09/11/2012 11:39 EDT | Updated 11/11/2012 05:12 EST

Discovery Air shares fall as Q2 profit cut in half due to acquisitions

Discovery Air Inc. shares plummeted in Tuesday trading after the specialty aviation company's growth initiatives weighed on its bottom line despite higher revenues.

On the Toronto Stock Exchange, its shares fell nearly 11 per cent, losing 35 cents at $2.85 in morning trading.

The Yellowknife-based company reported Tuesday that its second-quarter profit fell to $8.9 million or 38 cents per share on a diluted basis, down from $17.98 million or 96 cents per diluted share in the year-earlier period.

Excluding a $300,000 gain from the May acquisition of Northern Air Support Ltd. (NAS), it earned $8.6 million, compared to $13.7 million in the same quarter last year.

Discovery (TSX:DA.A), which primarily provides air transportation services to remote areas, said its profit fell due to the significant investments it has made to grow.

Second-quarter revenue rose to $74.2 million from $70.6 million a year earlier. The increase was largely due to higher demand for services provided by its aviation segment, which posted a seven-per-cent increase in revenues to $68 million.

Revenues and flight hours increased from resource-based customers, incremental revenue contributed by the acquisition of SpA and NAS, along with higher forest fire and medevac services.

Helicopter charter company NAS was acquired in May for $9.4 million. It serves the western Canadian mining, forestry and oil and gas seismic sectors with bases in Kelowna, B.C., and Rocky Mountain House, Alta.

Other revenues fell to $6.2 million from $7.4 million a year ago due to lower exploration camp and logistics activity as well as lower revenues from the maintenance, repair and overhaul activities.

Despite the five-per-cent boost in overall revenues, the increase was short of Discovery's expectations. It experienced lower than planned revenues from the airborne training services, an unexpected decline in mining exploration revenues in northern Canada, delays in obtaining regulatory approvals for new aircraft and longer lead times to generate customer orders for the new service offerings.

"Our earnings declined despite strong revenue growth due largely to significant investments we made in a short period of time to position Discovery Air to capture long-term profitable growth opportunities," stated Brian Semkowski, interim president and chief executive.

Discovery acquired the two helicopter operations, put three commercial jets into service for a new charter operation and acquired seven aircraft so far this year. Its subsidiary Discovery Air Technical also acquired a portion of the airframe business from insolvent Aveos Fleet Performance.

"The acquisition, certification and operating costs associated with these recent additions in a relatively short span of time caused our expenses to grow at a faster rate than our revenues," he stated.

"We are committed to generating strong returns from our investments and expect our earnings to improve as our technical services business matures and we increase the utilization of our newly acquired aircraft."

Semkowski was appointed interim president and CEO in June, replacing David Jennings who had held the post since 2008. Jennings remains a director of the company.

The June 20 announcement came less than a week after Discovery reported that it had returned to the black in the first quarter of fiscal 2013, which also recorded a 42 per cent increase in revenue — rising to $52.9 million from $37.2 million.

Discovery, with some 850 employees and more than 150 helicopters and fixed-wing aircraft, provides airborne training to the Canadian military as well as airborne fire services, air charter services and logistics support along with a range of maintenance, engineering and certification services.