Business Context and Reporting Period
Company: Canadian Pacific Railway Limited (CP)
Filing Type: Form 6-K (Report of Foreign Private Issuer)
Reporting Period: Fourth Quarter and Full Year ended December 31, 2014
Release Date: January 22, 2015
CP reported record net income and the lowest quarterly operating ratio in its history for Q4 2014. The company highlighted a successful transformation from an industry laggard to a leader, achieving its 2016 targets two years ahead of schedule.
Key Financial Metrics
| Metric | Q4 2014 | Q4 2013 | Full Year 2014 | Full Year 2013 |
|---|---|---|---|---|
| Total Revenues | $1.76 billion | $1.61 billion | $6.62 billion | $6.13 billion |
| Net Income | $451 million | $82 million | $1.48 billion | $875 million |
| Diluted EPS | $2.63 | $0.47 | $8.46 | $4.96 |
| Adjusted EPS | $2.68 | $1.91 | $8.50 | $6.42 |
| Operating Ratio | 59.8% | 92.9% | 64.7% | 76.8% |
| Operating Income | $708 million | $114 million | $2.34 billion | $1.42 billion |
| Cash from Operations | $657 million | $659 million | $2.12 billion | $1.95 billion |
| Free Cash Flow | $115 million | $212 million | $725 million | $530 million |
| Long-Term Debt | $5.66 billion | $4.69 billion | $5.66 billion | $4.69 billion |
| Cash & Equivalents | $226 million | $476 million | $226 million | $476 million |
Material Changes vs. Prior Period
- Revenue Growth: Q4 revenues increased 10% year-over-year, driven by double-digit growth in crude, metals, and intermodal segments. Full-year revenue grew 8%.
- Profitability Surge: Q4 net income jumped 450% compared to Q4 2013. Full-year net income increased 69%.
- Operating Efficiency: The Q4 operating ratio dropped to a record 59.8%, a 33.1 percentage point improvement over Q4 2013. The full-year operating ratio fell to 64.7%.
- Expense Management: Total operating expenses decreased 30% in Q4 and 9% for the full year, primarily due to the absence of a $435 million asset impairment charge recorded in Q4 2013 related to the sale of the DM&E West line.
- Share Repurchases: The company repurchased 10.5 million shares in 2014 for a total of $2.09 billion, reducing the share count by approximately 6%.
Guidance, Outlook, and Risks
2015 Full-Year Guidance
- Operating Ratio: Below 62%.
- Revenue Growth: 7-8%.
- Adjusted EPS: Increase of more than 25% vs. 2014 adjusted EPS of $8.50.
Key Assumptions
- Exchange rate: C$1.20 to US$1.00.
- Tax rate: 27.5%.
- Capital expenditures: Approximately $1.5 billion.
- Crude oil price: Average WTI of $46.
- Share buybacks: No assumption beyond the current program expiring March 16, 2015.
Risks and Contingencies
- Asset Sale: Proposed sale of approximately 283 miles of the Delaware and Hudson Railway to Norfolk Southern is subject to regulatory approval.
- Pension Volatility: Remeasurement of pension plans resulted in net actuarial losses of $1.065 billion in Q4 2014 due to lower discount rates, significantly impacting other comprehensive income.
- Commodity Prices: Management notes short-term volatility in commodity prices but cites business diversity as a mitigating factor.
- Operational Risks: Includes weather events, labor disputes, and regulatory changes.
Investor Verification Checklist
- Adjusted vs. GAAP: Verify the reconciliation of Adjusted EPS ($2.68) to GAAP EPS ($2.63) to understand the impact of foreign exchange translation on debt.
- Pension Liability: Review the $1.065 billion actuarial loss and its impact on the balance sheet and future cash funding requirements.
- Debt Structure: Confirm the utilization of the new $1 billion commercial paper program and the status of forward starting swaps ($1.4 billion notional).
- Asset Sale Status: Monitor the regulatory approval status of the Delaware and Hudson Railway sale to Norfolk Southern.
- Share Count: Verify the impact of the $2.09 billion share repurchase program on future earnings per share dilution/accretion.