Business Context and Reporting Period
Company: Canadian National Railway Company (CN)
Filing Type: Form 6-K (Report of Foreign Issuer)
Reporting Period: Fourth Quarter and Full Year ended December 31, 2012
Business Overview: CN operates a transcontinental railway network spanning Canada and the mid-United States, connecting the Atlantic, Pacific, and Gulf of Mexico. The company reported record volumes, revenues, and earnings for the full year 2012.
Key Financial Metrics
| Metric (CAD Millions) | Q4 2012 | Q4 2011 | Full Year 2012 | Full Year 2011 |
|---|---|---|---|---|
| Revenues | $2,534 | $2,377 | $9,920 | $9,028 |
| Operating Income | $922 | $839 | $3,685 | $3,296 |
| Net Income | $610 | $592 | $2,680 | $2,457 |
| Diluted EPS | $1.41 | $1.32 | $6.12 | $5.41 |
| Adjusted Diluted EPS | $1.41 | $1.30 | $5.61 | $4.84 |
| Operating Ratio | 63.6% | 64.7% | 62.9% | 63.5% |
| Free Cash Flow | ($30) | ($153) | $1,006 | $1,175 |
| Total Debt (Long-term + Current) | $6,900 | $6,576 | $6,900 | $6,576 |
| Cash and Equivalents | $155 | $101 | $155 | $101 |
Note: Debt figures derived from Balance Sheet (Current portion of long-term debt + Long-term debt). Free cash flow for Q4 2012 was negative due to seasonal pension contributions and dividends.
Material Changes vs. Prior Period
- Revenue Growth: Full-year 2012 revenues increased 10% to $9.92 billion, driven by higher freight volumes, rate increases, and a weaker Canadian dollar translating U.S. dollar revenues favorably.
- Volume Increases: Carloadings rose 4% to 5.06 million for the year. Revenue ton-miles increased 7%.
- Profitability: Operating income rose 12% for the full year. The operating ratio improved by 0.6 points to 62.9%, reflecting efficiency gains despite higher fuel and labor costs.
- Segment Performance: Significant revenue growth was seen in Petroleum and Chemicals (+15%), Coal (+15%), and Intermodal (+11%). Forest products and metals/minerals saw declines in Q4 but growth for the full year.
- Unusual Items: Full-year 2012 GAAP net income included a $281 million gain on the disposal of rail segments (Bala and Oakville subdivisions), which was excluded from adjusted earnings.
Guidance, Outlook, and Risks
2013 Outlook
- Earnings: Management anticipates high single-digit growth in 2013 diluted EPS over the 2012 adjusted EPS of $5.61.
- Headwinds: The outlook accounts for an approximate $150 million headwind from increased pension expenses and depreciation studies.
- Cash Flow: Expected 2013 free cash flow is in the range of $800 million to $900 million, including normalized, higher cash taxes.
- Dividends: The Board approved a 15% increase in the 2013 quarterly common-share dividend.
- Capital Investment: Planned capital spending is approximately $1.9 billion, with over $1 billion targeted at track infrastructure.
Key Assumptions and Risks
- Economic Assumptions: Forecasts assume 2.0% growth in North American industrial production, U.S. housing starts of 950,000 units, and crude oil prices between $90-$100 per barrel.
- Currency: Assumes the Canadian-U.S. exchange rate will be around parity in 2013.
- Risks: Key risks include general economic conditions, fuel price volatility, labor negotiations, regulatory changes, and environmental claims.
Investor Verification Checklist
- Adjusted vs. GAAP Earnings: Verify the impact of the $281 million asset disposal gain on full-year 2012 GAAP net income versus the adjusted figure of $2.456 billion.
- Foreign Exchange Impact: Review the sensitivity of results to currency fluctuations; Q4 2012 net income would have been $11 million higher on a constant currency basis.
- Pension Obligations: Monitor the $150 million headwind cited for 2013 related to pension expenses and the $700 million voluntary pension contribution made in 2012.
- Operating Ratio Trends: Confirm the sustainability of the 0.6-point improvement in the full-year operating ratio amidst rising labor and fuel costs.
- Capital Allocation: Assess the balance between the $1.9 billion capital investment plan and the projected $800-$900 million free cash flow for 2013.