aircraft Company, Pilatus Aircraft Ltd., Embraer, Lockheed Martin.
System manufacturers/integrators and Defense Contractors
Liebherr-Aerospace, Thales, Honeywell International, Rafael, Elbit, IAI, Lockheed, EADS, Eaton Aerospace, Parker Hannifin Corporation, Raytheon.
 
The development projects and purchasing processes of many of TAT’s OEM customers are lengthy and complex and accordingly, with some customers,  TAT enters into frame agreements that determine certain legal conditions, but under which the customer is not obligated to purchase any quantity of products.  Typically, customers issue purchase orders with the required supply quantity, price, lead times and other related terms.
 
MRO Customers
 
TAT services MRO customers primarily through Limco, Piedmont and Turbochrome, including major U.S. domestic and international airlines, air cargo carriers, maintenance service centers, the U.S. military and navy and other military air forces.
 
TAT’s partial list of MRO customers is set forth in the following table:
 
Domestic and International Airlines and Air Cargo carriers
Singapore Airlines, Air France-KLM, SAS, Swiss, EL AL, Delta, United, US Airways, Air Canada Jazz, Republic Airways, Expressjet, DHL, Austrian Airlines, TAM, Saudia, Interjet, Thai, Korean Air, Air India, FedEx, Swiftair, Aerothrust, Summit Aviation, Haeco Americas, Jet Engine Technologies, Turbine Engine Solution, Turbine Engine Center and Cargolux.
Maintenance Service Centers
Fokker, Honeywell International, Kellstrom Commercial, Aerokool, Lufthansa Technik, UTAS-Hamilton Sundstrand, SR Technics, Evergreen Aviation Component Services, Gulfstream, Bell Helicopters,.
 
Government and Air forces
U.S. Army, Air Force and Navy; Israeli Air force; Belgium Air Force, Polish Air Force, Portuguese Air Force

 
39

 
Military Contracts
 
Sales to the U.S. and Israeli governments accounted for approximately 4.9% and 0.6% of TAT’s revenues for the year ended December 31, 2015, approximately 6.4% and 0.4% of its revenues for the year ended December 31, 2014 and approximately 3.6% and 0.6% of its revenues for the year ended December 31, 2013, respectively.
 
Many of TAT’s contracts are competitively bid and awarded on the basis of technical merit, personnel qualifications, experience and price. TAT also receives some contract awards involving special technical capabilities on a negotiated, noncompetitive basis due to TAT’s technical capabilities.
 
TAT provides products under government contracts that usually require performance over a period of several months to several years. Long-term contracts for the U.S. military may be conditioned upon continued availability of congressional appropriations. Variances between anticipated budget and congressional appropriations may result in a delay, reduction or termination of these contracts.
 
 
40

 
The vast majority of the governmental contracts to which TAT is party to are fixed-price contracts, some of which contain fixed price escalation mechanism. Under these contracts TAT agrees to perform specific work for a fixed price and, accordingly, realizes the benefit or detriment to the extent that the actual cost of performing the work differs from the contract price. The allowable government contract costs and fees of TAT are subject to audit and may result in non-reimbursement of some contract costs and fees. While governments reserve the right to conduct further audits, audits conducted for periods through fiscal year 2015 have resulted in no material cost recovery disallowances for TAT.
 
The eligibility of TAT to perform under its government contracts requires TAT to maintain adequate security measures. TAT has implemented security procedures that it believes adequately satisfies the requirements of its current government contracts.

Backlog
 
Our backlog includes the following: (i) actual purchase orders, and (ii) our maximal estimated sales that we expect to generate from long-term agreements for which we do not have actual purchase orders. It should be noted that in these long-term agreements there is no legal obligation from the customer to purchase our products or services, yet typically none of our customers would sign such agreement unless there is a specific business opportunity.
 
As of December 31, 2015, we had outstanding purchase orders representing an aggregate amount of $42 million, and sales that we expect to generate from long-term agreements (the longest of which is until 2030), for which we haven’t received yet actual purchase orders in an aggregate amount of $184 million. Backlog information may not necessarily represent an indication of future sales.
 
Product and Service Warranties
 
TAT provides warranties for its products and services ranging from one to three years, which vary with respect to each contract and in accordance with the nature of each specific product. To date, TAT’s warranty costs have not been substantial. As of December 31, 2015, the combined warranty reserve for TAT was $324 thousand.

 
41

 
 
Competitive Environment
 
OEM of Heat Transfer Solutions, Aviation Components and Heat Transfer Products
 
The aerospace and defense OEM industries in general and specifically, the commercial and military aviation markets, are characterized by intense competition and the need to constantly be in the forefront of technological innovations in order to be able to offer advanced and attractive products. Competition in these OEM markets is also based on price, quality and turn-around time. TAT estimates the market size of heat management solutions to be significant based on the scope of development projects and purchasing processes of the potential customers. TAT estimates that due to the high barriers to enter the aerospace and defense OEM industries, which include the need for highly qualified and trained personnel, technologically advanced facilities and the need to obtain appropriate governmental approvals, there are a small number of competing suppliers in the markets in which it operates. The nature of the projects in the OEM industry, which are often time consuming and complex also require long term supplier relationships and customer loyalty in order to succeed.

TAT’s competitors in the global OEM aerospace and defense industries can be divided into two main groups:
 
·  
Complete system manufacturers that either independently or through subcontractors, design, develop  and manufacture complete systems (such as a manufacturer of aircraft hydraulic systems) directly for the platform manufacturer (i.e. for business jets). Although some of these companies have the capabilities to design and manufacture each standalone component in a complete system (i.e. a heat exchanger integrated in hydraulic systems) it is unlikely that such companies will compete with TAT in projects where there is a specific requirement for a stand-alone component. These companies will compete on complete systems and/or projects where the components/products TAT develops are part of the complete system. In such cases it is very likely that these companies will subcontract to companies such as TAT the design and manufacturing of one or a few components in the system.
 
·  
Component manufacturers for which the design and manufacture of components (such as heat exchangers) is the main business (and which are normally placed in the “value chain” one level below the system manufacturers, such as a manufacturer of an aircraft’s hydraulic system and two tiers below the platform manufacturer such as manufacturer of a new aircraft). Although some of the component manufacturers have the capabilities to design, develop and manufacture a complete system (i.e. environmental control system for a business jet) for a certain platform, these companies will usually not compete on projects for complete systems in which their manufactured component constitutes a small part of the complete system, mainly due to the extreme competitive barriers to entry and to their inability to move up the “value chain” from a component supplier to a whole system manufacturer. These companies are likely to compete in projects where there is a specific requirement for a standalone aviation component (such as a heat exchanger) and in tenders by manufacturers of complete systems or products for sub-contractors.
 
 
42

 
 
The major competitors of TAT in the area of OEM of Heat Transfer Solutions, Aviation Components and Heat Transfer Products include manufacturers in the U.S. such as Honeywell, Hughes-Treitler division of Ametek Inc., Lytron Inc., Kintex, Niagra Thermal, UTC Aerospace Systems (Hamilton Sundstrand), Stewart Warner South Wind Corp., and Triumph Thermal Systems, manufacturers based in Europe such as I.M.I. Marston Ltd., Serck Aviation, Secan, BEHR and manufacturers based in Asia such as Sumitomo Precision Products from Japan. Such competitors may enjoy competitive advantages over Gedera, such as:
 
 
·            The ability to independently offer systems in addition to components;
 
  
·            Greater access to capital;
 
 
·            Stronger relationships with customers and suppliers;
 
  
·            Better name recognition;
 
 
·            Access to superior technology and marketing resources; and
 
  
·            The ability to adapt more quickly to changes in customer requirements and industry conditions or trends.
 
 
43

 
Heat Transfer Services
 
The market for maintenance, repair and overhaul (MRO) services in the field of heat transfer is highly competitive. Competition in this market is based on quality, price, and the ability to provide a broad range of services and to perform repairs and overhauls rapidly. TAT’s global competitors in services in the field of heat transfer can be divided into two main groups:
 
·  
Service Divisions of OEMs – generally, each OEM of products in the heat management solutions segment has the necessary capabilities to provide MRO services for products it designs and manufactures throughout their lifetime – commencing on the initial production period and through the after-market period. These service divisions of OEMs may also acquire capabilities to service other OEM’s products to further expand their MRO services.
 
·  
Service Centers – which provide MRO services for a broad range of components and systems. These Service Centers can be either the in-house maintenance services of commercial airlines or other independent service providers.
 
Accordingly, in the areas of OEM operations, manufacturers of components can compete with manufacturers of complete systems.  Such OEM manufacturers can also compete for the provision of MRO services with other providers of MRO services.
 
For heat transfer MRO services, TAT’s major competitors are the Triumph Accessory Services, Drake Air- Ametek, Honeywell-LORI, American Cooler Service, Elite Aerospace, Hamilton Malaysia, Lufthansa Technik and SECAN.
 
A number of Limco’s competitors have inherent competitive advantages. For example, Limco competes with the service divisions of large OEMs who in some cases have design authority with respect to their OEM products and are able to derive significant brand recognition from their OEM manufacturing activities. Limco also competes with the in-house service divisions of large commercial airlines and there is a strong incentive for an airline to fully utilize the services of its maintenance employees and facilities. Further, Limco’s competitors may have additional competitive advantages, such as:
 
 
·  
OEM name recognition;
 
 
·  
Ability to bundle heat transfer and other aircraft components;
 
 
·  
Lower cost structure;
 
 
44

 
 
·  
Regional support near customers’ location; and
 
 
·  
Access to marketing resources.
 
MRO Services for Aviation Components
 
The market for MRO services, in which Piedmont operates, is highly competitive. Competition in this market is based on quality, price, and the ability to provide a broad range of services and to perform repairs and overhauls rapidly. Piedmont’s primary MRO services competitors are the service divisions of OEMs, the in-house maintenance services of a number of commercial airlines and other independent service providers. For APU and landing gear MRO services Piedmont’s major competitors are Standard Aero Group Inc., Aerotech International Inc., Honeywell International, Chase Aerospace, Professional, Messier-Dowty Aerospace (MD), AAR Corp., Hawker Pacific and APRO.
 
A number of Piedmont’s competitors have inherent competitive advantages. For example, Piedmont competes with the service divisions of large OEMs who in some cases have design authority with respect to their OEM products and are able to derive significant brand recognition from their OEM manufacturing activities. Piedmont also competes with the in-house service divisions of large commercial airlines and there is a strong incentive for an airline to fully utilize the services of its maintenance employees and facilities. Further, Piedmont’s competitors may have additional competitive advantages, such as:
 
 
·     The ability to adapt more quickly to changes in customer requirements and industry conditions or trends;
 
 
·     Greater access to capital;
 
 
·     Stronger relationships with customers and suppliers;
 
 
·     Better name recognition; and
 
 
·     Access to superior technology and marketing resources.
 
 
45

 
Overhaul and Coating of Jet Engine Components
 
The market for MRO services, in which Turbochrome operates, is highly competitive. Competition in this market is based on quality, price, level of service and turnaround time. Turbochrome’s primary MRO services competitors are the service divisions of OEMs, the in-house maintenance services of a number of commercial airlines and other independent service providers. With respect to Fan Blades, Turbochrome's major competitors are Snecma, General Electric, GKN and PAS. With respect to JT8D, Turbochrome's major competitors are Chromalloy Southwest and MCT Japan. With respect to materials, Turbochrome's major competitor is APV Coatings.
 
A number of Turbochrome’s competitors have inherent competitive advantages. For example, Turbochrome competes with the service divisions of large OEMs who in some cases have design authority with respect to their OEM products and are able to derive significant brand recognition from their OEM manufacturing activities. Turbochrome also competes with the in-house service divisions of large commercial airlines and there is a strong incentive for an airline to fully utilize the services of its maintenance employees and facilities. Further, Turbochrome’s competitors may have additional competitive advantages, such as:
 
 
·     The ability to adapt more quickly to changes in customer requirements and industry conditions or trends;
 
 
·     Strong relationship with the OEM's
 
 
·     Greater access to capital;
 
 
·     Stronger relationships with customers and suppliers;
 
 
·     Better name recognition; and
 
 
·     Access to superior technology and marketing resources.
 
Competitive Strengths
 
We believe that TAT’s success can be attributed to several critical factors, including the following:
 
 
·      Active efforts to preserve its customer base in existing projects, while actively making efforts tobroaden and increase its engagements with such clients.
 
 
·
Conducting marketing activities aiming at penetrating new geographical markets and obtaining newcustomers, while taking advantage of the unique knowledge and expertise that TAT and its subsidiaries gained in various areas.
 
 
·      Entering into additional related operating segments that will enable TAT and its subsidiaries to fulfill their growth potential.
 
 
46

 
 
·
Providing its customers with the best value, including competitive prices, by tailoring service packages that combine the design and planning of an OEM component, the manufacture of such component, andthe provision of maintenance services.
 
 
·
Extending MRO capabilities in order to establish a ‘one-stop-shop’ center for comprehensive MRO services for the types of aircraft Limco and Piedmont target.
 
 
·
Enhancing its engineering capabilities in order to support customer needs related to new projects and in order to certify MRO services that differ from processes previously approved by the FAA, EASA or other regulatory authorities. This will allow shortening the long and complex approval process, streamlining the design and certification process and reducing costs.
 
 
·
Constant search for new technologies and manufacturing techniques in the heat management solutions line.
 
 
·
Innovations and improvements aiming at enhancing the quality and performance of existing products of TAT and its subsidiaries.
 
 
·
Cutting delivery times and reducing costs.
 
 
·
Entrepreneurship and innovation in the development of new products in an effort to become a market leader and to enter into long term platforms.
 
Engineering and Manufacturing
 
As of December 31, 2015, TAT had 549 employees engaged in manufacturing, repair, testing of products and engineering (out of a total of 623 employees). TAT believes that its engineering staff provides it with the ability to support its customers with innovative and efficient products while maintaining short product development cycles, high quality design and competitive pricing.
 
Gedera’s engineering staff has an extensive knowledge and experience in designing Heat Transfer Products. The lead engineer for each product is in charge of all changes to the product.
 
In general, Gedera has manufacturing capabilities for most of the Heat Transfer Components. Gedera manufactures the necessary tools, fixtures, test equipment and special jigs which are required to manufacture, assemble and test these products. Gedera developed proprietary design and analysis techniques which assist in the mechanical and thermal design of its products. All of Gedera’s products are inspected and tested by trained inspectors using highly sophisticated test equipment in accordance with its customer requirements.
 
 
47

 
 
Limco’s engineering department enhances its ability to provide its customers with high-end top quality MRO services, supports the development of MRO services for new products with commercial potential and supports its OEM activity. Limco’s engineering department employs several certified mechanical and aerospace engineers. Limco’s multi-disciplinary team of engineers specializes, among others, in heat transfer components and supports all processes of thermal and structural analysis, mechanical and metallurgical research and development for manufacturing design. Limco’s engineers have direct experience with aerospace component repair and obtaining supplemental type certificates from the FAA. Limco’s engineering department supports the development of new capabilities with repairs that extend beyond the limits of the component maintenance manual and utilizes Designated Engineering Representatives (DER) to obtain the necessary FAA approvals.
 
Piedmont’s engineering department employs experienced mechanical and aerospace engineers with repair station and manufacturing experience in both engineering and quality. Piedmont also has an FAA certified Designated Engineering Representative (DER) on staff with delegations in Powerplant (APUs) & Mechanical Systems and with special delegation to manage and approve Repair Specifications.  Besides developing quality major repairs, Piedmont’s engineers have experience in obtaining Supplemental Type Certificates and Parts Manufacturer Approvals while working directly with the FAA Aircraft Certification Office. The Piedmont engineering team is dedicated to providing its worldwide customers with safe, reliable and economical solutions in the repair of APU, landing gear, line replaceable units and associated equipment.
 
Turbochrome’s engineering department enhances its ability to provide its customers with high-end top quality MRO services. Turbochrome’s engineering department employs several certified mechanical and metallurgical engineers. Turbochrome’s multi-disciplinary team of engineers specializes, among other things, in heat transfer components and supports all processes of thermal and structural analysis and mechanical and metallurgical research and development. Turbochrome’s engineers have substantial experience with aerospace component repair and with obtaining DER and DOA certificates from the FAA and EASA.
 
Research and Development
 
The technological developments in the markets in which TAT operates, increase the need to constantly examine the use of new materials and technology in an effort to improve both the physical characteristics of the products (size, weight), as well as their performance (optimal heat transfer, higher reliability and increased lifespan). TAT also develops new products and enhanced functionalities to its existing products based on customer demands and by the competitive environment and market potential. TAT invests resources to attain such technological and product improvements in cooperation with its customers.

 
48

 
Source and Availability of Raw Materials and Spare Parts
 
TAT and its subsidiaries acquire most of the components for the manufacture of their products from a limited number of suppliers and subcontractors, most of whom are located in Israel and the United States. Certain of these suppliers are currently the sole source of one or more components upon which TAT and its subsidiaries are dependent. Since many of TAT's and its subsidiaries’ purchases require long lead-times, a delay in the supply of an item can significantly delay the delivery of a product. Generally, TAT and its subsidiaries have not experienced difficulty in obtaining timely deliveries of necessary components. The raw materials used in manufacturing programs are generally readily available metals and alloys. TAT and its subsidiaries have not had any difficulty in obtaining such materials in the past and if they are unable to obtain these components when needed, they would experience delays in manufacturing their products and their financial results could be adversely affected.
 
TAT and its subsidiaries select their suppliers primarily based on their ability to ensure that their parts are serviceable and traceable to OEM-approved sources, their delivery performance and their ability to help reduce their total cost of procuring those parts. For quality control, cost and efficiency reasons, TAT and its subsidiaries generally purchase supplies only from vendors with whom they have ongoing relationships or who their customers have previously approved.
 
Authorizations from OEMs often require that TAT purchase component parts that are needed for its MRO services from the OEM or its designated distributors.
 
When deemed essential, TAT and its subsidiaries have been and are investing efforts in order to qualify second sources or have identified alternate sources for many of its parts needs.

 
49

 
 
Israeli Export Policy
 
Exports of military related products are subject to the military export policy of the State of Israel. Current Israeli Government policy encourages exports to approved customers, provided that such exports do not run counter to Israeli policy or national security considerations. Gedera must obtain a permit to initiate a sales proposal and ultimately an export license for the transaction required. Gedera may not be able to obtain export permits or licenses in the future. In addition, governmental policy with respect to military exports may be altered. However, to date Gedera has not encountered any significant difficulties in obtaining necessary permits or licenses for sale of its products.
 
U.S. Export Regulations.
 
Our U.S. subsidiaries' export of defense products, military technical data and technical services to Israel and other countries is subject to applicable approvals of the U.S. government under the U.S. International Traffic in Arms Regulations (ITAR). Such approvals are typically in the form of an export license or a technical assistance agreement (TAA). Other U.S. companies wishing to export defense products or military related services and technology to our Israeli and other non-U.S. entities are also required to obtain such export licenses and TAAs. An application for an export license or a TAA requires disclosure of the intended end user and the use of the technology. Pursuant to recent export control reform initiatives in the U.S., a greater part of our U.S. subsidiaries’ and our U.S. suppliers' activities are becoming subject to control under the Export Administration Act "dual use" regulations. The U.S. government may deny an export authorization if it determines that a transaction is counter to U.S. policy or national security.

Proprietary Rights
 
At the present time TAT and its subsidiaries do not own any patents. TAT and its subsidiaries rely on laws protecting trade secrets, and consider such items proprietary, but TAT believes that its success depends less on the ownership of such proprietary rights than on their innovative skills, technical competences, marketing and engineering abilities. TAT and its subsidiaries have no material registered trademarks.

 
50

 
B.              Government Regulations
 
Aerospace and Safety Regulations
 
The commercial aerospace industry is highly regulated by the FAA in the United States, EASA in Europe, the Civil Aviation Authority in England and other governmental authorities elsewhere in the world, while the military aerospace industry is governed by military quality specifications established by the U.S. Department of Defense for the manufacturing and repair industries and ISO-9000. TAT is required to be certified by one or more of these entities and, in some cases, by individual OEMs. TAT must also satisfy the requirements of its customers, including OEMs and airlines that are subject to FAA regulations and to evolving industry standards, and provide these customers with products that comply with the government regulations applicable to commercial flight operations. TAT believes it currently satisfies or exceeds these FAA maintenance standards in its repair and overhaul activities. Each of its repair stations is approved by the FAA. TAT also believes it currently satisfies all industry standards in its facilities.
 
TAT’s operations are also subject to a variety of worker and community safety laws including the Occupational Safety and Health Act of 1970, known as OSHA, which mandates general requirements for safe workplaces for all US employees. In addition, OSHA provides special procedures and measures for the handling of certain hazardous and toxic substances. TAT believes that its operations are in material compliance with OSHA’s health and safety requirements.
 
TAT believes that it is in material compliance with US, European and other governmental regulations affecting the aerospace and defense industry.
 
Israeli Regulations
 
TAT’s operations in Israel are subject to supervision by the Ministry of Defense and Civil Aviation Administration. Gedera is certified by the Israeli Air Force and the Ministry of Defense for both manufacturing and maintenance. Gedera is also licensed as a repair station for certain components by the Israeli Civil Aviation Administration. In addition, Gedera’s export of certain products and/or know-how is subject to approval by the Department for Control of Defense Export of the Israeli Ministry of Defense, known as API. Permits from API must be obtained for the initiation of sales proposals with regard to such exports, as well as for the actual export of such products.
 
 
51

 
Environmental Matters
 
TAT’s operations are subject to a number of stringent federal, state and local environmental laws in the United States and Israel, and to regulation by government agencies, including the U.S. Environmental Protection Agency. Among other matters, these regulatory authorities impose requirements that regulate the emission, discharge, generation, management, transportation and disposal of pollutants and hazardous substances. These authorities may require TAT to initiate actions to remediate the effects of hazardous substances which may be or have been released into the environment, and require TAT to obtain and maintain permits in connection with TAT’s operations. This extensive regulatory framework imposes significant compliance burdens and risks.
 
Although TAT seeks to maintain its operations and facilities in compliance with applicable environmental laws, there can be no assurance that TAT has no violations, or that change in such laws, regulations or interpretations of such laws, will not require TAT to make significant additional expenditures to ensure compliance in the future. Currently, TAT does not believe that it will have to make material capital expenditures for its operations to comply with environmental laws or regulations, or to incur material costs for environmental remediation during the 2016 fiscal year.
 
TAT has received no material third party environmental claims relating to its facilities, and TAT believes that it has all material licenses and certifications that are required in the jurisdictions in which it operates.

C.           Property, Plants and Equipment
 
The Gedera facility is located in Park Re’em near Gedera. The Park Re’em location houses TAT’s executive offices, Gedera’s research and development and manufacturing operations and includes approximately 344,000 square feet facility. The land of this facility is leased by TAT Industries Ltd. from the Israel Land Authority, or ILA pursuant to a lease that expires in 2016 with respect to one plot (237,000 square feet) and 2020 with respect the other plot (107,000 square feet). The term of the leases may be extended for a subsequent period of up to 49 years, subject to payment to be calculated according to the ILA's rules. Approximately 43,000 square feet of the facility are sub-leased to TAT from 1991 until 2020 for rental fees. TAT sub-leases the remaining 301,000 square feet of the facility from TAT Industries pursuant to an agreement TAT entered into in connection with the purchase of the operations relating to the manufacture of aviation accessories of TAT Industries in February 2000. In 2015 the rental fee was reviewed by a real estate appraiser, and as a result was determined that the rental fee will be $656,000 per year with an additional incremental payment of 2% per year. Total rental payments TAT paid to TAT Industries during 2015, 2014 and 2013 were $667,000, $427,000 and $424,000, respectively.
 
 
52

 
Limco owns and operates a 55,000 square feet manufacturing plant in Tulsa, Oklahoma which has historically supported all its business, including its aftermarket heat transfer component repair station. This facility also has housed Limco’s administration, engineering, quality control and support services. Limco also leases an additional 16,000 square feet repair station adjacent to its Tulsa manufacturing plant which has supported its heat transfer component and pneumatic ducting MRO services. In 2015, 2014 and 2013, the rental expense for this property was $50,700, $51,600 and, $50,000, respectively for each one of these years. The lease expires in October 31, 2016.
 
Piedmont leases approximately 56,000 square feet space for its facility in Kernersville, North Carolina to support its aftermarket APU component and overhaul repair station. In 2015, 2014 and 2013, the rental expense for this property was $78,000 for each one of these years. The lease expires in October 31, 2016.  Piedmont also leases approximately 32,000 square feet for its facility in Winston Salem, North Carolina to support its landing gear component and overhaul repair station as well as the machining, plating & grinding operation. In 2015, 2014 and 2013, the rental expense for this property was $76,000 for each one of these years. The lease expires on December 31, 2017. Piedmont also leased approximately 10,000 square feet of storage space in Winston-Salem near its main facility starting in 2014 on a month to month lease. In 2015 and 2014 Piedmont’s expense for this property was $19,000 and $14,000 respectively for each one of these years. Piedmont began a new lease in April 2015 for an approximate 82,000 square feet space to be used for its landing gear component and overhaul repair station as well as the machining, plating & grinding operation beginning in the second quarter of 2016.  The lease expires on June 30, 2025.  In 2015 the rental expense for this property was $195,000.
 
Turbochrome operates a 135,000 square feet manufacturing plant in Qiryat Gat, Israel which supports all its business. The land on which the plant is based is leased from the Israeli Land Administration. The leasehold rights are for a period ending in 2045 and are recorded on Turbochrome's name. The Company had paid the entire lease payments due until 2045 in a one-time payment (discounted to present value).

 
53

 
Item 4A.                   Unresolved Staff Comments
 
Not applicable.

Item 5.                      Operating and Financial Review and Prospects
 
Operating Results
 
The following discussion of our results of operations should be read together with our consolidated financial statements and the related notes, which appear elsewhere in this annual report.  The following discussion contains forward-looking statements that reflect our current plans, estimates and beliefs and involve risks and uncertainties. Our actual results may differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to such differences include those discussed below and elsewhere in this annual report.
 
Overview
 
TAT provides a variety of services and products to the aerospace and defense industries under four segments: (i) original equipment manufacturing or “OEM” of heat transfer solutions and aviation components (ii) heat transfer services and products (iii) maintenance, repair and overhaul or “MRO” services of aviation components in the area of landing gear and auxiliary power units, and (iv) overhaul and coating of jet engine components.
 
TAT’s activities in the field of OEM of Heat Transfer Solutions and Aviation Components primarily relate to its Gedera facility and include the (i) design, development, manufacture and sale of a broad range of heat transfer products (such as heat exchangers, pre-coolers and oil/fuel hydraulic coolers) used in mechanical and electronic systems on-board commercial, military and business aircraft; and (ii) manufacture and sale of environmental control and cooling systems and (iii) a variety of other electronic and mechanical aircraft accessories and systems such as pumps, valves, power systems and turbines.
 
TAT’s activities in the field of heat transfer services and products primarily relate to its subsidiary, Limco, and include the maintenance, repair and overhaul of heat transfer products and to a lesser extent, the manufacturing of certain heat transfer products. Limco 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 MRO services for aviation components primarily relate to its subsidiary, Piedmont, and include the maintenance, repair and overhaul of APUs and landing gear. Piedmont operates an FAA certified repair station, which provides aircraft component MRO services for airlines, air cargo carriers, maintenance service centers and the military.
 
 
54

 
TAT’s activities in the area of jet engine overhaul relate to its subsidiary, Turbochrome, and include the overhaul and coating of jet engine components, including turbine vanes and blades, fan blades, variable inlet guide vanes and afterburner flaps.
 
TAT is reliant on the commercial and military aviation and defense industries. Any downturn in these industries could decrease demand for its services and products and negatively impact its financial condition. The commercial airline industry is cyclical and has historically been subject to fluctuations due to general economic and political conditions, such as fuel and labor costs, price competition, downturns in the global economy and national and international events.
 
TAT’s revenues from OEM operations generally have higher gross margins than from MRO services. Respectively, the manufacturing of OEM products require higher level of expertise, associated labor and initial investments than does the provision of MRO services.
 
TAT’s cost of revenues for OEM operations and MRO services consists of component and material costs, direct labor costs, quality assurance costs, shipping expenses, royalties, overhead related to manufacturing and depreciation of manufacturing equipment. TAT’s gross margin is affected by the proportion of its revenues generated from each of its operational segments.
 
The principal factors that affect the operating income of TAT’s four segments, in addition to their gross profit, is the amount TAT expends for selling and marketing expenses and general and administrative expenses. While TAT plans to tightly monitor and save on its operating expenses, TAT believes that these operating expenses may increase in the future in accordance with its plans to grow the business of these segments.
 
TAT’s research and development expenses are related to new products and technologies or significant improvement in existing products and technologies.
 
TAT’s selling and marketing expenses are related to commission payments, compensation and related expenses of TAT’s sales teams, attendance at trade shows, travel expenses, advertising expenses and related costs for facilities and equipment.
 
 
55

 
TAT’s general and administrative expenses are related to compensation and related expenses for executive, finance and administrative personnel, professional fees such as legal, audit, SOX, internal audit, other general corporate expenses and related costs for facilities and equipment.
 
Sources of Revenues
 
TAT, directly and through its subsidiaries, provides a variety of services and products to the commercial and military aerospace and defense industries, including:
 
 
(i)
Original equipment manufacturing or “OEM” of heat transfer products and aviation components, such as heat exchangers, pre-coolers and oil/fuel hydraulic coolers, (through our Gedera facility);
 
(ii)
Heat transfer services and products (through our Limco subsidiary);
 
(iii)
Maintenance, repair and overhaul or “MRO” services for aviation components (through our Piedmont subsidiary); and
 
(iv)
Overhaul and coating of jet engine components (through Turbochrome subsidiary).
 
TAT’s revenues from its four operational segments for the three years ended December 31, 2015 were as follows:
 
   
Year Ended December 31,
 
   
2015
   
2014
   
2013
 
   
Revenues
in
Thousands
   
% of
Total
Revenues
   
Revenues
in
Thousands
   
% of
Total
Revenues
   
Revenues
in
Thousands
   
% of
Total
Revenues
 
Revenues (*)
                                   
OEM of Heat Transfer  Solutions and Aviation Components
  $ 27,351       32 %   $ 28,185       35 %   $ 31,138       39 %
Heat Transfer Services and Products
    31,001       36 %     30,350       38 %     29,907       38 %
MRO services for Aviation Components
    29,665       35 %     27,734       34 %     22,429       28 %
Overhaul and coating of jet engine components (**)
    1,905       2 %     -       - %     -       - %
Eliminations
    (4,315 )     (5 )%     (5,543 )     (7 )%     (3,923 )     (5 )%
Total revenues
  $ 85,607       100.0 %   $ 80,726       100.0 %   $ 79,551       100.0 %

(*) Excluding discontinued operations for the year ended on December 31, 2013.
(**) The results are for the period from October 19, 2015 (date of acquisition) to December 31, 2015.
 
The following table reflects the geographic breakdown of TAT’s revenues for each of the three years ended December 31, 2015:
 
   
Years Ended December 31,
 
   
2015
   
2014
   
2013
 
   
Revenues
in
Thousands
   
% of
Total
Revenues
   
Revenues
in
Thousands
   
% of
Total
Revenues
   
Revenues
in
Thousands
   
% of
Total
Revenues
 
                                     
United states
  $ 52,751       62 %   $ 50,153       62 %   $ 45,655       57 %
Europe
    18,336       21 %     16,419       20 %     16,985       21 %
Israel
    4,916       6 %     5,641       7 %     6,860       9 %
Other
    9,604       11 %     8,513       11 %     10,051       13 %
Total
  $ 85,607       100.0 %   $ 80,726       100.0 %   $ 79,551       100.0 %
   
(*) Excluding discontinued operations for the year ended on December 31, 2013.
 
56

 
 
Costs and Expenses
 
Cost of revenues TAT’s cost of revenues for OEM operations and MRO services consist of component and material costs, direct labor costs, quality-assurance costs, royalties, shipping expenses, overhead related to manufacturing and depreciation of manufacturing equipment.
TAT’s gross margin was affected by the proportion of TAT’s revenues generated from OEM operations and MRO services in each of the reported years.
 
Research and development expenses, net. Research and development expenses, net are related to new products and technologies or to a significant improvement of products and technologies, net of grants and participations received.
 
Selling and marketing expenses. Selling and marketing expenses consist primarily of commission payments, compensation and related expenses of TAT’s sales teams, attendance at trade shows, travel expenses, advertising expenses and related costs for facilities and equipment.
 
General and administrative expenses. General and administrative expenses consist of compensation and related expenses for executive, finance and administrative personnel, professional fees such as legal, audit, SOX, internal audit, other general corporate expenses and related costs for facilities and equipment.
 
Other income (expense). Other income (expense) results from capital gain on sale of property and equipment and onetime expenses, which in 2015 are mainly attributed to the Turbochrome acquisition and related expenses.
 
Gain on bargain purchase. Gain on bargain purchase is related to the acquisition of Turbochrome and represents the excess of the estimated fair value of the assets and liabilities acquired over the purchase price.
 
Financial income (expense), net. Financial income (expense), net consists of exchange rate and interest income (expense). Interest income (expense) relates to the interest received from (paid to) banks and changes in the rate of the NIS or other currencies against the U.S. dollar.
 
Tax expense (income). Tax expense consists of Israeli, U.S. federal and state taxes on the income of TAT’s business and changes in deferred tax assets (liabilities).
 
Net loss from discontinued operations. Consists of a $2.2 million loss from the impairment of the entire interest in Bental (the assets and liabilities of which were segregated at the end of 2013 and classified as held for sale). In addition, the Company recorded a loss from discontinued operations of $0.2 million for the year ended on December 31, 2013.
 
 
57

 
Critical Accounting Policies and Estimates
 
TAT’s consolidated financial statements are prepared in accordance with U.S. GAAP. These accounting principles require management to make certain estimates, judgments and assumptions based upon information available at the time that they are made, historical experience and various other factors that are believed to be reasonable under the circumstances. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities as of the date of the financial statements, as well as the reported amounts of revenues and expenses during the periods presented. While all the accounting policies impact the financial statements, certain policies may be viewed to be critical. These policies are those that are both most important to the portrayal of TAT’s financial condition and results of operations and require management’s most difficult, subjective and complex judgments and estimates. Actual results could differ from those estimates.
 
In many cases, the accounting treatment of a particular transaction is specifically dictated by generally accepted accounting principles in the United States 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
 
·
Inventory valuation
 
 
58

 
 
·
Income taxes
 
·
Allowance for doubtful accounts
 
·
Acquisitions and other intangible assets

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, delivery of the product has occurred, 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 product sales are recognized when product is shipped to the customer and title passes to the customer.
 
Revenues from multi-year, fixed price contracts for OEM customers are recognized when a product is shipped (and title passes) to the customer. Management provides for losses, if expected for the remaining portion of such contracts.
 
Revenues from MRO services are generally recognized when services are completed and the item is shipped back to the customer. 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.
 
Revenues from royalties from sales of products developed with TAT’s intellectual property, technology and technical assistance are recognized when the related sales are made.
 
 
59

 

Inventory valuation
 
Inventories are stated at the lower of cost or market. 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 because of 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.

 
60

 
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 that are 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 in 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.

 
61

 
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. On February 25, 2016, Republic Airways Holdings Inc., a customer of Piedmont, announced that it and certain of its subsidiaries have filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code. The Company and Piedmont are currently assessing the implications of Republic's voluntary petition for bankruptcy on the maintenance support agreement with Republic. As of the date hereof, there are outstanding receivables from Republic of several hundred thousand U.S. dollars.

 
62

 

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 related to the fair market value of certain the property, plant and equipment , in relation to replacement costs, and on 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.
 
The acquisition of Turbochrome was funded through cash on hand and an earn-out payment (up to $2 million). The earn-out Payment is 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 will reassess the fair value of the contingent consideration on a quarterly basis and record any applicable adjustments to earnings in the period they are determined.

 
63

 
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
 
   
2015
   
2014
   
2013
 
   
(in thousands)
 
Revenues
                 
OEM of Heat Transfer Solutions and Aviation Components
  $ 27,351     $ 28,185     $ 31,138  
Heat Transfer Services and Products
    31,001       30,350       29,907  
MRO Services for Aviation Components
    29,665       27,734       22,429  
Overhaul and Coating of Jet Engine Components
    1,905       -       -  
Eliminations
    (4,315 )     (5,543 )     (3,923 )
Total revenues
    85,607       80,726       79,551  
Cost of revenues
                       
OEM of Heat Transfer Solutions and Aviation Components
    23,887       23,249       24,141  
Heat Transfer Services and Products
    22,541       23,101       22,464  
MRO Services for Aviation Components
    28,474       23,502       19,224  
Overhaul and Coating of Jet Engine Components
    1,485                  
Eliminations
    (4,445 )     (5,330 )     (4,086 )
Total cost of revenues
    71,942       64,522       61,743  
Gross profit
    13,665       16,204       17,808  
Research and development costs, net
    890       1,070       713  
Selling and marketing
    2,903       3,203       3,150  
General and administrative
    8,469       8,123       8,668  
Other expenses (income)
    631       (11 )     (20 )
Gain on bargain purchase
    (4,833 )     -       -  
      8,060       12,385       12,511  
Operating income from continuing operations
    5,605       3,819       5,297  
Financial expense, net
    (349 )     (1,294 )     (50 )
Income from continuing operations before taxes on income
    5,256       2,525       5,247  
Taxes on income
    644       1,360       1,041  
Net income from continuing operations after taxes on income
    4,612       1,165       4,206  
Share in results of affiliated company and impairment of share in affiliated company
    1,237       267       1,025  
Net income from continuing operations
    5,849       1,432       5,231  
Net loss from discontinued operations, net of tax
    -       -       (2,429 )
Net income attributable to TAT Technologies Ltd. shareholders
  $ 5,849     $ 1,432     $ 2,802  
 
 
64

 
 
The following table pents, for the periods indicated, information concerning TAT’s results of operations as a percentage of revenues:
 
       
   
Year Ended December 31,
 
   
2015
   
2014
   
2013
 
Revenues
                 
OEM of Heat Transfer Solutions and Aviation Components
    31.9 %     34.9 %     39.1 %
Heat Transfer Services and Products
    36.2       37.6       37.6  
MRO Services for Aviation Components
    34.7       34.4       28.2  
Overhaul and Coating of Jet Engine Components
    2.2       -       -  
Eliminations
    (5 )     (6.9 )     (4.9 )
Total revenues
    100       100       100  
Cost of revenues
                       
OEM of Heat Transfer Solutions and Aviation Components
    27.9       28.8       30.3  
Heat Transfer Services and Products
    26.3       28.6       28.2  
MRO Services for Aviation Components
    33.3       29.1       24.2  
Overhaul and Coating of Jet Engine Components
    1.7       -       -  
Eliminations
    (5.1 )     (6.6 )     (5.1 )
Cost of revenues
    84       79.9       77.6  
Gross profit
    15.9       20.1       22.4  
Research and development costs, net
    1       1.3       0.9  
Selling and marketing
    3.4       4.0       4.0  
General and administrative
    9.9       10.1       10.9  
Other income
    0.7       *       *  
Gain on bargain purchase
    (5.6 )     -       -  
      9.4       15.3       15.7  
Operating income from continuing operations
    6.5       4.7       6.7  
Financial expense, net
    (0.4 )     (1.6 )     (0.1 )
Income from continuing operations before taxes on income
    6.1       3.1       6.6  
Taxes on income
    0.8       1.6       1.4  
Net income from continuing operations after taxes on income
    5.3       1.5       5.2  
Share in results of affiliated company and impairment of share in affiliated company
    1.4       *       1.3  
Net income from continuing operations
    6.7       1.8       6.5  
Net loss from discontinued operations, net of tax
            -       (3.0 )
Net income attributable to TAT Technologies’ Shareholders
    6.7 %     1.8 %     3.5 %
________________________
* Less than one percent.
 
 
65

 
Year ended December 31, 2015 compared with Year ended December 31, 2014
 
Revenues. Total revenues were $85.6 million for the twelve months ended December 31, 2015, compared to $80.7 million for the twelve months ended December 31, 2014, an increase of 6%. This reflects (i) the decrease in revenues in the OEM of Heat Transfer Solutions and Aviation Components segment; (ii) the increase in revenues in the Heat Transfer Services and Products segment; (iii) the increase in revenues in the MRO Services for Aviation Components segment; and (iv) consolidation for the first time in the fourth quarter of 2015 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 decreased to $27.4 million for the year ended December 31, 2015 from $28.2 million for the year ended December 31, 2014, a decrease of 3% mainly due to decrease in sales of aviation components.
 
Revenues from Heat Transfer Services and Products. Revenues from the Heat Transfer Services and Products operating segment increased to $31 million for the year ended December 31, 2015, from $30.4 million for the year ended December 31, 2014, an increase of 2.1% mainly due to an increase in demand for heat transfer products and services.
 
 
66

 
Revenues from MRO Services for Aviation Components. Revenues from MRO Services for Aviation Components operating segment increased to $29.7 million for the year ended December 31, 2015, from $27.7 million for the year ended December 31, 2014, an increase of 7.2%. During a periodic assessment of its long-term projects, the Company updated its estimates of profits expected 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 mainly due to higher cost accrued and lower revenues expected of those long term projects.
 
Revenues from overhaul and coating of jet engine components. Revenues from Overhaul and Coating of Jet Engine components operating segment is $1.9 million for the period as of October 19, 2015 until December 31, 2015. This is the first time that the segment is being consolidated following the acquisition of Turbochrome by the Company.

Cost of revenues. Cost of revenues was $71.9 million for the twelve months ended December 31, 2015, compared to the $64.5 million for the twelve months ended December 31, 2014, an increase of 11.5%. This is primarily attributable to the increase in the cost of revenue mainly in the MRO Services for Aviation Components segment  and a consolidation for the first time in the fourth quarter of 2015 of Overhaul and Coating of Jet Engine components segment.

Cost of revenues as a percentage of revenues was 84% for the twelve months ended December 31, 2015, compared to 79.9% for the twelve months ended December 31, 2014. This is primarily attributable an increase in the cost of revenue in the MRO Services for Aviation Components segment.

Cost of revenues for OEM of Heat Transfer Solutions and Aviation Components. Cost of revenues for the OEM of Heat Transfer Solutions and Aviation Components operating segment increased to $23.9 million for the year ended December 31, 2015, from $23.2 million for the year ended December 31, 2014, an increase of 2.7%. The increase is primarily attributable to product mix, increase in direct labor costs, quality-assurance costs and overhead related to manufacturing during 2015.
 
Cost of revenues as a percentage of revenues in this segment increased to 87.3% in the year ended December 31, 2015, from 82.5% for the year ended December 31, 2014. The increase is primarily as a result of product mix with lower margin sold during the year 2015 along with higher rate of fixed production costs in 2015 compared with 2014.
 
 
67

 
Cost of revenues for Heat Transfer Services and Products. Cost of revenues for the Heat Transfer Services and Products operating segment decreased to $22.5 million for the year ended December 31, 2015 from $23.1 million for the year ended December 31, 2014, a decrease of 2.4%. The decrease is primarily attributable to lower material cost.
 
Cost of revenues as a percentage of revenues in this segment decreased to 72.7% in the year ended December 31, 2015 from 76.1% for the year ended December 31, 2014, primarily as a result of reductions in material cost and no increase in headcount.
 
Cost of revenues for MRO services for Aviation Components. Cost of revenues for MRO services for Aviation Components operating segment increased to $28.4 million for the year ended December 31, 2014 from $23.5 million for the year ended December 31, 2014, an increase of 20.9%. This increase is primarily attributed to the increase in labor and material cost compared to the rate of increase in sales during 2015.
 
Cost of revenues as a percentage of revenues in this segment increased to 96% in the year ended December 31, 2015 from 84.7% for the year ended December 31, 2014. The increase is primarily attributable to: (i) the increase in the cost of revenue due to the type of services and the cost that was accumulated to certain services, and (ii) the fact that during a periodic assessment of its long-term projects, the Company updated its estimates of profits expected 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.
 
Cost of revenues for Overhaul and Coating of Jet Engine components. Cost of revenues for the Overhaul and Coating of Jet Engine Components segment was $1.5 million for the period as of October 19, 2015 until December 31, 2015.
Cost of revenues as a percentage of revenues in this segment was 78% in the period from October 19, 2015 until December 31, 2015.

Research and development, net. Research and Development expenses were $0.9 million for the twelve months ended December 31, 2015, compared to $1.1 million for the twelve months ended December 31, 2014, a decrease of 16.8%.
 
 
68

 
Research and Development expenses as a percentage of revenues were 1% for the twelve months ended December 31, 2015 compared to 1.3% for the twelve months ended December 31, 2014. 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 coming years.

Selling and marketing. Selling and marketing expenses were $2.9 million for the twelve months ended December 31, 2015, compared to $3.2 million for the twelve months ended December 31, 2014, a decrease of 9.4% mainly due to decrease in labor and direct expenses.

Selling and marketing expenses as a percentage of revenues were 3.4% for the twelve months ended December 31, 2015, compared to 4.0% for the twelve months ended December 31, 2014. TAT expects to invest additional resources in selling and marketing activities in coming years.

General and administrative. General and administrative expenses were $8.5 million for the twelve months ended December 31, 2015, compared to $8.1 million for the twelve months ended December 31, 2014, an increase of 4.3%. The increase in general and administrative expenses was mainly attributable to the first time consolidation in the fourth quarter of 2015 of the Overhaul and Coating of Jet Engine Components segment after the closing of Turbochrome's acquisition.

General and administrative expenses as a percentage of revenues were 9.9% for the twelve months ended December 31, 2015, compared to 10.1% for the twelve months ended December 31, 2014.

Other expenses (income). For the twelve months ended December 31, 2015, TAT reported other expenses of $0.6 million, an increase of 100% from the year ended December 31, 2014. The increase in other expenses is mainly attributable to acquisition expenses related to Turbochrome's 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.
 
 
69

 

Financial expenses. Financial expenses for the twelve months ended December 31, 2015 were $1.3 million, compared to $2.5 for the twelve months ended December 31, 2014. The decrease is primary attributable to the losses on forward transactions that were entered into in order to minimize its currency risk from expenses paid in NIS during the twelve months ended December 31, 2014, and had lower influence during the twelve months ended December 31, 2015. The decrease is also attributed to the changes in exchange rates between the U.S. dollar and the Israeli Shekel.

Financial income. Financial income for the twelve months ended December 31, 2015 was $0.9 million, compared to $1.2 million for the twelve months ended December 31, 2014. Financial income during the twelve month period ended on December 31, 2014 primarily resulted from changes in exchange rates between the U.S. dollar and the Israeli Shekel, interest received from the Israeli tax authorities for excess payments made in previous years and from interest received on short-term investments.
 
Taxes on income. Taxes on income for the twelve months ended December 31, 2015, amounted to $0.6 million (effective tax rate of 11%), compared to $1.4 million (effective tax rate of 56%) for the twelve months ended December 31, 2014. The decrease is mainly attributed to the fact that the gain from barging purchase of $4.8 million is not taxable.  
 
Share in results of equity investment of affiliated company. TAT recognized income of $1.2 million mainly from the sale of 237,932 shares of Class B Common Stock of FAvS representing 23.18% of FAvS' share capital and its entire holdings (16,253) of FAvS' Series A Preferred stock for the twelve months ended December 31, 2015 compared to an income of $0.3 million for the twelve months ended December 31, 2014.

 
70

 
Net income from continuing operations. TAT recognized net income from continuing operations of $5.8 million for the twelve months ended December 31, 2015 compared to net income of $1.4 million for the twelve months ended December 31, 2014. The increase is primarily attributable to the gain on bargain purchase of $4.8 million related to the acquisition of Turbochrome. The increase was offset by a periodic assessment of profit estimates for several long-term contracts of TAT, which resulted in a decrease of $1.4 million in net income for the same period.

Year ended December 31, 2014 compared with Year ended December 31, 2013
 
Revenues. Total revenues were $80.7 million for the twelve months ended December 31, 2014, compared to $79.5 million for the twelve months ended December 31, 2013, an increase of 1.5%. This reflects (i) the decrease in revenues in the OEM of Heat Transfer Solutions and Aviation Components segment; (ii) the increase in revenues in the Heat Transfer Services and Products segment; and (iii) the increase in revenues in the MRO Services for Aviation 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 decreased to $28.2 million for the year ended December 31, 2014 from $31.0 million for the year ended December 31, 2013, a decrease of 9.5%.
 
Revenues from Heat Transfer Services and Products. Revenues from the Heat Transfer Services and Products operating segment increased to $30.4 million for the year ended December 31, 2014, from $29.9 million for the year ended December 31, 2013, an increase of 1.5%.
 
Revenues from MRO services for Aviation Components. Revenues from the MRO Services for Aviation Components operating segment increased to $27.7 million for the year ended December 31, 2014, from $22.4 million for the year ended December 31, 2013, an increase of 23.7%. The increase was attributable to increased sales both to existing and new customers.
 
Cost of revenues. Cost of revenues was $64.5 million for the twelve months ended December 31, 2014, compared to the $61.7 million for the twelve months ended December 31, 2013, an increase of 4.5%. This reflects (i) the decrease in revenues in the OEM of Heat Transfer Solutions and Aviation Components segment; (ii) the increase in revenues in the Heat Transfer Services and Products segment; and (iii) the increase in revenues in the MRO Services for Aviation Components segment, which is primarily attributable to the increase in material cost associated with the increase in revenues

 
71

 
Cost of revenues as a percentage of revenues was 79.9% for the twelve months ended December 31, 2014, compared to 77.6% for the twelve months ended December 31, 2013. This is primarily attributable to product mix with lower margin products sold during 2014 in the OEM of Heat Transfer Solutions and Aviation Components, in the Heat Transfer Services and Products and in the MRO Services for Aviation operating segments.

Cost of revenues for OEM of Heat Transfer Solutions and Aviation Components. Cost of revenues for the OEM of Heat Transfer Solutions and Aviation Components operating segment increased to $23.2 million for the year ended December 31, 2014, from $24.1 million for the year ended December 31, 2013, an decrease of 3.7%. This decrease in primarily attributable to the decrease in revenues in 2014.
 
Cost of revenues as a percentage of revenues in this segment increased to 82.5% in the year ended December 31, 2014, from 77.5% for the year ended December 31, 2013. The increase is primarily as a result of product mix with lower margin products sold during year 2014 along with higher rate of fixed production costs in 2014 compared with 2013.
 
Cost of revenues for Heat Transfer Services and Products. Cost of revenues for Heat Transfer Services and Products operating segment increased to $23.1 million for the year ended December 31, 2014 from $22.5 million for the year ended December 31, 2013, an increase of 2.7%. This increase in primarily attributable to the increase in material cost associated with the increase in revenues in 2014.
 
Cost of revenues as a percentage of revenues in this segment increased to 76.1% in the year ended December 31, 2014 from 75.1% for the year ended December 31, 2013, primarily as a result of product mix with lower margins sold during year 2014.
 
Cost of revenues for MRO services for Aviation Components. Cost of revenues for MRO Services for Aviation Components operating segment increased to $23.5 million for the year ended December 31, 2014 from $19.2 million for the year ended December 31, 2013, an increase of 22.3%.
 
 
72

 
Cost of revenues as a percentage of revenues in this segment decreased to 84.7% in the year ended December 31, 2014 from 85.7% for the year ended December 31, 2013, primarily as a result of product mix with higher margin products sold during year 2014.

Research and development, net. Research and Development expenses were $1.1 million for the twelve months ended December 31, 2014, compared to $0.7 million for the twelve months ended December 31, 2013, an increase of 50.1%, and are related to new products and technologies within the OEM of Heat Transfer Solutions and Aviation Components and the Heat Transfer Services and Products operating segments.
 
Research and Development expenses as a percentage of revenues were 1.3% for the twelve months ended December 31, 2014 compared to 0.9% for the twelve months ended December 31, 2013. 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 coming years.

Selling and marketing. Selling and marketing expenses were $3.2 million for the twelve months ended December 31, 2014, compared to $3.1 million for the twelve months ended December 31, 2013, an increase of 1.7%. This was due to increased expenses in the Heat Transfer Services and Products segment, primarily attributable to an increase in commission’s costs.

Selling and marketing expenses as a percentage of revenues were 4.0% for the twelve months ended December 31, 2014, similar to 4.0% for the twelve months ended December 31, 2013. TAT expects to invest additional resources in selling and marketing activities in coming years.

General and administrative. General and administrative expenses were $8.1 million for the twelve months ended December 31, 2014, compared to $8.7 million for the twelve months ended December 31, 2013, a decrease of 6.9%. The decrease in general and administrative expenses was impacted by the decrease in general and administrative expenses in the OEM of Heat Transfer Solutions and Aviation Components operating segment, primarily attributable to the decrease in bonuses.

 
73

 
General and administrative expenses as a percentage of revenues were 10.1% for the twelve months ended December 31, 2014, compared to 10.9% for the twelve months ended December 31, 2013.

Operating income from continuing operations. For the twelve months ended December 31, 2014, TAT reported operating income of $3.8 million compared to operating income of $5.3 million for the twelve months ended December 31, 2013, a decrease of 28.3%. The decrease in operating income is attributable to (i) the decrease in operating income in the OEM of Heat Transfer Solutions and Aviation Components operating segment; (ii) partially offset by the increase in operating income in the MRO Services for Aviation operating segments.

Financial expenses. Financial expenses for the twelve months ended December 31, 2014 were $2.5 million, compared to $0.9 for the twelve months ended December 31, 2013. Financial expenses during the twelve months ended December 31, 2014 primarily resulted from losses on Forward transactions which the company entered in order to minimize its currency risk from expenses paid in NIS, changes in exchange rates between the U.S. dollar and the Israeli Shekel, bank fees and interest payments on long-term loans.

Financial income. Financial income for the twelve months ended December 31, 2014 was $1.2 million, compared to $0.9 million for the twelve months ended December 31, 2013. Financial income during the twelve month period ended on December 31, 2014 primarily resulted from changes in exchange rates between the U.S. dollar and the Israeli Shekel, interest received from the Israeli tax authorities for excess payments made in previous years and from interest received on short-term investments.

Taxes on income. Taxes on income for the twelve months ended December 31, 2014, amounted to $1.4 million, compared to $1.0 million for the twelve months ended December 31, 2013. Taxes on income for the twelve months ended December 31, 2014, were impacted by tax expenses recorded in the MRO Services for Aviation operating segments.
 
74

 
 
Share in Results of affiliated company. TAT recognized income of $0.3 million from its approximately 28% interest in FAvS’ results for the twelve months ended December 31, 2014 compared to an income of $1 million for the twelve months ended December 31, 2013.

Net income from continuing operations. TAT recognized net income from continuing operations of $1.4 million for the twelve months ended December 31, 2014 compared to net income of $5.2 million for the twelve months ended December 31, 2013.
 
Net loss from discontinued operations. For the twelve months ended December 31, 2013, TAT recognized an impairment of $3.3 million attributable to the sale of our entire interest in Bental, the OEM of Electric Motion Systems (out of which $2.3 million attributed to controlling interest), as mentioned above.
 
Net income (loss) from continuing operations attributable to controlling interest. TAT recognized net income of $1.4 million for the twelve months ended December 31, 2014 compared to net loss of $2.8 million for the twelve months ended December 31, 2013.
 
TAT expects its operating results to fluctuate in the future as a result of various factors, many of which are outside of TAT’s control, including the timing of orders, the provision of services and deliveries. Consequently, TAT believes that period-to-period comparisons of its operating results may not necessarily be meaningful, and as a result, you should not rely on them as an indication of future performance.

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 the State of Israel. See “RISK FACTORS” for a description of governmental, economic, fiscal, monetary or political polices or factors that have materially affected or could materially affect TAT’s operations.

 
75

 
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. TAT cannot assure you that TAT will not 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.
 
 
76

 
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) %
 
2003
    (1.9 )     7.6       5.7  
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  
 
A 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. This 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 the 2013 the NIS appreciated against the U.S. dollar by 7.5%. Such trend was continued through the end of 2014, during which the NIS appreciated by additional 12% by the end of 2014. During 2015 the exchange rates between the NIS and the U.S. dollar have not changed materially. Through March 21, 2016 exchange rates between the NIS and the U.S. dollar have not changed materially compared to the corresponding average rate as of December 31, 2015.
 
 
77

 
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. TAT cannot assure you that in the future its 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 is 26.5% for the year ended December 31, 2014 and 2015, and 25% for the year ended December 31, 2013. In 2016 and thereafter the regular corporate tax rate is set to be 25%.
 
However, the rate is effectively reduced for income derived from an approved enterprise and beneficiary enterprise. Until December 31, 2010, TAT has elected to participate in the alternative package of tax benefits for its current approved enterprise and beneficiary enterprise under the Law for the Encouragement of Capital Investments, 1959, as amended (the "Investment Law"). 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 during the tax-exemption period other than upon liquidation) and subject to reduced corporate tax rates for an additional period.
 
Additional 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 tax 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 distributed from taxable income derived from an Approved Enterprise or Benefiting Enterprise 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 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.
 
 
78

 
Under the transitional provisions of the 2011 Amendment, the Company elected to irrevocably implement the 2011 Amendment with respect to its existing Approved and Benefiting Enterprises while waiving benefits provided under the legislation prior to the 2011 Amendment.
 
Under a more 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).
 
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 enterprises 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 statutory tax of TAT’s U.S. subsidiaries was 38% in the years ended December 31, 2015, 2014 and 2013, respectively.

 
79

 
Recently Issued Accounting Standards

 
(1)
During November 2015, the FASB issued ASU 2015-17, Balance Sheet Classification of Deferred Taxes, which simplifies the presentation of deferred income taxes. ASU 2015-17 provides presentation requirements to classify deferred tax assets and liabilities as noncurrent in a classified statement of financial position. The standard is effective for fiscal years beginning after December 15, 2016, including interim periods within that reporting period. Early adoption is permitted for any interim and annual financial statements that have not yet been issued. We early adopted ASU 2015-17 effective October 31, 2015, retrospectively. Adoption resulted in a $1.1 million decrease in other accounts receivable and prepaid expenses, a $0.9 million increase in Long-term deferred tax assets, net, and a $0.2 million decrease in long-term deferred tax liability, net in our consolidated balance sheets at December 31, 2014. Adoption had no impact on our results of operations and cash flow.
 
 
(2)
In September 2015, the FASB issued ASU 2015-16, Business Combinations - Simplifying the Accounting for Measurement-Period Adjustments, which eliminates the requirement to restate prior period financial statements for measurement period adjustments. The guidance requires that the cumulative impact of a measurement period adjustment (including the impact on prior periods) be recognized in the reporting period in which the adjustment is identified. We early adopted this guidance in our fourth quarter of fiscal 2015. See “Note 3 — Acquisitions”. Adoption had no impact on the Company's financial statements as of December 31, 2015.
 
 
(3)
In February 2015, the FASB issued amended guidance on current accounting for consolidation of certain entities. Pursuant to this guidance, reporting enterprises should evaluate whether (a) they should consolidate limited partnerships and similar entities, (b) fees paid to a decision maker or service provider are variable interests in a variable interest entity ("VIE"), and (c) variable interests in a VIE held by related parties of the reporting enterprise require the reporting enterprise to consolidate the VIE. The guidance is effective for the interim and annual periods beginning on or after December 15, 2015. The Company does not expect this guidance to have a material effect on its consolidated financial statements at the time of adoption of this standard.
 
 
80

 
 
(4)
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2014-09 (ASU 2014-09) "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 is currently evaluating the impact of the amended guidance on its consolidated financial statements.
 
 
(5)
In July 2015, the FASB issued guidance on current accounting for inventory measurement.  The new guidance requires entities to measure inventory at the lower of cost or net realizable value.  Net realizable value is defined by the guidance as the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation.  The guidance is effective for the interim and annual periods beginning on or after December 15, 2016 (early adoption is permitted).  The Company is currently evaluating the impact of the new guidance on its consolidated financial statements.
 
 
(6)
In February 2016, the FASB issued ASU 2016-02 – Leases (ASC 842), 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 apply a dual approach, classifying leases 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 will 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.
 
 
81

 

Liquidity and Capital Resources
 
As of December 31, 2015, TAT had cash and cash equivalents and short-term bank deposits of $26.8 million, compared with cash and cash equivalents and short-term bank deposits of $28 million as of December 31, 2014.

Capital expenditures for the years ended December 31, 2015, 2014 and 2013 were approximately $3.3 million, $3 million and $2.2 million, respectively. TAT funded these expenditures from cash flows from operations and also from financing activities. TAT expects that its available cash and cash equivalents and cash flow that will be generated from operations will be sufficient to enable it to fund its capital expenditures.

TAT 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. 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.
 
 
82

 
Cash Flows
 
The following table summarizes TAT’s cash flows for the periods presented:
       
   
Year Ended December 31,
 
   
(in thousands)
 
   
2015
   
2014
   
2013
 
Net cash provided by (used in) operating activities
  $ 733     $ (1,458 )   $ 7,203  
Net cash provided by (used in) investing activities
    (4,470 )     4,624       70  
Net cash used in financing activities
    (469 )     (2,909 )     (2,936 )
Net cash provided by discontinued operations
    -       -       514  
Net increase (decrease) in cash and cash equivalents
    (4,206 )     257       4,851  
Cash and cash equivalents at beginning of the year
    22,894       22,637       17,786  
Cash and cash equivalents at end of the year
    18,688       22,894       22,637  
Less – Cash and cash equivalents of discontinued operations at end of year
    -       -       2,823  
Cash and cash equivalents of continuing operations at end of year
  $ 18,688     $ 22,894     $ 19,814  

The net cash provided by (used in) operating activities for the year ended December 31, 2015 amounted to approximately $0.7 million, compared to $(1.4) million for the year ended December 31, 2014 and $7.2 for the year ended December 31, 2013.
 
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 for non-cash line items: an upwards 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 upwards adjustment of $0.4 million for increase in trade accounts payable. This was offset with 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 operating activities for the year ended December 31, 2014 was principally derived from $1.4 million of net income from continuing operations and from the following adjustments for non-cash line items: an upwards adjustment of $2.1 million for depreciation and amortization; an upwards adjustment of $2.7 million for decrease in accounts receivable; and an upward adjustment of $1.2 million for decrease in net deferred income tax asset. This was offset with a downward adjustment of $0.3 million for share in results of affiliated company; an downward adjustment of $6 million for increase in inventories; a downward adjustment of $0.5 million for decrease in liability in respect of employee rights upon retirement; a downward adjustment of $0.8 million for increase in other accounts receivable, prepaid expenses and funds in respect of employee rights upon retirement; a downward adjustment of $0.5 million for decrease in accounts payable and a downward adjustment of $0.7 million for decrease in other accounts payable and accrued expenses.

 
83

 
Net cash provided by operating activities for the year ended December 31, 2013 was principally derived from $5.3 million of net income from continuing operations and from the following adjustments for non-cash line items: an upward adjustment of $1.9 million for depreciation and amortization; an upwards adjustment of $1 million for decrease in other accounts receivable, prepaid expenses and funds in respect of employee rights upon retirement; an upward adjustment of $0.7 million for decrease in inventories; an upwards adjustment of $0.3 million for increase in liability in respect of employee rights upon retirement; an upwards adjustment of $0.3 million for increase in other accounts payable and accrued expenses and an upwards adjustment of $0.1 million for decrease in net deferred income tax asset. This was offset with a downward adjustment of $1.0 million for share in results of affiliated company; a downward adjustment of $1.2 million for increase in accounts receivable; and a downward adjustment of $0.4 million for decrease in other accounts payable and accrued expenses.

Net cash used in investing activities was approximately $(4.5) million for the year ended December 31, 2015, compared to net cash provided by investing activities of $4.6 million for the year ended December 31, 2014 and net cash used in investing activities of approximately $0.1 million for the year ended December 31, 2013.

Of the 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.
 
Of the cash provided by investing activities in the year ended December 31, 2014 approximately $3 million was used for the purchase of property and equipment, primarily production equipment and building improvements, offset by $5.1 million from maturities of short-term deposits and $2.2 million from the sale of a subsidiary.
 
 
84

 
Of the cash used in investing activities in the year ended December 31, 2013 approximately $2.3 million was used for the purchase of property and equipment, primarily production equipment and building improvements, offset by $2.3 million from the release of restricted deposit.
 
Net cash used in financing activities was approximately $0.5 million for the year ended December 31, 2015, compared to net cash used in financing activities of approximately $2.9 million for the year ended December 31, 2014 and net cash used in financing activities of approximately $2.9 million for the year ended December 31, 2013.
 
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.
 
In the year ended December 31, 2014, the net cash used in financing activities was primarily attributable to repayments of $0.9 million of long-term credit and payment of $2 million of cash dividend.
 
In the year ended December 31, 2013, the net cash used in financing activities was primarily attributable to repayments of $0.7 million of short-term credit and repayments of $2.3 million of long-term loans.
 
A.              Research and Development, Patents and Licenses
 
Not applicable.
 
B.              Trend Information
 
In recent years, trends in the aerospace industry in which we operate have been impacted by the increase in number of commercial and defense aircraft, increase in number of passenger traffic and a corresponding increase in airlines’ revenue. There is no assurance that such increase in the number of aircraft, passenger traffic and airlines revenue will continue in the future. Airplane carriers continue with their efforts to reduce cost of MRO activities and increase efficiencies.
 
 
85

 
In recent years, consolidation in the aerospace industry 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 existing and new 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, 2015 and the effect we expect them to have on our liquidity and cash flow in future periods (not include future liabilities from held for sale operating segment).
 
Contractual Obligations
 
Payments due by Period
 
   
Total
   
Less than 1
year
   
1-3 Years
   
3-5 Years
   
More than
5 years
 
Operating lease obligations
    8,491,000       1,492,000       2,367,000       2,105,000       2,527,000  
Purchase commitments
    3,667,000       3,667,000       -       -       -  
Total
  $ 12,158,000     $ 5,159,000     $ 2,367,000     $ 2,105,000     $ 2,527,000  
_________________

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, 2015, our severance pay liability, net was $245,000.
 
In October 2015, TAT completed the acquisition of Turbochrome Ltd. for approximately $3.5 million. In addition, TAT may pay an earn-out, capped at $2 million, in the event that Turbochrome meets certain annual revenue targets in 2015 and 2016. 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 will be obligated to pay to Chromalloy American LLC (the previous shareholder of Turbochrome), $500 as an earn out payment with respect to fiscal year 2015 revenues.
 
 
86

 
TAT also has the following Guarantees as of December 31, 2015:
 
 
·
In order to secure TAT's liability to the Israeli customs, the Company provided a bank guarantee in the amount of $214. The guarantee is linked to the consumer price index and is valid until December 2016.
 
·
In order to secure the TAT's liability to the lessor of its premises, the Company provided a bank guarantee in the amount of $658. The guarantee is linked to the consumer price index in Israel and is valid until July 2016.
 
·
In order to secure Turbochrome liability to the Israeli customs, the Company provided a bank guarantee in the amount of $256. The guarantee is linked to the consumer price index in Israel and is valid until December 2016.

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
 
Samuel Vlodinger
 
65
 
Chairman of the Board of Directors
 
Itsik Maaravi   56   Chief Executive Officer until April 30, 2016  
Igal Zamir
 
50
 
Chief Executive Officer as of April 30, 2016
 
Guy Nathanzon
 
44
 
Chief Financial Officer
 
Eyal Lipetz-Eliassi
 
45
 
Chief Marketing Officer
 
Rick Reed
 
61
 
Chief Executive Officer of Piedmont
 
Yair Raz
 
60
 
Chief Executive Officer of Limco
 
Tamir Ziv
 
44
 
Vice President Operations
 
Motty Katz
 
65
 
Turbochrome's Site Manager and Chief Operations and Engineering Officer
 
Amos Malka
 
63
 
Director
 
Avi Shani (1)(2)(3)(4)(5)
 
68
 
External  Director
 
Dafna Gruber (1)(3)(4)(5)
 
51
 
Independent Director
 
Jan Loeb
 
57
 
Director
 
Ron Ben-Haim
 
47
 
Director
 
Aviram Halevi (1)(2)(3)(4)(5)
 
58
 
External  Director
 
 
(1) “Independent Director” under the applicable NASDAQ Marketplace Rules and the applicable rules of the U.S. Securities and Exchange Commission.
(2)  “External Director” as required by Israel’s Companies Law
(3) Member of Audit Committee.
(4) Member of the committee that examines TAT's financial statements prior to the Board of Directors' approval.
(5) Member of Compensation Committee.

 
87

 

Mr. Samuel Vlodinger was elected by our Board of Directors as the Chairman of the Board of Directors in August 2013. Mr. Vlodinger has been a senior partner in FIMI since 2009. Prior to joining FIMI, Mr. Vlodinger held senior management positions in several industrial companies and has been an active private equity investor. Mr. Vlodinger holds a B.Sc. in industrial engineering from the Technion, Institute of Technology. Mr. Vlodinger currently serves as the chairman of the board of directors of Raval ACS, Ltd. and Ginegar Plastic Industries, Ltd.
 
Mr. Itsik Maaravi has served as TAT’s Chief Executive Officer since January 2012 and will step down from this position on April 30, 2016. Prior to that, Mr. Maaravi served as President of TAT’s Piedmont subsidiary, a position he held since July 2011.  From July 2009 through June 2011 Mr. Maaravi was Chief Marketing Officer for Piedmont as well as for the Company’s Limco subsidiary.  Between 2000 and June 2009 Mr. Maaravi held senior marketing positions at Kamor Aviation and Israel Aerospace Industries.

Mr. Igal Zamir will serve as TAT’s Chief Executive Officer effective as of April 30, 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., which owns and operates 370 convenient stores and gas stations in the southeastern region of the U.S. 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. Prior to Metrolight from 1998 until 2004, Mr. Zamir served as CEO of Rostam, the world's largest and leading provider of private label tampons. Mr. Zamir holds B.S. in industrial engineering from Tel-Aviv University, Israel and an MBA from Bar-Ilan University, Israel.
 
 
88

 
Mr. Eyal Lieptez-Eliassi has served as TAT's VP Marketing since 2015. Prior to that, Mr. Eliassi has served as Israel Country Manager & Innovation Based Growth Leader at DuPont and has led various commercial transactions and international business development activities within the Finance, High-Tech and Aerospace sectors. Mr. Eliassi holds a B.Sc. in Aerospace Engineering from the Technion – Israel Institute of Technology, and M.A. in Business Administration from Manchester University.

Mr. Rick Reed has served as Piedmont’s President since March 2016. Prior to that, Mr. Reed was with Triumph Actuation Systems, LLC, a subsidiary of The Triumph Group, Inc., serving as Company President. Mr. Reed was formerly with Piedmont Aviation, Inc. from February 1978 to June 2000, serving in senior engineering and operations management positions with both the Airline Division and the General Aviation Group, which included extensive aircraft and component MRO capabilities.

Dr. Yair Raz has served as Chief Executive Officer of Limco since November 2012. Prior to that Dr. Raz served as the Chief Operating Officer of Piedmont Aviation, a position he held since April 2012. From January 2011 to January 2012 Dr. Raz was the BTI Vice President Marketing and Business Development for North America. Between August 2005 and December 2011 Dr. Raz served as General Manager of PCI, a PWA and BTI Joint Venture in the US. Between 1995 and July 2005 Dr. Raz held various management positions with PCI in the US including operation manager, engineering, procurement and president assistant. Between 1998 and 2012 Dr. Raz was also involved with the JV of BTI and PWA in Xian China. Between 1983 and 1995 Dr. Raz held management positions with BTL in Israel. Those positions included Quality and plant Management. Dr. Raz holds a B.Sc degree in Mechanical Engineering and an M.Sc degree in Material Science from the Technion Institute of Technology and a Phd. degree from La Salle University in the US.

Mr. Tamir Ziv currently holds the position of VP Engineering and COO of TAT. Mr. Ziv served as TAT’s Director of Engineering since November 2013, and was appointed Director of Business Units in November 2012. Mr. Ziv has over a decade of experience in aircraft design and structural integrity analyses.  Mr.  Ziv worked at Cessna Aircraft Company with the responsibly to ensure the structural integrity of all business jet platforms.   In addition, Mr. Ziv worked at Lockheed Martin in Fort Worth, Texas on the F35-JSF (Joint Strike Fighter) and F16 aircrafts overseeing wing to body structural integrity group.  Mr. Tamir Ziv holds a B.Sc in Aerospace Engineering from Embry Riddle Aeronautical University (Daytona Beach, Florida) and M.Sc in Aerospace Engineering from Wichita State University (Wichita, Kansas).

 
89

 
 
Mr. Motty Katz has been appointed as Site manager and Chief Operations and Engineering Officer at Turbochrome Ltd. since October 2015. Prior to his appointment, Mr. Katz served as Operations and Engineering manager since 1994 till 2015. Prior to that, between the years 1986-1994 Mr. Katz served as Head of Engineering Department. Prior to that Mr. Katz worked as Chemical & Metallurgical Laboratory Manager (1983-1986). Prior to that Mr. Katz served as laboratory metallurgical engineer between the years 1979-1983. Prior to Turbochrome Mr. Katz served for 2 years (1977-1979) as researcher at Ben Gurion University as well as a lecturing and Lab Instructor. During his 37 years career with Turbochrome (formerly – Chromalloy Israel) Mr. Katz was in charge of developing the most advanced Turbochrome’s repair capabilities as well as development of manufacturing lines advanced products.  Mr. Katz holds a B.Sc in Materials Engineering and M.Sc in Materials Engineering from Ben-Gurion University, Israel.
 
Mr. Amos Malka was elected as a director by our Board of Directors in April 2016. Since 2008, Mr. Malka has been a Founder and Chairman of Nyotron Information Security Ltd., a privately-held cyber security provider based in Israel and in Silicon Valley. Since 2016, Mr. Malka is also serving as a Founder and Chairman of Spire Security Solutions Ltd., a security, intelligence and cyber security. From 2007 until 2015 Mr. Malka served as the Chairman of the Board and CEO of Logic Industries Ltd. From 2007 - 2010 he served as Chairman of the Board of Plasan Sasa LTD., an armored vehicle manufacturer. From 2005 - 2007 he served as the Chairman of the Board of Albar. Albar is one of the leading companies in the Israeli automobile sector. From 2002 - 2005 he 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 military career. 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 (1987), graduated from the IDF Staff & Command College (1979-80) and its National Defense Academy (1986-87).

Mr. Avi Shani has served as an external director since 2008 and is a member of TAT’s Audit Committee; in July 2014, Mr. Shani was re-elected to serve as an external director for a second three-year term. Mr. Shani is also serving as a director of Harel Sal, with Malibu investment and Ecommunity. From 2005 until 2008 Mr. Shani served as the CEO of TCM Mobile, a startup company, and prior to that, during years 2000 - 2004 he served as Executive Vice President Investments and Chief Economist of IDB Development, a leading Israeli holding company, in charge of new Investments. Mr. Shani holds a B.A degree in Economics and an MBA, both from Tel Aviv University.

 
90

 
Ms. Dafna Gruber was elected as al director by our Board of Directors in November 2013 Ms. Gruber is serving as the chief financial officer of Clal Industries Ltd., a private company, from October 2015. From April 2007 until April 2015, Ms. Gruber served as the chief financial officer of Nice Systems Ltd., a public company traded on NASDAQ and TASE. From 1996 until May 2007, Ms. Gruber was part of Alvarion Ltd., a public company traded on NASDAQ and TASE, mostly as chief financial officer.. Ms. Gruber serves as an external director at Nova Measuring systems Ltd.  a public company traded on NASDAQ and TASE, since April 2014. Ms. Gruber is a certified public accountant and holds a Bachelor’s degree in Accounting and Economics from Tel Aviv University, Israel.

Mr. Jan Loeb was elected as a director by our Board of Directors in August 2009. Mr. Loeb has served as President of Leap Tide Capital Management, Inc., a capital investment firm, since 2007. From February 2005 through January 2007, he served as a portfolio manager of Amtrust Capital Management, Inc. From February 2004 through January 2005, Mr. Loeb was a Portfolio Manager for Chesapeake Partners, a capital investment firm. From January 2002 through December 2004, Mr. Loeb was a Managing Director of Jefferies & Company, Inc., an investment banking firm based in New York City. From 1994 through 2001, Mr. Loeb was a Managing Director of Dresdner Kleinwort and Wasserstein, Inc., an investment banking firm based in New York City, which was formerly known as Wasserstein Perella & Co., Inc. Mr. Loeb is the Chief Executive Officer of Acorn Energy Inc. a publicly traded company that among other assets owns an Israeli defense company.  Mr. Loeb graduated from Baruch College – City University of New York with a baccalaureate in Finance and Investments.

Mr. Ron Ben-Haim was elected as a director by our Board of Directors in August 2013. Mr. Ben-Haim has been a partner in FIMI since 2006. Mr. Ben Haim was previously with Compass Advisers, LLP, an investment banking firm based in New York and in Tel Aviv and with the Merrill Lynch Mergers & Acquisitions group in New York. Prior to Merrill Lynch, Mr. Ben-Haim worked at Teva Pharmaceuticals in production management. Mr. Ben-Haim holds a B.Sc. in industrial engineering from the Tel Aviv University and an MBA from New York University. Mr. Ben-Haim currently serves on the board of directors of Tadir-Gan Precision Products, 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. Aviram Halevi was elected as an external director (within the meaning of the Israeli Companies Law) by our Board of Directors in November 2013. Mr. Halevi has been since 2011 the owner and CEO of Intel System Ltd., a provider of business intelligence services. Prior to that, from 2007 through 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 (of City University of New York)  the University of Toronto and an MBA from Tel Aviv University.

 
91

 
Compensation
 
The following table sets forth all compensation TAT paid with respect to all of its directors and executive officers as a group for the year ended December 31, 2015.
 
   
Salaries, fees,
Commissions and bonuses
   
Other benefits
 
All directors and executive officers as a group (11 persons)
  $ 1,460,000     $ 110,000  

During the year ended December 31, 2015, TAT paid its directors, 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 2,595 (approximately $665), plus an annual fee of NIS 69,680 (approximately $17,858).
 
The table below sets forth the compensation paid to our five most highly compensated senior office holders (as defined in the Companies Law) during or with respect to the year ended December 31, 2015, 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 the Covered Executive(1)
 
 
Name and Principal Position(2)
 
Base Salary
   
Benefits and
Perquisites(3)
   
Variable Compensation(4)