On Thursday, Firan Technology Group (TSX:FTG) discussed second-quarter financial results during its earnings call. The full transcript is provided below.

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Access the full call at https://www.ftgcorp.com/investors/why-invest-in-ftg/

Summary

FTG achieved record revenues, earnings, bookings, and backlog in Q2 2026, with an 8.2% increase in revenue year-over-year to $52.7 million.

Bookings reached $86.7 million, an 89% increase over the previous year, resulting in a book-to-bill ratio of 1.64 to 1, and the backlog increased by 30% to $193.5 million.

Adjusted EBITDA rose by 20% to $10.5 million, and adjusted net earnings increased by 44% to $5.1 million.

FTG is expanding its aerospace and defense market presence, including ramping up deliveries to China’s C919 program and opening a new facility in Hyderabad, India.

The company is managing tariff impacts by diversifying its customer base and shifting production to non-US sites.

Management is optimistic about future growth, supported by strong market demand, increased defense budgets, and strategic initiatives in aerospace.

Operational challenges include potential cost increases due to tariffs and labor constraints, particularly in Circuits Toronto and Minnetonka.

FTG maintains a strong financial position with significant liquidity and plans to continue expanding globally while managing operational efficiencies.

Full Transcript

OPERATOR

Good morning. I would like to welcome everyone to the FPG Q2 2026 analyst call. All lines have been placed on mute. There will be a question and answer session following the call. If you would like to ask a question during this time, simply press Star followed by one on your telephone keypad. If you'd like to withdraw your question, please press Star followed by two. Please note that this call is being recorded. I would now like to turn the call over to Mr. Brad Blake, President and Chief Executive Officer of FPG. Mr. Bourne, you may proceed.

Brad Bourne, President and CEO

Thank you. Good morning. I'm Brad Bourne, President and CEO of FTG. Also on the call today is Drew Knight, our Chief Financial Officer. Before we go any further, I must caution you that this call may contain forward-looking statements. Such statements are based on the current expectations of management of the Company and inherently involve numerous risks and uncertainties known and unknown, including economic factors and the Company's industry generally.

The preceding list is not exhaustive of all possible factors. Such forward-looking statements are not guarantees of future performance, and actual events and results could differ materially from those expressed or implied by forward-looking statements made by the Company. The listener is cautioned to consider these and other factors carefully when making decisions with respect to the Company and not place undue reliance on forward-looking statements.

The Company does not undertake and has no specific intention to update any forward-looking statements, written or oral, that may be made from time to time by or on its behalf, whether as a result of new information, future events, or otherwise. Our second quarter was a record quarter for FTG on virtually every metric. We had record revenues, record earnings, record bookings, and record backlog with continued strong end market demand. More specifically, in our second quarter of 2026, we achieved the following: bookings were 86.7 million in the quarter, our best ever bookings in a single quarter and an 89% increase over Q2 2025, resulting in a book-to-bill ratio of 1.64 to 1. This included additional bookings on the two classified defense programs we have previously mentioned. But to be clear, bookings were strong across our business, not just on these two programs. The quarter-end backlog stood at 193.5 million, a 30% rise from the previous year. End revenue was 52.7 million, again our best ever quarter and an 8.2% increase over Q2 2025. Adjusted EBITDA was 10.5 million in Q2 2026, a record high, up 20% from 8.7 million in Q2 last year.

Adjusted net earnings were 5.1 million in Q2 this year, an increase of 44% from Q2 last year and another record for FTG. This once again demonstrates the top-line growth and profitability at FTG. Free cash flow was positive 2.7 million in our second quarter, and we maintained a strong balance sheet with net debt down to 2.9 million or 0.1 times trailing 12-month EBITDA. Most of our debt is government loans. Other accomplishments in our second quarter included in 2025 our circus business qualified for two large-scale classified defense programs, and significant orders have been placed for these two programs during Q2 this year.

Only one of these programs had any revenue in our second quarter, and it was not significant. FTG Aerospace Calgary continued to benefit from efforts to certify and sell its product portfolio globally and had profitable results again in the quarter. I will talk more on this later. Our efforts to reduce our exposure to US tariff risk continue, and in Q2 2026, our efforts continued to sell outside the US. Deliveries to China's C919 program continue.

In addition, deliveries to the new Babylon Canadair 515 aerial firefighting aircraft started to ramp up. More deliveries on both these programs are expected to continue in the second half of 2026. We also made more progress on moving non-US customer orders to our non-US sites to further reduce our exposure to any tariff risk. And finally, we had some larger orders for circuit boards from a Canadian customer, but offsetting this was continued strong demand coming from the US Market.

Drew will provide more details on our second quarter results shortly. Let me turn to some external items. Our end market demand remains strong. Airbus is targeting 870 aircraft deliveries this year, up about 10% from last year, but more importantly, they're looking to ramp to over 1000 aircraft annually in the next few years. Airbus has a backlog of over 8,000 orders, which is over a decade's worth of production at current production rates. At Boeing, they shipped 600 planes last year, up from 350 in 2024.

But looking forward, Boeing has plans to ramp their production to over 800 planes annually in the next few years. Boeing's backlog is about 6,000 planes, so also over a decade's worth of orders at current production rates. In the business jet market, Bombardier reported a high single-digit shipment increase last year. They're also pushing hard to add a defense component to their business, and they've had some success today in selling their business jets for defense applications, including a NATO award this week for surveillance mission aircraft.

In Q1 this year, Bombardier sales were up 5% in the helicopter market. Bell Helicopter reported a 20% increase in revenues last year driven by increased defense programs. In the first quarter of 2026, revenues were up 9% again on increased defense activity. All of this bodes well for us as we look to future demand in the coming years. Defense spending is expected to increase going forward. The US budget request for next year is for a 50% increase in spending to about $1.5 trillion.

There are new commitments from all NATO members, including Canada, to ramp defense spending to 3.5% of GDP, with another 1.5% for defense infrastructure. Canada increased their defense spending in 2025-26 to 2% of GDP. All of this indicates significant increases in defense budgets for all European countries and Canada. The recent creation of a Defense Investment Agency in Canada to accelerate and streamline future defense procurement activity is positive for the industry here.

Looking at the longer term, Boeing's most recent 20-year forecast for commercial aircraft shows significant long-term industry growth, and they continue to show 28% of all new aircraft deliveries going to China and close to 40% to Asia, as has been the case in all of their recent forecasts. A recent business jet market forecast from Honeywell similarly predicts growth in this market of 5% this year and 3% annually over the next decade. So, as we have said for many years, FTG's goal is to participate in all segments of the aerospace and defense markets as each moves through their independent business cycles.

It is not often all segments are growing as is the case right now. Beyond all this, let me give you a quick update on some key metrics for FTG for our second quarter of 2026. First, as already noted, a leading indicator of business is our bookings or new orders. Our bookings were almost 87 million in the quarter. This resulted in the backlog of over 193 million at quarter end. Even after record shipments in the quarter, Q2 sales were 52.7 million, which is up 8% over Q2 last year.

In our Aerospace business, sales were up 21% in Q2 to 17.1 million compared to Q2 last year. Sales in Toronto, Tianjin, and Calgary were up while activity in Chatsworth was down in the year due to the timing of some orders. The growth in aerospace was in spite of some challenges on our C919 program in China where we had to deal with some sizeable customer concerns and returns, including some shipments that arrived at the customer with water damage to the shipping containers.

In this case, the good news was when we took the product back and inspected and tested them, none of the product itself was damaged. But this took a lot of time and energy for our plants in Tianjin and Toronto to support our customer and get the product returned successfully to them. And still, they had a strong quarter. Calgary saw strong revenues from hardware sales which were mostly Satcom radials delivered in Canada and the US but also from our second delivery of EDGE class WQARs in Asia.

Data sales were also strong due to Satcom radio data, but also an increase in weather data for NOAA. Licensing revenues were again from our Satime radio which were very strong in the quarter. On the circuit side of our business, sales in the quarter were 34.3 million, up 1.9% over Q2 last year. Our two largest sites were down slightly in the quarter, but the other sites more than offset this. Circus Toronto was down due to an operational disruption mid-quarter, and Circus Minnetonka was down due to a product mix shift towards higher technology product and by labor constraints.

But by quarter end, Minnetonka had made strong progress on staffing which will benefit them in the second half of the year. On the positive side, our Circuit Fredericksburg site almost doubled their revenues in our second quarter. With work transferred from Minnetonka and with no change in their staffing levels, they truly had an amazing quarter. While our two largest sites did not grow, Fredericksburg was up over 90%, Chatsworth was up 18%, and our Haverhill site was up 15% overall.

At FTG, our top five customers accounted for 51.2% of the total revenue in Q2 2026. This compares to 52.8% last year. Airlines were three of our top customers in the year due to the flight acquisition. Also interesting to note, of the top 10 customers, five are customers shared between circuits and aerospace and two are former flight customers. Given the actions of the new administration in the US of implementing tariffs, it's also good to see that two of our top 10 customers are outside the US with one in Canada and one in China, and another six have operations outside the US.

While on this topic, 70.3% of FTG sales are to US-based customers in 2026. This includes sales by our US sites as well as sales from sites in Canada or China. This compares to 69.7% last year. While sales grew by 10% in the US, they also grew by 4% in Asia and by 44% in Canada. As we benefit from previous efforts to expand globally, including things like our content on C919 aircraft in China and acquiring flight. With sales globally, sales decreased in Europe by 8% in the quarter.

Sales outside the US are helpful in the event of any tariff that the US might impose on our non-US based sites. Our goal is to continue to grow our non-US revenue for our non-US sites. In Q2 2026, 35.8% of total revenues came from our aerospace business compared to 32% last year. I'd now like to turn the call over to Drew who will summarize our financial results for our second quarter 2026 and afterwards I will talk about some key priorities we are working on.

Drew Knight, Chief Financial Officer

Thanks, Brandon. Good morning, everyone. I would like to provide some additional detail on our financial performance for Q2, starting with revenue and gross margin on sales of 52.7 million. FTG achieved a gross margin of 19.2 million or 36.5% in Q2 2026 compared to 15.9 million or 32.6% on sales of 48.7 million in Q2 2025. The increase in gross margin dollars is based on top line growth, while the gross margin rate increased due to operational improvements in multiple facilities, despite unfavorable FX variances.

The improved profitability at Aero Calgary and several US sites has a substantial impact on consolidated margin rates. Aero Calgary continues to benefit from its ongoing licensing revenue that resumed in 2026 as well as repeat hardware sales of its Afer's Edge product. The US sales improved margins via increased throughput with limited added resources. Moving on to SGA, SGA expense was 8.4 million or 15.9% of sales in Q2 2026 as compared to 6.8 million or 14.1% of sales in the prior year.

The increase of $1.55 million during Q2 was primarily due to performance compensation tied to profitability, amortization of deferred financing costs, and some corporate amend costs of the new leadership team. Now speaking to R&D, R&D costs for Q2 2026 were 2.8 million or 5.3% of sales compared to 2.4 million or 5.0% of revenue in 2025. R&D efforts include product and process improvements at the circuit segment as well as aerospace segment, product development, and process improvements.

Regarding foreign exchange, FTG is exposed to currency risk through transactions, also assets and liabilities recorded in foreign currencies, and finally from foreign subsidiaries. Translation of Financial Statements for Consolidation, the average exchange rate experienced in Q2 2026 was 1.373 on the US dollar as compared to 1.407 in 2025, which equates to a weakening of the US dollar by 2.4% and this hurts results for FTG. Moving on to profitability and EBITDA, adjusted EBITDA as detailed in the MDA was 10.5 million for Q2 2026 or 19.9% of sales compared to 8.7 million or 17.9% of sales for Q2 2025.

As noted with gross margins, the year-over-year comparison of adjusted EBITDA has improved $1.78 million over Q2 2025 as a result of growing the top line organically. Operational improvements in the US plants and Aero Calgary revenue streams added in 2026 for Edge plus and licensing. Regarding earnings for Q2 2026, FTG recorded net earnings of 5.0 million or $0.20 per diluted share as compared to 3.5 million or $0.14 per diluted share. The earnings comparison to prior year was improved by favorable income taxes based on the distribution of profits in 2026 being more widespread.

Speaking to Income Taxes, Q2 2026 was tax inefficient with a few non-deductible losses unable to reduce taxable income in profitable business units. However, this inefficiency improved year over year. Also, FTG incurred a $200,000 withholding tax hit on the repatriation of some cash from a foreign subsidiary. I would like to remind everyone that FTG continues to have substantial tax losses available to offset future income and the accounting benefit of these losses has not been recognized in our financial statements.

These tax loss carryforwards are located in both the USA and Canada with the Canadian losses recently acquired in the acquisition of FLYHT in December 2024. Regarding our financial position, FTG maintains a strong balance sheet with our net debt position as of Q2 2026 at $2.9 million as compared sequentially to net debt of $4 million as of Q1. This leverage ratio represents 0.09% of trailing twelve months. EBITDA free cash flow in Q2 2026 was $2.7 million as compared to negative $5.5 million in Q2 2025.

Capital expenditures were $0.9 million as compared to $1.3 million in 2025. Going forward, we expect CapEx to be closer to FTG's long-term target of 3% of revenue notwithstanding any significant capacity increases. As of the end of Q2 2026, the corporation's primary sources of liquidity totaled $85 million, consisting of working capital of $61.8 million and $23.3 million of unused credit facilities. FTG has plans to improve cash efficiency and minimize stranded cash in various business units.

Accounts receivable days were 60 at the end of Q2, up from 55 at the recent year end due to timing of a couple of customer payments and top line revenue growth. Inventory days were 112 at the end of Q2 2026, up from 105 at 2025 year end to address order fulfillment in upcoming months and accounts payable days were outstanding were 57 at the end of Q2 2026 as compared to 58 at the end of at year end. Transitioning to our future outlook, FTG's book to bill ratio for Q2 2026 was 1.64 to 1.

We enter Q3 2026 with a record backlog of 193.5 million, of which approximately 66% is expected to be converted to revenue in the next 12 months. The new business activities in both the aerospace and defense industries are strong and continue to accelerate. Both the circuits business and aerospace business are increasing throughput and winning their share of customer RFPs. Last quarter we noted program awards for two substantial classified defense programs.

We have since received the opening POS for delivery in 2026, though these orders are only a fraction of the annualized volumes. I should note that FTG's reported backlog only includes POS received and does not include program awards with estimated volumes. As we approach the midpoint of Q3, we are focused on managing cash flow and improving operational efficiency and continuing with the Aero Calgary Revenue plan which is already bearing fruit. I should note that our complete set of quarterly filings are available on sedarplus.com or on the FTG website.

Brad Bourne, President and CEO

Thanks, Booth. Let me delve into some important items for the future of FTG that will continue to build on our past accomplishments. We will continue to pursue growth in the defense market. As noted previously, we expect defense spending to continue to grow in Canada, in the US, and in NATO. We have seen some good success on some new classified programs in the US last year and we are pursuing more new programs in 2026. We are seeing volumes ramp up in many areas including electronics for various weapon and electronic warfare systems.

Beyond this, we will look for opportunities outside the US as well. The NATO budget was about a third of the US budget a decade ago and is 2/3 today, so it's definitely a market of interest to us. As Canada ramps its defense spending and its commitment to NATO, we are hopeful that it will create new opportunities for FTG sites outside the US. After the US and NATO, the next biggest defense market is India and as we get our site established there, we will hope to capture some market share in this market too.

We will look to capture more work in the commercial aerospace market and grow as volumes ramp up. As part of this, we will look for ways to increase our activity with Airbus as they are the stronger performer right now. To do this, we will leverage our Canadian and China sites. Given the uncertainty regarding tariffs from the US, we will look to continue to diversify revenue streams for our non-US sites. Some of the items I already mentioned will assist in this, but it will remain a priority action for us.

We will increase our sales staff outside the US in 2026 to help drive this growth. Tariffs are now impacting input costs in our circuits business. This is because a lot of materials used in our manufacturing processes originate outside of North America. The impact is highest for our US sites, but Toronto is also impacted where material is shipped by the US to Canada. We estimate the overall cost impact to be in the millions of dollars in 2026. We have started to work with our customers to pass on these increased costs to them and to the end users.

Also for our circuits business, we are seeing significant cost increases on input costs, mostly driven by circuit board demand related to AI data centers. Costs are moving up fast and again we are working towards passing these costs onto our customers, but it is tough to keep up with the rate of cost increases we are seeing. Also, our collective agreement to our unionized staff at our Circuits Toronto facility expires in July. Negotiations are ongoing and we are hopeful of a successful conclusion, but nothing is firm until a contract is ratified by the members.

We will continue to take steps to create value from our acquisition of Flight last year. As of December 1st last year, we have renamed the business FTG Aerospace Calgary as we amalgamated it legally into FTG. The amalgamation was done to possibly enable us to use Flight's tax losses beyond just our operation in Calgary. But to be clear, we do not have certainty that this will be possible in the Calgary business itself. We believe we are now well-positioned to have a strong year as a result of our product certification and STC efforts last year.

We are seeing strong demand for all three products and our pipeline looks robust. The licensing revenue on our Satcom radio product has returned and should be reasonably consistent going forward. The licensed product ends up on Airbus aircraft so we know the demand is strong. We are working to become the manufacturer of this product for the licensee to capture additional margin from this product. If things proceed as anticipated, this will benefit us in 2027 and beyond.

We are looking to manufacture the Satcom radio product in our Chatsworth, California facility. The production area is set up and parts are on order. This should help get our Chatsworth facility ramped up going forward. The Edge Class WQAR has the key STCs in place with our first few orders or few deliveries behind us. We are quoting many new opportunities in a number of geographic jurisdictions and we are starting to manufacture this product in our Tianjin plant to enable us to capture this margin as well.

We expect sales of their weather product to ramp up in the second half of 2026 as well with our contract with NOAA in the US. Our contract with UK Met in England was unfortunately cancelled in Q2, but not for reasons related to the product. While disappointing, we continue to see strong potential for this product elsewhere, including some military applications in Q2. We installed our first kit for this product on a WestJet aircraft and we expect to have our STC for the 737 Max in Q3 this year.

Once approved and installed, there will be a recurring revenue stream as we provide real-time weather and water vapor readings to NOAA. We also expect to install further units with WestJet through the balance of this year, each incrementally increasing our recurring data revenue potential. These actions should enable FTG Aerospace Calgary to be a positive addition to FTG and further mitigate the risks from US tariffs. We opened our aerospace facility in Hyderabad, India last week.

Our decision to expand geographically was partly us looking for an insurance policy against anything negative happening in our China operations, but is also partly to expand into a new region with growth potential. As we analyzed our options, we concluded India was a very cost-effective place for manufacturing and with Prime Minister Modi's Make in India policy coupled with significant defense spending, it would be an ideal place to operate in a place where we can serve our existing Western customers but also penetrate the Indian aerospace and defense market.

We selected Hyderabad as it has an aerospace hub primarily focused on manufacturing. After our grand opening last week, we attended an aerospace conference in Hyderabad and came away with some exciting new customer opportunities. While we held our grand opening, we're still sourcing some necessary equipment to be ready to go. Our estimated total investment is forecast to be approximately 2 to 3 million dollars. While not the original intent, we believe this initiative could also help mitigate any negative impact from US tariffs.

Through the balance of this year, we will be staffing up and training and building some initial products. That is expected to be intercompany activities so no real incremental benefit to FTG before 2027. We continue to assess possible corporate development opportunities that could fit with either of our businesses. We have a few areas of interest, including establishing a footprint in Europe, growing our presence in India, or expanding our technology in a few areas.

In our second quarter, three circuit board manufacturing companies were sold in Europe, but none of them to us. TTM bought two companies but neither had a strong focus in aerospace and defense. Somacis just bought ACB Circuits which is a multi-site business focused on aerospace and defense, but their operations are primarily in France and this is not a jurisdiction we are keen on. And finally, as a reminder, our third quarter is seasonally a bit softer due to increased vacations and lost production days.

We estimate about one week or 8% of lost production in the quarter. With a focus on operational excellence in all parts of FTG, our strong financial performance in 2025 and the first half of 2026, our recent acquisitions, and our key sales wins, we are confident we are on a strong long-term growth trajectory. This concludes our presentation. I thank you for your attention. I would now like to open the phones for any questions. Vincent.

OPERATOR

Ladies and gentlemen, we will now begin the question and answer session. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. Again, that will be star, then the number one on your telephone keypad. If you would like to withdraw a question, please press star, then the number two. Your first question comes from Nick Vujic from ADB Core Mark Capital Markets. Please go ahead.

Nick Vujic, ADB Core Mark Capital Markets

Good morning, guys. Brad, you mentioned a lot about the outlook that you have now in this increased booking backlog activity. What's the confidence you have to deliver given the existing footprint and labor availability? Are there any bottlenecks or things that might prevent that from spilling through over the coming 12 to 24 months?

Brad Bourne, President and CEO

Yeah, for sure. There's always challenges and bottlenecks and such and it's different across the sites and I guess all sites but one. It's about staffing and training and getting people operating equipment more hours a day. And so for every site except Circuits Toronto, it's about that and I tried to allude to it, but the key for us, one of the keys is Minnetonka, and we've been struggling to make that happen. But we didn't see the result in Q2. But we saw significant improvement in staffing in Q2, which I believe is going to help us going forward in Q3 and beyond.

So that was really good to see. The other sites to their credit. So Chatsworth grew 18% with a handful, a couple of staff additions. Fredericksburg grew almost 100% with no staff additions. Haverhill grew 15% with no staff additions. And so the sites are really performing well and we will add staff as necessary to support future demand. Then finally, on the last one on the circuit side, so our Circuits Toronto, for sure, we have some production bottlenecks that are equipment related.

So we're already running 24/7. So that's not an opportunity to just run it longer. We are working to address the equipment bottlenecks. We have orders in place for some expansion. Our plating line, we've ordered in place for some drills to expand our capacity there. Our only challenge, which might delay it a little bit, but it's just the lead time on equipment is pushing out a bit just given the overall demand in the circuits industry. But everything's on order.

We're hoping that.

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