News
Bombardier swings profit, C Series testing on track
Feb. 13, 2014, Montreal - Bombardier Inc. won’t make its profit margin targets in 2014 as the company lowers expectations following a disappointing fourth quarter and adds about $1-billion (U.S.) to the cost of its C Series new-jet program.
February 13, 2014 By The Globe and Mail
Shares on the Toronto Stock Exchange fell sharply on the news.
Senior
executives said on a conference call Thursday that development costs of
about $750-million and capitalized interest in the $300-million range
will have to be spent on the C Series as the company adjusts spending
following a series of delays in the program.
That’s in addition to the $3.4-billion already earmarked for the C
Series, calculated as $3.9-billion under new accounting rules.
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| Photo courtesy of Bombardier.
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Bombardier
president and chief executive officer Pierre Beaudoin said he is
confident the company can absorb the additional costs thanks to
anticipated higher revenues and improved profitability as well as a
tapering off of spending on development of the C Series and other
programs.
“We remain confident that we have a good business case” for the C Series,” he said.
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.
However,
Moody’s Investors Service and Standard & Poor’s on Thursday 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 earnings 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.
Analysts
expressed concerns over the lower margin targets and the company’s
liquidity position given potential cost overruns due to the latest delay
in the $3.9-billion C Series new jet program.
“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.
But
one analyst pointed out that Bombardier’s business-jet rivals are
performing very well in what appears to be a resurgent market.
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, the company again delayed entry into service of the C Series, to the second half of 2015.
It also announced the layoff of 1,700 employees across all operations of its aerospace division as it seeks to cut costs.
Analysts have cautioned that higher-than-projected spending on the C Series program might result in a cash crunch.
Bombardier
said on Thursday it had $771-million in free cash flow at the end of
the fourth quarter, down from $854-million in the year-earlier period.
So
far, Bombardier has booked firm orders for 201 C Series planes from 17
customers. The target it 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.
Bombardier Aerospace revenue in the quarter was $2.9-billion, up from $2.6-billion.
On the rail side, revenues totalled $2.5-billion, up from $2-billion.
The
combined backlog of the aerospace and rail divisions is a record
$69.7-billion, and $5-billion in new orders has already been booked
since the beginning of the year, he said.
