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## 22. BUSINESS SEGMENT INFORMATION:
As a result of the Hardy Acquisition, the Company has changed the structure of its internal organization to consist of two busi- ness divisions, Constellation Wines and Constellation Beers and Spirits. Separate division chief executives report directly to the Company’s chief operating officer. Consequently, the Company reports its operating results in three segments: Constellation Wines (branded wine, and U.K. wholesale and other), Constellation Beers and Spirits (imported beers and distilled spirits) and Corporate Operations and Other (primarily corporate related items and other). Amounts included in the Corporate Operations and Other segment consist of general corporate administration and finance expenses. These amounts include costs of executive management, investor relations, internal audit, treasury, tax, corporate development, legal, financial reporting, professional fees and public rela- tions. Any costs incurred at the corporate office that are applicable to the segments are allocated to the appropriate segment. The amounts included in the Corporate Operations and Other segment are general costs that are applicable to the consolidated group and are therefore not allocated to the other reportable segments. All costs reported within the Corporate Operations and Other segment are not included in the chief operating decision maker’s evaluation of the operating income performance of the other oper- ating segments. The new business segments reflect how the Company’s operations are being managed, how operating performance within the Company is being evaluated by senior management and the structure of its internal financial reporting. In addition, the Company changed its definition of operating income for segment purposes to exclude restructuring and related charges and unusu- al costs that affect comparability. Accordingly, the financial information for the years ended February 28, 2003, and February 28, 2002, has been restated to conform to the new segment presentation. For the year ended February 29, 2004, restructuring and related charges and unusual costs consist of the flow through of inventory step-up and financing costs associated with the Hardy Acquisition of $22.5 million and $11.6 million, respectively, and restructuring and related charges of $48.0 million, including a write-down of commodity concentrate inventory of $16.8 million, partially offset by the relief from certain excise tax, duty and other costs incurred in prior years of $10.4 million. For the year ended February 28, 2003, restructuring and related charges and unusual costs consist of an asset impairment charge of $4.8 million recorded in connection with the Company’s realignment of its business operations within the Constellation Wines segment. For the year ended February 28, 2002, restructuring and related charges and unusual costs consist of the write-off of the remaining deferred financing costs and unamortized discount associated with certain of the Company’s senior subordinated notes which were redeemed in February 2002 of $2.6 million. The Company evaluates performance based on operating income of the respective business units. The accounting policies of the segments are the same as those described for the Company in the Summary of Significant Accounting Policies in Note 1 and include the recently adopted accounting pronouncements described in Note 2. Transactions between segments consist mainly of sales of products and are accounted for at cost plus an applicable margin.
Segment information is as follows:
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The Company’s areas of operations are principally in the United States. Operations outside the United States are primarily in the United Kingdom and Australia and are included within the Constellation Wines segment.
Geographic data is as follows:
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## 23. ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED:
In December 2003, the Financial Accounting Standards Board issued FASB Interpretation No. 46 (revised December 2003) (“FIN No. 46(R)”), “Consolidation of Variable Interest Entities—an interpretation of ARB No. 51”, which will replace FASB Interpretation No. 46 (“FIN No. 46”), “Consolidation of Variable Interest Entities,” upon its effective date. FIN No. 46(R) retains many of the basic concepts introduced in FIN No. 46; however, it also introduces a new scope exception for certain types of enti- ties that qualify as a business as defined in FIN No. 46(R) and revises the method of calculating expected losses and residual returns for determination of primary beneficiaries, including new guidance for assessing variable interests. The application of the transi- tion requirements of FIN No. 46(R) with regard to special purpose entities and existing variable interest entities did not result in any entities requiring consolidation or any additional disclosures. The Company is continuing to evaluate the impact of FIN No. 46(R) for its adoption as of May 31, 2004. However, it is not expected to have a material impact on the Company’s consolidated financial statements.
In December 2003, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 132 (revised 2003) (“SFAS No. 132(R)”), “Employers’ Disclosures about Pensions and Other Postretirement Benefits—an amendment of FASB Statements No. 87, 88, and 106.” SFAS No. 132(R) supersedes Statement of Financial Accounting Standards No. 132 (“SFAS No. 132”), by revising employers’ disclosures about pension plans and other postretirement benefit plans. SFAS No. 132(R) requires additional disclosures to those in SFAS No. 132 regarding the assets, obligations, cash flows, and net periodic benefit cost of defined benefit pension plans and other defined benefit postretirement plans. SFAS No. 132(R) also amends Accounting Principles Board Opinion No. 28 (“APB Opinion No. 28”), “Interim Financial Reporting,” to require additional disclosures for interim periods. The Company has adopted certain of the annual disclosure provisions of SFAS No. 132(R), primarily those relat- ed to its U.S. postretirement plan, for the fiscal year ending February 29, 2004. The Company is required to adopt the remaining annual disclosure provisions, primarily those related to its foreign plans, for the fiscal year ending February 28, 2005. The Company is required to adopt the amendment to APB Opinion No. 28 for financial reports containing condensed financial state- ments for interim periods beginning March 1, 2004.
In March 2004, the Financial Accounting Standards Board issued a proposed statement, “Share-Based Payment, an amendment of FASB Statements No. 123 and 95.” The objective of the proposed statement is to require recognition in an entity’s financial state- ments of the cost of employee services received in exchange for equity instruments issued, and liabilities incurred, to employees in share-based payment (or compensation) transactions based on the fair value of the instruments at the grant date. The proposed statement would eliminate the alternative of continuing to account for share-based payment arrangements with employees under APB No. 25 and require that the compensation cost resulting from all share-based payment transactions be recognized in an enti- ty’s financial statements. If adopted in its current form, the proposed statement would be effective for awards that are granted, modified, or settled in fiscal years beginning after December 15, 2004. Also, if adopted in its current form, the proposed statement could result in a significant charge to the Company’s Consolidated Statement of Income for the fiscal year ended February 28, 2006.
## 24. SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED):
A summary of selected quarterly financial information is as follows:
<img src='content_image/122325.jpg'>
## QUARTER ENDED
## QUARTER ENDED
<img src='content_image/122326.jpg'>
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(1) In the third quarter of fiscal 2004, the Company revised its accounting policy with regard to the income statement presentation of the reclassification adjustments of cash flow hedges of certain sales transactions. These cash flow hedges are used to reduce the risk of foreign currency exchange rate fluctuations resulting from the sale of product denominated in various foreign currencies. As such, the Company’s revised accounting policy is to report the reclassification adjustments from AOCI to sales. Previously, the Company reported such reclassification adjustments in selling, general and administrative expenses. This change in accounting policy resulted in a reclassification which increased selling, general and administrative expenses and sales by $1.2 million and $2.3 million for the three months ended May 31, 2003, and August 31, 2003, respectively. No such reclassification was required for the comparable prior year periods. This reclassification did not affect operating income or net income.
(2) In Fiscal 2004, the Company recorded net unusual costs consisting of the flow through of inventory step-up and financing costs associated with the Hardy Acquisition; restructuring and related charges resulting from (i) the realignment of business operations in the Constellation Wines segment and (ii) the Company’s decision to exit the commodity concentrate product line in the U.S. and sell its winery located in Escalon, California; and gains from the relief of certain excise tax, duty and other costs incurred in prior years. The following table identifies these items, net of income taxes, by quarter and in the aggregate for Fiscal 2004:
<img src='content_image/85678.jpg'>
(3) The sum of the quarterly earnings per common share in Fiscal 2004 and Fiscal 2003 may not equal the total computed for the respective years as the earnings per common share are computed independently for each of the quarters presented and for the full year.
(4) During the fourth quarter of Fiscal 2003, the Company’s Constellation Wines segment recorded an asset impairment charge of $4.8 million in connection with the planned closure of two of its pro- duction facilities in Fiscal 2004.
## CONSTELLATION COMMON STOCK PRICES AND DIVIDENDS
The following tables set forth for the periods indicated the high and low sales prices of the Class A Stock and the Class B Stock as reported on the NYSE.
## CLASS A STOCK
<img src='content_image/85683.jpg'>
<img src='content_image/85684.jpg'>
## CLASS B STOCK
The Company has not paid any cash dividends on its common stock since its initial public offering in 1973. In addition, under the terms of the Company’s senior credit facility, the Company is currently constrained from paying cash dividends on its common stock. Also, the indentures for the Company’s outstanding senior notes and senior subordinated notes may restrict the payment of cash dividends on its common stock under certain circumstances. Any indentures for debt securities issued in the future and any credit agreements entered into in the future may also restrict or prohibit the payment of cash dividends on common stock.
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## The Board of Directors and Stockholders
## Constellation Brands, Inc.:
We have audited the accompanying consolidated balance sheets of Constellation Brands, Inc. and subsidiaries as of February 29, 2004 and February 28, 2003 and the related consolidated statements of income, stockholders’ equity and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. The February 28, 2002 consolidated state- ments of income, stockholders’ equity and cash flows of Constellation Brands, Inc. and subsidiaries were audited by other auditors who have ceased operations. Those auditors expressed an unqualified opinion on those consolidated financial statements, before the revisions described in Notes 1, 2, 5, 11 and 22 to the consolidated financial statements, in their report dated April 9, 2002.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those stan- dards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial state- ments are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclo- sures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant esti- mates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial posi- tion of Constellation Brands, Inc. and subsidiaries as of February 29, 2004 and February 28, 2003, and the results of their opera- tions and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
As discussed above, the accompanying consolidated statements of income, stockholders’ equity and cash flows of Constellation Brands, Inc. and subsidiaries for the year ended February 28, 2002 were audited by other auditors who have ceased operations. As described in Note 5, the consolidated financial statements have been revised to include the transitional disclosures required by Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets, which was adopted by the Company as of March 1, 2002. In our opinion, these disclosures for 2002 in Note 5 are appropriate. Additionally, as described in Note 2, the consolidated statement of income for the year ended February 28, 2002 has been revised to reflect reclassifications of certain con- sumer and trade promotional expenses as required by Emerging Issues Task Force Issue No. 01-9, Accounting for Consideration Given by a Vendor to a Customer (EITF 01-9), which was also adopted by the Company as of March 1, 2002; as described in Notes 2 and 11, the consolidated statement of income and disclosure for income taxes for the year ended February 28, 2002 have been revised to reflect the reclassification of the extraordinary loss, net of income taxes, related to the extinguishment of debt by increas- ing selling, general and administrative expenses and adjusting the provision for income taxes as required by Statement of Financial Accounting Standards No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections (FASB No. 145), which was fully adopted by the Company as of March 1, 2003; as described in Note 1, the proforma disclosures of net income and earnings per common share related to stock-based compensation for the year ended February 28, 2002 have been adjusted from the amounts originally reported; and as described in Note 22, the Company changed the composition of its reportable segments, and the amounts in the 2002 consolidated financial statements relating to reportable segments have been restated to conform to the current composition of reportable segments. We audited the adjustments that were applied to restate the 2002 consolidated financial statements for the adoption of EITF 01-9 and FASB No. 145, to restate the dis- closure of amounts of pro forma net income and earnings per share related to stock-based compensation for the year ended February 28, 2002 and to restate the disclosures for reportable segments reflected in the 2002 consolidated financial statements. In our opin- ion, such adjustments are appropriate and have been properly applied. However, we were not engaged to audit, review, or apply any procedures to the February 28, 2002 consolidated statements of income, stockholders’ equity and cash flows of Constellation Brands, Inc. and subsidiaries, other than with respect to such disclosures and adjustments; accordingly, we do not express an opin- ion or any other form of assurance on the February 28, 2002 consolidated financial statements taken as a whole.
<img src='content_image/130112.jpg'>
Rochester, New York April 7, 2004
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80 basis points
RECORD FREE CASH FLOW FROM OPERATIONS **
* On a comparable basis (see note on page 2). On a reported basis, operating margins declined 110 basis points, net income grew 8 percent and EPS declined 6 percent.
NET SALES INCREASED 30% TO REACH
$3.5 billion
OPERATING PROFIT MARGINS IMPROVED *
EARNINGS PER SHARE INCREASED *
$235 million
NET INCOME GREW *
39%
20%
** Net cash provided by operating activities of $340 million less capital expenditures of $105 million.
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THE FOLLOWING REPORT IS A COPY OF A REPORT PREVIOUSLY ISSUED BY ARTHUR ANDERSEN LLP AND HAS NOT BEEN REISSUED BY ARTHUR ANDERSEN LLP. AS DESCRIBED IN NOTE 2 TO THE ACCOMPANYING CONSOLI- DATED FINANCIAL STATEMENTS, IN THE YEAR ENDED FEBRUARY 28, 2003, THE COMPANY ADOPTED THE PROVI- SIONS OF EMERGING ISSUES TASK FORCE ISSUE NO. 01-9, ACCOUNTING FOR CONSIDERATION GIVEN BY A VEN- DOR TO A CUSTOMER, WHICH REQUIRED RECLASSIFICATION OF CERTAIN CONSUMER AND TRADE PROMOTION- AL EXPENSES IN CONSOLIDATED STATEMENTS OF INCOME FOR THE YEAR ENDED FEBRUARY 28, 2002. ALSO, IN THE YEAR ENDED FEBRUARY 28, 2003, THE COMPANY ADOPTED STATEMENT OF FINANCIAL ACCOUNTING STAN- DARDS NO. 142, GOODWILL AND OTHER INTANGIBLE ASSETS (SFAS NO. 142). INCLUDED IN NOTE 5 ARE TRANSI- TIONAL DISCLOSURES FOR THE YEAR ENDED FEBRUARY 28, 2002 THAT ARE REQUIRED BY SFAS NO. 142. IN THE YEAR ENDED FEBRUARY 29, 2004, THE COMPANY ADOPTED THE PROVISIONS OF STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 145, RESCISSION OF FASB STATEMENTS NO. 4, 44, AND 64, AMENDMENT OF FASB STATEMENT NO. 13, AND TECHNICAL CORRECTIONS, WHICH REQUIRES THE RECLASSIFICATION OF THE EXTRA- ORDINARY LOSS RELATED TO THE EXTINGUISHMENT OF DEBT RECORDED IN THE YEAR ENDED FEBRUARY 28, 2002, BY INCREASING SELLING, GENERAL AND ADMINISTRATIVE EXPENSES AND DECREASING THE PROVISION FOR INCOME TAXES. NOTES 2 AND 11 REFLECT THE ADJUSTMENTS TO THE CONSOLIDATED STATEMENT OF INCOME AND DISCLOSURE FOR INCOME TAXES FOR THE YEAR ENDED FEBRUARY 28, 2002. ALSO, AS DESCRIBED IN NOTE 1 TO THE ACCOMPANYING CONSOLIDATED FINANCIAL STATEMENTS, IN THE YEAR ENDED FEBRUARY 28, 2003, THE COMPANY ADJUSTED THE PRO FORMA DISCLOSURE OF NET INCOME AND EARNINGS PER COM- MON SHARE RELATED TO STOCK-BASED COMPENSATION FOR THE YEAR ENDED FEBRUARY 28, 2002 FROM THE AMOUNTS ORIGINALLY REPORTED. LASTLY, AS DESCRIBED IN NOTE 22 TO THE ACCOMPANYING CONSOLIDAT- ED FINANCIAL STATEMENTS, IN THE YEAR ENDED FEBRUARY 29, 2004, THE COMPANY CHANGED THE COMPOSI- TION OF ITS REPORTABLE SEGMENTS. AMOUNTS FOR THE YEAR ENDED FEBRUARY 28, 2002, HAVE BEEN RESTAT- ED TO CONFORM TO THE CURRENT COMPOSITION OF REPORTABLE SEGMENTS. THE ARTHUR ANDERSEN LLP REPORT DOES NOT EXTEND TO THESE CHANGES IN THE 2002 CONSOLIDATED FINANCIAL STATEMENTS. THE TRANSITIONAL DISCLOSURES IN AND THE ADJUSTMENTS TO THE FISCAL 2002 CONSOLIDATED FINANCIAL STATE- MENTS WERE REPORTED ON BY KPMG LLP AS STATED IN THEIR REPORT APPEARING HEREIN.
## REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Constellation Brands, Inc.:
We have audited the accompanying consolidated balance sheets of Constellation Brands, Inc. (a Delaware corporation) and sub- sidiaries as of February 28, 2002 and February 28, 2001, and the related consolidated statements of income, changes in stockhold- ers’ equity and cash flows for each of the three years in the period ended February 28, 2002. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of mate- rial misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Constellation Brands, Inc. and subsidiaries as of February 28, 2002 and February 28, 2001, and the results of their operations and their cash flows for each of the three years in the period ended February 28, 2002 in conformity with accounting principles gener- ally accepted in the United States.
Rochester, New York April 9, 2002
## CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Information required in this Annual Report for changes in and disagreements with accountants on accounting and financial dis- closure has been previously reported in the Company’s Current Report on Form 8-K dated April 4, 2002, and Form 8-K/A filed May 24, 2002.
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## DIRECTORS
RICHARD SANDS Chairman of the Board and Chief Executive Officer, Constellation Brands, Inc.
ROBERT SANDS President and Chief Operating Officer, Constellation Brands, Inc.
GEORGE BRESLER (3) Senior Counsel of the law firm of Kurzman Eisenberg Corbin Lever & Goodman, LLP
JEANANNE K. HAUSWALD (1,2,3) retired from The Seagram Company Ltd.
JAMES A. LOCKE III (3) Partner of the law firm of Nixon Peabody LLP
THOMAS C. MCDERMOTT (1,2,3) Chairman of GPM Associates, LLP
PAUL L. SMITH (1,2,3) retired from Eastman Kodak Company
## EXECUTIVE OFFICERS
RICHARD SANDS Chairman of the Board and Chief Executive Officer, Constellation Brands, Inc.
ROBERT SANDS President and Chief Operating Officer, Constellation Brands, Inc.
F. PAUL HETTERICH Executive Vice President, Business Development and Corporate Strategy, Constellation Brands, Inc.
THOMAS J. MULLIN Executive Vice President and General Counsel, Constellation Brands, Inc.
THOMAS S. SUMMER Executive Vice President and Chief Financial Officer, Constellation Brands, Inc.
W. KEITH WILSON Executive Vice President and Chief Human Resources Officer, Constellation Brands, Inc.
ALEXANDER L. BERK* Chief Executive Officer, Constellation Beers and Spirits
STEPHEN B. MILLAR* Chief Executive Officer, Constellation Wines
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## FACILITIES
## WINE AND GRAPE PROCESSING
Bay of Fires Winery Pipers River, Tasmania
Berri Estates Winery Glossop, South Australia
Blackstone Winery Gonzales, California
Bristol Winery Bristol, England
Canandaigua Winery Canandaigua, New York
Columbia Winery Woodinville, Washington
Drylands Winery Marlborough, South Island New Zealand
Dunnewood Vineyards Ukiah, California
Estancia Winery Soledad, California
Franciscan Vineyards Rutherford, California
Houghton Winery Upper Swan, Western Australia
Huapai Winery West Auckland, North Island New Zealand
Kamberra Winery Canberra, Australian Capital Territory
Leasingham Winery Clare, South Australia
Mission Bell Winery Madera, California
Nannup Winery Nannup, Western Australia
Paul Masson Cellars & Vintners Madera, California
Ravenswood Winery Sonoma, California
Renmano Winery Renmark, South Australia
Reynella Winery South Australia
Simi Winery Healdsburg, California
Stanley Winery Buronga, New South Wales
Ste. Chapelle Winery Caldwell, Idaho
Stonehaven Winery Padthaway, South Australia
Sunnyside Operations Sunnyside, Washington
Tintara Winery McLaren Vale South Australia
Turner Road Vintners Woodbridge, California
Veramonte Winery Casablanca, Chile
Widmer’s Wine Cellars Naples, New York
## DISTILLED SPIRITS
Viking Distillery Barton Brands of Georgia, Inc. Albany, Georgia
Barton Brands of Georgia, Inc. Atlanta, Georgia
Barton Brands, Ltd. Bardstown, Kentucky
Barton Brands of California, Inc. Carson, California
Barton Brands, Ltd. Owensboro, Kentucky
The Black Velvet Distilling Co. Lethbridge, Alberta, Canada
Schenley Distilleries Inc. Valleyfield, Quebec, Canada
## CIDER PROCESSING
Shepton Mallet Somerset, England
## BOTTLED WATER PRODUCTION
Strathmore Mineral Water Co. Forfar, Scotland
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## CORPORATE HEADQUARTERS
Constellation Brands, Inc. 370 Woodcliff Drive, Suite 300 Fairport, New York 14450 585.218.3600 888.724.2169 cbrands.com Investor Center: 888.922.2150
## STOCK TRANSFER AGENT AND REGISTRAR – U.S.
Mellon Investor Services Overpeck Centre 85 Challenger Road Ridgefield Park, New Jersey 07660 800.288.9541 melloninvestor.com
## COMMON STOCK TRADING
The Company’s Class A and Class B Common Stock trade on the New York Stock Exchange (NYSE) under the ticker symbols STZ and STZ.B, respectively. As of April 30, 2004, there were 1,000 and 237 holders of record of Class A and Class B Common Stock, respectively.
## DEPOSITARY SHARE TRADING
Depositary Shares each representing 1/40 of a share of the Company’s 5.75% Series A Mandatory Convertible Preferred Stock trade on the NYSE under the ticker symbol STZPrA.
## INVESTOR INFORMATION
## CDI TRANSFER AGENT AND REGISTRAR – AUSTRALIA
ComputerShare Pty Ltd. GPO Box 1903 Adelaide, South Australia 5001 800.030.606 (toll free within Australia) 61.3.9611.5711 (outside Australia)
## CDI TRADING
CHESS Depositary Interests trade on the Australian Stock Exchange (ASX) under the ticker symbol CBR. As of April 30, 2004, there were 992 holders of record.
## DIVIDEND POLICY
With respect to its common stock, the Company’s policy is to retain all of its earnings to finance the development and expansion of its business, and the Company has not paid any cash dividend on its common stock since its initial public offering in 1973.
The Company pays quarterly dividends on its preferred stock in accordance with its terms.
## INFORMATION REGARDING FORWARD- LOOKING STATEMENTS
The statements set forth in this report, which are not historical facts, are forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from those set forth in, or implied by, the forward-looking statements. For risk factors associated with the Company and its business, please refer to the Company’s Annual Report on Form 10-K for the fiscal year ended February 29, 2004.
## ADDITIONAL COPIES OF FORM 10-K
The Annual Report on Form 10-K may be obtained by contacting Constellation Brands, Inc.’s Investor Relations department, attention Mark Maring, at our corporate headquarters address provided on this page. Alternatively, a copy is available on our Constellation Brands’ Web site at cbrands.com, or by request from the Securities and Exchange Commission.
## ANNUAL STOCKHOLDERS’ MEETING
The Annual Meeting will be held at 11:00 a.m. on Tuesday, July 20, 2004, at One HSBC Plaza, Rochester, New York.
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370 Woodcliff Drive, Suite 300 Fairport, New York 14450 585.218.3600 888.724.2169 cbrands.com
<img src='content_image/83237.jpg'>
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<img src='content_image/115243.jpg'>
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# We ’ ve made al otof progress
<img src='content_image/42785.jpg'>
Annual Report Year Ended January 31 2004
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MESSAGES TO SHAREHOLDERS 20 CORPORATE GOVERNANCE 24 AEROSPACE 26 TRANSPORTATION 34 SOCIAL RESPONSIBILITY AND SUSTAINABILITY 36 FINANCIAL HIGHLIGHTS 38 FINANCIAL SECTION 39 MAIN BUSINESS LOCATIONS 136 BOARD OF DIRECTORS AND OFFICERS 137 SHAREHOLDER INFORMATION 138
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We divested ourselves of certain assets to concentrate on trains and planes. Focus is everything. 7 5 %r oy
FRANÇOIS THIBAULT VICE PRESIDENT, ACQUISITIONS
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## 4 F INANCE RECEIVABLES
BC’s finance receivables were as follows as at January 31:
<img src='content_image/11218.jpg'>
Includes $1,582 million securitized to third parties as at January 31, 2004 ($2,089 million as at January 31, 2003). (2)
Comprised of $669 million of loans, $2,558 million of receivables and $116 million of lease receivables as at January 31, 2004 ($771 million, $2,953 million and $151 million respectively, as at January 31, 2003). (3)
In addition, manufactured housing portfolios in public securitization vehicles amounting to $1,559 million as at January 31, 2004 ($2,096 million as at January 31, 2003) were serviced by BC. (4)
Includes the technology management and finance, mid-market equipment commercial finance and small ticket finance portfolios. (5)
Comprised of $690 million of loans and $191 million of lease receivables as at January 31, 2004 ($1,852 million of loans, $1,039 million of receivables and $398 million of lease receivables as at January 31, 2003).
## Product description
## a) Continued portfolios
The inventory finance portfolio represents mainly floorplan receivables from retailers of recreational products. These receivables are generally collateralized by the related inventory and are secured by repurchase agreements with distributors or manufacturers. In the event of default, BC may repossess the products from a retailer within a specified time period and may require the distributors or manufacturers to repurchase them.
Effective June 1, 2002, certain modifications were made to the securitization agreements related to the floorplan receivable portfolios. As a result, the Corporation regained control for accounting purposes, of these portfolios and, accordingly, an amount of $2.0 billion of securitized receivables and the related short-term borrowings and long-term debt were recognized on-balance sheet as of that date. No gains or losses resulted from these transactions.
Receivable financing with BRP consists of trade receivables originated from BRP. BC funds receivables subject to certain eligibility criteria for BRP’s U.S. and European subsidiaries. Funding occurs in U.S. dollars and currency risk is retained by BRP (see note 9).
The commercial aircraft portfolio includes loans and lease receivables related to interim and long-term financing of commercial aircraft. The loans and lease receivables are generally collateralized by the related assets.
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## NOTE 4. FINANCE RECEIVABLES (CONT ’ D)
## b) Wind-down portfolios
The manufactured housing portfolio consists of contractual promises made by the buyers of manufactured housing units in the U.S. to pay amounts owed under retail instalment sales contracts. BC obtains a security interest in the housing units purchased.
The business aircraft portfolio consists of loans and lease receivables, mainly with third-party purchasers of new and pre-owned business aircraft. During fiscal year 2004, the Corporation sold a significant portion of this portfolio for $339 million US ($475 million) at the carrying value of the assets sold. Payment of $42 million US ($56 million) is conditional upon the performance of the portfolio sold. This amount is presented in other assets on the consolidated balance sheets.
The consumer finance portfolio relates primarily to the financing of third-party recreational products in the form of revolving credit and instalment loans, secured by the related recreational products, to consumers in the U.S.
The industrial equipment portfolio consists mainly of loans and finance leases receivables to companies in the ski industry. Following the decision to no longer originate loans in this portfolio, the portfolio has been reclassified from continuing to wind-down portfolios in fiscal year 2004.
Receivable factoring consisted of third-party trade receivables originated from Bombardier’s manufacturing segments.
## Lease receivables
Lease receivables are mostly concentrated in the commercial aircraft long-term leasing and the business aircraft portfolios, as well as the “other” wind-down portfolios and consist of the following, before-allowance-for-credit losses as at January 31:
<img src='content_image/109107.jpg'>
## Minimum receipts
Minimum receipts in connection with finance receivables for the next five fiscal years and thereafter were as follows:
<img src='content_image/109108.jpg'>
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NOTE 4. FINANCE RECEIVABLES (CONT ’ D)
## Credit facilities
BC has provided certain of its third-party customers with credit facilities totalling $652 million and $2,572 million US as at January 31, 2004 ($671 million and $2,519 million US as at January 31, 2003). The unused portion of these facilities amounted to $246 million and $950 mil- lion US as at January 31, 2004 ($168 million and $907 million US as at January 31, 2003). These credit facilities are generally committed for periods not exceeding one year.
## Allowance for credit losses
Changes in the allowance for credit losses were as follows as at January 31:
<img src='content_image/8241.jpg'>
Impaired finance receivables amounted to $8 million and $93 million as at January 31, 2004 for continued and wind-down portfolios respectively ($40 million and $218 million respectively as at January 31, 2003). Repossessed assets amounted to $49 million and $31 million as at January 31, 2004 and 2003 respectively.
## Geographic distribution
The geographic distribution of finance receivables before allowance for credit losses was as follows as at January 31:
<img src='content_image/8242.jpg'>
<img src='content_image/8243.jpg'>
No single customer represented more than 10% of BC’s finance receivables as at January 31, 2004 and 2003.
## Securitizations and other transfers of receivables
BC retains interests in the finance receivables sold to special-purpose entities (SPEs), amounting to $87 million as at January 31, 2004 ($114 million as at January 31, 2003). The retained interests are presented with the related finance receivable portfolios. BC was also servicing finance receivables sold to third parties related to its wind-down portfolios, amounting to $84 million as at January 31, 2004 ($179 million as at January 31, 2003). BC records fee income in connection with the retained servicing rights.
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## 5 ASSETS UNDER OPERATING LEASES
Assets under operating leases were as follows as at January 31:
<img src='content_image/86851.jpg'>
$^{(1)}$The industrial equipment portfolio was reclassified from continuing to wind-down portfolios during the fiscal year ended January 31, 2004.
The weighted average maturity of the operating leases was 66 and 39 months for Bombardier and BC, respectively, as at January 31, 2004 (47 and 56 months for Bombardier and BC, respectively, as at January 31, 2003).
Depreciation of assets under operating leases was $6 million and $125 million for Bombardier and BC, respectively, for the year ended January 31, 2004 (nil and $169 million for Bombardier and BC, respectively, for the year ended January 31, 2003) and is included in depreciation and amortization in the consolidated statements of income.
BC also manages a portfolio of freight cars under operating leases whereby BC is the lessee/sub-lessor. The net present value of the minimum lease payments payable by BC pursuant to these arrangements was $864 million as at January 31, 2004 ($1,018 million as at January 31, 2003). BC’s undiscounted minimum lease payments related to this portfolio are included in note 24.
## 6 INVENTORIES
Bombardier’s inventories were as follows as at January 31:
<img src='content_image/86852.jpg'>
As at January 31, 2004, finished products included four new aircraft, not associated with a firm order, amounting to $71 million and 23 pre-owned aircraft amounting to $213 million (16 new aircraft amounting to $244 million and 11 pre-owned aircraft amounting to $80 million as at January 31, 2003).
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## NOTE 6. INVENTORIES (CONT ’ D)
## Aerospace programs
Aerospace program inventories included the following excess over-average production costs (EOAPC) as at January 31:
<img src='content_image/35531.jpg'>
The EOAPC recoverable from existing firm orders amounted to $440 million as at January 31, 2004 ($515 million as at January 31, 2003). Management expects to recover the balance of EOAPC from future customer orders.
Anticipated proceeds from future sales of aircraft for each program exceeded the related costs in inventories as at January 31, 2004 and 2003, plus the estimated additional production costs to be incurred for each program. However, substantial amounts of EOAPC costs may eventually be charged to expense in a given year if fewer than the aircraft program quantity are sold, the proceeds from future sales of aircraft are lower than those anticipated, or the costs to be incurred to complete the programs exceed current estimates.
## Advances and progress billings
Under certain contracts, title to inventories is vested in the customer as the work is performed, in accordance with contractual arrangements and industry practice. In addition, in the normal conduct of its operations, the Corporation provides performance bonds, bank guarantees and other forms of guarantees to customers, mainly in the transportation segment, as security for advances received from customers pending performance under certain contracts. In accordance with industry practice, the Corporation remains liable to the purchasers for the usual contractor’s obligations relating to contract completion in accordance with predetermined specifications, timely delivery and product performance.
Costs incurred and recorded margins related to long-term contracts and costs incurred related to ongoing aerospace programs amounted to $5,510 million and $2,922 million respectively, as at January 31, 2004 ($5,212 million and $3,275 million respectively, as at January 31, 2003). Advances received and progress billings on long-term contracts and ongoing aerospace programs amounted to $5,836 million and $1,571 million, respectively, as at January 31, 2004 ($6,542 million and $1,866 million respectively, as at January 31, 2003), $2,764 million and $799 million of which represent a liability disclosed as advances and progress billings in excess of related costs as at January 31, 2004 ($3,041 million and $775 million respectively, as at January 31, 2003).
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## 7 PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment were as follows as at January 31:
<img src='content_image/108283.jpg'>
Included in the above are assets under construction and development amounting to $210 million and $634 million, respectively as at January 31, 2004 and 2003. Interest capitalized to assets under construction and development amounted to $18 million and $35 million, respectively, for the years ended January 31, 2004 and 2003.
## 8 GOODWILL
Goodwill is related to the DaimlerChrysler Rail Systems GmbH (Adtranz) acquisition. The change in the carrying amount of goodwill relates mainly to foreign exchange fluctuations.
## 9 TRANSACTIONS WITH RELATED PARTIES
In the ordinary course of business, BC purchases receivables from BRP, a company with common significant shareholders with Bombardier Inc., from which it earns financing revenues. In addition, BC also earns financing revenues related to sales incentive programs in connection with retailer financing provided by BC. These transactions are measured at exchange amounts which approximate fair value.
Total transactions with BRP were as follows during the period between December 19, 2003 and January 31, 2004:
<img src='content_image/108284.jpg'>
BRP and BC have entered into a retail floorplan inventory financing agreement for retailers of BRP products and a receivables financing agreement.
The inventory financing agreement is for a maximum amount of $750 million US ($995 million) for a renewable period of five years. Under the agreement, BC acts as the exclusive provider of floorplan financing to retailers of BRP-manufactured products (excluding outboard engine products). During the term of the agreement, BC has agreed not to provide retailer floorplan financing related to products of direct competitors of BRP (excluding outboard engine products).
The receivable financing agreement is for a maximum of $115 million US ($153 million) and expires in June 2005. BC funds receivables subject to certain eligibility criteria for BRP’s U.S. and European subsidiaries. Funding occurs in U.S. dollars and currency risk is retained by BRP.
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## 10 OTHER ASSETS
Other assets were as follows as at January 31:
<img src='content_image/9401.jpg'>
(1) Include licences, patents and trademarks. (2)
Loans and investments include $262 million as at January 31, 2004 ($58 million as at January 31, 2003) related to financing structures in the aerospace segment, as well as $89 million as at January 31, 2004 ($72 million as at January 31, 2003) related to marketable securities and $21 million as at January 31, 2004 (nil as at January 31, 2003) of other long-term receivables. (3)
The loan was made in connection with a financing transaction entered into for term-debt management.
## 11 SHORT-TERM BORROWINGS
Short-term borrowings were as follows as at January 31:
<img src='content_image/9404.jpg'>
Under banking syndicate agreements, Bombardier Inc. and some of its subsidiaries must maintain certain financial ratios, a condition which was met as at January 31, 2004 and 2003.
## Bombardier
Bombardier’s credit facilities and their rates and maturities, were as follows as at January 31:
<img src='content_image/9410.jpg'>
<img src='content_image/9409.jpg'>
(1) The foreign currency component of the amounts drawn was € 195 million.
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## NOTE 11. SHORT-TERM BORROWINGS (CONT ’ D)
On September 9, 2003, the Corporation renewed the 364-day portion of its North American credit facility for an amount of $730 million (previously $750 million).
On July 9, 2003, the Corporation renewed the 364-day portion of its European credit facility for an amount of € 560 million (previously € 600 million).
Remaining bilateral facilities resulting from the Adtranz acquisition amounted to $380 million as at January 31, 2004 ($505 million as at January 31, 2003).
In addition to the outstanding letters of credit shown in the above tables, Bombardier had $406 million of outstanding letters of credit as at January 31, 2004 ($900 million as at January 31, 2003).
In October 2002, Bombardier repaid, at maturity, $802 million (¥20 billion, € 200 million and $250 million) of floating-rate notes issued in August 2001.
On July 10, 2002, the Corporation entered into a new € 3,750-million credit facility to refinance its existing € 1,700-million European credit facility and various bilateral facilities resulting from the Adtranz acquisition. This credit facility had a committed 364-day portion of € 600 million and a committed five-year portion of € 3,150 million.
## BC
BC’s credit facilities and borrowings and their rates and maturities were as follows as at January 31:
<img src='content_image/122472.jpg'>
$^{(1)}$The foreign currency component of the amounts drawn was $473 million US for the revolving lines; $50 million US and various Western European currencies for an equivalent Canadian dollar amount of $63 million for the bank loans; and $777 million US for the securitized floorplan.
During the year ended January 31, 2004, BC did not renew two 364-day revolving facilities of $470 million and $400 million US, which matured in September 2003, in accordance with BC’s expected future requirements.
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## 12 ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities were as follows as at January 31:
<img src='content_image/74969.jpg'>
## Product warranties
Product warranties in the aerospace segment typically range from one to five years, except for structural warranties which extend up to 20 years, and from one to five years in the transportation segment.
The following table summarizes product warranty activity during the year ended January 31, 2004:
<img src='content_image/74970.jpg'>
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## 13 LONG-TERM DEBT
Long-term debts were as follows as at January 31:
<img src='content_image/2507.jpg'>
These amounts are expressed in Canadian dollars. (2)
Interest rates are before giving effect to the related hedging derivative financial instruments – see note 22, and for variable-rate debt, represent the average rate for the year. (3)
Monthly (M), semi-annually (SA) and annually (A). (4)
The amount in currency of origin represents the total committed facility.
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Trains, where we ’ re number ONE in the world
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## NOTE 13. LONG-TERM DEBT (CONT ’ D)
<img src='content_image/59572.jpg'>
$^{(1)}$These amounts are expressed in Canadian dollars.
$^{(2)}$Interest rates are before giving effect to the related hedging derivative financial instruments – see note 22, and for variable-rate debt, represent the average rate for the year.
$^{(3)}$Monthly (M), quarterly (Q), semi-annually (SA) and annually (A).
$^{(4)}$The amount under currency of origin represents the total committed facility.
The repayment requirements of the long-term debt during the next five fiscal years are as follows:
<img src='content_image/59571.jpg'>
All outstanding debt as at January 31, 2004, with the exception of the securitized floorplan, currently rank pari-passu and are unsecured. The securitized floorplan are collateralized by a pledge of the related finance receivables.
As at January 31, 2004 and 2003, the Corporation had complied with the covenants contained in its various financing agreements.
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## 14 S HARE CAPITAL
## Preferred shares
An unlimited number of non-voting preferred shares, without nominal or par value, issuable in series are authorized. The following series have been issued:
## 12,000,000 Series 2 Cumulative Redeemable Preferred Shares
Redemption: Redeemable, at the Corporation’s option at $25.50 per share.
Conversion: Convertible on a one-for-one basis, at the option of the holder, on August 1, 2007 and on August 1 of every fifth year thereafter into Series 3 Cumulative Redeemable Preferred Shares. Fourteen days before the conversion date, if the Corporation determines, after having taken into account all shares tendered for conversion by holders, that there would be less than 1,000,000 outstanding Series 2 Cumulative Redeemable Preferred Shares, such remaining number shall automatically be converted into an equal number of Series 3 Cumulative Redeemable Preferred Shares. Additionally, if the Corporation determines that on any conversion date, there would be less than 1,000,000 outstanding Series 3 Cumulative Redeemable Preferred Shares, then no Series 2 Cumulative Redeemable Preferred Shares may be converted.
Dividend: Since August 1, 2002, the variable cumulative preferential cash dividends are payable monthly on the 15th day of each month, if declared, with the annual variable dividend rate being equal to 80% of the Canadian prime rate. The dividend rate will vary in relation to changes in the prime rate and will be adjusted upwards or downwards on a monthly basis to a monthly maximum of 4% if the trading price of the Series 2 Cumulative Redeemable Preferred Shares is less than $24.90 per share or more than $25.10 per share. Until July 31, 2002, the quarterly dividend rate was equal to $0.34375 per share.
## 12,000,000 Series 3 Cumulative Redeemable Preferred Shares
Redemption: Redeemable, at the Corporation’s option, at $25.00 per share on August 1, 2007 and on August 1 of every fifth year thereafter.
Conversion: Convertible on a one-for-one basis, at the option of the holder, on August 1, 2007 and on August 1 of every fifth year thereafter into Series 2 Cumulative Redeemable Preferred Shares. Fourteen days before the conversion date, if the Corporation determines, after having taken into account all shares tendered for conversion by holders, that there would be less than 1,000,000 outstanding Series 3 Cumulative Redeemable Preferred Shares, such remaining number shall automatically be converted into an equal number of Series 2 Cumulative Redeemable Preferred Shares. Additionally, if the Corporation determines that on any conversion date there would be less than 1,000,000 outstanding Series 2 Cumulative Redeemable Preferred Shares, then no Series 3 Cumulative Redeemable Preferred Shares may be converted.
Dividend: Until July 31, 2007, the Series 3 Cumulative Redeemable Preferred Shares carry fixed cumulative preferential cash dividends at a rate of 5.476% or $1.369 per share per annum, payable quarterly on the last day of January, April, July and October of each year at a rate of $0.34225, if declared. For each succeeding five-year period, the applicable fixed annual rate of the cumulative preferential cash dividends calculated by the Corporation shall not be less than 80% of the Government of Canada bond yield, as defined in the Articles of Incorporation. These dividends shall be payable quarterly on the last day of January, April, July and October, if declared.
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NOTE 14. SHARE CAPITAL (CONT ’ D)
## 9,400,000 Series 4 Cumulative Redeemable Preferred Shares
Redemption: Redeemable, at the Corporation’s option, any time on or after March 31, 2007, at $26.00 per share if redeemed prior to March 31, 2008; $25.75 if redeemed on or after March 31, 2008 but prior to March 31, 2009; $25.50 if redeemed on or after March 31, 2009 but prior to March 31, 2010; $25.25 if redeemed on or after March 31, 2010 but prior to March 31, 2011; and $25.00 if redeemed on or after March 31, 2011.
Conversion: On or after March 31, 2007, the Corporation may, subject to the approval of the Toronto Stock Exchange and such other stock exchanges on which the Series 4 Cumulative Redeemable Preferred Shares are then listed, at any time convert all or any of the outstanding Series 4 Cumulative Redeemable Preferred Shares into fully paid and non-assessable Class B Shares (Subordinate Voting) of the Corporation. The number of Class B Shares (Subordinate Voting) into which each Series 4 Cumulative Redeemable Preferred Shares may be so converted will be determined by dividing the then applicable redemption price together with all accrued and unpaid dividends to, but excluding the date of conversion, by the greater of $2.00 and 95% of the weighted average trading price of such Class B Shares (Subordinate Voting) on the Toronto Stock Exchange for the period of 20 consecutive trading days, which ends on the fourth day prior to the date specified for conversion or, if that fourth day is not a trading day, on the trading day immediately preceding such fourth day. The Corporation may, at its option, at any time, create one or more further series of Preferred Shares of the Corporation, into which the holders of Series 4 Cumulative Redeemable Preferred Shares could have the right, but not the obligation, to convert their shares on a share- for-share basis.
Dividend: The holders of Series 4 Cumulative Redeemable Preferred Shares are entitled to fixed cumulative preferential cash dividends, if declared, at a rate of 6.25% or $1.5625 per share per annum, payable quarterly on the last day of January, April, July and October of each year at a rate of $0.390625 per share.
On March 8, 2002, the Corporation issued 9,400,000 Series 4 Cumulative Redeemable Preferred Shares. The net proceeds from this issue amounted to $228 million.
On August 1, 2002, 9,402,093 Series 2 Cumulative Redeemable Preferred Shares were converted into 9,402,093 Series 3 Cumulative Redeemable Preferred Shares, leaving 2,597,907 Series 2 Cumulative Redeemable Preferred Shares issued and outstanding out of the authorized 12,000,000 Series 2 Cumulative Redeemable Preferred Shares, which had all been issued and outstanding until that date.
## Common shares
The following classes of common shares, without nominal or par value, were authorized:
1,892,000,000 (1,792,000,000 in 2003) Class A Shares (Multiple Voting)
Voting rights: 10 votes each.
Conversion: Convertible, at any time, at the option of the holder, into one Class B Share (Subordinate Voting).
1,892,000,000 (1,792,000,000 in 2003) Class B Shares (Subordinate Voting)
Voting rights: One vote each.
Conversion: Convertible, at the option of the holder, into one Class A Share (Multiple Voting): (i) if an offer made to Class A (Multiple Voting) shareholders is accepted by the present controlling shareholder (the Bombardier family); or (ii) if such controlling shareholder ceases to hold more than 50% of all outstanding Class A Shares (Multiple Voting) of the Corporation.
Dividend: Annual non-cumulative preferential dividend of $0.0015625 per share, in priority to the Class A Shares (Multiple Voting), payable quarterly on the last day of January, April, July and October of each year at a rate of $0.000390625 per share, if declared.
On April 17, 2003, the Corporation issued 370,000,000 Class B Shares (Subordinate Voting) at a price of $3.25 per share. The net proceeds from this issue amounted to $1,170 million, net of issue costs of $33 million.
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## 15 S HARE- BASED PLANS
## Share option plans
Under share option plans, options are granted to key employees and up to October 1, 2003 to directors to purchase Class B Shares (Subordinate Voting). Of the 135,782,688 Class B Shares (Subordinate Voting) initially reserved for issuance, 61,967,660 were available for issuance under these share option plans as at January 31, 2004.
## Prior share option plans
For options issued to key employees prior to May 27, 2003, and options issued to directors, the exercise price is equal to the average of the closing prices on the stock exchange during the five trading days preceding the date on which the option was granted. These options vest at 25% per year during a period beginning two years following the grant date, except for 245,000 outstanding options granted to directors, which vest at 20% per year beginning on the grant date. The options terminate no later than 10 years after the grant date.
The summarized information on options issued and outstanding and exercisable is as follows as at January 31, 2004:
<img src='content_image/56592.jpg'>
$^{(1)}$Including 3.1 million options held by former employees of the Corporation’s recreational products segment.
The number of options has varied as follows for the years ended January 31:
<img src='content_image/56591.jpg'>
## Current performance share option plan
Effective May 27, 2003, the Corporation amended prospectively the share option plan for key employees. The exercise price is equal to the average of the closing prices on the stock exchange during the five trading days preceding the date on which the option was granted. However, predetermined target market price thresholds must be achieved in order for the options to be exercised. As at January 31, 2004, target prices ranged between $6 and $10. The options granted under the amended plan vest at 25% per year during a period beginning one year following the grant date. The options terminate no later than seven years after the grant date. Options granted prior to May 27, 2003 have not been affected by this amendment.
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## NOTE 15. SHARE-BASED PLANS (CONT ’ D)
The summarized information on options issued and outstanding is as follows as at January 31, 2004:
<img src='content_image/54710.jpg'>
The number of options has varied as follows for the year ended January 31, 2004:
<img src='content_image/54711.jpg'>
## Stock-based compensation expense
The weighted average grant date fair value of all stock-based arrangements granted during the year ended January 31, 2004 amounted to $1.52 per option. The fair value of each option granted was determined using an option pricing model and the following weighted average assumptions:
<img src='content_image/54712.jpg'>
## Pro forma disclosure of fair value of share options
Prior to February 1, 2003, the Corporation accounted for options granted under its share option plans as capital transactions. If the options granted in fiscal year 2003 had been accounted for based on the fair value method, net loss for the year ended January 31, 2004 would have increased by $8 million and basic and diluted loss per share would have remained as reported. For the year ended January 31, 2003, net loss would have increased by $7 million and basic and diluted loss per share would have remained as reported. The pro forma figures do not give effect to stock options granted prior to February 1, 2002.
The weighted average grant date fair value of all stock-based arrangements granted during the year ended January 31, 2003 amounted to $4.64 per option. The fair value of each option granted was determined using an option pricing model and the following weighted average assumptions:
<img src='content_image/54713.jpg'>
## Employee share purchase plan
Under the employee share purchase plan, employees of the Corporation may set aside funds through payroll deductions up to a maximum of 20% of their base salary to a yearly maximum of $30,000 per employee. The Corporation contributes to the plan an amount equal to 20% of the employees’ contributions. The contributions are used to purchase the Corporation’s Class B Shares (Subordinate Voting) in the open market. The Corporation’s contribution to the plan for the year ended January 31, 2004 amounted to $8 million ($11 million for the year ended January 31, 2003).
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## 16 EARNINGS (LOSS) PER SHARE
Basic and diluted earnings (loss) per share were as shown below for the years ended January 31. The number of shares and options in the table are expressed in thousands.
<img src='content_image/80308.jpg'>
For the year ended January 31, 2004, a total of 42,799,520 stock options (22,980,375 options for the year ended January 31, 2003) were excluded from the calculation of diluted earnings per share from discontinued operations, since the average market value of the underlying shares was less than the exercise price or the predetermined target market price thresholds of the Corporation’s Class B Shares (Subordinate Voting) for the year. For fiscal years ended January 31, 2004 and 2003, the effect of stock options potentially exercisable on loss per common share from continuing operations was anti-dilutive; therefore, basic and diluted loss per share from continuing operations are the same.
## 17 INTEREST EXPENSE, NET
Interest expense, net was as follows for the years ended January 31:
<img src='content_image/80309.jpg'>
BC’s interest expense is classified as cost of sales.
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## 18 S PECIAL ITEMS
The Corporation recorded the following special items:
<img src='content_image/29078.jpg'>
## Transportation
On March 16, 2004, the Board of Directors of the Corporation approved a proposed restructuring initiative to reduce the cost structure in the transportation segment. This restructuring initiative was launched as a result of significant plant manufacturing overcapacity.
Bombardier proposes to reduce the global workforce of Bombardier Transportation by approximately 6,600 positions, 1,500 of which are contractual employees. In addition, seven production sites in five European countries have been identified for closure.
Additional charges of approximately $320 million related to this restructuring initiative are expected to be recorded as special items over the next two years.
## Aerospace
## For the year ended January 31, 2004
The Corporation completed the sale of its MAS unit for net proceeds of $85 million US ($112 million), generating a gain of $98 million. The Corporation also completed the sale of the Belfast City Airport for net proceeds of £35 million ($78 million), generating a gain of $3 million.
Severance and other involuntary termination costs of $73 million were recorded, relating to reduction of employment levels at facilities in Montréal, Toronto, Belfast, Tucson and Wichita. The charges for the Tucson and Wichita facilities arise from the creation of integrated Bombardier Learjet and Challenger Series business aircraft manufacturing centres at the Wichita and Dorval facilities.
## For the year ended January 31, 2003
Severance and other involuntary termination costs related mainly to the Corporation’s September 27, 2002 announcement to reduce employment levels at all Aerospace sites.
The Corporation revised the assumptions used to estimate the average unit production cost for each program, including the reduction of accounting program quantities. As a result, special charges of $615 million were recorded mainly for the Bombardier Q-Series, Bombardier Global Express and Bombardier Learjet 45 programs. The changes in estimates, including revisions of accounting program quantities, reflected the continued uncertainty in the turboprop market and the weakness of the business aircraft segment.
Special charges of $556 million were recorded, $171 million of which was mainly related to the write-down in the value of pre-owned aircraft inventories, and from lower-than-anticipated sub-lease revenues on pre-owned turboprop aircraft was recorded in the second quarter. In addition, as a result of market price declines in the pre-owned business and turboprop aircraft markets, an additional special charge of $385 million was recorded in the fourth quarter. A special charge of $32 million related to the write-down of turboprops production inventories was also recorded.
The Corporation also recorded special charges of $41 million in connection with the final settlements of a lawsuit and a contractual dispute with a customer.
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## NOTE 18. SPECIAL ITEMS (CONT ’ D)
The following table summarizes provisions for severance and other involuntary termination costs, write-downs and other costs for the years ended January 31: SEVERANCE PROPERTY,
<img src='content_image/43563.jpg'>
## 19 I NCOME TAXES
The reconciliation of income taxes allocated to continuing operations computed at the Canadian statutory rates to income tax expense (recovery) was as follows for the years ended January 31:
<img src='content_image/43565.jpg'>
Details of income tax expense (recovery) allocated to continuing operations were as follows for the years ended January 31:
<img src='content_image/43566.jpg'>
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## NOTE 19. INCOME TAXES (CONT ’ D)
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Corporation’s deferred income tax asset (liability) as at January 31 were as follows:
<img src='content_image/78817.jpg'>
The net amount of deferred income tax is presented on the Corporation’s balance sheet as follows as at January 31:
<img src='content_image/78818.jpg'>
Operating losses carried forward and other temporary differences, which are available to reduce future taxable income of certain subsidiaries, for which a valuation allowance has been recognized, amounted to $6.0 billion as at January 31, 2004 ($5.0 billion as at January 31, 2003), approximately $1.3 billion of which have expiry dates between two and 20 years, while the remaining losses can be carried forward indefinitely. Approximately $2.6 billion of the operating losses carried forward and other temporary differences relate to business acquisitions. Any subsequent recognition of these future tax benefits will be recorded as a reduction of the goodwill related to this acquisition.
In addition, the Corporation has approximately $1.2 billion of available capital losses, most of which can be carried forward indefinitely. Capital losses can only be used against future capital gains, and therefore no deferred tax benefits have been recognized.
Undistributed earnings of the Corporation’s foreign subsidiaries are considered to be indefinitely reinvested and, accordingly, no provision for income taxes has been provided thereon. Upon distribution of these earnings in the form of dividends or otherwise, the Corporation may be subject to withholding taxes.
## 20 DEFERRED TRANSLATION ADJUSTMENT
Deferred translation adjustment, which arises from the translation to Canadian dollars of assets and liabilities of the Corporation’s foreign self-sustaining foreign operations, and of the long-term debt designated as hedges of the net investment in self-sustaining foreign operations resulted in a net change of $393 million for the year ended January 31, 2004. The net change resulted primarily from the strengthening of the Canadian dollar against the U.S. dollar and the sterling pound.
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## 21 NET CHANGES IN NON-CASH BALANCES RELATED TO OPERATIONS
The net changes in non-cash balances related to operations were as follows for the year ended January 31:
<img src='content_image/55008.jpg'>
## 22 FINANCIAL INSTRUMENTS
## Derivative financial instruments
The Corporation is subject to currency and interest rate fluctuations. To manage the volatility relating to these exposures, the Corporation nets the exposures on a consolidated basis to take advantage of natural offsets. The Corporation is party to a number of derivative financial instruments, mainly forward foreign exchange contracts, interest-rate swap agreements and cross-currency interest-rate swap agreements to hedge a significant portion of the residual risk. These derivative financial instruments are used to manage currency and interest-rate risks on existing assets and liabilities, as well as on forecasted foreign currency cash flows.
## a) Forward foreign exchange contracts
Forward foreign exchange contracts are agreements whereby one counter-party contracts with another, to exchange a specified amount of one currency in exchange for a specified amount of a second currency, at future dates.
The Corporation uses forward foreign exchange contracts to manage currency exposure arising from forecasted foreign currency cash flows. For the North American operations, forward foreign exchange contracts allow the Corporation mainly to sell U.S. dollars and buy Canadian dollars at predetermined rates. For the European operations, forward foreign exchange contracts mainly allow the sale or purchase of U.S. dollars, sterling pounds, euros and other Western European currencies at predetermined rates.
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## NOTE 22. FINANCIAL INSTRUMENTS (CONT ’ D)
The following table summarizes, by major currency, the Corporation’s forward foreign exchange contracts as at January 31:
<img src='content_image/134625.jpg'>
$^{(1)}$Notional amounts for the buy currency are expressed in the currency of origin, except for other categories which are expressed in Canadian dollars.
$^{(2)}$The rate represents the weighted average committed exchange rate.
<img src='content_image/134624.jpg'>
$^{(1)}$Notional amounts for the buy currency are expressed in the currency of origin, except for other categories which are expressed in Canadian dollars.
$^{(2)}$The rate represents the weighted average committed exchange rate.
b) Interest-rate swap agreements
Interest-rate swap agreements are contracts in which two counter-parties agree to exchange cash flows, over a period of time, based on a rate applied to a specified notional principal amount. Typically, one counter-party agrees to pay a fixed interest rate in exchange for a variable interest rate, determined on the same notional principal.
Bombardier entered into interest-rate swap agreements to convert a long-term debt and certain operating lease commitments from variable to fixed rates. The interest-rate swap agreements were as follows as at January 31, 2004 and 2003:
<img src='content_image/134623.jpg'>
$^{(1)}$Canadian deposit offering rate.
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## NOTE 22. FINANCIAL INSTRUMENTS (CONT ’ D)
The Corporation also entered into interest-rate swap agreements to convert certain of BC’s long-term debts from fixed to variable interest rates. The notional amount is $650 million US, for which the Corporation will pay one-month LIBOR and receive interest at fixed rates, ranging from 1.7% to 2.1% and the interest-rate swap agreements mature in fiscal year 2007.
BC entered into interest-rate swap agreements to convert certain long-term debts and certain finance receivables from fixed to variable interest rates. The interest-rate swap agreements were as follows as at January 31:
<img src='content_image/48963.jpg'>
BC also entered into basis swap agreements to convert certain of its securitized floorplan debts’ base interest rate from Libor to US prime. These contracts are used to align the base interest rate of certain debts to the same basis as their offsetting finance receivables. The total notional amount of the basis swaps was $827 million US as at January 31, 2004 ($800 million US as at January 31, 2003). The swaps mature in fiscal year 2005.
## c) Cross-currency interest-rate swap agreements – BC
Cross-currency interest-rate swap agreements are contracts in which counter-parties exchange principal and interest flows in different currencies over a period of time. These contracts are used to manage both the currency and the interest-rate exposure.
BC enters into cross-currency interest-rate swap agreements that modify the characteristics of certain long-term debts from the euro and sterling pounds to the U.S. dollar.These contracts also change the interest rate from fixed to variable to match the variable interest of its finance receivables. The notional amount of the cross-currency interest-rate swap agreements outstanding as at January 31, 2004 was an equivalent of $1,551 million ($1,872 million as at January 31, 2003). These contracts mature between calendar years 2007 and 2010.
## d) Interest-rate cap agreements
Interest-rate cap agreements are used as a hedge against the exposure of the Corporation from interest rate increase protection granted in connection with certain sales commitments. The notional amount totals $253 million US ($336 million). The interest-rate cap varies between 1. 7% and 5.7%, and the agreements mature in 2012.
## Fair value of financial instruments
The fair value information presented herein is based on information available to management at the dates presented. The estimated fair value of certain financial instruments has been determined using available market information or other valuation methodologies that require considerable judgment in interpreting market data and developing estimates. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that the Corporation could realize in a current market exchange. The use of different assumptions and/or estimation methodologies may have a material effect on the estimated fair values.
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## NOTE 22. FINANCIAL INSTRUMENTS (CONT ’ D)
The fair values of financial instruments have been established as follows:
Cash and cash equivalents, receivables, short-term borrowings and accounts payable and accrued liabilities: the carrying amounts reported on the consolidated balance sheets approximate the fair values of these items due to their short-term nature.
Finance receivables: the fair values of variable-rate finance receivables that reprice frequently and have no significant change in credit risk, approximate the carrying values. The fair values of fixed-rate finance receivables are estimated using discounted cash flow analyses, using interest rates offered for finance receivables with similar terms as those of borrowers of similar credit quality.
Loans and investments: the fair values of loans and investments are estimated using public quotations, when available, or discounted cash flow analyses, using interest rates applicable for assets with similar terms. The carrying amounts reported on the consolidated balance sheets approximate their fair values.
Long-term debt: the fair values of long-term debt are estimated using public quotations or discounted cash flow analyses, based on current corresponding borrowing rates for similar types of borrowing arrangements.
Derivative financial instruments: the fair values generally reflect the estimated amounts that the Corporation would receive upon the settlement of favourable contracts or be required to pay to terminate unfavourable contracts at the reporting dates. Investment dealers’ quotes from the Corporation’s bankers are available for substantially all of the Corporation’s forward foreign exchange contracts, interest-rate and cross- currency swap agreements and interest-rate cap agreements.
The fair value of financial instruments for which the carrying amount reported is different from the fair value was as follows as at January 31:
<img src='content_image/113536.jpg'>
$^{(1)}$Includes interest-rate and cross-currency interest-rate swap agreements.
## Credit risk
In addition to the credit risk described elsewhere in these Consolidated Financial Statements, the Corporation is subject to risk related to the off-balance sheet nature of derivative financial instruments, whereby counter-party failure would result in economic losses on favourable contracts. However, the counter-parties to these derivative financial instruments are investment grade financial institutions that the Corporation anticipates will satisfy their obligations under the contracts.
The Corporation considers that its credit risk associated with its receivables did not represent a significant concentration of credit risk at January 31, 2004, due to the large number of customers and their dispersion across many geographic areas.
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## 23
## Pension plans
## EMPLOYEE FUTURE BENEFITS
The significant actuarial assumptions adopted to determine the benefit cost and projected benefit obligation were as follows (weighted-average assumptions as at the December - 31 measurement date preceding the fiscal year end):
<img src='content_image/21695.jpg'>
The following table provides the components of the benefit cost for the years ended January 31:
<img src='content_image/21696.jpg'>
(1) For the year ended January 31, 2004, benefit cost recognized includes $15 million for the Canadian plans and $10 million for the foreign plans ($14 million and $9 million, respectively, for the year ended January 31, 2003) relating to the recreational products segment. These amounts are included in income from discontinued operations in the consolidated statements of income. For the year ended January 31, 2004, benefit cost excludes curtailment and settlement gains of $1 million for the Canadian plans and $47 million for the foreign plans resulting from the sale of the recreational products segment and MAS since these gains are included in the calculation of the gain on disposal of businesses.
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## NOTE 23. EMPLOYEE FUTURE BENEFITS (CONT ’ D)
The following tables provide a reconciliation of the changes in the pension plans’ projected benefit obligation and fair value of assets as at the December - 31 measurement date, preceding the fiscal year end and their allocation by major countries:
<img src='content_image/74841.jpg'>
<img src='content_image/74842.jpg'>
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## NOTE 23. EMPLOYEE FUTURE BENEFITS (CONT ’ D)
The reconciliation of the funded status of the pension plans to the amounts recorded on the consolidated balance sheets was as follows as at January 31:
<img src='content_image/40132.jpg'>
$^{(1)}$For the year ended January 31, 2003, the accrued benefit asset (liability) includes a liability of $8 million for the Canadian plans and $42 million for the foreign plans relating to the recreational products segment. These amounts are presented in liabilities related to assets held for sale.
Included in the above are plans with projected benefit obligation in excess of plan assets as follows:
<img src='content_image/40133.jpg'>
The most recent actuarial valuation for funding purposes of the Corporation’s funded pension plans was prepared with an effective date of December 31, 2002, and the next valuation will be completed during the second quarter of the fiscal year ended January 31, 2005 with an effective date of December 31, 2003, except for U.K. plans, for which the most recent actuarial valuation dates range between December 2001 and September 2003 and the next required valuation dates range between June 2004 and June 2006.
Plan assets are held in trust and their weighted average allocations were as follows as at the measurement date:
<img src='content_image/40134.jpg'>
The expected return on plan assets is determined by considering long-term historical returns, future estimates of long-term investment returns and asset allocations.
As at December 31, 2003, the publicly-traded equity securities did not include any of the Corporation’s shares. As at December 31, 2002, the publicly-traded equity securities included 160,000 Class A Shares (Multiple Voting) and 1,105,000 Class B Shares (Subordinate Voting) with a fair value of $1 million and $6 million respectively.
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## NOTE 23. EMPLOYEE FUTURE BENEFITS (CONT ’ D)
Cash contributions to the pension plans for fiscal year 2005 would amount to $370 million. Actual cash contributions to the pension plans for fiscal year 2005 are estimated to be $400 million. This estimate includes a voluntary contribution of $242 million to the aerospace plans in the U.K., and excludes a $212 million advance contribution made during fiscal year 2004.
## Benefits other than pensions
The significant actuarial assumptions used to determine the benefit cost and projected benefit obligation were as follows (weighted-average assumptions as at the December - 31 measurement date preceding the fiscal year end):
<img src='content_image/71887.jpg'>
As at January 31, 2004, the health-care cost trend rate, which is a weighted-average annual rate of increase in the per capita cost of covered health- and dental-care benefits, is assumed to be 9.5% for all participants. This rate is assumed to decrease to 5.5% by fiscal year 2009 and then remain at that level. A one-percentage-point change in assumed health-care cost trend rates would have the following effects:
<img src='content_image/71886.jpg'>
The following table provides the components of the benefit cost for the years ended January 31:
<img src='content_image/71885.jpg'>
$^{(1)}$For the year ended January 31, 2004, benefit cost for the Canadian plans includes $4 million ($1 million for the year ended January 31, 2003) relative to the recreational products segment. These amounts are included in income from discontinued operations in the consolidated statements of income. For the year ended January 31, 2004, benefit cost excludes curtailment and settlement gains of $2 million for the Canadian plans resulting from the sale of the recreational products segment and MAS since these gains are included in the calculation of the gain on disposal of businesses.
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## NOTE 23. EMPLOYEE FUTURE BENEFITS (CONT ’ D)
The following tables provide a reconciliation of the changes in the projected benefit obligation and its allocation by major countries as at December 31, the measurement date preceding the fiscal year end:
<img src='content_image/15480.jpg'>
The reconciliation of the funded status of the benefit plans other than pensions to the amounts recorded on the consolidated balance sheets was as follows:
<img src='content_image/15479.jpg'>
$^{(1)}$For the year ended January 31, 2003, the accrued benefit liability includes $9 million for the Canadian plans and $4 million for the foreign plans relating to the recreational products segment. These amounts are presented in liabilities related to assets held for sale.
The following table provides the accrued benefit asset (liability) recognized in the consolidated balance sheets as at January 31:
<img src='content_image/15478.jpg'>
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## 24
## COMMITMENTS AND CONTINGENCIES
In addition to the commitments and contingencies described elsewhere in these Consolidated Financial Statements, the Corporation is subject to other off-balance sheet risks. The table below presents the maximum potential exposure for each major group of exposure as at January 31. The maximum potential exposure does not reflect payments expected by the Corporation.
<img src='content_image/83464.jpg'>
$^{(1)}$Some of the residual value guarantees can only be exercised once the credit guarantees have expired without exercise and, therefore, must not be added together to calculate the combined maximum exposure for the Corporation.
$^{(2)}$In addition, the Corporation has also provided performance and other guarantees (see section g).
The Corporation’s maximum exposure in connection with credit and residual value guarantees related to sale of aircraft represents the face value of the guarantees before giving effect to the net benefit expected from the estimated value of the aircraft and other collateral available to mitigate the Corporation’s exposure under these guarantees. The provisions for anticipated losses have been established to cover the risks from these guarantees after considering the effect of the estimated resale value of the aircraft, which is based on independent third- party evaluations, and the anticipated proceeds from other collateral covering such exposures. The anticipated proceeds from the collaterals are expected to cover the Corporation’s total credit and residual value exposure after taking into account the provisions and liabilities.
## Aircraft sales
a) Credit and residual value guarantees
Bombardier provides credit guarantees in the form of guarantees of lease payments, as well as services related to the remarketing of aircraft. These guarantees are mainly issued for the benefit of providers of financing to customers, maturing in different periods up to 2024. Substantially all financial support involving potential credit risk lies with commercial airline customers. The credit risk relating to three commercial airline customers accounted for 43% of the total maximum credit risk as at January 31, 2004.
In addition, Bombardier provides guarantees for the residual value of aircraft at the expiry date of certain financing and lease agreements. The following table summarizes the outstanding residual value guarantees as at January 31, 2004 and the period in which they can be exercised:
<img src='content_image/83463.jpg'>
The provisions and liabilities recorded in connection with the credit and residual value guarantee exposure totalled $1,094 million as at January 31, 2004 ($919 million as at January 31, 2003).
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NOTE 24. COMMITMENTS AND CONTINGENCIES (CONT ’ D)
## b) Trade-in options
In connection with the sale of new aircraft, the Corporation provides, from time to time, trade-in options to customers. These options allow customers to trade in their pre-owned aircraft at a predetermined amount and during a predetermined period, conditional upon purchase of a new aircraft. As at January 31, 2004, the Corporation’s commitment to purchase pre-owned aircraft was as follows:
<img src='content_image/20805.jpg'>
The Corporation reviews its trade-in aircraft purchase commitments relative to the aircraft’s anticipated fair value and records anticipated losses as a charge to income. Fair value is determined using both internal and external aircraft valuations, including information developed from the sale of similar aircraft in the secondary market. As at January 31, 2004, the Corporation recorded $32 million ($30 million as at January 31, 2003) of provisions relating to anticipated losses on trade-in options, based on the likelihood that these options will be exercised. In addition, the Corporation recorded a provision of $28 million as at January 31, 2004 ($91 million as at January 31, 2003) related to trade-in commitments in connection with firm orders of new aircraft.
## c) Fractional ownership put options
Under the North American Bombardier Flexjet fractional ownership program, customers purchase fractional shares of a Bombardier business aircraft. The Corporation provides customers with an option to sell back their portion of the aircraft at estimated fair value if the option is exercised within a period of five years from the date of purchase. As at January 31, 2004, the Corporation’s commitment to repurchase fractional shares of aircraft based on estimated current fair values totalled $669 million ($985 million as at January 31, 2003).
In addition, certain customers can trade in their fractional shares of aircraft at predetermined amounts for a fractional share of a larger model at predetermined amounts. The total commitment to repurchase fractional shares of aircraft, in exchange for a fractional share of a larger model, was $107 million as at January 31, 2004 ($152 million as at January 31, 2003). The Corporation recorded a $30-million provision as at January 31, 2004 ($32 million as at January 31, 2003) for anticipated losses based on the likelihood that these options will be exercised.
## d) Financing commitments
The Corporation has committed to provide financing in relation to orders on hand which, net of third-party financing already arranged, amounted to $4.6 billion as at January 31, 2004 ($5.2 billion as at January 31, 2003). These commitments are provided under certain terms and conditions, and are related to aircraft on firm order, scheduled for delivery through fiscal year 2010. These commitments have scheduled expiration dates.
## Other guarantees
## e) Credit and residual value guarantees
In connection with the sale of certain transportation rail equipment, Bombardier has provided a credit guarantee of lease payment. This guarantee matures in 2020 and relates to a single customer. In addition, at the expiry date of certain financing and other agreements, the Corporation provides residual value guarantees, mostly in the transportation segment, mainly exercisable in 2014.
## f) Repurchase obligations
The Corporation has provided certain financing providers and customers, mainly in the transportation segment, the right, under certain conditions, to sell back equipment to the Corporation at predetermined prices. Of the total amount, $224 million as at January 31, 2004 ($233 million as at January 31, 2003) relates to two agreements whereby the Corporation may be required, beginning in 2008, upon customer default on payments to the financing providers, to repurchase the equipment. In addition, on three separate dates, beginning in 2008, the Corporation may also be required to repurchase the equipment. In connection with this commitment, funds have been deposited in a cash collateral account by the customer, which, together with accumulated interest, is expected to entirely cover the Corporation’s exposure.
## g) Other
In certain projects carried out through consortia or other partnership vehicles in the transportation segment, all partners are jointly and severally liable to the customer. In the normal course of business under such joint and several obligations or under performance guarantees that may be issued in relation thereto, each partner is generally liable to the customer for a default by the other partner. These projects normally provide counter indemnities among the partners. These obligations and guarantees typically extend until final product acceptance by the
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read more on Aerospace’s achievements and challenges on page 26
PIERRE BEAUDOIN PRESIDENT AND CHIEF OPERATING OFFICER, BOMBARDIER AEROSPACE
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## NOTE 24. COMMITMENTS AND CONTINGENCIES (CONT ’ D)
customer. The Corporation’s maximum exposure to projects for which the exposure of the Corporation is capped, amounts to approximately $1.5 billion as at January 31, 2004. For projects where the exposure of the Corporation is not capped, such exposure has been determined in relation to the Corporation’s partners’ share of the total contract value. Under this methodology, the Corporation’s exposure would amount to approximately $1.0 billion as at January 31, 2004. Such joint and several obligations and guarantees have been rarely called upon in the past, and no significant liability has been recognized in the Consolidated Financial Statements in connection with these obligations and guarantees.
In the normal course of its business, the Corporation has entered into agreements that include indemnities in favour of third parties, mostly tax indemnities. These agreements generally do not contain specified limits on the Corporation’s liability and therefore, it is not possible to estimate the Corporation’s maximum potential exposure under these indemnities.
## Sale and leaseback
BC and Bombardier concluded third-party sale and leaseback transactions mostly relating to freight cars, which in most instances were simultaneously leased to operators. Details of minimum lease payments as at January 31, 2004 were as follows:
<img src='content_image/118459.jpg'>
Minimum lease payments include $1,518 million for freight cars, $4 million for pre-owned aircraft, $2 million for transportation rail equipment and $46 million for other equipment.
Expected minimum sub-lease rentals from operators and the net benefit of the estimated resale value of the equipment approximate the amount of minimum lease payments.
## Operating leases
The Corporation leases buildings and equipment and assumes aircraft operating lease obligations on the sale of new aircraft. The related minimum lease payments and the residual value guarantees for the next five years and thereafter are as follows:
<img src='content_image/118460.jpg'>
## Other commitments
As at January 31, 2004, the Corporation had commitments under agreements to outsource a significant portion of its information technology function in the aerospace and transportation segments requiring minimum annual payments as follows:
<img src='content_image/118461.jpg'>
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NOTE 24. COMMITMENTS AND CONTINGENCIES (CONT ’ D)
## Claims
## a) Adtranz
Effective May 1, 2001, the Corporation acquired from DaimlerChrysler AG of Stuttgart, Germany (DaimlerChrysler) all of the common shares of its subsidiary Adtranz. Pursuant to the terms of the SPA, a purchase price of $725 million US ($1.1 billion) was agreed upon. The SPA also contemplates an adjustment to the purchase price for a maximum of € 150 million based on the carrying value of the adjusted net assets acquired, established under U.S. GAAP, as at April 30, 2001 (Net Asset Amount), provided that the minimum Net Asset Amount was delivered on the closing date.
Starting in May 2001, Adtranz, under the ownership of the Corporation, prepared its April 30, 2001 closing balance sheet under U.S. GAAP, in accordance with the provisions of the SPA for the purpose of establishing the Net Asset Amount. The resulting Net Asset Amount did not meet the minimum value contemplated in the SPA due to significant adjustments pertaining to the application of U.S. GAAP and to unrecorded costs required to complete contracts with third parties.
The Corporation announced on February 14, 2002 that discussions with DaimlerChrysler had failed to result in an agreement as to the value of the Net Asset Amount delivered at closing. In July 2002, the Corporation filed a request for arbitration with the International Chamber of Commerce in Paris.
Under the SPA, DaimlerChrysler made contractual representations and guarantees to the Corporation, including a written confirmation that the minimum Net Asset Amount was met on the closing date of April 30, 2001. The Corporation’s claim for damages is largely based on material breaches of contractual representations and guarantees, including a significant deficiency in the value of the Net Asset Amount. The Corporation’s claim under the request for arbitration is for an amount of € 960 million ($1,542 million) plus interest and costs, and its resolution will result in a reduction of goodwill, $206 million ( € 150 million) of which was recorded during the year ended January 31, 2002.
## b) Amtrak
On November 8, 2001, the Corporation filed a claim against Amtrak in the United States District Court for the District of Columbia. The claim sought damages in excess of $200 million US ($265 million) as compensation for additional costs incurred in relation to the Acela high-speed trainset and locomotive contracts, including costs incurred as a result of Amtrak’s failure to upgrade its infrastructure to accommodate the new equipment.
On November 20, 2002, Amtrak filed a counterclaim against the Corporation and a claim against Alstom Transport Inc., alleging damages in excess of $200 million US ($265 million).
As a result of mediation and negotiations, the Corporation and Alstom Transport Inc. reached a settlement agreement with Amtrak on March 16, 2004. The settlement agreement provides for total payments of $42.5 million US ($56 million) by Amtrak to the Corporation and Alstom Transport Inc., $32.8 million US ($44 million) of which will be paid to the Corporation. The other main components of the agreement are:
i) With respect to trainsets, locomotives and facilities:
- For each type of equipment, a detailed list of items required to be completed by the consortium to obtain a Certificate of Acceptance;
- Extension of the general warranty of the trainsets until October 1, 2006; and
- Warranty on all modifications to be done on trainsets and/or locomotives until October 1, 2006.
ii) With respect to management services:
- The joint venture formed by the Corporation and Alstom Transport Inc. will continue to perform the maintenance of the fleet until October 1, 2006, at which time the maintenance of the fleet will be taken over by Amtrak; and
- Additional training provided to Amtrak to ensure that it will be able to take over on October 1, 2006.
A charge of $139 million related to this settlement was recorded in cost of sales for the year ended January 31, 2004.
## c) Other litigations
The Corporation is a defendant in certain legal cases currently pending before various courts in relation to product liability and contract disputes with customers and other third parties.
The Corporation intends to vigorously defend its position in these matters. Management believes the Corporation has set up adequate provisions to cover potential losses and amounts not recoverable under insurance coverage, if any, in relation to these legal actions.
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## 25
## RECLASSIFICATION
Certain of the comparative figures have been reclassified to conform to the presentation adopted in the current year.
## 26
## SEGMENT DISCLOSURE
The Corporation operates in the three reportable segments described below. Each reportable segment offers different products and services and requires different technology and marketing strategies.
Bombardier Aerospace is a manufacturer of business, regional and amphibious aircraft and a provider of related services. It offers comprehensive families of regional jet and turboprop commercial aircraft and a wide range of business jets. It also provides the Bombardier Flexjet fractional ownership program, technical services, aircraft maintenance and pilot training.
Bombardier Transportation, the global leader in the rail equipment manufacturing and servicing industry, offers a full range of passenger railcars, as well as complete rail transportation systems. It also manufactures locomotives, freight cars, airport people movers, propulsion and controls and provides rail control solutions. Bombardier Transportation is also a provider of maintenance services.
BC offers secured inventory financing and interim financing of commercial aircraft, primarily in North American markets, and manages the wind-down of various portfolios.
The accounting policies of the segments are the same as those described in the Summary of Significant Accounting Policies. Management evaluates performance of each segment based on income or loss before income taxes. Intersegment services are accounted for at current market prices as if the services were provided to third parties.
Net corporate interest costs are allocated to the manufacturing segments based on each segment’s net assets, and are computed as follows: one half of the Canadian prime rate is charged on gross utilized assets reduced by interest on customer advances calculated at the Canadian prime rate. The balance of unallocated actual interest costs is allocated to each manufacturing segment based on its net assets. The Corporation does not allocate corporate interest charges to the BC segment. Net assets exclude cash and cash equivalents, investment in BC and advances and subordinated loans to Bombardier and deferred income taxes, and are net of accounts payable and accrued liabilities, advances and progress billings in excess of related costs and accrued benefit liability. Most corporate office charges are allocated based on each segment’s revenues.
The table containing the detailed segmented data is shown after note 27.
## 27
## SUBSEQUENT EVENT
Effective February 1, 2004, the Corporation changed its functional currencies from the Canadian dollar and the sterling pound to the U.S. dollar for the Canadian and U.K. operations in the aerospace segment, and from the Canadian dollar and the Mexican peso to the U.S. dollar for the Canadian and Mexican operations in the transportation segment. The European operations of the transportation segment continue to mainly use Western European currencies as their functional currencies. No gains or losses will result from the change of functional currencies. This change was made as a result of the increasing proportion of the Corporation’s revenues, costs, inter-company arrangements, capital expenditures and long-term debt denominated in U.S. dollars.
The Corporation has historically used the Canadian dollar as its reporting currency for its Consolidated Financial Statements. Following the change of certain functional currencies to the U.S. dollar, the Corporation will adopt, effective for the first quarter of fiscal year 2005, the U.S. dollar as its reporting currency. Comparative financial information previously expressed in Canadian dollars will be restated in U.S. dollars for all periods presented, using the exchange rate applicable at each balance sheet date and the average exchange rate for the consolidated statements of income and consolidated statements of cash flows. Equity transactions will be translated at historical rates with opening equity on February 1, 1999 translated at the rate of exchange on that date. The effect of the translation adjustments will be included in the deferred translation adjustment in shareholders’ equity.
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## Bombardier Inc.
BOMBARDIER INC. Corporate Office 800 René-Lévesque Blvd. West Montréal, Québec Canada H3B 1Y8 Telephone: +1 514 861-9481 Fax: +1 514 861-7053 www.bombardier.com
## Bombardier Aerospace
BOMBARDIER AEROSPACE Headquarters 400 Côte-Vertu Road West Dorval, Québec Canada H4S 1Y9 Telephone: +1 514 855-5000 Fax: +1 514 855-7401
BOMBARDIER AEROSPACE Toronto site 123 Garratt Boulevard Downsview, Ontario Canada M3K 1Y5 Telephone: +1 416 633-7310 Fax: +1 416 375-4546
BOMBARDIER AEROSPACE Learjet Inc. One Learjet Way Wichita, Kansas 67209 United States Telephone: +1 316 946-2000 Fax: +1 316 946-2220
BOMBARDIER AEROSPACE Short Brothers plc Airport Road, Belfast BT3 9DZ Northern Ireland Telephone: +44 2890 458 444 Fax: +44 2890 733 396
BOMBARDIER INC. Defence Services 10000 Helen-Bristol Street Montréal Airport, Mirabel Mirabel, Québec Canada J7N 1H3 Telephone: +1 450 476-4633 Fax: +1 450 476-6382
BOMBARDIER INC. Amphibious Aircraft 3400 Douglas-B. Floréani Saint-Laurent, Québec Canada H4S 1V2 Telephone: +1 514 855-5000 Fax: +1 514 855-7604
BOMBARDIER AEROSPACE Flexjet 3400 Waterview Parkway Suite 400 Richardson, Texas 75080 United States Telephone: +1 800 353-9538 Fax: +1 972 720-2435
BOMBARDIER AEROSPACE Flexjet Europe Vista Office Centre 50 Salisbury Road, 9th Floor Hounslow, Middlesex TW4 6JH United Kingdom Telephone: +44 20 8538 0200 Fax: +44 20 8538 0201
BOMBARDIER AEROSPACE Flexjet Asia-Pacific 400 Côte-Vertu Road West Dorval, Québec Canada H4S 1Y9 Telephone: +1 888 880-3539 Fax: +1 514 855-7802
BOMBARDIER AEROSPACE Skyjet 3040 Williams Drive Suite 404 Fairfax, Virginia 22031 United States Telephone: +1 703 584-3330 Fax: +1 703 584-3361
## Bombardier Transportation
BOMBARDIER TRANSPORTATION Headquarters Saatwinkler Damm 43 13627 Berlin Germany Telephone: +49 30 3832 0 Fax: +49 30 3832 2000
BOMBARDIER TRANSPORTATION North America 1101 Parent Street Saint-Bruno, Québec Canada J3V 6E6 Telephone: +1 450 441-2020 Fax: +1 450 441-1515
BOMBARDIER TRANSPORTATION Light Rail Vehicles Donaufelder Strasse 73-79 1211 Vienna Austria Telephone: +43 1 25 110 Fax: +43 1 25 110 8
BOMBARDIER TRANSPORTATION Mainline & Metros Am Rathenaupark 16761 Hennigsdorf Germany Telephone: +49 33 02 89 0 Fax: + 49 33 02 89 20 88
## Main business locations
BOMBARDIER TRANSPORTATION Locomotives & Freight Brown-Boveri Strasse 5 8050 Zurich Switzerland Telephone: +41 1318 3333 Fax: +41 1318 2727
BOMBARDIER TRANSPORTATION Total Transit Systems P.O. Box 220, Station A Kingston, Ontario Canada K7M 6R2 Telephone: +1 613 384-3100 Fax: +1 613 384-5244
BOMBARDIER TRANSPORTATION Propulsion & Controls Brown-Boveri Strasse 5 8050 Zurich Switzerland Telephone: +41 1318 3333 Fax: +41 1318 1543
BOMBARDIER TRANSPORTATION Services West Street, Crewe Cheshire CW1 3JB United Kingdom Telephone: +44 1270 500 333 Fax: +44 1270 255 439
BOMBARDIER TRANSPORTATION Rail Control Solutions 10 Church Street, Reading Berkshire RG1 2SQ United Kingdom Telephone: +44 118 953 8000 Fax: +44 118 953 8483
BOMBARDIER TRANSPORTATION Bogies Siegstrasse 27 57250 Netphen Germany Telephone: +49 271 702 0 Fax: +49 271 702 222
BOMBARDIER TRANSPORTATION London Underground Projects Litchurch Lane Derby DE24 8AD United Kingdom Telephone: +44 1332 344 666 Fax: +44 1332 251 635
## Bombardier Capital
BOMBARDIER CAPITAL INC. 12735 Gran Bay Parkway West Suite 1000 Jacksonville, Florida 32258 United States Telephone: +1 904 288-1000 Fax: +1 904 288-1920
BOMBARDIER CAPITAL INC. 261 Mountain View Drive Colchester, Vermont 05446-0991 United States Telephone: +1 802 654-8100 Fax: +1 802 654-8435
BOMBARDIER CAPITAL INC. 6400 Auteuil Street, 2nd Floor Brossard, Québec Canada J4Z 3P5 Telephone: +1 450 443-4400 Fax: +1 450 443-8943
BFI INC. 261 Mountain View Drive Colchester, Vermont 05446-0991 United States Telephone: +1 802 654-8100 Fax: +1 802 654-8432
BOMBARDIER CAPITAL RAIL INC. 12735 Gran Bay Parkway West Suite 1000 Jacksonville, Florida 32258 United States Telephone: +1 904 288-1000 Fax: +1 904 288-2155
BOMBARDIER CAPITAL LTD. 6400 Auteuil Street, 2nd Floor Brossard, Québec Canada J4Z 3P5 Telephone: +1 450 443-4400 Fax: +1 450 443-8943
BOMBARDIER FINANCE INC. 300-840 6th Avenue S.W. Calgary, Alberta Canada T2P 3E5 Telephone: +1 403 238-5045 Fax: +1 403 251-5038
BOMBARDIER CAPITAL Insurance Agency Inc. 12735 Gran Bay Parkway West Suite 1000 Jacksonville, Florida 32258 United States Telephone: +1 904 288-1000 Fax: +1 904 288-1920
RJ FINANCE CORP. ONE 261 Mountain View Drive Colchester, Vermont 05446-0991 United States Telephone: +1 802 654-8100 Fax: +1 802 654-8433
BOMBARDIER INC. Real Estate Services 2505 des Nations Street Suite 200 Saint-Laurent, Québec Canada H4R 3C8 Telephone: +1 514 335-9511 Fax: +1 514 335-7007
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<img src='content_image/120008.jpg'>
<img src='content_image/120016.jpg'>
## BOARD OF DIRECTORS
Laurent BEAUDOIN, c.c, FCA Executive Chairman of the Board Bombardier Inc.
Paul M. TELLIER President and Chief Executive Officer Bombardier Inc.
Jalynn H. BENNETT, c.m. President Jalynn H. Bennett & Associates Ltd.
## OFFICERS/GROUPS
Pierre BEAUDOIN President and Chief Operating Officer Bombardier Aerospace
## OFFICERS/CORPORATE OFFICE
Laurent BEAUDOIN Executive Chairman of the Board
Paul M. TELLIER President and Chief Executive Officer
Pierre ALARY Senior Vice President and Chief Financial Officer
<img src='content_image/120009.jpg'>
<img src='content_image/120017.jpg'>
<img src='content_image/120010.jpg'>
<img src='content_image/120018.jpg'>
J.R. André BOMBARDIER Vice Chairman of the Board Bombardier Inc.
Janine BOMBARDIER President and Governor J. Armand Bombardier Foundation
L. Denis DESAUTELS Corporate Director
André NAVARRI President Bombardier Transportation
J.R. André BOMBARDIER Vice Chairman of the Board
Richard C. BRADEEN Senior Vice President, Corporate Audit Services and Risk Assessment
Roger CARLE Corporate Secretary
<img src='content_image/120011.jpg'>
<img src='content_image/120019.jpg'>
<img src='content_image/120012.jpg'>
<img src='content_image/120020.jpg'>
André DESMARAIS President and Co-Chief Executive Officer Power Corporation of Canada
Jean-Louis FONTAINE Vice Chairman of the Board Bombardier Inc.
Daniel JOHNSON Counsel McCarthy Tétrault, LLP
Brian PETERS President and Chief Operating Officer Bombardier Capital
Michael DENHAM Senior Vice President, Strategy
Daniel DESJARDINS Senior Vice President, General Counsel and Assistant Secretary
Jean-Louis FONTAINE Vice Chairman of the Board
William J. FOX Senior Vice President, Public Affairs
<img src='content_image/120013.jpg'>
<img src='content_image/120014.jpg'>
Michael H. MCCAIN President and Chief Executive Officer Maple Leaf Foods Inc.
Jean C. MONTY Corporate Director
James E. PERRELLA Retired Chairman and Chief Executive Officer Ingersoll-Rand Company
Federico SADA G. President and Chief Executive Officer Vitro, S.A. de C.V.
Moya GREENE Senior Vice President, Operational Effectiveness
François LEMARCHAND Senior Vice President and Treasurer
Carroll L’ITALIEN Senior Vice President
Marie-Claire SIMONEAU Executive Assistant to the Chairman
<img src='content_image/120015.jpg'>
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## SHARE CAPITAL
AUTHORIZED AND ISSUED AS AT JANUARY 31, 2004
<img src='content_image/19877.jpg'>
(1) Includes 370,000,000 Class B shares issued on April 17, 2003.
## SHAREHOLDER AND INVESTOR RELATIONS
## Shareholders
To order additional copies of this report and other corporate or financial documents, please access www.bombardier.com, then Investor Relations, then Contacts. BOMBARDIER INC. PUBLIC AFFAIRS 800 René-Lévesque Blvd. West Montréal, Québec, Canada H3B 1Y8 Telephone: +1 514 861-9481, extension 390 Fax: +1 514 861-2420
## Investors
BOMBARDIER INC. INVESTOR RELATIONS 800 René-Lévesque Blvd. West Montréal, Québec, Canada H3B 1Y8 Telephone: +1 514 861-9481, extension 487 Fax: +1 514 861-7769 E-mail : [email protected]
## Transfer agent and registrar
Shareholders with inquiries concerning their shares should contact: COMPUTERSHARE TRUST COMPANY OF CANADA 100 University Avenue, 9th Floor Toronto, Ontario, Canada M5J 2Y1 1500 University Street, Suite 700 Montréal, Québec, Canada H3A 3S8 Telephone: +1 514 982-7270 or +1 800 564-6253 (toll-free, North America only) Fax: +1 416 263-9394 or +1 888 453-0330 (toll-free, North America only) [email protected]
## STOCK EXCHANGE LISTINGS
Class A and Class B shares Preferred shares, Series 2, Series 3 and Series 4 Class B shares
Stock listing tickers BBD (Toronto) BOM (Brussels) BBBd.F (Frankfurt)
## Media
For information on Bombardier, contact the Public Affairs Department at +1 514 861-9481, extension 245. Bombardier’s press releases are available on the Internet at the following address: www.bombardier.com.
## Incorporation
The Corporation was incorporated on June 19, 1902 by letters patent and prorogated June 23, 1978 under the Canadian Business Corporations Act.
## Auditors
Ernst & Young LLP 1 Place Ville-Marie Montréal, Québec, Canada H3B 3M9
## Annual meeting
The annual meeting of shareholders will be held on Tuesday, June 1, 2004 at 10:00 a.m. at the following address: Place Bonaventure Exhibition Halls 800 de la Gauchetière Street West Montréal, Québec, Canada H5A 1K6
Toronto (Canada)
Toronto (Canada) Brussels (Belgium) and Frankfurt (Germany)
Duplication: Although Bombardier strives to ensure that registered shareholders receive only one copy of corporate documents, duplication is unavoidable if securities are registered under different names and addresses. If this is the case, please call the following number: +1 514 982-7270 or +1 800 564-6253 (toll-free, North America only) or send an e-mail to [email protected].
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and planes, where we ’reaworld LEADER in regional aircraft and business jets.
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Product photos, page 28 to 33 Rear view of the Bombardier Global Express business jet Bombardier Global 5000 business jet Bombardier CRJ700 regional jet Bombardier TRAXX locomotive, Germany AirTrain JFK, New York, USA Front view of the AGC high-capacity train, France __
Un exemplaire en français vous sera expédié sur demande adressée à Bombardier Inc., Affaires publiques 800, boul. René-Lévesque Ouest Montréal (Québec) Canada H3B 1Y8 Consultez le site Internet au www.bombardier.com __ y _
Printed in Canada 2-921393-59-x – Legal deposit, Bibliothèque nationale du Québec
All amounts mentioned in this report are in Canadian dollars, unless otherwise stated.
This annual report is printed on chlorine-free recycled paper containing at least 20% post-consumer fibre. ;
All rights reserved. © 2004 Bombardier Inc. or its subsidiaries.
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BOMBARDIER
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## We r e s t r uctured
## Still not e nough .
operations in Aerospace to ensure our competitiveness and leadership position, and we ’ re starting to see our work bear fruit.
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read more on cost savings and efficiency improvement initiatives at Transportation on page 34 u — :
And we ’ ve just embarked on the same process at Transportation.
MOYA GREENE SENIOR VICE PRESIDENT, OPERATIONAL EFFECTIVENESS
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This is NOT THE END. This is not even the BEGINNING OF THE END . But itmaybe THE END OF THE BEGINNING .
—WINSTON CHURCHILL
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We ’ re on
PAUL M. TELLIER PRESIDENT AND CHIEF EXECUTIVE OFFICER
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but there ’ s still al o tof progress TO BE MADE.
PAUL M. TELLIER PRESIDENT AND CHIEF EXECUTIVE OFFICER
read more on our rigorous action plan on page 20
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# our way
LAURENT BEAUDOIN, FCA
EXECUTIVE CHAIRMAN OF THE BOARD
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As the cover of this document suggests, we have made a lot of progress over the course of a very challenging fiscal year—and there is a lot more progress to be made.
In last year’s annual report, I outlined a rigorous action plan designed to address shareholder concerns, regain the confidence of the marketplace and restore Bombardier to prosperity. During the past 12 months, we have demonstrated both the capability and the resolve required to execute that plan.
In short, we have done what we said we would do—we’ve made good on our commitments.
Let’s examine the record. Year one of the action plan entailed strength- ening Bombardier’s balance sheet and supplementing our working capital by means of a recapitalization program and the divestitures of the recreational products business and certain non-core assets. The outcome? A successful equity offering yielded total proceeds of $1.2 billion—some $400 million or 50% more than originally anticipated. Liquidity was further enhanced by the sale of our recreational products business, which was completed in December 2003, for a total consideration of $960 million.
Successful divestitures, along with the sale of a significant portion of Bombardier Capital’s business aircraft portfolio, boosted total proceeds from our recapitalization initiative to some $2.5 billion. As well, we success- fully renewed the Company’s short-term bank facilities in North America and in Europe, confirming that key lenders have confidence in Bombardier.
Elsewhere, we have continued with the orderly winding down of portfolios at Bombardier Capital, which is now tightly focused on two areas: inventory financing and the interim financing of commercial aircraft, within clearly defined limits on both the amount of capital that can be committed and the number of aircraft. We also delivered on our commitment to switch from program accounting to average cost accounting in Aerospace to facilitate enhanced investor understanding of the Company’s financials. And in keep- ing with our move to a simpler structure, Aerospace and Transportation have assumed the responsibilities of the former Bombardier International unit, which essentially had accomplished its mission of helping estab- lish beachheads in the emerging markets of Asia, Eastern Europe and Latin America.
Together, these achievements represent a tremendous start to our plan. They gave us some breathing space from a balance sheet perspective and—just as importantly—they have resulted in a much more focused enter- prise. In today’s intensely competitive global marketplace, focus is everything.
The focus of today’s Bombardier is planes and trains—period. We now are in a position to concentrate all our efforts and resources on main- taining and enhancing Bombardier’s leadership positions in the global aerospace and rail transportation industries.
## MAKING good on our COMMITMENTS
Significant as they are, the recapitalization and refocusing initiatives enu- merated above were just the beginning of a rigorous, ongoing action plan that entails several more steps and many more months of commitment and hard work before our rebuilding task will be complete. We have already embarked on the second year of that plan, which involves a consolidation of manufacturing operations at Bombardier Aerospace that has already been launched, and a comprehensive restructuring plan at Bombardier Transportation. This will improve the competitiveness of all our operations by focusing resolutely on performance and the bottom line.
I wish to make clear, however, that the streamlining taking place at Aerospace and Transportation is not about cost cutting per se. Rather, it’s about reinforcing the competitiveness of our core businesses in the context of fundamental changes to the environments in which they operate.
## Aerospace
In the aerospace arena, manufacturers of commercial aircraft continue to face the fallout from September 11, 2001, which is reflected in the general fragility of the airline industry. But as creator of the regional jet—which is leading a turnaround in the airline industry’s fortunes—Bombardier offers a sought- after solution to carriers’ woes. Demand for regional jets, in fact, continues to grow and Bombardier remains the market leader in this category. Paradoxically, however, many airlines have limited access to the financial resources they need to acquire new equipment. Under the circumstances, I am particularly pleased to note that Bombardier achieved an increase in its deliveries of regional aircraft for the latest year—a feat unmatched by the competition. Going forward, we will be working to facilitate increased avail- ability of outside sources of financing for commercial aircraft customers, in order to capitalize on continuing strong demand for our market-leading Bombardier CRJ product family.
In the fall of 2003, we announced a consolidation of our business aircraft manufacturing operations. Final line activities and interior completions for the Bombardier Learjet and Bombardier Challenger Series business aircraft programs are being integrated at the Wichita, Kansas and Montréal, Québec sites, respectively. The creation of these integrated manufacturing centres will result in annual savings, starting with the first full year of operation.
With three new corporate jets being rolled out over the course of 2004— and having already moved to streamline production—Bombardier Aerospace is positioned to derive maximum benefit from an anticipated upturn in the business aircraft segment.
Moreover, we are beginning to see concrete results from the intense focus on costs and financial discipline that has been brought to bear across the entire Aerospace group.
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## Transportation
The global transportation industry has also been undergoing fundamental changes due to factors such as deregulation, the emergence of private- sector players and revamped policies and practices in the lynchpin European Union market. However, ongoing industry consolidation—in which Bombardier has been a major participant—has not yet been reflected in the elimination of excess production capacity. For instance, many of our own European plants have been operating recently at less than 50% capacity. Decisive action was called for. Subsequent to year end, we put new lead- ership in place at Bombardier Transportation and announced a major reorganization of its European manufacturing network, designed to elimi- nate overcapacity, decrease costs and increase margins. The Transportation group will reduce its global workforce by 6,600 positions, representing 18.5% of the total, over the next two years. Seven production sites in five European countries are slated to be closed, and an industrial site improve- ment program designed to increase operating efficiency will be introduced at a number of other locations. Implementation of the restructuring plan will take place in consultation with our workplace partners and in full compliance with laws and regulations in the various jurisdictions.
We have also revamped the Bombardier Transportation organizational chart to simplify lines of responsibility, reduce administrative over- heads and—most critically—improve accountability. As well, the group is pursuing a procurement initiative designed to wring more value from the supply chain.
While regrettable, the site and workforce reductions are absolutely necessary to balance Bombardier Transportation’s industrial footprint with projected market demand. I am confident that the restructuring plan will enable the group to compete more aggressively in global passenger rail markets. In fact, I am pleased to report that, in the final months of the fiscal year, not only were we winning a goodly percentage of contracts up for grabs, but we also stand to make acceptable margins on the new business. This is the result of a more rigorous bid preparation process that factors in ample consideration for contingencies.
## Bombardier Capital
Things are unfolding according to plan at Bombardier Capital, which is on track in terms of results and the winding down of portfolios. Our emphasis here continues to be on the profitable and professional management of continuing business and the steady reduction of discontinued activities.
## Leveraging Bombardier’s strengths
Among Bombardier’s many strengths is the fact that we have superb product and services portfolios in rail transportation equipment, business jets and regional aircraft alike, as well as strong global market positions on which to build.
The imperative now is to leverage these portfolios by honing our execu- tion skills and becoming better project managers. This is particularly critical in Transportation, where every contract is essentially a one-off project. Simply put, our aim is to produce the best products at the best prices in both core businesses—a combination that adds up to a superior value equation.
Improving our competitiveness and enhancing our profitability will give us the financial wherewithal required to pursue the third year of our strategy— capitalizing on the attractive opportunities for profitable growth that we are confident will come our way in the future, while maximizing value for Bombardier shareholders.
To that end, we continue striving every day to make good on our commit- ments. At today’s Bombardier, it’s about focus. It’s about resolve. It’s about accountability—knowing where the buck stops.
## Acknowledgements
It’s also about teamwork. In that respect, I would like to take this opportu- nity to formally acknowledge several recent newcomers to our executive ranks, as well as individuals who have taken on added responsibilities. Pierre Alary, formerly Vice President, Finance, for Bombardier, was named Senior Vice President and Chief Financial Officer. Moya Greene, a former sen- ior vice president at Canadian Imperial Bank of Commerce who also has experience in the upper echelons of the Canadian federal public service, joined Bombardier as Senior Vice President, Operational Effectiveness. André Navarri, whose credentials include three years as president of the Alstom Group’s transportation arm, was appointed President of Bombardier Transportation, effective February 22, 2004. Wolfgang Toelsner, formerly head of Bombardier Transportation’s Locomotives and Freight division, was named Chief Operating Officer of the Transportation group. Together, they bring a wealth of talent and experience that further enhances our team’s ability to get the job done.
I also wish to thank employees throughout the Company for their commit- ment and hard work. I understand it is particularly tough for people who are part of an organization that has enjoyed so much success in the past to adapt to changed circumstances. However, I’m confident that the resiliency for which our people are known—and which helped Bombardier overcome earlier obstacles to becoming a global powerhouse—will enable us to successfully meet the current challenges. Your efforts are appreciated.
As well, I wish to reiterate my appreciation for the continuing support of the majority shareholder. Our Executive Chairman of the Board, Laurent Beaudoin, and the Bombardier family have stood squarely behind our efforts, not only regarding the sale of the heritage recreational products asset, but in terms of the entire action plan. Finally, it would be remiss of me not to thank the Board of Directors for its support.
## Priorities for fiscal 2005
As fiscal year 2005 continues to unfold, we will press ahead with implemen- tation of the restructuring and streamlining at Bombardier Transportation— focusing on costs, productivity, improving the procurement chain and fur- ther refining the bid process. As well, we will be looking to further increase our share of the value-added services segment. Going forward, we also will be working with customers, suppliers and industry partners to bring about increased standardization in transportation solutions.
At Bombardier Aerospace, we will continue to focus on improving our competitiveness in order to leverage our leadership positions in regional and business aircraft. Other priorities include facilitating export financing for commercial aircraft sales and, in the longer term, supporting the propo- sition that Canada adopt a comprehensive new aerospace policy that would address R&D and manufacturing as well as sales financing issues, thereby putting Canadian players on more of a level playing field with foreign com- petitors. We have also established a multidisciplinary task force to examine the feasibility of developing a larger, new-generation commercial aircraft.
As I stated at the beginning of this letter, there is a lot more progress to be made. However, I can assure you that team members are united in their resolve to successfully implement the remaining steps of the action plan. Together, we will continue making good on our commitments.
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Signed by
PAUL M. TELLIER
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A year ago, in my message to shareholders, I expressed confidence in our then recently appointed President and Chief Executive Officer, Paul Tellier. I am pleased to observe that, over the intervening months, my assess- ment of his leadership abilities has proven to be more than justified— as demonstrated by the successful recapitalization and restructuring of the organization, and the ongoing action plan to restore earnings power and shareholder value.
I should note as well, that my confidence in Mr. Tellier is evidently shared by his peers, who recently selected him as Canada’s most respected CEO for the second year running.
Bringing in new leadership was critical to getting Bombardier back on track, but that was just the first step. Over the course of fiscal year 2004, we have seen the successful culmination of a $2.5-billion recapitalization program, a refocusing of the Company’s activities around two core busi- nesses—aerospace and transportation—and the introduction of tough new measures designed to enhance the competitiveness of all our operations.
## Governance, another top priority
We also have been busy building on Bombardier’s solid track record in the crucial area of corporate governance. Our approach to corporate governance has always been to ensure that the Company’s affairs are effectively man- aged to enhance value for all shareholders. However, in the context of the broader public debate swirling around governance issues, I committed at the outset of the fiscal year to overseeing a major review of the structure and responsibilities of our Board of Directors. That review resulted in a number of initiatives designed to further strengthen Bombardier’s governance prac- tices, while ensuring the Company’s ability to comply with sweeping changes to reporting and regulatory requirements.
Details of these initiatives, which took effect at the time of the annual general meeting in June 2003, can be found in the Corporate Governance section of this report. However, in keeping with my commitments of a year ago, I would like to briefly review some of the key changes that have been enacted.
The executive committee of the Board has been disbanded and the four Board committees are: the Audit Committee; the Human Resources and Compensation Committee; the Corporate Governance and Nominating Committee; and the Retirement Pension Oversight Committee. All these committees are comprised exclusively of highly-qualified, independent (non-related) directors. We also have reviewed the mandate of the Board, as well as my mandate and that of the President and CEO.
On my recommendation, the Board has appointed a Lead Director— which further ensures that the Board is totally independent of management. The role of Lead Director has been ably assumed by James E. Perrella,
## REKINDLING the vision
retired chairman and CEO of the Ingersoll-Rand Company, who has been a Bombardier director since 1999. At their discretion, either prior to or after each regular Board meeting, independent directors meet under the chair- manship of Mr. Perrella, who brings any questions, comments or suggestions from the independent directors to the attention of the Executive Chairman and/or the President and CEO. The Lead Director also chairs the pivotal Corporate Governance and Nominating Committee.
Continuous, systematic evaluation of all aspects of governance is an integral part of our approach. For instance, one of my primary responsi- bilities—as stipulated in the mandate of the Executive Chairman—is to ensure the quality and continuity of the Bombardier Board. This entails meeting with the Corporate Governance and Nominating Committee to review the collective performance and the mandates of the Board, as well as that of the Board committees, committee chairs and individual Board members. Our discussions also involve potential director candidates and nominations for Board membership.
## Special committee scrutinized asset sale
The divestiture of the recreational products business provided us with an ideal opportunity to put our approach to corporate governance into practice.
As soon as family members expressed an interest in being a party to the group of buyers, in order to ensure the stability and continuity of the recre- ational products business, appropriate steps were taken to make certain that the rights of all shareholders were fully protected through a process that reflected the highest standards of governance.
As a member of the family, I wish to emphasize that the entire sale process was scrutinized by an independent committee of the Board. A former auditor general of Canada, L. Denis Desautels, chaired the committee.
The Board received favourable fairness opinions from its own financial advisor, UBS, and from Morgan Stanley, financial advisor to the inde- pendent committee. As well, directors who are members of the Bombardier family—including the undersigned—abstained from participating in Board meetings at which the sale was considered and did not vote on the transaction.
## Ensuring compliance with new regulations
In recent months, Bombardier has been pressing ahead with other important, governance-related measures. In January 2004, for example, we appointed a corporate Compliance Officer. The Compliance Officer’s responsibilities include assisting the Board in ensuring full adherence to applicable laws and regulations, as well as strict compliance with Bombardier’s Code of Ethics and Business Conduct, which was reviewed and updated during the year.
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In addition, even more rigorous internal processes will enable the Board to cope with the significantly increased oversight responsibilities stem- ming from new Canadian and U.S. regulations. The new Canadian legislation requires the CEO and the Chief Financial Officer to sign and file a certification form with securities regulators for each interim and annual report—a process similar to that required under the U.S. Sarbanes- Oxley Act.
## Enduring values
Like good governance, innovation and entrepreneurship are Bombardier hallmarks. That explains how Bombardier Aerospace has managed to design and bring to market 15 new aircraft in the space of 15 years—more than the other two leading commercial aircraft makers combined. The fact that we recently delivered our 1,000th Bombardier CRJ aircraft—a feat accom- plished by only seven other commercial airliners in the 100-year history of flight—further underscores our strengths in that regard. So do state-of- the-art solutions such as the “brains on trains” technologies being pioneered these days at Bombardier Transportation.
I am confident that those enduring cultural values—the entrepreneurial vision and passion for innovation that drove us to revolutionize air travel with the Bombardier CRJ aircraft—will keep us on the leading edge of future advances in aerospace and rail transportation. In fact, we are evaluating the possibility of developing a new-generation commercial airliner that would take air passenger travel to the next level. A multidisciplinary team was put together in March 2004 to evaluate such a program and will report back within 12 months.
While product development will continue to figure prominently in Bombardier’s future, I should point out that innovation encompasses more than new products—a lot more. It’s also about enhancing the quality, reliability and cost competitiveness of existing products to offer cus- tomers an even more compelling value equation. It’s about developing
and disseminating best practices. It’s about finding ways to improve cus- tomer service. It’s about working smarter—precisely the sort of ingenuity we require to maintain our positive momentum and put Bombardier back on a solid footing.
## Acknowledgements
Yet another constant at Bombardier is the quality of our people. On behalf of the entire Board, I would like to thank employees for their loyalty and dedication in these very challenging times.
I also wish to thank my fellow Board members for their hard work and valu- able counsel during a year marked by a major transformation at Bombardier. Special thanks are owed to André Desmarais, who is leaving the Board after nearly 20 years of service. In fact, Mr. Desmarais has been a Bombardier director since 1985 and has contributed much to our success over the years. As well, I would like to take this opportunity to formally welcome two individ- uals who joined the Board over the course of the past fiscal year, Michael H. McCain and Federico Sada G. Mr. McCain is President and CEO of Maple Leaf Foods Inc. and Mr. Sada G. is President and CEO of glass manufacturer Vitro, S.A. de C.V.
Finally, I wish to express the Board’s appreciation to Paul Tellier and his team for the excellent progress made to date—and for the tenacity they are demonstrating in pursuing the remaining phases of the action plan.
A year or so ago, when we took the first steps to restore the competi- tiveness of the Company, no one said it was going to be easy. And we’re not there yet. There is much more work to be done.
But with the decisive actions of the past year, we have clearly demon- strated that Bombardier still has what it takes. In the process, I sense that we have also begun to rekindle the spirit and vision that helped make this organization great.
We’re on our way!
LAURENT BEAUDOIN, FCA EXECUTIVE CHAIRMAN OF THE BOARD
Signed by
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Sound corporate governance has been fundamental to Bombardier’s suc- cess over the years. Consistent with that tradition—and in the context of a broader public debate around corporate governance issues, as well as major changes to securities regulations—Bombardier undertook, in the first half of 2003, a comprehensive review of the structure and responsibilities of the Board of Directors. That review prompted a number of changes designed to further enhance the Corporation’s governance structure.
Among the latest reflections of this proactive approach to governance was the January 2004 appointment of a corporate Compliance Officer to assist the Board in ensuring full adherence to applicable laws and regu- lations and strict compliance with Bombardier’s Code of Ethics and Business Conduct. The Code of Ethics and Business Conduct, which was reviewed and updated during the year—along with a new complaint reporting program designed to encourage employees and other stakeholders to step forward and report any concerns or complaints—are on schedule for introduction in fiscal year 2005.
## Pension oversight and asset management
In June 2002, the Corporation created the Retirement Pension Oversight Committee, which was given the mandate to oversee, review and monitor investment of the assets of the Corporation’s pension plans and related matters. As well, the team responsible for providing management services to the Corporation’s pension plans and pension committees with respect to plan assets now reports directly to the Senior Vice President and Treasurer. This change was made with a view to enhancing controls and realizing synergies with other treasury-related functions.
Finally, the Investment Policy that defines the permissible asset mix of the various plans has been revised with the aim of reducing the volatility of returns. To that end, the portion of assets to be invested in stocks has been reduced.
## Ensuring compliance with new securities regulations
Another priority during the past year was the launch by the corporate finance function, in collaboration with the Audit Committee of the Board of Directors, of a global finance transformation initiative designed to ensure full compli- ance with new Canadian securities regulations.
The regulations, which came into effect as of March 30, 2004, include new requirements with respect to continuous disclosure obligations, audit committees’ responsibilities and certification by the Chief Executive Officer and Chief Financial Officer of annual and interim filings. Ultimately, this process will be closely aligned with that required under the U.S. Sarbanes- Oxley Act.
## CORPORATE governance
The new regulations regarding audit committees oblige Canadian public companies to have audit committees comprised of independent directors who are financially literate. Issuers will have to include a description of the relevant education and experience of each member of the committee in their annual information forms. As well, audit committees must have a written man- date setting forth certain prescribed responsibilities. Although the Corporation has until July 5, 2005 to comply with these particular changes, the existing charter of the Audit Committee of Bombardier’s Board of Directors is already in compliance.
Bombardier meets—and in some instances exceeds—the new Canadian securities regulations, as well as the corporate governance guidelines of the Toronto Stock Exchange.
## Accounting treatment of stock options
In keeping with current best governance practices, the Corporation has opted to expense stock options granted to key employees and directors. This change took effect as of February 1, 2004 and reflects all options granted during the course of the fiscal year.
## Clearly-delineated governance roles
During fiscal year 2004, the mandates and roles of the Board of Directors and its committees, the Executive Chairman and the President and Chief Executive Officer have all been reviewed and clearly delineated, as sum- marized below.
## Board of Directors
As part of its stewardship responsibility, the Board of Directors advises management on significant business issues and is responsible for approving
Bombardier’s strategy and monitoring:
• financial matters and internal controls;
• pension fund matters;
• environmental, safety and security matters; and
• corporate governance issues.
The Board also assesses succession planning and the compensation policy.
Four committees of Bombardier’s Board of Directors—comprised exclu- sively of reputable, qualified and independent (non-related) directors—help ensure adherence to the very highest standards of corporate governance.
In addition, in June 2003, a formal structure was implemented to enable the Board of Directors to function independently of management. Prior to or after each regular meeting of the Board, the directors who are not part of management meet under the chairmanship of James E. Perrella in his capacity as Lead Director.
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## Audit Committee
The Audit Committee has the mandate of assisting the Board of Directors in monitoring the financial reporting and disclosure process. All members of the committee are financially literate and at least one member, L. Denis Desautels, has accounting or related financial expertise.
Chair: L. Denis Desautels
Members: Daniel Johnson, Michael H. McCain, Jalynn H. Bennett, James E. Perrella
## Human Resources and Compensation Committee
The Human Resources and Compensation Committee monitors the com- pensation policy of the Corporation and assesses the performance of the Corporation’s senior officers and determines their compensation. The committee also reviews, reports and, where appropriate, provides recom- mendations to the Board of Directors on succession planning matters.
Chair: Jean C. Monty
Members: André Desmarais, James E. Perrella
## Corporate Governance and Nominating Committee
The Corporate Governance and Nominating Committee monitors the evo- lution of corporate governance principles, including the Code of Ethics and Business Conduct. The Executive Chairman of the Board, in consultation with the committee, identifies potential candidates as directors, examines such candidacies and makes recommendations to the Board accordingly. The committee also reviews the performance of the Board, of its commit- tees and their respective members, and periodically reviews the size and composition of the Board, the compensation of directors in light of market conditions and practices, as well as risks and responsibilities. The com- mittee’s mandate also includes making recommendations regarding share ownership guidelines for directors.
Chair: James E. Perrella
Members: Daniel Johnson, Jean C. Monty
## Retirement Pension Oversight Committee
The primary responsibility of the Retirement Pension Oversight Committee is to oversee, review and monitor the investment of the assets of Bombardier’s pension plans, as well as related matters, and report to the Board of Directors thereon.
Chair: Jalynn H. Bennett
Members: Daniel Johnson, L. Denis Desautels
## Executive Chairman
The role of the Executive Chairman is to ensure that the Board of Directors carries out its responsibilities effectively and clearly understands and respects the boundaries between the Board of Directors’ and manage- ment’s responsibilities.
The Executive Chairman’s responsibilities include:
• providing leadership to enhance the Board of Directors’ effectiveness;
• managing the Board of Directors and setting the agenda in consultation with the President and CEO;
• ensuring the quality and continuity of the Board of Directors;
• acting as liaison between the Board of Directors and management and representing Bombardier to external groups;
• ensuring the continuing development of good corporate governance practices; and
• reviewing corporate transactions and overseeing the decision-making process in terms of acquisitions, divestitures and financings, in consultation with the President and CEO.
## President and Chief Executive Officer
The President and CEO is responsible for the management of Bombardier’s strategic and operational agenda and for the execution of the Board of Directors’ resolutions and policies.
The CEO’s specific responsibilities include:
• providing strategic orientation in the form of a strategic plan and a business plan;
• managing both Bombardier’s commercial and internal affairs, including:
• assuming responsibility for day-to-day operations, including capital management and financial management;
• implementing decisions with respect to acquisitions, divestitures, financings and similar activities, subject to prior approval from the Board of Directors and in consultation with the Executive Chairman;
• ensuring that Bombardier has effective disclosure controls and procedures and internal controls in place; and
• identifying, assessing and managing the risks involved in the course of business; as well as
• overseeing corporate governance matters in consultation with the Executive Chairman and the Corporate Governance and Nominating Committee of the Board of Directors.
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We have restructured the operations of Bombardier Aerospace to enhance the group’s competitive- ness and leadership position—and we are starting to see the results.
Bombardier Aerospace is a world leader in the design and manufacture of innovative aviation products and services for the business, regional and amphibious aircraft markets. With a legacy of innovation consolidating over 250 years of aviation history from four of the world’s original leading aircraft manufacturers (Canadair, Short Brothers, Learjet and de Havilland), Bombardier Aerospace has launched an unparalleled 15 new aircraft programs in the past 15 years. The group also offers the Bombardier * Flexjet * fractional own- ership program and the Bombardier * Skyjet * aircraft charter program, as well as management and technical services, aircraft maintenance and pilot training.
During fiscal year 2004, aggressive action was taken to streamline operations, reduce costs and increase productivity—positioning the group to derive maximum benefit from continuing strong demand for regional aircraft and an improving outlook for business aircraft.
The timely entry into service of the new Bombardier * Challenger * 300 and Bombardier * Learjet * 40 business jets, to be followed by the entry into service of the Bombardier Global 5000 * aircraft this fiscal year, have further enhanced the most modern, comprehensive portfolio in business aviation—just as more customers are entering or returning to the marketplace. This trio of new business jets reflects a decision to continue investing in new aircraft during the prolonged market downturn, and attests to Bombardier’s ongoing commitment to innovation and prod- uct development.
## BOMBARDIER Aerospace
The group also reinforced its position as the lead- ing designer and manufacturer of regional jets, with the initial deliveries of the 86-passenger Bombardier * CRJ900 $^{*}$, the first 70-plus-seat regional aircraft on the market.
The implementation of widespread cost reduction measures, the creation of integrated manufac- turing centres for business aircraft, the re-opening of collective agreements at the Toronto, Ontario and Wichita, Kansas sites, and the outsourcing of certain information technology functions have all contributed to a leaner, more competitive organization that is better able to respond to the realities of a changing market environment.
In March 2003, the group announced plans to reduce staffing at Aerospace facilities in Montréal, Toronto and Belfast by a total of 3,000 people. That process is now complete.
In October 2003, plans were unveiled for the creation of integrated manufacturing centres for Bombardier Learjet and Bombardier Challenger Series business jets at the Wichita and Montréal locations, respectively. Once fully operational, this initiative will produce annual savings estimated at $33 million while further reducing headcount by some 1,150.
By combining final assembly and interior completion activities at the same sites, the new manufacturing centres will significantly reduce production cycle times and inventory levels and make it easier for customers to do business with Bombardier.
Approximately 800 of the jobs impacted by the streamlining of production are in Tucson, Arizona. However, the Bombardier Business Aviation Services Centre will continue to operate at the site, adjacent to Tucson International Airport. In addition, Tucson has been selected as the
location for the Western Bombardier Regional Aircraft Service Centre, which will result in the creation of approximately 300 new jobs over a three-year period.
In January 2004, plans were announced to consolidate regional and business aircraft spare- parts activities into a single logistics organization designed to provide customers with substan- tially improved service. The new organization will move to a single SAP $^{**}$-based operating system and will establish new distribution warehouses in Chicago and Frankfurt that will be operated by world-renowned Caterpillar Logistics Services.
The group’s commitment to innovation was underscored in December 2003, with the delivery of the milestone 1,000th Bombardier * CRJ * air- craft. By the end of the fiscal year, on January 31, 2004, the delivery total had climbed to 1,046— making the Bombardier CRJ, at that point, the sixth most successful commercial jetliner program ever. What began in the mid-1980s as a bold step into uncharted territory—there was no apparent market for a regional jet— sparked a revolution in airline transportation that continues today, as the regional jet spearheads a turnaround in the airline industry’s fortunes.
Despite the problems being experienced by the airline industry overall, the regional seg- ment is growing—and profitable—and regional jets continue to be crucial to the economic health of the major airlines. Consider that between April 2000 and April 2003, regional jet seat capacity in the U.S. grew by 97%. A reflection of the continuing positive momentum in that regard was the conversion of options into a firm order for 32 50-seat Bombardier * CRJ200 * regional jets received in early March 2004, from Delta Connection.
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Bombardier’s family of 50-, 70- and 86-seat Bombardier CRJ aircraft offers unparalleled commonality and flexibility in terms of training, maintenance and crew scheduling that trans- late into significantly lower operating costs and increased profit opportunities for carriers. Moreover, with the market moving towards larger regional aircraft, the fact that Bombardier was the first to have 70- and 86-seat models in serv- ice represents a clear advantage. Seven out of the world’s 10 largest commercial airlines operate Bombardier CRJ200 and Bombardier * CRJ700 * regional airliners.
As of January 31, 2004, 143 of the larger Bombardier CRJ700 and Bombardier CRJ900 aircraft were already flying. Two of the recent deliv- eries were to Shandong Airlines—making the Bombardier CRJ700 the first 70-seat regional jet to become operational in China or, indeed, any- where in the Asia-Pacific region. The Corporation is confident that demand for its market-leading family of regional jets will continue for years to come.
There also is significant market interest in the new-generation Bombardier * Q400 * turboprop. The 70-seater offers all the comfort characteristics of a jet, combined with the lowest seat-mile costs of any regional aircraft operating today. U.K.- based FlyBE. ordered 17 additional Bombardier Q400 aircraft during the last fiscal year and Japan- based All Nippon Airways added two more to its fleet. Meanwhile, Australia’s Qantas signed for six 50-passenger Bombardier * Q300 * turboprops and, subsequent to year end, converted an option into a seventh firm order.
Other noteworthy achievements at Aerospace during the year under review included: the suc- cessful first flight of the Bombardier Global 5000,
which received full type approval from Transport Canada on March 12, 2004 and is scheduled to enter service during the fourth quarter of this year; delivery of the 600th Bombardier Challenger business jet in October 2003; delivery of the first Bombardier Challenger 300 aircraft on December 23, 2003; and on January 21, 2004, delivery of the first Bombardier Learjet 40 business jet. Another positive development was the government of Italy’s purchase of three more Bombardier * 415 * amphi- bious aircraft.
Moreover, the group will be adding 17 new Challenger 300 aircraft to the Bombardier Flexjet fleet over the next few months. As of late March 2004, the four Bombardier Challenger 300 in the Bombardier Flexjet fleet had flown more than 900 hours, while the Learjet 40 in the fleet had flown more than 200 hours. Bombardier recently partnered with the Delta AirElite ** private jet membership program to make its Flexjet frac- tional ownership program even more accessible. As well, the Bombardier Skyjet charter program has been extended to Europe, enabling customers to enjoy the many benefits of private air travel at an affordable price.
Over the next 12 months, Bombardier will also be studying the feasibility of proceeding with the development of a new-generation commercial aircraft. Gary R. Scott, a long-time senior executive at The Boeing Company, has been appointed President, New Commercial Aircraft Program, with the responsibility for leading a multidiscipli- nary task force that will thoroughly evaluate the potential of such a program.
As you might expect from the Corporation that revolutionized regional air travel with the Bombardier CRJ, the aim is to develop a truly ad- vanced new commercial aircraft that would offer
customers significant advantages over anything available from the competition in terms of opera- tional efficiencies. There would have to be a clear market for such an aircraft and a strong business case for such a project from Bombardier’s per- spective before any decision to proceed is made.
While having achieved increased deliveries of both business and regional aircraft despite the challenging market conditions of fiscal year 2004, there are still significant challenges ahead. One of the issues Bombardier Aerospace will continue to address is the necessity to ensure the avail- ability of financing for regional aircraft. This remains a crucial consideration given the financial con- straints carriers face. In addition, the group will continue to build a more responsive, customer- focused organization, providing exceptional service to support its innovative products—the new spare parts initiative reflects this commit- ment—while concurrently reducing costs to increase its competitiveness.
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Bringing in new leadership was critical, but that was just THE FIRST STEP.
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Bombardier Transportation is the acknowledged global leader in the rail equipment, manufacturing and servicing industry. Its wide range of products includes passenger rail vehicles and total transit systems. It also manufactures locomotives, freight cars, propulsion and control systems and sig- nalling equipment for a worldwide customer base.
Some tough decisions have been made in recent months to ensure that the group’s market leadership will be better reflected in its bottom-line performance, through improved margins and enhanced earnings power. There is a new senior management team in place. The group has adopt- ed a simplified organizational structure that will facilitate improved accountability. And, subse- quent to the fiscal year end, plans were unveiled for a major restructuring that will include stream- lining the underutilized European manufacturing network, significantly reducing the global work- force and refining the procurement and project management processes.
With respect to leadership, André Navarri, widely known and respected in the global transportation industry, joined Bombardier Transportation as group President effective February 22, 2004. Mr. Navarri’s demonstrated ability to formulate— and successfully execute—a strategic plan com- plements his strong project management skills and keen appreciation for the importance of cost effectiveness. Wolfgang Toelsner, who pre- viously headed the group’s Locomotives and Freight division, was appointed Chief Operating Officer—a role that formerly was part of the president’s responsibilities.
The comprehensive restructuring initiative announced March 17, 2004 was designed to address excess capacity and drive performance improvements. Sites identified for closure in 2004
## BOMBARDIER Transportation
are Amadora, Portugal; and Doncaster and Derby Pride Park, United Kingdom. Closures of facilities in Ammendorf, Germany; Kalmar, Sweden; Pratteln, Switzerland; and Wakefield, United Kingdom are envisioned for 2005. None of the seven plants intended for closure has work scheduled beyond 2005.
Five additional sites: in Crespin, France; Aachen and Siegen, Germany; Bruges, Belgium; and Crewe, United Kingdom, will be part of the initial phase of a global site improvement program that over time will be rolled out to all the group’s man- ufacturing facilities. This program will focus on trimming inventory levels, reducing production overheads, enhancing manufacturing time esti- mation processes and increasing efficiency with regard to site configuration.
The proposed European site closings and additional global workforce reductions will impact 6,600 positions and bring Bombardier Transportation’s industrial footprint into better balance with projected market demand.
Earlier in the year, the Industrial division, which had been responsible for the group’s manufacturing network in Europe, was disbanded. Manufacturing facilities have been integrated into the relevant divisions, enabling each one to have direct respon- sibility not only for marketing, sales and engineering, but also for production.
Management is also targeting the group’s pro- curement and supply chain as an area that offers significant opportunities for cost savings and efficiency improvements, given that materials represent approximately 65% of Bombardier Transportation’s cost base. A procurement integration initiative launched in early 2004 is aimed at rationalizing the number of suppliers, increasing parts standardization and centralizing
negotiation processes to achieve economies of scale wherever possible.
As part of the overall focus on margin improve- ment, the group has adopted a more rigorous “bid for results” approach to contract tendering. This entails making certain that contingencies and risks are properly identified and adequately accounted for in the price calculation. If a bid does not meet strict margin criteria, it will be dropped.
The group is also striving for flawless execution of contracts through tighter project management. All contracts will be subject to ongoing scrutiny that will include periodic reviews of the overall project, regular adjustments to estimated costs and enhanced claim management. As well, there will be further training and empowerment of project managers.
Bombardier Transportation also is working to make more use of common platforms and exist- ing, proven technologies, an approach that stands to benefit both the Corporation and the customer. The group launched two new vehicle brands during the year—Bombardier * FLEXITY * for light rail vehicles and Bombardier * TRAXX * for loco- motives. Both product families offer customers significant platform synergies, including increased standardization and modularization, savings on capital costs, on life-cycle costs and on spares. Bombardier * Talent * and AGC continue to be among the most successful regional train product families.
Together, such initiatives will lead to reduced overheads, increased competitiveness and an enhanced capability to deliver on commitments to customers. The result will be a revamped group, better suited to a market environment that has been experiencing rapid change under the influ- ences of increased liberalization, closer scrutiny of
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spending by public agencies and continued growth of the services sector.
Meanwhile, Bombardier Transportation has maintained its commitment to the development of new technologies that will provide customers with added value in terms of lower operating costs and improved asset utilization. For instance, at the 55th International Association of Public Transport (UITP) World Congress in Madrid in May 2003, the group unveiled its new Fully Integrated Composite Assembly System (Bombardier * FICAS $^{*}$) technology. The FICAS technology uti- lizes thin, modularized “sandwich” materials and composite assembly techniques that enable design engineers to reduce the thickness of a vehicle sidewall by some 75%. The benefits include more inner space, which translates into higher capacity—up to 10% more passengers for a given exterior vehicle dimension—and lower vehicle weight, hence less energy consumption. An advanced version of Bombardier’s proven C20 Stockholm Metro vehicle, incorporating FICAS technology, entered commercial service later in 2003.
Then there’s the Bombardier * Mitrac * energy- saving solution, based on high-performance dou- ble-layer capacitors, which can reduce the energy consumption of a light rail system by up to 30%. With the Mitrac energy saver solution, Bombardier Transportation engineers overcame the chal- lenge of incorporating an energy recycling system into a low-floor light rail system.
The group also has pioneered the first com- mercial applications of the state-of-the-art Level 2 European Rail Traffic Management System (ERTMS), which established a punctuality record of close to 100% during a pilot project in Switzer- land. The new ERTMS standard will considerably
boost the efficiency of European rail traffic sys- tems by easing cross-border traffic, leading to increased capacities, higher speeds and lower operating costs.
Bombardier Transportation booked new orders worth a total of $15.7 billion in fiscal year 2004. Significant new contracts reflected both the breadth of the group’s portfolio and its worldwide geographic reach. Included were a $729-million contract for a fully automated rapid transit sys- tem in Taipei; an order from Deutsche Bahn for 233 double-deck cars valued at $495 million; an order from Austrian Railways (ÖBB) for 240 elec- trical multiple unit cars valued at $248 million; a $191-million order from the Brussels Transport Authority (STIB) for 46 trams plus overhaul serv- ices; a $170-million order from Italian State Railways (Trenitalia) for 48 electric passenger loco- motives; an order from Swiss Federal Railways (SBB) for 18 multi-system freight locomotives valued at $103 million; and a $40-million order from the Ministry of Railways of the People’s Republic of China for 38 high-grade intercity passenger cars.
Noteworthy contract wins on the services side included long-term vehicle maintenance agree- ments with the Massachusetts Bay Transportation Authority and the Southern California Regional Railway Authority in the United States. In February 2004, subsequent to fiscal year end, a consortium comprised of Bombardier Transportation and Patentes Talgo was selected by Spanish National Railways (RENFE) to maintain its fleet of 16 AVE ** S 102 very high-speed trains for a period of 14 years. Bombardier’s share of that contract is valued at approximately $208 million. Work also got underway during fiscal year 2004 on the early stages of the massive London Underground
project. As a partner in the Metronet consortia and a turnkey supplier to the project, Bombardier Transportation’s portion of the work is worth some £3.4 billion or $7.9 billion over 15 years. The sheer magnitude of the London project—and its vital importance to the future of urban transport in one of the world’s great cities—further underscores the group’s leadership role and the confidence it has earned in the global marketplace.
## Outlook
Forecasters expect the worldwide accessible rail market to continue growing by 3-5% annually over the next five years. Moreover, the services and total transit systems markets—which are among Bombardier Transportation’s strengths—are expected to outstrip that pace. With the major restructuring now being implemented, the group will be even better positioned to capitalize on attractive long-term growth prospects.
A relentless focus on costs, productivity and improved project management should translate into enhanced earnings power, as Bombardier Transportation forges ahead with delivery of its $31.4-billion year-end backlog while pursuing profitable new business.
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Bombardier prides itself on its reputation as a responsible corporate citizen and a force for positive change in society.
The Corporation realizes that operating in a socially responsible, sustainable manner is cru- cial to the long-term well-being of the organization, its stakeholders and, of course, society at large. Consequently, it strives to achieve continuous improvement with regard to all three essential elements of sustainability—economic, social and environmental. Bombardier has always been a preferred employer, providing healthy and safe workplaces and leaving the legacy of a sound natural environment to future generations.
## Enhanced sustainability helps to secure quality jobs and economic spin-offs
From an economic perspective, the Corporation is working harder than ever these days to make the very best use of the resources—people, plants, processes and raw materials—that go into its innovative products and services. Further enhance- ment of the sustainability and competitiveness of Bombardier’s operations contributes to producing planes and trains that represent exceptional value for customers in terms of purchase price, oper- ating economics and total life-cycle costs, while delivering superior returns to shareholders. The Corporation also provides the sort of high-quality, rewarding jobs that enable it to attract and retain top-rated employees—and continues to make positive contributions to the broader economic and social fabric.
## Giving something back to communities
From a social perspective, Bombardier makes a point of giving something back to the many towns and cities around the world where it has
## SOCIAL RESPONSIBILITY and sustainability
a presence—communities large and small that employees and their families call home.
In Canada, the J. Armand Bombardier Foundation has long been a driving force in that regard. The Foundation was created in 1965 by the family of Bombardier’s founder to carry on the humanitarian work he had begun. The Foundation focuses primarily on the areas of arts and culture, education, health and social serv- ices. The Foundation also continues to support the activities of the J. Armand Bombardier Museum and the Yvonne L. Bombardier Cultural Centre, both located in Valcourt, Québec, birthplace of the Corporation’s founder.
During fiscal year 2004, the Foundation pro- vided close to $8 million of financial support for a variety of worthwhile recipients throughout Québec and Canada. Included were funding for academic chairs and capital campaigns at leading Canadian universities, financial contri- butions to health-care research and hospitals, and support, among others, for underprivileged fami- lies, abused women, and for social reintegration in major urban areas.
Many of the Foundation’s donations involve multi-year commitments of large sums, which enable recipients to proceed with capital projects or the establishment of academic chairs that require an assured source of funding over an extended period. The support to the Fondation de l’Université du Québec à Montréal for the creation of a preparatory centre for studies abroad is one example of many such undertakings. Recent beneficiaries of the Foundation’s support in the health-care area include the Fondation québécoise du cancer, the Douglas Hospital Foundation, the Notre-Dame de la Merci health centre’s foundation, the Fondation de la recherche
sur les maladies infantiles, all in Québec, and the St. Joseph’s Foundation of Thunder Bay, Ontario, to name just a few.
Major charities also continue to benefit from the generosity of Bombardier and Bombardier people. In Montréal, the Foundation contributed to Father Emmett Johns’ organization, Le Bon Dieu dans la rue, which supports youth homeless- ness and youth at risk. Furthermore, employees, together with the Foundation and the Bombardier family, contributed $1.3 million to the annual Centraide Campaign. It was a similar story at many other Bombardier sites, as the Corporation and its employees teamed up to lend a hand to the less fortunate.
Indeed, Bombardier’s philanthropic activities are by no means limited to the Foundation. The Corporation itself, the respective business groups and individual sites around the globe are involved in a myriad of activities to support education, arts and culture and community involvement. In Toronto for instance, Bombardier Aerospace made its suburban Downsview site available as the venue for a Rolling Stones concert that was staged to help revitalize the city’s economy—particularly tourism—in the wake of the SARS epidemic. The event attracted some 450,000 rock ’n’ roll buffs from across North America. Other less high-profile, but equally worthwhile community endeavours included Bombardier Capital’s ongoing support of a daycare centre for the children of low-income families in Jacksonville, Florida; Bombardier Transportation’s support of the Technology Challenge in Maryborough, Australia, which involved teams of secondary school stu- dents designing, building, testing and racing CO 2 -powered vehicles; children’s workshops sponsored by the Bombardier Aerospace
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Foundation in Northern Ireland as part of the Centennial of Flight Celebrations in Belfast; and a wildly successful exhibition of historical locomo- tives organized by employees at Crewe facilities in the United Kingdom, which attracted 30,000 vis- itors and raised in excess of £60,000 ($145,000) for local charities.
Closer to home base, Les Grands Ballets Canadiens de Montréal, the Montréal Science Centre and the Orchestre symphonique de Montréal received financial support from Bombardier, as did the Toronto Symphony Orchestra. A corporate donation—matched by the Foundation—also was made to help restore landmark Point Pleasant Park in Halifax, Canada, which was devastated by hurricane Juan in September 2003.
## Integrated approach to health, safety and the environment
A 60% reduction in the accident frequency rate
over the past five years underscores the impact of Bombardier’s unrelenting commitment to contin- uous improvement in occupational health and safety. Over the past year alone, the Corporation succeeded in reducing the frequency case rate by a further 22%, from 3.2 to 2.5 accidents per 200,000 work hours. The objective is to ratchet the rate down to 0.5 by the end of fiscal year 2006.
Bombardier’s combined Health, Safety and Environment Policy was rolled out across the organization during the course of fiscal year 2004. Further progress was made, as well, in the drive to have all operations certified to internationally recognized Occupational Health and Safety Assessment Series (OHSAS) 18001 standards. At year’s end, 42% of Bombardier sites had completed the process.
From an environmental perspective, Bombardier’s commitment to a greener world starts with key products—public transit vehicles, commuter and
intercity trains, business and regional aircraft, all designed to move people faster and more effi- ciently, utilize less energy and help relieve congestion on city thoroughfares and major high- ways. From product design and performance through procurement and manufacturing activities, environmental stewardship is a key consideration. During the past year, this comprehensive approach was reflected, for instance, in Bombardier Transportation becoming a signatory to the Sus- tainability Charter of the International Association of Public Transport (UITP), as well as in initiatives that achieved substantial reductions in both haz- ardous wastes and greenhouse gas emissions at the Bombardier Aerospace complex in Belfast.
Finally, it should be noted that more than 90% of Bombardier manufacturing sites are now certi- fied to the ISO 14001 environmental standards of the Geneva-based International Organization for Standardization (ISO).
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read more on our spirit and vision on page 22
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## Table of contents
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## Overview
ALL AMOUNTS IN THIS REPORT ARE IN CANADIAN DOLLARS AND TABULAR FIGURES ARE IN MILLIONS OF CANADIAN DOLLARS, UNLESS OTHERWISE INDICATED.
This Management’s Discussion and Analysis (MD&A) has been prepared to provide a meaningful understanding of the Corporation’s operations, performance and financial condition for the year ended January 31, 2004. The MD&A is presented in the following sections:
<img src='content_image/10323.jpg'>
This MD&A includes “forward-looking statements” that are subject to risks and uncertainties. For information identifying legislative or regulatory, economic, currency, technological, competitive and other important factors that could cause actual results to differ materially from those anticipated in the forward-looking statements, see “Risks and uncertainties.”
## Highlights
## Recapitalization program
- Net proceeds of $1.2 billion were generated on April 17, 2003 from the issue of 370 million Class B Shares (Subordinate Voting).
- Net proceeds of $740 million, net of cash disposed, were generated on December 18, 2003 from the sale of the recreational prod- ucts segment, resulting in an after-tax gain of $101 million.
- Net proceeds of $85 million US ($112 million) were generated on October 31, 2003 from the sale of Military Aviation Services (MAS), resulting in a gain of $98 million.
- Net proceeds of £35 million ($78 million) were generated on May 22, 2003 from the sale of the Belfast City Airport (BCA), resulting in a gain of $3 million.
- The wind-down portfolios were reduced by $3.0 billion, or 71%, during the current
fiscal year. The reduction of these portfolios is proceeding as planned at Bombardier Capital (BC).
## Restructuring initiative
- On March 16, 2004, the Board of Directors approved a restructuring initiative in the trans- portation segment. The initiative proposes to reduce the global workforce of Bombardier Transportation by approximately 6,600 posi- tions and contemplates the closure of seven production sites in five European countries. The restructuring initiative also contemplates operational efficiency measures at five other European locations and other cost reduction programs. The Corporation is also targeting procurement and supplier base as areas offer- ing significant opportunities for cost savings and efficiency improvements.
- The total costs of the restructuring initiative are estimated at $777 million, $457 million of which was recorded during the fourth quar- ter of fiscal year 2004, with the remainder to be recorded in fiscal years 2005 and 2006.
## Major orders in fiscal year 2004
- On April 4, 2003, Bombardier Transportation signed contracts amounting to approximately £3.4 billion ($7.9 billion) as part of the Metronet consortia for the supply, over 15 years, of rolling
stock, signalling, maintenance and project management for the modernization of the London Underground.
- On May 12, 2003, Bombardier Aerospace received an order from US Airways for the delivery of 60 Bombardier * CRJ200 * and 25 Bombardier * CRJ700 * aircraft, for a total value of approximately $2.2 billion US ($3.2 bil- lion). The 85 firm orders include the transfer of 36 Bombardier * CRJ * aircraft firm orders held by GE Capital Aviation Services, for a net backlog increase of 49 aircraft.
- On September 15, 2003, Bombardier Aero- space received an order from SkyWest Airlines for 30 Bombardier CRJ700 aircraft, for a total value of approximately $862 mil- lion US ($1.2 billion).
## Change of functional and reporting currencies
- Effective February 1, 2004, the Corporation changed its functional currencies from the Canadian dollar and the sterling pound to the U.S. dollar for the Canadian and U.K. opera- tions in the aerospace segment and from the Canadian dollar and the Mexican peso to the U.S. dollar for the Canadian and Mexican operations in the transportation segment. In addition, effective the first quarter of fiscal year 2005, the Corporation will change its reporting currency to the U.S. dollar.
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## Basis of presentation
The consolidated operations of the Corporation are referred to hereafter as the Corporation or Bombardier Inc., the manufacturing opera- tions are referred to as Bombardier and the financial and real estate services as BC. This presentation has no impact on net income and shareholders’ equity.
BC’s operations and financial position are fundamentally different from those of the manufacturing segments. As such, the capital markets use different performance indicators from those used for the manufacturing oper- ations to analyze and measure these two distinct businesses. The following discussion and analysis segregates these two types of businesses to better highlight their respective characteristics. The consolidated balance sheets are unclassified.
The Summary of significant accounting poli- cies accompanying the Consolidated Financial Statements describes the significant account- ing principles followed by the Corporation.
## Effect of currency fluctuations
Fiscal year ended January 31, 2004
The Corporation is subject to currency fluc- tuations from the translation of statement of income items and of assets and liabilities of self-sustaining foreign operations using a functional currency other than the Canadian dollar, mainly the U.S. dollar, the euro and the sterling pound and from transactions in foreign currencies, mainly the U.S. dollar.
The year-end exchange rates used to translate assets and liabilities were as follows as at January 31: YEAR-END RATES
<img src='content_image/66613.jpg'>
The average exchange rates used for the years ended January 31 to translate statement of income items were as follows: AVERAGE EXCHANGE RATES
<img src='content_image/66611.jpg'>
## Translation of self-sustaining foreign operations
As a result of the fluctuation in the average exchange rates shown above, revenues and earnings before taxes (EBT) of the euro- denominated foreign operations translated in Canadian dollars, mainly in the transpor- tation segment, were positively impacted. Revenues and EBT of the U.S. dollar- and sterling-pound-denominated foreign operations were negatively impacted.
The main impact of the year-end exchange rate fluctuations on the financial position of the Corporation as at January 31, 2004 was a reduction of the U.S. dollar- and sterling pound- denominated consolidated balance sheet items. The effect of these translation adjust- ments is included in the deferred translation adjustment account in the consolidated statements of shareholders’ equity and has no impact on net income.
## Transactions in foreign currencies
In the aerospace segment, the Corporation uses forward foreign exchange contracts to manage its currency exposure arising from anticipated foreign currency cash flows, mainly the U.S. dollar. The forward foreign exchange contracts typically extend from one- to 24-month periods. Therefore, a significant portion of the currency fluctuations will impact the results of operations with a similar time lag.The forward
foreign exchange hedge contracts, in the aerospace segment, mitigated the negative impact of the weakening of the U.S. dollar compared to the Canadian dollar by approxi- mately $250 million during fiscal year 2004.
The transportation segment primarily uses western European and U.S. currencies as its functional currencies. Under the Corporation’s foreign exchange policy, foreign currency denominated risks are hedged on a contract- by-contract basis at the inception of the respective contracts. Accordingly, contract margins are not expected to be significantly affected by currency fluctuations, assuming hedge effectiveness.
## Future currency exposure
Effective February 1, 2004, the Corporation changed its functional currencies from the Canadian dollar and the sterling pound to the U.S. dollar for the Canadian and U.K. operations in the aerospace segment, and from the Canadian dollar and the Mexican peso to the U.S. dollar for the Canadian and Mexican operations in the transportation segment. The European operations of the transportation segment continue to mainly use western European currencies as their functional currencies.
Effective the first quarter of fiscal year 2005, the Corporation will also change its reporting currency to the U.S. dollar.
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The following provides a discussion of the Corporation’s future exposure to currency fluctuations arising from the translation of self-sustaining foreign operations and from transactions in foreign currencies after giving effect to the above-mentioned changes.
## Translation of self-sustaining foreign operations
As of February 1, 2004, the functional currency for the operations in the aerospace segment will be the U.S. dollar. Therefore, currency fluctuations arising from the translation of foreign operations in the aerospace segment will no longer have an impact on the results of operations and on balance sheet items. In the transportation segment, the exposure to cur- rency fluctuations arising from the translation of most foreign operations will arise from the change in the value of the western European currencies relative to the U.S. dollar, rather than to the Canadian dollar.
## Transactions in foreign currencies
Revenues and most of the costs in the aero- space segment and the Canadian operations of the transportation segment are denom- inated in U.S. dollars. However, certain costs, mainly salaries and manufacturing overhead costs, are denominated in Canadian dollars and in sterling pounds and are subject to cur- rency fluctuations. Under the Corporation’s foreign exchange policy, a significant portion of these expected costs in foreign currencies are hedged for periods of up to two years.
It is estimated that a 1% change in the value of the Canadian dollar relative to the U.S. dollar in the aerospace segment would impact fiscal year 2005 total costs by approximately $15 mil- lion US before giving effect to forward foreign exchange hedge contracts, and approximately $3 million US after giving effect to the out- standing forward foreign exchange hedge contracts. The impact of these currency
fluctuations on total costs does not have an immediate equivalent impact on income, since a significant portion of these costs are subject to program average cost accounting or included in aerospace program tooling and depreciated over a number of years.
## Effect of change in reporting currency
As a result of adopting the U.S. dollar as its reporting currency, all assets and liabilities as at February 1, 2004 will be translated from Canadian dollars to U.S. dollars at the current exchange rate at that date. Certain non- monetary assets, mainly program inventories and program tooling in the aerospace segment and long-term contract inventories in the trans- portation segment will be translated at higher exchange rates than the ones in effect when these assets were initially recognized on the consolidated balance sheets.
Therefore, in the aerospace segment, open- ing program inventories and program tooling are approximately $35 million US and $65 mil- lion US higher than historical amounts. In the transportation segment, the effect on opening
<img src='content_image/131342.jpg'>
long-term contract inventories is not significant. Accordingly, a one-time currency adjustment of approximately $100 million US resulting from this upward revaluation will be reflected on the balance sheet as part of the deferred translation adjustment account presented in the consoli- dated statements of shareholders’ equity. The increase in these opening asset values will be expensed as inventories are consumed and aerospace program tooling is depreciated.
The upward revaluation of program invento- ries and program tooling is expected to result in lower EBT of approximately $4 million US for the first quarter of fiscal year 2005 and $20 million US for fiscal year 2005.
## Selected annual information
The Consolidated Financial Statements of Bombardier Inc. are prepared in accordance with Canadian generally accepted accounting prin- ciples (GAAP) and are expressed in Canadian dollars. The recreational products segment’s results are presented as discontinued opera- tions. The following table provides selected financial information for the last three fiscal years.
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Fiscal year 2004 results include special items of $429 million, $457 million of which was recorded in the transportation segment in con- nection with a restructuring initiative (see the transportation section in this MD&A). Fiscal year 2003 results include special items of $1.3 billion recorded in the aerospace segment, mainly related to revisions of program esti- mates as well as write-downs of inventories and other related provisions (see the aerospace section in this MD&A).
## Analysis of results
This MD&A is based on reported earnings in accordance with GAAP. It is also based on EBT before the effect of special items, a non-GAAP measure. Special items are viewed by Man- agement as items that do not arise as part of the normal day-to-day business operations or that could potentially distort the analysis of trends. These earnings measures do not have a stan- dardized meaning prescribed by GAAP and are therefore not readily comparable to similar measures presented by other corporations.
On April 2, 2003, the Board of Directors of the Corporation approved the decision to sell the recreational products segment. Accordingly, the results of operations, cash flows and financial position of the recreational products segment are reported as discon- tinued operations. The results of operations of the recreational products segment are presented for all periods as a single line item in the Corporation’s consolidated statements of income.
The following table presents the results of operations for the years ended January 31:
<img src='content_image/68530.jpg'>
$^{(1)}$Includes selling, general and administrative and research and development expenses.
Consolidated revenues amounted to $21.3 billion for the year ended January 31, 2004, compared to $21.2 billion for the preceding fiscal year. The increase is mainly due to higher revenues in the transportation segment.
Cost of sales amounted to $18.3 billion or 85.8% of revenues for fiscal year 2004, compared to $18.1 billion or 85.4% of rev- enues for the previous fiscal year. This increase is mainly due to higher cost of sales in the transportation segment, arising from the settlement of claims in connection with the Acela ** contracts and revisions of estimates related to a limited number of contracts, partially offset by lower cost of sales in the aerospace segment.
Operating expenses amounted to $1.6 bil- lion for fiscal year 2004, compared to $1.7 billion for the previous fiscal year. This decrease is due to lower operating expenses in all segments.
Depreciation and amortization decreased to $793 million for the year ended January 31, 2004, compared to $806 million for the year ended January 31, 2003. This decrease is due to lower depreciation in the BC segment, partially offset by higher depreciation in the manufacturing segments.
Net interest expense increased to $236 million for fiscal year 2004, compared to $216 million
the previous fiscal year (BC’s interest expense is classified as cost of sales). The increase in net interest expense results mainly from higher interest expense on long-term debt.
As a result, EBT before special items was $439 million or 2.1% of revenues for the year ended January 31, 2004, compared to $381 million or 1.8% the previous fiscal year.
## Revenues and EBT margin from continuing operations before special items
<img src='content_image/68531.jpg'>
(BILLIONS OF CDN$)
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Special items amounted to $429 million for the year ended January 31, 2004, compared to $1.3 billion for the year ended January 31, 2003.
The following table provides a reconciliation of EBT before special items to EBT for the years ended January 31:
<img src='content_image/111248.jpg'>
$^{(1) }$The special items are discussed in the aerospace and transportation segments section of this MD&A.
The Corporation recorded an income tax expense of $205 million for fiscal year 2004, compared to an income tax recovery of $221 million the previous fiscal year. The income tax expense for the fiscal year ended January 31, 2004 was higher than the expense that would be recognized at the effective income tax rate, mainly due to the non- recognition of $123 million of income tax benefits related to the restructuring initiative at Bombardier Transportation and an increase
*T r a demark(s) of Bombardier Inc. or its subsidiaries.
** Acela is a trademark of Amtrak.
in the valuation allowance for deferred tax assets recorded for the U.S. operations in the fourth quarter. The details of the components of the income tax expense are provided in note 19 to the Consolidated Financial Statements.
For fiscal year 2004, loss from continuing operations was $195 million, or $0.13 per share, compared to a loss from continuing operations of $709 million, or $0.54 per share, for fiscal year 2003.
Income from discontinued operations, net of income taxes, totalled $106 million for the period from February 1, 2003 to December 18, 2003, compared to income of $94 million for fiscal year 2003. Income from discontinued operations includes a $101-million after-tax gain on the sale of the recreational products segment recorded in the fourth quarter of fiscal year 2004.
Net loss was $89 million for the year ended January 31, 2004, or $0.07 per share (basic and diluted). This compares to a net loss of $615 mil- lion the previous fiscal year, or $0.47 per share (basic and diluted).
Bombardier’s order backlog as at January 31, 2004 totalled $45.9 billion, compared to a backlog of $44.4 billion as at January 31, 2003. The increase is due to an increase in the trans- portation segment backlog, partially offset by a decrease in the aerospace segment backlog, and the negative impact of the strengthening of the Canadian dollar compared to the U.S. dollar, for approximately $1.8 billion in the aerospace segment.
<img src='content_image/111245.jpg'>
## Evolution of backlog
(BILLIONS OF CDN$)
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https://cdla.io/permissive-1-0/
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"content_image/2782.jpg",
"content_image/2783.jpg"
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overall_image/7544dd9a2a937b4190527836023af6301ce358f7a7aaaa41990d20e222e76df2.png
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## Segments
## Bombarbier Aerospace
Bombardier Aerospace is a manufacturer of business, regional and amphibious aircraft and a provider of related services. It offers comprehensive families of regional jet and turboprop commercial aircraft and a wide range of business jets. It also provides the Bombardier * Flexjet * fractional ownership pro- gram, technical services, aircraft maintenance and pilot training. Bombardier Aerospace’s main manufacturing facilities are principally located in Canada, the United States, and the United Kingdom.
Management evaluates the performance of each segment based on EBT. Accordingly, seg- ment information is presented on this basis.
<img src='content_image/2781.jpg'>
## Revenues Fiscal year 2003
## Bombardier Transportation
Bombardier Transportation, the global leader in the rail equipment manufacturing and serv- icing industry, offers a full range of passenger railcars, as well as complete rail transportation systems. It also manufactures locomotives, freight cars, airport people movers, propulsion and controls and provides rail control solutions. Bombardier Transportation is also a provider of maintenance services. Bombardier Transportation’s main manufacturing facilities are principally located in Germany, the United Kingdom and the United States.
Corporate interest costs are only allocated to the manufacturing segments, based on the segment’s net assets. Most other corporate charges are allocated to all segments based on each segment’s revenues.
<img src='content_image/2782.jpg'>
## Revenues Fiscal year 2004
## Bombardier Capital
BC offers secured inventory financing and interim financing of commercial aircraft, prima- rily in North American markets, and manages the wind-down of various portfolios.
The following analysis of operating results cov- ers the activities of Bombardier Aerospace, Bombardier Transportation and BC.
<img src='content_image/2783.jpg'>
## EBT from continuing operations before special items
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1,008 |
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overall_image/4fbc7f112099c8f56a2d1d7f7780bbff3e2a0335c3da670c024f64852be33034.png
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## Bombardier Aerospace Analysis of results
<img src='content_image/62516.jpg'>
$^{(1) }$Includes revenues from Defence Services, spare parts, the Bombardier Flexjet program’s service activities, and product support activities.
$^{(2)}$Includes mainly sales of pre-owned aircraft.
$^{(3)}$Includes selling, general and administrative and research and development expenses.
Bombardier Aerospace’s segmented revenues amounted to $11.3 billion for each of the years ended January 31, 2004 and 2003. Manufac- turing revenues amounted to $8.6 billion for the year ended January 31, 2004, compared to $8.5 billion for the preceding fiscal year. The increase in deliveries of business and regional aircraft was partially offset by lower deliveries of wide-body aircraft interiors, and a lower effective exchange rate for the U.S. dollar compared to the Canadian dollar, which had a negative impact of approximately $485 mil- lion. Service revenues amounted to $1.5 billion for each of the years ended January 31, 2004 and 2003. Higher spare parts revenue was offset by the negative impact of a lower effective exchange rate for the U.S. dollar of approximately $135 million. Other revenues totalled $1.2 billion for each of the years ended January 31, 2004 and 2003. Pre-owned aircraft deliveries were higher in the current fiscal year compared to the previous fiscal year.
This increase was offset by a lower effective exchange rate for the U.S. dollar, which had a negative impact of approximately $130 million.
Cost of sales amounted to $9.8 billion for the year ended January 31, 2004, compared to $10.0 billion for the year ended January 31, 2003. As a result, the segmented margin was $1.5 billion or 13.7% of revenues for fiscal year 2004, compared to $1.3 billion or 11.7% of rev- enues the previous year. This increase in the margin is mainly due to higher business and regional aircraft deliveries, partially offset by additional sales incentive costs.
Operating expenses amounted to $571 million for the year ended January 31, 2004, compared to $610 million for the preceding fiscal year. This decrease is mainly due to the impact of a lower effective exchange rate for the U.S. dollar, as well as cost reduction initiatives.
Depreciation and amortization amounted to $442 million (including $270 million for pro- gram tooling) for the year ended January 31,
2004, compared to $424 million (including $264 million for program tooling) for the year ended January 31, 2003.
Interest expense totalled $270 million for the year ended January 31, 2004, compared to $319 million for the year ended January 31, 2003. This decrease is mainly attributable to lower average net assets. Interest expense includes interest charges arising on certain sales incentive liabilities recorded at the present value of the estimated future pay- ments upon initial recognition.
As a result, EBT before special items amounted to $262 million, or 2.3% of seg- mented revenues, for fiscal year 2004, compared to negative EBT before special items of $33 million for the previous fiscal year.
<img src='content_image/62519.jpg'>
## Revenues and EBT margin before special items
(BILLIONS OF CDN$)
|
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