Good morning, and thank you for joining the TAT Technologies second quarter 2026 earnings conference call. This call is being recorded. My name is Matt Chessler with FNKIR, a U.S.-based investor relations firm supporting Iran Younger, TAT's Head of Investor Relations. Joining me today are Igor Zamir, TAT's President and CEO, and Ehud Ben-Yayer, TAT's CFO. Before we begin, I'd like to remind you that certain statements made on this call may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and other federal securities laws. These statements are based on current expectations and assumptions and involve risks and uncertainties that could cause actual results to differ materially. Additional information regarding these risks and uncertainties can be found in our filings with the SEC, including our most recent form 20s pht assumes no obligation to update forward-looking statements except as required by law investors are cautioned not to place undue reliance on these forward-looking statements during this call we may disclose certain non-gap measures reconciliations of these measures to the most directly comparable gap measures are available in our earnings release issued earlier today and in our Form 6K filed with the SEC. And with that, I'll turn the call over to Egal.
Thank you, Matt. Good morning, everybody, and thank you for joining us. We appreciate your continued interest in TAT. The strong second quarter marked an important inflection point for TAT. We delivered another record quarter, converting strong demand into the highest backlog in our history and grew revenue by nearly 23%. Improving supply chain conditions allowed us to convert previously constrained customers' demand into revenue, further plustering our strong performance while continuing to expand profitability and grow our record backlog. TAT competitive position continues to strengthen. We are becoming an increasingly important aftermarket partner to airlines, OEM, and MRO providers, leveraging the breadth of our capabilities, the quality of our execution, and long-standing relationship across aviation ecosystem an important milestone this quarter was the expansion of our strategic relationship with honeywell aerospace we are now honeywell's sole global authorized distributor for spare parts for the 331 250 apu platform we also extended our mro license for that platform to 2036 and acquired three honeywell aerospace 131 9a apus to expand our trading and leasing business. The expanded Honeywell agreement adds a distribution capability we didn't have on this platform before. Historically, we've supported the 331-250 platform to MRO and service alone, and now we're also a part supplier giving operators less source and MRO partners one source across the full lifecycle, from parts to repairs and return. Also, extending the agreement to 2036 further strengthened the long-term visibility and secured the profitability of this important business while reinforcing one of our most valuable OEM relationships. When it comes to the industry, commercial aviation fundamentals remains exceptionally healthy, aircraft are staying in service longer than historically known, utilization rates are high, and operators continue to prioritize reliable aftermarket support. These trends continue to support healthy demand across our repairs overall and components business while supply chain conditions have improved significantly significantly they have not fully normalized we will continue to prioritize customer support even when that requires targeted inventory investment or higher procurement cost although these actions have somewhat dampened our profitability gains in the short term. They help keep the aircraft in service and reinforce our reputation as a trusted aftermarket partner. We expect inventory requirement to become more efficient as supply chain continues to improve. We believe that investments we are making today will strengthen the customer relationship, expand future business opportunities, and create long-term value for shareholders. On the strategic priorities and M&A front, M&A remains an important component of our long-term growth strategy. We see acquisition as a way to expand our MRO capability, strengthen our thermal system business, and broaden our platform portfolio, and finally, establish a greater presence in geographies that brings us closer to customers. These opportunities have the potential to enhance our competitive position while expanding our relevance across the global aviation aftermarket we believe that we are well positioned to execute this strategy our strong balance sheet provide the financial flexibility to produce to pursue acquisitions while our operating platforms and integration capabilities enable us to successfully incorporate complementary businesses as always we remain disciplined on valuations and strategic feet and we will not pursue acquisitions simply to sake for the sake of growth our mna efforts continue to move front and center we have built a robust pipeline of potential acquisition target completed initial due diligence on number of opportunities and are actively evaluating them mna is becoming an important focus of our team reflecting both the quality and the opportunities we are seeing and our commitment to execute them to execute this important element of our long-term growth strategy in terms of the outlook for the rest of the year our performance in the second quarter and the first six months of 2026 demonstrate the progress we have made and the strong position tat occupies in the industry customer demand remain exceptionally strong with our record backlog of 615 million dollar providing excellent visibility into the future revenue simultaneously supply chain conditions continue to improve giving us increasing confidence in our ability to convert our record backlog into revenue while maintaining service levels to our customers. Building on the existing relationship, we continue to strengthen our competitive position through expanding OEM relationship and broader platform coverage, highlighted by the recent Honeywell Agreement, which enhanced our service offering while extending an important long-term partnership through 2036. Finally, our strong balance sheet provides the financial flexibility for strategic acquisition that can further expand our capabilities and addressable market. Taking together these factors reinforce our confidence in TAT's ability to continue delivering profitable growth while creating long-term value for our shareholders. With that, I will turn the call over to Ehud for more detailed review of the financial results.
Thank you, Yigal, and good morning, everyone, and good afternoon for the guys in Yigal. As Yigal noted, the second quarter benefited from strong demand and the record backlog. Also, the improvement in supply chain environment and Evelast to convert a significant portion of work into revenue as supply constraints is. We have won several new contracts. We are now starting to see the benefit of these wins following through our financials. All in all, it was a great quarter. That said, while profit margin improved, our operating level would have been higher if not for some ongoing supply chain issues and weaker exchange rate of the U.S. dollar against the Israeli shareholder. Second quarter revenue was $52.9 million, compared to $43.1 million in the second quarter of 2025, an increase of nearly 23%. All product segments contributed to the growth in this quarter. Demand remains exceptionally strong, as reflected in a record backlog and a long-term agreement, which increased to a record of $615 million at the end of June 30, 2026. Gross profit increased by 23%, year-over-year with 13.3 million, with gross margin remaining about 25 percent this reflected healthy pricing and operating execution despite continued supply chain inefficiencies that increased procurement costs in certain product lines we are closely monitoring the landing gear supply chain issues which are impacting revenue growth while we continue to maintain full expense level for this segment we still have a low visibility of when supply chain issues within this segment will be resolved. Operating income was 5.6 million or 10.6% of revenue compared to 4.4 million or 10.3% of revenue in the second quarter of 2025. With parts availability in certain areas of our business remaining challenging, we have continued to prioritize customer delivery schedule by securing certain components at higher costs when necessary. Absence these ongoing supply chain challenges, our margin expansion would have been even stronger. We continue to invest in the company's growth infrastructure and M&A capabilities. This led to an increase of SG&A expenses. We also continue to invest in development of future thermal systems, resulting in a modestly higher RMB expenses. Net income were $8.1 million compared to $3.4 million in the second quarter of 2025. Diluted earnings per share were $0.61 compared to $0.30 in the second quarter of 2025. The second quarter of 2026 included a non-requiring one-time gross gain of approximately $4.3 million from the sale of a minority interest in an unconsolidated entity and a non-retiring charge of $900,000 related to tax expenses. The net impact was $3.4 million on the net profit. Excluding the non-retiring gain from the minority interest sale, net income was $4.6 million or $0.35 per lucrative share. The foreign exchange of USD against the Israeli shekel was a headwind in the second quarter of 2026. The strength of the shekel to the US dollar during Q2 led to foreign exchange losses of over $600,000. We are working with our customers and suppliers on finding solutions to these issues without harming the flow of operation in Israel. Adjusted EBITDA excluding the one-time gain was $7.4 million or 14% of revenue compared to $6.1 million or 14% of revenue in the second quarter of 2025. For the cash, cash used in operating activity was $0.6 million compared to $7 million in a positive cash flow in the second quarter of 2025. a portion of the revenue that we recognize had not yet converted to cash collection by quarter-end, and we expect to convert during the third portion. Working capital requirements are expected to remain elevated in the mid-term, as we support the extended annual distribution agreement through strategic inventory investments. We view these investments as an attractive use of capital that supports future revenue growth. Briefly summarizing the results for the first six months of 2026, revenue increased by 10.4% compared to the same period in 2025 and reached to $94.1 million. Gross profit increased by 12.4% to $23.4 million. This would present 24.8 gross margin, up approximately 40 basis points year over year. Operating income was flat at 8.6 million. Net income, which included 3.4 million one-time benefit, increased by 58.1% to 11.5 million. And excluding the non-retirement benefit, net income would have increased approximately by 11% to 8.1 million. The lucid earnings per share inclusive of the one-time gain were 87 cents versus 64 cents. The one-time gain represented approximately 26 cents in the lucid earnings per share in the current period. Adjusted EBITDA excluding the one-time gain increased by 4.1% to 12.3 million or 13.1% EBITDA margin. For the balance sheet, our balance sheet remains a competitive advantage. We ended the quarter with net cash of $43 million with a 0.2 debt-to-cash ratio and a 0.43 debt-to-last-four-quarter EBITDA ratio. We also recently secured a new $100 million five years revolving line of credit with several US-based banks, giving us significant flexibility to support our M&A strategy and future growth of the company. Diving into the product line, heat exchangers revenue increased by 7.8% in the second quarter of 2026 and 4.2% in the first half compared to the same period last year. Heat exchanger business is both OEM and MRO, and the growth is single-digit and steady according without expectation. In APU, this quarter results are affected by the supply chain recovery as communicated on the previous earning call, as well as by new long-term contract wins. we expect to continue the positive trend overall this product line grew by 22.2 percent in the first half of 2026 despite the supply chain impact i'm sorry trading and listening is by 17 percent this quarter with several good trades and steady revenue from listing activities which will now benefit from three additional 131 and 9a engines that will purchase Lending here at 5% of our total revenue is still affected by supply chain constraints. To summarize, the backlog is at record level. We announced two new and important contracts with APU customers that involve both the legacy platform and the new platform. Cost margins continue to be stable above 25%, and the balance sheet is positioned to support our growth strategy. The supply chain is improving and adding incremental growth, and we are very optimistic about TAT's future in general, and especially for 2026 results in particular. And with that, I will turn the call back to Igal.
Thank you, Ayod. Before we move to questions, I would like to thank our employees around the world. Their professionalism, especially the close coordination with our customers and the suppliers this quarter is what makes the results like this possible. as we close there are three quick takeaways first our fundamentals have never been stronger customer demand keeps growing and backlog and long-term agreements reach a new record second we are deepening our competitive position our expanded relationship with the honeywell adds new distribution rights and extends our mro authorization to 2036 and third our balance it gives us flexibility to grow organically but more importantly to support our strategic inorganic growth to create long-term value for our shareholders we've we are entering the second
half of 2026 with more momentum more visibility and a stronger competitive position than at any point in our history i would like to thank you for your continued support and we look forward to updating you in our progress with that i will turn over to matt for questions thank you igal we're now going to open up to the q a session from zoom there are two ways you can participate the first is to raise your hand i'm using the icon which is at the bottom of your screen clicking on it will alert us that you'd like to ask a question live and we'll place you in queue and then call on you you'll remain on mute until called on the second way to participate in Q&A is to use the Q&A widget, which allows you to type in your question. We will take questions from there as well. And if we run into a time constraint, someone from the IR team will follow up with you if your question is not addressed on today's call. So with that, we'll pause for a moment to build the queue. The next question is from Ben Cleave at Benchmark.
Ben, please go ahead. all right is that working can you guys hear me yes all right um well first of all congratulations on a very good quarter here uh first i have a question about the uh apu business and the parts availability dynamic uh and and i'm i'm curious if you can give us a bit of context around the number of APU units that have been, you know, sitting awaiting that parts availability to unlock.
So, you know, I'm just curious if you can kind of level set us and kind of where the, you know, number of units waiting to be worked on ended, you know, 2025, kind of where that peaked at the height of the parts challenge earlier this year and kind of where that sits right now so i think uh hi ben by the way um i think that if you come to the greensboro facility give or take at any time you will see dozens a couple of dozens of apos in the shop in different stages um those of you who visited us and when we had the analyst day in greensboro so back then we had about 50 60 in the shop on this on a certain day random day i think we picked at the end of Q1 because we had a couple of, we have several engines that were ready to ship but missing the last part that we couldn't found. Obviously all these engines were shipped during Q2 and the overall amount of engines kind of normalized a little bit back but at any point even at the end of second quarter if you show up at the facility you will see 40-50 the engines easy in any certain day. I would say that now it's back to normal. You need to remember that the other factor is that we won several new businesses which we published. Obviously, with new customers sending more engines, you should expect to see a gradual increase in the amount of engines in WIP in the process.
Got it. Very good. That's very helpful. Then for my follow-up, and then we'll get back in queue, is also around this parts availability dynamic. I mean, I'm curious, one, the degree to which the second quarter results were kind of a positive surprise for you relative to where you thought this may end up during your first quarter call, if the parts availability kind of came in faster than you were expecting. And then also, can you give us any kind of context around your expectations here for really when this will fully normalize on a full quarter basis, if you even have that visibility. And then I'll get back and kill.
You know, I have to split my answer into three different levels, parallel tracks. On a macro level, what we see in the industry more and more is more parts producers or raw material producers that are extending their lead times. You know, there is so much pain around on-time delivery and some of the vendors just choose to increase lead time so they can meet their turnaround expectations or delivery expectations. So that's one factor that affects you because when they announce that they have a new extended lead time, all of a sudden it creates a rupture in the system. Some of the OEMs that were used to keep very large inventories to support shops like ours are also under pressure to reduce inventory, and they are, as a measure to reduce their inventory, reducing their level of inventories, more aligned with their subcontractors' lead times, and their availability or ability to react fast to changing demand. you know we need to remember on the oem uh it's fairly easy to project and to anticipate six to 12 months in advance and to provide the vendors enough lead time and the general saying we don't have problems there at all going into your last question oem is stabilized as a general saying but on the mro because of the nature of the business and because of the large fluctuations and power consumption between different airlines between different times of the year there is much more volatility and that's more challenging. And now that the lead times are expanding, it's becoming more and more challenging. The last factor is the specific crisis that we had in Q1 with one major OEM that just couldn't ship. And when we announced it the first time when we published our annual results, we said that we have a problem and we didn't see the light of the end of the tunnel, but we've been getting a lot of promises for recovery which took a lot of time eventually they caught up so this major crisis that that we experience in q1 is behind us and now we are more into general supply chain challenges in mro and aerospace with extended lead times and there and the need to uh to predict much more in advance which is difficult what you will need and when you will need and be able to give the vendors enough time to react. So obviously, it's a challenge, and we are adjusting our systems to these new expectations and new lead times, mainly affecting lending gear and APU.
Very good. Appreciate that, caller. Thanks for taking my questions. Congratulations again on a nice quarter. I'll go back in queue. Thank you.
And the next question is from Alexandra Mandry from Truist. Alexander, please go ahead, unmute your line, and please go ahead.
Hey, good morning. Great results, and thanks for taking my questions. Hopefully, you can hear me. Yes, hi, Alexander. Hi. So, I was wondering how your progress is on gaining content on the APU MRO for a Boeing 737 and the A320 series.
What is your strategy like to gain content there, and has it shifted at all over time i think i remember that you asked me more or less the same question three months ago in the in the last call and it's pretty much the same i think that we are gaining traction on the nice traction on the on the 500 engine and on the boeing 737 and the airbus 320 it's more of one-off opportunities than long-term contracts and i believe that given the very competitive nature on the 131 and it's expected and I don't anticipate any major by the way we are competing all the time on RFPs hoping to win some of them but we are not targeting the large airlines as a key opportunity for growth in this platform Are you seeing any impacts of higher jet fuel prices or a conflict in the middle east impacting your customers or the business and what have you heard from your airline customers you know obviously they are concerned about it but we didn't see any impact if you think if you look at industry data utilization of aircraft is in in a very healthy position and the fleets are flying it it puts some constraint on on the airline's profitability but it doesn't affect they need to keep the fleet flying and the Utilization is high, so it doesn't affect MRO, the general saying, I would.
Let's now answer the question from Josh Sullivan at Jones Trading, who submitted it via chat. And here's the question. With the supply chain improving here, how do we think about backlog conversion going forward? Should we expect the impressive backlog to release here or can it extend even as you deliver more? Can it expand even as you deliver more?
I think, you know, and I would feel free to add after I give my two cents, but as a general thing, the vast majority of the backlog increase, the value of the long-term agreement is long-term agreement. So I'm not expecting any, um i call it miracles quarter over quarter uh obviously q1 was a one time uh one time deep that we recovered from it but uh moving forward uh any new wind that we published is going to be spread over three to five years and we're expecting a steady growth not uh not any major jump and there was a little bit of factor this quarter of uh specific black logs of engines that were stuck in the building and we couldn't bring you the finish line obviously we recognized in and recognized them in q2 but looking forward we i i don't see there is no expectation obviously
things can change and we may be surprised but by very large intake but i don't have any indication today that suggests that such a jump is expected i don't know if you have any further color to it yeah i think the only the only thing to add is just i want to make sure that the audience and the analysts that are covering the company understand that this quarter had some catch up on the previous quarter so i'm suggesting for all those who's trying to understand the past and try to focus the future out is to look at the average of the first six months of the year rather than thinking that the second quarter is the baseline for the future. Obviously, the company will continue to grow, but I need to make sure that people understand exactly the results.
Josh's follow-up question is on M&A. He's asking what leverage levels are you comfortable with and what areas are in the strategic interest at this point? Does the the extended lead time dynamic influence your M&A thoughts as well.
Would you like to take a lead?
Yeah, so first of all, I would say that with the M&A in general, we are doing a very good progress. I think we're looking now with a very healthy funnel of very interesting opportunities. And as you guys said, it was a quote a few minutes ago. We are very disciplined about it. We defined strategic deals that we're looking for. we defined what are the prices that are willing to pay and we are going to be very disciplined but in general i'm very encouraged with the fact that there is a very very healthy funnel with regards to the other financial aspects we communicated in the past and it's still the this is still the plan any deal that will be executed will be at a lower and multipize than we are trading for sure and we usually go to finance it with a 50 percent credit and 50 money that will come from the capital market. We're not going to expose the company too much in terms of credit leverage and we want to keep it as a healthy leverage, not a more than that. We're not going to take any places here.
Thanks, Ehud. Let's move on.
Let's move back to a live question we have jason schmidt from lake street jason please unmute your line and go ahead and ask your question hey guys thanks for taking my questions uh just curious if you could discuss the supply chain dynamics in the landing gear market i know you had some open work orders last quarter but given the sequential and year-over-year improvement and the landing gear business just wondering if we should take that that the supply conditions have ease there as well hi jason um you know before we start just uh just let's all make sure that we remember lending is a very small portion of the business about five percent uh and uh we don't see the
recovery as we reported in the last few quarters uh what the dynamics that we see is a dramatic drastic extension of lead times, in some cases to more than 12 months, which has a major impact on the ability to adjust to the needs. These are very expensive parts. You need to remember that on lending gear, not like the APU where you can use USM parts and find solutions from the market when the OEM gets stuck. When lending gear is a general saying, there is much more usage of new parts from the OEM and when these parts are not available then you cannot complete the work we don't have visibility to when this trend is going to stabilize but it really affects the lending of business understood and then just as a follow up can you help us think about operating expenses and that trend through the second half of this year Yeah, you need to be reminded, and we discussed it second half of last year, we invested a lot in establishing infrastructure to support a good strategic growth and to support M&A. So we expanded our overhead at the group level in a meaningful way in the second half of last year in preparation and obviously everybody you know we are working very hard to get going with M&As and to show the first deal whenever we will be ready and moving forward I think that we have the infrastructure today that we need to support the growth and as we continue growing it will help us improve the margin the operating margin okay thanks a lot guys thank you Jason the next question is a follow-up from Jeff Van Sinderen at B Reilly.
Great. Can you guys hear me now?
Yes, Jeff. Hi, how are you?
Okay. Hi, thank you. Let me add my congratulations on the strong results for the quarter. Just wanted to circle back to supply chain for a moment, if we could. Wondering what still needs to happen for normalization there? Are there specific remaining bottlenecks that you're working on?
And then what do you think it's the time frame for normalization that's um i would say it's a tricky question because in in most cases we we are dealing with the oems that have their own supply chain challenges so it's a pastoral from sub subcontractors to the oems not something that we can definitely impact one way or the other so it's we are more dependent on on the oem actions when it comes to direct material as i stated before when it comes to direct materials or parts that we source directly from the source um it's stabilized when you look at all the raw materials for our thermal components as example we have no issues um when it comes to uh parts that we are sourcing from oems then these oems have a very large network of subcontractors and some of them are really struggling to catch up you know i i think i i still that we are still in the after covid effect so many many small subcontractors disappeared or shut down their business during covid and lots of single source dependency and now and now the need to develop new sources and to certify them which is a very long process in aerospace but that's my personal thought But what we experience is the relationship with the OEM and what we are projecting to you guys is more based on what the OEMs are telling us. There is another factor that affects some of the businesses. in normal times, there is a large market of USM parts available as a substitution for OEM parts when there is a shortage of parts. But these days, airlines, the retirement of old fleets are much slower than normal because airlines are forced to keep on flying old fleets. Everybody is searching for the USM parts, which makes it much more difficult to find them. And even if you find them, you pay much more than what we used to pay in the past. So that's the dynamic. We see it all over the place, and we see many of our competitors and other industry players sharing the same dynamic. The only thing that we can do, and we've been doing it, is to drastically increase our inventory to keep much more buffers to deal with all of this.
Okay, that's really helpful. It seems like you're handling it very effectively. Could you maybe elaborate a little bit more on your expanded relationship with Honeywell and how you expect that relationship to benefit your business in the future?
You know, first of all, the relationship with Honeywell is extremely important to us. It's one of our, the APUs in general is one of our strategic product lines and represents the fastest growth opportunity for TAT. We are making good, we made great strides on the 321, 1250 platform over the last few years. We are growing this type of engine very, very fast. And now with distribution, it gives us the full, we can support the full ecosystem, Not just providing MRO services and leasing, but now also supporting customers and other industry players, including competitors with parts when they need them. I see it as an opportunity also to grow the distribution. In general, we find the distribution business very interesting and this first deal, basically on top of being a good deal for TAT and expanding the business and everything that we mentioned, is also the first time that we are going to experiment and get proficient in dealing with distributions, which hopefully we can do in distribution services, which hopefully we can do more in the future. And I think that the expansion of the agreement in six more years is also a critical component a major advantage for t80 which provides a lot of visibility and help us to to secure a profitable growth for the next 10 years okay excellent thanks for taking my questions and continued success thank you thank you very much we have a question that was emailed in from sergio heber who's asking us to walk through the working capital dynamic in the second quarter in terms of operating cash flow?
And then related to that, is there anything that we should be thinking about in terms of working capital and cash flow as it relates to the expanded relationship with Honeywell?
Yes, so the operating cash flow in the second quarter of 2026 was impacted from two things mainly. One of them is a continued increasing inventory as I explained before, we started purchasing inventory for the distribution deal, and also we strategically invested in inventory on areas where we felt that there was a part shortages and risk in the market, not to be caught again with the situation that we were in in Q1 of this year. Looking forward for the rest of the year, I'm expecting the inventory to continue growing. Again, that's a strategic decision here, and it will have some impact on the working capital. On the other end, as I mentioned before, there were several deals that were not collected during the second quarter of the year, and they were pushed for collection in few three for this year which will create a positive impact on the cash flow so all in all just to summarize all those details i'm expecting operating cash flow to continue trading in this way i'm expecting inventory to continue growing and as i said you know that overcome two factors the distribution deal and the and the lack of parts in the market. On the other hand, as the CFO of the company, I'm not concerned. We have enough cash, we are generating profits. So we have the internal resources to deal with those demands without increasing any line of credit or increasing the direct leverage of the company.
Thank you, Ehud. You know, with that, there are no more questions in the queue that haven't already been addressed at some point during the conversation today. So with that, we are going to bring the conference call to a close. I wanted to thank everyone for joining us today, and we look forward to keeping you updated on the company's progress on future earnings calls. With that, you may now disconnect your lines.
Thank you very much. Thanks.
