Business Context and Reporting Period
Company: Canadian National Railway Company (CN)
Filing Type: Form 6-K (Report of Foreign Issuer)
Reporting Period: Third quarter and nine months ended September 30, 2014
Business Overview: CN operates a rail network spanning Canada and mid-America, transporting goods valued at approximately C$250 billion annually. The company serves major ports and metropolitan areas across North America.
Key Financial Metrics
| Metric | Q3 2014 | Q3 2013 | 9M 2014 | 9M 2013 |
|---|---|---|---|---|
| Revenues | C$3,118 million | C$2,698 million | C$8,927 million | C$7,830 million |
| Operating Income | C$1,286 million | C$1,084 million | C$3,364 million | C$2,906 million |
| Net Income | C$853 million | C$705 million | C$2,323 million | C$1,977 million |
| Diluted EPS | C$1.04 | C$0.84 | C$2.81 | C$2.33 |
| Operating Ratio | 58.8% | 59.8% | 62.3% | 62.9% |
| Free Cash Flow (9M) | C$2,045 million | C$1,307 million | ||
| Total Debt (Long-term + Current) | C$7,841 million | C$7,840 million (Dec 31, 2013) | ||
| Cash and Equivalents | C$176 million | C$214 million (Dec 31, 2013) |
Material Changes vs. Prior Period
- Revenue Growth: Q3 2014 revenues increased 16% to a record C$3,118 million, driven by higher freight volumes and a weaker Canadian dollar. Nine-month revenues rose 14%.
- Profitability: Net income increased 21% in Q3 2014. Adjusted diluted EPS grew 21% to C$1.04, excluding a C$19 million tax expense in Q3 2013 related to higher provincial tax rates.
- Volume and Yield: Carloadings reached a record 1,475 thousand (+11%), and revenue ton-miles grew 13%. Rail freight revenue per revenue ton-mile increased 2%.
- Operating Efficiency: The operating ratio improved by 100 basis points to 58.8% in Q3 2014.
- Commodity Performance: Significant revenue increases were seen in grain and fertilizers (+29%), petroleum and chemicals (+21%), and automotive (+17%). Coal revenues declined 3%.
- Foreign Currency Impact: On a constant currency basis, Q3 2014 net income would have been C$22 million lower, indicating the weaker Canadian dollar positively impacted reported results.
Guidance, Outlook, and Risks
- 2014 Outlook: CN maintains its outlook for solid double-digit EPS growth over adjusted 2013 EPS of C$3.06. Free cash flow is expected to range between C$1.8 billion and C$2.0 billion (excluding major asset sales).
- Key Assumptions: Management assumes North American industrial production growth of 3-4%, U.S. housing starts of ~1 million units, and U.S. motor vehicle sales of ~16 million units. The Canadian dollar is assumed to trade between US$0.90 and US$0.95, with crude oil (WTI) averaging US$95-$105 per barrel.
- Capital Program: CN plans to invest approximately C$2.25 billion in 2014, with C$1.2 billion targeted for network safety and integrity.
- Risks: Key risks include economic conditions, competition, fuel price volatility, currency fluctuations, regulatory changes, environmental liabilities, and operational disruptions (e.g., severe weather, labor negotiations).
- Unusual Items: The nine-month 2014 results included an C$80 million gain on the disposal of the Deux-Montagnes subdivision. Adjusted net income excludes this gain.
Investor Verification Checklist
- Constant Currency Performance: Verify the impact of the weakening Canadian dollar on reported earnings versus organic growth.
- Adjusted EPS Reconciliation: Review the reconciliation of GAAP net income to adjusted net income, specifically the exclusion of the C$80 million asset disposal gain in the nine-month period.
- Debt Structure: Confirm the composition of total debt (C$7.84 billion) and the status of the C$800 million revolving credit facility (no outstanding borrowings as of Sept 30, 2014).
- Environmental Liabilities: Assess the adequacy of the C$118 million accrual for environmental costs across approximately 260 identified sites.
- Share Repurchases: Note the completion of a C$1.4 billion share repurchase program and the approval of a new program for up to 28.0 million shares on October 21, 2014.