www.wingsmagazine.com

News
Bombardier dealing with CSeries cost hike

Feb. 14, 2014, Montreal - Bombardier Inc. raised its C Series cost estimate by more than $1-billion and forecast weaker profit margins this year, prompting concerns about the company’s finances as it struggles with development delays and uncertain demand for aircraft.


February 14, 2014
By The Globe and Mail

The Montreal transportation giant added development costs of about
$750-million and interest charges of about $300-million to the C Series,
following a series of delays in bringing the narrow-body passenger jet
to market. Bombardier had previously calculated a total cost of
$3.9-billion for the program.

C Series is the centrepiece of Bombardier’s growth plan, but delays
in performance tests of the jet after its maiden flight last year have
led to higher costs amid slow sales. Still, the company is hoping to win
solid market share in the narrow-body segment as it targets the second
half of 2015 for entry into service of the jet.

 

“We remain
confident that we have a good business case for the C Series,” said
Bombardier president and chief executive officer Pierre Beaudoin on a
conference call, adding the company can absorb the additional costs.

 

But
the higher cost outlook and pressure on profit margins are raising
concerns about Bombardier’s financial performance and future cash needs.
Shares of the company, already down sharply in recent months, tumbled
about 9 per cent to $3.68 a share on the Toronto Stock Exchange
Thursday.

 

Moody’s Investors Service and Standard & Poor’s
trimmed their corporate debt ratings on Bombardier one more notch, to
three levels below investment grade.

 

“The downgrade of
Bombardier’s ratings is driven by its higher than expected cash
consumption in 2013 and our view that the company’s negative cash flow
and elevated leverage will persist longer than we previously expected,”
said Moody’s senior credit officer Darren Kirk.

 

The aerospace
division is expected to post a profit margin before interest and taxes
(EBIT) this year in the 5-per-cent range, down from previous guidance of
6 per cent, the company said Thursday. On the rail side, EBIT is now
expected to come in at 6 per cent instead of 8 per cent.

 

The
company reported fourth-quarter net earnings on an adjusted basis of
$129-million (U.S.) or 7 cents per share, down from $181-million or 10
cents in the year earlier period. Analysts had been expecting earnings
per share of 11 cents. On a non-adjusted basis, profit was $97-million
or 5 cents, compared to a net loss of $4-million or 1 cent.

 

Revenues
were $5.3-billion, up from $4.6-billion.

 

“Overall, this was a weak
quarter on many different levels. [Free cash flow] and aero [capital
expenditures] will be the key areas of concern,” RBC Dominion Securities
analyst Walter Spracklin said in a research note Thursday.

 

“We
continue to believe that [Bombardier] remains in a challenging liquidity
position and today’s lower than anticipated [free cash flow] generation
will likely add to funding concerns.”

 

Bombardier executives said
on the call that the lower aerospace target is due to a lack of recovery
in the business jet segment and the fact that deliveries of the new C
Series jet have been put off to the second half of 2015.

 

“We haven’t seen any significant recovery in the business aircraft market,” said chief financial officer Pierre Alary.

 

Meanwhile,
Bombardier Transportation has been experiencing problems on some
contracts and is working on resolving the issues and restructuring the
division, said Mr. Beaudoin.

 

Pressed to provide a date on when
Bombardier Transportation expects to reach its objective of an 8 per
cent margin, Mr. Beaudoin said, “I want to feel confident that this
reorganization is in place before I give you a specific date.”

 

Mr. Beaudoin said the C Series is “now well into its extensive flight test program.”

 

Last
month, Bombardier announced the layoff of 1,700 employees across all
operations of its aerospace division as it seeks to cut costs.

 

So
far, Bombardier has booked firm orders for 201 C Series planes from 17
customers. The target is to have 300 firm orders by first delivery.

 

As
for Bombardier’s existing aerospace products, the company delivered 60
business aircraft in the fourth quarter, the same as in the year-earlier
period. The number of commercial planes delivered was 21, up from 16.

 

Chief financial officer Pierre Alary said the finances are in good shape.

 

Available
short-term capital resources at the end of the quarter were
$4.8-billion, including cash and cash equivalents of $3.4-billion,
compared with $4-billion and $2.6-billion respectively in the
year-earlier period.

 

“This is a level we feel is adequate given the investments we still have to make,” Mr. Alary said on the conference call.