Bombardier says CSeries delays pushing program cost up to US$4.4 billion

MONTREAL – Bombardier insists its CSeries commercial aircraft will be a financial success even though the airplane’s cost will rise to about US$4.4 billion as delays in first deliveries add about US$1 billion in development costs and capitalized interest.

The Montreal-based aerospace and rail equipment manufacturer disclosed the higher costs Thursday on the same day it report quarterly adjusted earnings that came in well below estimates.

Investors responded with a major sell-off that saw Bombardier (TSX:BBD.B) shares knocked down 36 cents, or 8.91 per cent, to $3.68 on massive volume of some 49.2 million shares, almost six times their daily average.

The shares had hit a new 52-week low of C$3.44 in morning trading on the Toronto Stock Exchange.

Bombardier — which has delayed entry of its CS100 plane to the second half of 2015, with the larger CS300 six months after that — said Thursday that it now epects to spend $750 million on development costs through 2016 and about $300 million in interest.

It previously estimated the CSeries would cost US$3.4 billion under GAAP accounting standards and US$3.9 billion under new IFRS rules.

Despite the delays and higher costs, chief executive Pierre Beaudoin said he remains bullish about the new plane.

“With the investments we are showing you on the CSeries, we feel very good about the business case for the (airplane),” he said during a conference call to discuss fourth-quarter and 2013 results.

Beaudoin declined to say how many aircraft need to be sold to break even, but said the CSeries program will generate US$5 billion to US$8 billion a year in revenues at maturity and help to improve the company’s overall profitability.

“Our potential is enormous and we’re excited about our future. Our investments are about to pay off,” he said.

The sell-off came as Bmbardier reported adjusted net income fell 29 per cent to US$129 million in the fourth quarter, down from US$181 million a year earlier.

That translated into seven cents per share, compared to 10 cents per share in the prior year and four cents less than the 11 cents analysts surveyed by Thomson Reuters expected.

Despite the miss on earnings, revenue was slightly better than expected, rising to US$5.3 billion for the three months ended Dec. 31 from US$4.6 billion a year earlier.

Reporting in U.S. dollars, the company’s net income under standard accounting, before adjustments, was $97 million or five cents per share, which compared with a year-earlier loss of $4 million or one cent per share.

The results are the first since the company again delayed the entry into service of the 110- to 160-seat CSeries by up to two years from the original date and announced the layoff of 1,700 aerospace workers in North America.

The aircraft has flown 100 hours of testing, well short of the 2,400 required to receive Transport Canada certification. Beaudoin said the company may get some credit for ground testing and expects flight hours will pick up as the seven test airplanes, each with different missions, take to the air.

Analysts have raised concerns about whether the delay will cause a cash crunch for the company and force it to issue more shares or seek more funding. But officials assured that it has enough flexibility with $3.4 billion of cash and access to $1.4 billion in credit.

Still, Moody’s Investors Service and Standard & Poor’s downgraded Bombardier’s ratings.

“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 Darren Kirk, Moody’s vice-president and senior credit officer.

Following an order last weekend for three CS300 aircraft from an existing unnamed customer, Bombardier has booked orders and commitments for 445 CSeries aircraft, including firm orders for 201 CSeries aircraft from 17 customers. Bombardier aims to have at least 300 firm orders by first delivery.

Beaudoin said he doesn’t believe the delivery delays which narrow the window of advantage over its competitors will hamper orders.

“We have a significant competitive advantage and as far as I’m aware, there’s nobody developing a new airplane in that category,” he said, pointing to Embraer, Boeing and Airbus updating existing aircraft with new fuel-efficient engines.

The aerospace division earned $93 million on $2.9 billion of revenues in the quarter, up from $84 million on $2.6 billion of revenues a year earlier.

On the rail side of the business, Bombardier Transportation earned $92 million on $2.45 billion of revenues, compared to a loss of $83 million on $2.03 billion of revenues.

For the full year, Bombardier earned $572 million or 31 cents per share, up from $470 million or 25 cents in 2012. Adjusting for one-time items, profits slipped to $606 million or 33 cents per share, from $671 million or 36 cents a year earlier. Revenues increased nearly 11 per cent to $18.15 billion, up from $16.4 billion.

Walter Spracklin of RBC Capital Markets said the profit margin for both divisions was well below expectations in the quarter, at 3.2 per cent for aerospace and 3.8 per cent for transportation.

“It now appears that 2016 may be the year when meaningful improvements to profitability and cash flow materialize,” he wrote in a report.

Bombardier expects to deliver 280 aircraft in 2014, including 200 business jets and 80 commercial aircraft, up from 237 in 2013.

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