TAT Technologies Ltd.

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 Chesler with FNKIR, 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. 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-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 6K filed with the SEC. And with that, I'll turn the call over to Igal.

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 fostering 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 331-200-250 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 through MRO and service alone, and now we're also a part supplier, giving operators, lessors, 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 remain 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, 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 requirements to become more efficient as supply chain continues to improve. We believe that investments we are making today will strengthen customer relationships, 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 targets, completed initial due diligence on a 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 remains exceptionally strong with our record backlog of $615 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 enhance 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, 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. Also, 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 shepherd. Second quarter revenue was 52.9 million dollars 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 $615 million at the end of June 30, 2026. Gross profit increased by 23%, the overall yield to $13.3 million, with gross margin remaining about 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 lending and 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. Absence this 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. The yielded 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 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 operations 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 recognized had not yet converted to cash collection by quarter end and we expect to convert during the third quarter. Working capital requirements are expected to remain elevated in the near term as we support the extended annual distribution agreement through strategic inventory investments. We view these investments as an attractive use 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 includes the 3.4 million one-time benefit, increased by 58.1% to 11.5 million. And excluding the non-retiring benefit, net income would have increased approximately by 11% to 8.1 million. Diluted Earning Per Share inclusive of the one-time gain were $0.87 versus $0.64. The one-time gain represented approximately $0.26 in Diluted Earning 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 $105 million 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 to our expectations. 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% in the first half of 2026 despite The supply chain impact. I'm sorry. Trading and listing increased by 17% this quarter with several good trades and steady revenue from listing activities, which will now benefit from three additional 131 and 9A engines that were purchased. Landing here, a 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, about 25%, and the balance sheet is positioned to support our growth strategy. The supply chain is improving. and Adeline Incremental Growth. And we are very optimistic about TAT's future in general, and especially for the 2026 result in particular. And with that, I will turn the call back to Igal.