TAT Technologies 2026 Q3 Earnings Call

the TAT Technologies third 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, 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, and investors are cautioned not to place undue reliance on these forward-looking statements. During this call, we may also discuss certain non-GAAP financial 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, everyone, and thank you for joining us. We appreciate your continued interest in TAT. Q3 was an outstanding quarter for TAT. We delivered quarter revenue up 20% from last year and a record adjusted EBITDA of nearly $11 million. Performance was broad-based, and profitability grew faster than revenue. Our APU business continued to grow, leveraging new contracts won since the beginning of the year and the benefits of continued improvement in supply chain. Demand is robust across both APUs and heat exchangers areas, which we expect to remain the foundation of our growth. Trading, leasing, and distribution added meaningfully to their record results, benefiting from strong customer demand, supporting global fleets and other MROs, and our expanded strategic relationship with Honeywell. Our position in the APU MRO market is strengthened by the comprehensive business model that combines MRO capabilities, trading, leasing, and now distribution.

This integrated approach expands the share of the overall market we can address, creates additional growth opportunities, and enhances the value we deliver to our customers. It also strengthens our relationship with existing customers while making TAT an increasingly attractive partner for new customers. Collectively, these capabilities establish meaningful and sustainable competitive advantage. Furthermore, the new distribution agreement announced in early Q3, alongside our existing MRO agreements, one of which has been recently extended to 2036, provide a strong foundation for growth that we believe can outpace the broader industry. As we scale, we are seeing a clear improvement in our earning power. Margin expansion was driven by revenue growth, a more favorable business mix with higher contribution from APUs and heat exchangers, the addition of trading and distribution revenue, and continued improvement in operations efficiency.

This demonstrates our ability to translate incremental revenue into stronger growth and profitability as we continue to expand the business. The result reflects the strength of our competitive position in the aftermarket industry, the quality of our partner and customer relationship, and the successful execution of our strategy. Demand across our core markets remained fundamentally strong, supported by favorable aftermarket dynamics and our long-term standing relationship with the leading OEMs and customers. The third quarter clearly reflects the progress that we have made. APU is back at full run rate, trading and distribution is adding to our growth, and our cost initiatives are improving profitability. Intake across our business remains at a high level, and we are confident that the momentum will continue in Q4 and 2027. Few words about the industry. Rising oil prices raise concern about the outlook for air travel and the potential impact on airline spending.

However, industry data provided encouraging indicators of continued resilience in the aviation aftermarket. Across six major U.S. airlines, combined maintenance spendings increased 3% year-over-year in the third quarter to approximately $3.3 billion, with trailing 12 months spending up 4%. This suggests that despite higher fuel costs, the demand for flight is there, and airlines continue to prioritize maintenance and reliability for their fleet. We are also seeing positive trend across the broader aerospace aftermarket, with major industry players reporting continuing growth in engine services, parts, and repairs. The industry continues to benefit from sustained aircraft utilization, favorable pricing trend, and large install base of aging aircraft that require ongoing maintenance. While airlines are managing cost and adjusting capacity in response to fuel prices, maintenance remains essential to ensuring safe and reliable fleet operation.

Any potential spending reductions are more likely to initially affect discretionary areas such as certain cabin interiors, upgrades, and retrofits rather than essential maintenance activities. These industry trends are consistent with what we see, comparing to what we are seeing across our businesses. Customer demand and intake remain strong, particularly in APU and heat exchangers, and we continue to see attractive opportunities across our MRO and trading and leasing distribution activities. Taking together the industry data and our direct customer experience reinforce our confidence in the resilience of the aftermarket and the opportunities ahead of TAT. In terms of growth engines and outlook, we enter final quarter of 2026 with a strong customer demand, a healthy backlog, and long-term agreements, and a solid financial position. Momentum is building, and we expect to finish the year on a strong note.

As we continue to scale our core businesses, we expect to deliver meaningful operational leverage, sustained margin improvement, and deepen our relationship with existing customers while expanding our reach to new ones. Looking beyond 2026, we believe that TAT is well-positioned to build on this momentum in 2027. Our core markets remain attractive, our customers' relationship continue to deepen, and our expanded relationship with Honeywell strengthens our competitive position and creates additional opportunities in distribution and MRO. We believe we have a clear strategy and the financial flexibility to pursue both organic growth and strategic opportunities. We are excited about the opportunities ahead. Our focus remained on executing consistently, capitalizing on strong market demand, expanding our capabilities, and delivering sustainable, profitable growth that creates long-term value for our shareholders. With that, I will turn the call over to Ehud for more detail-driven review of our financial results.

Thank you, Igal. Hello, everyone, and thank you for joining us. This was indeed a record quarter. Our third quarter results reflect growing customer demand, a more favorable product mix, and the benefits of our disciplined cost management. Third quarter revenue increased by 20.2% year-over-year to a record of $55.6 million, compared to $46.2 million in the third quarter of 2025. For the first nine months of 2026, revenue increased by 13.8% to $149.6 million, compared to $135.5 million in the prior year period. On top of the double-digit organic growth in revenue, profitability was a particular highlight of the quarter. Gross profit increased by 48.2% to $17.2 million, representing a record gross margin of 30.9%.

This improvement reflects several positive developments, capacity shift from landing gear to a higher margin APU business, healthy trading activity, the addition of distribution, and the full impact of the operational efficiencies initiatives that we discussed last quarter. For the first nine months, gross margin reached 27.1%, an improvement of 250 basis points year-over-year. We believe that this year-to-date performance provides a meaningful indication of the underlying progress in our business and should be seen as a reasonable margin profile for our near-term business. Operating income was $9 million, or 16.3% of revenue, compared to $5.3 million, or 11.4% of revenue in the third quarter of 2025. For the nine months, operating income increased by 27.3% to a level of $17.6 million. Net income increased to $7.7 million, compared to $4.8 million in the third quarter of 2025.

Diluted earnings per share increased to $0.58 from $0.37 in the prior year quarter. For the nine months, net income increased by 58.3% to $19.1 million. As a reminder, the second quarter included a one-time gain, net of taxes of $3.4 million on the sale of an equity method asset. Excluding this non-recurring benefit, net income for the first nine months would have been approximately $15.7 million. Diluted earnings per share were $1.46, representing a 42% increase compared to $1.02 in the prior year period. During the third quarter, we also converted shekel-denominated loans into US dollar-denominated loans. By this, we reduced the interest rate and eliminated the foreign exchange exposure associated with the loans and the related interest expenses. This further strengthens our financial position and reduces our exposure to currency fluctuations. For the EBITDA. Adjusted EBITDA increased by 60.9% to a record of $10.9 million, or 19.6% of revenue, compared to $6.8 million, or 14.6% of revenue in the third quarter of 2025.

For the first nine months of the year, adjusted EBITDA increased by 47% to $27.4 million, or 18.3% of revenue. To summarize the profitability parameters, the gross margin and adjusted EBITDA margin puts us at the highest standard compared to our peers and competitors. For the coming quarter, our focus is on sustaining the improved profitability as we move into 2027. Cash flow from operating activities was $3.8 million in the third quarter, despite a $10.6 million investment in inventory, most of which was associated with adding the inventory needed to support the new distribution channel, which we announced last quarter.

We view this inventory investment as supporting the growth of our business and our ability to serve customers throughout an expanded product offering. Our financial position remains strong, and we continue to manage our working capital and investment requirement with discipline as we grow. With regard to taxes on income, as we have discussed previously, we expected to utilize our remaining tax losses carry forward in Israel and the U.S. and begin paying income taxes in 2027. Based on our current expectation, we anticipate an average corporate tax rate of approximately 15%-19%. While this represents a change from the benefits of our historical tax attributes, it reflects the continued development of our business and our expectation of sustained profitability. Turning into our individual product lines, we continue to see encouraging performance across our portfolio. Our APU business continued to be a standout performer.

APU revenue increased by 34.4% in the quarter and 26.8% year to date. Overcoming supply chain challenges and the return of full operational run rate, combined with sustained customer demand, has contributed meaningfully to our growth and profitability. We are encouraged by this momentum, and we expect APU to remain an important driver of our business. In heat exchangers, revenue increased by 7.3% in the third quarter and 5.2% during the first nine months of 2026 compared to the respective period last year. This business serves both OEM and MRO customers, and we are pleased with its steady growth, which is consistent with our expectation. This segment provides a reliable long-term foundation for the company. Trading and leasing and distribution also delivered a very strong quarter, with revenue increasing by 85.5%. The performance reflected several meaningful transactions during the quarter, alongside the contribution from the distribution business.