Business Context and Reporting Period
Company: Canadian National Railway Company (CN)
Filing Type: Form 6-K (Report of Foreign Issuer)
Date: July 6, 2020
Reporting Period: The filing primarily presents the 2020 Investor Fact Book Update, detailing full-year financial and operational results for the year ended December 31, 2019, with quarterly breakdowns for 2018 and 2019. All financial figures are expressed in Canadian dollars (CAD) unless otherwise noted.
Key Financial Metrics (Full Year 2019)
| Metric | 2019 Value | 2018 Value |
|---|---|---|
| Total Revenues | $14,917 million | $14,321 million |
| Operating Income | $5,593 million | $5,493 million |
| Net Income | $4,216 million | $4,328 million |
| Adjusted Net Income | $4,189 million | $4,056 million |
| Diluted Earnings Per Share (EPS) | $5.83 | $5.87 |
| Adjusted Diluted EPS | $5.80 | $5.50 |
| Operating Ratio | 62.5% | 61.6% |
| Adjusted Operating Ratio | 61.7% | 61.5% |
| Free Cash Flow | $1,992 million | $2,514 million |
| Adjusted Debt-to-Adjusted EBITDA | 2.02x | 1.94x |
| Adjusted ROIC | 15.1% | 15.7% |
Liquidity and Capital: Total assets stood at $43,784 million at year-end 2019. Shareholders' equity was $18,041 million. The company returned $1.7 billion to shareholders via share repurchases and paid $1.544 billion in dividends.
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased by 4.1% year-over-year to $14.9 billion, driven by a 4.8% increase in freight revenues.
- Operating Ratio: The reported operating ratio increased by 90 basis points to 62.5%, primarily due to higher fuel costs and inflationary pressures on operating expenses.
- Net Income: GAAP net income decreased slightly by 2.6% to $4.2 billion, largely impacted by a one-time deferred income tax recovery in 2018 that did not recur in 2019.
- Adjusted Performance: Adjusted net income increased by 3.3% to $4.2 billion, and Adjusted Diluted EPS grew 5.5% to $5.80, reflecting underlying operational strength.
- Volume: Gross Ton Miles (GTMs) decreased by 1.5% to 482.9 billion, while Revenue Ton Miles (RTMs) decreased by 2.6% to 242.0 billion.
Guidance, Outlook, and Risks
Management Commentary: Management highlighted a "transformational change" underway, focusing on diversifying the talent pool, integrating new technologies, and strengthening the supply chain approach. The company emphasized its "Scheduled Railroading" model and fluidity advantage in Chicago.
Forward-Looking Statements: The filing includes standard forward-looking statements regarding future performance, noting that actual results may differ due to risks and uncertainties.
Key Risks Identified:
- Pandemic Impact: Specific mention of the effects of a pandemic outbreak (COVID-19) and general economic conditions.
- Operational Disruptions: Risks include illegal blockades of rail networks, severe weather, and natural events.
- Market Volatility: Fluctuations in fuel prices, currency exchange rates, and interest rates.
- Regulatory and Environmental: Compliance with environmental laws, climate change, and legislative developments.
- Labor: Potential disruptions from labor negotiations.
Unusual Items: The 2018 results included a significant deferred income tax recovery of $1.7 billion related to the enactment of a lower provincial corporate income tax rate, which impacted year-over-year comparisons for GAAP net income.
Investor Verification Checklist
- Adjusted vs. GAAP: Verify the reconciliation of GAAP net income to Adjusted net income, specifically the $1.7 billion tax recovery in 2018 that inflated prior-year GAAP earnings.
- Operating Ratio Drivers: Confirm the specific impact of fuel price increases and inflation on the 90-basis point deterioration in the operating ratio.
- Volume Trends: Investigate the decline in Gross Ton Miles (GTMs) and Revenue Ton Miles (RTMs) despite revenue growth, indicating a shift toward higher-yield traffic.
- Free Cash Flow: Review the 20.8% decrease in Free Cash Flow ($2.5B to $2.0B) and its impact on future capital allocation (dividends and buybacks).
- Debt Metrics: Monitor the increase in the Adjusted Debt-to-Adjusted EBITDA multiple from 1.94x to 2.02x.