Exchange Income Corporation Reports Financial Results for First Quarter 2013

WINNIPEG, May 14, 2013 /CNW/ – Exchange Income Corporation (TSX: EIF) (“Corporation” or “Exchange”), a diversified, acquisition-oriented company focused on the transportation and industrial manufacturing sectors, reported its financial results for the three-month period ended March 31, 2013. All amounts are in Canadian currency.

“We grew revenue by 50% to $220 million and increased EBITDA by 25% to $17.6 million despite the negative impact that seasonality factors had on the performance of our Aviation and Manufacturing segments alike,” said Mike Pyle, President and CEO of Exchange Income Corporation. “Our strong Q1 results provide further evidence of the effectiveness and success of our diversification model. With the accretive growth contributions from our Regional One acquisition expected to begin in Q2, we are well positioned to sustain our momentum throughout 2013 even if economic conditions remain volatile.”

Q1 2013 Highlights

Consolidated revenue increased 50% to $219.6 million.
EBITDA increased 25% to $17.6 million.
Adjusted net income was $2.7 million (69% increase) or $0.13 per share (44% increase).
Free cash flow increased 20% to $13.4 million.
Raised $65 million through a debenture financing aimed at strengthening the Corporation’s balance sheet and supporting its acquisition.
Announced the acquisition of Regional One Inc., a privately-owned US company that is a leading provider of aircraft and engine aftermarket parts to regional airline operators around the world. Subsequent to the end of the quarter, the total purchase price was confirmed at US $74.2 million subject to an earn-out that could result in additional payments of up to US $9.3 million. This is the Corporation’s largest acquisition to date.
Q1 2013 Results

Selected Financial Highlights

All amounts in thousands except % and share data Q1 2013 Q1 2012 % Change
Revenue $219,572 $146,683 +50%
EBITDA1 $17,593 $14,061 +25%
Net Earnings $1,586 $910 +74%
Adjusted Net Earnings2 $2,655 $1,567 +69%
Earnings per Share3 $0.08 $0.05 +60%
Adjusted Earnings per Share $0.13 $0.09 +44%
Dividends declared $8,717 $7,553 +15%

Consolidated revenue for Q1 2013 was $219.6 million, up 50% from $146.7 million for Q1 2012. The revenue increase was chiefly due to the organic growth of the manufacturing segment, and driven largely by the contributions of WesTower Communications, a manufacturer and servicer of cell phone towers, which generated revenue of $135.1 million.

Exchange generates revenue from its Aviation and Manufacturing segments, each of which is comprised of subsidiaries operating in niche markets and generating defensible cash flow. On a segmented basis, the Aviation segment generated revenue in Q1 2013 of $62.8 million. This compares to $65.8 million for Q1 2012. The Aviation segment’s year-over-year revenue decline of $3.0 million was due to a number of contributing factors. These included adverse weather conditions that impacted flight schedules, increased competitive pressures faced by Bearskin in eastern Canada markets, and as previously discussed, the loss of a charter service customer by Calm Air at the end of Q1 2012. The decline in the mining sector has negatively impacted the volume of charter services for both fixed and rotary wing aircraft, and also scheduled service volumes for Calm Air.

The Manufacturing segment generated revenue in Q1 2013 of $156.8 million, up 94% from $80.9 million for Q1 2012. The growth was largely due to the contributions of WesTower, which generated revenue of $135.1 million.

Consolidated EBITDA for Q1 2013 was $17.6 million, up 25% from $14.1 million generated in Q1 2012. The growth was principally due to the contributions of WesTower, which continued the build-out of its turf contract with AT&T Wireless Mobility.

On a segmented basis, Exchange’s Aviation segment generated EBITDA of $7.1 million, down 17% from $8.6 million for Q1 2012. EBITDA margins for the Aviation segment in Q1, which traditionally is the Corporation’s weakest due to seasonality factors, were impacted by a number of developments. The largest impact on the lower EBITDA in the first quarter were the revenue drivers discussed above. Cost reductions helped to offset some of these revenue decreases, however the cost reductions did not fully offset the revenue decreases. Calm Air’s fleet rationalization plan has started to contribute to lower expenses and the Corporation expects to realize further benefits of the fleet rationalization plan as the year progresses. EBITDA margin for the Aviation segment in Q1 2013 was 11.3%, down from 13.0% for Q1 2012.

Consistent with results of previous years, the Corporation expects that EBITDA for its Aviation segment will improve throughout 2013 as seasonality factors affecting Q1 performance subside. The completion of the fleet restructuring initiative for Calm Air, anticipated to be finalized in the third quarter of 2013, is also expected to result in improved EBITDA.

The Manufacturing segment generated EBITDA of $12.6 million for Q1 2013, up 77% from $7.1 million for Q1 2012. The growth was primarily attributable to WesTower, which generated EBITDA of $8.7 million, as a result of the on-going delivery of its service contract with AT&T Wireless Mobility. Included in WesTower’s EBITDA are consulting charges of $1.3 million. Exchange has directed considerable internal and external resources to manage the growth at WesTower and to position it for further opportunities. This consulting focus is expected to continue for the remainder of the year. Exchange’s other manufacturing subsidiaries contributed EBITDA of $3.9 million, which represented a decline of $0.5 million over Q1 2012. The decline was due to weaker market conditions for Stainless and Alberta operations. EBITDA margin for the Manufacturing segment in Q1 2013 was 8.0%, down from 8.8% for the same period in 2012. The decline in EBITDA margins was the result of product mix as the lower margin WesTower business contributed a higher proportion of revenue in 2013.

Exchange reported net earnings for Q1 2013 of $1.6 million or $0.08 per share basic. In Q1 2012, the Corporation reported net earnings of $0.9 million or $0.05 per share basic. Consistent with the discussion above, the increase in net earnings of $0.7 million, or 74%, was driven by the higher contributions from WesTower.

Net earnings per share in Q1 2013 were impacted by an increase of 13% in the average number of shares outstanding on a year over year basis. The growth was due to an increase in the conversion of debentures by investors and issuance of shares to support acquisition and financing activities.

Excluding net intangible amortization and acquisition costs totaling $1.1 million expensed as a result of IFRS, Exchange had adjusted net income of $2.7 million or $0.13 per share. These compare to $1.6 million and $0.09 per share, respectively, for the corresponding period of 2012.

As at March 31, 2013, the Corporation had a net cash position of $2.8 million and net working capital of $162.8 million, which represents a current ratio of 1.92 to 1. These compare to a net cash position of $4.2 million and net working capital of $156.6 million, or a current ratio of 1.90 to 1, at December 31, 2012.

Selected Key Performance Indicators

All amounts in thousands except % and share data Q1 2013 Q1 2012 % Change
Free Cash Flow4 $13,412 $11,167 +20%
Free Cash Flow per share $0.65 $0.61 +7%
Total Maintenance Capex $7,955 $7,301 +9%
Free Cash Flow less Maintenance Capex $5,457 $3,866 +41%
Free Cash Flow less Maintenance Capex per share $0.26 $0.21 +24%
Dividends/Distributions Declared $8,717 $7,553 +15%
Free Cash Flow less Maintenance Capex Payout Ratio 162% 193%

Given its operations and commitment to stable dividend payments to shareholders, Exchange currently uses a number of key performance indicators, most notably Free Cash Flow, to evaluate its progress and assess its ability to sustain its dividend policy. With the adoption of IFRS, Exchange is no longer utilizing Distributable Cash, a metric used as a performance indicator from the time when the Corporation operated as an income trust. Exchange will use Free Cash Flow and Free Cash Flow less Maintenance Capex as performance indicators. Under IFRS, the calculation of Distributable Cash and Free Cash Flow less Maintenance Capex are very similar and presenting both would be a duplication of the same metric. Free Cash Flow less Maintenance Capex has been chosen over the Distributable Cash because this metric can tie directly into Exchange’s consolidated financial statements.

Free Cash Flow for Q1 2013 totaled $13.4 million, up 20% for Q1 2012. Free Cash Flow on a per share basis in Q1 2013 was $0.65. This compares to $0.61 per basic share for Q1 2012. The growth in Free Cash Flow was principally due to the contributions of WesTower. Free Cash Flow gains were offset by a decrease within pre-existing Aviation segment companies due primarily to seasonality and competitive factors already cited.

Free Cash Flow less Maintenance Capex was $5.5 million, or $0.26 per share, for Q1 2013. This compares to $3.9 million, or $0.21 per share, for Q1 2012. Maintenance Capex grew by 9% over the prior year primarily in the aviation segment on aircraft maintenance events and rotable components.

Outlook
“We are very encouraged by our recent acquisition of Regional One, which is our largest to date,” said Mr. Pyle. “Not only does it allow us to further diversify our revenue streams and cash flow through its sale of aircraft parts and equipment to regional carriers around the world, Regional One will also help to offset the rising costs of a major expense category of our Aviation segment. These two factors, combined with operational efficiencies and the fleet restructuring we are implementing, should result in improved performance of our Aviation segment in the periods ahead.”

Mr. Pyle added, “We are also very optimistic about our growth prospects over the longer term. The introduction of new technology and capabilities within the wireless industry show no signs of slowing down, providing strong organic growth opportunities for WesTower. Equally important, we have more than $229 million of available capital to deploy for targeted acquisitions that will help drive accretive growth.”

The Corporation’s complete financial statements and management’s discussion and analysis for the three months ended March 31, 2013 will be made available at www.exchangeincomecorp.ca or at www.sedar.com after the Corporation’s Annual General Meeting, which is scheduled for 10:30 AM CST at the Calm Air Hangar facility, located at 50 Morberg Way, Winnipeg.