Business Context and Reporting Period
Company: Canadian Pacific Railway Limited (CP)
Filing Type: Form 6-K (Report of Foreign Private Issuer)
Reporting Period: Third Quarter ended September 30, 2013 (Year-to-Date also provided)
Date of Filing: October 23, 2013
CP reported record quarterly earnings and its lowest operating ratio in company history. The results reflect a strategic focus on service execution and cost control, achieving earnings growth despite a softer volume environment in certain sectors.
Key Financial Metrics
| Metric (CAD Millions) | Q3 2013 | Q3 2012 | YTD 2013 | YTD 2012 |
|---|---|---|---|---|
| Total Revenues | $1,534 | $1,451 | $4,526 | $4,193 |
| Operating Expenses | $1,010 | $1,075 | $3,220 | $3,304 |
| Operating Income | $524 | $376 | $1,306 | $889 |
| Net Income | $324 | $224 | $793 | $469 |
| Diluted EPS | $1.84 | $1.30 | $4.50 | $2.72 |
| Adjusted EPS (excl. tax item) | $1.88 | N/A | N/A | N/A |
| Operating Ratio | 65.9% | 74.1% | 71.1% | 78.8% |
| Free Cash Flow (YTD) | $318 | $21 | N/A | N/A |
Liquidity and Debt:
- Cash and cash equivalents: $329 million (Sept 30, 2013).
- Long-term debt: $4,591 million (Sept 30, 2013).
- Restricted cash and investments pledged as collateral: $346 million.
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 6% in Q3 2013, driven by a 12% increase in freight revenue per revenue ton-mile (RTM). Freight revenue grew 6% despite a 3% decline in total RTMs.
- Cost Reduction: Operating expenses decreased 6% in Q3 2013. Compensation and benefits dropped 11% ($40 million), and equipment rents fell 15% ($8 million).
- Profitability Surge: Net income rose 45% to $324 million. Adjusted net income (excluding a $7 million tax item) increased 48% to $331 million.
- Efficiency Gains: The operating ratio improved by 820 basis points to 65.9%, the lowest in company history. This was achieved through higher revenue per unit and lower costs per unit.
- Operational Metrics: Average train weight increased 13% and average train length increased 10%. Total employees decreased 14% year-over-year.
Guidance, Outlook, and Risks
Management Commentary: CEO E. Hunter Harrison described the quarter as "outstanding," noting the company is ahead of its transformational plan. Management expects a record 2013 and remains focused on driving earnings growth and lowering the operating ratio.
Personnel Changes: CFO Brian Grassby announced his retirement, effective year-end 2013, with a search for a successor underway.
Risks and Contingencies:
- Lac-Megantic Incident: CP was added as a named party in a class action and an environmental cleanup order regarding the July 2013 Lac-Megantic derailment (operated by MM&A). CP contests liability. No accrual has been recognized as the potential loss is undeterminable at this stage.
- Forward-Looking Risks: Includes economic conditions, weather, fuel price volatility, labor disputes, and regulatory changes.
- Tax Impact: A $7 million income tax expense was recorded in Q3 2013 due to an increase in British Columbia's corporate income tax rate.
Investor Verification Checklist
- Adjusted EPS Reconciliation: Verify the $7 million tax item excluded from Adjusted EPS and confirm the calculation of the $1.88 Adjusted EPS figure.
- Lac-Megantic Liability: Monitor legal proceedings regarding the Lac-Megantic derailment for any updates on potential liability or cleanup costs, as no accrual is currently recorded.
- Volume vs. Rate Mix: Analyze the divergence between declining volume (RTMs down 3%) and rising revenue (up 6%) to assess the sustainability of rate increases.
- Workforce Reduction: Review the impact of the 14% reduction in total employees on long-term service quality and operational capacity.
- CFO Transition: Track the appointment of the new CFO to ensure continuity in financial strategy and reporting.