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Press release from CNW Group

Exchange Income Corporation Reports Financial Results for Third Quarter 2010

Wednesday, November 10, 2010

Exchange Income Corporation Reports Financial Results for Third Quarter 201017:00 EST Wednesday, November 10, 2010- Generates record revenue of $63.6 million; invests $15.3 million in growth initiatives -WINNIPEG, Nov. 10 /CNW/ - Exchange Income Corporation (TSX: EIF) (the "Corporation" or "Exchange"), a diversified, acquisition-oriented company focused on the transportation and industrial manufacturing sectors, reported its financial results for the three- and nine-months periods ended September 30, 2010. All amounts are in Canadian currency."Our third quarter results, while strong, reflect the significant level of investment that we made to support a number of growth initiatives, particularly for our Aviation segment," said Mike Pyle, President and CEO of Exchange Income Corporation. "These investments, which included the purchase of aircraft, building of infrastructure and the hiring of staff, will enable us to service our new contracts signed with the Government of Nunavut and Hydro One. Combined with our acquisition of Bearskin Airlines and the return of modest revenue growth in our Manufacturing segment, we believe that our recent progress takes our business model to a new level and effectively positions us well for long-term growth and increased dividend distributions over time."Q3 2010 HighlightsConsolidated revenue was $63.6 million, up 6%.Invested $15.3 million in growth capital expenditures, relating primarily to the acquisition of Aviation segment equipment and infrastructure to service new contracts.Net earnings were $3.6 million, down 7% from $3.9 million.EBITDA was $8.8 million, down from $11.1 million.Total senior debt to equity ratio was 0.15, down 42% from 0.26 at September 30, 2009.Keewatin Air, a subsidiary of the Corporation's Aviation segment, was awarded a five-year contract by the Nunavut Government to perform exclusive medevac services into the Baffin Island region. The contract value is anticipated to be $50 million over five years. Keewatin anticipates that service will begin late in December of this year.Calm Air, a subsidiary of the Corporation's Aviation segment, was awarded a three-year contract by Hydro One for the hauling of diesel and bio-diesel into northern Ontario.Signed a letter of intent to acquire Bearskin Airlines, a privately-owned commuter airline providing passenger service in Ontario and Manitoba, for $32.5 million. The acquisition is expected to close in late Q4 of 2010.Selected Third Quarter Financial HighlightsAll amounts in thousands except % and share dataQ3 2010Q3 2009ChangeRevenue$63,588$60,175+6%EBITDA1$8,786$11,128-21%Net Earnings$3,606$3,869-7%Earnings per Share (fully diluted)2$0.26$0.36-$0.10Dividends/Distributions declared per share$0.39$0.39$0"Our Q3 results were marked by record revenue and the second consecutive quarter of performance improvement by our Manufacturing segment," said Adam Terwin, Chief Financial Officer of Exchange Income Corporation. "However, our EBITDA margins suffered as a result of growth initiatives within our Aviation segment, specifically the preparation for the Baffin Island region medevac contract and the costs to bring the new ATR 72 aircraft type online, which will be initially used to service the recently awarded Hydro One contract. The costs of these initiatives, such as hiring and training staff and establishing a brand new base in Iqaluit, without the added benefit of the revenue from the new medevac contract or the added efficiencies of the new aircraft type have temporarily reduced margins in Q3. These increased expenses, along with the current low senior debt leverage on our balance sheet due to the exercise of warrants and the convertible debenture offering completed earlier in 2010, have placed short-term pressures on our per share performance results. Over the long term, we expect our per share results to improve as recent investments pave the way for revenue and EBITDA growth and we execute on our acquisition strategy which will bring our leverage back to a historically normal level."Selected Year-to-date Financial Results All amounts in thousands except % and share dataFY2010FY2009ChangeRevenue$177,063$153,223+16%EBITDA$24,304$23,692+3%Net Earnings$9,622$9,286+4%Earnings per Share (fully diluted)$0.76$1.08-$0.32Dividends/Distributions declared per share$1.17$1.17$0Review of Financial Results Consolidated revenue for Q3 2010 was $63.6 million, up 6% from $60.2 million for the corresponding period of 2009. The revenue growth was due to the strong performance of the Corporation's Aviation segment, which historically experiences its highest sales during the third quarter as there are no permanent roads into many of the communities serviced. The growth was also due to stronger performance of the Manufacturing segment as a result of improving economic conditions. On a year-to-date basis, revenue for FY2010 was $177.1 million, up 16% from $153.2 million for FY2009.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 Q3 2010 revenue of $49.4 million, up 6% or $2.7 million on a comparative basis. The Aviation segment also generated 78% of the consolidated revenue total for Q3 2010. This compares to $46.7 million, or 78% of the consolidated total, for the corresponding period of 2009. The increased aviation revenue over the prior year was driven by increased cargo and charter opportunities as the Aviation segment continues to expand the reach of its services.The Manufacturing segment generated Q3 2010 revenue of $14.2 million, up 6% or $0.8 million from $13.5 million for Q3 2009. On a sequential basis, revenue for the Manufacturing segment grew 10% from $12.9 million for Q2 2010.The growth was primarily due to the strong performance of Overlanders Manufacturing, the Corporation's manufacturer of precision sheet metal and tubular products.Consolidated EBITDA for Q3 2010 was $8.8 million, down 21% from $11.1 million for the corresponding period of 2009. This decline was caused by a decline in the EBITDA generated by the Aviation segment, and an increase in the cost of the corporate operations, offset by an increase in the EBITDA generated by the Manufacturing segment. The decline in the Aviation segment was the result of higher costs incurred because of several growth initiatives which were underway but have not been completed. Specifically, the ATR 72 aircraft was not licensed and operated until late September and as a result work quoted for this aircraft had to be completed on less efficient aircraft not as well suited for this work. Additionally, Keewatin was implementing two new aircraft types and ramping up the size of its human resource and fixed asset infrastructure for the Baffin Island region medevac contract which will not generate revenue until very late in the fourth quarter. On a year-to-date basis, consolidated EBITDA for FY2010 was $24.3 million, up 3% from $23.7 million for FY2009.Net earnings for Q3 2010 were $3.6 million, or $0.26 per share fully diluted. In the corresponding period of 2009, the Corporation reported net earnings of $3.9 million, or $0.36 per share fully diluted. The decline in net earnings wasn't as significant as the decline in EBITDA as a result of the Corporation experiencing $2.7 million of one-time conversion costs in Q3 2009. The decline of net earnings on a per share basis was a result of our de-leveraged balance sheet. The two most recent convertible debenture offerings completed for a total of $60 million, combined with the shares issued for the acquisition relating to the conversion back to a corporation and the warrants issued have combined to put significant pressure on both our basic and fully diluted per share results. On a nine-month basis, net earnings for FY2010 were $9.6 million or $0.76 per share fully diluted. These compare to $9.3 million and $1.08, respectively, for FY2009.In Q3 2010, the Corporation generated surplus distributable cash, and free cash flows over dividends declared, however net earnings from operations fell short of dividends declared by $1.4 million. The net earnings shortfall is attributable to the higher number of shares outstanding and corresponding increase in dividends paid compared to the prior year. As the Corporation moves forward and available funds are deployed, the balance sheet will return to normal leverage levels and additional net earnings will be generated. Until then Corporation plans on maintaining its current level of dividends.At September 30, 2010, the Corporation had working capital of $22.2 million, including cash and cash equivalents of $6.2 million. This compares to $5.5 million and $4.9 million, respectively, at December 31, 2009. The working capital position at December 31, 2009 was artificially low as $9.7 million of debentures that the Company had called were classified as a current liability. As well working capital is higher at the end of the third quarter due to the seasonality of the Aviation segment.Selected Third Quarter Key Performance IndicatorsAll amounts in thousands except % and share dataQ3 2010Q3 2009ChangeFree Cash Flows3$7,538$9,966-24%Distributable Cash4$6,655$8,986-26%Distributable Cash per Share (basic)$0.50$0.90-$0.40Dividends/Distributions Declared$5,270$3,925+34%Total Dividends /Distributions Declared (basic) as a Percentage of Distributable Cash79%44% 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 flows, distributable cash, distributable cash per share and dividends / distributions declared to shareholders, to evaluate its progress and assess its ability to sustain its dividend policy. Although some of these metrics are not commonly utilized to measure the performance of public companies, they were historically used by the Corporation when it operated as an income trust, and are being used to provide a consistent basis for comparison.Free cash flows for Q3 2010 totaled $7.5 million, down 24% from $10 million for Q3 2009. Distributable cash for Q3 2010 was $6.7 million, down 26% from $9 million generated in Q3 2009, as a result of lower EBITDA. Distributable cash on a per share basis for Q3 2010 was $0.50 basic and $0.42 fully diluted. For the corresponding period of 2009, distributable cash on per share basis was $0.90 basic and $0.77 fully diluted, respectively.The Corporation expects that some of the performance indicators used when it operated as an income trust, such as distributable cash or distributable cash per share, may change as it continues its evolution as a publicly-traded corporation.Outlook"We are bullish on our prospects given the significant progress we have made recently," added Mr. Pyle.  "Before the end of the fourth quarter, we expect to complete the acquisition of Bearskin Airlines, which will allow us to expand our operations in Ontario. Just as significant, we expect to finalize the preparatory work needed to enable us to begin delivering on our new service contracts with the Government of Nunavut and Hydro One. We believe this blend of accretive acquisition and organic growth will drive improved financial results in the coming periods. Over a longer horizon, we expect continued gradual recovery for our Manufacturing segment, and remain committed to adding a new segment to our operations. Combined, these focused efforts will result in further diversification of our revenue, EBITDA and cash flows, underscoring our commitment to increasing dividend distributions."Exchange complete financial statements and management's discussion and analysis for the three months ended September 30, 2010 can be found at or at Call NoticeThe Corporation will hold a conference call to discuss its 2010 third quarter financial results on November 11, at 9:30 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 call by dialing 1-888-231-8191. Please dial in 15 minutes prior to the call to secure a line. The conference call will be archived for replay until Thursday, November 18, 2010 at midnight. To access the archived conference call, please dial 1-800-642-1687 or 416-849-0833 and enter the reservation code 16262369.A live audio webcast of the conference call will be available at and 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.Caution concerning forward-looking statementsThe statements contained in this news 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 Exchange Income 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, the risk of shareholder liability, 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 Exchange Income Corporation with the securities regulatory authorities, available at 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 Perimeter Aviation LP, Keewatin Air LP and Calm Air International LP, and the specialty manufacturing segment consists of Jasper Tank Ltd., Overlanders Manufacturing LP, Water Blast Manufacturing LP, and Stainless Fabrication, Inc. For more information on Exchange Income Corporation, please visit EBITDA is defined as earnings before interest, income taxes, depreciation, amortization, other non-cash expenses and any unusual non-operating one-time items. 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 The Corporation had 13,860,786 shares outstanding at September 30, 2010 compared to 10,261,775 at September 30, 2009.3 Free cash flows is a financial metric used by Management to assess the Corporation's performance and assess its ability to sustain its dividend policy. Free cash flows 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.4 Distributable cash is a performance measure used by Management to summarize the funds available for the payment of dividends to shareholders. Distributable cash is defined as EBITDA less cash interest, cash taxes and capital expenditures required to maintain the operations at their current level. It is not a recognized measure under Canadian GAAP.For further information: Mike Pyle President and CEO Exchange Income Corporation (204) 982-1850 mpyle@eig.caJoe Racanelli Investor Relations The Equicom Group Inc. (416) 815-0700 or 1-800-385-5451 ext. 243