(The Montreal Gazette posted the following article by Nicolas Van Praet on its website on December 4.)
MONTREAL — Investors pushed up shares of transportation conglomerate Bombardier yesterday after the company reported higher third- quarter profits, and chief executive Paul Tellier vowed to turf workers and shut down production at several underperforming train plants in Europe.
Bombardier stock jumped 45 cents to close at $5.40 in trading on the Toronto Stock Exchange.
Analysts said it could have run up higher were it not for another development: Bombardier said it will get about $115 million less from the sale of its recreational- products division than expected.
The company said yesterday it finalized a deal to sell the recreation unit with a group formed by the Bombardier family, Bain Capital and the Caisse de dépôt et placement du Québec.
But the net purchase price dropped to $960 million from the $1.08 billion previously announced. The aggregate price both sides first agreed on was $1.23 billion.
That means adjustments have now lowered the price of the unit by $265 million.
Bombardier said the drop was caused mainly by the steady rise of the Canadian dollar relative to the U.S. dollar which lowered the value of the business. Most of the unit’s sales of snowmobiles, personal watercraft and all-terrain vehicles are made in the U.S. Tellier said Bombardier Inc. also moved some cash out of the unit.
“The price adjustment is acceptable given the currency fluctuations which occurred since we entered into the initial agreement,” Tellier said.
Since Aug. 27, when Bombardier and the purchasers struck the deal, the loonie has rocketed up 7.4 per cent. It closed Tuesday above 77 cents U.S. for the first time since 1993.
Tellier put the snowmobile unit on the auction block as part of a wide-ranging shakeup and recapitalization at Bombardier, which he joined in January. He said the sale of recreational products nearly completes that process.
“Bombardier Inc. can now focus on its aerospace and transportation operations.”
Plane-making drove Bombardier’s third-quarter profits higher by two per cent for the three months ended Oct.31.
Net earnings rose to $184.8 million from a restated $181 million in the year-earlier period.
Earnings per share fell to 10 cents from 13 cents in part because Bombardier recently issued new shares, increasing the number of shares outstanding.
Revenue for the quarter fell 3.7 per cent to $4.7 billion.
The company made a one-time gain of $112.3 million by selling its military-aviation unit. Not counting that sale, profit per share was 6 cents, in line with analysts’ expectations.
Tellier insisted Bombardier’s efforts to cut costs and boost profits in its plane-making business have succeeded. The proof: the aerospace division went from a loss in the first quarter to a 3.2-per-cent profit margin in the latest quarter.
But analysts warn plane buyers are having a hard time finding financing and firms are still reluctant to buy corporate jets.
“Everyone is in trouble,” said John Walsh, an U.S.-based aerospace consultant. Walsh said Bombardier’s jet backlog is declining compared with rival Embraer’s, and production rates of its RJs should slow down.
Bombardier aerospace boss Pierre Beaudoin said the company is banking on more revenues from bigger regional jets as sales of its smaller 50-seater drop off.
Profit at Bombardier’s train-making unit fell 27 per cent in the latest quarter to $77 million.
Tellier tongue-lashed the weak performance of the division and had few kinds words for Pierre Lortie, who quit last week as president of the troubled rail unit. Tellier is so concerned about turning the business around quickly he’s leading several rationalization initiatives himself.
The problem is particularly acute in Europe, where Tellier said some plants will be shut down and workers laid off, including management. He could not provide more details yesterday, saying the changes will be made over the next several months and could extend into 2006.
Bombardier acquired several train-making plants in recent years such as the ADtranz factory in Derby, Britain. but has not yet succeeded in squeezing optimal operations out of them. Several plants are now operating at barely 35 to 40 per cent of their maximum capacity, Tellier said.
The firm faces a challenge in making cuts in Europe, where labour laws are stronger than in North America and politicians have a history of meddling in corporations’ decisions.
Tellier agreed it will be a difficult task. “Having said this, it has been done. It is doable. And we are determined to do it.”