TAT Technologies Ltd. (TATT) Earnings

Management highlights

### Core Business Performance & Industry Fundamentals - Q2 2026 was a record quarter, with 23% year-over-year revenue growth and a company record backlog of $615 million as of June 30, 2026. - Improved, but not fully normalized, supply chain conditions allowed the company to convert previously constrained customer demand into revenue. - Commercial aviation industry fundamentals remain healthy: aircraft are staying in service longer, utilization rates are high, and operators prioritize reliable aftermarket support, driving strong demand for the company's services. ### Strategic Milestone: Expanded Honeywell Aerospace Partnership - TAT is now Honeywell's sole global authorized distributor for spare parts for the 331-200-250 APU platform, and its MRO license for the platform was extended to 2036. - TAT acquired three Honeywell 131-9A APUs to expand its trading and leasing business. The new distribution capability adds end-to-end lifecycle support (parts, repair, return) for customers, creating long-term visibility and secured profitability for this business line. ### Strategic Growth: M&A Priorities - M&A remains a core component of TAT's long-term growth strategy, focused on expanding MRO capabilities, strengthening the thermal systems business, broadening the platform portfolio, and increasing geographic proximity to customers. - TAT has a strong balance sheet with significant financial flexibility for acquisitions, maintains strict discipline on valuation and strategic fit, and will not pursue deals purely for growth. - The company has built a robust pipeline of targets, completed initial due diligence on multiple opportunities, and is actively evaluating prospects, making M&A a top near-term team focus. ### Operational Investments - The company continues to prioritize customer support even when this requires targeted inventory investments or higher procurement costs, which modestly dampened short-term profitability, but strengthens customer relationships and long-term market position. - Investments in growth infrastructure and M&A capabilities increased SG&A expenses, and modestly higher R&D spending continues for future thermal system development.

Guidance

- Management maintained confidence in continued profitable growth for full-year 2026, supported by record backlog, improving supply chain conditions, expanded OEM partnerships, and a strong balance sheet for strategic growth. - Q2 2026 included catch-up revenue from delayed work stuck in Q1 2026 due to supply chain constraints; management advises using average H1 2026 results as a baseline for forward expectations, rather than the elevated Q2 2026 revenue level. - Steady, incremental growth is expected moving forward, with no projected sharp quarterly jumps, as new long-term contract wins will be recognized gradually over 3 to 5 years. - Inventory levels are expected to continue increasing through the rest of 2026, driven by strategic buffer investments for supply chain volatility and the new Honeywell distribution partnership, keeping near-term working capital requirements elevated.

Segment performance

Q2 2026 total company revenue was $52.9 million, a 23% increase from $43.1 million in Q2 2025. All segments contributed to growth: 1. **Heat Exchangers**: Revenue increased 7.8% year-over-year in Q2 2026, and 4.2% year-over-year in H1 2026. Growth was steady single-digit, in line with management expectations, and includes both OEM and MRO business. 2. **APU (Auxiliary Power Units)**: Revenue grew 22.2% year-over-year in H1 2026, with Q2 performance lifted by supply chain recovery and new long-term contract wins. Management expects the positive growth trend to continue. 3. **Trading and Leasing**: Revenue increased 17% year-over-year in Q2 2026, driven by strong trades and steady leasing revenue. The business will benefit from three additional acquired 131-9A APUs added in the quarter. 4. **Landing Gear**: Contributes 5% of total company revenue. It continues to be impacted by ongoing supply chain constraints.

Risks & headwinds

- Supply chain conditions have not fully normalized, with extended lead times from OEMs and their subcontractors creating ongoing volatility, particularly for the MRO business and the small landing gear segment. - Aerospace industry consolidation of suppliers during COVID left single-source dependency gaps; certifying new suppliers is a lengthy process, creating ongoing bottlenecks. - Slower-than-normal retirement of older aircraft has reduced the available supply of used serviceable material (USM) for parts, increasing competition and raising prices for available USM parts. - A stronger Israeli shekel relative to the US dollar created a $600,000 foreign exchange headwind in Q2 2026. - Higher procurement costs from expediting and securing scarce components have constrained near-term margin expansion, even as core gross margins remain stable around 25%.

Analyst Q&A

• Q: How has the number of APU units awaiting parts changed from the end of 2025 through the height of supply chain issues to now, and when will parts availability fully normalize?

  A: The number of APUs in the shop peaked at the end of Q1 2026, when dozens of completed units were held waiting for final parts; all delayed units were shipped in Q2, and volumes have now returned to normal levels. The Q1 2026 crisis with a major OEM is fully resolved, but broader industry challenges remain: OEMs are extending lead times and reducing inventory buffers, creating volatility that is particularly pronounced for the variable-demand MRO business, with no clear near-term timeline for full normalization.

• Q: What is TAT's progress in gaining APU MRO content for Boeing 737 and Airbus A320 aircraft, and have any external factors like higher jet fuel or the Middle East conflict impacted business?

  A: TAT has gained solid traction on 500 series engines, but opportunities for 131 series engines (used on 737 and A320) remain mostly one-off rather than large long-term contracts, due to high competition; the company does not target large airlines as a core growth opportunity for this platform. Higher jet fuel prices and the Middle East conflict have not impacted demand, as aircraft utilization remains high and airlines must keep their fleets flying, so MRO demand is unchanged.

• Q: How will backlog conversion proceed now that supply chains are improving, what leverage levels are comfortable for M&A, and what types of targets are priority?

  A: The vast majority of the record backlog comes from long-term agreements that will be converted gradually over 3-5 years, so steady growth rather than a sharp release of backlog is expected. TAT maintains a disciplined approach: all completed deals will have lower valuation multiples than TAT's current trading price, deals will be financed 50% debt and 50% equity, leverage will be kept at healthy conservative levels, and priority targets complement existing business by expanding MRO capabilities, thermal systems, platform portfolio, and geographic reach.

• Q: What are supply chain dynamics for the landing gear segment, and how will operating expenses trend in H2 2026?

  A: Landing gear (5% of total revenue) is still heavily impacted by supply chain issues, with lead times for OEM parts extending to over 12 months; unlike APUs, landing gear relies heavily on new OEM parts rather than available USM alternatives, so work cannot be completed when parts are unavailable, with no clear visibility for when this will stabilize. TAT already expanded overhead infrastructure in H2 2025 to support M&A and long-term growth, so no further major overhead increases are expected; as revenue grows, operating margin will improve.