Business Context and Reporting Period
Company: Canadian National Railway Company (CN)
Filing Type: Form 6-K (Report of Foreign Issuer)
Reporting Period: Fourth quarter and full year ended December 31, 2011
Release Date: January 24, 2012
Business Overview: CN operates a railway network spanning Canada and mid-America, connecting the Atlantic and Pacific oceans to the Gulf of Mexico. The company reported record annual carloadings and revenues for 2011, driven by broad-based service innovation and a modest improvement in the North American and global economies.
Key Financial Metrics
| Metric | Q4 2011 | Q4 2010 | Full Year 2011 | Full Year 2010 |
|---|---|---|---|---|
| Revenues (C$ millions) | 2,377 | 2,117 | 9,028 | 8,297 |
| Net Income (C$ millions) | 592 | 503 | 2,457 | 2,104 |
| Diluted EPS (C$) | 1.32 | 1.08 | 5.41 | 4.48 |
| Adjusted Diluted EPS (C$) | 1.30 | 1.08 | 4.84 | 4.20 |
| Operating Income (C$ millions) | 839 | 774 | 3,296 | 3,024 |
| Operating Ratio (%) | 64.7% | 63.4% | 63.5% | 63.6% |
| Free Cash Flow (C$ millions) | (153) | 184 | 1,175 | 1,122 |
| Carloadings (thousands) | 1,232 | 1,190 | 4,873 | 4,696 |
Liquidity and Debt: As of December 31, 2011, total current assets were C$1,848 million, including C$101 million in cash and cash equivalents. Total long-term debt was C$6,441 million, with a current portion of C$135 million. The debt-to-total capitalization ratio stood at 38.1%.
Material Changes vs. Prior Period
- Revenue Growth: Q4 revenues increased 12% to a record C$2,377 million. Full-year revenues rose 9% to C$9,028 million. Growth was driven by higher freight volumes, fuel surcharges, and rate increases, partially offset by the negative translation impact of a stronger Canadian dollar.
- Profitability: Q4 net income rose 18% to C$592 million. Full-year net income increased 17% to C$2,457 million. Adjusted diluted EPS for the full year increased 15% to C$4.84.
- Operating Efficiency: The full-year operating ratio improved slightly to 63.5% from 63.6% in 2010. However, the Q4 operating ratio increased to 64.7% from 63.4% in Q4 2010, primarily due to higher fuel costs and labor expenses.
- Commodity Performance: All commodity groups saw revenue increases in 2011. Metals and minerals (+17%), intermodal (+14%), and grain/fertilizers (+7%) were notable contributors. Coal revenues were flat in Q4 but grew 3% for the full year.
- Unusual Items: Full-year 2011 results included an after-tax gain of C$254 million on the disposal of the Lakeshore East segment and C$38 million on the sale of IC RailMarine Terminal Company assets. Excluding these, adjusted net income was C$2,194 million.
Guidance, Outlook, and Risks
2012 Outlook:
- EPS Growth: CN aims for diluted EPS growth of up to 10% over the 2011 adjusted diluted EPS of C$4.84.
- Free Cash Flow: Expected to be approximately C$875 million, consistent with 2011 levels excluding major asset sales.
- Headwinds: Management anticipates an additional pension expense of approximately C$120 million in 2012.
- Capital Investment: Planned capital programs total approximately C$1.75 billion, with over C$1 billion targeted for track infrastructure.
Dividend: The Board approved a 15% increase in the 2012 quarterly common-share dividend.
Key Assumptions:
- North American industrial production increase of ~3%.
- U.S. housing starts around 700,000 units; motor vehicle sales ~13.5 million units.
- Canadian-U.S. exchange rate at parity; crude oil (WTI) at US$100/barrel.
Risks: Forward-looking statements are subject to risks including global economic uncertainty, fuel price volatility, currency fluctuations, regulatory changes, labor negotiations, and operational disruptions (e.g., severe weather, derailments).
Investor Verification Checklist
- Adjusted vs. Reported Earnings: Verify the impact of the C$292 million in after-tax gains from asset sales on full-year 2011 net income to understand core operational performance.
- Currency Impact: Review the constant currency analysis, as the strengthening Canadian dollar negatively impacted reported revenue growth compared to constant currency figures.
- Operating Ratio Trend: Monitor the Q4 operating ratio increase (64.7%) against the full-year improvement (63.5%) to assess cost control effectiveness in the face of rising fuel and labor costs.
- Free Cash Flow Volatility: Note the negative free cash flow of C$153 million in Q4 2011 compared to positive generation in prior periods; verify the reconciliation of operating cash flow and capital expenditures.
- Pension Obligations: Confirm the projected C$120 million increase in pension expense for 2012 and its potential impact on future earnings guidance.