* Q4 EPS $0.18 vs est $0.11
* Free cash flow $1.5 bln vs $512 mln year earlier
* Sets aerospace margin of 10 pct in 2013, 5 pct for 2011
* Order backlog grows to $50.1 bln from $43.8 bln
* Shares up 14 percent to C$7.16 on TSX (Adds details from conference call, updates stock price. In U.S. dollars unless noted)
By Susan Taylor and Bhaswati Mukhopadhyay
OTTAWA/BANGALORE, March 31 (Reuters) - Bombardier Inc (BBDb.TO) reported a bigger-than-expected quarterly profit on Thursday as the world's No. 3 civil aircraft maker got a lift from lower taxes and financing costs, while business jet orders picked up sharply after a two-year slump.
Bombardier, whose bigger rivals are Airbus EAD.PA and Boeing (BA.N), also reported a three-fold jump in closely watched free cash flow, to $1.5 billion in the quarter. Cash reserves rose to $4.2 billion from $3.4 billion in the year-before quarter.
"That becomes important because, looking forward, a large use of that cash will be to fund future (aircraft) development programs including the C-Series and Learjet 85 as well as other aerospace programs, " PI Financial analyst Chris Murray said.
Bombardier shares were up 86 Canadian cents at C$7.16 on the Toronto Stock Exchange on Thursday afternoon.
Bombardier reported a net profit of $325 million, or 18 cents a share, for its fourth quarter, while analysts on average were expecting 11 cents a share. [ID:nASA01UNG]
Revenue rose to $5.37 billion from $5.35 billion.
Montreal-based Bombardier, which is also the world's biggest passenger train maker, said its total backlog rose to $50.1 billion at year-end from $43.8 billion in the year-before quarter.
"The backlogs are healthy, most of the key trends appear to be moving in a positive direction, and I think with the strength of their performance in this quarter they certainly have the financial capability to execute on some of those growth strategies," Murray said.
National Bank Financial analyst Cameron Doerksen bumped his 12-month stock target to C$8 from C$7.50 after the results.
"We expect an ongoing rebound in the business jet market as well as potential new CSeries orders could drive the stock higher in the coming months," he said in a note.
The business jet market fell hard in 2009 as companies cut spending and tighter credit made purchases difficult, but it has recently started getting back on track with the global economic recovery.
Bombardier's aerospace unit got a major lift this month from a massive order of up to 120 business jets from Warren Buffet's NetJets Inc, a deal that could be worth as much as $6.7 billion. [ID:nL3E7E20EN]
The company repeated on Thursday a forecast it made in February that it will deliver 150 business jets and 90 commercial aircraft in calendar 2011, an estimate based on an 11-month financial year.
Orders for its regional planes will gradually recover in 2011 and increase "more significantly" in 2012, the company said.
Bombardier said it will review production rates and demand for its Q400 and CRJ passenger aircraft over the next two to three months to determine if layoffs are required.
Development work continues on schedule for its new C-Series narrow-body commercial jets, Bombardier said, with the first flight scheduled in 2012 and the airliner going into service in 2013.
Aerospace sales in the quarter rose about 7 percent to $2.9 billion. The profit margin rose to $181 million, or 6.3 percent of revenue, from $106 million, or 4 percent, in the same period last year.
Bombardier set what it called an "aggressive" profit margin target of 10 percent by 2013 from its aerospace unit. For calendar 2011, the margin is seen at just 5 percent, due to a change in accounting standards, and free cash flow is seen at $1.5 billion.
Quarterly revenue at its passenger rail unit fell 7 percent to $2.5 billion.
The company said revenue declined due to a currency hit from a weaker euro and the wrap-up of some big projects in Western Europe and Asia.
The division notched a 7.4 percent profit margin, advancing toward the 8 percent target for 2013.
The rail unit, which has a record backlog of $33.5 billion, saw its order intake surge to $3.4 billion in the quarter from $1.8 billion last year.
$1=$0.97 Canadian Reporting by Susan Taylor in Ottawa and Bhaswati Mukhopadhyay in Bangalore; Editing by Unnikrishnan Nair and Peter Galloway