Bombardier misses guidance in preview of 2014 results, stock plunges 22% in early trading

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.


15 Comments on “Bombardier misses guidance in preview of 2014 results, stock plunges 22% in early trading

  1. It was the best thing to do. The CSeries is a great bet and Bombardier executives continue to bet. There are no innovative product that is safe without risk. And then the Global 7000 and 8000 are much more important on a strategic and financial plan.

    • If Embraer made a business jet off the E175e2, would it have any advantage over the large globals or gulfstreams?

      • No, Global and Gulfstream are designed to fly up to Mach 0.90+ and 54,000 ft, the E2 is a commercial airliner and he is designed to fly up to Mach 0.78 and 42,000 ft. Anyway, even if the E175E2 BJ could fly at Mach 0.90, he could never approach the Gulfstream/Bombardier business jet range.

        • Thanks, the Global and Gulfstream are impressive machines. I was thinking about the merits of engine placement. I guess fuselage mounted is still the way to go even as these jets get slightly larger.

        • Let’s call the Spade a Shovel Nick-
          Although legal repercussions are in cyberspace too, can’t be too careful what you say on the World Wide Web so let’s talk facts on public information
          The E 2 was launched approx 16 months ago and has sold more planes than the challenger series total sold in 16 years, imagine if they make a ultra long range plane ……
          FYI -the E2 can’t be compared to a global or 650 – a fair comparison is the CRJ 200 or maybe 700 and nobody in the civil market goes legally above fl510 or 51,000ft or cruises above M90+even remotely efficiently without spitting our more fuel than it’s worth to save 25 minutes on a 5hr flight

  2. Bombardier is in cash preservation mode. They have to sacrifice something and the Learjet 85 is it. Of course, if they could afford to continue development, they would, as it’s not so obvious that demand is weak in this segment.

    The CSeries has become more of a bet-the-company projet than BBD would have believed when it started it. Another major incident or delay could push cash needs too close to the brink.

    Unfortunately, financing has the nasty habit of drying up when you truly need it. In the case of BBD, worst case scenario is that the company would have to secure interim financing from the Canadian, Quebec and British governments to pursue CSeries development.

    • If the money runs out, in the worst and best case scenario, Bombardier will form a joint venture with COMAC. Bombardier would save 20 years to COMAC. With credibility, reputation, etc.

  3. I don’t buy the “bet the company myth” thing, Boeing would have gone on fine, despite a drop off in company fortunes for a bit.

    The only one I truly know of was Ford putting it on the line just before the drop in 2008, but there was a solid plan there and surviving the drop was proof it was a very good one.

    I always thought BBD hung themselves out on this one a long ways. I think the concept is right, but I always though they underestimated the resources needed to make it succeed. Frankly I was surprised when they resurrected it after I thought they had put it to rest.

    I do hope to see them succeed, its a unique aircraft in a category there really is no direct rival for.

  4. My quick assessment from the last two weeks of aerospace reports is that A and B are both doing very well: they have great product line-ups, the demand seems quite overwhelming, and both are essentially limited by the global supply chain which fortuitously ensures healthy margins. Looking forward, the two OEMs will likely maintain a 50/50 split of orders and deliveries for the foreseeable future. Both A and B will have less than stellar cash-flow in the next three to four years, but that will gradually improve since none is planning any “moonshot” anytime soon.

    As a consequence, the duopoly looks as strong as ever. The barriers to entry in this industry, in terms of finance and regulation, but also timely engineering, supply chain management and customer relations/support, are truly massive. Because both OEMs seem to be very cognizant to airline demands, fleet planners have little reason to look towards third party manufacturers. The difficulties of BBD’s CSeries moonshot will probably also effectively serve as a deterrent for investors considering entry into the general commercial aviation market; if BBD seemingly can’t enter, then who can?

    The delay of the CSeries program raises an additional hurdle. Because of the rapid growth of RPMs, about 5% year-on-year according to ICAO, the CSeries is rapidly becoming undersized, even for its market niche. Since inception fifteen years ago, airlines have shifted toward demanding aircraft that carry considerably more passengers. This development, while seemingly predictable, has also adversely affected the 787 program, which since seven years has only booked its stretch variants, and the A350 program, which has had to cancel its shrink variant. Ten years from now, less than halfway into the service life of the first CSeries delivered, the global RPM demand will be more than 60% greater than today; a capacity gap that will be met through increased frequency and, notably, larger airplanes.

    • I agree with your view of the increased number of seats. Precisely, between the years 2020 and 2030, and if the regional aviation in the United States and elsewhere based on aircraft with 100 seats at a minimum, CS100, CS300 CSeries, having experienced their reliability, would they not aircraft of choice, knowing that Bombardier could offer compatibility with larger aircraft as a CS500 or CS700?

      • I wish Bombardier all the best, certainly, and the CSeries will probably ultimately be successful. But it seems awfully difficult to attack a rapidly expanding market from below, particularly given the entrenched duopoly. Ten years from now there will be plenty of 737-700 and A319 available for lease, with 20% higher block fuel burn relative to the CS300 but at vastly lower capital costs, and an abundance of type rated pilots, trained mechanics and available spares. Again, let’s root for the underdog, but realistically it will at best be a grind.

        • Beautiful synthesis of other issues, indeed. Thank you. What an incredible game of chess is being prepared on the horizon with the possible entry of new single-aisle of Boeing and Airbus around 2025! For now, though I would buy the shares at $ 3 betting as Bombardier produces a CS500 / CS700 in 2020, so before anyone else! With virtually equivalent technology, etc.

        • That’s already happened with the A319. Newish planes for immediate lease at aggressive prices and the workhorse of airlines you have never heard of operating out of countries you barely know about, as well as Spirit and Frontier. Established airlines are also happily using the A319 while gradually upgrading to the A320.

          No-one is buying the plane but everyone is using it, which will impact the CSeries and its cashflow for sometime yet.

    • John B: Of course there will be moonshots and entries, China and Russia with full government backing. Private not so likely if at all.

      The won’t succeed to any serious degree. You can’t do with airplane that you do with computers. You have one shot and you can’t do advance tech because you haven’t mastered (commercial) tech and what it takes to sell and support. When an aircraft design is going to serve 30 years it has to be right or you have to be able to correct it quickly.

      China can’t even get the ARJ certified let alone start the improvement cycle. C919 by the time its going will be superseded by single aisle replacements (and suffers worse than 737 on pax limits)

      The odd part is that C Series is in a segment that A & B no longer serve, it would be to their advanget to have good econoila aircet serving into those markets (airport) that their hardware does serve.

      • Airbus & Boeing are going to face a similar problem.737 & 320 are highly refined & have huge infrastructure supporting their current production methods.its going to be horribly risky to replace knowing your competitor might come up with something fundamentally is in a slightly better position,as Boeing will probably have to go guys are always criticising planes for being not big enough,unless it’s the a380 which is apparently too big!

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