Business Context and Reporting Period
This Form 6-K, filed on November 2, 2011, by Canadian National Railway Company (CN), announces the availability of the 2011 Investor Fact Book. The document provides a comprehensive overview of CN's business model, financial performance, and strategic outlook. While the filing date is November 2011, the primary financial data presented covers the full year 2010 and the first half (H1) of 2011. CN operates a 20,500 route-mile network spanning Canada and the mid-United States, connecting the Atlantic, Pacific, and Gulf coasts.
Key Financial Metrics
| Metric (in millions, except per share) | 2010 Full Year | 2011 H1 | 2010 H1 |
|---|---|---|---|
| Revenues | $8,297 | $4,344 | $4,058 |
| Operating Income | $3,024 | $1,519 | $1,416 |
| Net Income | $2,104 | $1,206 | $1,045 |
| Adjusted Net Income | $1,973 | $992 | $914 |
| Diluted EPS | $4.48 | $2.63 | $2.21 |
| Adjusted Diluted EPS | $4.20 | $2.16 | $1.93 |
| Free Cash Flow | $1,122 | $823 | $958 |
| Net Capital Expenditures | $1,586 | $597 | $435 |
| Operating Ratio | 63.6% | 65.0% | 65.1% |
| Debt-to-Total Capitalization | 35.0% | 34.2% | 36.0% |
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 7% in H1 2011 compared to H1 2010, driven by higher volumes in overseas markets (Intermodal), domestic retail shipments, and freight rate increases. This growth was partially offset by the negative translation impact of a stronger Canadian dollar.
- Profitability: Operating income rose 7% year-over-year in H1 2011. The operating ratio improved slightly to 65.0% from 65.1% in the prior year period.
- Volume Metrics: Gross ton miles (GTM) increased 4% to 176.3 million in H1 2011. Revenue ton miles (RTM) grew 5% to 92.8 million. Carloads increased 4% to 2.38 million.
- Commodity Performance:
- Intermodal: Revenues up 13% in H1 2011 due to strong transpacific trade and domestic retail growth.
- Grain & Fertilizers: Revenues up 11% in H1 2011, driven by canola, soybean, and feed grain shipments.
- Coal: Revenues up 6% in H1 2011, supported by strong offshore demand.
- Automotive: Revenues flat (1% increase) in H1 2011, impacted by lower imported vehicle shipments following the Japanese earthquake.
- Capital Allocation: CN repurchased 10.5 million shares for $747 million in H1 2011. The company also increased its quarterly dividend to $0.3250 per share.
Guidance, Outlook, and Risks
Outlook and Strategy: Management emphasizes "Precision Railroading" to drive service excellence and productivity. Key growth opportunities include intermodal container markets, offshore exports of bulk products (potash, coal), and North American industrial recovery. CN expects to invest approximately $1.7 billion in capital expenditures for 2011, focusing on track infrastructure and growth initiatives.
Operational Initiatives:
- Scheduled Services: Implementation of Scheduled Grain and Scheduled Potash services to improve supply chain reliability.
- Technology: Deployment of Distributed Power (DP) locomotives and SmartYard systems to improve fuel efficiency and yard throughput.
- Infrastructure: Expansion of Kirk Yard in Gary, Indiana, and consolidation of Chicago classification yards.
Risks and Contingencies:
- Labor Relations: Several collective agreements in Canada and the U.S. expire in late 2011. While some agreements were renewed in early 2011, negotiations are ongoing for track maintenance, locomotive engineers, and rail traffic controllers. Strikes or lockouts could materially affect operations.
- Regulatory: CN is subject to economic and safety regulations in both Canada and the U.S., including the implementation of Positive Train Control (PTC) by 2015, estimated to cost $220 million.
- Market Conditions: Results are sensitive to global economic conditions, fuel price volatility (mitigated by fuel surcharges), and currency fluctuations.
Investor Verification Checklist
- Labor Negotiations: Verify the status of collective bargaining agreements expiring December 31, 2011, particularly for track forces and locomotive engineers in Canada and the U.S.
- Currency Impact: Assess the sensitivity of future earnings to the Canadian dollar exchange rate, as a significant portion of revenue and debt is U.S. dollar-denominated.
- Capital Expenditure Plan: Confirm the execution of the $1.7 billion 2011 capital plan, specifically the $1 billion allocated to track infrastructure and the $220 million PTC implementation costs.
- Share Repurchase Program: Monitor the remaining capacity of the share buyback program approved in January 2011 (up to 16.5 million shares).
- Non-GAAP Reconciliations: Review Appendix B for reconciliations of Adjusted Net Income and Free Cash Flow to understand the impact of excluded items (e.g., gains on asset sales, tax recoveries).