Firan Technology Group Corp
TSX:FTG
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Firan Technology Group Corp
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Good morning, everyone. My name is Marcella, and I will be your conference operator today. I'd like to welcome everyone to the FTG Q3 2022 Analyst Call. [Operator Instructions] Please note this call is being recorded. I would now like to turn the call over to Mr. Brad Bourne, President and Chief Executive Officer of Firan Technology Group. Mr. Bourne, you may proceed.
Thank you. Good morning. I'm Brad Bourne, President and CEO of Firan Technology Group Corporation, or FTG. Also on the call today is James Crichton, 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 in 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 honest behalf, whether as a result of new information, future events or otherwise.
Well, in Q3, we have returned to profitability without the help of any government support, and we are very proud of this accomplishment. Maybe we're not back to pre-pandemic levels of profitability, but we are certainly heading in that direction. Our challenges of the past 2 years of reduced demand have been replaced with the new challenge of ramping production as fast as demand is ramping. This is a better challenge. Q3 this year showed a 17% increase in sales compared to Q3 last year, while our bookings increased by 33% on the same basis. As I talked about in the last 2 quarters, we have changed our mindset at FTG. For the past 2 years, we played defense.
We played great defense. We took many actions to ensure we got through the pandemic, but defense is only half the game. As of the start of 2022, we are consciously taking actions to place some offense. We have a great balance sheet and the market is coming back. We are taking advantage of our balance sheet to increase capital spending to support higher technology, improve our operations and to grow. We will continue to do this, but we can and will do more. Our balance sheet puts us in a great position to grow through acquisition or other corporate development activities. We are putting a lot of effort into this area now. And we can and are looking at other capital allocation options that can benefit our shareholders. Specifically, during Q2 and Q3, we had then CIB in place to buy back up to 5% of Oaktown outstanding stock, and we have purchased about 450,000 shares for about $900,000 so far.
We believe that FTG has the resources to pursue multiple capital allocation efforts to create shareholder value, including organic growth, acquisitions and the stock buyback. Now let me summarize some key accomplishments from our third quarter of 2022. FTG achieved a seventh sequential quarter of increased bookings as the aerospace industry recovers from the pandemic. Third quarter bookings of $27.9 million or up 33% over Q3 last year and is the best booking quarter since Q3 2019. FTG achieved a 1.21:1 book-to-bill ratio for Q3 this year.
Total backlog at the end of Q3 is $55.8 million, up 57% from Q3 2021. We booked $7.5 million in new purchase orders to supply cockpit assemblies for military and commercial simulators for different aircraft, including refueling fixed-wing aircraft, helicopters and business jets, with the work to be performed by FTG Aerospace segment facilities in Toronto, Chatsworth and Tianjin over the next 9 to 12 months. Sales for Q3 2022 were $23.1 million, which is an increase of 17% over Q3 '21. FTG maintained strong liquidity with net cash on the balance sheet of $10.8 million after investments in the third quarter of $700,000 for capital expenditures, $1.4 million for research and development, $8.5 million for the aerospace chatsworth facility and $800,000 for the FTG share buyback.
FTG recorded earnings per share of $0.03 in Q3 2022 without the benefit of any government assistance. FTG achieved a trailing 12-month EBITDA of $8.5 million, of which $2.8 million was in Q3 this year. And finally, we received $1.3 million of funding from Fed Dev Ontario, which was the first installment from the aerospace regional recovery initiative program. This funding is repayable without interest commencing in 2025 through 2030. Jamie will talk about the financials shortly, but I would like to highlight what we are seeing in future market demand. The aerospace industry is recovering. U.S. and global air travel continues to rebound. And this morning, I heard Delta Airlines reported very strong revenues in the latest quarter, which were above 2019 levels.
There are many predictions regarding the life of time for the aerospace industry to recover, but all of them indicate a strong commercial aerospace market in 2022, even if not quite back to pre-pandemic levels and a full recovery by 2023. -- the big challenge in the travel business -- the travel business is facing is not customer demand, but being able to staff sufficiently to support the increase in daily flights. When looking at the performance and plans from the large airframe manufacturers, Airbus is projecting a production rate in 2022 that will be 15% to 20% above last year. And for 2023, they're planning another 40% increase, which would put them above pre-pandemic production rates.
Over the next few years, they are projecting a 180% increase in the production rate of the A320, where we have significant content. But like many industries in 2022, the largest challenge for the aerospace industry is supply chain disruptions and uncertainty. The story of Boeing is a little more complex that they've not shipped any Boeing 787 since May 2021 due to certification issues with the FAA. For the Boeing 737, they are now at a 27 plane per month production rate and are targeting ramping to 47 planes per month by the end of 2023, a 75% increase from the current rate. They just reported that their Q3 shipments and there was good news and bad news.
The good news is that they have started shipping 787 again. The bad news is that their deliveries of 737 was down sequentially. And then back to good news, Boeing booked 256 orders in their Q3 against shipments of 112 aircraft for a book-to-bill of 2.3:1. Looking at the longer term, Boeing's most recent 20-year forecast shows growth does show growth beyond the COVID downturn as air travel recovers. And it continued to show 40% of all new aircraft deliveries going to Asia has been in the case in their most recent forecast. For the defense market, the defense budget request in the U.S. for next year has a small increase, so this market remains strong.
And unfortunately, the conflict in the Ukraine is increasing the focus on defense spending around the world. The business jet market has already seen traffic recovery. A recent business jet market forecast for Honeywell [indiscernible] growth in this market in the coming years. The simulator market mirrors the end market application. So commercial aerospace simulator activity is down, but recovering, whereas the defense simulator market remains strong. But as we remind everyone about this market, for FGG, it is lumpy. So large year-to-year variations do occur. The good news is, as we reported, we booked $7.5 million in new simulator orders in Q3. We -- so we 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.
Within FTG, our Canadian and China sites are more focused on the commercial aerospace market, where our U.S. sites are more focused on the defense market. Beyond all this, let me give you a quick update on Q3 2022 for FTG. First, as already noted, the leading indicator of our business is our bookings or new orders. For the last 7 quarters, bookings have increased and Q3 saw bookings up 33% from Q3 last year. In Q3 '22, sales were up 17% compared to the same period last year. We definitely saw improved performance across the company as we had far fewer operational challenges in the quarter compared to earlier this year.
Sales were up in Canada in the U.S., in Europe and in Asia, they were up everywhere. In our aerospace business, Q3 sales were up 30% or $2.2 million compared to Q3 last year, and year-to-date sales are also up $2.2 million or 10%. On the circuit side of our business, sales were up $1.5 million or 11% on a Q3-over-Q3 basis. All sites were up with our JV in China being up but 160% on increased demand and new awards. On a year-to-date basis, sales are up $6.1 million or 16% in our Circuits business. Again, all sites were up this year versus last year. Overall at FTG, our top 5 customers accounted for 58.5% of total revenue in the quarter.
This percentage compares to 59.3% last year. One of our top 5 in Q3 this year is an account we have been focused on for the past number of years, and this is the first time it has made it to our top 5 list. Also interesting to note, of the top 10 customers, 7 are shared between Circuits and Aerospace. We like the shared customers as it means we are maximizing our penetration of these customers by selling both cockpit products and circuit boards. And it's also important to note that one of our top 10 customers in this quarter is the U.S. Defense Logistics Agency.
And this is important as they are a key customer for the defense aftermarket opportunities. And clearly, we have grown our aftermarket activity, which has been the strategic objective for us for the past number of years. In Q3, 2 39.8% of our total revenues came from our Aerospace business compared to 33% last year. I'd like to turn the call over to Jamie, who will now summarize our financial results for Q3 '22, and afterwards, I will talk to some key priorities and status at a site level. Jamie?
Thanks, Brad. Good morning, everyone. I'd like to provide some additional detail on our financial performance for Q3. On sales of $23.1 million, FTG achieved a gross margin of $5.7 million or 24% compared to $3.8 million or 19.2% on sales of $19.7 million in Q3 2021. Excluding the benefit of wage subsidy programs in Canada and the United States in the prior year quarter, gross margin dollars improved by $2.6 million on a sales increase of $3.4 million. The increase in gross margin dollars and the gross margin rate for the third quarter of 2022 is a result of increased operating leverage on higher sales volumes, FX lift and operational efficiencies.
The gross margin rates for the Toronto sites are positively impacted by the weaker Canadian dollar relative to the U.S. dollar as much of the underlying cost structure of those sites is in Canadian currency. The average exchange rate experienced in Q3 2022 was $1.29 as compared to $1.25 in Q3 2021. At the site level, the increased gross margin rate was most evident at our sites in China, where the sales increase was more than a double. We continue our focus on operational efficiency. One metric to measure this is revenue per employee. For Q3 2022, annualized revenue per employee is approximately $205,000, which is an increase of 18% over the comparable quarter of 2021.
In light of the current constraints on the supply of labor in all of our manufacturing locations, we will continue this focus through the automation of manufacturing processes and investment in capital equipment. From a geographical standpoint, 76.3% of FGG's Q3 2022 sales were derived from customers in the U.S., which is up from 74% in the prior year. SG&A expense was $3.3 million or 14.1% of sales in Q3 2022 as compared to $3.1 million or 15.9% of sales in the prior period. The increased expense level is due to increased professional fees, completion of wage subsidy programs and increased credit loss provisions commensurate with sales volumes.
R&D costs for Q3 2022 were $1.4 million or 6.0% of net sales compared to $1.2 million or 6.2% of sales for Q3 2021. R&D efforts include product and process improvements at the circuit segment and efforts to develop and qualify new products for future aerospace programs. The exchange rate at the Q3 2022 close was $1.31 as compared to $1.26 at Q2 2022, which is a weakening of the Canadian dollar in the quarter. FTG's balance sheet includes assets and liabilities denominated in U.S. currency with a net asset balance of approximately $10.3 million. The translation of our U.S. dollar assets and liabilities into Canadian currency at the end of Q3 2022 resulted in foreign exchange gains for the quarter of $0.3 million compared to $0.4 million in the prior year quarter.
Although FTG does maintain an active FX hedging program for the sales and purchases in foreign currency, we currently have an unhedged balance sheet position with $5.6 million of cash within our Canadian and Chinese operations. Earnings EBITDA was $2.8 million for Q3 2022 as compared to $3.1 million in Q3 2021. Excluding government assistance programs in Q3 2021, EBITDA increased by $2.1 million to $2.8 million or 11.9% of sales in Q3 2022 from $0.7 million or 3.3% of sales in Q3 2021. For Q3 2022, FTG recorded earnings before income taxes of $1.3 million as compared to earnings before income taxes for Q3 2021 of $1.5 million. However, the prior year quarter included government assistance of $2.5 million.
The Q3 2022 income tax provision of $0.5 million or 41% of pretax earnings reflects that the corporation's Canadian and Chinese operations were profitable and that deferred tax assets of certain foreign operating losses were not recognized in the quarter. Our net cash position as of Q3 2022 is $10.8 million as compared to net cash of $17.1 million as of Q3 2021. The lower net cash position reflects the acquisition of the Aerospace Chatsworth facility during the quarter for cash consideration of $8.5 million or $6.6 million. Our intention remains that we will complete a sale-leaseback transaction for this facility on suitable terms.
Excluding this transaction, free cash flow in Q3 2022 was $4.6 million as compared to $0.2 million for Q3 2021. We -- the increase in free cash flow over the prior year quarter is due to favorable changes in noncash working capital of $2.7 million, principally customer prepayments and that Q3 2021 included noncash earnings of $1.7 million from the PPP loan forgiveness. As at quarter end, the corporation's primary sources of liquidity totaled $15 million, consisting of cash, accounts receivable, contract assets and inventory. Further, we had $19 million of unused lines of credit. Working capital at Q3 quarter end was $30.8 million as compared to $40.0 million as of the 2021 year-end. The reduction in working capital was primarily due to the use of cash to acquire the aerospace as word facility.
During Q3, we also deployed $800,000 in cash to buy back 41,700 shares at an average price of $1.96. Accounts receivable days outstanding were 67 as of Q3 quarter end compared to 72 as of the 2021 year-end. Inventory turns were 3.7 as of Q3 compared to 3.4 at the 2021 year-end. And accounts payable days were 68 at the Q3 quarter end as compared to 86 at the 2021 year-end. We completed Q3 2022 with a book-to-bill ratio of $1.21 and a backlog of close to $56 million.
Backlog includes $31 million of orders scheduled for Q4 2022 with the caveat that we are encountering constraints in the supply of certain aerospace components and to some degree, labor also. We believe these conditions are prevalent throughout the aerospace and defense industry today. We will continue our focus on cash management in the balance sheet, cost control and operating efficiency. Our complete set of Q3 filings are now available on sedar.com. With that, I will turn things back to Brad.
Thanks, Jamie. Let me delve into some important items regarding our performance across FTG -- for me, I thought our third quarter had further improved operational performance. If you look at Q3 this year versus Q3 last year and exclude the government assistance received in each of the quarters, the revenue this year increased $3.4 million, and the bottom line improved $2.5 million, takes exceptional operational performance to achieve a contribution margin of over 70%. We did have a bit of a benefit from the weakening of the Canadian dollar, but still, the operating performance was really pleasing to see.
And we have a similar improvement on a year-to-date basis, where sales are up $6.8 million, and the bottom line is up $5.4 million, again, excluding government assistance. This too is a 70% contribution margin. We are very pleased -- we were very pleased to announce that we have been approved for $7 million under the Canadian aerospace regional recovery initiative program in the quarter. This program provides assistance to help Canadian aerospace companies recover faster from the pandemic. It is certainly going to enable FTG to play more often. In the quarter, we filed our first claim and received $1.3 million in funding under the progress. In our Aerospace business, our Toronto facility has done a great job in managing through the pandemic, but now the focus is on growth.
They have made some good inroads and increasing activity in the defense market. We saw a big recovery in their simulator business in Q3, at least in terms of new orders, and this should benefit the fourth quarter of 2022 and beyond. We've had a few supply chain challenges such as chip shortages this year. But so far, we have mitigated the impact down to a manageable level. It has, however, delayed shipments and our ability to ramp production as fast as our orders have ramped up. Our Aerospace Chatsworth facility was also impacted by pushouts of suppliers for some military components. But they continue to have a long list of new sales opportunity, almost all coming from the defense market.
They continue to see and win U.S. defense aftermarket opportunities, again, resulting in the DLA being in our top 10 customers for the first time in Q3 this year. Our Aerospace Chatsworth facility operating performance was significantly improved in Q3 this year, and they are profitable for the quarter and for the year-to-date. And of course, there's Aerospace Chatsworth facility itself. In the quarter, we took possession of the building, which we needed to do to protect our operations there. But we are working to find the right sale leaseback opportunity to return to being a tenant and free up cash for other investments. In our Circuit segment, bookings in our Toronto facility have been very robust this year as the commercial aerospace industry recovers.
We are taking actions to ramp production and align with this increased demand. Q3 was impacted by some equipment challenges, but they were still solidly profitable. In July, the collective agreement with represented staff at that facility expired. Negotiations are ongoing. Given the reality of the current levels of inflation in Canada, there will be increased cost in a new agreement. And until a contract is ratified, there's always a possibility of the work stoppage. Circuits Fredricsburg is back on track after a slow start to 2022. Q3 saw a solid performance. Circuits Chatsworth had improved operational performance in Q3 this year with sales up in the quarter and year-to-date.
We continue to invest in the business to further improve performance, including additional capital equipment, process improvements and strengthening the organization. But this site is not yet at the performance levels we expect. Both our China sites are exclusively focused on the commercial aerospace market. As noted from the Boeing market forecast, Asia remains a key market for commercial aerospace activity. Our Aerospace Tianjin facility has seen orders increase consistently since the start of 2021 as the commercial aerospace market recovers and they win new work. Q3 sales were up 130% compared to Q3 last year.
In Q3 this year, a significant portion of the increase was for new cockpit products for the Boeing 737. These orders are showing the results or return on investment from a multiyear effort to have the Tianjin and Toronto sites approved to supply cockpit products and panels to bone. Tianjin is also seeing strong demand from the business jet customers and in general aviation. We have a hiring plan in Tianjin that would see us add 40% to 50% more production staff as fast as possible. At their current capacity, they are sold out through 2022. But of course, our goal is to add capacity so they can continue to grow. On September 29, CAAC in China announced that COMAC had received the type certificate for the C919 aircraft, indicating the design and production process have been -- design of production process have complied with national standards. This is an important milestone for the program after 14 years of development, therefore, represents a transition from a development program to a production program. COMAC has reported more than 800 orders for the aircraft.
At our Searches joint venture in China, we saw new wins and increased demand at that site in Q3 than in the coming quarter. Sales were up almost 120% year-to-date compared to last year. We continue to manage our balance sheet, but also to leverage its strength. Our net cash on the balance sheet is above $10 million at the end of Q3. This is after the acquisition of the facility in Chatsworth, $900,000 in share buyback so far this year and after normal investments in the business and capital and R&D as part of managing our cash, we have initiated actions to repeat create some cash from our China operations. Their strong performance has resulted in surplus cash building in both businesses, and we believe we can deploy that cash elsewhere in the world to achieve better returns. We are seeing a number of acquisition and corporate development opportunities to arise that could fit with either of our businesses.
Given our commitment to playing some offense and our very strong cash position, we are evaluating and pursuing them. Our criteria for any such transaction would remain what we've always said. It would need to meet a number of the following objectives: -- we aligned with our market and product focus, expand our technology, expand our geographic coverage, such as Europe or India or other top 10 Western defense countries, accelerate FTG's penetration of the aftermarket [indiscernible] utilization, be an attractive price to multiple be accretive to earnings. And finally, looking forward into the balance of 2022 and beyond, there are reasons for optimism.
As already noted, the industry is recovering and ramping production. Our sales team has been doing a stellar job and we are seeing and winning new programs and adding new customers. We are playing offense to capture new work. With a focus on operational excellence in all parts of FTG, we are confident we remain on a growth trajectory in the coming quarters. This concludes our presentation. I thank you for your attention. I would now like to open the phones for any questions. Marcella?
[Operator Instructions] Your first question comes from Nick Corcoran from Acu Capital.
It's from Acumen Capital. First question just has to do with the inflationary pressure may be seeing in the business. Have you seen any upward pressure on either input costs or labor? And have you been able to pass on a price?
Yes. Simple answer is yes to both of those, but we are seeing material cost increases in both our businesses. On the circuit side, I'd say it's more just general price increases on the materials. On the aerospace side, we're seeing lead times push out for components. If you want to get them faster, you need to pay premiums and expedites to get them in but both of them definitely are seeing inflationary pressures. Labor, yes, again, yes. And as I talked about, we are in negotiations right now with the representative staff for Circuits Toronto. And there is no doubt that the fact is there's inflation around is going to put pressure on those negotiations.
And then to your question, but can we pass it on Yes, but not 100% across the board. In some cases, we have contracts that have multiyear pricing. And those ones are tougher to address instantaneously, although we're doing what we can. But for sure, as any of these contracts come to their end, we are definitely passing on all of the inflationary costs to those customers. And the good news is, a number of the significant contracts we have are at the end. And so we are right in the midst right now of repricing parts reflecting today's reality.
Great. And then you mentioned there's been an impact from availability of electronic components. Can you quantify what that impact was in the quarter?
Yes. And I'm going to generalize it a little bit. And so it's a combination of a number of things that I'm going to talk about. So definitely, there's some delay components that are impacting revenue. As Jamie said, there's also a little bit of impact from not being able to staff as fast as we need to, to support the ramp in orders. And as of the end of the quarter, our past due orders to customers was on the order of $5 million or $6 million. And I don't think we're ever expect to be perfect, but that's a big number for us. And that is the impact of not being able to get product out the door to meet the customer's dock date.
Great. And then obviously, a strong backlog at quarter end, how much do you expect to get through in the fourth quarter?
Yes. As always, Nick, we don't give official guidance, but we have a huge backlog, as Jamie talked about. And I know we're going to continue to struggle to ramp fast enough to support that. I would be surprised if we could actually bring down our past due orders much in the quarter, if at all.
That's great [indiscernible], Thanks for taking my questions.
Your next question comes from Paul [indiscernible]. He's a private investor.
I've got a couple of questions. Maybe could you talk firstly about the decision to purchase the Chatsworth facility versus extending the lease there?
Yes. Sure. Hey, it was not our first choice, but it was our only choice. And the reason I say that is our lease was coming to a conclusion. And as it did, the landlord decided it was time to sell the building. That -- at the beginning was not a big deal. The problem was it was listed. And truly the first 10 people that went through wanted to buy it and use it for their own purposes, and we would not have a facility. And so we quickly made a decision, we need to buy it to maintain our production facilities. And we just -- we would not have had enough time to find a new facility, build it out, get the government certifications that we need. So we just totally destroyed our Aerospace Chatsworth business. So we bought it. And we bought it to protect our production. But long term, our goal is not to own real estate. We don't own any other real estate at FTG. So having bought it, having dealt with our problem, we are now looking for a sale leaseback opportunity that we could go back to being a tenant.
Perfect. That helps. If I look back the history of FTG, I guess you've done 8 acquisitions that I can see back through 2003. Maybe talk about which of those you view as being the most successful that we might look at as a template. Would we want to think about the Teledyne purchase in 2016 or Colonial Circuits. You gave us a sense of the flavor of how you're thinking about deploying capital, but I think it would be helpful in this market. And then I've got one kind of follow-up.
A couple of comments on that. That's a good question. But when we have done acquisitions in the past, we have always done them for a specific reason. Either we're looking to buy a technology or to buy a revenue stream or to add some capacity. And so it's very situational what we do. And I guess, having said that, if you go back to the last 3, in 2016, we did 2 acquisitions. We bought Teledyne Printed Circuit Technology we bought [indiscernible] -- both of those were to buy a revenue stream, Neither of those businesses was performing well, but we -- our goal was to take that revenue move it to our existing facilities, drive up utilization and make them successful.
Those types of acquisitions are definitely the toughest because in the aerospace and defense market, when you move product between sites, you get into a lot of certification requirements and qualifications and testing and just -- it's a very tough type of acquisition. And the fact we did 2 together in 2016 was in hindsight, not the best idea we've ever had. But we got through that. And we definitely have had the upside of that additional revenue ever since. And so those were definitely tougher to get through, but they definitely helped FTG and moves us to another level. In 2019, we bought Colonial Circuits. We're actually looking to buy capacity. Our timing was not perfect because within 6 months of buying it, there was a pandemic.
But nevertheless, from an integration perspective, that was a much easier acquisition because our goal was buy it, run it as is, where is, no transition of parts or anything to other FTG sites. And so those are much easier to do. And so as we look forward, -- right now, I would say, generally, we're looking more at the easier integration type opportunities. I can't think of anywhere we're looking at them where it would be a buy it, close it, move all the revenue. And that's important because it does definitely reduce the risk of the acquisition and helps them be accretive much faster.
That's great. That helps. Last one for me. Just -- and you might have caught a bit of it earlier on. I noticed that contract liabilities spiked fairly materially this quarter. In fact, I don't think it's spiked like this since the start of '18 and the start of '20, is the deferred revenue that you've taken specific to a particular customer contract? And should we think that it just sort of waterfall the way it has in the past where it sort of burns off over 3 quarters.
Yes. The contract liability, I guess, is the current accountant terminology for advanced payments. So those are specific contractual payments from specific customers that will burn off over the period performance of contract and a 3- to 4-quarter assumption would be fair.
[Operator Instructions] There are no further questions at this time. Please proceed.
A replay of the call will be available until November 13 this year at the numbers and [indiscernible] listed on the press release. The replay will also be available on our website in a few days. I thank you all for your interest and participation. Thank you.
Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you disconnect your lines.