Poor Bombardier. The great Canadian manufacturer of planes and trains that just can’t quite seem to get off the ground. They are split between Bombardier Transportation, which is a leading provider of rail cars and services, and Bombardier Aerospace, which manufactures business jets and commercial planes. Their CSeries commercial aircraft has been a huge overhang over the entire Company (and a vacuum of cash). It is a “100% new” aircraft that has been delayed for a few years already but is going through testing now and is (in my view) on its way to finally operating commercially.
I have held a very small position in the Company for a few years now and I have run under the assumption that the Company has a great suite of products but are discounted because of the troubled CSeries program (a problematic program that I think will be OK).
Then on Thursday, January 15th, the Company announced that they have decided to 1) “Pause” their Learjet 85 program (leading to 1,000 layoffs) and, more importantly, 2) Their expected EBIT margins for both aerospace and transportation segments are worse than previously forecasted. This led to a 25% drop in the share price, or over $1.5 billion of market cap. Is Bombardier really worth so much less today? The drop was enough to warrant my attention to find out of there really are serious problems here or maybe there is a bargain.
So the issue? Cashflow. The Company is burning through cash and might be stuck in a huge cash crunch depending on a number of variables, with the most important one being the timing of the CSeries delivery program.
Whenever I am trying to understand a Company I have found that it is important to talk with management or at least listen to the conference call Q&A. You can stare at the Company’s financials and presentations for a few days and think that you understand what is going on but there are always things that will be misunderstood and nuances that are better to know than to not. It also provides a bit of color on management and reading between the lines (and non-answers) can often provide some important insight. The problem with a company the size of Bombardier is that the CFO and CEO are usually not picking up their phones anymore and so conference calls become the main source of nuggets.
So, I listened to their call. Analysts and media members dragged management along for over an hour with questions and comments. Call tidbits:
- The guidance news release appears, to me, to have been structured to provide all of any expected bad news in one go. A great strategy to reset expectations and make things easier going forward.
- I was reminded of the Company’s exposure to RVG (Residual-Value Guarantees) and the Company does not provide quarterly guidance – Per the 2013 YE report: “RVGs are offered as a strip of the value of an aircraft with a ceiling and a floor. If the underlying aircraft is sold at the end of the financing period (or during this period in limited circumstances), the resale value is compared to the RVG strip. We are required to make payments under these RVGs when the resale value of the aircraft falls below the ceiling of the strip covered by the guarantee, but our payment is capped at the floor of the strip if the resale value of the aircraft is below that level”.
- Liquidity – Currently have $3.8B liquidity. “Do you see modifications in the schedule of various programs to protect liquidity?” – Management said no flatly. They do not have concerns with various schedules (the elephant in the room being the CSeries) putting the Company into a real liquidity crisis. The key question is can this be believed?
- “Is there a minimum amount of liquidity level needed to run the Company that we should pencil in?” - “No specific per quarter, we will share in February”. Minimum liquidity is $1 Billion (meaning they have $2.8 excess liquidity).
- Long-term debt do not have specific financial covenants, rather “they have standard investment grade package covenants”. The Facilities that are at the BA and BT level, are not provided, and cannot be calculated because they “do not provide enough public information to calculate”. The Revolver has covenants related to aircraft activity. An analyst asked “do you foresee the need to ask for relaxation of any covenants?” Management provided a non-answer (“review our plans with our lenders frequently and we adjust what we need to adjust when that is the case”.
- They are very friendly with their analysts. A lot of questions ended with “let’s discuss this offline after the call”. I have never liked this but it is common.
- CSeries still expected in 2H2015.
The main thing this call reminded me of is how complicated this Company is. RVGs, pension obligations, corporate restructuring efforts, contract pricing and cashflow timing, and on, and on, and on. And then the question is, which of these items are the true drivers? What is really important? What do I have to get comfortable with?
The most important nugget was the comment on minimum liquidity needed to run the Company. The stated minimum of C$1 Billion means they have C$2.8B of cushion. The next logical questions are, how fast is the cash burn and can they make it through the CSeries program?
Right now I am in the middle of my analysis and have not come to any conclusions. What I do know for sure is that Bombardier definitely does not pass the simple business test. They are providing updated guidance in February.
Take a listen yourself! Call link: http://ir.bombardier.com/en/event-calendar/54789-learjet-85-program-pause-and-revised-2014-guidance