10-QPeriod: Q2 FY2019

CANADIAN PACIFIC KANSAS CITY LTD/CN Quarterly Report for Q2 Ended Jun 30, 2019

Filed July 16, 2019For Securities:CP

Summary

Canadian Pacific Kansas City Ltd. (CP) reported strong financial performance for the quarter ending June 29, 2019. Diluted earnings per share (EPS) saw a significant increase of 70% year-over-year, reaching $5.17, driven by a 66% rise in net income to $724 million. This robust growth was primarily attributed to an increase in operating income and favorable foreign exchange translation gains on debt and lease liabilities, contrasting with losses in the prior year. The company also demonstrated improved operational efficiency, with its operating ratio improving by 580 basis points to 58.4% due to higher freight revenues and enhanced operational performance. Total revenues experienced a healthy 13% increase to $1,977 million, propelled by higher volumes, increased freight rates, and a favorable foreign exchange impact. The company also highlighted operational improvements, including a 5% increase in average train speed and a 3% increase in average train weight and length. These improvements underscore CP's focus on efficiency and productivity in its operations.

Key Highlights

  • 1Diluted EPS increased by 70% to $5.17, and Net Income rose by 66% to $724 million in Q2 2019 compared to Q2 2018.
  • 2Total revenues grew by 13% to $1,977 million, driven by higher volumes, freight rates, and favorable foreign exchange.
  • 3Operating ratio improved significantly by 580 basis points to 58.4%, indicating enhanced operational efficiency.
  • 4Average train speed increased by 5% due to network infrastructure improvements completed in 2018.
  • 5The company adopted new lease accounting standards (ASC 842) effective January 1, 2019, which materially impacted the balance sheet by recognizing operating lease liabilities and right-of-use assets, but did not significantly affect the income statement.
  • 6CP declared a quarterly dividend of $0.8300 per share, an increase from $0.6500 per share in the prior year.
  • 7The company continues to actively repurchase shares under its normal course issuer bid (NCIB).

Frequently Asked Questions

The significant increase in net income and EPS was primarily driven by a substantial rise in operating income. This was further boosted by favorable foreign exchange (FX) translation gains on debt and lease liabilities in 2019, which contrasted with FX translation losses experienced in the prior year. Additionally, a higher income tax recovery associated with changes in tax rates contributed to the net income growth.

Operational performance improved due to higher volumes, freight rates, and efficiencies from better operating performance and asset utilization. Key indicators show a 7% increase in Gross Ton-Miles (GTMs), a 5% increase in average train speed to 22.4 mph, and a 3% increase in average train weight and length. The operating ratio improved by 580 basis points to 58.4%.

The adoption of ASC 842, effective January 1, 2019, had a material impact on CP's balance sheet by introducing operating lease liabilities and right-of-use (ROU) assets. However, the standard did not have a significant impact on the consolidated statement of income. Finance lease accounting remained largely unchanged.

CP maintains adequate liquidity through cash and cash equivalents, a revolving credit facility, and letter of credit facilities. As of June 30, 2019, the company had $45 million in cash and cash equivalents, an undrawn U.S. $1.0 billion revolving credit facility, and approximately $543 million available under its letter of credit facilities. The company also has a commercial paper program of up to U.S. $1.0 billion.