Bombardier puts Russian turboprop assembly plans on ice due to political unrest

MONTREAL – Bombardier is suspending negotiations on a $3.4-billion proposal to assemble turboprop aircraft in Russia due to the country’s political situation and weak economy.

“We’re not moving ahead because the conditions are not right at this point in time for a joint venture in Russia,” president and CEO Pierre Beaudoin said Thursday during a conference to discuss the company’s third-quarter results.

The Montreal-based train and aerospace concern was hoping to conclude negotiations this year with Russian’s Rostec for the assembly of 100 Q400 regional jets.

The decision comes after Canada slapped sanctions against Russian individuals and entities, including government agencies, over Moscow’s involvement in unrest in Ukraine.

Bombardier (TSX:BBD.B) said a reorganization announced in July that cut 2,900 aerospace and transportation employees caused its net profit to plunge by half to US$74 million in the quarter, despite a 20 per cent increase in revenues.

About 2,000 aerospace employees were laid off, above the company’s earlier forecast for the elimination of 1,800 non-union administrative positions. An additional 900 transportation jobs were cut, about 100 less than originally planned.

The changes resulted in US$63 million of additional expenses in the quarter, including US$57 million for workforce reductions.

Over time, the changes are expected to boost earnings by US$268 million a year — US$200 million in the aerospace division and US$68 million in the transportation segment.

“In both groups, a new lighter structure will result in a more nimble organization which brings reduced costs and contributes to increased profitability,” Beaudoin told analysts.

Bombardier, reporting in U.S. dollars, earned US$74 million or three cents per share in the quarter ended Sept. 30, down from $147 million or eight cents per share in the third quarter of 2013.

Revenues were US$4.9 billion, up from $4.1 billion a year earlier.

Excluding special items, Bombardier’s adjusted net income rose by 35 per cent from a year earlier to US$222 million or 12 cents per share — beating analyst estimates by three cents per share.

Analysts had estimated nine cents per share of adjusted profit and 10 cents before adjustments with $4.8 billion of revenue, according to Thomson Reuters data.

Meanwhile, Bombardier said flight testing of the new CSeries commercial jet is progressing well, with 450 hours of flight tests now recorded, a 36 per cent increase since testing resumed Sept. 7, following a three month pause resulting from an engine failure. Flight hours are expected to accelerate as two flight test aircraft are added in the coming weeks, including the one damaged in the May incident during ground testing.

The company continues to say the CS100 will enter into service in about a year. Employees hired to assemble the aircraft are expected to gradually be added, starting around the second quarter.

Analysts said the results were strong, but investors will be concerned about the use of free cash flow, which was $368 million, above their forecast of $184 million, but down from $522 million last year. About $180 million of the free cash flow was consumed by aerospace, $81 million by transportation and $107 million by income taxes and interest payments in this year’s third quarter.

“With capital expenditures declining in the third quarter, we believe that Bombardier is moving in the right direction to improve its balance sheet and we would see any weakness as a buying opportunity,” wrote Benoit Poirier of Desjardins Capital Markets.

In the third quarter, Bombardier Transportation, the rail division, generated $2.3 billion of revenue, up 12 per cent from $2.1 billion, excluding the impact of currency fluctuations. New orders totalled $1.1 billion, resulting in an order backlog of $34.5 billion as of Sept. 30, up from $32.4 billion as of Dec. 31, 2013.

Bombardier Aerospace revenue increased by 29 per cent to $2.6 billion from $2 billion. It delivered 71 aircraft, up from 45 in the same period a year before. It also received 76 additional orders, compared with 26 in the third quarter of fiscal 2013.

For the first time in six quarters, Bombardier beat rival Gulfstream as the world’s leading business jet manufacturer, according to the General Aviation Manufacturers Association. It delivered 45 aircraft for a value of US$1.72 billion, up from 36 planes worth US$1.38 billion last year. Gulfstream shipped 31 planes worth US$1.68 billion, down from 38 planes for nearly US$2 billion in the 2013 period.

Meanwhile, Beaudoin denounced Quebec’s moves this year to reduce tax credits by 20 per cent, suggesting it might affect investment decisions by the major provincial employer and its suppliers.

“We believe that the tax credits towards the aerospace industry have tremendously contributed to our economy,” he said in response to a media question.

“When you invest in programs and you want to remain competitive on the world market you have to see what the best place is to do the work.”

Bombardier also said the company is looking at offering a lower-priced subway car to better compete in markets such as Latin America.

On the Toronto Stock Exchange, Bombardier shares closed down six cents at $3.81.

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