TAT Technologies Ltd 2026 Q2 Earnings Call

Second quarter 2026 earnings conference call. This call is being recorded. My name is Matt Chesler with FNK IR, a U.S.-based investor relations firm supporting Eran Yunger, TAT's Head of Investor Relations. Joining me today are Igal Zamir, TAT's President and CEO, and Ehud Ben-Yair, 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 20-F. TAT 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-GAAP measures. Reconciliations of these measures to the most directly comparable GAAP measures are available in our earnings release issued earlier today and in our Form 6-K filed with the SEC. With that, I'll turn the call over to Igal.

Thank you, Matt. Good morning, everybody. 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 bolstering 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 the aviation ecosystem. An important milestone this quarter was the expansion of our strategic relationship with Honeywell Aerospace. We are now Honeywell 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. Now we are also a parts supplier, giving operators, lessors, and MRO partners one source across the full life cycle, 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 historical norms. Utilization rates are high. 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, 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 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 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 fit, and we will not pursue acquisitions simply for the sake of growth. Our M&A 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.

M&A is becoming an important focus of our team, reflecting both the quality and the opportunities we are seeing and our commitment 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 remained exceptionally strong, with our record backlog of $650 million 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. Taken 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, Igal, and good morning, everyone. Good afternoon for the guys in Israel. As Igal noted, the second quarter benefited from strong demand and the record backlog. The improvement in supply chain environment enabled us to convert a significant portion of work into revenue as supply constraints eased. 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 leverage would have been higher if not for some ongoing supply chain issues and weaker exchange rate of the US dollar against the Israeli shekel. Second quarter revenue was at $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 the long-term agreement, which increased to a record of $650 million at the end of June 30, 2026. Gross profit increased by 23% year-over-year to $13.3 million, with gross margin remaining above 25%. 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 cost when necessary. Absent 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 system, resulting in a modestly higher R&D expenses. Net income was $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-recurring one-time gross gain of approximately $4.3 million from the sale of a minority interest in an unconsolidated entity and a non-recurring charge of $900,000 related to tax expenses.

The net impact was $3.4 million on the net profit. Excluding the non-recurring gain from the minority interest sale, net income was $4.6 million or $0.35 per diluted 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 a solution 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 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 recognized had not yet converted to cash collection by quarter end, and we expect that to convert during the third quarter. Working capital requirements are expected to remain elevated in the near term as we support the expanded Honeywell distribution agreement through strategic inventory investments. We view these investment 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 represents 24.8% gross margin, up approximately 40 basis points year-over-year. Operating income was flat at $8.6 million. Net income, which include the $3.4 million one-time benefit, increased by 58.1% to $11.5 million.

Excluding the non-recurring benefit, net income would have increased approximately by 11% to $8.1 million. Diluted earnings per share inclusive of the one-time gain were $0.87 versus $0.64. The one-time gain represented approximately $0.26 in diluted 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 U.S.-based banks, giving us significant flexibility to support our M&A strategy and future growth of the company.