Business Context and Reporting Period
Company: Canadian National Railway Company (CN)
Filing Type: Form 6-K (Report of Foreign Issuer)
Reporting Period: Second Quarter and Six Months ended June 30, 2014
Business Overview: CN operates a rail network spanning Canada and mid-America, transporting approximately C$250 billion worth of goods annually. The company serves key ports and metropolitan areas across North America.
Key Financial Metrics
| Metric (in millions, except per share) | Q2 2014 | Q2 2013 | 6M 2014 | 6M 2013 |
|---|---|---|---|---|
| Revenues | C$3,116 | C$2,666 | C$5,809 | C$5,132 |
| Operating Income | C$1,258 | C$1,042 | C$2,078 | C$1,822 |
| Net Income | C$847 | C$717 | C$1,470 | C$1,272 |
| Diluted EPS | C$1.03 | C$0.84 | C$1.77 | C$1.49 |
| Operating Ratio | 59.6% | 60.9% | 64.2% | 64.5% |
| Free Cash Flow (6M) | C$1,270 | C$788 | ||
| Total Debt (Long-term + Current) | C$7,661 | C$7,840 | ||
| Cash and Cash Equivalents | C$127 | C$87 |
Material Changes vs. Prior Period
- Revenue Growth: Q2 2014 revenues increased 17% year-over-year, driven by a 14% increase in revenue ton-miles and an 11% increase in carloadings. Growth was broad-based, with significant increases in grain and fertilizers (35%), metals and minerals (20%), and intermodal (17%).
- Profitability: Net income rose 18% to C$847 million. Adjusted diluted EPS increased 24% to C$1.03, excluding a C$13 million gain in Q2 2013 from a non-monetary transaction.
- Efficiency: The operating ratio improved by 1.3 points to 59.6%, reflecting strong operational recovery from Q1 weather challenges and volume growth.
- Cash Flow: Free cash flow for the first half of 2014 was C$1,270 million, a significant increase from C$788 million in the prior year period.
- Foreign Currency Impact: The weaker Canadian dollar positively impacted reported revenues. On a constant currency basis, Q2 2014 net income would have been C$28 million lower.
Guidance, Outlook, and Risks
Revised 2014 Outlook
Management revised its 2014 financial outlook positively based on strong Q2 results:
- EPS: Expects solid double-digit EPS growth over adjusted 2013 diluted EPS of C$3.06.
- Free Cash Flow: Revised range to C$1.8 billion to C$2.0 billion (previously C$1.6 billion to C$1.7 billion).
Key Assumptions
- North American industrial production growth of 3-4%.
- U.S. housing starts of approximately 1 million units.
- Canadian dollar trading in the range of US$0.90 to US$0.95.
- Crude oil (WTI) prices in the range of US$95-US$105 per barrel.
- Capital program investment of approximately C$2.25 billion for 2014.
Risks and Contingencies
- Operational Risks: Severe weather, labor negotiations, and derailments.
- Legal and Environmental: Ongoing litigation regarding personal injury and property damage; environmental remediation liabilities at approximately 270 sites with aggregate accruals of C$119 million.
- Market Risks: Fluctuations in fuel prices, foreign exchange rates, and general economic conditions.
Investor Verification Checklist
- Constant Currency Performance: Verify the impact of the weakening Canadian dollar on reported earnings versus constant currency results.
- Grain Supply Chain: Confirm the sustainability of the record grain hopper car movements and the status of port line-ups.
- Capital Expenditures: Review the C$2.25 billion capital program allocation, specifically the C$1.2 billion targeted for network safety and integrity.
- Debt Structure: Analyze the debt-to-total capitalization ratio (36.5%) and the maturity profile of the C$7.661 billion total debt.
- Environmental Liabilities: Assess the adequacy of the C$119 million accrual for environmental costs against potential future regulatory changes.