Business context and reporting period
Canadian Pacific Railway Limited (the registrant named in this filing; the request metadata names Canadian Pacific Kansas City Ltd) filed this unaudited Form 10-Q for the three months ended March 31, 2019. Financial amounts are in Canadian dollars unless otherwise noted. The company operates a freight railway, and management cautions that seasonal weather and demand can affect quarterly comparisons.
Financial performance and position
- Revenue: $1.767 billion, up 6% from $1.662 billion. Freight revenue rose 6% to $1.726 billion; higher rates and favorable foreign exchange contributed, while carloads declined 2%.
- Profit and margins: Operating income was $543 million, up 1%; net income was $434 million, up 25%; diluted EPS was $3.09 versus $2.41. Adjusted diluted EPS, a non-GAAP measure, increased 3% to $2.79. The operating ratio worsened 180 basis points to 69.3%.
- Cash flow: Operating cash flow was $413 million versus $397 million. Capital additions were $224 million, and company-defined free cash was $193 million versus $164 million. Cash and cash equivalents ended the quarter at $352 million, up from $61 million at year-end.
- Debt and liquidity: Total debt, including current maturities, was $8.923 billion, compared with $8.696 billion at December 31, 2018. The company issued $400 million of 3.150% ten-year notes. Its $1.0 billion revolving facility was undrawn, with no commercial paper outstanding; it also reported $541 million available under letter-of-credit facilities. Adjusted net debt to adjusted EBITDA was 2.6 times, against a long-term target range of 2.0–2.5 times.
- Shareholder returns: The declared dividend was $0.65 per share, up from $0.5625. The company repurchased 708,000 shares for $185 million during the quarter.
- Other metrics: The effective tax rate was 24.24%, compared with 25.92%. Twelve-month ROIC was 15.6%, down from 19.5%; adjusted ROIC was 15.9%, up from 14.6%.
Material changes versus the prior comparable period
- Revenue grew, led by energy, chemicals and plastics, which increased 23%, and forest products, up 11%. Metals, minerals and consumer products revenue fell 5%; fertilizers and sulphur fell 7%.
- Operating expenses increased 9% to $1.224 billion. Purchased services and other rose $82 million, including higher casualty costs, a $10 million loss-contingency charge, and weather-related costs. Compensation and benefits increased 9%; fuel expense declined 3%.
- Reported net income and EPS benefited materially from a $45 million non-cash foreign-exchange gain on debt and lease liabilities. Adjusted diluted EPS excludes this item and rose only 3%.
- Operating conditions and safety indicators deteriorated: FRA-reported personal injuries per 200,000 employee-hours increased to 1.97 from 1.57, and train accidents per million train-miles rose to 1.62 from 1.19. Fuel efficiency worsened 3%.
- Adoption of the new lease standard on January 1, 2019 added operating lease right-of-use assets and liabilities to the balance sheet; adoption reduced opening retained earnings by $5 million and did not significantly affect quarterly income.
Outlook, management commentary, risks and contingencies
Management attributed operating pressure to severe winter conditions, network disruptions, and more frequent and severe casualty incidents and derailments. The company reported related weather-fighting and casualty costs, as well as lost and deferred revenue during operations and subsequent network recovery. Management expected a 2019 annualized effective tax rate of approximately 25.5%–26%. The filing provides no broader earnings or revenue guidance in the supplied text.
Key exposures include foreign-exchange movements, fuel prices, weather and operational disruption, safety and derailment liabilities, labor and regulatory matters, and environmental remediation. A one-cent weakening of the Canadian dollar against the U.S. dollar was estimated to increase annual revenue by about $28 million, operating expenses by about $15 million, and net interest expense by about $3 million.
Litigation relating to the 2013 Lac-Mégantic derailment remains unresolved. The Province of Québec’s action seeks $315 million; other proceedings include an unquantified class action and insurer claims. CP denies liability and says potential responsibility and losses cannot currently be determined. Management states that ordinary-course legal matters are not expected to materially adversely affect financial position or results, but cannot predict outcomes for pending claims. Environmental remediation provisions were $81 million, with expected payments through 2029. Contractual commitments totaled $22.380 billion, including long-term debt, interest, leases and supplier purchases.
Important facts for investors to verify
- Whether reported earnings growth is sustainable after excluding the $45 million foreign-exchange gain; compare GAAP and adjusted results and their reconciliations.
- Whether service, safety and operating efficiency recover from the severe winter and elevated casualty incidents, and what related costs or deferred revenue persist.
- Developments and potential exposure in the Lac-Mégantic proceedings, including the Québec action and pending claims whose losses are not estimable.
- Debt, lease obligations and leverage relative to the company’s 2.0–2.5-times adjusted net debt-to-EBITDA target, alongside capital spending and shareholder returns.
- Assumptions underlying the 2019 tax-rate outlook and the effects of exchange rates, fuel prices and seasonal conditions on future results.