Business Context and Reporting Period
This Form 6-K filing by Canadian National Railway Company (CN), dated May 29, 2009, serves as an update to the 2008 Investor Fact Book. The document provides unaudited financial and statistical data for the fiscal years 2006, 2007, and 2008, with a primary focus on the full-year 2008 results and quarterly breakdowns for 2007 and 2008. All financial figures are expressed in Canadian dollars (CAD) unless otherwise noted, prepared under U.S. GAAP.
Key Financial Metrics (2008 Full Year)
- Revenues: $8,482 million (up from $7,897 million in 2007).
- Operating Income: $2,894 million (up from $2,876 million in 2007).
- Net Income: $1,895 million (down from $2,158 million in 2007).
- Adjusted Net Income: $1,778 million (up from $1,725 million in 2007).
- Diluted Earnings Per Share (EPS): $3.95 (Adjusted: $3.71).
- Operating Ratio: 65.9% (worsened from 63.6% in 2007).
- Free Cash Flow: $794 million (down from $828 million in 2007).
- Net Capital Expenditures: $1,424 million.
- Debt-to-Total Capitalization: 42.8% (Adjusted: 45.2%).
- Adjusted Debt-to-Adjusted EBITDA: 2.4 times.
Material Changes vs. Prior Period
Comparing 2008 to 2007, CN experienced a 7.4% increase in total revenues despite a decline in volume metrics. Revenue ton miles (RTM) decreased by 3.4% to 177.951 million, and carloads dropped 2.7% to 4.615 million. The revenue increase was driven by higher rates, with rail freight revenue per RTM rising to 4.29 cents from 3.90 cents.
Cost Pressures: Operating expenses increased to $5,588 million. Fuel costs were a significant driver, with the average fuel price rising to $3.39 per gallon in 2008 compared to $2.40 in 2007, despite a reduction in total fuel consumption (380 million gallons vs. 392 million gallons).
Profitability: While operating income remained relatively flat, reported net income declined due to a reduction in one-time gains. In 2007, the company recorded significant gains from the sale of the Central Station Complex and an investment in English Welsh and Scottish Railway. These non-recurring items were absent in 2008, resulting in a lower reported net income, though adjusted net income (excluding tax recoveries and one-time items) showed growth.
Leverage: Debt levels increased, pushing the debt-to-total capitalization ratio from 35.6% in 2007 to 42.8% in 2008. Long-term debt rose from $5,363 million to $7,405 million by year-end 2008.
Outlook, Risks, and Unusual Items
Unusual Items and Adjustments: The filing highlights significant non-GAAP adjustments. In 2007, reported net income included a $328 million deferred income tax recovery and gains from asset sales. In 2008, a $117 million deferred income tax recovery was excluded from adjusted measures. Management emphasizes "Adjusted Net Income" and "Free Cash Flow" as better indicators of ongoing operational performance.
Operational Risks: The company faces exposure to volatile fuel prices, which significantly impacted the operating ratio. Additionally, the decline in volume (carloads and ton miles) reflects broader economic headwinds affecting the transportation sector.
Guidance: This specific filing does not contain forward-looking guidance or management commentary regarding 2009 or future periods; it is a retrospective update of 2008 data.
Investor Verification Checklist
- Verify the impact of the decline in volume (carloads and RTM) on future revenue growth potential.
- Assess the sustainability of the operating ratio given the historical volatility of diesel fuel prices.
- Review the increase in leverage (Debt-to-EBITDA rising to 2.4x) and its impact on credit ratings and interest coverage.
- Confirm the reconciliation of non-GAAP measures to understand the true recurring earnings power versus one-time tax benefits or asset sales.
- Monitor free cash flow trends, which have declined for two consecutive years (2007 to 2008), to ensure sufficient liquidity for dividends and capital expenditures.