Bombardier swings to profit, prepares for production increas
THE GLOBE & MAIL - Feb 20, 2022
The Canadian maker of luxury private jets said it is positioning its factories to boost output by another 15 to 20 per cent as soon as 2023. That would likely mean recalling employees, reversing a trend in recent years of layoffs. The company’s major factories are located in Montreal and Toronto.
“While we still have much to do, we are now on firm ground and can look into the future with optimism,” Bombardier Chief Executive Eric Martel said in a statement Thursday accompanying better-than-expected fourth quarter financial results.
After years of turmoil at Bombardier that saw it teeter on the verge of bankruptcy, Mr. Martel is trying to stage a recovery for the Montreal-based industrial giant that hinges on a slimmed-down business model focused solely on selling and servicing private jets. Fourth-quarter and year-end financials reported Thursday suggest the effort continues to yield early results.
Bombardier’s adjusted earnings before interest, taxes, depreciation and amortization came in at US$113-million versus a loss of US$165-million for the same period last year. Revenue decreased 24 per cent to US$1.77-billion in the quarter as the company delivered 38 planes.
The company ekked out a net profit of US$238-million or 9 cents per share for the three-month period, reversing last year’s loss of US$337-million. Free cash flow, a metric closely watched by investors, was much better than analysts expected at US$314-million. Meanwhile, strong sales activity pushed the company’s book-to-bill, a measure of new orders against deliveries, to 1.5 for the year, according to the published results.
Once a major multinational with separate businesses making trains, commercial airliners and private jets, Bombardier is now a single-business manufacturer focused on private aviation. Its flagship product is the Global 7500 luxury jet, which sells at a starting price of US$75-million.
The Montreal-based company is riding an unforeseen surge in minimal-contact travel during the pandemic, which has lured business travellers out of commercial airliners and into private jets. Many airlines have drastically scaled back available flights over the past two years, pushing even more travellers to private flying options.
It is also benefitting from surging wealth among billionaires. Soaring equity markets and rising valuations of everything from mansions to crypto to commodities boosted the collective fortune of the world’s 500 richest people by more than US$1-trillion last year, even as the Covid-19 pandemic roiled the globe, according to Bloomberg data.
Those individuals are buying yachts but also private jets like those made by Bombardier and rivals Gulfstream and Textron. And those who aren’t prepared to wait years for their new plane to be built and delivered are fuelling nearly-unprecedented shortages in the used-jet market.
Bombardier said it expects demand for new jets to continue in the months ahead as economies reopen and the coronavirus pandemic leads more people to turn to private air travel. It issued a new 12-month financial forecast, saying revenue will climb from 2021 levels to top US$6.5-billion while adjusted earnings will top US$825-million.
Bombardier faces pressure on several fronts however, and potential supply chain disruption is near the top of the list. Some of the company’s smaller suppliers are facing labour shortages and the company has dispatched a team of its own specialists into different regions to work with them and help identify and fix any problems.
All manufacturers are trying to figure out how to get the suppliers back up quickly to be able to capitalize on the increase in demand, said Rolland Vincent, a former Bombardier executive who now runs his own aerospace consultancy.
“In March, April 2020, they told them to slow down. And you can’t whipsaw the supply chain and expect them to be able to recover,” Mr. Vincent said in an interview ahead of Bombardier’s results. “There are thousands of suppliers. It doesn’t take too many to slow the whole thing down.”
Competition is another issue. Announcements by rivals U.S.-based Gulfstream Aerospace Corp. and Dassault Aviation SA of France that they intend to bring new jets to market have increased the pressure on Bombardier to refresh its own lineup further, according to analysts. But the company’s weak financial position and pledges – it plans to limit capital expenditures at about US$200-million annually for the next several years – have raised questions about how long it can go without ramping up product development spending.
A problem thought to be resolved early last summer has also resurfaced. Two Bombardier bondholders previously locked in a dispute with Bombardier over its move to sell its train business to Alstom SA among other asset divestitures are now suing the company. They say the decision violates the terms of debt covenants on a US$250-million debenture maturing in 2034 and deprives them of basic credit support for their investment that came from a diversified transportation business.
In a claim filed with the New York Supreme Court, Antara Capital Master Fund and Corbin Opportunity Fund are demanding relief and damages over alleged breach of contract. They say the convenant stipulates that Bombardier cannot dispose of “the whole or substantially the whole” of its assets for the 30-year term of the debt, which is exactly what it did in dumping various businesses that generated almost 80 per cent, or roughly US$12.6-billion, of its total revenue and a similar proportion of after-tax earnings.
Bombardier has always maintained the allegations are without merit, but to fix the situation last year, it approached a wide swath of investors holding eight separate bond issues asking them to approve changes to their covenants to clarify language stating that the asset sales are permitted and to waive any alleged default. It won significant support from its lenders but not from the 2034 note holders.
To overcome that, the company sold US$260-million worth of new 2034 bonds via private placement to an unidentified institutional investor that agreed to support the waiver. The new investor’s stake is a majority stake in that tranche of debt so the practical effect of the move was to dilute the dissenting bondholders, who now say the move was illegal.
“The Company incurred $260 million in new debt that was far more expensive than alternative financing available in the market and paid a substantial premium to the unnamed Institutional Investor to buy off its consent,” the lawsuit states. “Those efforts are an abuse of bondholder rights under the Indenture and constitute bad faith and unfair dealing”
Bombardier says the allegations are without merit and that it has never been in breach of any covenant under the relevant indenture. When the bondholder issues first surfaced last year, Mr. Martel characterized them as “a little bump in the road” that would not distract management from its effort to turn the company around.