Jan. 15, 2015: Bombardier, struggling with poor aerospace sales across its business jet and commercial lines, missed previous guidance on cash flow and other metrics, three Wall Street investment banks reported today.
BBD’s stock traded off 22% in early trading.
Immediate reaction from the banks’ aerospace analysts:
Goldman Sachs (Sell) writes:
Bombardier pre-announced substantially worse than expected 4Q14 operations, and announced a “pause” in the Learjet 85 business jet program. The 4Q operational items announced by the company appear to imply approximately $0.03 of EPS for the quarter, compared to consensus and our estimate of $0.12, and a full-year free cash burn roughly $500mn worse than we anticipated.
With regard to 4Q:
BBD stated that following a review of preliminary results for the year ended December 31, 2014 it has become clear that certain financial guidance previously provided will not be met. It says the EBIT margin at Aerospace for the year is now expected to be approximately 4% compared to prior guidance of 5%, with the variance due to increased provisions for credit and residual value guarantees, pricing pressure on new aircraft, and a decrease in fair value of used aircraft. The YTD EBIT margin at Aerospace was slightly greater than 5%, so for the full-year to be 5% 4Q would need to be barely greater than breakeven (compared to our estimate of 5.0% for the quarter). EBIT margin at Transportation for the year is now expected to be approximately 5% compared to prior guidance of 6%, with BBD citing revised escalation assumptions for some contracts which impacted estimated future revenues. The YTD EBIT margin at Transportation was nearly 6%, so for the full year to be 5% 4Q would need to be approximately 3.5% (compared to our estimate of 6.7% for the quarter). BBD also significantly negatively revised its cash flow expectations for the year. The numbers provided in the release suggest 4Q free cash flow approximately half of our estimate – approximately $400mn, vs our estimate of $855mn. It also implies a full-year free cash flow use of $(1.3)bn, larger than last year’s $(907)mn. The company lowered its free cash flow expectations in both Aerospace and Transportation.
With regard to the Learjet 85:
Bombardier uses the term “pause”. It is not clear if that means it plans to temporarily stop the program with a specific planned timeline for a restart, or if it is indefinitely stopping the program. The company states the pause is due to weak demand for the aircraft specifically and continued weakness in overall light cabin business jet. BBD will record a pre-tax special charge in 4Q14 of $1.4bn mainly related to the impairment of the Learjet 85 development costs. BBD also stated it will reduce workforce by 1,000 employees at related sites, which will result in a severance provision of $25mn in 1Q15.
We are Sell rated on Bombardier.
We believe this announcement supports a Sell rating. Our existing 12-month price target of C$3.15 is derived from targeting 6.5X CY15E EV/EBITDA. Key risks for BBD include: (1) the last CSeries schedules reset was long, making the timeline more realistic, (2) a potential recovery in the business jet market, (3) overall low investor expectations
JP Morgan (Underweight) writes:
Liquidity is now the key issue for the stock.
Our primary focus following Bombardier’s pre-announcement this morning is liquidity. Cash at December 31 was $2.4 bn after Q4 FCF missed our estimate (which had been below guidance) by ~$600 mn. Management has noted in the past that it needs ~$2 bn to run the business, and Bombardier typically burns cash during the first nine months of the year (~$1.7 bn each of the past four years). Cash burn in 2015 may be less than usual following the Q4 weakness, but cash still seems likely to move well below the required level unless the company raises fresh capital. Bombardier’s revolvers could provide an additional $1.4 bn if necessary for the near term. However, the company also has to refinance $750 mn of debt due in Jan 2016 and one of its two revolvers matures in March 2016. We estimate that net leverage was ~4x LTM adjusted EBITDA at year end based on today’s announcement. Bombardier has had consistent access to the debt market in recent years, but it is unclear to us if this is still the case and what the cost of debt may be.
Aerospace margin and cash from operations missed guidance.
Management now forecasts a ~4% Aerospace margin vs ~5% previously and $800 mn of cash from operations vs $1.2-1.6 bn. Key issues on the earnings side include credit and residual value guarantee provisions, lower values for used aircraft, and pricing pressure on new aircraft. We have been concerned about Bombardier over-producing business jets and believe this is playing a primary role in the pricing weakness. From a cash flow standpoint, lower than expected EBIT, lower advances (on weak orders), and higher used aircraft inventories drove the shortfall. It is possible that the adverse working capital swings in Q4 provide a better starting point for 2015; however, issues like pricing pressure as a consequence of over-production might not go away quickly.
Transportation margin and cash fell short as well.
Management lowered the 2014 Transportation margin guidance by 100 bps, in this case to 5% from 6%, citing new escalation assumptions. Cash flow is expected to be slightly positive vs in line with EBIT previously, which drives a ~$400 mn reduction in expected cash flow relative to our estimate for changing cash flow profiles for individual contracts and lower advances. Over the past four years, BT has now generated $650-700 mn of cash flow vs estimated adjusted EBIT of $2.1 bn, calling into questions management’s framework for generating cash flow in line with EBIT over time.
Lear 85 pause is not a major surprise.
We had expected Bombardier’s decision to shelve the Lear 85 for now due to the program’s struggles and the more important development and production challenges Bombardier faces for the CSeries and Global 7000/8000.
UBS (Neutral) writes:
Slashes margin & FCF guidance
BBD cut its 2014 EBIT guidance by ~$200M and its pre-tax FCF guidance by ~$900M as Aerospace and Transportation margin expectations both move ~100 bps lower to 4% and 5%, respectively, while working capital builds at both businesses on lower advances and higher inventory. We estimate that guidance implies 2014 FCF at use of ~$1.3B assuming $300M in cash interest and no cash taxes. BBD also delayed Learjet 85 development program indefinitely. While push-out itself is not a surprise (we model first delivery in 2018), $1.4B related charge was larger than we would have expected.
Cuts Transportation margin and FCF guidance
BBD attributed 100 bps Transportation margin short-fall to lower price escalation that impacts contract pricing, likely related to recent commodity price declines while lower input cost probably comes through with a lag. Transportation FCF now seen relatively flat (on unlevered/untaxed basis), as compared to prior guidance for “in line with EBIT”, which would have implied $550-600M at 6% margins with difference attributed to lower customer advances, which we highlighted as a risk in our 2013 initiation report.
Cuts Aerospace guidance too
BBD attributed 100 bps margin short-fall at Aerospace to increased provisions for credit guarantees and residual value guarantees, along with deteriorating pricing and used aircraft inventory write-downs. We see guidance cut as consistent with 50-seat RJ supply glut that we have highlighted. FCF now seen at use of $1B (on unlevered/untaxed basis), ~$650M worse relative to midpoint of prior guidance with difference attributable to lower advances, higher inventory and lower EBIT. We note that Q3 Global backlog at 21 months is back to 2009 level, potentially contributing to deteriorating advance profile along with possible return of prior Learjet 85 advances.
The Canadian investment bank Desjardins (Buy) writes:
This morning Bombardier revised its 2014 guidance down, with Bombardier Aerospace (BA) EBIT margin ex special items expected to be at ~4% (was 5%; we expected 5.3%) and Bombardier Transportation (BT) EBIT margin ex special items at 5% (was ~6%; we expected 5.8%). Management explained that this decline at BA is due to the increased provision for credit and residual value guarantees, pricing pressure on new aircraft sold and decreased fair value of used aircraft. On BT’s side, the decrease is mainly due to revised escalation assumptions for some contracts which impacted estimated future revenues.
BBD now expects BA cash flow from operations of ~US$800m (was US$1.2–1.6b) and net additions to PP&E and intangible assets of ~US$1.8b (guidance was US$1.6–1.9b), notably due to a lower level of customer advances and lower EBIT. BT’s FCF guidance has also been revised down from “in line with EBIT” to “FCF slightly positive”. As a result, BBD’s available short-term capital resources at the end of 4Q14 were at US$3.8b, including US$2.4b in cash & cash equivalent (we expected US$2.7b).
More importantly, management also announced this morning that it is pausing the Learjet 85 program because of weak market demand. As a result, BBD will record a pre-tax special charge of ~US1.4b during 4Q14 and will reduce its workforce by ~1,000 employees at its Querétaro and Wichita sites. While we believe the Street was already somewhat concerned about the Learjet 85 program because of previous delays, we believe this decision will raise concerns about management’s decision process. However, we believe this was the right decision to make as management remains committed to lowering capex and developing the CSeries and new Global programs.