Business Context and Reporting Period
Company: Canadian National Railway Company (CN)
Filing Type: Form 6-K (Report of Foreign Issuer)
Date Filed: September 9, 2022
Reporting Period: This filing does not report new operational results for a specific quarter. Instead, it provides restated historical financial information for the years ended December 31, 2017 through 2021, and quarterly data for 2020 and 2021. The restatement is due to a change in accounting policy regarding the calculation of market-related values for pension assets, adopted in Q1 2022.
Key Financial Metrics (Restated)
Financial data is presented in Canadian dollars (CAD) unless otherwise noted. All figures below reflect the restated amounts following the pension accounting change.
Annual Performance (Year Ended Dec 31, 2021)
| Metric | 2021 (Restated) | 2020 (Restated) |
|---|---|---|
| Net Income | $4,899 million | $3,545 million |
| Adjusted Net Income (Non-GAAP) | $4,225 million | $3,767 million |
| Diluted EPS | $6.90 | $4.97 |
| Adjusted Diluted EPS (Non-GAAP) | $5.95 | $5.28 |
| Operating Income | $5,616 million | $4,777 million |
| Adjusted Operating Ratio (Non-GAAP) | 61.2% | 61.9% |
| Free Cash Flow (Non-GAAP) | $3,296 million | $3,227 million |
| Adjusted Debt-to-Adjusted EBITDA (Non-GAAP) | 1.82x | 1.98x |
| ROIC (Non-GAAP) | 16.4% | 12.7% |
Balance Sheet Highlights (As of Dec 31, 2021)
- Total Assets: $48,538 million
- Total Shareholders' Equity: $22,744 million
- Debt (GAAP): $12,485 million
- Adjusted Debt (Non-GAAP): $13,362 million (includes operating lease liabilities and pension deficiencies)
Material Changes and Accounting Policy Update
The primary material change in this filing is the retrospective restatement of financial results due to a change in the methodology for calculating market-related values of pension assets for defined benefit plans.
- Previous Method: Realized and unrealized gains/losses were recognized over a five-year period.
- New Method: A "corridor approach" is now applied. The market-related value will not exceed 110% or be less than 90% of the fair value. Amounts outside this 10% corridor are recognized immediately.
- Impact: This change affects "Other components of net periodic benefit income," "Income before income taxes," "Net income," and "Accumulated other comprehensive loss." For 2021, Net Income increased by $7 million (from $4,892M to $4,899M) due to the restatement.
Management Commentary, Non-GAAP Adjustments, and Risks
Management utilizes several non-GAAP measures to assess underlying business trends, excluding items not reflective of core operations.
Significant Adjustments to 2021 Adjusted Net Income
The 2021 Adjusted Net Income of $4,225 million excludes the following significant items:
- Merger Termination Fee: Excluded a $886 million fee (after-tax $770M) received from Kansas City Southern (KCS) for terminating the merger agreement.
- Transaction Costs: Excluded $84 million in transaction-related costs and $97 million in amortization of bridge financing fees related to the KCS deal.
- Asset Sales: Excluded a $137 million recovery related to the sale of non-core rail lines.
- Workforce Reduction: Excluded $39 million in severance costs.
Outlook and Risks
This filing does not contain forward-looking guidance or specific risk factors for future periods. It serves strictly to update historical data. However, the text notes that non-GAAP measures do not have standardized meanings under GAAP and may not be comparable to other companies.
Investor Verification Checklist
- Verify Restatement Impact: Confirm how the new pension corridor approach affects future quarterly earnings volatility compared to the previous five-year smoothing method.
- Review Non-GAAP Reconciliations: Scrutinize the reconciliation of GAAP Net Income to Adjusted Net Income, specifically the exclusion of the $886M KCS merger termination fee, to understand core operational profitability.
- Assess Debt Metrics: Compare GAAP debt ($12.5B) against Adjusted Debt ($13.4B) to understand the full scope of obligations including pension deficiencies and lease liabilities.
- Check Cash Flow Quality: Review the Free Cash Flow calculation, noting the adjustments made for the KCS merger advance and refund, to assess true liquidity generation.
- Confirm Pension Status: Verify the funded status of defined benefit plans, as the accounting change impacts the recognition of gains/losses but not the annual funded status itself.