On the heels of posting a net loss of $418.6 million in the last fiscal year, due primarily to the stalled market for business jets and regional airliners, Montreal, Quebec, Canada-based Bombardier announced a major recapitalization program last month.

The main ingredients of the recapitalization program include a change in accounting methods, a dividend cut, an equity offering of $544.4 million, an ongoing reduction of assets of Bombardier Capital and the sale of several “non-core” assets, including Belfast City Airport in Northern Ireland (a process that has actually been under way since October last year) and the consumer products division, which includes ATVs, outboard motors and Bombardier’s original product–snowmobiles.

The sweeping changes were revealed by company CEO Paul Tellier, who had abruptly replaced Robert Brown in December. Tellier, 63, a Bombardier director since 1997 and president of Canadian National Railway at the time of his appointment to head Bombardier, is credited with transforming the formerly government-owned Canadian National into one of the most efficient railways in North America.

Bombardier Aerospace, like many other aircraft makers, has been staggering for the past 20 months from a significant drop in demand for business jets. But unlike other manufacturers, Bombardier curtailed production of several models. The company is also concerned about financially strapped airlines delaying or canceling orders for its regional jets. The company is just emerging from an unprecedented production suspension. And in March the aerospace unit revealed that it would lay off some 3,000 more employees–10 percent of its worldwide workforce–over the next several months.

As a result of the divestitures, Bombardier will concentrate solely on its aerospace and transportation products–primarily business and regional aircraft and railway cars. The divestitures and equity offering are intended to generate more than $1.3 billion within the next six to nine months and offset about $2.2 billion in pretax write-downs.

Bombardier decided to shed its recreational products business because it is the “most liquid asset” in the company’s portfolio. Bombardier family members have expressed an interest in participating in the process as part of an eventual group of investors seeking to acquire this business. The Bombardiers hold roughly 22 percent of the company’s shares but 60 percent of the voting rights. The family plans to buy new shares in the equity issue and will retain voting control, according to Tellier.

Conceding that Bombardier’s “program accounting method” used to measure the performance of the aerospace division was unclear and confusing to the investment industry, Tellier said that the aerospace division has changed to the “average cost accounting method.” Bombardier is making these changes because “we believe that this new accounting method will enhance investor understanding of our performance,” Tellier said. “Although we are taking substantial write-downs, these are expected to be offset by our recapitalization initiative, which will provide us with a strengthened balance sheet to see us through this period of uncertainty.”

The changes also make the new accounting method for aircraft production “much more compliant” with accounting principles in the U.S., he added.

A ‘New’ Bombardier
For the fiscal year ended January 31 (Bombardier’s fiscal year runs from February 1 to January 31), Bombardier Aerospace had revenues of C$11.3 billion, compared with C$12.3 billion in the previous year. The company delivered 298 aircraft last fiscal year (220 regional aircraft, 77 business jets and one turboprop amphibian), compared with 370 the year before. In calendar year 2002, Bombardier delivered 108 business jets, compared with 180 in 2001 and 207 in 2000.

In looking ahead, Tellier said the “new Bombardier will be made up primarily of two almost equal-sized businesses–Bombardier Transportation and Bombardier Aerospace.” While Tellier would not provide any formal financial projections in light of the uncertainty in the markets, he did give some hints at what he expects from his aerospace division. For example, he said that although aircraft deliveries this year are expected to remain at levels similar to last year’s, revenues are expected to improve as the Challenger 300 and CRJ900 enter service.

Tellier pointed out that in addition to the Challenger 300 and CRJ900, Bombardier Aerospace over the next two years will introduce three other new or derivative aircraft–the Global 5000, Learjet 40 and Learjet 45XR. The “major investments” for the CRJ900 and Global 5000 “are behind us,” Tellier noted. The Global 5000 had its first flight on March 7 and the fifth Challenger 300 entered flight test the next day, March 8.

“We will rebuild our credibility with investors with this action plan,” Tellier told investors. “The sale of our recreational products business provides a good balance between our asset divestitures and the equity offering. Combined with our cost-reduction programs, it gives us the financial flexibility we need going forward.”

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