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, 2009
Business Overview: CN operates a railway network spanning Canada and mid-America, connecting the Atlantic and Pacific oceans to the Gulf of Mexico. The company reported results for Q4 2009 and the full fiscal year, navigating challenges including weather disruptions, a five-day locomotive engineer strike in Canada, and a stronger Canadian dollar.
Key Financial Metrics
| Metric | Q4 2009 | Q4 2008 | Full Year 2009 | Full Year 2008 |
|---|---|---|---|---|
| Revenues (C$ millions) | 1,882 | 2,200 | 7,367 | 8,482 |
| Net Income (C$ millions) | 582 | 573 | 1,854 | 1,895 |
| Diluted EPS (C$) | 1.23 | 1.21 | 3.92 | 3.95 |
| Adjusted Net Income (C$ millions) | 424 | 531 | 1,533 | 1,778 |
| Adjusted Diluted EPS (C$) | 0.90 | 1.12 | 3.24 | 3.71 |
| Operating Ratio (%) | 65.3% | 62.7% | 67.3% | 65.9% |
| Free Cash Flow (C$ millions) | 133 (Q4) | 311 (Q4) | 790 (FY) | 794 (FY) |
| Long-Term Debt (C$ millions) | 6,391 | 7,405 | 6,391 | 7,405 |
| Cash and Equivalents (C$ millions) | 352 | 413 | 352 | 413 |
Material Changes vs. Prior Period
- Revenue Decline: Q4 revenues fell 14% year-over-year, and full-year revenues dropped 13%. This was driven by lower freight volumes due to economic conditions, reduced fuel surcharges, and the negative translation impact of a stronger Canadian dollar on U.S.-denominated revenues.
- Profitability: While reported net income increased slightly in Q4 (+2%) and decreased slightly for the full year (-2%), adjusted net income declined significantly. Adjusted Q4 net income fell 20% (C$424M vs C$531M), and adjusted full-year net income dropped 14% (C$1,533M vs C$1,778M).
- Operating Ratio: The operating ratio worsened to 65.3% in Q4 (from 62.7%) and 67.3% for the full year (from 65.9%), indicating higher operating expenses relative to revenue.
- Volume Trends: Q4 carloadings were flat year-over-year but improved 4% sequentially from Q3. Full-year revenue ton-miles declined 10%. Coal, automotive, grain, and fertilizers volumes grew in Q4, while intermodal and forest products declined.
- Debt Reduction: Long-term debt decreased by approximately C$1 billion year-over-year, reducing the debt-to-total capitalization ratio from 42.8% to 36.5%.
Guidance, Outlook, and Risks
2010 Outlook
- Economic Recovery: Management anticipates a gradual economic recovery in 2010, forecasting North American industrial production growth of 3-4%.
- Earnings Target: CN aims for double-digit growth in diluted EPS in 2010 compared to the adjusted 2009 EPS of C$3.24.
- Cash Flow: Free cash flow is expected to be in the order of C$700 million for 2010.
- Capital Investment: Planned capital spending is approximately C$1.5 billion, with over C$1 billion targeted for track infrastructure.
Shareholder Returns
- Dividend: The Board approved a 7% increase in the quarterly common-share dividend.
- Share Buyback: A new program was approved to repurchase up to 15 million common shares through December 31, 2010.
Risks and Headwinds
- Currency: The Canadian-U.S. exchange rate is a significant headwind; the rate averaged C$0.88 in 2009 but is expected to be substantially higher (C$0.95 to par) in 2010, negatively impacting earnings.
- Cost Pressures: Anticipated increased expenses in 2010 include higher depreciation and lower credits for casualty expenses.
- Operational Risks: Risks include severe weather, labor negotiations, fuel price volatility, and regulatory changes.
Investor Verification Checklist
- Adjusted vs. Reported Earnings: Verify the impact of non-recurring items (line sales to Metrolinx, tax recoveries) on reported net income versus the adjusted figures used for guidance.
- Currency Sensitivity: Assess the exposure of U.S.-denominated revenues to the strengthening Canadian dollar and its impact on 2010 earnings targets.
- Volume Recovery: Monitor sequential volume trends, particularly in depressed sectors like forest products and intermodal, to validate the "gradual recovery" thesis.
- Capital Allocation: Confirm the execution of the new C$1.5 billion capital program and the 15 million share repurchase authorization.
- Operating Ratio Trajectory: Track the operating ratio to ensure cost-control initiatives offset the expected rise in depreciation and casualty costs in 2010.