It's hard to find much to cheer for in Bombardier Inc.'s attempts to turn around its dreary fortunes. This is a company that is now engaged in its second ill-timed turnaround attempt in 12 years, having recapitalized by selling stock at rock bottom levels (as it did in 2003) and assessing its stable of chronically underperforming assets for something valuable to sell.
So far, the big bold idea, unveiled Thursday, is an initial public offering of a minority stake in the company's train-making division, with Bombardier retaining majority control, to "crystallize [its] full value," the company said Thursday. The buoyant market for initial public offerings must already be at peak froth level if this one flies with investors.
What is there to be excited about at the division known as Bombardier Transportation? It makes big shiny bullet trains (and other commuter railcars) and sells them around the world. OK, that's kind of cool; they sure look spiffy in those TV ads the company airs around the Olympics to whip up local pride. The division is large-ish, with $9.6-billion (U.S.) in 2014 revenues, though not gargantuan. And…well, that's about it.
The key bullet point likely to be downplayed on the road show is that this division has been a big lumbering underperformer for years. Short-lived CEO Paul Tellier put the boots to this division more than a decade ago, sending senior executive Moya Greene on assignment to Europe to rationalize the company's vast and underutilized network of half-empty train plants, some which dated to the 1800s. That worked, and after both left the company, management promised the division would commence a steady march to higher margins. The goal was earnings before interest and tax (EBIT) equalling 8 per cent of division revenues.
The latest annual report shows how the company has performed to that objective. Bombardier Transportation EBIT clocked in at 7.5 per cent in its fiscal year covering most of 2010 (it changed its year end to Dec. 31 from Jan. 31 only recently). That fell to 7.3 per cent the following year, then 5.6 per cent the year after that. Somewhere along the way, management softened its resolve, saying an 8 per cent EBIT margin "remains the objective," but set a target of 6 per cent for 2014 "as BT focuses on contract execution improvement."
Instead, the margins kept on falling, to a dismal 5.1 per cent last year. That's four out of five years that margins headed in the wrong direction, making that 8 per cent goal ever more elusive. Figures released Thursday show EBIT margins rose all the way from 5.6 per cent in last year's first quarter to 5.8 per cent this year. Full steam ahead!
The top line isn't any more inspiring. Revenues have ping-ponged in the last five years; 2014's revenues were barely 3 per cent higher than they were three years earlier. Order intake (which is different than revenues, and more indicative of market demand) has also been uneven; the figure jumped to $12.6-billion in 2014 from $8.8-billion the year before, but they were higher, at $14.3-billion, in 2010, and even before the credit crisis they topped $11-billion annually. As for free cash flow, it's best not to look at last year's results – the company brought in just $122-million, down from $668-million in 2013.
If potential IPO investors are left asking three questions – Does this company have good growth prospects? How well is it managed? And is it an earnings machine? – they may just want to wait for the next train to roll in.
Sean Silcoff