Exchange Income Corporation Reports Financial Results for Q2 2013

WINNIPEG, Aug. 13, 2013 /CNW/ – Exchange Income Corporation (TSX: EIF) (the “Corporation”), a diversified, acquisition-oriented company focused on the transportation and industrial manufacturing sectors, reported its financial results for the three- and six-month periods ended June 30, 2013. All amounts are in Canadian currency unless noted.

“Q2 was a busy and challenging period for EIC. While revenues reached an all-time high of $276 million, and we closed the acquisition of Regional One, our profitability fell short of last year’s performance. This decline was principally the result of reduced margins at WesTower as we grow the company and make strategic investments in it to manage its dramatic growth. The challenges at WesTower have been somewhat offset by improvements at Calm Air, as a result of the significant investments made in fleet renewal and ground infrastructure in recent periods. Results at Keewatin have also strengthened.” said Mike Pyle, President and CEO of Exchange Income Corporation. “These positive impacts are exemplified by 51% revenue growth for our Manufacturing segment, the immediate and positive contributions that Regional One has made since being acquired, a 19% organic growth in EBITDA for our Aviation segment, and a strong consolidated free cash flow performance to sustain our dividend distributions.”

Mr. Pyle added, “Our profitability was negatively impacted by low margins at WesTower throughout the second quarter of 2013 due to challenges managing the significant growth. Management has taken decisive steps to address these challenges, including the use of short-term external advisors and implementation of structural efficiencies. While these expenses have had and will continue to have a near-term impact on our results, we believe the strategic investments that we are making will strengthen WesTower – and the Corporation – for the long term.”

Q2 2013 Highlights

Consolidated revenue was $275.7 million, up 37%
Consolidated EBITDA was $25.0 million, up 2%
Aviation segment EBITDA increased 36%
Incurred $2.0 million of short-term external advisory costs related to managing the growth of WesTower and introducing business efficiencies to its operations
Adjusted net income was $6.6 million, down 18%
Completed the acquisition of Regional One Inc., a provider of aircraft and engine aftermarket parts to regional carriers from around the world

Review of Financial Results
Consolidated revenue for Q2 2013 was $275.7 million, up 37% from $201.6 million for the corresponding period of 2012. The revenue increase was driven largely by the contributions of WesTower Communications and the addition of Regional One Inc. to the Company’s list of operating subsidiaries effective April 12, 2013. Regional One, a provider of aircraft and engine aftermarket parts to regional airline operators around the world, contributed revenue of $8.8 million in Q2 2013. On a year-to-date basis, Exchange’s consolidated revenue for FY2013 was $495.3 million, up 42% from $348.3 million for FY2012.

Exchange generates revenue from its Aviation and Manufacturing segments, each of which is comprised of subsidiaries operating in niche markets and generating defensible cash flows.

On a segmented basis, the Aviation segment generated revenue in Q2 2013 of $81.0 million, up 12% from $72.4 million for the corresponding period of last year. The growth was due to the acquisition of Regional One Inc., while the demand for the Aviation segment’s existing services was consistent with the prior year period. This was the result of increased demand for medevac and charter services in select markets in northern Manitoba and Nunavut off-set by a number of contributing factors. As disclosed previously, these factors included increased competitive pressures faced by Bearskin Airlines in certain markets in eastern Canada and a decline in demand for charter services for Custom Helicopters and Calm Air due to uncertainty in the mining sector. In Q2 2013, the Aviation segment generated 29.4% of Exchange’s consolidated revenue. This compares to 35.9% of the consolidated revenue for Q2 2012.

Exchange’s Manufacturing segment generated revenue in Q2 2013 of $194.7 million, up 51% from $129.2 million for Q2 2012. The growth was principally due to WesTower Communications, which increased its revenue by 63.5% to $172.5 million. WesTower’s growth was due to the ongoing expansion of its turf contract with AT&T Mobility as well as to continued demand for its products and services by wireless communications companies across North America.

Excluding the contributions of WesTower, revenue for the Corporation’s Manufacturing segment was down 6.3% to $22.2 million. In Q2 2012, the non-WesTower Manufacturing segment’s revenue was higher due to several large field projects won by Corporation’s Stainless subsidiary.

In Q2 2013, the Manufacturing segment generated 70.6% of Exchange’s consolidated revenue. This compares to 64.1% of the consolidated revenue for Q2 2012.

Consolidated EBITDA for Q2 2013 was $25.0 million, up 2% from $24.5 million for Q2 2012. The year-over-year gain was largely due to the improved performance of the Aviation segment as a result of the acquisition of Regional One and the ongoing implementation of fleet renewal programs announced previously. The gains of the Aviation segment were largely offset by lower results from WesTower, as their profitability was impacted by lower margins in the quarter. WesTower also incurred $2.0 million of short-term external advisory costs in the quarter. Excluding these costs, EBITDA would be $27.0 million, an increase of 10% over Q2 2012. On a year-to-date basis, EBITDA for FY2013 was $42.6 million, up 10% from 38.5 million for FY2012. Included in the 2013 year to date results is $3.3 million of short-term external advisory costs.

On a segmented basis, Exchange’s Aviation segment generated EBITDA of $19.3 million in Q2 2013, up 36% from $14.2 million for the same period of last year. The growth was due to a number of factors, including the addition of Regional One, which contributed $3.6 million in EBITDA. Excluding the contributions of Regional One, pre-existing Aviation segment companies grew EBITDA by 19% to $14.5 million. The organic growth of the Aviation segment was due to the ongoing implementation of fleet renewal and ground infrastructure plan announced previously. The consolidated EBITDA growth of the Aviation segment was partially offset by the performance of Custom Helicopters, which experienced an EBITDA decline as a result of weaker demand for its charter services largely as a result of increased volatility in the mining sector. The Aviation segment’s consolidated EBITDA margin for Q2 2013 was 23.8% up from 19.6% for Q2 2012.

The Manufacturing segment generated EBITDA of $7.4 million for Q2 2013, down 43% from $13.0 million for Q2 2012. WesTower contributed $4.6 million of this decline. WesTower’s performance declined as a result of lower margins and $2.0 million of short-term external advisory costs. As previously announced, the Corporation has implemented initiatives to enable WesTower to better manage the considerable growth it is experiencing as well as position it for future opportunities. The short-term external advisory costs associated with the initiatives are expected to be in effect through 2013. Margins at WesTower were impacted by measures taken to meet the customer’s growth plans, which led to higher training and labour costs in the quarter. Excluding WesTower’s contributions, the Manufacturing segment generated EBITDA of $4.1 million, down from $5.1 million. The decrease was due to a decline in results from Stainless compared to Q2 2012 which was a very strong quarter driven by large field projects which can yield lumpy results when making quarterly comparisons.

Exchange reported net earnings for Q2 2013 of $5.7 million, or $0.27 per basic share. In the corresponding period of 2012, the Corporation reported net earnings of $7.8 million or $0.38 per basic share. Consistent with the discussion above, the decline was largely due to margin pressures at WesTower, as well as $2.0 million in short-term external advisory costs in the quarter.

Excluding acquisition costs of $0.8 million, intangible asset amortization of $0.5 million and the fair value gain on the contingent share liability consideration for Regional One of $0.4 million recorded as a result of IFRS, the Corporation had adjusted net earnings of $6.6 million or $0.31 per basic share.

On a year-to-date basis, net earnings for FY2013 were $7.3 million, down 16% from $8.7 million for FY2012. Excluding acquisition costs of $1.7 million, intangible asset amortization of $0.6 million and the fair value gain on the contingent share liability consideration for Regional One of $0.4 million recorded as a result of IFRS, the Corporation had adjusted net earnings for FY2013 of $9.2 million, down from $9.6 million for FY2012.

At June 30, 2013, the Corporation had working capital of $210.8 million, including cash and cash equivalents of $8.4 million, which represents a current ratio of 1.95 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 Second Quarter Key Performance Indicators
Given its operations and commitment to stable dividend payments to shareholders, the Corporation 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 Q2 2013 totaled $19.6 million, down 6% from $20.8 million for Q2 2012. Free Cash Flow on a basic per share basis in Q2 2013 was $0.92 per share basic, down from $1.02 from Q2 2012. The decrease in Free Cash Flow was largely due to the performance of the Manufacturing segment. The decreases were partially offset by contributions of Regional One and improved performance by pre-existing Aviation segment subsidiaries. Included in Free Cash Flow are short-term external advisory costs of $2.0 million. If these costs are excluded, Free Cash Flow would increase by an after tax amount of $1.2 million, yielding Free Cash Flow of $20.9 million or $0.97 per share basic.

Free Cash Flow less Maintenance Capex was $11.1 million or $0.52 per basic share in Q2 2013. This compares to $12.5 million, or $0.61 per basic share, for Q2 2012. Included in Free Cash Flow less Maintenance Capex are short-term external advisory costs of $2.0 million. If these costs are excluded, Free Cash Flow less Maintenance Capex would increase by an after tax amount of $1.2 million, yielding Free Cash Flow less Maintenance Capex of $12.3 million or $0.57 per share basic.

Outlook
“We are committed to improving the performance of both of our segments,” said Mr. Pyle. “The strategic activities we are implementing will continue to result in higher expenses and a drag on results through 2013. Over the long-term, however, we believe that these efforts and strategic investments will lead to stronger operations, improved financial performance and organic growth.”

Mr. Pyle added, “We remain active on the acquisition front as well. With more than $200 million in available capital, we continue to seek out opportunities where we can deploy our acquisition strategy and drive accretive growth opportunities.”

The Corporation’s complete financial statements and management’s discussion and analysis for the three and six months ended June 30, 2013 can be found at www.exchangeincomecorp.ca or at www.sedar.com.