Business Context and Reporting Period
Company: Canadian National Railway Company (CN)
Filing Type: Form 6-K (Report of Foreign Issuer)
Reporting Period: Fourth quarter and full year ended December 31, 2013
Business Overview: CN operates a rail network spanning Canada and mid-America, transporting approximately C$250 billion worth of goods annually. The company reported record volumes and revenues for the full year 2013, driven by strong energy markets, market share gains, and North American economic growth.
Key Financial Metrics
| Metric | Q4 2013 | Q4 2012 | Full Year 2013 | Full Year 2012 |
|---|---|---|---|---|
| Revenues (C$ millions) | 2,745 | 2,534 | 10,575 | 9,920 |
| Operating Income (C$ millions) | 967 | 922 | 3,873 | 3,685 |
| Net Income (C$ millions) | 635 | 610 | 2,612 | 2,680 |
| Diluted EPS (C$) | 0.76 | 0.71 | 3.09 | 3.06 |
| Adjusted Diluted EPS (C$) | 0.76 | 0.71 | 3.06 | 2.81 |
| Operating Ratio (%) | 64.8% | 63.6% | 63.4% | 62.9% |
| Free Cash Flow (C$ millions) | 316 | 130 | 1,623 | 1,661 |
| Debt-to-Total Capitalization (%) | 37.7% | 38.5% | 37.7% | 38.5% |
Note: Free cash flow definition was redefined in Q4 2013 to exclude dividends and foreign exchange fluctuations on cash equivalents.
Material Changes vs. Prior Period
- Revenue Growth: Full-year 2013 revenues increased 7% to C$10.575 billion. Growth was led by petroleum and chemicals (+18%), intermodal (+9%), and metals and minerals (+7%). Coal revenues declined 3%.
- Volume and Yield: Carloadings rose 3% to 5.19 million. Revenue ton-miles increased 4%. Rail freight revenue per revenue ton-mile (yield) increased 3%.
- Expense Pressure: Operating expenses increased 7% to C$6.702 billion, driven by higher labor and fringe benefits (pension costs), purchased services, and the negative translation impact of a weaker Canadian dollar on U.S.-denominated expenses.
- Operating Ratio: The full-year operating ratio increased 0.5 points to 63.4%, reflecting higher costs outpacing revenue growth slightly.
- Currency Impact: The weaker Canadian dollar provided a positive translation impact on U.S.-denominated revenues. On a constant currency basis, full-year net income would have been C$37 million lower.
Guidance, Outlook, and Risks
2014 Outlook
- Earnings: CN aims to deliver double-digit EPS growth in 2014 over the adjusted 2013 diluted EPS of C$3.06.
- Free Cash Flow: Expected to be in the range of C$1.6 billion to C$1.7 billion.
- Capital Expenditures: Planned at approximately C$2.1 billion (up from C$2.0 billion in 2013), with over C$1.2 billion targeted for track infrastructure.
- Dividend: The Board approved a 16% increase in the 2014 quarterly common-share dividend.
Key Assumptions
- North American industrial production increase of ~3%.
- U.S. housing starts of 1.1 million units and motor vehicle sales of 16 million units.
- Grain crops in Canada and the U.S. above or in-line with five-year averages.
- Canadian-U.S. exchange rate of approximately C$0.95.
- Crude oil (WTI) price range of US$95-$105 per barrel.
Risks and Contingencies
- Market Risks: General economic conditions, industry competition, inflation, and fuel price volatility.
- Operational Risks: Severe weather, natural disasters, labor negotiations, and derailments.
- Regulatory Risks: Changes in environmental laws, legislative developments, and regulatory actions.
- Unusual Items: 2013 results included gains on the disposal of rail segments and easements, which were excluded from adjusted earnings measures.
Investor Verification Checklist
- Adjusted vs. Reported EPS: Verify the reconciliation of reported net income (C$2,612M) to adjusted net income (C$2,582M), noting the exclusion of asset disposal gains and tax impacts.
- Free Cash Flow Definition: Confirm understanding of the redefined free cash flow metric starting Q4 2013, which no longer deducts dividends.
- Currency Sensitivity: Assess the impact of the weaker Canadian dollar on reported results versus constant currency performance.
- Capital Allocation: Review the increase in capital expenditures to C$2.1 billion and the 16% dividend increase against the projected free cash flow range.
- Operating Ratio Trend: Monitor the widening operating ratio (63.4% in 2013 vs. 62.9% in 2012) to ensure cost controls remain effective against inflation and labor costs.