Mr. Mike Pyle reports
EXCHANGE INCOME CORPORATION REPORTS RECORD QUARTERLY REVENUE AND EPS
Exchange Income Corp. has released its financial results for the three and nine months ended Sept. 30, 2019. All amounts are in Canadian currency.
"The third quarter saw us reach new highs on a number of financial metrics, once again demonstrating the importance of our diversified business model," said Mike Pyle, the chief executive officer of Exchange Income. "Record revenue and EBITDA contributed to a new milestone for EIC; our adjusted net earnings were $1.03 per share for the quarter -- the first time in our history that our adjusted net earnings exceeded $1 per share. Net earnings per share increased 17 per cent to 90 cents.
Q3 financial highlights:
- Revenue and EBITDA (defined in the attached table) each reached all-time quarterly highs:
Revenue grew 15 per cent to $355-million.
- EBITDA increased by 12 per cent to $89-million.
- Adjusted net earnings per share increased 10 per cent to $1.03 per share.
- Adjusted net earnings payout ratio improved to 55 per cent from 58 per cent for the quarter; the trailing 12-month payout ratio improved to 72 per cent from 75 per cent.
- Free cash flow less maintenance capital expenditures increased to 49 per cent from 42 per cent for the quarter; the trailing 12-month payout ratio improved to 57 per cent from 62 per cent.
These results were achieved despite a temporary headwind; an airline customer of Regional One filed for bankruptcy, resulting in a bad-debt expense of approximately $6-million.
Exchange Income closed two acquisitions subsequent to the quarter, L.V. Control Mfg. Ltd. and Advanced Window Inc. (AWI), both of which will be part of Exchange Income's manufacturing segment. "These acquisitions align with our long-standing strategy of acquiring profitable companies with niche markets and a strong management team," stated Adam Terwin, chief corporate development officer of Exchange Income. "L.V. Control is a unique opportunity to grow our manufacturing segment and provides exposure to the agricultural sector with a best-in-class operator, and the acquisition of AWI enables Quest to further enhance its offering to its key markets in the northeastern United States, building out sales channels and overall product offering, and provides vertical integration for the Quest plant."
Darryl Bergman, Exchange Income's chief financial officer, commented: "Since the end of the quarter, we have had success in further strengthening our balance sheet to fund our future growth. Firstly, our common shares offering of $70-million was oversubscribed, which enabled the underwriters to exercise their overallotment option, bringing the offering to $80.5-million. We utilized these funds to close the L.V. Control and AWI acquisitions. Also, during the quarter, our lenders approached EIC with a new credit facility which more accurately reflects the performance of EIC. Not only did it increase the size of the facility and reduce rates, but it also relaxed covenants to make the facility more flexible for EIC. The precise details of this facility are available in our MD&A, but the most salient point is that in one month we have successfully tapped both debt and equity markets and have set up the foundation for growth for the foreseeable future.
"One final thought," Mr. Bergman continued, "it has taken EIC 15 years to utilize $700-million of our current facility. The fact that we now have access to an additional $900-million should in no way be viewed as a change in our balance sheet strategy. Our aggregate leverage has stayed remarkably constant for 15 years and we don't intend to change that now. We have earned the confidence of the capital markets with our consistent strategy; that has never been more evident than over the last month."
SELECTED FINANCIAL HIGHLIGHTS
(in thousands of dollars, except percentages and per-share data)
Q3 2019 Q3 2018 YTD 2019 YTD 2018
Revenue $355,164 $308,179 $978,087 $887,655
EBITDA (1) $89,002 $79,174 $240,065 $208,258
Net earnings $28,990 $24,162 $58,353 $52,323
Per share (basic) $0.90 $ 0.77 $1.83 $1.66
Adjusted net earnings (2) $33,073 $29,550 $72,370 $67,690
Per share (basic) $1.03 $ 0.94 $2.27 $2.15
Trailing 12-month adjusted net earnings payout ratio (basic) 72% 75%
Free cash flow (3) $67,166 $64,219 $177,141 $163,600
Per share (basic) $2.08 $2.04 $5.55 $5.19
Free cash flow less maintenance capital expenditures (4) $36,885 $41,103 $89,140 $80,624
Per share (basic) $1.14 $1.31 $2.79 $2.56
Trailing 12-month free cash flow less maintenance
Capital expenditures payout ratio (basic) 57% 62%
Dividends declared $18,145 $17,215 $52,978 $51,305
(1) EBITDA is defined as earnings before interest, income taxes, depreciation, amortization, other non-cash
items, such as gains or losses recognized on the fair value of contingent consideration items, asset
impairment and restructuring costs, and any unusual non-operating one-time items, such as acquisition costs.
EBITDA is not a defined performance measure under international financial reporting standards (IFRS), but it
is used by management to assess the performance of the corporation and its segments.
(2) Adjusted net earnings is defined as net earnings adjusted for acquisition costs, amortization of
intangible assets that are purchased at the time of acquisition, interest accretion on acquisition contingent
consideration and non-recurring items. Adjusted net earnings is a performance measure, along with free cash
flow less maintenance capital expenditures, which the corporation uses to assess cash flow available for
distribution to shareholders.
(3) Free cash flow is a performance measure used by management and investors to analyze the cash generated
from operations before the seasonal impact of changes in working capital items or other unusual items. Free
cash flow for the period is equal to cash flow from operating activities as defined by IFRS, adjusted for
changes in non-cash working capital, acquisition costs, principal payments on right of use assets and any
unusual non-operating one-time items.
(4) Maintenance capital expenditures is not an IFRS 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 include principal payments made on
Review of Q3 financial results
Consolidated revenue for the quarter was a record $355.2-million, representing an increase of $47.0-million or 15 per cent over the comparative period. A significant increase of $39.9-million in the aerospace and aviation segment accounted for most of the growth, while the remaining $7.1-million was generated by the manufacturing segment.
The aerospace and aviation segment had revenue of $266.5-million, an increase of 18 per cent compared with the third quarter of last year. Revenue from Legacy Airlines and Provincial was up $15.9-million or 10 per cent for the quarter. Regional One's revenue increased by $24.0-million, or 37 per cent, while sales and service revenue increased by 54 per cent, as a result of higher than average volume of whole aircraft and engine sales. The manufacturing segment revenue increased by $7.1-million to $88.7-million as a result of production from Quest's U.S. plant.
Consolidated EBITDA increased 12 per cent over the prior year to $89.0-million, also hitting an all-time quarterly high. EBITDA growth of 29 per cent for the Legacy Airlines and Provincial contributed to overall growth. This increase can be attributed to a variety of factors, including an increase in revenue due to the deployment of the Force Multiplier on several missions, increased service support revenue, higher passenger volumes in Newfoundland and Labrador and Quebec, increased passenger and medevac volumes in the Kivalliq region and increased passenger revenue in Manitoba. A bad debt expense of approximately $6.0-million reduced consolidated EBITDA for Regional One for the quarter. This one-time writedown was the result of a significant airline customer of Regional One filing for bankruptcy. Excluding this write-off, EBITDA would have reached $95-million.
The manufacturing segment's EBITDA fell 11 per cent due to decreased EBITDA contribution from Quest, associated with initial costs for the commencement of commercial production at the new U.S. plant as production ramps up. The remainder of the segment continued to benefit from operational efficiencies and strong demand.
Setting a new mark for the third quarter, adjusted net earnings increased by 12 per cent to reach $33.1-million. Adjusted net earnings per share increased 10 per cent to $1.03 per share in comparison with 94 cents per share in the third quarter of 2018. Net earnings and net earnings per share increased by 20 per cent and 17 per cent, respectively, also a quarterly record for the corporation.
Free cash flow generated in the third quarter was $67.2-million, an increase of $2.9-million or 5 per cent compared with the same period last year. Excluding the $6.0-million one-time write-off due to customer bankruptcy, free cash flow increased by 13 per cent. Free cash flow less maintenance capital expenditures decreased by 10 per cent to $36.9-million as a result of higher maintenance capital expenditures in the quarter. The higher maintenance capital expenditures were related to normal quarter to quarter variability and now the growth in the maintenance capital expenditures for the nine months is in line with the growth of operations, consistent with Exchange Income's prior guidance. On a per-share basis, free cash flow less maintenance expenditures decreased by 13 per cent to $1.14, which in turn increased the quarterly dividend payout ratio to 49 per cent from 42 per cent for the third quarter.
Exchange Income's complete interim financial statements and management's discussion and analysis for the three- and nine-month periods ended Sept. 30, 2019, can be found on the company's website and on SEDAR.
"We remain on track to meet our guidance for the year, including our expectations for EBITDA to grow between 10 and 15 per cent, and adjusted net earnings per share to increase between 8 and 12 per cent," added Mr. Pyle. "With the Force Multiplier signing on more missions for the remainder of 2019 and into 2020, the new Quest production facility continuing to ramp up, and the new contract with the Canadian government for surveillance on the East and West coasts, we are bullish on 2020 and expect our growth next year to meet or exceed that achieved this year. We have a great group of companies with strong growth prospects, and that group just got larger with the addition of L.V. Control and AWI. I look forward to providing you a more detailed outlook for 2020 when we report our 2019 fourth quarter results in February."
Conference call notice
Management will hold a conference call to discuss its 2019 third quarter financial results on Friday, Nov. 8, 2019, at 8:30 a.m. ET. To join the conference call, dial 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 Nov. 15, 2019, at midnight. To access the archived conference call, please dial 1-855-859-2056 and enter the encore code 8566297.
A live audio webcast of the conference call will be available on the company's website. 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 90 days.
About Exchange Income Corp.
Exchange Income is a diversified acquisition-oriented company, focused in two sectors: aerospace and aviation services and equipment, and manufacturing. The corporation uses a disciplined acquisition strategy to identify already profitable, well-established companies that have strong management teams, generate steady cash flow, operate in niche markets and have opportunities for organic growth.
We seek Safe Harbor.
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