Interactive Buyside Equity Research

February 16th, 2014

ERICKSON AIR-CRANE, INC. Thesis Overview

Erickson Air Crane (EAC) is a helicopter services company in transition. In 2013, EAC purchased Evergreen Helicopters (EHI) and Air Amazonas (AA) which will more than double revenue and increase its fleet from 20 helicopters to 87 helicopters / airplanes. The largest opportunity rests on the turnaround of EHI, which was an underperforming asset purchased at a distressed multiple. The situation is complicated and underfollowed because it doesnt fall into a natural industry coverage bucket and has a small market capitalization; however, management is becoming more vocal as it seeks to attract an institutional investor base. If management is able to integrate and execute, leverage works in the equity holders favor and the stock could appreciate to $29 (50% upside) in the next 1 2 years.

Stock Rating Catalyst Category Price Target Price (2/17/14): $19.68 Upside: 42% Ticker: EAC Exchange: NASDAQ Industry: Aerospace & Defense Trading Stats ($USD millions) Market Cap: $272 Enterprise Value: $693 Price / Book: 1.4x Dividend Yield: 0% EV / Pro Forma 2015E EBITDA: 4.7x Price Performance 52 Week range: $11.29 - $29.42 Analyst Details IB Username: Eric Beckmann Employer: Private Fund Job Title: Analyst Analyst Disclosure EAC Position Held: Yes

BUY Value $28.00

Interactive Buyside Equity Research

February 16th, 2014

Company Overview
Erickson Air-Crane Inc. (NASDAQ: EAC) manufactures and operates Erickson S-64 Aircrane (S-64) heavy-lift helicopters. The company operates through two segments, Aerial Services and Aircraft Manufacturing and Maintenance, Repair, and Overhaul (Manufacturing/MRO). The Aerial Services segment offers a range of heavy-lift helicopter services using its worldwide fleet, including firefighting, timber harvesting, and infrastructure construction and related crewing services for government and commercial customers. The Manufacturing/MRO segment manufactures air cranes from existing airframes, produces components, and provides customers with MRO services. As of May 2, 2013, the company operated a fleet of 87 rotary-wing and fixed wing aircraft, including a fleet of 20 heavy-lift S-64 Aircranes. The company was founded in 1971 and is headquartered in Portland, Oregon.

EAC History
The base Erickson Air Crane business has existed for 40 years and specializes in lifting heavy things; 50% of their revenue is tied to firefighting while other services include construction work and timber harvesting. Their fleet of Aircranes (20) are capable of lifting 25,000 pounds so expect to see them dumping water on forest fires in Colorado or carrying enormous logs from areas without forest road access . In their Oregon headquarters, EAC manufactures and maintains their aircraft.

Interactive Buyside Equity Research

February 16th, 2014

New Deal
In 2009, Erickson Air Crane was sold to ZM Private Equity (aka Centre Lane Partners) and hired a new CEO. In April 2012, EAC went public though Centre Lane continues to own ~60% of the equity. In order to diversify away from its seasonal (summer fire season) and somewhat cyclical (timber harvesting) business, EAC acquired EHI in a distressed sale (an air transport provider, mostly defense related cargo and personnel) and AA as a carve out (the in house aerial logistics provider of HRT, one of the largest Brazilian oil exploration firms). Both these companies were purchased for 4 5x EBITDA. The combined end markets include the USA Department of Defense (43%, 30% Afghanistan), firefighting (19%), oil and gas (15%), timber harvesting (7%), crewing (4%), construction (3%), commercial (2%), and MRO (7%). North America represents 34% of revenue, Afghanistan (30%), South America (15%), Asia Pacific (10%), Europe (10%), and Africa (1%). In 2013, the company is guiding to a combined 390mm in revenue and 107mm in EBITDA (27% margins).

Interactive Buyside Equity Research

February 16th, 2014

The Opportunity
The unappreciated opportunity for the new EAC is the ability to increase utilization and decrease penalties at the EHI business. EHI was the helicopter operating subsidiary of Evergreen International Aviation, a distressed aviation services company. Due to financial challenges, the parent company was sweeping cash from EHI to pay its creditors and maintain overall operations. The EHI subsidiary was starved of capital investment so 30 of its 60 aircraft remained idle (50% utilization). Additionally, EHI s operational readiness declined to 85% meaning helicopters were not available for customers routes. The lack of inventory has led to substantial customer penalties: In 2012, EHI incurred 17mm in revenue penalties which flow entirely to the bottom line. Put another way, in 2012, the Legacy EAC business generated ~9mm per aircraft while EHI only generated ~3mm per aircraft. Although there are differences in project types and pricing, it is clear that EHIs fleet has underperformed. Under new ownership and capital investment, EAC will be able to redeploy EHI aircraft more efficiently across the customer portfolio (i.e. cross selling and optimizing aircraft to mission). If management is able to increase fleet utilization from 50% to 80% (management guidance), and decrease revenue contract penalties from 17mm to 2.5mm (management guidance), EHI EBITDA should increase ~25mm to 76mm, effectively lowering the purchase price of EHI to 3.3x (EAC purchased EHI for total consideration of $250mm (cash + debt + converts) off 2012 adjusted EBITDA of 51.2mm, implying at 4.9x valuation). I discounted the rev / utilization factor by 50% and projected incremental margins below corporate average (17.5%) because management has noted that the currently idle planes are generally smaller and less profitable than the existing fleet.

Interactive Buyside Equity Research

February 16th, 2014

In addition to revenue synergies from the EHI turnaround, there are also cost synergies from increasing scale. EAC has an internal MRO business (maintenance, repair, and overhaul = a helicopter body shop) that is running at less than 50% capacity utilization. By insourcing the repair operations for EHI and AAs fleets, EAC estimates it can save 8mm annually (management guidance). Other cost synergies (not included in projected financials) include combined marketing and SG&A initiatives and procurement benefits from increased scale.

Other Investment Highlights

Assets outweigh current enterprise value. EACs fleet was recently appraised at 714mm. Including other inventory and facilities, management believes the company owns 800mm in assets. Growth. Management has suggested (at conferences) that EAC is in a position to grow from a 500mm business to a 1bn business in 5 years, while carrying mid to high 20s EBITDA margins. High leverage magnifies opportunity. At a 60% debt / value, benefits will accrue to shareholders. If the company is successful, EAC should be in a position to refinance its 8.5% second lien note (callable in 2016). Aggressive ownership. Given PE firm Centre Lane owns 60% of equity, expect shareholder friendly activities.

Investment Concerns
EAC equity sold off ~40% after a negative Seeking Alpha article was posted questioning Centre Lanes ethics regarding the EAC / EHI merger (Massive Insider Deal Threatens Erickson Air-Crane). Concurrently, Centre Lane filed a shelf registration to sell all of its shares. The article posits that Centre Lane, which owned a large position in the 2nd lien debt of Evergreen International Aviation (EHIs distressed parent), pushed EAC to purchase EHI at an inflated price so that they could reali ze a decent return on their distressed debt investment. In reality, Goldman Sachs ran a full auction process for EHI (with multiple bidders), Houlihan Lokey wrote a fairness opinion, and Centre Lane purposely removed their board vote on the EHI merger (in order to maintain an arms length transaction). Furthermore, Centre Lanes equity consideration in EAC was worth more than their debt consideratio n in Evergreen International Aviation, so it doesnt make sense that they would leave EAC holding the bag. R egarding Centre Lanes shelf registration, it should be expected that they seek a return on their 2009 investment. I would expect them to lea k equity over the next several years so they dont risk oversupplying the market. The 40% sell off was a misunderst ood situation, magnified by a small public float, and represents a better buying opportunity.

Interactive Buyside Equity Research

February 16th, 2014

Business wise, the largest area of concern is EACs exposure to the Department of Defense (40% of overall revenue), particula rly in the Afghanistan geography (30% of overall revenue). With sequestration and the reduction of troops in the Middle East as headwinds, I expect Afghanistan demand to decrease 50% by 2015; this translates to ~17.5mm of EBITDA that is at risk. However, EAC is able to redeploy aircrafts to other customers and other parts of the world, making up for this lost EBITDA. Transportation costs to redeploy helicopters are not onerous; in fact, EACs 20 Aircranes migrate from the northern to southe rn hemispheres every winter in order to fight summer fires on the other side of the globe. This means overall utilization should still increase from 50% to 80%, per managements guidance.

Interactive Buyside Equity Research

February 16th, 2014

Financials and Valuation

Given a build to 2015 EBITDA of 149mm, a similar current (discounting based on small size and integration concerns to be conservative, I arrive at a $29 share price (50% upside).

Interactive Buyside Equity Research

February 16th, 2014

Financials and Valuation