Business Context and Reporting Period
Company: Canadian National Railway Company (CN)
Filing Type: Form 6-K (Report of Foreign Issuer)
Reporting Period: Second quarter and first six months ended June 30, 2003
Release Date: July 22, 2003
Business Overview: CN operates a transcontinental railway spanning Canada and mid-America, serving key ports and cities from the Atlantic and Pacific oceans to the Gulf of Mexico.
Key Financial Metrics
| Metric | Q2 2003 | Q2 2002 | YTD 2003 | YTD 2002 |
|---|---|---|---|---|
| Revenues | $1,463 million | $1,551 million | $2,959 million | $3,060 million |
| Operating Income | $437 million | $490 million | $811 million | $896 million |
| Net Income | $244 million | $280 million | $496 million | $510 million |
| Diluted EPS | $1.26 | $1.39 | $2.53 | $2.54 |
| Operating Ratio | 70.1% | 68.4% | 72.6% | 70.7% |
| Free Cash Flow | $169 million | $164 million | $350 million | $356 million |
| Carloadings (000s) | 1,052 | 1,059 | 2,090 | 2,058 |
Liquidity and Debt:
- Cash and cash equivalents: $130 million (June 30, 2003) vs. $25 million (Dec 31, 2002).
- Long-term debt: $4,552 million (June 30, 2003) vs. $5,003 million (Dec 31, 2002).
- Debt to total capitalization ratio: 38.9%.
Material Changes vs. Prior Period
- Revenue Decline: Q2 revenues fell 6% and YTD revenues fell 3%. Management attributes approximately $90 million of the Q2 revenue decline and $135 million of the YTD decline to the stronger Canadian dollar (11% appreciation in Q2, 8% YTD).
- Grain Volume Impact: Reduced grain traffic due to drought conditions in Western Canada cut Q2 revenues by $37 million and YTD revenues by $80 million. Grain and fertilizer revenues dropped 21% in Q2 and 17% YTD.
- Operating Expenses: Q2 expenses declined 3% and YTD expenses declined 1%. Savings in purchased services, labor, and equipment rents (partly due to currency effects) were offset by higher fuel costs (up 10% in Q2) and casualty expenses.
- Accounting Change: A cumulative after-tax benefit of $48 million ($24 cents per diluted share) was recorded in the first half of 2003 due to a change in accounting for removal costs of track structure assets (SFAS No. 143). Excluding this, YTD net income was $448 million.
- Share Repurchases: The company repurchased 8.8 million common shares for $569 million in the first half of 2003.
Guidance, Outlook, and Risks
- Outlook: Management is "guardedly optimistic" for the balance of 2003 and into 2004. Improved precipitation on the Prairies suggests a good 2003/2004 grain crop, with volumes expected to improve in the fourth quarter.
- Intermodal Strength: The intermodal unit remained a standout, with revenues up 11% in Q2 and 12% YTD, driven by new business and the "Intermodal Excellence" initiative.
- Risks and Contingencies:
- Legal: Aggregate reserves for personal injury and other claims were $610 million. Final outcomes cannot be predicted with certainty.
- Environmental: Aggregate accruals for environmental costs were $89 million. Future liabilities related to remediation cannot be reasonably estimated but could be material.
- Guarantees: Maximum potential liability under standby letters of credit and surety bonds was $384 million.
Investor Verification Checklist
- Verify the impact of the Canadian dollar exchange rate on future revenue projections, as currency fluctuations significantly affected 2003 results.
- Monitor grain crop reports and precipitation levels in Western Canada to validate the anticipated Q4 volume recovery.
- Review the reconciliation of Non-GAAP Free Cash Flow ($169 million Q2) to GAAP operating cash flow to understand capital expenditure and dividend impacts.
- Assess the sustainability of the operating ratio improvement (70.1% in Q2) given rising fuel costs and potential inflation in labor and materials.
- Confirm the status of the $569 million share repurchase program and remaining authorization under the normal course issuer bid.