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Exchange Income Corporation (EIC), a diversified, acquisition-oriented company focused on opportunities in the aviation, aerospace and manufacturing sectors, reported its financial results for the three and 12 month periods ended Dec. 31, 2017. All amounts are in Canadian currency.
CEO Commentary
“The fourth quarter of 2017 marked the third consecutive quarter, and the 11th in the past 12, that quarterly results have increased over the prior year,” said EIC CEO Mike Pyle.
“This continuing improvement has driven EIC to new annual records for many of our major metrics, including EBITDA, net earnings and adjusted net earnings, both in total dollars and on a per share basis. We made the decision to concentrate our maintenance capital investments in our airlines and incur some additional operating costs in the first half of the year and we were able to capitalize on opportunities that presented themselves in the latter half of the year because we had the necessary capacity to meet our customers’ requirements.”
Carmele Peter, EIC’s president, said: “The fourth quarter was an exceptionally busy and exciting one for EIC. In addition to seeing improvements in operations across the board, we executed on a number of strategic initiatives. In November, we expanded our footprint in the Manufacturing segment when we acquired Quest Window Systems Inc. During that month, PAL Aerospace also unveiled its “Force Multiplier” aircraft at the Dubai Air Show, generating immediate and substantial interest. In December, we closed a bought deal offering of convertible unsecured subordinated debentures that was originally $70 million but, due to investor demand, was increased to $100 million. We are heading into 2018 with tremendous momentum.”
“We are extremely proud of the results that the Corporation generated in 2017 and we are excited by the outlook for 2018. We have a number of new initiatives planned for 2018 that we truly believe will generate both immediate and long term benefits for EIC,” said Pyle.
“On the heels of the acquisition of Quest, we are going to expand its capacity by investing in a new U.S. manufacturing facility. This plant, located nearer the markets with the highest growth potential, will provide Quest with double its capacity and enable it to grow beyond its current backlog.”
“Earlier today we announced that EIC entered into an agreement to acquire Moncton Flight College, the largest flight college in Canada. With a purchase price of up to $55 million, this acquisition will be immediately accretive. More importantly, it provides EIC with a unique opportunity to help address the worldwide pilot shortage. I believe that this strategic acquisition will support our future growth and operational requirements of our airline and aerospace portfolio.”
“These initiatives, combined with the improvement in our operations and lower taxes arising from decreasing U.S. tax rates and increased global expansion will generate significant returns for the Corporation. As a result, EIC will be increasing its annual dividend from $2.10 to $2.19 per share, an increase of $0.0075 per month,” Pyle announced.
“This marks the 13th time the Corporation has raised its dividend since its inception, and the annual dividend is now more than double the Corporation’s original dividend rate of $1.08. Sustainable, increasing dividends are a hallmark of EIC and even with this increase to the monthly dividend to $0.1825 per share, we fully anticipate that the annual payout ratio will decline in 2018.”
2017 financial and operating highlights
- Consolidated revenue was $1 billion, up 14 per cent;
- Consolidated EBITDA increased 17 per cent to $248.7 million;
- Net Earnings were $72.2 million, up 17 per cent from $61.5 million;
- Net Earnings per basic share were $2.33, up seven per cent, which takes into account a 10 per cent increase in the weighted average number of shares;
- Adjusted Net Earnings were $79.7 million, up 10 per cent from $72.2 million;
- Adjusted Net Earnings per basic share were $2.58, up one per cent;
- Adjusted Net Earnings payout ratio increased to 81 per cent from 78 per cent;
- Free Cash Flow was $191.1 million, up 16 per cent;
- Free Cash Flow less Maintenance Capital Expenditures was $91.9 million, essentially unchanged from $91.6 million last year;
- Free Cash Flow less Maintenance Capital Expenditures payout ratio increased to 71 per cent from 61 per cent.
EBITDA, Net Earnings, Net Earnings per Share, Adjusted Net Earnings, Adjusted Net Earnings per basic share and Free Cash Flow set new all time annual records
- Closed a bought deal equity offering with net proceeds of $93 million from the issuance of 2,303,450 shares at $42.45 per share;
- Expanded the Corporation’s syndicated credit facility by $200 million to $750 million;
- Keewatin was awarded a five year medevac contract in the Kitikmeot region of Nunavut;
- PAL Airlines expanded its Labrador indigenous partnership to include both the Innu and Inuit under the Air Borealis brand
- Regional One took delivery of the final CRJ 900 aircraft from the previously announced re-marketing agreement with Bombardier;
- Acquired Quest Window Systems Inc., a leading manufacturer of an advanced window wall system used primarily in high-rise multi-family residential projects in Canada and the United States, for up to $100 million;
- Closed a $100 million bought deal offering of five-year, 5.25 per cent Unsecured Subordinated Debentures convertible at $51.50 per share due Dec. 31, 2022.
Highlights Subsequent to Year End
- EIC funded the previously announced redemption of its seven-year, 5.50 per cent convertible debentures due Sept. 30, 2019, redeeming outstanding debentures in the principal amount of $56.8 million;
- EIC entered into an agreement with Wasaya Group and its shareholders whereby EIC will acquire an ownership interest in Wasaya Group. EIC expects to invest $25 million in Wasaya through a combination of debt and equity;
- Announced an agreement to acquire Moncton Flight College, the largest flight training college in Canada, which offers domestic Canadian pilot training as well as a foreign pilot program, for up to $55 million;
- Increased annual dividend by 4.3 per cent to $2.19 per share from $2.10 per share.
Review of FY2017 Financial Results
Consolidated revenue for FY2017 was $1,013 million, up $121.9 million or 14 per cent from 2016.
Consolidated EBITDA for FY2017 was $248.7 million, up $36.1 million or 17 per cent from 2016.
Organic growth in the Aerospace & Aviation segment is the primary driver for these increases.
Revenue in the Manufacturing segment also grew organically and as a result of the Q4 acquisition of Quest.
For U.S. based subsidiaries, the strengthening of the Canadian dollar compared to the prior period impacted the Canadian converted value U.S. denominated revenues.
Had the average exchange rates from 2016 persisted into 2017, revenues would have been approximately $6.5 million higher.
Within the Aerospace & Aviation segment, revenue increased by $105.2 million or 15 per cent to $808.6 million in 2017. EBITDA also increased by $43.7 million or 21 per cent to $247.9 million.
Previous investments in inventory and growth capital investments were the drivers behind a 52 per cent increase in revenue at Regional One.
Increased volumes in the Kivalliq region, targeted growth in Northwestern Ontario, higher activity levels for fixed wing and rotary aircraft related to fire suppression, evacuation and related services and increased volumes in Provincial’s airline operations as a result of its partnership in Air Borealis also drove the increase in revenue.
These increases were somewhat offset by lower revenue in Provincial’s aerospace modifications programs as one program was completed in 2016 and some projects have shifted into future periods.
The increase in revenue is responsible for generating the bulk of the increase in EBITDA. Previous investments in the northern cargo operations led to operational efficiencies and positively impacted margins as well.
Improved yields at Provincial, largely as a result of the investment in Air Borealis, have also led to an improvement in EBITDA.
The Manufacturing segment generated revenue of $204.4 million in FY2017, up $16.7 million or 9% from FY2016.
EBITDA was down slightly in FY2017 compared to FY2016, decreasing by $0.7 million or three per cent to $23.1 million.
The addition of Quest midway through the fourth quarter of FY2017 increased both revenue and EBITDA and all entities within the segment with the exception of WesTower experienced growth in both revenue and EBITDA.
WesTower continues to be negatively impacted by reduced capital spending by cellular carriers in WesTower’s traditional services as they prepare for the next generation of technology.
WesTower has implemented a number of measures to increase revenue, reduce costs and generate efficiencies, which has mitigated the declines in its revenue and EBITDA.
On a consolidated basis, EIC generated Net Earnings of $72.2 million, or $2.33 per share (basic) for FY2017.
These compare to $61.5 million, or $2.18 per share (basic), for FY2016.
The growth was driven by the factors already discussed and by a gain of $3.9 million (after tax) on the disposal of the Corporation’s partnership interest in Innu Mikun.
These increases were partially offset by increased depreciation, interest and acquisition costs.
In addition, income tax expense decreased by $2.4 million and the effective tax rate decreased to 24.3 per cent from 29.3 per cent in FY2017 compared to FY2016 as a result of the revaluation of the Corporation’s deferred tax liabilities from the passing of decreasing tax rates in the U.S. prior to Dec. 31, 2017 and a shift in the proportion of earnings being generated in lower tax rate jurisdictions.
Net Earnings per share improved by seven per cent or $0.15 over FY2016, even with a 10 per cent year-over-year increase in the weighted average number of shares.
Adjusted Net Earnings for the period were $79.7 million, or $2.58 per share (basic) compared to $72.2 million or $2.56 per share (basic) for the comparative period.
The growth was driven by the factors impacting Net Earnings, excluding the impact of the gain from disposal of the partnership interest in Innu Mikun and the increase in acquisition costs.
Adjusted Net Earnings per share improved by one per cent or $0.02 despite a 10 per cent increase in the weighted average number of shares.
Review of Key Performance Measures for FY2017
Free Cash Flow for FY2017 totalled $191.1 million, up 16 per cent from $164.2 million in FY2016. Free Cash Flow on a per share basis in FY2017 was $6.17 (basic), up six per cent from $5.83 in FY2016 even with a 10 per cent increase in the weighted average number of shares.
Maintenance Capital Expenditures were $99.2 million, up 37 per cent from $72.6 million in FY2016.
The increase is due to higher maintenance capital expenditures at Regional One as a result of an increase in depreciation tied to its larger lease portfolio of aircraft and higher maintenance capital expenditures within the Legacy Airlines and Provincial due to the higher number of large aircraft overhauls in FY2017 compared to FY2016.
Free Cash Flow less Maintenance Capital Expenditures in FY2017 was $91.9 million which is up from $91.6 million in FY2016.
On a per share (basic) basis, Free Cash Flow less Maintenance Capital Expenditures was $2.97 per share in FY2017, down from $3.25 per share in FY2016.
The basic per share payout ratio based on Free Cash Flow less Maintenance Capital Expenditures increased to 71 per cent for FY2017 from 61 per cent in FY2016.
The increase is a direct result of the higher Maintenance Capital Expenditures during the year. The Adjusted Net Earnings payout ratio was relatively stable, increasing to 81 per cent in FY2017 from 78 per cent in FY2016 as it is not impacted by the timing of the Maintenance Capital Expenditures.
