Capitalize For Kids: Second Place Winner - Short Exchange Income Corporation

Second Place Winner
Short Exchange Income Corporation

By Mike Yerashotis, Veritas Investment Research Corp.
Intelligent Investing Challenge
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2014 CAPITALIZE FOR KIDS INTELLIGENT INVESTING CHALLENGE

JULY 9, 2014 MIKE YERASHOTIS

myerashotis@veritascorp.com1
EXCHANGE INCOME CORPORATION: RUNNING ON FUMES

Exchange Income Corporation (EIF or the Company) has registered cumulative cash flow from
operations of $32 million since the beginning of 2011. Over this same time period, it has also paid $105
million in dividends, made $200 million in capital expenditures and purchased $165 million worth of
businesses. To fund its cash deficit, EIF has significantly increased its senior credit facility and tapped the
public debt markets five times. Today, the Company has a net debt-to-TTM EBITDA of 5.3x and too many
under-performing businesses.

Top of the list of under-performing businesses is WesTower Communications (WesTower), which has seen
its EBITDA fall from $34 million in F12 to under $3 million in the most recent TTM period. With WesTower
leading the way, the street is expecting a major turnaround in the Companys profitability and cash flow
that we think is unlikely to materialize. We rate EIF a Sell, with an $8.50 intrinsic value per share. Our
conclusion is based on the following:

WesTowers biggest customer is AT&T, representing 63% of the companys F13 revenue. There is
strong evidence indicating near-term negative revisions to AT&Ts wireless infrastructure spending
plans, and based on recent disclosures of WesTowers closest competitor, we estimate a 20%
reduction in WesTowers revenue;

Management is guiding to a substantial improvement in WesTowers EBITDA margin that we
believe is unlikely to materialize given a decline in AT&T revenue. Additionally, we believe
accounting-based estimates may have overstated WesTowers underlying profitability and a
material portion of the companys work-in-progress may prove to be unrecoverable;

Dragged down by a number of under-performing legacy airlines, in our view, EIFs remaining
portfolio of businesses will not pick up the slack of a failed WesTower turnaround;

EIFs aviation businesses are highly capital-intensive. Despite little-to-no organic growth,
management designates only about half of the Companys capital expenditures as
maintenance spend. In our view, EIFs reported maintenance capex understates EIFs annual
sustaining capital re-investment requirements by at least $8 million per year;

Management claims to employ a disciplined acquisition strategy, but we believe that the
Companys acquisition-focused business model is faltering and we are not confident that
additional acquisitions can fix EIFs cash flow problems; and

We wouldnt be surprised to see management raise EIFs dividend in the very near term, but
believe the dividend will be at risk once public debt becomes too costly or unavailable, which
may also occur in the near future.

We have not discussed the contents of this report with management of EIF. We first contacted investor
relations on J une 23, 2014. At the request of investor relations, we provided dates and times that we were
available to hold a call with management. Since then, we have followed-up with investor relations and
management on several occasions. We have not yet been provided with an opportunity to hold a call with
management; however, we intend to follow-up with management regarding the contents of this research
report.

[Unless noted, all amounts cited herein are denominated in Canadian dollars]



VALUATION SUMMARY

Our base case intrinsic value is $8.50 per share. Our valuation reflects a failed turnaround in WesTowers
profitability, a moderate decline in EIFs legacy aviation businesses, and higher sustaining capital
expenditures than management reports as maintenance capex.

We believe that on a best case basis, EIFs shares could be worth $24.00, about $2.00 above the current
market price. As a worst case, the Companys cash flow cant carry its current (substantial) debt load,
resulting in a nil value. All of our valuation scenarios are DCF-based and utilize a 9% WACC.

This report addresses the key variables in our valuation and is structured as follows:

1. Background and Understanding the Bull Case (page 2 and Appendix A)

2. WesTower Is the Key (page 4) Why we believe WesTower is the make-or-break for EIF

3. WesTower Likely to Falter (page 6) Why we believe a WesTower turnaround is unlikely

4. Can the Rest Pick Up the Slack? (page 13) Why we believe EIFs remaining businesses cannot
pick up the slack of a failed WesTower turnaround

5. Understated Maintenance Capex (page 16) Why we believe EIFs reported maintenance capex is
understated

6. Valuation (page 18)

7. Intangibles and Catalysts (page 18) Possible catalysts and unquantifiables, including dividend
sustainability and further acquisitions

8. Conclusion (page 20)

BACKGROUND AND UNDERSTANDING THE BULL CASE

In its most recent Annual Information Form (AIF), management describes EIF as a diversified, acquisition-
oriented corporation focused on opportunities in the manufacturing and aviation sectors. The business plan
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 Companys stated objectives are to provide
Shareholders with stable and growing dividends; to maximize Common Share value through on-going
active monitoring of its Operating Subsidiaries; and to continue to acquire additional companies or
businesses or interests therein to expand and diversify the Corporations investments.

The Company has the following three operating segments:

1. Aviation The legacy portion of this segment provides scheduled airline, charter and emergency
medical services to communities located in Manitoba, Ontario, Nunavut and Alberta (legacy
Aviation). In Q2-F13, EIF acquired Regional One, which supplies regional airline operators with
after-market aircraft, engines and parts under sale or lease arrangements.

2. Manufacturing Provides a variety of metal manufacturing goods and metal-related services.

3. Infrastructure Consists only of WesTower, which is a manufacturer, installer and maintenance
service provider of communication towers and sites in Canada and the U.S. WesTowers (and EIFs)
largest customer is AT&T.



Appendix A summarizes the Companys historical financial results on a segmented basis.

One stand-out from EIFs recent results is the significant decline in profitability of its WesTower subsidiary,
which has seen its EBITDA fall from $34 million in F12 to under $3 million in TTM Q1-F14, despite a 52% increase
in revenue over this period. We believe another clear theme from EIFs results is a lack of cash flow to
support the Companys dividend and capital investment requirements.

The Companys historical lack of cash flow is key to understanding the bull case for EIF because the bull
case is premised on a significant turnaround in cash flow. In this regard, Figure 1 summarizes the funding of
EIFs cash flow deficit since the beginning of F11, which we define as cash flow from operating activities
(CFO) less cash flow from investing activities (CFI) and dividends (the Cash Flow Deficit).

Figure 1
Funding EIFs Cash Flow Deficit, the Beginning of F11 to the End of Q1-F14
(Amounts in thousands of CAD; rounded)

Q1-F14 F13 F12 F11 F10
31-Mar-14 31-Dec-13 31-Dec-12 31-Dec-11 31-Dec-10

Cash Flow Deficit (CFO less CFI and dividends) (19,000) (189,000) (143,000) (69,000)

Cumulative Cash Flow Deficit (420,000)

Senior debt outstanding, net of cash on hand 184,000 197,000 66,000 38,000 52,000
Subordinated debt outstanding 255,000 220,000 161,000 115,000 51,000
Net debt 439,000 417,000 227,000 153,000 103,000

Increase in net debt over period 22,000 190,000 74,000 50,000

Cumulative increase in net debt 336,000

Sources: EIF financial statements and other disclosures, and Veritas estimates

Figure 1 shows a significant increase in net debt of $336 million, which roughly mirrors the Companys
cumulative Cash Flow Deficit of $420 million from the beginning of F11 to Q1-F14. The remaining funding
shortfall of $84 million is on account of equity issuances and some minor reconciling items.

From a sustainability perspective, funding investments and dividend payments primarily through debt
certainly cannot continue forever. Even managements own calculation of the Companys dividend
payout ratio on Free Cash Flows less maintenance capital expenditures of 133% in F13 alludes to a
dividend that may not be sustainable. We therefore believe it is relevant for investors to ask, will the
Company be self-sustaining going forward? This brings us to the bull case for EIF, which, in our view, can be
summarized as follows:

1. Earnings will grow through future acquisitions, leading to increases in cash flow. Management
employs what it refers to as a disciplined approach to acquisitions, which will result in accretive
uses of capital; and

2. Earnings will grow organically, leading to increases in cash flow.

Tenet #2 of the bull case is primarily contingent on a significant improvement in WesTowers profitability,
which we believe will not occur. The impact of tenet #1 is difficult to quantify, but it is also linked to the fate
of WesTower. If and when WesTowers profitability does not recover, we believe management will take a
substantial hit to its credibility. In addition to the WesTower problem, we believe legacy Aviation has not
demonstrated a sufficient return on invested capital, leaving us with little faith that managements
acquisition strategy is paying off. All-in-all, we believe the bull case is deeply flawed.



WESTOWER IS THE KEY

Without the hope of a substantial improvement in WesTowers cash flow, EIF would be well-short of covering
its dividend and capital investment requirements. Figure 2 illustrates the importance of WesTower to EIF,
summarizing selected financial results of EIF, excluding the impact of WesTower.

Figure 2
Selected Financial Results, Excluding the Impact of WesTower, F10 to TTM Q1-F14
(Amounts in thousands of CAD, except as noted; rounded)

TTM Q1-F14 F13 F12 F11 F10

EBITDA
Aviation 73,000 65,000 52,000 57,000 44,000
Manufacturing 16,000 16,000 17,000 12,000 7,000
Company (9,000) (9,000) (9,000) (7,000) (6,000)
80,000 72,000 60,000 62,000 45,000

Cash interest 21,000 16,000 11,000 10,000 7,000
Cash taxes* 3,000 5,000 2,000 1,000 (2,000)

CFO 56,000 51,000 47,000 51,000 40,000

Capital expenditures
Reported maintenance 40,000 36,000 29,000 28,000 14,000
Reported growth 37,000 38,000 32,000 12,000 44,000

CFO less maintenance capex (A) 16,000 15,000 18,000 23,000 26,000

CFO less all capex (B) (21,000) (23,000) (14,000) 11,000 (18,000)

Dividends
36,000
36,000 33,000 27,000 20,000
Payout ratio on A 225% 240% 183% 117% 77%
Payout ratio on B nm nm nm 245% nm

* Assuming cash taxes are reduced by 50% due to the exclusion of WesTower.


Figure 2 shows that without any contribution from WesTower (positive or negative), EBITDA and CFO would
have been approximately $80 million and $56 million, respectively, in the most recent TTM period. Prior
periods do not represent an appropriate go-forward run rate due to the impact of acquisitions Regional
One, in particular (Aviation segment), which occurred in Q2-F13.

If we deduct reported maintenance capex from CFO, the dividend payout ratio on CFO for TTM Q1-F14
would be 225%. If we deduct all capex from CFO, free cash flow would be negative. Therefore, we believe
it is reasonable to conclude that future cash flow sustainability is primarily dependent on a turnaround at
WesTower.

From Figure 2, we can also see that a major surge in earnings and cash flow from the Aviation segment
could theoretically pick up the slack from a failed WesTower turnaround. However, for reasons discussed
later in this report, we believe such an outcome is extremely unlikely.



WhatDoesManagementandtheStreetExpectfromWesTower?

WesTower has been struggling of late, with EBITDA margins hovering between -3% and 2% over the past
four quarters. In EIFs Q3-F13 MD&A, management disclosed the following regarding WesTowers difficulties:

Due to reduced profitability for certain projects completed during the third quarter management
determined that certain forecasted estimates of projected contract revenues and costs should be
adjusted and related margins reduced The US operations of WesTower experienced lower gross
margins as a result of project inefficiencies with higher than expected costs to complete the work,
higher overhead costs and a higher level of material related revenues that have lower margins.

Similar references to problems at WesTower were cited throughout the other F13 disclosures.

Management is currently guiding to mid-high single-digit margins for WesTower by the end of F14, and
based on our analysis, such a recovery is reflected in consensus EBITDA estimates. Consensus EBITDA for F15
sits at $138 million, $56 million higher than TTM Q1-F14. Figure 3 summarizes the impact that improved
WesTower margins would have on EIFs TTM EBITDA.

Figure 3
Bridging the Gap between TTM Q1-F14 and F15 Consensus EBITDA
(Amounts in thousands of CAD; rounded)

TTM Q1-F14 EBITDA 82,000

Add: WesTower margin improvement from 0.5% in TTM
period to 8% in F15*

49,000

Add: other improvement in EBITDA 7,000

F15 consensus EBITDA 138,000

* Assuming the same revenue base as TTM Q1-F14.


Figure 3 shows that if we assume WesTower EBITDA margins improve from their current 0.5% in TTM Q1-F14 to
8% in F15, EBITDA would improve by about $49 million. The remaining $7 million required EBITDA
improvement is likely on account of expected revenue increases at WesTower, as well as EBITDA
improvements from EIFs other businesses.

See Appendix B for a summary of WesTowers historical stand-alone results.

$56 million



WESTOWER LIKELY TO FALTER

The fact that WesTower has struggled since mid-2013 to generate positive EBITDA is no secret. However, we
believe the extent of WesTowers troubles go far beyond its reported numbers and that a ~$50 million
EBITDA improvement will not be achieved. The following factors support our conclusion:

1. Negative Revisions to AT&Ts Capital Spending Plan
WesTowers key competitor, MasTec, Inc. (MasTec), has recently disclosed a significant reduction
in its expected calendar Q2 revenue from AT&T, as well as a lack of visibility regarding AT&Ts
wireless infrastructure spending for the remainder of the year and into F15. We believe WesTower
will not be immune to adverse changes in AT&Ts spending plans, and is likely to experience an
even greater negative impact than MasTec.

2. Accounting Profits May Overstate Underlying Profitability
We believe historical financial results of WesTower, with EBITDA margins having hit 8% in F11 and
F12, do not represent the long-term normalized profitability of the company. We believe our
analysis of EIFs WIP balances and related accounts indicates a high risk that historical margins
benefitted from estimated accounting-based profits that will prove to be unrecoverable from
AT&T.

Each of the above factors is addressed in detail below.

Negative Revisions to AT&Ts Capital Spending Plan
MasTec provides construction, engineering and maintenance services for a variety of industries, including
the telecommunications industry. Based on our research, it is also the alternate turfing vendor designated
by AT&T in at about half of the geographic regions that WesTower currently operates in. The following is an
excerpt from MasTecs updated second quarter guidance press release issued on J une 1, 2014:

MasTec, Inc. today announced that it expects second quarter results to be negatively impacted
by new and unexpected delays in wireless project spending activity MasTec now anticipates
reduced levels of second quarter wireless project revenues, as various planned projects have
recently been deferred and or reduced in scope. While the Company still expects wireless revenue
levels to grow in the second quarter when compared to last year, growth levels are expected to
be lower than previously expected, impacting anticipated second quarter communication
segment revenues by approximately $45-$50 million. These unexpected revenue declines are
anticipated to significantly impact segment results reflecting the effect of reduced absorption of
non-variable indirect and overhead costs. The Company anticipates that additional changes to
levels of second half 2014 wireless project spending may also occur, although the level of potential
changes cannot yet be estimated. The Company will provide further guidance on any potential
impacts of these items once they are determinable. [emphasis added]

In response to analysts questions on the conference call related to the updated guidance, MasTec
management elaborated further on the issue:

Q: A little bit more detail, is this broad-based across all geographies, or are you finding that it's just
in pockets? And secondly, is it broad-based across all types of services you're providing to this
customer? Is it only associated with, maybe, new builds?

A: So I just want to be careful on how I answer it, Alex. I think right now it's broad-based. Whether it
continues to be broad-based for the balance of the year, we'll see.

Q: The revenue you're pulling out of your comms guidance today, is that all basically since mid-
May through the end of the quarter, or did you see weakness before the announced merger as
well between your two customers?

A: No, we didn't it's really all from mid-May on.



The morning after the announcement, MasTecs stock fell 11%. Since then, it is down a further 4% from its
May 30 close. In the same J une 1 press release, MasTec also disclosed a reduced Q2 outlook for its oil and
gas segment revenues; however, based on our review of the disclosures, news reports and analyst
commentary on the issue, the reduced and uncertain outlook on AT&Ts wireless spending was (and
continues to be) the main driver behind the share price drop.

Our industry research corroborates and builds upon MasTecs press release. Although AT&T has not
announced any changes in their capital spending plans to date, numerous news and opinion-based
reports available on the Internet cite cost, technology and the DirectTV merger (announced in mid-May)
as likely reasons for a re-thinking of its spending plans. In response to the rumours and MasTecs disclosures
on the issue, a number of sell-side analysts have materially reduced their target prices for MasTecs stock.
There are also recent reports of layoffs at MasTec and other AT&T-associated contractors, although MasTec
management declined to confirm with us whether or not the company has communicated terminations to
its employees.

Based on our research, it appears that MasTec is the primary turfing contractor in approximately three of
the six AT&T regions that WesTower services. If MasTec has been adversely affected by an about-face on
AT&Ts capital spending plans, we believe it is extremely unlikely that WesTower would not be negatively
impacted as well. In fact, we believe WesTower is far more likely than MasTec to be negatively impacted
by a change in AT&Ts capital spending for the following reasons:

AT&T represented 18% of MasTecs F13 revenue, but AT&T represents 63% of WesTowers revenue.
All else equal, an across-the-board reduction or delay in capital spending is likely to have a much
greater negative impact on WesTower than MasTec;

We believe MasTecs relationship with AT&T runs deeper than WesTowers AT&T relationship.
MasTec received AT&Ts outstanding supplier award in 2014 and has a decades-long relationship
with AT&T. It is also a key partner in AT&Ts tower crew augmentation program (TCAP), which was
developed by AT&T to ensure adequately trained tower crew resources are on hand to deploy in
short periods of time. To our knowledge, WesTower has never won a an outstanding supplier
award from AT&T, has not worked with AT&T for as long as MasTec and does not participate in the
TCAP;

While there is evidence of mis-execution at WesTower, MasTec has actually reported steadily rising
annual EBITDA margins in its Communications segment in the 9.4% to 12.6% range since 2011,
suggesting better (and improving) project management capabilities. Therefore, MasTec may be
better able to cope with a material decline in its AT&T-related revenue;

We believe that MasTec has been designated by AT&T as the primary turf contractor in three of the
geographies WesTower operates in. Based on our research, a secondary turf contractor is usually
awarded work when the primary contractor does not have the capacity or capability to deliver,
i.e. the secondary contractor acts as a capacity filler / marginal supplier. If this is in fact true,
WesTower would experience the greatest revenue reduction in the geographies where it is the
secondary turf vendor;

Given high overhead to service a turfing region and a likely desire to retain quality employees in
an industry suffering from a skills shortage, any reduction in AT&T revenue could cause MasTec to
aggressively take business from WesTower. It is very costly to ramp up personnel and other fixed
costs in a short time frame (as cited by management of EIF numerous times during 2012 and 2013).
Therefore, even if AT&Ts capital spending plans are merely delayed for a quarter or two, it may be
most cost-effective for MasTec to put idle resources to work in the short term, even if projects
operate on a minimal or no-profit basis; and

We understand from a number of sources that the AT&T TCAP guarantees a certain minimum level
of work for participating turf vendors, paying them for idle time if not put to work. If this is true, AT&T
has an incentive to put MasTec to work at WesTowers expense, rather than pay WesTower to do a
job as well as cover MasTecs idle time.



AT&T represented 18% of MasTecs F13 revenue and we estimate the $45 to $50 million drop-off since mid-
May to represent approximately 20% to 25% of the companys AT&T revenue run rate. As we believe
WesTower will fare worse than MasTec in any decline to its AT&T revenue, a 30% near-term decline in
WesTowers AT&T revenue is a reasonable expectation, in our view. Applying a 30% decline to its AT&T
revenue would yield a near-term decline in WesTowers overall revenue of approximately 20%.

Assuming a 4% EBITDA margin, a 20% revenue loss would equate to $5 million per year, and assuming the
streets 8% margin, the loss would equal $10 million. On top of a revenue decline, we believe
managements guided EBITDA margin in the mid-high single-digits may not even be achievable simply
due to reduced economies of scale, and inconsistent or delayed capital spending could create lumpy
revenue that drives inefficiencies.

There is also the risk that WesTowers AT&T contract will not be renewed. In EIFs initial disclosures on the
contract in its F11 AIF, it was very clear that the contract was for a term of three years, to end in 2014:

The award was for a three-year infrastructure service contract that began immediately.

Disclosure then became a little less clear, with the following disclosed in EIFs F12 and F13 AIFs:

The AT&T contract was signed in November 2011 and is a four year contract, including a one year
extension.

In our view, the above disclosure reads like the one-year extension was actually agreed upon by AT&T and
WesTower. However, on the Q1-F14 conference call, management seems to indicate that the AT&T
contract is up for renewal in 2014:

Q: And just on the current contract that you have signed with AT&T. How far is it taking, what month this
year? Or have you signed a new contract?

A: There's discussions ongoing. Okay. It's really not as simple as a straight contract. Due to the fall of this
year but AT&T is a processes going through and reduce the number of turf vendors that have, and
while we don't have the precise numbers that AT&T its been happened to be gone from about half of
something like 25 to something like 13 or 14 vendors that we've maintained all of our markets. So, in
terms of our expectations on a go-forward basis with AT&T, we are confident we'll maintain if not
expand our markets. [emphasis added]

So we are unsure if the turf contact is up for renewal this year, in whole, or in part. However, the term of the
contract is not the most important issue. The contract has no guaranteed minimum spend; therefore,
making money on the contract is entirely contingent on the quantum and stability of AT&Ts capital
spending.

Accounting Profits May Overstate Underlying Profitability
EIF accounts for its profitability at WesTower using percentage of completion accounting (POC
accounting), whereby revenues and expenses are estimated on a quarterly basis in proportion to the
estimated percentage of completion on its customer contracts. Recognition of revenue and profit under
POC accounting results in the creation of WIP, which eventually gets transferred to accounts receivable
when the customer is billed. Substantially all of EIFs POC revenue and WIP relates to WesTower, with a very
small portion attributable to its Manufacturing segment.

Assuming no major changes in facts and circumstances, POC accounting should theoretically result in fairly
even profit recognition over the term of a given contract. In reality, however, when estimates change,
profits derived from POC accounting can fluctuate from quarter to quarter.

Even with the use of hindsight, its usually not possible for an outsider to conclude whether or not estimates
of progress on contract profitability are correct from an accounting perspective; however, we can use
hindsight to understand the long-term profitability of a business. In fact, due to the potential volatility in
quarterly accounting estimates, we would argue that one must use long-term trends to understand the



underlying ability of a business to generate profits on long-term contracts. We therefore look at WesTowers
performance on a long-term basis, as summarized in Figure 4.
Figure 4
WesTower Cumulative EBITDA
Margin, Q2-F11 to Q1- F14
(Amounts in thousands of CAD, except as
noted; rounded)

Cumulative revenue 1,378,000

Cumulative EBITDA 59,000
EBITDA margin 4.3%

Sources: EIF financial statements and other disclosures

Figure 4 might lead one to conclude that an EBITDA margin around 4% is sustainable for WesTower.
However, its important to also consider the build-up of WesTowers WIP over the Q2-F11 to Q1-F14 time
period. In our view, the 4.3% cumulative margin is only representative of economic profits if the WIP
accumulated on WesTowers balance sheet is recoverable from its customers. If WIP is ultimately not
recoverable, the 4.3% cumulative margin is not much more than an accounting construct and does not
reflect the reality of what customers have agreed to pay.

As discussed in detail below, we believe WesTowers mis-execution on the AT&T contract has resulted in a
build-up of WIP at high profit margins, of which, material portions may not be recovered from AT&T.
Therefore, in our view, there is a high risk that an EBITDA margin of 4.3% overstates WesTowers long-term
economic profitability.

Figures 5, 6 and 7 summarize our analysis of EIFs WIP build-up. Note that there are gaps in the data
available for our analysis, as EIF scaled-down its quarterly POC accounting-related disclosures beginning in
Q1-F13.

Figure 5 illustrates our WIP/R analysis, which compares EIFs WIP balances to the revenue recognized from
POC accounting.

Figure 5
WIP Analysis #1 EIFs WIP/R Ratio
(Amounts in thousands of CAD, except as noted)

Q4-F13 Q4-F12 Q3-F12 Q2-F12 Q1-F12 Q4-F11 Q3-F11 Q2-F11

31-Dec-13 31-Dec-12 30-Sep-12 30-Jun-12 31-Mar-12 31-Dec-11 30-Sep-11 30-Jun-11
WIP (net) 133,369 90,622 84,679 59,865 31,683 12,424 24,441 23,526
Annual Basis
Average WIP/POC revenue 0.17 0.11 0.09
Quarterl y Basis
Average WIP/POC revenue 0.58 0.53 0.39 0.32 0.28 0.36




Figure 5 shows that as EIFs WIP balance has grown from $24 million in Q2-F11 to $133 million at the end of
F13, the WIP/R ratio increased dramatically, from 0.09 for F11 to 0.17 for F13. On a quarterly basis, the same
is true, with the WIP/ R ratio increasing from 0.36 in Q3-F11 to 0.58 in Q4-F12. These trends indicate that a
greater proportion of revenue, and hence profit, is being recorded on an estimated, as opposed to
billed basis, which results in higher estimation risk.

Higher profit based on POC estimates is not inherently negative for WesTower. However, we believe there
are counter-intuitive trends in WIP profitability versus EBITDA margins, as summarized in Figure 6.

Figure 6
WIP Analysis #2 Build-Up of EIFs WIP Profitability

Q4-F13 Q3-F13 Q2-F13 Q1-F13 Q4-F12 Q3-F12 Q2-F12 Q1-F12 Q4-F11 Q3-F11 Q2-F11
31-Dec-13 30-Sep-13 30-Jun-13 31-Mar-13 31-Dec-12 30-Sep-12 30-Jun-12 31-Mar-12 31-Dec-11 30-Sep-11 30-Jun-11

Annual Basis
Costs incurred on
uncompleted contracts
543,658

308,489

138,266

Estimated earnings (A) 194,666 112,532 35,608
Total costs and
estimated earnings (B)
738,324

421,021

173,874

WIP profitability (A/B) 26.4% 26.7% 20.5%

Quarterl y Basis
Costs incurred on
uncompleted contracts
543,658
Quarterly disclosure ceased
in Q1-F13
308,489 249,158 193,112 150,130 138,266 128,493 114,612
Estimated earnings (A) 194,666 112,532 80,390 56,462 37,943 35,608 29,934 26,239
Total costs and
estimated earnings (B)
738,324
421,021
329,548 249,574 188,073 173,874 158,427 140,851
WIP profitability (A/B) 26.4% 26.7% 24.4% 22.6% 20.2% 20.5% 18.9% 18.6%

WesTower EBITDA
margin %
1.0% -2.9% 1.9% 6.5% 8.9% 9.2% 7.5% 4.8% 9.5% 8.0% 6.5%


Figure 6 shows the composition of WesTowers WIP over time. The percentage of profit embedded in WIP
(WIP profitability) has risen from the 18% to 21% range during F11 and early F12 to the 26% range by the
end of F12 and during F13.
1

We believe Figure 6 exhibits a counter-intuitive relationship between EBITDA margin and WIP profitability. As
WIP profitability rose from the sub-20% range to over 26%, EBITDA margins declined significantly, from the 8%
range during most of F11 and F12, to under 2% from Q2-F13 onward. As EBITDA margins declined during F13,
we would have expected to see a notable decline in WIP profitability. This is because the high WIP profits
at Q4-F12 would be billed out to customers throughout the year, reducing WIP, while WIP would be
replenished with new profits earned for work performed during F13 at very low margins, thus pulling down
overall WIP profitability.

In our view, the fact that WIP profitability remained around 26% from Q4-F12 to Q4-F13 while EBITDA margins
declined significantly over this period implies that the high profit WIP has been sitting on the balance
sheet for a year, without getting billed out to WesTowers customers. If the billing of WIP is withheld, it is most
likely due to an expectation that customers will not pay the bill. The counter-intuitive WIP profitability trend
1
Note that WIP profitability does not necessarily represent EBITDA or gross margin. Additionally, it is the trends that are important
to note from Figure 6, and a direct comparison of EBITDA margin to WIP profitability in a given quarter may be misleading.



in combination with a rising WIP/ R ratio leads us to believe there is a high risk that a material portion of
WesTowers WIP is not recoverable.

We believe our view is supported by disclosures in EIFs October 7, 2013 press release regarding WesTowers
execution problems, which imply potential disagreements with customers over the recoverability of certain
work performed by WesTower:

management updates projected contract revenue, cost and profit or loss for each of our
contracts based on changes in facts, such as an approved scope change, and changes in
estimates WesTower continues to dialogue with its customers regarding variations and other
claims.

As a basis for comparison, Figure 7 shows our WIP analysis over approximately the same time period for
another of WesTowers competitors, Dycom Industries, Inc. (Dycom), which also has a turfing contract
with AT&T. We consider Dycom a reasonable benchmark for WesTower; however, there are differences in
the nature and volume of the telecommunications infrastructure work performed by the two companies.
2

Figure 7
Dycom WIP Analysis

Q2-F14 Q1-F14 Q4-F13 Q3-F13 Q2-F13 Q1-F13 Q4-F12 Q3-F12 Q2-F12 Q1-F12 Q4-F11
25-Jan-14 26-Oct-13 27-Jul-13 27-Apr-13 26-Jan-13 27-Oct-12 28-Jul-12 28-Apr-12 28-Jan-12 29-Oct-11 30-Jul-11
Average
WIP/revenue
0.47 0.39 0.38 0.35 0.34 0.38 0.36 0.32 0.34 0.30 0.27
WIP profitability 18.3% 19.5% 19.1% 18.9% 18.2% 21.6% 20.9% 18.7% 18.1% 20.0% 21.1%
EBITDA margin 7.2% 12.3% 12.1% 10.1% 10.1% 12.5% 12.7% 10.1% 9.2% 12.6% 13.1%

Sources: Dycom financial statements and other disclosures, and Veritas estimates

Similar to EIF, Figure 7 shows a notable increase in Dycoms WIP/R ratio. Additionally, Dycom also has a
more consistent WIP profitability, within a range of 18.1% to 21.6%. This is in contrast to WesTowers WIP
profitability, which varies significantly over time. Perhaps most important is the fairly high correlation
between changes in EBITDA margin and WIP profitability. Figure 7 shows that when EBITDA margin comes
down, WIP profitability usually follows, which is what we would have expected to see with EIF.

2
The absolute values in Figure 7 are not the most important consideration; rather, it is the trends in Dycoms ratios relative to those
of WesTower that we believe are relevant.



The Potential Impact of Unrecoverable WIP

What would historical EBITDA margins have looked like if significant portions of WesTowers WIP ultimately
prove to be unrecoverable? Figure 8 illustrates that if only 25% of WIP proves to be unrecoverable, just over
half of WesTowers $60 million in cumulative EBITDA since Q2-F11 would be wiped out and the company will
have registered only 1.9% in cumulative EBITDA margin.

Figure 8
WesTowers Revised Cumulative EBITDA Margin

WIP balance at Mar 31/14 130,000

Assuming 25% write-down 32,500

Cumulative WesTower EBITDA (Figure 4) 59,000
Cumulative EBITDA after write-down 26,500
New cumulative EBITDA margin 1.9%


Based on our analysis of WesTowers WIP-related balances, we believe there is a high risk that at least 25%
of WesTowers WIP will not be recoverable. A 25% write-down would imply an average WIP profitability at
Q4-F13 of about 21%, which is equal to the average WIP profitability from Q2-F11 to Q3-F12, right before WIP
profitability shot up to almost 27% (see Figure 6).

At about 2%, WesTowers historical adjusted EBITDA margin looks weak; but what gives us confidence that
a turnaround in WesTowers profitability is likely not in the cards is a high probability that AT&T will cancel
and/ or defer substantial portions of its spending in the near future. In the end, we believe that EIF will be
forced to discontinue, sell or otherwise wind-down WesTowers U.S. operations. Therefore, in our view, the
most likely outcome is a reversion within a year or two to a pre-AT&T WesTower, which generated annual
EBITDA in the $15-million range prior to its 2011 U.S. expansion.

In an alternate, but less likely scenario, we could see WesTower hitting the low end of managements
guided EBITDA margin under a reduced level of AT&T revenue. Assuming a 5% margin and a 20% reduction
in revenue, WesTower would hit $26 million in EBITDA, or $23 million better than its TTM EBITDA, which is still
well short of the ~$50 million incremental improvement needed to hit F15 consensus.

Figure 9 summarizes the impact of the above alternate WesTower EBITDA scenarios on EIFs current share
price. Note that our analysis assumes that a return to 8% WesTower margins is currently the consensus
expectation, which we believe is likely given managements guidance.



Figure 9
Impact of Alternate WesTower EBITDA Scenarios on EIFs Current
Share Price

Base Case
Scenario
More
Optimistic
Scenario

F15E WesTower EBITDA based on return to
pre-AT&T profitability
15,000

F15E WesTower EBITDA based on 20%
revenue reduction and 5% EBITDA margin
26,000

F15 consensus WesTower EBITDA
assuming 8% margin and TTM revenue
52,000 52,000

Difference (37,000) (26,000)

EV impact @ 6.7x current F15 EBITDA
multiple
(248,000) (174,000)

Impact per share ($) (11.40) (8.00)

* Assuming Q1-F14 TTM revenue as a base.

Sources: EIF financial statements and other disclosures, Bloomberg and Veritas estimates

Our base case from Figure 9 shows a downside to EIFs shares in the $11 range. Figure 9 also shows that
even under a more optimistic scenario related to AT&T, there is still significant downside to EIFs current
share price, in the $8 range.

CAN THE REST PICK UP THE SLACK?

Manufacturing is too small to drive a material improvement in the Companys earnings and cash flow. EIFs
only hope rests with either legacy Aviation or Regional One. However, based on our analysis, we believe
legacy Aviation is on the cusp of a moderate revenue and profitability decline and although Regional One
may be able to churn out some respectable EBITDA growth, it is not nearly enough to make up for
WesTower and legacy Aviation. Refer to Appendix A for a relative weighting of each segment.

Legacy Aviation
Legacy Aviation consists of a number of Canadian regional air transportation-related companies, which
includes Bearskin Airlines (passenger airline; Northern Ontario and Manitoba), Calm Air International
(passenger airline, cargo; Manitoba and Nunavut), Perimeter Airlines (passenger airline medical flights and
cargo; Manitoba and Northwestern Ontario), Keewatin Air (medical flights; Manitoba and Nunavut) and
Custom Helicopters (medical flights and emergency services; Manitoba and Nunavut). EIF doesnt disclose
the revenue and/ or EBITDA contributions from each of these businesses, but based on the assets deployed
for each business and their respective acquisition prices, we believe the largest historical contributors to
revenue and EBITDA are Bearskin, Calm Air and Perimeter.



Bearskin and Calm Air have experienced increased competition and reduced passenger volumes of late.
For example, in EIFs F13 MD&A, the following is disclosed:

the Aviation segments pre-existing entities experienced a decline in revenue in 2013. The
decrease is primarily the result of reduced passenger volumes in Calm Airs market combined with
increased competition in the Ontario market serviced by Bearskin. [emphasis added]

But in the same disclosure, management also stated:

Going forward, further material reductions in passenger services are not anticipated. Management
is confident that the business foundation of the segment remains strong and intact, and is well
positioned for 2014. [emphasis added]

However, managements initial assessment of further material reductions in passenger services proved to
be incorrect, as evidenced by the following disclosed in the Q1-F14 MD&A:

An extensive review of the eastern market was completed and a restructure plan implemented in
the second quarter of 2014 to realign Bearskins operations and improve profitability. This plan
includes the reduction of scheduled services in certain eastern market segments combined with
the termination of operations in markets materially impaired by competition. This has resulted in a
headcount reduction of approximately 30% and focuses on reestablishing profitability on all
routes The restructure, however, combined with recent growth in scheduled, cargo and charter
operations in other markets will positively impact the segment going forward. [emphasis added]

The disclosures regarding increased competition are also confirmed by news reports citing Bearskins
dropping of passenger services to Ottawa and Kitchener-Waterloo, and a reduction in services to Timmins.
These changes took effect at the beginning of April, so they have not yet been reflected in EIFs reported
financial results. Additionally, based on our research, it appears that WestJ et Encore has just added a route
between Winnipeg and Thunder Bay, which is likely to cause further problems for Bearskin going forward.

A slowdown in the commodities market has also reduced demand for some of the routes and charter
flights to remote Northern destinations provided by several of the airlines in the legacy Aviation segment.
The commodities market has yet to pick-up and we expect this decreased demand to be a lingering
headwind going forward.

Figure 10 summarizes the historical results of legacy Aviation, which highlight a lack of revenue and EBITDA
growth.

Figure 10
Selected Quarterly Financial Results of Legacy Aviation, Q2-F11 to Q1-F14

Q1-F14* Q4-F13 Q3-F13 Q2-F13 Q1-F13 Q4-F12 Q3-F12 Q2-F12 Q1-F12 Q4-F11 Q3-F11 Q2-F11

Revenue 63,600 68,200 71,500 72,200 62,800 68,800 73,500 72,400 65,800 68,800 72,400 71,200
YoY % change 1.3% -0.9% -2.7% -0.3% -4.6% 0.0% 1.5% 1.7%

EBITDA 6,500 11,500 15,500 15,700 7,100 12,000 17,300 14,200 8,600 13,700 17,000 15,600
YoY % change -8.5% -4.2% -10.4% 10.6% -17.4% -12.4% 1.8% -9.0%

EBITDA
margin
10.2% 16.9% 21.7% 21.7% 11.3% 17.4% 23.5% 19.6% 13.1% 19.9% 23.5% 21.9%
YoY bps
change
-1.1% -0.6% -1.9% 2.1% -1.8% -2.5% 0.1% -2.3%

* Excludes insurance proceeds gain of $1.3 million.



Figure 10 illustrates a trend of flat-to-declining revenue since Q2-F12. Despite the addition of Custom
Helicopters in Q1-F12, EBITDA has also materially declined in most quarters since Q2-F12. Based on historical
results, the legacy Aviation segment appears to be a steady-decline business. In addition, we believe the
following factors will put pressure on EBITDA going forward:

As addressed above, service cancellations for major routes of Bearskin have already begun in Q2-F14.
Management has initiated a restructuring plan and there is the risk that cost reductions will not offset
lost revenue.

Calm Air may be negatively impacted by the recently-announced proposed merger of First Air and
Canadian North, two regional airlines in the Canadian North that operate on many of the same routes.

Based on the above, we believe it is reasonable to conclude that legacy Aviation will not provide the
surge in earnings and cash flow needed to make up for a failed turnaround in WesTowers profitability. In
our view, legacy Aviation will continue its steady decline, which increases the hurdle that Regional One
would have to overcome.

Regional One
Regional One supplies regional airline operators with after-market aircraft, engines and parts under sale or
lease arrangements. Management discloses that the company has experienced an average annual
growth rate of 25% over the past five years. Based on our review of Regional Ones stand-alone financial
results, we believe such a growth rate is unlikely without a substantial increase in capex on a go-forward
basis. However, even if EIF can maintain Regional Ones historical growth rate, the incremental earnings
and cash flow would be insufficient to take EIFs EBITDA even close to F15 consensus of $138 million, given
the drag of WesTower and legacy Aviation.

Figure 11 summarizes Regional Ones stand-alone financial results.

Figure 11
Selected Stand-Alone Financial Results of Regional One,
F11 to TTM Q1-F14
(Amounts in CAD, except as noted; rounded)

TTM Q1-F14 F13 F12* F11

Revenue 54,600 49,100 47,700 31,300
% change 11.2% 2.9% 52.4%

EBITDA 22,600 19,100 20,200 10,600
% change 18.3% -5.4% 90.6%

EBITDA margin 41.4% 38.9% 42.3% 33.9%
Bps change 2.5% -3.4% 8.5%

Total capex 20,400 12,400 300 100

* Excludes insurance proceeds gain of $4.1 million.




Figure 11 shows a moderate increase in revenue and EBITDA, but a definite slowdown in growth rates after
Regional One was acquired by EIF. Further, it is clear from Figure 11 that EIF has significantly increased the
level of capital investment in the business. It appears highly likely, therefore, that had the additional capex
not been invested, revenue and EBITDA would have declined, or at best stayed flat, since F12. In
conclusion, Regional One may have some growth potential perhaps in the 20% per year range but only
at the cost of significant annual capital reinvestment, and nowhere close to the $56 million needed to
bridge EIFs current TTM EBITDA to F15 consensus.

UNDERSTATED MAINTENANCE CAPEX

Overall, EIF invested about $83 million in capital expenditures over the latest TTM period, approximately the
same as the Companys EBITDA of $82 million and significantly in excess of its CFO, which was negative $10
million. Clearly, EIFs businesses are capital intensive, which is mostly on account of the Companys
Aviation segment, accounting for about 90% of TTM capex. Therefore, a reasonable determination of
maintenance, or sustaining, capital expenditures is critically important to EIFs valuation and an
assessment of its cash flow sustainability.

In its F13 MD&A, management articulates the difference between growth and maintenance capital
expenditures as follows:

Management characterizes capital expenditures as either maintenance capital expenditures or
growth capital expenditures. Maintenance capital expenditures are those required to maintain the
operations of the Company at its current level. Other capital expenditures are made to grow the
enterprise and are expected to generate additional EBITDA. These other capital expenditures are
classified as growth capital expenditures and are not considered by management in determining
the cash flows required to sustain the current operations of the Company. [emphasis added]

Over the past three years, management has designated anywhere from 31% to 54% of the Companys
total capex as growth capex. However, when we put managements growth capex definition to the test,
we believe it is clear that all or substantially all of the Companys capex should be designated as
maintenance capex. Figure 12 summarizes EIFs historical revenue and EBITDA, as well as managements
reported maintenance/ growth capex split.



Figure 12
Selected Financial Results and Split between Growth/Maintenance Capex, F11 to TTM Q1-F14

F11 to TTM
Q1-F14
TTM Q1-F14 F13 F12 F11

Including WesTower
Revenue
1,067,986 1,030,079 800,573 510,303
% change
3.7% 28.7% 56.9%

EBITDA
82,363 80,499 94,498 74,839
% change
2.3% -14.8% 26.3%

Excluding WesTower (rounded)
Revenue
75,000 419,000 402,000 373,000 344,000
% change
21.8% 4.2% 7.8% 8.4%

EBITDA
19,000
80,000 72,000 60,000 61,000
% change
31.1% 11.1% 20.0% -1.6%

Reported Capital Expenditures

Maintenance
41,739 38,007 30,771 29,640
Growth
41,258 44,104 36,293 13,442
Total
82,997 82,111 67,064 43,082

% maintenance
50% 46% 46% 69%
% growth
50% 54% 54% 31%

Cumulative " growth" capex, F11 to
TTM Q1-F14
96,253


We exclude WesTower from consolidated EIF results, as one could argue that WesTowers problems
generating earnings dont negate growth capex investments made in other segments of the business.
Excluding WesTower, Figure 12 shows that EBITDA on a TTM basis has improved by $19 million, or 31%, since
F11. However, Regional One, which was acquired in Q2-F13 generated about $22 million in EBITDA over the
TTM Q1-F14 period, indicating that EBITDA has actually declined since F11 on an organic basis.

Without organic growth, it is difficult to argue that $96 million in cumulative growth capex invested since
F11 actually contributed to EBITDA growth. Therefore, we believe that all or a majority of EIFs reported non-
Regional One growth capex is in substance maintenance capex.

For our base case valuation, we have assumed an annual maintenance capex requirement of $50 million
per year, $8 million higher than reported maintenance capex. Our estimate assumes that Regional Ones
reported growth capex is legitimate and a scaled-back WesTower would require less capital re-investment.
We conservatively assume that 50% of growth capex not related to Regional One or WesTower is actually
maintenance capex.



VALUATION

Our base case valuation is $8.50 per share. Our best, base and worst case valuations are all DCF-based
and utilize a 9% WACC. Our key assumptions and valuation for each case are summarized as follows:

Base case: $8.50/share
EIF will achieve $95 million in EBITDA in F15. We believe a turnaround in WesTower profitability will
not occur, registering approximately nil margins until its U.S. operations are wound-down. By F15,
we have assumed a return to $15 million in annual EBITDA for WesTower, which is the approximately
EBITDA run rate prior to WesTowers U.S. expansion. Weve credited Regional One with 20% annual
growth, but this upside is substantially offset by a projected moderate decline in legacy Aviation.
We have factored in maintenance capex of $50 million per year, about $8 million higher than
reported TTM maintenance capex. Our base case valuation implies a multiple on F15 EBITDA of
6.5x, slightly lower than the 6.7x F15E EBITDA multiple EIFs shares currently trade at.

Best case: $24.00/share
EIF will achieve $117 million in EBITDA in F15. WesTower is able to reach 6% EBITDA margins and
managements reported TTM maintenance capex of $42 million is utilized as a go-forward rate of
capital reinvestment. We assume a 10% reduction in AT&T revenue. All other assumptions are the
same as our base case.

Worst case: $nil/share
EIFs cash flow is insufficient to carry the cost of its debt. Maintenance capex is at least $65 million
per year, $23 million in excess of what management reports as maintenance capex. All other
assumptions are the same as our base case.

We note the significant variation in the above three valuations. This variation is primarily due to the fact that
EIF is significantly levered, with about $440 million in net debt, and varying assumptions related to
WesTowers future profitability. Our $8.50 base case is about $13 less than EIFs current share price. We
estimate that about $11 of this differential is attributable to different expectations regarding WesTowers
future EBITDA, as summarized in Figure 9.

INTANGIBLES AND CATALYSTS

In our view, the key catalyst for EIF going forward is the fate of WesTower. In addition, we highlight the
following intangible factors that we believe investors should be aware of:

1. Dividend sustainability
In the long run and given our expectation of a failed restructuring at WesTower, we believe the
Companys dividend is not sustainable. However, we cannot predict if management will act
proactively to reduce the dividend to a sustainable level. In fact, we would expect
management will raise EIFs dividend within the next two quarters to remain a holding in
BlackRocks S&P/ TSX Canadian Dividend Aristocrats Index Fund, which holds 10% of EIFs
outstanding shares. Based on the funds re-balancing requirements, it would be a forced seller
of EIFs shares if the dividend is not increased on a year-over-year basis. Thereafter, we believe
the dividend will be reduced due to one of the following constraints materializing:

The Company gets too close to violating its senior debt covenants. Currently, we
estimate that EIF has a reasonable cushion on its debt covenants. However, if
WesTower continues to underperform and additional acquisitions cannot be funded
with increases in subordinated debt, there is a good chance that the senior covenants
will be at risk within the next 12 to 24 months; or

Senior creditors stop lending for a reason other than covenant compliance, or the
public debt market is no longer receptive due to a failed turnaround at WesTower or
the general perception of a failing business model.



2. Further acquisitions
Management has made it clear that pursuing acquisitions is an integral part of corporate
strategy. The Company currently has $144 million available under its senior credit line which
can be put to use for acquisitions. Given this debt capacity and the likelihood of a near-term
disappointment at WesTower, we would not be surprised to see another acquisition in the very
near future. We estimate a $2/share potential near-term upside on a $100 million debt-funded
acquisition
3
.

The timing of the above factors is hard to predict. However, we take comfort in our view that EIFs business
model is faltering. WesTower is the most obvious example, having mis-executed significantly on its U.S.
expansion, right after being acquired by EIF. In our view, WesTower is not a one-off. In our view, the legacy
Aviation segment has struggled to generate a sufficient return on capital on a combined basis. To illustrate
this point, we summarize in Figure 13 the investments that have been made in legacy Aviation, along with
the segments returns, since F10, the last year with comparative IFRS data available.

Figure 13
Return on Legacy Aviation, F10 to F13

F04 to F09
Cumulati ve

Custom
Acq.
Bearskin
Acq.
F13 F12 F11 F10

Acquisition costs - 28,000 33,000 - 71,000

EBITDA 50,000 52,000 57,000 44,000 -

Maintenance capex for legacy Aviation 60,000 60,000 39,000 14,000 -

Growth capex for legacy Aviation - - - 43,000 42,000

Pre-tax free cash flow (10,000) (7,000) 18,000 29,000 -

Cumulative pre-tax free cash flow 30,000

Total invested capital 217,000
Total return 20%
CAGR 4%


Figure 13 shows that since F10, the legacy Aviation segment has only produced a pre-tax compound
annual growth rate on its invested capital of 4%. Even of a pre-tax basis, this rate of return is insufficient to
cover EIFs WACC, which we estimate at 9%. We define invested capital as acquisition costs plus growth
capex, and pre-tax free cash flow is calculated as EBITDA less maintenance capex.

We have reflected EIFs growth capex from F11 to F13 as maintenance capex. As previously discussed,
we believe all or a substantial majority of what management defines as growth capex over this period is
maintenance capex from an economic perspective. After removing the impact of the Bearskin acquisition
3
Calculated as: $100 million purchase based on a 5x EBITDA multiple, implies $20 million in EBITDA. $20 million in EBITDA at a
6.7x corporate multiple results in ~$120 million in enterprise value. $120 million in enterprise valued less the $100 million
purchase price results in $20 million in equity value, or ~$2 per EIF share.



in F11, the legacy Aviation segment achieved a small level of organic EBITDA growth. Therefore, we have
given management the benefit of the doubt and reflected the entire $43 million in reported growth capex
as a capital investment, rather than a reduction in free cash flow for F10, which we believe to be a
conservative assumption.

In our view, such results indicate that either management overpaid for its recent acquisitions or has mis-
executed on the legacy Aviation businesses post-acquisition. Either way, based on this analysis and
WesTowers recent struggles, we do not have confidence that EIFs existing businesses or further acquisitions
will yield substantially better results.

CONCLUSION

We believe EIF is an unsustainable dividend machine running on fumes and, on the basis of fundamentals,
the Companys shares are significantly overvalued. Although fundamentals tell the story, problems with
cash flow and profitability are most likely to come to the forefront once the subordinated debt issuances
stop or become too costly. Given the streets lofty expectations for WesTower, a failed turnaround may be
what grinds the debt cycle to a halt. Sell.



APPENDIX A: BACKGROUND ON EIF

Figure A1 summarizes selected financial results of EIF, segmented across its business lines. Note that EIF
changed its segmented reporting in Q1-F14, removing WesTower from the Manufacturing segment and
creating the Infrastructure segment. We have used supplemental disclosures provided by the Company in
periods prior to Q1-F13 to segregate WesTowers operations, for an apples-to-apples comparison of
historical segmented results.

Figure A1
EIF Selected Financial Results, F10 to TTM Q1-F14

Q1-F13
Regional One
Acq.

Q2-F11
WesTower
Acq.

%
Contribution
TTM Q1-F14 F13 F12 F11 F10
Revenue
Aviation 31% 328,741 313,214 280,407 274,337 189,013
Manufacturing 8% 90,074 88,945 92,946 69,446 55,373
Infrastructure (WesTower) 61% 649,171 627,920 427,220 166,520 n/a
100% 1,067,986 1,030,079 800,573 510,303 244,386

EBITDA
Aviation 88% 72,513 64,722 52,065 57,160 43,665
Manufacturing 19% 15,897 15,579 16,600 11,506 6,954
Infrastructure (WesTower) 3% 2,728 8,896 34,443 13,488 n/a
Corporate -11% (8,775) (8,698) (8,610) (7,315) (6,351)
100% 82,363 80,499 94,498 74,839 44,268

CFO (9,646) (6,365) (20,943) 55,775 37,230

Capital expenditures
Reported maintenance 41,739 38,007 30,771 29,640 14,413
Reported growth 41,258 44,104 36,293 13,442 44,109

CFO less maintenance
capex (A)
(51,385) (44,372) (51,714) 26,135 22,817

CFO less all capex (B) (92,643) (88,476) (88,007) 12,693 (21,292)

Dividends 36,308 35,889 32,717 27,100 20,342
Payout ratio on A nm nm nm 104% 89%
Payout ratio on B nm nm nm 214% nm


The more than four-fold revenue increase since F10 is primarily due to a combination of acquisitions and
organic growth related to WesTowers wireless infrastructure turfing contract with AT&T, which
commenced in November 2011 and currently accounts for about 38% of EIFs total revenue (63% of



WesTowers revenue).
4
The Companys two largest acquisitions since the beginning of F10 were the $90
million Regional One purchase in Q2-F13 and the $74 million WesTower purchase in Q2-F11.

Figure A1 also shows that while revenue has risen dramatically, EBITDA has lagged, peaking in F12, at $94
million, and currently sitting at $82 million at TTM Q1-F14. CFO has lagged even more, falling to negative
territory since F12. Both the sagging EBITDA and negative CFO are primarily due to mis-execution at
WesTower on its AT&T contract.

With respect to dividend coverage, Figure A1 shows that if we deduct what management defines as
maintenance capex from CFO, only in F10 was the Companys payout ratio less than 100%, at 89%. If we
deduct all capex from CFO, the Company has not once covered its dividend for the periods shown in
Figure A1.

4
Percentages pertain to F13 revenue concentration.



APPENDIX B: WESTOWER STAND-ALONE RESULTS

Figure B1 summarizes selected financial results of WesTower on a stand-alone basis.

Figure B1
Selected Financial Results of WesTower, F11 to Q1-F14

Q1-F14 Q4-F13 Q3-F13 Q2-F13
TTM
Q1-F14
F13 F12 F11

Revenue 156,000 157,000 163,000 173,000 649,000 628,000 427,000 167,000

EBITDA 3,000 2,000 (5,000) 3,000 3,000 9,000 34,000 13,000
EBITDA margin 1.9% 1.3% -3.1% 1.7% 0.5% 1.4% 8.0% 7.8%

WIP balance * 130,000 133,000 91,000 12,000

WIP increase (reduction) (3,000) 42,000 79,000 12,000

* WIP presented on a net basis. WIP solely attributable to WesTower is not disclosed. The balance presented includes what we
estimate to be an immaterial portion of WIP due to EIFs Manufacturing segment.


Figure B1 illustrates that WesTowers EBITDA margin has been as high as 8%, which was achieved in both F11
and F12. Since then, profitability has sagged, with near-flat margins from F13 onward. The trough was
reached in Q3-F13, at -3%, but has risen since then to 2% in Q1-F14. The companys WIP has been a drag on
cash flow, with almost a $120 million investment since the end of F11.

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EXCHANGE INCOME CORPORATION: RUNNING ON FUMES

Appendix A summarizes the Companys historical financial results on a segmented basis.

WESTOWER IS THE KEY

WESTOWER LIKELY TO FALTER

Sources: EIF financial statements and other disclosures

The Potential Impact of Unrecoverable WIP

APPENDIX A: BACKGROUND ON EIF

APPENDIX B: WESTOWER STAND-ALONE RESULTS

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