Business Context and Reporting Period
Company: Canadian National Railway Co (CN)
Reporting Period: Second Quarter and First Half ended June 30, 2001
Business Overview: CN operates a transcontinental railroad spanning Canada and mid-America, serving major ports and cities. The company reported strong fundamental performance despite high fuel costs and weakness in the automotive sector. Five of seven business units recorded revenue gains.
Key Financial Metrics
| Metric | Q2 2001 | Q2 2000 | YTD 2001 | YTD 2000 |
|---|---|---|---|---|
| Revenues | $1,392 million | $1,333 million | $2,790 million | $2,705 million |
| Net Income (GAAP) | $217 million | $230 million | $492 million | $484 million |
| Net Income (Excl. Non-Recurring) | $240 million | $230 million | $442 million | $426 million |
| Diluted EPS (GAAP) | $1.10 | $1.15 | $2.49 | $2.39 |
| Diluted EPS (Excl. Non-Recurring) | $1.21 | $1.15 | $2.24 | $2.11 |
| Operating Income (Excl. Charge) | $444 million | $418 million | $829 million | $800 million |
| Operating Ratio (Excl. Charge) | 68.1% | 68.6% | 70.3% | 70.4% |
| Cash from Operations | $487 million | $323 million | $592 million | $574 million |
| Carloadings | 947,000 | 939,000 | 1,899,000 | 1,891,000 |
Liquidity and Debt: Cash and cash equivalents stood at $73 million as of June 30, 2001. Long-term debt was $3,873 million, with a current portion of $281 million. The debt-to-total capitalization ratio was 39.3%.
Material Changes vs. Prior Period
- Revenue Growth: Q2 revenues increased 4% year-over-year, driven by gains in metals and minerals (+13%), grain and fertilizers (+10%), intermodal (+9%), and forest products (+7%). This offset declines in automotive (-9%) and petroleum/chemicals (-1%).
- Expense Pressure: Operating expenses (excluding special charges) rose less than 4% in Q2, primarily due to a 16% increase in fuel costs and a 21% increase in material costs. Fuel prices averaged $0.36/liter in Q2 2001 compared to $0.32 in Q2 2000.
- Productivity: The operating ratio improved by 0.5 percentage points to 68.1% in Q2 (excluding special charges), reflecting efficiency gains despite higher input costs.
- Volume: Carloadings increased 1% in Q2 and remained flat year-to-date compared to 2000.
Guidance, Outlook, and Unusual Items
Unusual Items (Q2 2001):
- Workforce Adjustment Charge: A $62 million after-tax charge ($98 million pre-tax) was recorded for a program to reduce 690 positions (approx. 3% of workforce) to improve productivity. About 50% of reductions were completed by quarter-end.
- Investment Write-down: A $71 million after-tax charge ($99 million pre-tax) was recorded to write down the net investment in 360networks Inc. following the company's filing for creditor protection.
- Tax Recovery: A $110 million deferred income tax recovery was recorded due to the enactment of lower corporate tax rates in Canada.
Management Commentary: CEO Paul M. Tellier stated the business structure remains strong. The workforce reduction is a strategic move to streamline administrative functions and improve freight operations in a competitive environment.
Contingencies and Risks:
- Wisconsin Central Acquisition: CN entered a merger agreement to acquire Wisconsin Central Transportation Corporation for approximately $1,200 million (Cdn). The deal is subject to regulatory approval by the U.S. Surface Transportation Board, with a final decision anticipated by September 7, 2001.
- Share Repurchase: A program to repurchase up to 10 million shares was approved in January 2001; no shares were repurchased under this program as of June 30, 2001.
Investor Verification Checklist
- Verify the regulatory status and timeline for the Wisconsin Central Transportation Corporation acquisition.
- Confirm the progress of the workforce adjustment program and the associated cash outflows for severance payments.
- Monitor the impact of sustained high fuel prices on future operating margins.
- Review the financial health and recovery prospects of 360networks Inc. to assess potential further impairment risks.
- Track the performance of the automotive and petroleum/chemicals business units, which showed revenue declines.