(Bloomberg News circulated the following story on May 27.)
WASHINGTON, D.C. — Bombardier Inc., the world’s biggest maker of train cars, had a first-quarter loss because of cost overruns on rail contracts and expenses to cut jobs and offer incentives to sell aircraft. The stock fell as much as 13 percent.
The net loss in the period ended April 30 was $174 million, or 10 cents a share, compared with net income of $54 million, or 3 cents, a year earlier, Montreal-based Bombardier said. Sales rose 5.9 percent to $3.53 billion, helped by higher jet deliveries.
Chief Executive Officer Paul Tellier, hired more than a year ago to turn around the company, asked investors today to “be patient” as he fixes the unprofitable rail unit by closing plants and improving contract performance. The unit recorded $200 million of contract losses in the quarter because of unforeseen costs and lower-than-expected revenue.
“They’re still struggling, and the stock’s not cheap,” said Peter Arender, who helps manage the equivalent of $323 million for Acker Finley Inc. in Toronto. “Honeymoons only last so long and investors are expecting that Tellier’s working his magic and stuff’s happening. At some point people will want to see the results.”
The net loss was Bombardier’s second in a row. The company was expected to have first-quarter profit of 5 Canadian cents (4 cents) a share, the average estimate of nine analysts surveyed by Thomson Financial.
Shares of Bombardier fell 72 Canadian cents to C$5.05 at 12:46 p.m. in Toronto. Earlier they dropped 13 percent to C$5, their biggest decline since September 2002. The stock had climbed 45 percent in the past year.
Profit Margins
Tellier expects savings from the train-unit restructuring he began in March to start to show next year. He is eliminating 6,600 jobs, or 19 percent of the workforce in the unit, and expects the plan to save about $438 million annually.
“I’m asking our shareholders to continue to be patient,” Tellier, 65, said on a conference call. “There is light at the end of the tunnel.”
Tellier took over Bombardier in January 2003 when its controlling family recruited him after the company’s shares plunged 80 percent in two years and former Chief Executive Robert Brown stepped down.
Bombardier is Tellier’s second turnaround assignment. After leaving as Canada’s top civil servant in 1992, he took Canadian National Railway Co. public as CEO, boosted the stock sevenfold and turned it into North America’s most-efficient railway.
Job Cuts
Tellier has eliminated more than 1,000 jobs at Bombardier since March. Before restructuring costs, the company had a $110 million pretax loss in the train business, which contributed 48 percent of sales.
Its aircraft unit had a $23 million loss because of sales incentives, depreciation expenses related to the development of its Challenger 300 business jet and the strong Canadian dollar against the U.S. dollar. Sales rose 9.4 percent to $1.76 billion.
Sales incentives related to the company guaranteeing the value of the planes sold to airlines hurt profit by $11 million in the quarter, said Pierre Beaudoin, president of the aircraft unit.
Aircraft Deliveries
Bombardier’s business that sells complete transit systems had $110 million of the rail segment’s contract losses because of costs to resolve unexpected technical problems, it said.
The company became more dependent on its rail business when demand for aircraft slowed. It has tried to improve the image of the unit after a public dispute with Amtrak, the U.S. government- owned passenger railroad, over defects.
Tellier has said he would improve the train unit’s profit margins by cutting management posts and making more profitable contract bids.
The train business “is less of a manufacturing business than a project-management business, and it’s project management where the company needs to improve,” said Dlouhy Merchant Inc. analyst Cameron Doerksen, who has a “sell” rating on Bombardier and doesn’t own the shares.
Turnaround
Last year, Tellier led the issue of 370 million shares in April to raise C$1.2 billion and the C$960 million sale of the company’s snowmobile business in December. Those moves helped keep Bombardier’s credit rating from falling to non-investment grade.
Tellier today said the U.S. debt-rating companies Moody’s Investors Service, Standard & Poor’s and Fitch told him they will maintain their ratings that are one notch above junk. Canada’s Dominion Bond Rating Service will drop its rating a notch to be in line with the U.S. ratings, Tellier said.
Closing Plants
Bombardier’s train business had a $285 million loss in the company’s last fiscal year. Tellier said plants in Bombardier’s train division should have been closed after the 2001 purchase of Daimler-Chrysler AG’s rail-equipment business.
Tellier ended production at a plant in Amadora, Portugal, on May 21 and plans to close its Doncaster, England, factory by the end of June, six months early. The company also is closing plants in Derby Pride Park in the U.K. this year, and in Pratteln, Switzerland; Ammendorf, Germany; Kalmar, Sweden; and Wakefield in the U.K. in 2005.
Tellier expects the moves to cost about $567 million over two years. He is targeting margins for the business of 6 percent. The restructuring is “on schedule,” the company said today.
“Short-term the results are not great, but it’s part of a plan to get on the right footing,” said Robert Callander, analyst for Toronto-based Caldwell Securities Ltd., which has Bombardier shares. “They’re doing the necessary surgery and it takes time.”
Management Jobs
The company for the first time reported results in U.S. dollars after previously using Canadian currency. Sales in the year- earlier first quarter were $3.33 billion.
Almost two-thirds of the 1,000 jobs that have been cut have been in management, the company said. The rail-unit restructuring comes after Bombardier cut 11 percent of its aircraft jobs last year amid a drop in business-jet sales.
Bombardier expects to deliver the same number of aircraft in the next fiscal year as this year. The company said it will lay off 500 aircraft workers in Montreal as it cuts regional-jet output by 20 aircraft this year.
Bombardier delivered 71 aircraft in the quarter, up from 63 a year earlier. That included 24 Learjet and other business jets and 47 commercial jets with 50 seats to 90 seats.
Backlog in the division rose to $11 billion from $10.9 billion in January, while rail business backlog fell to $22.5 billion from $23.7 billion.