Exchange Income Corporation Reports Financial Results for Q3 2013

WINNIPEG, Nov. 11, 2013 /CNW/ - Exchange Income Corporation (TSX:  EIF) ("Exchange" or the "Corporation"), a diversified, acquisition-oriented company focused on the transportation and industrial manufacturing sectors, reported its financial results for the three and nine month periods ended September 30, 2013. All amounts are stated in thousands of Canadian dollars, except per share data, unless otherwise stated.

"We are disappointed with our third quarter results, which although consistent with our EBITDA guidance, were below our expectations," said Mike Pyle, President and CEO of Exchange Income Corporation. "Our Q3 performance largely reflects the challenges that WesTower US is facing due to its continued massive growth in the United States. To keep pace with growing market demand and existing customer commitments, we experienced higher costs and inefficiencies that eroded margins and profitability. We are focused on developing the right organizational structure and management tools to support WesTower's growth and expect margins to improve in the periods ahead."

Mr. Pyle added, "Despite these short-term pressures, we remain confident in our business model and our prospects over the long-term. Given our strong balance sheet and dependable cash flows, we are also confident in our ability to sustain monthly dividends."

Q3 2013 Highlights

  • Consolidated revenue was $267.3 million, up 21%
  • Manufacturing segment generated revenue of $184.5 million, up 25%
  • WesTower's US operations incurred an $11 million expense in the third quarter as a result of the net effect of changes to estimates for revenue and costs associated with its projects and this was entirely recorded in Q3 2013
  • Consistent with guidance provided in our press on October 7, 2013, consolidated EBITDA was $15.6 million
  • Invested $19.0 million in growth capital expenditures aimed at positioning the Corporation for future growth opportunities

Subsequent to quarter end

  • Mike Jarvis, who has overseen WesTower since it was acquired by Exchange, as well as for many years as a private company, has announced his retirement. The Corporation thanks him for his dedication to WesTower and his vision and leadership in bringing the company to this new level.
  • Steven Pickett will be joining WesTower as its new CEO. Mr. Pickett has a proven track record as a CEO in the telecommunications field. Mr. Pickett comes to WesTower with over 27 years of experience in the telecommunications industry. For a number of those years he has held a multitude of senior executive roles for Alcatel-Lucent. Most recently he has held the position of CEO for a network equipment solutions company which also provides network services globally. We look forward to his leadership of WesTower as we look to improve our current profitability and diversify our customer base.

Selected Third Quarter Financial Highlights

All amounts in thousands except % and share data Q3 2013 Q3 2012 Change
Revenue $267,327 $220,807 +21%
EBITDA1 $15,612 $30,332 - 49%
Net Earnings (Loss) ($205) $9,972 -102%
Adjusted Net Earnings2 $132 $11,610 -99%
Earnings per Share3 (basic) ($0.01) $0.49 -102%
Adjusted Earnings per Share (basic) $0.01 $0.57 -98%
Dividends declared $9,068 $8,351 +9%

"We invested $19.0 million in growth capital expenditures in Q3," said Adam Terwin, Chief Financial Officer of the Corporation. "The investments are designed to position the company for long-term growth opportunities. The bulk of the Q3 growth capital expenditures, or $9.2 million, was allocated to support Regional One's expansion. We are excited by the future prospects of this unique business, especially Regional One's ability to further grow the business with the access to capital that Exchange provides to them."

Selected Year-to-date Financial Results

All amounts in thousands except % and share data FY2013 FY2012 Change
Revenue $762,579 $569,126 +34%
EBITDA $58,173 $68,856 -16%
Net Earnings $7,113 $18,641 -62%
Adjusted Net Earnings4 $9,366 $21,240 -56%
Earnings per Share (basic) $0.33 $0.94 -65%
Adjusted Net Earnings per Share (basic) $0.44 $1.07 -59%
Dividends declared 26,797 $24,162 +11%

Review of Financial Results
Consolidated revenue for Q3 2013 was $267.3 million, up 21% from $220.8 million for the corresponding period in 2012. The revenue increase was driven largely by the organic growth of WesTower and the addition of Regional One to the Corporation's list of operating subsidiaries, effective April 2013. On a year-to-date basis, consolidated revenue for FY2013 was $762.6 million, up 34% from $569.1 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 Q3 2013 of $82.8 million, up 13% from $73.5 million for the corresponding period of last year. The growth was due to the acquisition of Regional One and increased demand for the Corporation's medevac and cargo services in select markets in northern Manitoba and Nunavut. The growth was off-set, however, by a number of contributing factors, including increased competitive pressures faced by Bearskin Airlines in certain markets in eastern Canada as well as a decline in demand for charter services due to unfavorable market conditions in the mining sector and lower fire evacuation work. In Q3 2013, the Aviation segment generated 31% of Exchange's consolidated revenue. This compares to 33% of the consolidated revenue for Q3 2012.

Exchange's Manufacturing segment generated revenue in Q3 2013 of $184.5 million, up 25% from $147.3 million for Q3 2012. The growth was primarily attributable to the contributions of WesTower, which increased its revenue by 31% to $163.1 million, largely due to the ongoing expansion of its turf contract in the United States with AT&T as well as to continued demand for its products and services by wireless communications companies across North America. Excluding the contributions of WesTower, Exchange's Manufacturing segment saw its revenue decline by $1.9 million or 8% when compared to Q3 2012. The year-over-year decline was due to the performance of Stainless, which won an exceptional contract in 2012 and resulted in a short-term revenue spike for the Manufacturing segment. In Q3 2013, the Manufacturing segment generated 69% of Exchange's consolidated total. This compares to 67% of the consolidated total for Q3 2012.

Consistent with guidance provided in our press on October 7, 2013, consolidated EBITDA for Q3 2013 was $15.6 million, down 49% from $30.3 million for Q3 2012. The year-over-year decline was largely due to higher operating costs and inefficiencies experienced by WesTower US. Most notably, WesTower incurred an $11 million expense as a result of the net effect of changes made to initial estimates for revenue and costs associated with its projects and this was entirely recorded in Q3 2013. WesTower US also incurred $1.6 million of external advisory costs in the quarter. The use of external advisors at WesTower ended effective October 31, 2013.

On a year-to-date basis, EBITDA for FY2013 was $58.2 million, down 16% from $68.9 million for FY2012. Included in the 2013 year to date results is $4.9 million of external advisory costs.

On a segmented basis, Exchange's Aviation segment generated EBITDA of $18.8 million in Q3 2013, up 9% from $17.3 million for the same period of last year. The increase was largely due to the addition of Regional One. The Aviation segment's EBITDA also grew as a result of the ongoing implementation of fleet renewal programs announced previously. This growth was offset, however, by a number of factors, including softer customer demand in some markets due to competitive pressures and unfavorable economic conditions, particularly in the mining sector. The Aviation segment's EBITDA margin for Q3 2013 was 22.7%, down from 23.5% for Q3 2012.

The Manufacturing segment generated negative EBITDA of $1.1 million for Q3 2013. This compares to positive EBITDA of $15.3 million for the same period of 2012. Excluding WesTower, the Manufacturing segment generated positive EBITDA of $3.6 million, down from $3.9 million in the corresponding period of 2012 when Stainless enjoyed a large one-time contract win.

WesTower generated negative EBITDA of $4.7 million in Q3 2013. This compares to positive EBITDA of $11.4 million for Q3 2012. The decline is due to a number of factors, including lower margins and external advisory costs of $1.6 million.

WesTower's EBITDA decline was driven by the performance of its US operations, including an expense of $11 million relating to changes in accounting estimates for its projects and this was entirely recorded in Q3 2013. WesTower's earnings are determined using the percentage of completion method, which is applied on a cumulative basis in each accounting period to the current estimates of contract revenue and contract costs. Consistent with IFRS, the effect of a net change in the preliminary estimate of a contract's revenue or contract's costs, or the effect of a net change in the estimate of the outcome of a contract, is accounted for as a change in accounting estimate during the reporting period.

Exchange reported a net loss of $0.2 million, or a loss of $0.01 per basic share, for Q3 2013. In the corresponding period of 2012, Exchange reported net earnings of $10.0 million or $0.49 per basic share. The year-over-year decline in net income was due to expenses described previously. The Corporation also incurred interest charges of $5.8 million in Q3, up 69% from 2012, due to an increase in the number of outstanding convertible debentures as a result of financing activities.

Excluding intangible asset amortization of $0.6 million and the fair value gain on the contingent share liability consideration for Regional One of $0.3 million recorded as a result of IFRS, the Corporation had adjusted net earnings of $0.1 million or $0.01 per basic share

On a year-to-date basis, net earnings for FY2013 were $7.1 million, down 62% from $18.6 million for FY2012. Excluding acquisition costs of $1.7 million, intangible asset amortization of $1.5 million and the fair value gain on the contingent share liability consideration for Regional One of $0.8 million recorded as a result of IFRS, the Corporation had adjusted net earnings for FY2013 of $9.4 million, down from $21.2 million for FY2012.

At September 30, 2013, the Corporation had working capital of $226.5 million, including cash and cash equivalents of $15.9 million, which represent a current ratio of 2.0 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 1.9 to 1, at December 31, 2012.

Selected Third Quarter Key Performance Indicators

All amounts in thousands except % and share data Q3 2013 Q3 2012 Change
Free Cash Flow5 $15,434 $24,059 -36%
Free Cash Flow per basic share $0.71 $1.17 -39%
Total Maintenance Capex6 $10,072 $7,860 +28%
Free Cash Flow less Maintenance Capex7 $5,362 $16,199 -67%
Free Cash Flow less Maintenance Capex per share $0.25 $0.79 -68%
Dividends Declared $9,068 $8,351 +9%
Free Cash Flow less Maintenance Capex Payout Ratio 168% 51%  

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 Q3 2013 totaled $15.4 million, down 36% from $24.1 million for Q3 2012. Free Cash Flow on a basic per share basis in Q3 2013 was $0.71 per share, down from $1.17 per share from Q3 2012. The decline in Free Cash Flow was primarily due to the pressures faced by WesTower US and partially offset by the positive contributions of Regional One. Free Cash Flow less Maintenance Capex was $5.4 million, or $0.25 per basic share, in Q3 2013. This compares to $16.2 million, or $0.79 per basic share, for Q3 2012.

Given its working capital, expected margin recovery at WesTower US and the resulting increased cash flows, the Corporation is not contemplating a change to its monthly distribution policy.

Outlook

"It is not the first time that one of our subsidiaries has faced a challenge," said Mr. Pyle. "In 2006, the aviation segment dealt with a new competitor that significantly reduced demand for our services while the manufacturing segment dealt with the severe economic downturn starting in 2009.  In both cases we focused on improving results and the affected segment returned to historical profitability.  In the interim, our diversified base of cash flows enabled us to maintain our dividends.  The current situation is similar but with one big difference, it is caused by significant demand and growth opportunities.  We are focused on returning margins to acceptable levels over the next series of quarters and when complete, the short-term problems we are experiencing will be well worth the benefit of transforming WesTower into a major player in the U.S. Telecom market. We are excited about the future and look forward to growing the other companies in our organization both organically and through opportunistic acquisitions. Over time, we intend to restore a balance to our diversified model so that the results of a single entity do not have as dramatic an effect on the overall performance of the Corporation as we have experienced this quarter."

The Corporation's complete financial statements and management's discussion and analysis for the three and nine months ended September 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 third quarter financial results on November 12, at 8:30 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 Tuesday, November 19, 2013 at midnight. To access the archived conference call, please dial 1-855-859-2056 and enter the encore code 88267988.

A live audio webcast of the Q3 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).

Forward-Looking Information:

The statements contained in today's press release that are forward-looking are based on current expectations and are subject to a number of uncertainties and risks, and actual results may differ materially. These uncertainties and risks include, but are not limited to, the dependence of the Corporation on the operations and assets currently owned by it, the degree to which its subsidiaries are leveraged, the fact that cash distributions are not guaranteed and will fluctuate with the Corporation's financial performance, dilution, restrictions on potential future growth, competitive pressures (including price competition), changes in market activity, the cyclicality of the industries, seasonality of the businesses, poor weather conditions, and foreign currency fluctuations, legal proceedings, commodity prices and raw material exposure, dependence on key personnel, and environmental, health and safety and other regulatory requirements. Further information about these and other risks and uncertainties can be found in the disclosure documents filed by the Corporation with the securities regulatory authorities, available on SEDAR.

___________________________

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 Q3 2013 adjusted net earnings excludes pre-tax acquisition costs of $1 (Q3 2012 - $2), pre-tax intangible amortization of $618 (Q3 2012 - $391), and a pre-tax fair value gain on the contingent share liability consideration for Regional One of $272 (Q3 2012 - $nil).
3 Exchange had 21.6 million common shares outstanding at September 30, 2013, up from 20.4 million common shares at September 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 $1,669 ($392 - FY2012), pre-tax intangible amortization of $1,519 ($1,172 - FY2012), and a pre-tax fair value gain on the contingent share liability consideration for Regional One of $834 ($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 Corporation 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

For further information:

Mike Pyle
President & CEO 
Exchange Income Corporation 
Phone: (204) 982-1850 
mpyle@eig.ca 

Joe Racanelli
Investor Relations
TMX Equicom
Phone: (416) 815-0700 Ext. 243
jracanelli@tmxequicom.com


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