CNI

Business Context and Reporting Period

Company: Canadian National Railway Company (CN)
Filing Type: Form 6-K (Report of Foreign Issuer)
Reporting Period: Full year ended December 31, 2002, and fourth quarter ended December 31, 2002.
Release Date: January 21, 2003

CN operates a transcontinental railroad network spanning Canada and mid-America. The 2002 results reflect the full-year integration of the Wisconsin Central (WC) acquisition, completed in October 2001. The company reported solid financial performance despite a challenging environment for bulk commodities, specifically grain and coal.

Key Financial Metrics

Debt and Liquidity: Total debt (current + long-term) was $5,577 million at year-end 2002. Cash and cash equivalents stood at $25 million. The company maintains a $1,000 million revolving credit facility and a commercial paper program.

Material Changes vs. Prior Period

• Revenue Growth: Full-year revenues increased 8% to $6.11 billion, driven by the WC acquisition and strong performance in petroleum/chemicals (+19%), forest products (+22%), automotive (+14%), and intermodal (+9%).
• Bulk Commodity Weakness: Gains were partially offset by declines in grain and fertilizers (-15%) and coal (-4%).
• Expense Increases: Operating expenses rose 17% to $4.64 billion. Adjusted operating expenses rose 10%, primarily due to a full year of WC operations and higher costs associated with merchandise traffic.
• Adjusted Performance: Excluding non-recurring items, adjusted net income increased 8% to $1.052 billion, and adjusted diluted EPS rose 6% to $5.22.
• Q4 Volatility: Q4 GAAP net income dropped significantly to $22 million (from $296 million in Q4 2001) due to specific charges detailed below.

Guidance, Outlook, and Unusual Items

Unusual Items Affecting Comparability

The filing identifies two significant charges in 2002 that impacted GAAP results:

• Personal Injury Claims: A $281 million charge ($173 million after-tax) recorded in Q4 2002 due to a change in methodology for estimating U.S. personal injury and other claims liability (from case-by-case to actuarial-based).
• Workforce Reduction: A $120 million charge ($79 million after-tax) for 1,146 job reductions to improve productivity.

2001 results were affected by a $98 million workforce charge, a $101 million gain on the sale of the Detroit River Tunnel Company interest, a $99 million write-down of 360networks Inc., and a $122 million deferred tax recovery.

Management Commentary and Outlook

CEO E. Hunter Harrison attributed the solid performance to the discipline of the operating plan and a focus on service quality, which drove revenue in service-sensitive units (merchandise and intermodal). This offset the downturn in grain revenues.

2003 Outlook: Management remains cautious regarding prospects due to uneven North American economic growth, uncertain precipitation levels in Western Canada (affecting grain), and volatile international energy prices. However, they are optimistic that merchandise and intermodal revenues will outpace overall economic growth based on superior service levels.

Investor Verification Checklist

• Actuarial Liability Change: Verify the long-term impact of the $281 million charge related to the new actuarial methodology for U.S. personal injury claims.
• Grain Market Exposure: Assess the sensitivity of future earnings to Western Canadian precipitation levels and grain volume, given the 15% revenue decline in this sector.
• Adjusted vs. GAAP: Confirm the reconciliation of adjusted net income ($1.052 billion) to GAAP net income ($800 million) to understand the true operational performance.
• WC Integration: Review the full-year contribution of Wisconsin Central to ensure synergies are being realized as projected.
• Share Repurchase Program: Monitor the execution of the approved $203 million share repurchase program initiated in October 2002.