16 January 2020 by jbchevrel
Bombardier Inc (BOMB) CDS widened from 415bp to 530bp today. BOMB warned on their Q4 results. Management this morning pre-released Q4 results that were lower than previous guidance. The key drivers were 1) actions taken to resolve challenging rail projects 2) the timing of milestone payments and new orders at Transportation 3) the delivery of four Global 7500 aircraft slipping into q120. FCF was guided lower -- estimated $1.0B vs $1.7B expected. This is as a result of timing of cash inflows from milestone payments on large Transportation projects and later-than-anticipated closing of certain orders. Should be recovered for Q120. The good news in aviation arm was that the ramp-up in Global 7500 production is encouraging. The company had been targeting delivery of 10 Global 7500’s in Q4 and 6 were delivered, with the remaining aircraft (which were set for delivery in the final days of Q4) slipping into Q1. BOMB also achieved its margin target of 7% in Q4. Issues remain in transportation arm. BOMB continues to deal with its challenging legacy projects, as discussed previously in this blog. BOMB announced a charge of approximately $350M related to certain projects in the UK (the Aventra platform), commercial negotiations with Swiss Federal Railways (SBB), and increased production and manufacturing costs for projects in Germany. The company did not achieve these milestones in Q4 and are now in negotiations with customers to reset schedules, to resolve late-delivery penalties, and to address related provisions and costs. Importantly, BOMB has also been reassessing their ongoing participation in A220 (JV with Airbus among others). BOMB announced that the financial plan from ACLP has been revised and calls for additional cash investments to support production ramp-up, pushes out the break-even timeline, and generates a lower return over the life of the program – negatively impacting the JV value. BOMB therefore pointed to a potential write-down, with the amount to be disclosed in Q4 release. The question is what the impact to BOMB will be from the additional capital required.