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Bombardier cash flow needs to reverse course soon

As Bombardier Inc.'s investors mull the company's quarterly financial results and management's latest assurances about the far-behind-schedule C Series airliner, they've been given a new number to worry about: negative-$915-million.

That was the size of the Montreal-based transportation manufacturer's outflow of free cash in the first quarter of 2014; essentially, the company spent nearly $1-billion more than it brought in over the quarter. Investors were braced for negative cash flow – it's actually not unusual for Bombardier's spending to outpace its sales in the first part of the year – but this outflow was roughly double what industry analysts had anticipated.

Company officials were quick to stress that this was a seasonal quirk in timing of costs versus deliveries, and all would be fine later in the year, when its capital spending needs will slow and the revenues will come rolling in. Free cash flow should be positive in the fourth quarter, they said.

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But based on the 6-per-cent drop in Bombarbier's stock, investors are leery. The big cash shortfall underlines Bombardier's biggest market risk: High costs and product delays have kept the company cash-flow negative for years now, and the balance sheet cracks are evident.

Analysts had been projecting that Bombardier will have negative free cash flow of about $600-million this year and another $200-million in 2015 – which would mark five years of cash outflows. Since 2010, Bombardier's debt has swollen to more than $7-billion, from less than $4-billion at the end of 2009. In a cash-intensive business, the company's cash holdings have shrunk to $2.5-billion from $3.7-billion a year ago.

A couple of years ago, investors had expected that cash would be coming in from the C Series by now. Instead, it continues to flow out. First delivery of the planes was originally planned for the end of 2013; now they aren't set to go into service until the second half of 2015. The program's cost, originally pegged at $3.4-billion, recently ballooned to $4.4-billion.

And the C Series isn't the only Bombardier aerospace project that has been bogged down by delays. Test flights of Bombardier's new Learjet 85 business jet, which were to have begun before the end of last year, were delayed twice before finally beginning in April – meaning that plane, too, will likely go into service later than previously planned.

All of which means it will take Bombardier much longer to recoup its costs on these projects – and get its cash flow turned around – than it, or its investors, had bargained for. Concern over the continuing cash outflows were front and centre in February, when credit-rating giant Standard and Poor's downgraded Bombardier's debt rating – and warned that it might consider downgrading it further.

"We could lower the rating on Bombardier should the C Series experience further delays or order levels do not allow for profitable production, resulting in a reassessment of the company's business risk profile," S&P said. "In addition, should the company be unable to … generate positive free cash flow post-2015, we could also reassess the company's business risk profile leading to a downgrade."

There are reasons to think the situation will improve, in part because costs associated with the C Series and Learjet 85 development will be winding down. Bombardier's aerospace capital spending, targeted at $1.6-billion to $1.9-billion this year, is slated to decline steadily over the next few years, to below $1-billion by 2016.

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Meanwhile, business is picking up: aircraft deliveries (56 vs. 53) and new orders (91 vs. 28) were stronger than in last year's first quarter, and new orders were also up substantially in the company's rail division. Between the aircraft and the rail divisions, Bombardier's order backlog totals a record $77-billion, and is up more than $7-billion in the past quarter alone.

But if converting those orders into delivered products continues to get pushed back by costly development delays, Bombardier's balance sheet is going to face further strain. The market's patience with cash flowing in the wrong direction is wearing thin.

Editor's note: The online version of this story has been changed to show that the Learjet 85 had its first test flight in April.

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