TAT (TATT) Q3 2026 Earnings Call Transcript

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DATE

Monday, Nov. 2, 2026

CALL PARTICIPANTS

• President and Chief Executive Officer - Igal Zamir
• Chief Financial Officer - Ehud Ben-Yair
• Investor Relations - Matt Chesler

TAKEAWAYS

• Revenue -- $55.6 million, representing a 20.2% increase year over year driven by strong performance in the APU and trading segments.
• Adjusted EBITDA -- $10.9 million, growing 60.9% year over year and achieving a record 19.6% margin.
• Gross Margin -- 30.9%, a record level reflecting a capacity shift toward higher-margin business and improved operational efficiencies.
• Net Income -- $7.7 million, increasing 60.4% from $4.8 million in the prior year quarter.
• Diluted EPS -- $0.58, representing a 56.8% increase compared to $0.37 in the third quarter of 2025.
• APU Revenue -- $19.6 million, growing 34.4% year over year as the business returned to a full operational run rate.
• Trading, Leasing, and Distribution Revenue -- $8 million, surging 85.5% year over year due to strong trading transactions and contributions from the new distribution business.
• Heat Exchangers Revenue -- $18.8 million, increasing 7.3% year over year on steady demand from OEM and MRO customers.
• Landing Gear Revenue -- $2.1 million, decreasing 45.5% year over year as management intentionally shifted capacity to the higher-margin APU segment.
• Backlog -- $577 million, compared to $615 million at the end of the second quarter, primarily due to the removal of $34 million in landing gear contracts facing supply chain shortages.
• Operating Cash Flow -- $3.8 million, achieved despite a $10.6 million investment in inventory to support the new Honeywell distribution channel.
• Net Cash -- $42.6 million, providing the company with significant financial flexibility for organic growth and strategic acquisitions.
• Inventory Investment -- $10.6 million, used primarily to build stock for the distribution agreement announced in the previous quarter.
• Debt-to-LTM Adjusted EBITDA -- 0.32x, reflecting a strong balance sheet with very low leverage.
• Tax Rate Guidance -- 15% to 19%, anticipated as the average corporate rate starting in 2027 as the company utilizes its remaining tax loss carryforwards.
• Core Segment Concentration -- 85%, the portion of total revenue now represented by the APU, heat exchanger, and trading business lines.
• Airline Maintenance Spend -- $3.3 billion, the combined third-quarter maintenance expenditure across six major U.S. airlines cited as a benchmark for aftermarket resilience.
• MRO Agreement Extension -- 2036, the year to which a key Honeywell MRO authorization was recently extended.
• Revolving Credit Facility -- $100 million, a new three-year facility secured with a consortium of U.S.-based banks.
• Year-to-Date Revenue -- $149.6 million, an increase of 13.8% compared to the first nine months of the previous year.
• Operating Income -- $9 million, or 16.3% of revenue, compared to $5.3 million or 11.4% of revenue in the third quarter of 2025.
• Year-to-Date Adjusted EBITDA -- $27.4 million, representing an 18.3% margin for the first nine months of 2026.

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RISKS

• Zamir stated, "Rising oil prices raise concern about the outlook for air travel and the potential impact on airline spending," noting that higher fuel costs could influence carrier capacity and discretionary spending.
• Zamir warned that the landing gear segment continues to face certain parts availability and supply chain challenges, leading the company to remove related contracts from its backlog.

SUMMARY

TAT Technologies Ltd. (NASDAQ:TATT) reported record quarterly revenue and profitability, driven by a strategic shift toward higher-margin auxiliary power unit (APU) and distribution services. Management reported that the company successfully converted capacity from lower-margin landing gear operations to meet robust demand in its core segments. The company stated that the aerospace aftermarket remains resilient despite macroeconomic concerns, as airlines prioritize essential maintenance to support flight reliability. Management indicated that the expanded relationship with Honeywell Aerospace, which includes new distribution rights and extended maintenance authorizations, provides a solid foundation for growth through 2027.

• CEO Zamir stated, "Improving our own internal capacities and ability to bring more engines is the third factor, improving efficiency," regarding the record profitability.
• CFO Ben-Yair stated, "The distribution is here to stay for a couple of more years, 10 years at least."
• CEO Zamir noted, "As long as the fleet continues flying, the APU demand will stay steady," due to the non-discretionary nature of engine maintenance.
• Management reported that distribution activities contribute significantly to profit margins despite representing a smaller portion of total top-line revenue.
• Zamir noted, "USM parts and trading is an essential portion of the ability to serve customers," particularly while original equipment supply chains remain constrained.

INDUSTRY GLOSSARY

• APU (Auxiliary Power Unit): A small engine on an aircraft that provides energy for functions other than propulsion, such as starting the main engines and powering electrical systems.
• MRO (Maintenance, Repair, and Overhaul): The service and repair of aircraft components to ensure they meet safety and airworthiness standards.
• OEM (Original Equipment Manufacturer): A company that produces the original parts or systems used in the manufacturing of aircraft.
• LTA (Long-Term Agreement): A multiyear contract between a service provider and a customer that outlines pricing and service terms for a specified period.
• eVTOL (Electric Vertical Takeoff and Landing): A type of aircraft that uses electric power to hover, take off, and land vertically, often associated with emerging urban air mobility designs.
• USM (Used Serviceable Material): High-quality parts harvested from retired aircraft that are inspected, repaired, and certified for reuse in active fleets.

Full Conference Call Transcript

Matt Chesler: 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 Technologies 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.

Igal Zamir: 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 Aerospace. 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 Technologies 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 Technologies. 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 Technologies 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 Aerospace 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.

Ehud Ben-Yair: 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 U.S. 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 United States 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. Year-to-date, revenue in the segment increased by 42.9%, which provides a broader perspective on its growth trajectory. As expected, quarterly revenue can fluctuate depending on the timing of individual transactions, but we are encouraged by the ongoing demand and the additional opportunities created by our expanded product offering and customer reach. These three business lines now account for nearly 85% of TAT Technologies total business.

Landing gear remains a smaller part of our portfolio, accounting for less than 4% of revenue this quarter, and continues to face certain parts availability and supply chain challenges. We shifted capacity to APU until such time that landing gear supply chain issues will be resolved. Backlog at the quarter end was $577 million compared to $615 million at the end of the second quarter. The decrease reflects $34 million in landing gear contracts that were removed from the backlog due to the shortage of components to perform the work on those contracts. Excluding those contracts, backlog was essentially unchanged, even as we delivered record quarter revenue.

To summarize, our two largest business segments continue to grow at an encouraging pace, providing a solid baseline for the business, while trading, leasing, and distribution provides additional growth opportunities and broaden our capabilities. We ended the quarter with net cash of $42.6 million. Our debt-to-equity ratio was 6%, and our debt-to-last-12-months EBITDA ratio was 0.32x, reflecting a strong financial position and a very low leverage. In addition, we secured a new $100 million three-year revolving credit facility with several U.S.-based banks that we discussed on our last call previous quarter.

We believe the combination of our net cash position, low leverage, and available credit capacity puts us in a strong position to execute our short-term working capital needs, as well as our long-term strategy while maintaining financial discipline. This is particularly important as we look forward to 2027 and evaluate opportunities to expand our capabilities and create additional value for shareholders. Following an excellent third quarter, we enter the final stretch of 2026 with strong momentum and a solid foundation for continued growth. Our results also demonstrate that TAT Technologies is not only growing, but also becoming more profitable.

We believe TAT Technologies is well-positioned to build on its performance in 2027 supported by strong customer relationship, attractive market opportunities, improving earning power, and the financial capability to pursue both organic growth and strategic acquisition. With that, I will return the call back to Igal.

Igal Zamir: Thank you, Ehud. Before we move to questions, I want to thank our employees around the world. Their dedication, professionalism, and close coordination with our customers and suppliers were instrumental in delivering the outstanding quarter. As we close, I want to leave you with three takeaways. First, our fundamentals have never been stronger. Customer demand keeps growing, and backlog and long-term agreements remains healthy. Second, we are deepening our competitive position and expanding our growth opportunities. Our APU and heat exchangers businesses continue to perform well, while our expanded relationship with Honeywell Aerospace adds new distribution rights and extended our MRO authorization to 2036. Third, we have the financial strength and strategic flexibility to keep moving forward.

Our strong balance sheet, significant liquidity, and financial resources position us to invest in all our business, pursuing inorganic strategic growth and capitalize on opportunities as they emerge. We are finishing 2026 with tremendous momentum. Following this record quarter, we believe TAT Technologies is well-positioned to continue growing in 2027, building on strengths of the core business, our customer relationship, and expanding capabilities. We are proud of what our team has accomplished, confident in the opportunities ahead, and focused on translating them to opportunities, that opportunity into sustained profitable growth for our shareholders. I want to thank you for your continued support, and we look forward to updating you on our progress.

Thank you for continued support, and with that, I will turn it into Matt for questions.

Matt Chesler: Thank you, Igal. We are now going to open it up for the Q&A session. From Zoom, there are two ways you can participate. The first is to use the raise your hand icon, which is at the bottom of your screen. Clicking it will alert us that you would like to ask a live question, and we will place you in a queue and call on you. You will remain on mute until called on. 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 some questions from there as well.

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 will pause for a moment to build the queue. Let's jump right in. The first question is from Jonathan Siegmann from Stifel. Jonathan, please unmute your line and go ahead.

Jonathan Siegmann: Good morning. Thank you for taking my questions, and congratulations on the very strong revenue and margins. Maybe just referring back to Q2, I recall you mentioning maybe taking the average of the first two months of revenue as kind of as a baseline and moderating your expectations for the second half. Clearly, Q3 was stronger on the APU side. I was just wondering if you could comment a bit more on maybe why revenue was stronger than you anticipated, and how we should think about Q4. Thank you.

Igal Zamir: I think that it is a combination of a few factors. First of all, we announced several large wins of APU contracts since the beginning of the year, and we are seeing more and more of these contracts coming to our shop. The second thing is supply chain. The second key parameter is supply chain. We all know where we started the year in Q1 with a major challenge, and in Q2, we reported that things are getting better and continue to get better in Q3, and I believe that they will continue doing so moving forward. As we stabilize our supply chain, we have the ability to bring more units to the finish line.

Improving our own internal capacities and ability to bring more engines is the third factor, improving efficiency. All in all, we see a very positive trend, which we believe that will continue because we are enjoying a very strong intake on the APUs. I hope that answer your question.

Jonathan Siegmann: Yes, thank you. Then maybe just a touch on the landing gear. You had talked about a strong cycle. Sounds like de-emphasizing that, at least in the near term, the adjustment to the LTAs. Just how much of this is somebody else able to get these parts more effectively than TAT Technologies, or is this work just deferred? Thank you.

Igal Zamir: Well, first of all, I would say the landing gear is such a small business of a portion of the TAT Technologies business. I don't know that we need to spend too much time on it. Second thing, I don't know if other people has the ability to obtain parts that we cannot obtain. I know about our business, and I believe that, like anything else, some customers may find other opportunities, some customers will wait, and time will tell.

Jonathan Siegmann: Thank you.

Matt Chesler: The next question is from Josh Sullivan at Jones Trading. Josh, please go ahead.

Josh Sullivan: Good morning. Great quarter.

Igal Zamir: Thanks, Josh. How are you?

Josh Sullivan: I am doing well. The new distribution agreement, since announcing it, has it opened the aperture on your thoughts of verticals and services you might be interested, particularly as you begin to think a little bit more about M&A?

Igal Zamir: I think that in general, the trading and distribution is a very interesting component or segment in the industry, from my perspective, for the coming few years. As long as the supply chain does not stabilize, and if we look at what the majors are reporting and their projections for how long it takes to really stabilize the industry and catch up with demands of new fleets, as long as these fundamental trends are there, USM parts and trading is an essential portion of the ability to serve customers. And I believe it is here to remain for a few good years. So we are definitely interested in expanding opportunities in this direction.

Josh Sullivan: Then the investment inventory, I think you said much of it was growth-focused, but is any of it strategic kind of supply chain buffer at this point?

Igal Zamir: Not necessarily, no. I think that when you sign a distribution agreement, then you need to make sure that you will have inventory to support your customers when they are calling you, whether it's airlines or other MRO shops, and you just need to make sure that you will have inventory. So if we had an inventory model that was supposed to support only our own shop, now we need to make sure that we will have sustainable inventory to support our customers. In an environment with lead times, extended lead times, and sometimes months and months before you get parts, you need to make sure that you have enough in stock to support the demand.

Josh Sullivan: Yeah. Then just one last one. We get a lot of questions on APU demand cycle versus primary engine cycles. As we go into 2027, do you have any thoughts you want to share just on the APU dynamics?

Igal Zamir: I'm not an expert on the main engine side, but on the APUs, I think that in most cases, the APUs are maintained by demand. Sometimes you take an APU because certain parts need to be replaced after X amount of cycles. But in the vast majority of the cases, APU is removed when there is a need to repair something. So as long as the fleet continues flying, the APU demand will stay steady. There is less discretionary in terms of when to time the maintenance, if you will.

Josh Sullivan: Great. Thank you for the time.

Igal Zamir: Thank you.

Matt Chesler: The next question is from Ben Klieve at StoneX Benchmark. Ben, please go ahead. Ben, it's your turn. Please unmute and--

Ben Klieve: Sorry about that. Thanks, guys. Thanks for a great quarter. Thanks for taking the questions, and congratulations here on a great quarter. My God. All right. Are we there now?

Igal Zamir: Yes.

Ben Klieve: All right. Sorry. Third time's the charm to unmute. I did it. Congratulations on a great quarter. Only one question from me regarding the parts and trading business. Obviously, the third quarter growth rate was just exceptional. I understand that this is a lumpy business, and I am curious about the degree to which the expanded scope of this segment is. Do you think that expanded scope is going to allow for that to be a more consistent business? So still some lumpiness, but maybe a little bit more consistent than it has been historically? Or am I reading too much into that?

Igal Zamir: I think that you can expect the volatility to continue, or the fluctuation between the quarters. I would not say volatility, because these are very large deals, and it depends on availability of assets, finding as-removed assets in the market, repairing them, and closing the deal. Closing these deals that are typically larger by nature takes more time. So there will continue to be fluctuation between the quarter. I think that when we look at year-to-date, where we are, that is the base that we are planning on growing from.

Ben Klieve: Very good. I appreciate that. Thanks for taking my questions. I will get back in queue.

Igal Zamir: Thanks.

Matt Chesler: The next question is from Alexandra Mandery from Truist. Alexandra, your turn. Please unmute your line and go ahead.

Alexandra Mandery: Hey. Good morning, guys. Nice results. I just had one question. I understand the backlog shift is related to the removal of landing gear contracts, but have you seen any shifts in backlog to maybe shorter cycle business?

Igal Zamir: Hi, Alexandra. I'm not sure that I understand the question. Can you please explain?

Alexandra Mandery: Yeah. I guess maybe if customers are coming to you with maybe a last-minute repair, versus maybe the longer contracts you have in backlog for APU and other agreements.

Igal Zamir: No, I don't see such a trend. All in all, on the landing gear, we just decided to take a conservative approach and not to keep in the backlog something that we are currently really struggling to sell. It relates, by the way, to only one of the landing gear lines. We removed it. Other than this, all the long-term agreements that we have, and we mentioned it in the past, represents roughly 60%-65% of our revenue. About 35%-40% of the revenue still comes from non-contractual customers on a short-term need, based on the short-term need.

But in terms of customer indications to how much they need from the backlog and their future view of consumption based on the long-term agreements, we don't see any change. I'm not aware of any change. I hope that answers.

Alexandra Mandery: Great. Thank you. Yeah, for sure. Thanks.

Matt Chesler: Next question is from Jaeson Schmidt at Lake Street Capital Markets. Jaeson, you're up.

Jaeson Schmidt: Hey, guys. Thanks for taking my questions. Just curious if you can update us on the defense business and how that order book is building into 2027.

Igal Zamir: As a general, TAT Technologies is a commercial company. We are a commercially focused company. We have some defense business, and we saw some growth on our defense sales this year. We have some opportunities for next year to continue on growing it. That's basically it. Obviously, defense represents some opportunities that we are trying to leverage, and the segment is growing nicely, as well as the commercial. There is nothing special that I would expect going into next year on the defense sector for us.

Jaeson Schmidt: Okay. Really helpful. Thanks a lot, guys.

Matt Chesler: Thank you. Let's take a call from the Q&A session here. The question is, "What level of initial potential do you see from the Honeywell Aerospace distribution agreements for parts supporting the 200-250 platforms, given the increase in" And then, given the increase in Why don't we do that one? Here we go. Would you like me to repeat it?

Igal Zamir: Yeah. We are not publishing projections, as we all know. I think that we need The distribution is not meaningful in revenue, but it has meaningful in profitability and supports the margin improvement, and will continue supporting the margin improvements moving forward.

Matt Chesler: Okay. Here's another question around the industry environment. "Given the increase in jet fuel prices, are you seeing the beginning of a trend toward higher aircraft retirement and scrappage rates compared to recent years?"

Igal Zamir: No, actually, I don't see it at all. I think the opposite. If we look at demand for flights, that is not, as far as I can tell from what I'm seeing, the demand for passenger demand is not going down, and passenger willing to absorb the increase in prices, and in combination with the major delays in delivering new fleets, I'm not sure that I can see how retirement is going to substantially grow moving forward.

Matt Chesler: Great.

Igal Zamir: I didn't see, and by the way, in all the research that we saw, we didn't see any meaningful or any new trend, if you will. We are still at a retirement, as far as I know, we are still at a retirement level that is lower than what the industry used to have before COVID.

Matt Chesler: Ehud, there's a number of questions in here regarding the big improvement in the gross margin. I know we addressed it during the prepared remarks, but can you provide any more color on what drove the improvement in the gross margin, and to what extent this is structural and sustainable going forward?

Ehud Ben-Yair: Yeah, sure. As I mentioned in my quote, obviously, first of all is the mix of product. As I said, we shifted capacity to higher profitability product rather than the lower ones. As I said, the demand is very strong, so the mix going to stay very similar in the next couple of quarters. We improved several operational efficiencies during Q2 and Q3, and we saw the impact of those efficiencies in the quarter. And again, as I mentioned in the past calls, every time that we implement a certain cost initiative or an operational initiative project, it is sustained and stays for the future.

So, we had a couple of them in this quarter, and it will take us forward. The distribution layer, as Igal added before, it's not high in the revenue, but very high in the profit. The distribution is here to stay for a couple of more years, 10 years at least. That's it. I believe that, as I said before, the average profitability of the last three quarters is a very good representative of the profitability going forward.

Matt Chesler: Thank you. There are other questions in here, but they were already asked by other callers, so I'm going to move past them. Igal, I'm going to turn the call back to you for brief concluding remarks.

Igal Zamir: A quick second.

Matt Chesler: It's just to wrap it up.

Igal Zamir: Yeah, yeah. Give me one quick second. Kind of lost my notes. Anyway, maybe just to repeat what we said in the beginning, we are very excited about the continued progress of the company. We see it as a progression. We've been reporting, and if you think about it, for four years now, we set up our strategy, we've been executing. We have several key pillars in the strategy that we are working on, with the exception of one quarter at the beginning of this year, where we had a more one-time supply chain crisis. If you look at the trend of the last four years, the company is growing.

We are focused on leveraging the strategic strengths that we have to improve revenues. We have major efforts, as I mentioned in the past, on improving our margin and operational efficiencies that yield great results. We want to focus on, as a strategy, we focus on our customers and improving relationships or partnerships with the large OEMs in the industry. The combination of all of this reflects in the results. We are very optimistically looking at next year and what's ahead of us and the opportunities to continue and grow the business, definitely finish 2026 on a very strong note. Thank you very much for joining us today, and looking forward to see you in the coming quarters.

Matt Chesler: Thank you all for joining us today. You may now disconnect your lines.

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