Bombardier Falls After Cutting 2014 Targets on Costs

Bombardier Inc. (BBD/B) tumbled to the lowest level in more than a year after it reduced 2014 profit targets for aerospace and train divisions and boosted the cost estimate for a second time for the CSeries family of jets.

Shares of the company fell 8.9 percent to C$3.68 by the end of trading in Toronto, the lowest close since December 2012. The slide was the biggest among 241 stocks on Canada’s benchmark Standard & Poor’s/TSX Composite Index. (SPTSX)

News from the Singapore Airshow:

Bombardier is depending on the CSeries to almost double annual sales toward decade’s end. It now expects the jets to cost about $4.4 billion in development, Chief Financial Officer Pierre Alary said today -- $1 billion more than the company targeted when it decided to proceed with the program in 2008. The plane will weigh on profit margins for the first two years after its commercial debut next year, executives said.

“We’re investing into our future, which will create a lot of growth for our company,” Chief Executive Officer Pierre Beaudoin said today on a conference call with analysts and reporters. “Temporarily it has some effect on our margins.”

Earnings before interest and taxes at the planemaking business will amount to about 5 percent of revenue this year, down from an earlier projection for a 6 percent margin, Montreal-based Bombardier said today in a statement. Ebit at the rail division will be about 6 percent of sales, short of the 8 percent goal that “remains the objective,” it said.

Photographer: Patrick Doyle/Bloomberg

Three delays to the introduction of the CSeries, Bombardier’s biggest-ever plane at 108 to 160 seats, have prevented the company from curtailing spending as fast as planned. Close

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Photographer: Patrick Doyle/Bloomberg

Three delays to the introduction of the CSeries, Bombardier’s biggest-ever plane at 108 to 160 seats, have prevented the company from curtailing spending as fast as planned.

Significantly Below

“Initial 2014 guidance is significantly below our forecast,” Fadi Chamoun, an analyst at BMO Capital Markets in Toronto with an outperform recommendation on Bombardier stock, said today in a report to clients. Cash resources “appear sufficient to support capital spending and program development, but are not at a comfortable level.”

Moody’s Investors Service and Standard & Poor’s today cut their corporate debt ratings on Bombardier one step to three levels below investment grade. Moody’s move was driven by “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,” Darren Kirk, senior credit officer at Moody’s, said in a statement.

Delays to the introduction of the CSeries -- Bombardier’s biggest-ever plane with 108 to 160 seats -- have prevented the company from curtailing spending as fast as planned.

Capital expenditures at the aerospace unit will be in a range of $1.6 billion to $1.9 billion this year and total $1.2 billion to $1.5 billion in 2015, Bombardier said. Those figures exceed the $1.5 billion budgeted for 2014 and $1 billion for next year that the company targeted a year ago.

Delays, Delays

Bombardier outlined plans in January to eliminate about 1,700 aerospace jobs after pushing back the new CSeries airliner’s entry into service by about nine months. Bombardier had 201 firm orders for the CSeries as of Feb. 9, compared with a target of 300 by the time the CS100 -- the smallest of two versions of the plane -- makes its commercial debut in the second half of 2015.

“Prior to the delay in the CSeries entry-into-service, 2015 was looking like the year things would come together for Bombardier; it now appears that 2016 may be the year when meaningful improvements to profitability and cash flow materialize,” Cameron Doerksen, an analyst at National Bank Financial in Montreal, said today in a note to clients.

Bombardier plans to spend $750 million to further develop the CSeries and will have $300 million in borrowing costs until the larger CS300 enters service in the first half of 2016, Alary said on the call. Total expenditures as of Dec. 31 amounted to $3.3 billion, he said.

The company had previously estimated the CSeries was going to cost $3.4 billion under Canadian Generally Accepted Accounting Principles, and $3.9 billion under new International Financial Reporting Standards rules.

Cash Flow

Bombardier used $771 million of free cash flow in the quarter, down from $854 million a year earlier.

Available short-term capital resources amounted to $4.8 billion at Dec. 31, including cash and cash equivalents of $3.4 billion, Bombardier said. That compares with $4 billion and $2.6 billion respectively a year earlier.

Bombardier has completed about 100 flight hours for the CSeries, Beaudoin said today, That’s equivalent to 4 percent of the planned 2,400 hour flight test program.

The manufacturer is targeting a 20 percent increase in plane deliveries this year to 280 aircraft, including 200 business jets and 80 regional models.

To contact the reporter on this story: Frederic Tomesco in Montreal at tomesco@bloomberg.net

To contact the editor responsible for this story: Ed Dufner at edufner@bloomberg.net

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