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, 2010
Business Overview: CN operates a transcontinental railway network spanning Canada and the mid-section of the United States, connecting the Atlantic and Pacific oceans to the Gulf of Mexico. The company reported strong operational performance driven by volume growth and improved service reliability.
Key Financial Metrics
| Metric | Q4 2010 | Q4 2009 | Full Year 2010 | Full Year 2009 |
|---|---|---|---|---|
| Revenues (C$ millions) | 2,117 | 1,882 | 8,297 | 7,367 |
| Net Income (C$ millions) | 503 | 582 | 2,104 | 1,854 |
| Diluted EPS (C$) | 1.08 | 1.23 | 4.48 | 3.92 |
| Operating Income (C$ millions) | 774 | 653 | 3,024 | 2,406 |
| Operating Ratio (%) | 63.4% | 65.3% | 63.6% | 67.3% |
| Free Cash Flow (C$ millions) | 184 | 133 | 1,122 | 790 |
| Total Debt (C$ millions) | Current: 540 | Long-term: 5,531 (Dec 31, 2010) | |||
| Cash and Equivalents (C$ millions) | 490 (Dec 31, 2010) |
Material Changes vs. Prior Period
- Revenue Growth: Q4 2010 revenues increased 12% year-over-year, driven by strong volume growth across all commodity groups. Full-year 2010 revenues rose 13% to C$8.297 billion.
- Adjusted Performance: While reported Q4 net income decreased due to one-time items in 2009, adjusted Q4 2010 net income increased 19% to C$503 million (C$1.08 EPS) compared to C$424 million (C$0.90 EPS) in Q4 2009. Full-year adjusted net income grew 30% to C$1.973 billion.
- Operating Efficiency: The operating ratio improved to 63.4% in Q4 2010 from 65.3% in Q4 2009, reflecting solid operating efficiencies despite higher fuel costs.
- Volume Metrics: Q4 carloadings and revenue ton-miles grew by more than 10%. Full-year carloadings increased 18% and revenue ton-miles increased 12%.
- One-Time Items: 2010 results included an after-tax gain of C$131 million from the sale of the Oakville Subdivision. 2009 results included gains from rail line sales and a deferred income tax recovery.
Guidance, Outlook, and Risks
2011 Outlook
- Earnings: Management targets double-digit growth in 2011 diluted EPS over the adjusted 2010 level of C$4.20.
- Cash Flow: Free cash flow is expected to be approximately C$850 million in 2011, despite higher cash taxes.
- Volume: Targeting mid-single-digit carload growth with pricing improvements above inflation.
- Capital Investment: Plans to invest approximately C$1.7 billion in capital programs, with over C$1 billion dedicated to track infrastructure.
Shareholder Returns
- Dividend: Board approved a 20% increase in the quarterly common-share dividend.
- Buyback: Approved a new share repurchase program to buy back up to 16.5 million common shares.
Risks and Assumptions
- Key Assumptions: 2011 outlook assumes North American industrial production growth of ~4%, U.S. housing starts of ~675,000 units, and crude oil prices (WTI) in the range of US$90-95 per barrel. Assumes Canadian-U.S. exchange rate near par.
- Risk Factors: Risks include general economic conditions, fuel price volatility, currency fluctuations, regulatory changes, labor negotiations, and operational disruptions (weather, derailments).
Investor Verification Checklist
- Adjusted vs. Reported Earnings: Verify the reconciliation of non-GAAP adjusted net income, specifically the exclusion of the C$131 million after-tax gain on the Oakville Subdivision sale in 2010 and the various one-time gains/tax recoveries in 2009.
- Currency Impact: Review the constant currency analysis; a stronger Canadian dollar negatively impacted reported results by C$12 million in Q4 and C$103 million for the full year.
- Fuel Costs: Monitor fuel expense trends, which rose 24% in Q4 2010, and the effectiveness of fuel surcharges in offsetting these costs.
- Capital Expenditures: Confirm the execution of the C$1.7 billion capital plan for 2011 and its impact on future depreciation and free cash flow.
- Share Count: Track the impact of the new 16.5 million share repurchase program on future earnings per share.