Business Context and Reporting Period
This Form 6-K, filed on May 1, 2019, by Canadian National Railway Company (CN), serves to distribute excerpts from the company's 2018 Annual Report. The filing coincides with CN's 100th anniversary, highlighting a century of operations across North America. The primary financial data presented covers the full fiscal year ended December 31, 2018, with comparative figures for 2017 and 2016.
Key Financial Metrics (2018)
| Metric | 2018 Value | Unit |
|---|---|---|
| Total Revenues | 14,321 | Millions USD |
| Rail Freight Revenues | 13,548 | Millions USD |
| Operating Income | 5,493 | Millions USD |
| Net Income | 4,328 | Millions USD |
| Adjusted Net Income | 4,056 | Millions USD |
| Diluted EPS | 5.87 | USD |
| Adjusted Diluted EPS | 5.50 | USD |
| Free Cash Flow | 2,514 | Millions USD |
| Operating Ratio | 61.6 | Percent |
| Adjusted Debt-to-Adjusted EBITDA | 1.94 | Times |
| Return on Invested Capital (ROIC) | 16.7 | Percent |
| Total Assets | 41,214 | Millions USD |
| Total Liabilities | 23,573 | Millions USD |
| Shareholders' Equity | 17,641 | Millions USD |
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 10% to $14.3 billion, driven by approximately $1.3 billion in growth during the final three quarters of 2018.
- Operating Income: Increased 5% to $5.5 billion, reflecting improved operating efficiency.
- Earnings Per Share: Diluted EPS decreased 19% to $5.87 compared to 2017. This decline was primarily due to a one-time deferred income tax recovery of $2.33 per share recorded in 2017 following U.S. tax rate changes. Conversely, Adjusted Diluted EPS increased 10% to $5.50.
- Operating Ratio: The operating ratio increased to 61.6% from 59.8% in 2017.
- Operational Volume: Gross ton miles (GTMs) rose to 490.4 billion, and revenue ton miles (RTMs) increased to 248.4 billion. Carloads reached 5.98 million.
- Capital Expenditures: Gross property additions were $3.5 billion in 2018, up from $2.7 billion in 2017.
Outlook, Management Commentary, and Risks
Strategic Initiatives and Outlook: CN is executing its largest infrastructure program in history, having completed seven yard expansions and nearly 60 miles of double track in 2018. For 2019, the company plans to add close to 80 miles of new double track and three new or extended sidings. The company is expanding its fleet with 260 new GE Tier 4 locomotives (140 scheduled for 2019 delivery) and acquiring 1,300 lumber cars, 1,000 boxcars, and 1,000 high-capacity hopper cars. Strategic acquisitions include TransX to strengthen intermodal capabilities. The Port of Prince Rupert handled over one million containers in 2018, a historic milestone.
Risks and Contingencies: The filing includes standard forward-looking statement disclaimers. Key risk factors identified include general economic conditions, industry competition, inflation, currency and interest rate fluctuations, fuel price volatility, regulatory changes, environmental compliance, cybersecurity threats, trade restrictions, hazardous material transportation, natural disasters (severe weather, fires, floods), climate change, labor negotiations, and litigation risks.
Investor Verification Checklist
- Verify the impact of the 2017 U.S. tax reform on the year-over-year comparison of Diluted EPS versus Adjusted Diluted EPS.
- Confirm the execution of the 2019 capital program, specifically the delivery of 140 new locomotives and 80 miles of double track.
- Monitor the operational performance of the new Automated Inspection Portals (AIPs) and their effect on safety metrics and maintenance costs.
- Review the progress of the CanaPuxTM bitumen pellet project and its potential to diversify energy shipments.
- Assess the sustainability of the 10% revenue growth rate in the context of current global trade arrangements and fuel prices.