Tat Technologies Ltd Q3 FY2025 Earnings Call

A U.S. based Investor Relations firm is supporting Eran Yunger, TAT's Internal Head of Investor Relations. Hosting today's call is Igal Zamir, TAT's President and CEO, along with Ehud Ben-Yair, TAT's CFO. Before we begin, please note that some of the matters discussed on this call may include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995 and other federal securities laws. These forward-looking statements reflect management's current expectations and are not guarantees of future performance. Actual results may significantly differ from those stated or implied in these forward-looking statements. These statements are made as of the date of this call, and unless required by law, TAT does not undertake any obligation to update or revise them. Investors are advised not to place excessive reliance on these forward-looking statements. For a thorough discussion on how various risks and uncertainties could lead to actual results differing significantly from those indicated in these forward-looking statements, please refer to our annual report on Form 20-F and other SEC filings. The financial metrics discussed today include non-GAAP measures. We believe investors emphasize non-GAAP financial measures when comparing results across different periods and among peer companies that release similar non-GAAP financial measures. For a reconciliation of non-GAAP financial measures to GAAP measures, please check this morning's Form 6-K, our earnings release, and the Investors section on our website. Non-GAAP financial information should not be viewed separately or as a substitute for GAAP financial information, but it is included because management believes it offers valuable insights into our business's financial performance and is beneficial for investors for informational and comparative reasons. The non-GAAP financial measures we use have limitations and may differ from those used by other companies. Now, I would like to pass the call over to Igal.

Good morning, everyone, and thank you for joining the TAT Technologies Third Quarter Earnings Call. I appreciate your interest and ongoing support as we review our performance and discuss our strategic direction moving forward. TAT continues to achieve organic growth that surpasses the broader MRO sector, driven by deliberate diversification and strategic positioning in high-demand and often under-served areas of the commercial aviation industry. We had another strong quarter in Q3, marked by double-digit revenue growth, record EBITDA margins, and increased cash generation. These results demonstrate disciplined execution, robust demand across our core business lines, and the operational leverage we have diligently developed in our business model. Incremental revenues are now having a more significant impact on our bottom line, representing a major achievement and a solid foundation for future growth. Our consistent progress and increasing profitability indicate that our model is functioning as planned—efficient, diversified, and designed to capture value across various segments of the aviation market. The broader aviation market continues to thrive in a positive operating environment. Fleet utilization remains high, aircraft retirements are happening at a slower rate than in previous cycles, and OEM delivery constraints are extending the life of existing aircraft. Collectively, these factors are driving sustained demand for maintenance, repairs, and operations, as well as components, parts, distribution, and leasing. This environment emphasizes the significance of our diversified MRO platform and the flexibility we offer to both commercial and cargo operators. As mentioned in earlier calls, normal quarterly variations are common in the MRO industry, particularly since much of our MRO activity involves discretionary maintenance. Airlines often adjust work across months and quarters based on budget cycles, expected flight capacities, and other operational factors. External influences can also affect timing, especially regarding defense-related work, but these tend to impact timing rather than the underlying demand. Therefore, we believe that a multi-quarter year-over-year perspective is the best way to capture the strength and momentum of our business. This viewpoint, supported by our trends year-to-date and for the trailing 12 months, offers a clearer understanding of the consistency of our growth, margin expansion, and cash generation. Over the past few years, we have enhanced our capabilities, improved operations, and diversified revenue streams. These strategic initiatives have positioned TAT for sustained performance and long-term value creation. In particular, we have entered several under-served MRO markets, adding essential capabilities. Looking forward, potential inorganic growth through acquiring complementary capabilities will further strengthen this established foundation. With a significantly improved balance sheet and a capable leadership team, we are refining our focus on identifying strategic opportunities to accelerate our current growth strategy. We have recently brought on experienced corporate development executives to assist in evaluating strategic M&A opportunities, and we are working to enhance our governance framework. At last week's Annual and Special General Meeting, shareholders elected three new independent directors to the company: Sagit Manor, Eitan Oppenheim, and Amir Harel, each bringing extensive financial and corporate development expertise from leading global firms. These additions bolster our governance and leadership capabilities as we prepare TAT for its next growth phase. With that context, I'll hand it over to our CFO, Ehud Ben-Yair, to provide a more detailed overview of the financial results.

Thank you, Igal, and good morning, everyone. I will review the key financial results, balance sheet highlights, and cash flow performance for the third quarter and the first nine months of 2025. Third quarter revenue increased by 14% to $46.2 million, up from $40.5 million in the same period last year. For the first nine months of the year, revenue was up more than 18%. This growth was fueled by strong demand across our core businesses, along with market share gains. Even while delivering another quarter of double-digit revenue growth, we essentially maintained our backlog and LTA value at $520 million. This robust backlog validates our belief in durable customer demand and reinforces our business strategy of expanding our addressable market by adding new capabilities. From the beginning of the year, the backlog grew by close to $100 million, representing a significant increase compared to the rise in revenue, signaling our potential to further grow our revenue line. Gross profit increased by 37%, and our gross margin expanded by 410 basis points to 25.1% compared to 21% in the third quarter last year. This improvement reflects our ongoing effort to optimize our cost structure, improve operational efficiencies, and enhance our product mix. Operating income reached $5.2 million, up by 52.6% year-over-year, demonstrating the leverage in our model as volume growth has translated to profitability. Our net income for the quarter was $4.8 million compared to $2.9 million a year ago. Taxes on income for the quarter were $800,000 versus a minimal amount in the same period last year. The new U.S. tax legislation enacted under the One Big Beautiful Bill Act had only a modest effect on our results, while changes such as the restoration of 100% bonus depreciation and updates to the R&D expenses affected certain deferred tax positions. The overall impact of our effective tax was not significant. However, the main benefit of implementing the new Act is an increase in the carry forward losses that will enable us to deduct them through the first three quarters of 2026, preventing us from paying any taxes in the U.S. for an additional four quarters. Prior to the new Act, we were supposed to start paying taxes by the end of this year, but now we will do so by the end of 2025. Our net financial expenses are close to zero this quarter, mainly due to favorable exchange rate differences between the Israeli shekel and the U.S. dollar, which were offset by ongoing interest on our long-term loans. Lastly, adjusted EBITDA increased by 34% to $6.8 million, translating to an adjusted EBITDA margin of 14.6%, a record margin and a notable improvement from the 12.4% margin in the same period last year. That continues to deliver operating leverage as a result of our disciplined expense management. Moving to cash flow. Cash flow from operations in the quarter was $7.5 million, driven by improved profitability, working capital efficiency, and disciplined cost management. For the first nine months, cash flow from operations was $9.5 million, representing an EBITDA cash conversion of 51%. Turning to the balance sheet, we ended the quarter with $47.1 million in cash and $12.1 million in total debt, resulting in a low debt-to-EBITDA ratio of 0.5x. Shareholders' equity stood at $170.7 million, supporting a strong equity-to-asset ratio of 76%. Now I will discuss the results by key product segments. In our APU businesses, after a modest sequential decline from Q1 to Q2, we saw a surge in intake in the third quarter with revenue increasing by 39% year-over-year and 27% on a sequential basis. On a year-to-date basis, APU revenue is up by 26% from last year, aligned with our expectations and market penetration plan. Heat exchanger revenue increased by 6% between Q3 '25 and Q3 of 2024, and year-to-date revenue grew by 14%. The increase in OEM is very stable and aligned with industry growth, while MRO growth was a bit slow in the last two quarters but is expected to increase in the coming quarters. In the landing gear area, revenue more than doubled year-over-year and nearly doubled on a sequential basis, reflecting a surge in intake and operational ramp-up, validating our strategy of supporting this underserved market. As communicated in the past, the E170 cycles have started, and we are well positioned with contracts that need to be served in the next three years. In trading and leasing, after a particularly strong second quarter, we saw a decline both sequentially and year-over-year, reflecting normal quarterly volatility as explained in the previous earnings call. On a year-to-date basis, trading and leasing revenue is up by 17%. In summary, TAT has delivered another period of solid growth and improving profitability, supported by disciplined expense management and strong cash conversion. Our balance sheet remains a strategic asset, providing the flexibility to invest in both organic and inorganic growth opportunities. Now, I will hand the call back to our CEO, Mr. Zamir.

Thank you, Ehud. The broader aviation market is still facing volatility, but our diversification has helped mitigate these effects. Although we are not completely shielded from challenges, our flexibility is a significant strength. We have developed the capacity to adjust our capabilities and resources in real time, allowing us to meet customer demands and maintain operational efficiency in a fluctuating environment. This adaptability remains one of our competitive edges. We intend to use our solid balance sheet to pursue acquisitions that will broaden our market reach, deepen customer relationships, and find natural extensions to our platforms. Over the past two years, we have significantly increased our long-term backlog. I expect this trend to persist as customers look for agile partners to address their maintenance requirements. Requests for proposals have their own rhythm with fluctuations from quarter to quarter, similar to our intake volume. However, the overall trend is positive, and I firmly believe we are positioned to gain more market share. In summary, TAT continues to outperform the industry and our operational discipline is enhancing our earning capabilities. The dynamics of the supply chain still require active management, and we have made substantial progress regarding our inventory levels, which is improving our cash generation ability, leaving me optimistic about the future. Before we take questions, I want to express my gratitude to our employees for their professionalism and hard work. Their dedication sets the benchmark for the industry and is the foundation of our achievements. I would also like to welcome our new independent directors. Their addition is part of our broader strategy to strengthen and diversify our Board in preparation for the next phase of our growth. Over time, we intend to further enlarge the Board with more U.S.-based and industry-focused expertise to support our strategy. I would now like to open the call for questions. Matt?

Thank you for that. I appreciate your comments, Igal. We will now transition to the Q&A session, taking both live and submitted questions since many of you have already submitted them. Please go ahead and raise your hands. Jonathan Siegmann, would you like to raise your hand, or would you prefer that I read your question? I'll read Jonathan Siegmann's question from Stifel. Congratulations on a strong quarter, impressive results, and solid cash flow. Last quarter, you discussed how TAT capitalized on the tariff-driven slowdown in MRO intake activity by shifting to APU repairs. Can you elaborate on how TAT adjusted its operating platform to respond to this quarter's demand changes? We were particularly surprised by the significant increase in landing gear. How should we assess TAT's revenue potential for landing gear MRO activities?

I would like to provide a wider perspective on this question. As I've mentioned every quarter since Q4 of last year, we cannot analyze TAT's MRO business on a quarter-to-quarter basis due to numerous variables, and conditions are evolving based on the factors I've outlined previously. I don’t believe it’s necessary to examine it on a year-over-year basis either. The increase in landing gear was anticipated, and we discussed it in earlier calls. We are entering a new cycle for landing gear with expectations of significant revenue growth over the next few years. This is not unexpected; we anticipated it. While there may be variations from quarter to quarter, the overall trend remains very strong. Our greatest advantage lies in our flexibility as a smaller player compared to many of our competitors. We can pivot focus and reallocate employees and resources as needed. Fluctuations occur, and the key is how to respond when the actual intake deviates from the plan, which is something that happens frequently. We have become adept at reallocating our workforce quickly and ensuring we adapt rather than simply accepting circumstances as they are. Last quarter, we discussed APUs and why our performance was strong. I reiterated my lack of concerns about APU intake, and this quarter reflects a significant increase in APU. Analyzing the year-over-year growth across all segments is very encouraging, and we anticipate a continuing positive trend, particularly when we consider the backlog.

This one is from Ben Klieve with Benchmark. Congratulations on another outstanding quarter. You mentioned your increased interest in looking at underserved MRO opportunities. I understand that you cannot get specific about what these opportunities are, but can you please discuss the characteristics of these opportunities and discuss why you think they've been underserved historically?

I believe the industry is currently facing a post-COVID recovery phase, characterized by part shortages and challenges faced by major players as they ramp up operations. This situation creates significant opportunities for agile companies that can swiftly adapt and deliver quality service. Over the past two years, we have significantly improved our on-time delivery and parts availability compared to many competitors. We invested heavily in inventory to ensure timely access to the right parts, which has led to strong performance. The new capabilities we developed in our APU segment have positioned us well in a market where airlines are struggling with capacity issues. Being able to deliver performance in these conditions enables us to gain a competitive edge. Regarding mergers and acquisitions, we are exploring opportunities not just in MRO but also on the OEM side. In MRO, we aim to add value by addressing the challenges airlines face with their smaller supply chain management teams, which often must coordinate with numerous vendors. We are seeking to consolidate operations with larger vendors capable of providing comprehensive support across various product lines. Our M&A strategy involves pursuing companies that can enhance our MRO offerings and provide greater value to our customers. Additionally, we are also targeting acquisitions in the OEM sector to broaden our thermal system capabilities and enter new market segments where we currently have no presence, thereby enhancing our position in the thermal systems industry.

I'm going to summarize a question about backlog that I received from a couple of investors. Thank you, Tal, and thank you, Yuval, for submitting them. Essentially, the backlog declined by a few million sequentially from last quarter. Can you comment on that?

I don't want to make a big deal out of it because it's really not an issue. If you look at our year-to-date performance, we are significantly ahead of where we began the year, showing substantial growth. It’s important to note that we only publish wins and add them to our backlog and long-term agreement value after we sign them. We can't control when airlines open their requests for proposals, when they select a winning bidder, or when our legal team and the airline's legal team finalize contracts for signature. As I mentioned earlier, we have a strong opportunity pipeline, larger than ever before, and we will continue to announce new wins as they come in. We are very optimistic about this. Over the last three months, we haven't signed any new wins yet, which has led to a slight reduction, but again, it's really not a concern.

Next, there is a question from Chen and a question from Othick that I think relates to your exposure to potential external disruptions. For example, how are your operations affected by the federal government shutdown that apparently just ended? Or is the grounding of some of the UPS and FedEx aircraft found the incident in Kentucky expected to affect any loads and schedules at your service centers?

I believe that every one of these interruptions or disruptions can lead to some short-term challenges. However, when examining the overall trend, none of them should have a lasting effect on our future growth patterns unless something escalates into a significant global issue. At this moment, there is no significant concern or major impact aside from these minor short-term issues. In fact, we are managing to navigate through them effectively because of our diverse product offerings, a broad customer base, and various operational factors. So far, we have not encountered any major concerns worth mentioning.

Okay. I have a follow-up question from Ben Klieve at Benchmark that relates to the landing gear business, which is scaling and seeing some lumpiness. Do you expect that the lumpiness is going to decrease or perhaps even get more pronounced?

I'm expecting it to remain consistent despite the fluctuations between the quarters, but the overall trend is very strong.

Okay, next…

Maybe I can add to it. On the landing gear side, we are trying to be more proactive with our customers, and you always try to come up with a predetermined schedule of removals and when exactly they are going to park the aircraft to remove the gear and to replace. And looking at next year on paper, it looks great and very little volatility from my 10 years of experience at TAT, the plan is great until the year starts. And there are always changes and unexpected events. It can be that, I don't know, a catering truck hit a gear in another aircraft, and now they have to change there. I'm giving it as one example. But there are always changes in and surprises. So I'm expecting volatility, but the overall trend and looking at where we are in the plan for next year, we expect to continue and to grow very nicely.

The next question is from Michael Ciarmoli from Truist. Operator, can you assist in activating Michael?

Yes.

Michael, I think if we can hear you.

Okay. Perfect. Nice results. Just on the margins, really nice margin performance. It looks like at the operating level incremental is about 31%. You've mentioned the EBITDA margins are at 15%. You're almost there. Can you share your thoughts on how you plan to achieve further operating leverage as volumes increase? Additionally, do you believe you can achieve additive pricing as well?

Yes. For those who have followed our calls over the past two to three years, I've consistently mentioned that I believe a leading company in our industry should achieve an EBITDA of 15% or higher. As you noted, Michael, we are making progress towards this goal, primarily due to the operational efficiency initiatives we've implemented. I’m pleased to say that we are close to reaching this target, and we still have numerous opportunities and initiatives to further enhance our margins going forward, even before considering revenue growth or price increases. Improving efficiency, minimizing waste, and cutting purchasing costs are high priorities for us as we plan for next year. Some of these improvements will help us stay competitive in RFPs, while others will contribute to boosting our EBITDA. When it comes to pricing, we are cautious about using it solely as a tool in the competitive landscape we operate in. We do have price escalation clauses in our contracts linked to predetermined indices, such as labor and materials. Historically, prices were raised year-over-year, but we are not relying on this approach to improve margins.

Got it. Okay. Helpful. And then just if I may, you guys break out your percent of revenues by MRO and OEM. And it looks like if I look at the OE percentage, it was up year-over-year, maybe close to 3%. And I just wanted to know your products on the thermal side, where you've got 737 exposure, what are you seeing there now that Boeing has gotten the FAA approval to rate brake higher? Is there any destocking? Do you see any inventory? Or do you think that side of your business starts to grow as we see the volumes increase on the MAX?

Yes. I believe that regarding the MAX and its impact on us, there is a minimal effect, which will not significantly influence our future business. If you examine the overall aircraft production rate in our OEM segment, our business is consistently growing alongside the increase in production rates. Without discussing specific platforms, looking at our order book and the planned capacity for Boeing, Embraer, Textron, and others, we are currently benefiting from this situation. We hope to continue enjoying this growth in the coming years as we anticipate an increase in new purchase orders.

The next question is a 2-parter from Richard Kay, who said, you generate strong cash flow, again, is that sustainable? And how would you characterize your balance sheet strength today?

I will address the first question regarding cash flow, and Ehud can discuss the balance sheet. We previously mentioned that we were experiencing rapid growth in a highly unstable market facing significant supply chain challenges and other customer-related issues. To ensure we were prepared for our customers, we made strategic decisions to significantly increase inventories and implement other measures to support customers facing difficulties. In the last quarter, I noted that our situation is quite healthy today, and we don't see the need to further increase inventories; we can convert more of our EBITDA into cash. Our collections have improved, and we no longer need to keep raising inventory levels. As long as we don't enter a new product line necessitating additional inventory, we are now in a position to accelerate inventory turnover rather than simply increasing total inventory. From a capital expenditure standpoint, we have made significant investments over the past four years to prepare for growth, including facilities and equipment. We are now scaling back because we believe we have what we need for the next one or two years, meaning that the major investments are largely behind us. However, there will always be some level of investment focused primarily on maintenance capital expenditures and improvements to our efficiency. Overall, we anticipate a substantial reduction in capital expenditure needs, which will positively affect our cash flow. While cash flow may vary from quarter to quarter based on collections and payments, we expect to continue generating very strong cash flow. Ehud, would you like to comment on the balance sheet?

I expect the equity ratio in our balance sheet to remain very high and strong, in the range of 70% to 75%, in the upcoming quarters, considering our profitability forecast and the working capital needs we are experiencing. However, as we mentioned previously, if we pursue an acquisition, part of the financing for this deal will be through debt, which will slightly alter the ratios in our balance sheet.

We have a follow-up question from Michael Ciarmoli from Truist.

Okay. Perfect. Just a follow-up. I think last quarter, I mean, you had a really good landing year performance, assuming that the internal supply chain challenges and inefficiencies you've had are kind of totally resolved. And then just one more on the APUs. I wanted to know what you're seeing on penetrating the market for the 131.

You are inquiring about the 131 specifically. We are currently pursuing several opportunities to bid on, but we haven't secured any significant requests for proposals yet. The opportunities are available, and we are still overcoming a learning curve. The demand exists, and the RFPs are coming in. I believe that, over time, we will start to show substantial growth in that area. Essentially, we are just at the beginning, as we mentioned in the past few quarters.

We have an additional submitted question, which is asking about the supply chain and whether conditions and capacity utilization are improving or how are they trending?

I would say it depends on the product lines. I believe that for the thermal components supply chain, where we primarily source raw materials, the supply chain has largely stabilized to pre-COVID levels, with no significant issues. However, for APUs and landing gear, APUs are more reliable, but we still face very long lead times from the vendors. The landing gear situation remains unstable, both in terms of lead times and vendor reliability. So, there are different phases for each. Overall, I can say the trend is very positive across all product lines, but we still need improvements in APUs and landing gear; the industry has not reached the necessary standards yet.

Here's a question from Ehun asking about gross margins. Can you discuss the mix of gross margins across your businesses? He has noticed that some of the gross margins, excluding leasing and trading, have increased significantly over the quarter. What does that mix look like across the businesses?

Ehun, would you like to address it?

Guys, do you hear me? Yes. I'm sorry, my line is not so good. Could you please repeat the question, Matt?

Yes, the question would be just maybe a comment on how gross margins vary across the various business lines because there was an observation about the increase in gross margins this quarter, excluding leasing and trading.

Yes, what we observed was that it's important not to make a long-term conclusion based on a single quarter. We should examine trends over several quarters to accurately assess the appropriate gross margin. The product mix and the revenue levels within each segment also influence gross profit because of our operational leverage. Generally, we are seeing a trend of improvement in gross margin for this segment. Looking ahead, we anticipate that margins will increase slightly, primarily due to the initiatives mentioned earlier by Igal and myself. We have several plans to enhance operational efficiencies, and we are effectively utilizing our employees, which means generating more revenue from the same labor, thus improving gross margins.

Looking at gross margin from quarter to quarter is nearly impossible. Even within the same product line, comparing quarters presents challenges due to varying customers and their margins. On the MRO side, there are significant variations, whereas on the OEM side, once a deal is finalized and supplies are secured, gross margins tend to be stable. However, in MRO, receiving engines for overhaul can lead to substantial differences, as some require only a few parts, while others may need numerous replacements. Our pricing to customers is often fixed and determined by a long-term statistical model. Yet, if we encounter a few engines that require heavy replacements, it can negatively impact the current margin. Conversely, if the following quarter features lighter engines, the margins can improve significantly. Therefore, it's not advisable to compare quarter to quarter, but rather to focus on long-term trends.

The final question before we turn it back to Igal for concluding remarks is from Robbie, asking how should investors think about Q4 and 2026?

As I mentioned earlier, I'm focusing solely on 2026. We are very optimistic about the strong trend we are observing. Our backlog is robust, as reflected in the numbers, and we have a considerable pipeline of opportunities at various stages, with a significant amount of potential business that we believe we can secure, at least a substantial portion of it. The market trend remains positive, with growing OEM demand and ongoing MRO needs. Overall, all indicators are encouraging, and we are actively enhancing our internal efficiency. Therefore, we are very optimistic about our ability to continue growing the business next year. I believe this is the best response I can offer at this time.

Thank you for joining us today. The financial performance in the quarter further validates our business model and strategy. We are currently participating in multiple RFPs, and the growth opportunities we are pursuing give us confidence in the long-term growth trajectory for TAT. We believe there are opportunities to accelerate our growth and increase our scale through targeted and strategic M&A activities. I think we are better positioned than many others in the industry for long-term growth, and I am increasingly confident in our future. Thank you again for joining us today, and I am happy to answer further questions.

Thank you, everyone, for joining us today. You may now disconnect your lines.

Thank you. Bye.