Canadian Pacific Railway Limited — Q1 2018 Form 10-Q
Entity note: The filing identifies the registrant as Canadian Pacific Railway Limited. The request metadata names Canadian Pacific Kansas City Ltd.; investors should verify the intended issuer. The quarter ended March 31, 2018. Amounts are in Canadian dollars unless stated otherwise.
Business context and results
CP operates a North American freight railway. Revenue growth was led by Intermodal, Potash, crude and frac sand volumes; severe winter conditions disrupted service and weighed on operating performance.
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Revenue | $1,662 million | $1,603 million | +4%; +6% on an FX-adjusted basis |
| Operating income | $540 million | $604 million | -11% |
| Net income | $348 million | $431 million | -19% |
| Diluted EPS | $2.41 | $2.93 | -18% |
| Adjusted diluted EPS | $2.70 | $2.50 | +8% |
| Operating ratio | 67.5% | 62.4% | Adjusted prior-year ratio: 65.6% |
| Cash from operations | $397 million | $311 million | +$86 million |
| Free cash flow (non-GAAP) | $164 million | $87 million | +$77 million |
Adjusted income was $390 million, up 6% from $368 million. These adjusted measures exclude significant items and are not GAAP measures. The 2017 operating-income comparison was retrospectively reclassified for pension-cost presentation; that change did not affect net income or EPS.
Cash, debt and liquidity
- Cash and equivalents were $125 million at quarter-end, down from $338 million at December 31, 2017. Operating cash flow was $397 million; property additions used $241 million.
- Total debt, including current maturities, was $8.357 billion, versus $8.159 billion at year-end. The filing reports an adjusted net debt-to-adjusted EBITDA ratio of 2.7, compared with 2.9 a year earlier; CP’s long-term target is 2.0–2.5.
- The U.S. $2.0 billion revolving credit facility was undrawn, and CP reported compliance with its debt covenant. Commercial paper borrowings were nil. The company reported $301 million of letters of credit drawn under a $600 million facility.
- Share repurchases used $298 million of cash in the cash-flow statement; the equity note reports $318 million of repurchases including fees. CP repurchased 1.44 million shares at a weighted-average $221.76. Dividends declared were $0.5625 per share, versus $0.50.
Material changes and management commentary
- Revenue ton-miles rose 6%; total freight revenue increased 4%. Freight growth was strongest in Intermodal (+13%), Energy, Chemicals and Plastics (+13%), and Potash (+14%). Grain revenue declined 9%.
- Operating costs rose 12%, including compensation and benefits up 25% and fuel up 26%. Management cited the prior-year $51 million CEO-transition recovery, harsh winter conditions, higher fuel prices, volume-related costs, and approximately 3% wage and benefit inflation. Higher volumes and operating efficiencies partly offset these pressures.
- Average train speed fell 8% to 20.6 mph and terminal dwell rose 11% to 7.9 hours, primarily due to winter conditions and network disruptions. Fuel efficiency improved 3%. FRA train accidents per million train miles increased to 1.07 from 0.85; personal injuries declined to 1.74 from 1.85.
- Q1 2018 reported earnings included a $49 million non-cash FX loss on U.S.-dollar debt. Q1 2017 included a $51 million management-transition recovery and a $28 million FX gain. Management attributed the lower reported earnings largely to these items and lower operating income.
Outlook, risks and unusual items
- Management expected a 2018 annualized effective income-tax rate of approximately 24.5%–25%. No broader earnings or revenue guidance is provided in the supplied filing text. The company’s long-term adjusted leverage target is 2.0–2.5.
- On April 18, 2018, CP received 72-hour strike notices from the Teamsters Canada Rail Conference-Train & Engine and the International Brotherhood of Electrical Workers for planned strikes beginning April 21; CP said it was pursuing a negotiated settlement.
- In litigation related to the 2013 Lac-Mégantic derailment, Québec’s amended claim was $315 million and a cleanup claim was $95 million; other claims include unquantified amounts. CP denied liability and said potential responsibility and losses could not be determined. A liability trial was scheduled to begin in September 2019. Management said resolution of ordinary pending claims was not expected to materially adversely affect results or financial position.
- Environmental remediation accruals were $80 million, with payments expected through 2027. CP noted that future environmental charges could vary and may materially affect the period in which recognized.
- CP early adopted certain hedge-accounting guidance and adopted revenue-recognition guidance with no opening retained-earnings adjustment and an expected immaterial ongoing net-income effect. The company expected lease-standard adoption in 2019 to materially increase recognized right-of-use assets and lease liabilities, but not materially affect net income.
- Key stated risks include severe weather, labor disputes, fuel and currency movements, commodity demand, derailments and dangerous-goods transportation, litigation, pension-market changes, and regulatory or tax changes.
Important facts for investors to verify
- Confirm the issuer identity: the filing is for Canadian Pacific Railway Limited, not the company named in the request metadata.
- Assess whether volume growth can continue while winter-related service delays, higher costs and accident frequency are addressed.
- Track labor negotiations and any operational or financial impact from the strike notices.
- Monitor FX exposure and fuel-price recovery, including the effect of U.S.-dollar debt translation on reported earnings.
- Follow developments in Lac-Mégantic litigation and environmental obligations; the filing says potential litigation losses cannot currently be estimated.
- Review repurchases, capital spending, liquidity and leverage against the company’s stated long-term leverage target.