Business Context and Reporting Period
Company: Canadian National Railway Company (CN)
Filing Type: Form 6-K (Report of Foreign Issuer)
Reporting Period: Third quarter and nine months ended September 30, 2013
Business Overview: CN operates a rail network spanning approximately 20,000 route miles across Canada and the mid-United States, connecting the Atlantic, Pacific, and Gulf of Mexico coasts. The company transports a diversified portfolio of commodities including petroleum, chemicals, metals, minerals, forest products, coal, grain, fertilizers, intermodal, and automotive goods.
Key Financial Metrics
| Metric (C$ Millions) | Q3 2013 | Q3 2012 | 9M 2013 | 9M 2012 |
|---|---|---|---|---|
| Revenues | 2,698 | 2,497 | 7,830 | 7,386 |
| Operating Income | 1,084 | 985 | 2,906 | 2,763 |
| Net Income | 705 | 664 | 1,977 | 2,070 |
| Diluted EPS | $1.67 | $1.52 | $4.66 | $4.71 |
| Operating Ratio | 59.8% | 60.6% | 62.9% | 62.6% |
| Free Cash Flow (9M) | 778 | 1,036 | - | - |
| Total Debt (Current + Long-term) | 7,498 | - | 7,498 | - |
Note: Debt figures represent carrying amounts as of September 30, 2013. Free cash flow for the nine months ended September 30, 2013, was C$778 million.
Material Changes vs. Prior Period
- Revenue Growth: Q3 2013 revenues increased 8% to a quarterly record of C$2,698 million, driven by a 4% increase in revenue ton-miles, a 3% increase in carloadings, freight rate increases, and a positive translation impact from the weaker Canadian dollar.
- Profitability: Operating income rose 10% to C$1,084 million. The operating ratio improved by 0.8 points to 59.8% in Q3 2013. However, on a constant currency basis, Q3 net income would have been lower by C$14 million due to foreign exchange fluctuations.
- Expense Increases: Operating expenses increased 7% in Q3 2013, primarily due to higher labor and fringe benefits, depreciation, purchased services, and the negative translation impact of the weaker Canadian dollar on U.S.-denominated expenses.
- Commodity Performance: Revenues increased significantly for petroleum and chemicals (17%), intermodal (13%), and metals and minerals (11%). Revenues declined for grain and fertilizers (3%) and coal (1%).
- Unusual Items: Q3 2013 results included a C$19 million expense from a one-time deferred income tax adjustment. The nine-month period included gains from the disposal of the Lakeshore West property (C$40 million) and an exchange of easements (C$29 million).
Guidance, Outlook, and Risks
- Outlook: CN maintains its 2013 financial outlook issued in January 2013. The company expects to invest approximately C$2 billion in capital programs for 2013, with C$1.1 billion targeted for track infrastructure.
- Assumptions: Management forecasts North American industrial production growth of ~2%, U.S. housing starts of ~950,000 units, and U.S. motor vehicle sales of ~15 million units. The company assumes a Canadian-U.S. exchange rate range of C$0.95-C$1.00 and crude oil prices (WTI) of US$90-$100 per barrel for 2013.
- Capital Allocation: The Board approved a two-for-one common stock split (effective November 29, 2013) and a new share repurchase program for up to 15.0 million shares (pre-split). The quarterly dividend was increased to C$0.430 per share.
- Risks: Key risks include general economic conditions, competition, inflation, currency and interest rate fluctuations, fuel price volatility, regulatory changes (including Positive Train Control implementation), labor negotiations (specifically with the Teamsters Canada Rail Conference), and environmental liabilities.
Investor Verification Checklist
- Constant Currency Impact: Verify the impact of the weakening Canadian dollar on reported results; Q3 net income was positively impacted by C$12 million due to FX, masking a C$14 million decline on a constant currency basis.
- One-Time Items: Review the reconciliation of GAAP to Adjusted Net Income, specifically the C$19 million tax expense in Q3 and the C$69 million in gains from property disposals in the first nine months of 2013.
- Debt Structure: Note the increase in current portion of long-term debt to C$1,488 million (from C$577 million in 2012), driven by the new accounts receivable securitization program (C$400 million) and commercial paper usage.
- Labor Negotiations: Monitor the status of collective agreement negotiations with the Teamsters Canada Rail Conference, which entered a statutory cooling-off period in October 2013.
- Stock Split: Confirm that all future share and per-share data will reflect the two-for-one stock split approved in October 2013.