Exchange Income Corporation Reports Financial Results for Q2 2013

- Revenue grows 37% to $276 million; EBITDA up 2% to $25 million -

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

Selected Second Quarter Financial Highlights

All amounts in thousands except % and share data	Q2 2013	Q2 2012	Change
Revenue	$275,680	$201,636	+37%
EBITDA^1	$24,968	$24,463	+2%
Net Earnings	$5,732	$7,759	-26%
Adjusted Net Earnings^2	$6,579	$8,062	-18%
Earnings per Share^3	$0.27	$0.38	-29%
Adjusted Earnings per Share	$0.31	$0.39	-21%
Dividends declared	$9,012	$8,258	+9%

Selected Year-to-date Financial Results

All amounts in thousands except % and share data	FY2013	FY2012	Change
Revenue	$495,252	$348,319	+42%
EBITDA	$42,561	$38,524	+10%
Net Earnings	$7,318	$8,669	-16%
Adjusted Net Earnings^4	$9,234	$9,629	-4%
Earnings per Share (fully diluted)	$0.35	$0.44	-20%
Adjusted Net Earnings per Share (fully diluted)	$0.44	$0.49	-10%
Dividends declared	$17,729	$15,811	+12%

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

All amounts in thousands except % and share data	Q2 2013	Q2 2012	Change
Free Cash Flow^5	$19,636	$20,821	-6%
Free Cash Flow per basic share	$0.92	$1.02	-10%
Total Maintenance Capex^6	$8,575	$8,313	+3%
Free Cash Flow less Total Maintenance Capex^7	$11,061	$12,508	-12%
Free Cash Flow less Maintenance Capex per share	$0.52	$0.61	-15%
Dividends Declared	$9,012	$8,258	+9%
Free Cash Flow less Maintenance Capex Payout Ratio	81%	66%

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.

Conference Call Notice
The Corporation will hold a conference call to discuss its 2013 second quarter financial results on August 14, at 10:00 a.m. ET. Mike Pyle, President and CEO, and Adam Terwin, Chief Financial Officer, will co-chair the call.

All interested parties can join the conference call by dialing 1-888-231-8191 or 647-427-7450. Please dial in 15 minutes prior to the call to secure a line. The conference call will be archived for replay until Wednesday, August 22, 2013 at midnight. To access the archived conference call, please dial 1-855-859-2056 or 416-849-0833 and enter the reservation code 23766004.

A live audio webcast of the Q2 conference call will be available at www.exchangeincomecorp.ca  and www.newswire.ca. Please connect at least 15 minutes prior to the conference call to ensure adequate time for any software download that may be required to join the webcast. An archived replay of the webcast will be available for 365 days.

About Exchange Income Corporation
Exchange Income Corporation is a diversified acquisition-oriented company, focused on opportunities in the industrial products and transportation sectors which are ideally suited for public markets except for their size. The strategy of the Corporation is to invest in profitable, well-established companies with strong cash flows operating in niche markets in Canada and/or the United States.

The Corporation is currently operating in two niche business segments: aviation and specialty manufacturing. The aviation segment consists of the operations by Perimeter Aviation, Keewatin Air, Calm Air International, Bearskin Lake Air Service, Custom Helicopters and Regional One, and the specialty manufacturing segment consists of the operations by Jasper Tank, Overlanders Manufacturing, Water Blast Manufacturing, Stainless Fabrication and WesTower Communications. For more information on the Corporation, please visit www.exchangeincomecorp.ca.

Additional information relating to the Corporation, including all public filings, is available on SEDAR (www.sedar.com).

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^1	EBITDA is defined as earnings before interest, income taxes, depreciation, amortization, other non-cash expenses, such as unrealized foreign exchange gains or losses and asset impairment, and any unusual non-operating one-time items, such as acquisition costs.  EBITDA is not a defined performance measure under Canadian generally accepted accounting principles (GAAP). It is used by Management to assess the performance of the Corporation and its operating segments.
^2	Q2 2013 adjusted net earnings excludes pre-tax acquisition costs of $838,000 (Q2 2012 - $14,000), pre-tax intangible amortization of $574,000 (Q2 2012 - $396,000), and a pre-tax fair value gain on the contingent share liability consideration for Regional One of $562,000 (Q2 2012 - $nil).
^3	Exchange had 21.5 million common shares outstanding at June 30, 2013, up from 20.4 million at June 30, 2012. The growth is due to an increase in the conversion of debentures, shares issued under the dividend reinvestment plan, and the issuance of shares in support of acquisition activities.
^4	Year to date adjusted net earnings excludes pre-tax acquisition costs of $1.7 million ($390,000 - FY2012), pre-tax intangible amortization of $901,000 ($781,000 - FY2012), and a pre-tax fair value gain on the contingent share liability consideration for Regional One of $562,000 million ($nil - FY2012).
^5	Free Cash Flow is a financial metric used by Management to assess the Corporation's performance and assess its ability to sustain its dividend policy. Free cash Flow for the period is equal to the cash flow from operating activities as defined by Canadian GAAP, adjusted for changes in non-cash working capital and any unusual non-operating one-time items. It is not a recognized measure under Canadian GAAP.
^6	Maintenance Capex is not a GAAP measure. Capital expenditures are characterized as either maintenance or growth capital expenditures. Maintenance capital expenditures are those required to maintain the operations of the Company at its current level and includes principal payments made on finance leases.
^7	Free Cash Flow less Maintenance Capex is not a GAAP measure. It approximates the metric Distributable Cash that the Corporation reported prior to the adoption of IFRS.

 

 

SOURCE: Exchange Income Corporation

Mike Pyle
President and CEO
Exchange Income Corporation
[phone]
[email protected]

Joe Racanelli
Investor Relations
TMX Equicom
[phone] Ext. 243
[email protected]