TAT Technologies Ltd. (TATT) Earnings

Management highlights

- Backlog and Demand Status * Total backlog and long-term agreements reached a record $580 million as of March 31, 2026, up from $550 million at end-2025, driven by new contract wins and strong MRO customer intake. * Overall industry demand for commercial and defense aerospace MRO services remains strong, driven by ongoing need to maintain and extend the service life of existing aircraft fleets; the supply chain disruptions affecting Q1 are an industry-wide phenomenon, not TAT-specific. * All deferred Q1 revenue is under contract and will be shifted to future periods rather than lost; demand, capacity, workforce, and customer relationships all remain fully intact. - Operational and Financial Performance * Gross profit increased 0.8% year-over-year to $10 million, with gross margin expanding 80 basis points to 24.4% from 23.6% in Q1 2025, driven by operational discipline, cost structure improvements, and operating efficiencies. * Generated positive operating cash flow of $1.9 million in Q1 2026, compared to a negative $5 million operating cash flow in Q1 2025. * Ended the quarter with $51.2 million in cash and $11.2 million in total debt, for a debt-to-EBITDA ratio of 0.45 (trailing four quarters) and an equity-to-balance sheet ratio of 77.5%, creating strong financial flexibility for organic growth and M&A. - M&A Strategy Progress * M&A remains a core strategic priority for TAT; over the past nine months, the company has built out dedicated M&A infrastructure, including hiring a specialized corporate development leadership team with deep aerospace experience, adding new board members with scaled company operating experience and aerospace ecosystem connections, and upgrading internal systems for transaction closing and integration. * The M&A team is now actively engaged with potential targets, private equity owners of aerospace assets, and industry advisors, resulting in an expanded deal pipeline compared to six months prior. * The company focuses on strategic bolt-on acquisitions that fit its existing platform, expand its addressable market, and deepen customer value; management remains disciplined, is not rushing deals, and will only pursue the right opportunities at appropriate valuations.

Guidance

- Management reaffirmed its prior expectation that 2026 will deliver meaningful year-over-year growth in both revenue and adjusted EBITDA, unchanged by the Q1 supply chain timing issues. - Management confirmed that gross margin will improve in 2026, driven by ongoing cost efficiency initiatives and operating leverage from growing revenue; it maintained the long-term expectation of gross margin expansion over the next 12 months despite near-term headwinds. - Supply chain normalization is expected to be a gradual process over the coming months, with full recovery expected by the second half of 2026; deferred contracted backlog will be converted to revenue as parts availability improves. - Management has committed to completing at least one strategic acquisition in 2026, while remaining disciplined on valuation and strategic fit.

Segment performance

Consolidated total revenue for Q1 2026 was $41.1 million, a slight year-over-year decline from $42.1 million in Q1 2025. 1. Heat Exchangers: Revenue grew year-over-year even against a high Q1 2025 base (which included a large volume of late 2024 orders closed in the quarter), with increasing demand for both OEM and MRO services. It achieved a 97% on-time delivery rate this quarter, and remains the foundational business segment for TAT. No absolute revenue figure was provided. 2. Auxiliary Power Units (APU): Order intake reached a record high in Q1 2026, with new customer wins and increased flow of work on newer engine platforms. Ended the quarter with higher contracted work than it started, achieving an above-average book-to-build ratio. $15.5 million in nearly completed APU and landing gear open work orders were delayed in the quarter due to missing parts. 3. Landing Gear: It is a smaller portion of the overall business, also limited by component availability issues, which are at an earlier stage of resolution compared to APU. Demand and market position remain unchanged, and active resolution efforts with OEM partners are ongoing. 4. Trading and Leasing: Delivered 29% year-over-year revenue growth, though transaction volume was partially constrained by the same industry-wide parts availability issues affecting MRO operations. It remains a meaningful contributor to consolidated results.

Risks & headwinds

- Industry-wide aerospace supply chain disruptions for small commodity-level components have delayed revenue recognition in Q1 2026, and the gradual recovery process will lead to a gradual ramp-up of revenue over the next few months rather than an immediate return to full growth trajectory. - For landing gear, there is a higher risk that OEM suppliers prioritize their own in-house operations over third-party MRO providers like TAT for allocating limited parts, though landing gear represents a small share of TAT's overall business. - If supply chain disruptions linger longer than currently expected, landing gear operations could face more material industry-wide operational issues, while APU operations are expected to recover by the second half of 2026 even with slower progress. - Near-term military demand may see temporary delays as active operational fleets in the Middle East have scheduled MRO cycles pushed back until conflict eases, though the mid-to-long term impact of global unrest on military MRO demand is net positive.

Analyst Q&A

• Q: Has there been any backlog slippage (cancellations or delayed orders) from customers due to the current parts shortage or macro challenges like high jet fuel prices? Has the large build-up in open work orders affected overall demand momentum? /

  A: Management confirmed there has been no material general slippage or canceled demand; all delayed Q1 volume remains under contract, with only minimal isolated exceptions. The $15.5 million in nearly completed but undelivered open APU and landing gear work, and the corresponding Q1 inventory increase, are clear indicators of how much contracted volume was deferred rather than lost. New order intake continues to show strong sustained momentum with no signs of weakening from macro or supply headwinds.

• Q: Is there a risk that OEM suppliers prioritize their own internal production over your third-party MRO business when allocating scarce parts? /

  A: For APU, there is zero risk of this: the shortage is limited to small commodity parts needed for final assembly, while all large core APU components are already in TAT's strategic inventory, and there is no conflict between OEM production and TAT's needs for these small parts. For landing gear, there is theoretical risk of prioritization since OEMs supply parts both to their own MRO shops and to TAT, but landing gear represents a very small share of TAT's overall business. Management is working actively with OEMs to secure appropriate allocation aligned with customer needs.

• Q: Have the current supply chain disruptions changed your M&A strategy, and are you now looking at acquisitions of PMA parts capabilities to mitigate future commodity parts shortages? /

  A: Management noted there is potential for supply chain issues to drive strategic M&A in parts capabilities, but no transactions are expected to mature in the next 1-2 quarters. Acquiring PMA capabilities is something TAT would consider for future bolt-on acquisitions, where permitted by existing OEM contracts and aligned with the company's strategy of expanding MRO capabilities. TAT is already utilizing short-term alternative sourcing solutions for current commodity parts shortages alongside collaboration with OEM partners.

• Q: Can you update on the size and priorities of your current M&A deal funnel, and how the current market environment affects your approach? /

  A: After building out full M&A infrastructure over the past year, TAT now has an active pipeline of interesting opportunities aligned with its strategy of bolt-on acquisitions in OEM or MRO aerospace businesses. Management is committed to closing at least one deal in 2026 but will remain highly disciplined on valuation and strategic fit, and will not rush into an unattractive deal. Recent market volatility has lowered valuation multiples for aerospace targets, and TAT will only pursue acquisitions that trade at a lower multiple than TAT's own current valuation to create shareholder value.