TAT Technologies Q2 2026 Earnings Report

TAT Technologies EPS Results

• Actual EPS: $0.35
• Consensus EPS: $0.30
• Beat/Miss: Beat by +$0.05
• One Year Ago EPS: N/A

TAT Technologies Revenue Results

• Actual Revenue: $52.94 million
• Expected Revenue: $44.86 million
• Beat/Miss: Beat by +$8.07 million
• YoY Revenue Growth: N/A

TAT Technologies Announcement Details

• Quarter: Q2 2026
• Date: 8/5/2026
• Time: Before Market Opens
• Conference Call Date: Wednesday, August 5, 2026
• Conference Call Time: 8:00AM ET

TAT Technologies (NASDAQ:TATT) is a global provider of environmental control and thermal management solutions for the aerospace industry. The company specializes in the design, manufacturing and support of aircraft environmental control systems (ECS), heat exchangers and related components. Its product portfolio serves commercial and military airframers, engine manufacturers and airlines, offering critical systems that regulate cabin pressure, temperature and ventilation on fixed-wing and rotary aircraft.

Key offerings include air cycle machines, preconditioned air units, steam/water separators and specialty heat exchangers engineered to meet stringent aerospace standards. TAT’s proprietary manifold and ducting solutions for aircraft auxiliary power and air-start systems are designed to improve reliability and weight efficiency. The company also supplies ground support equipment (GSE) to maintain and test environmental control systems during line maintenance and overhaul cycles.

In addition to new equipment manufacturing, TAT Technologies provides aftermarket repair, overhaul and spare parts services through its certified maintenance facilities. The company’s engineering teams support custom modifications, lifecycle upgrades and certification activities to extend the service life of aging fleets. Headquartered in Israel, TAT maintains manufacturing sites and support offices in North America, Europe and Asia, serving a global customer base with on-demand logistics and technical support.

TAT Technologies Q2 2026 Earnings Call Transcript

Key Takeaways

• Positive Sentiment: Record backlog and strong demand drove second-quarter revenue up nearly 23% year over year to $52.9 million, with backlog and long-term agreements reaching a record $650 million.
• Positive Sentiment: The expanded Honeywell relationship makes TAT the sole global authorized distributor of spare parts for the 331-250 APU platform, extends the MRO license through 2036, and adds three 131-9A APUs to its trading and leasing business.
• Positive Sentiment: Profitability improved despite supply-chain inefficiencies, with operating margin rising to 10.6% and gross margin remaining above 25%; management expects further operating leverage as revenue grows.
• Negative Sentiment: Supply-chain constraints remain a risk, particularly in landing gear and APU parts, where lead times can exceed 12 months. The company is increasing inventory and paying higher procurement costs, which is pressuring margins and near-term cash flow.
• Neutral Sentiment: Net income benefited from a $4.3 million one-time gain, while operating cash flow was negative $0.6 million due to inventory investments and delayed collections. Management is evaluating a robust M&A pipeline, intending to maintain disciplined valuations and moderate leverage.

Presentation

[Matt Chesler, Partner at FNK IR]

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.

[Matt Chesler, Partner at FNK IR]

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.

[Igal Zamir, President and CEO at TAT]

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 331-200/250 APU platform.

[Igal Zamir, President and CEO at TAT]

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 331-200/250 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.

[Igal Zamir, President and CEO at TAT]

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.

[Igal Zamir, President and CEO at TAT]

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.

[Igal Zamir, President and CEO at TAT]

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.

[Igal Zamir, President and CEO at TAT]

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.

[Ehud Ben-Yair, CFO at TAT]

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 U.S. 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.

[Ehud Ben-Yair, CFO at TAT]

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.

[Ehud Ben-Yair, CFO at TAT]

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.

[Ehud Ben-Yair, CFO at TAT]

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 U.S. 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.

[Ehud Ben-Yair, CFO at TAT]

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.

[Ehud Ben-Yair, CFO at TAT]

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.

[Ehud Ben-Yair, CFO at TAT]

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 with our 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% in the first half of 2026, despite the supply chain impact. I'm sorry. Trading and leasing increased by 17% this quarter, with several good trades and steady revenue from leasing activities, which will now benefit from three additional 131 and 9A engines that were purchased.

[Ehud Ben-Yair, CFO at TAT]

Landing gear 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 customer that involve both the legacy platform and the new platform. Gross margins continue to be stable above 25%, and the balance sheet is positioned to support our growth strategy. The supply chain is improving, enabling incremental growth, and we are very optimistic about TAT's future in general, and especially for 2026 results in particular. With that, I will turn the call back to Igal.

[Igal Zamir, President and CEO at TAT]

Thank you, Ehud. 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.

[Igal Zamir, President and CEO at TAT]

Our expanded relationship with Honeywell adds new distribution rights and extends our MRO authorization to 2036. Third, our balance sheet gives us flexibility to keep growing organically, but more importantly, to support our strategic inorganic growth to create long-term value for our shareholders. 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 on our progress. With that, I will turn over to Matt for questions.

[Matt Chesler, Partner at FNK IR]

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 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.

[Matt Chesler, Partner at FNK IR]

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. With that, we'll pause for a moment to build the queue. First question is from Jeff Van Sinderen at B. Riley Securities. Jeff, please go ahead.

[Igal Zamir, President and CEO at TAT]

Jeff, please unmute.

[Matt Chesler, Partner at FNK IR]

Jeff, please go ahead. Okay, let's move on. Jeff, you can jump back into the queue. The next question is from Josh Sullivan at Jones Trading. Josh, please go ahead. Josh, please unmute your line. Operator, are you able to assist?

[Igal Zamir, President and CEO at TAT]

Josh, if you can please check your audio settings and make sure your microphone is set up to the correct device. We can't hear you.

[Matt Chesler, Partner at FNK IR]

Let's move on to the next question. The next question is from Ben Klieve at Benchmark. Ben, please go ahead.

[Ben Klieve, Analyst at Benchmark]

All right. Is that working? Can you guys hear me?

[Igal Zamir, President and CEO at TAT]

Yes. Finally.

[Ben Klieve, Analyst at Benchmark]

All right. Well, first of all, congratulations on a very good quarter here. First, I have a question about the APU business and the parts availability dynamic. I'm curious if you can give us a bit of context around the number of APU units that have been sitting, awaiting that parts availability to unlock. I'm just curious if you can kind of level set us on kind of where the number of units waiting to be worked on ended 2025, kind of where that peaked at the height of the parts challenge earlier this year, and kind of where that sits right now.

[Igal Zamir, President and CEO at TAT]

Hi, Ben, by the way. I think that if you come to the Greensboro facility, give or take, at any time, you will see dozens, couple of dozens of APUs in the shop in different stages. Those of you who visited us when we had the analyst day in Greensboro, back then, we had about 50, 60 on the shop on a certain day, random day. We peaked at the end of Q1, because 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.

[Igal Zamir, President and CEO at TAT]

The overall amount of engines kind of normalized a little bit back. At any point, even at the end of second quarter, if you show up at the facility, you will see 40, 50 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.

[Ben Klieve, Analyst at Benchmark]

Got it. Very good. That's very helpful. For my follow-up, and then we'll get back in queue, is also around this parts availability dynamic. 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. 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. Then I'll get back in queue.

[Igal Zamir, President and CEO at TAT]

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. 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. 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.

[Igal Zamir, President and CEO at TAT]

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 subcontractor's lead times, and their availability or ability to react fast to changing demand. We need to remember, on the OEM, it's fairly easy to project and to anticipate six to 12 months in advance and to provide the vendors enough lead time. The general saying, we don't have problems there at all. Going into your last question, OEM is stabilized as a general saying. On the MRO, because of the nature of the business and because of the large fluctuations in part consumptions between different airlines, between different times of the year, there is much more volatility, and that's more challenging.

[Igal Zamir, President and CEO at TAT]

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. When we announced it 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. We've been getting a lot of promises for recovery, which took a lot of time. Eventually, they caught up.

[Igal Zamir, President and CEO at TAT]

This major crisis that we experienced in Q1 is behind us, and now we are more into general supply chain challenges in MRO, in aerospace, with extended lead times, and the need 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. Obviously, it's a challenge, and we are adjusting our systems to these new expectations and new lead times, mainly affecting landing gear and APU.

[Ben Klieve, Analyst at Benchmark]

Very good. Appreciate that color. Thanks for taking my questions. Congratulations again on a nice quarter. I'll go back in queue.

[Igal Zamir, President and CEO at TAT]

Thank you.

[Matt Chesler, Partner at FNK IR]

The next question is from Alexandra Mandery from Truist. Alexandra, please go ahead, unmute your line, and please go ahead.

[Alexandra Mandery, Analyst at Truist]

Hey, good morning. Great results, and thanks for taking my questions. Hopefully, you can hear me.

[Igal Zamir, President and CEO at TAT]

Yes. Hi, Alexandra.

[Alexandra Mandery, Analyst at Truist]

Hi. I was wondering how your progress is on gaining content on the APU MRO for Boeing 737 and A320 series. What is your strategy like to gain content there, and has it shifted at all over time?

[Igal Zamir, President and CEO at TAT]

I think I remember that you asked me more or less the same question three months ago in the last call. It's pretty much the same. I think that we are gaining nice traction on the 500 engine, on the Boeing 737 and the Airbus A320, it's more of a one-offs opportunities than long-term contracts. 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, and hoping to win some of them. We are not targeting the large airlines as a key opportunity for growth in this platform.

[Alexandra Mandery, Analyst at Truist]

Okay. Are you seeing any impacts of higher jet fuel prices or conflict in the Middle East impacting your customers or the business? What have you heard from your airline customers?

[Igal Zamir, President and CEO at TAT]

Obviously, they are concerned about it, but we didn't see any impact. If you look at industry data, utilization of aircraft is in a very healthy position, and the fleets are flying. It puts some constraint 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 as a general saying.

[Alexandra Mandery, Analyst at Truist]

Great. Thank you.

[Matt Chesler, Partner at FNK IR]

Let's now answer the question from Josh Sullivan at Jones Trading, who submitted it via chat. 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?

[Igal Zamir, President and CEO at TAT]

Ehud, feel free to add after I give my two cents, as a general saying, the vast majority of the backlog increase, the value of the long-term agreement is long-term agreement. We're not expecting any, I call it miracles, quarter-over-quarter. Obviously, Q1 was a one-time dip, we recovered from it. Moving forward, any new win that we published is going to be spread over three to five years, we're expecting a steady growth, not any major jump.

[Igal Zamir, President and CEO at TAT]

There was a little bit of factor this quarter of specific backlogs of engines that were stuck in the building, we couldn't bring to the finish line. Obviously, we recognized them in Q2. Looking forward, there is no expectation. Obviously, things can change, we may be surprised by very large intake. I don't have any indication today that suggests that such a jump is expected. Ehud, I don't know if you have any further color to add.

[Ehud Ben-Yair, CFO at TAT]

I think 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. I'm suggesting for all those who's trying to understand the past and try to forecast the future out of it, 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, I need to make sure that people understand exactly the results.

[Matt Chesler, Partner at FNK IR]

Josh, his 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 extended lead time dynamic influence your M&A thoughts as well?

[Igal Zamir, President and CEO at TAT]

Ehud, would you like to take the lead?

[Ehud Ben-Yair, CFO at TAT]

Yeah. 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 at the very healthy funnel of very interesting opportunities. As Igal said in his quote a few minutes ago, we are very disciplined about it. We define the strategic deals that we're looking for, we define what are the prices that we are willing to pay, and we are going to be very, very disciplined. In general, I'm very encouraged with the fact that there is a very, very healthy funnel.

[Ehud Ben-Yair, CFO at TAT]

With regards to the other financial aspect we communicated in the past, and this is still the plan, any deal that will be executed will be at a lower multiples than we are trading, for sure. We usually go to finance it with a 50% 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, nothing more than that. We're not going to take any crazy risk here.

[Matt Chesler, Partner at FNK IR]

Thanks, Ehud. Let's move back to a live question. We have Jaeson Schmidt from Lake Street. Jaeson, please unmute your line and go ahead and ask your question.

[Jaeson Schmidt, Analyst at Lake Street]

Hey, guys. Thanks for taking my questions. 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 in the landing gear business, just wondering if we should take that the supply conditions have eased there as well.

[Igal Zamir, President and CEO at TAT]

Hi, Jaeson. Before we start, just let's all make sure that we remember, landing gear is a very small portion of the business, about 5%. We don't see the recovery as we reported in the last few quarters. What the dynamics that we see is a 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.

[Igal Zamir, President and CEO at TAT]

You need to remember that on landing gear, not like the APU, where you can use USM parts and find solutions from the market when the OEM gets stuck. On landing gear, as a general saying, there is much more usage of new parts from the OEM. 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 landing gear business.

[Jaeson Schmidt, Analyst at Lake Street]

Understood. Then just as a follow-up, can you help us think about operating expenses and that trend through the second half of this year?

[Igal Zamir, President and CEO at TAT]

Yeah. You need to bear in mind that, we discussed it second half of last year, we invested a lot in establishing infrastructure to support the good strategic growth and to support M&A. We expanded our overhead at the group level in a meaningful way in the second half of last year in preparation. Obviously, we are working very hard to get going with M&As and to show the first deal, whenever we will be ready. 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.

[Jaeson Schmidt, Analyst at Lake Street]

Okay. Thanks a lot, guys.

[Matt Chesler, Partner at FNK IR]

Thank you, Jaeson. The next question is a follow-up from Jeff Van Sinderen at B. Riley. Jeff, it's all yours.

[Jeff Van Sinderen, Analyst at B. Riley Securities]

Great. Can you guys hear me now?

[Igal Zamir, President and CEO at TAT]

Yes, Jeff. Hi, how are you?

[Jeff Van Sinderen, Analyst at B. Riley Securities]

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? What do you think is the timeframe for normalization?

[Igal Zamir, President and CEO at TAT]

I would say it's a tricky question because, in most cases, we are dealing with the OEMs that have their own supply chain challenges, so it's a pass-through from subcontractors to the OEMs. Not something that we can definitely impact one way or the other. We are more dependent on the OEM actions. As I said it before, when it comes to direct materials or parts that we source directly from the source, it's stabilized. When you look at all the raw materials for our thermal components, as example, we have no issues. When it comes to 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. I think that we are still in the after-COVID effect, so many, many small subcontractors disappeared or shut down their business during COVID.

[Igal Zamir, President and CEO at TAT]

Lots of single source dependency. Now the need to develop new sources and to certify them, which is a very long process in aerospace, that's my personal thought. 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. These days, airlines, the retirement of old fleets are much slower than normal because airline are forced to keep on flying old fleets. Everybody is searching for the USM parts, which makes it much more difficult to find them.

[Igal Zamir, President and CEO at TAT]

Even if you find them, you pay much more than what we used to pay in the past. 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.

[Jeff Van Sinderen, Analyst at B. Riley Securities]

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?

[Igal Zamir, President and CEO at TAT]

First of all, the relationship with Honeywell is extremely important to us. The APUs in general is one of our strategic product lines, and represents the fastest growth opportunity for TAT. We made great strides on the 331-200 and 250 platform over the last few years. We are growing this type of engine very, very fast. Now with distribution, 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.

[Igal Zamir, President and CEO at TAT]

In general, we find the distribution business very interesting, 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, in distribution services, which hopefully we can do more in the future. I think that the expansion of the agreement in six more years is also a critical component, a major advantage for TAT, which provides a lot of visibility and help us to secure a profitable growth for the next 10 years.

[Jeff Van Sinderen, Analyst at B. Riley Securities]

Okay, excellent. Thanks for taking my questions, and continued success.

[Igal Zamir, President and CEO at TAT]

Thank you. Thank you very much.

[Matt Chesler, Partner at FNK IR]

We have a question that was emailed in from Sergio Heiber, who's asking us to walk through the working capital dynamic in the second quarter, in terms of operating cash flow. 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?

[Ehud Ben-Yair, CFO at TAT]

Yeah. The operating cash flow in the second quarter of 2026 will impact it 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, in order not to be caught again with the situation that we were in Q1 of this year. Looking forward for the rest of the year, I'm expecting inventories to continue growing. Again, that's a strategic decision here, and it will have some impact on the working capital.

[Ehud Ben-Yair, CFO at TAT]

On the other hand, 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 Q3 for this year, which will create a positive impact on the cash flow. All in all, just to summarize all those details, I'm expecting operating cash flow to continue trending in this way. I'm expecting inventory to continue growing. As I said, in order to overcome two factors, the distribution deal 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 leverage of the company.

[Matt Chesler, Partner at FNK IR]

Okay. Thank you, Ehud. With that, there are no more questions in the queue that haven't already been addressed at some point during the conversation today. 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.

[Ehud Ben-Yair, CFO at TAT]

Thank you very much.

[Igal Zamir, President and CEO at TAT]

Thanks.

Participants

Analysts

• Matt Chesler, Partner at FNK IR
• Igal Zamir, President and CEO at TAT
• Ehud Ben-Yair, CFO at TAT
• Ben Klieve, Analyst at Benchmark
• Alexandra Mandery, Analyst at Truist
• Jaeson Schmidt, Analyst at Lake Street
• Jeff Van Sinderen, Analyst at B. Riley Securities