01—Abstract
Summary
Summary of the 6-K filed August 1, 2003. Cited figures are marked; the original filing is the authoritative source.
Canadian Pacific Railway's second-quarter 2003 results (furnished on Form 6-K) show business volume growth overshadowed by a $150 milliona after-tax ($228 million pre-tax) special charge, which cut net income to $29 million from $169 million a year earlier and diluted EPS to $0.18 from $1.06.
Excluding the charge and foreign exchange gains on long-term debt, income was $87 millionb ($0.55 per diluted share) versus $111 million ($0.70) in Q2 2002. Freight revenue was essentially flat at $875 million, with intermodal up 11% and sulphur/fertilizer up 6%, while the operating ratio before the special charge deteriorated to 79.1% from 76.3%, driven by high fuel prices, a stronger Canadian dollar, and rising pension and insurance costs. The special charge funds a productivity program to eliminate 820 job positions by the end of 2005 (targeting roughly $11 million of 2003 savings rising to about $62 million annually in later years) and a $116 million write-down of the Delaware & Hudson (Northeastern U.S.) network, which will be restructured.
Management guided that the productivity gains and an expected grain crop should offset most of the high-fuel and currency headwinds, with second-half 2003 results expected to be in line with second-half 2002. Liquidity remained adequate, with net debt to net debt plus equity improving to 46.8% and a $350 millionc Medium-Term Note issue settled in July 2003. Investors should note several ongoing risks disclosed in the filing: an open labour dispute with the Rail Canada Traffic Controllers union (strike began June 18, 2003, with management running operations), expired contracts with conductors and engineers, U.S. tariffs on Canadian grain, and a pension plan deficit of $864 million at year-end 2002 that could drive higher funding and expense if conditions persist.
02—Key points
Key Highlights
- Q2 2003 net income fell to $29 million ($0.18 diluted EPS) from $169 million ($1.06) in Q2 2002, primarily due to a $228 million pre-tax special charge ($150 million after tax).
- Excluding the special charge and FX gains on long-term debt, Q2 diluted EPS was $0.55 versus $0.70 a year earlier; year-to-date it was $0.79 versus $1.12.
- Freight revenues were flat at $875 million, with intermodal up 11% ($24 million) and sulphur/fertilizers up 6%, offset by currency-driven declines in automotive, forest and industrial products.
- Operating ratio before the special charge worsened to 79.1% from 76.3%, as fuel expense rose 16% and the stronger Canadian dollar reduced U.S.-dollar revenues by $40 million.
- The special charge eliminates 820 positions by 2005 and writes down the Northeastern U.S. (D&H) operations by $116 million, with the network to be restructured for better economics.
- Management expects productivity gains and the Canadian grain crop to offset most of the high fuel and currency pressures, with second-half results projected to be in line with 2002.
- An ongoing strike by the Rail Canada Traffic Controllers union that began June 18, 2003, with no resolution timeline disclosed, is a key operational risk.
03—Questions
Frequently Asked Questions
What caused the sharp drop in CPR's second-quarter 2003 net income?
The main driver was a $228 million pre-tax ($150 million after-tax) special charge covering workforce reductions, a $116 million write-down of the Delaware & Hudson assets, and the write-off of two non-core investments. Underlying operating income before the charge also declined $28 million, due to high fuel prices and a stronger Canadian dollar.
Is the underlying business growing?
Partly. Volumes rose in five of seven commodity groups and revenue ton-miles grew 3.8%, led by intermodal. However, freight revenue was flat in Canadian-dollar terms because currency translation offset volume gains, and operating income before the special charge fell year over year.
What is the expected financial impact of the restructuring?
Management expects labour savings of about $11 million in 2003, $43 million in 2004, $58 million in 2005 and roughly $62 million annually thereafter. Cash restructuring payments are projected at $23 million in 2003, $45 million in 2004 and declining amounts through 2009.
What are the main risks to the outlook?
Key risks include persistently high fuel prices, the Canadian dollar's strength against the U.S. dollar, the open traffic controllers' strike and expired contracts with other unions, U.S. tariffs and anti-dumping investigations on Canadian grain, and a large pension deficit ($864 million at year-end 2002) that could raise future funding requirements.
How is CPR's balance sheet and financing position?
Net debt to net debt plus equity improved to 46.8% from 48.9% a year earlier. Cash fell to $49.8 million after debt repayments, and CPR issued $350 million of 4.9% Medium-Term Notes due 2010 in early July 2003, with proceeds used to refinance debt and fund capital spending.
04—Continue