Business Context and Reporting Period
Company: Canadian Pacific Railway Limited (CP)
Filing Type: Form 6-K (Report of Foreign Issuer)
Reporting Period: Fourth Quarter and Full Year ended December 31, 2010
Filing Date: January 26, 2011
CP operates a North American transcontinental railroad providing freight transportation, logistics, and supply chain services. The company reported strong demand across all lines of business, driven by volume increases and operational efficiency improvements.
Key Financial Metrics
| Metric | Q4 2010 | Q4 2009 | Full Year 2010 | Full Year 2009 |
|---|---|---|---|---|
| Total Revenues | $1.29 billion | $1.14 billion | $5.0 billion | $4.4 billion |
| Net Income (GAAP) | $186 million | $146 million | $651 million | $550 million |
| Diluted EPS (GAAP) | $1.09 | $0.87 | $3.85 | $3.30 |
| Adjusted Diluted EPS | $1.12 | $0.74 | $3.87 | $2.51 |
| Operating Income | $298 million | $168 million | $1.12 billion | $830 million |
| Adjusted Operating Ratio | 77.0% | 80.6% | 77.6% | 81.7% |
| Cash from Operations | $381 million | ($220 million) | $502 million | $451 million |
| Long-Term Debt | $4.03 billion | $4.14 billion | $4.03 billion | $4.14 billion |
| Cash & Equivalents | $361 million | $679 million | $361 million | $679 million |
Material Changes vs. Prior Period
- Revenue Growth: Full-year revenue increased 13% to $5.0 billion, driven by a 13.9% increase in total Revenue Ton-Miles (RTMs) and a 4.1% increase in revenue per carload.
- Profitability: Adjusted operating income rose 39% year-over-year. The adjusted operating ratio improved by 410 basis points to 77.6% for the full year.
- Debt Reduction: The company reduced long-term debt by approximately $250 million during 2010, aided by a $650 million voluntary prepayment to its defined benefit pension plan.
- Dividends: The quarterly dividend was increased by 9% to $1.08 per share annually.
- Accounting Policy Change: CP changed its accounting policy for rail grinding costs from capitalization to expensing as incurred. This change was applied retrospectively, reducing net properties by $89 million and shareholders' equity by $62.7 million as of January 1, 2010.
Guidance, Outlook, and Risks
- 2011 Capital Expenditures: CP plans to spend between $950 million and $1.05 billion on capital programs in 2011.
- Pension Contributions: Estimated 2011 defined benefit pension contributions are $100 million to $125 million, lower than previous estimates. Pension expenses are expected to be $46 million in 2011.
- Tax Rate: The expected effective tax rate for 2011 is in the range of 24% to 26%.
- Strategic Targets: Management aims to achieve a low 70s operating ratio over the next three to five years.
- Risks: Forward-looking statements are subject to risks including global economic conditions, agricultural production risks (weather, insects), energy commodity prices, labor disputes, and regulatory changes.
Investor Verification Checklist
- Non-GAAP Reconciliations: Verify the adjustments made to GAAP earnings to arrive at "Adjusted" figures, specifically the exclusion of foreign exchange gains/losses on long-term debt and one-time items like the 2009 shortline lease termination loss.
- Pension Liability Impact: Review the impact of lower discount rates on pension liabilities, which increased obligations by $547.8 million at year-end 2010.
- Accounting Policy Change: Confirm the retrospective impact of the rail grinding expense policy change on comparative 2009 and 2008 financial data.
- Volume vs. Rate: Analyze the breakdown of revenue growth between volume increases (RTMs) and pricing (revenue per RTM), noting that revenue per RTM declined slightly year-over-year (-2.8%) despite volume growth.
- Cash Flow Volatility: Note the significant swing in operating cash flow in Q4 2009 due to pension funding timing, which contrasts with the positive operating cash flow in Q4 2010.