Why did reported Q3 2003 net income increase 45% if underlying earnings declined?

The increase was driven mainly by foreign exchange. CPR recorded a $4 million FX loss on long-term debt in Q3 2003, compared with $47 million in Q3 2002, as the Canadian dollar strengthened against the U.S. dollar. Excluding FX on long-term debt and non-recurring items, income fell 8% to $99 million from $108 million.

How is the stronger Canadian dollar affecting CPR's operations?

The 13% year-over-year appreciation of the Canadian dollar reduced Q3 revenue by $53 million and operating expenses by $36 million, for a net $17 million hit to operating income. Because CPR has substantial U.S.-dollar revenues and expenses, currency movements translate directly into reported Canadian-dollar results.

What was the special charge in 2003 and what does it mean for future costs?

In Q2 2003, CPR took a $228.5 million pre-tax ($150 million after-tax) special charge. It comprises a $105.5 million accrual for eliminating 820 positions by 2005, a $116 million write-down of the Delaware & Hudson operations, and a $7 million write-off of non-beneficial investments. Management expects labour savings of about $11 million in 2003, $43 million in 2004, $58 million in 2005 and $62 million thereafter. The D&H is being restructured to improve its economic performance.

What operational risks and labour issues remain?

The collective agreement with running-trades employees (CCROU) expired December 31, 2002, and negotiations are suspended pending a Canada Industrial Relations Board decision on a United Transportation Union application, with resumption not expected before 2004. Agreements with the Brotherhood of Maintenance of Way Employees and the United Steel Workers expire December 31, 2003. Fuel prices, weather and the Canadian dollar's sustainability are also cited as uncertainties.

What is the company's financial position and capital structure?

At September 30, 2003, total assets were $9,926 million and the net-debt-to-net-debt-plus-equity ratio improved to 46.6% from 49.6% a year earlier. CPR issued $350 million of 4.9% medium-term notes in July 2003 and US$250 million of debt in March 2003. Cash and short-term investments rose to $360 million, and the company's unsecured long-term debt is rated Baa2 (Moody's), BBB (S&P) and BBB (DBRS).

CP 8-K SEC Disclosure — Nov 6, 2003

01—Abstract

Summary

Summary of the 6-K filed November 6, 2003. Cited figures are marked; the original filing is the authoritative source.

Canadian Pacific Railway (CP) reported third-quarter 2003 results showing net income up 45% to $95 million^a ($0.59 diluted EPS), versus $65 million ($0.41) a year earlier.

The headline improvement is largely a function of foreign exchange: the stronger Canadian dollar produced a $4 million^b FX loss on long-term debt in Q3 2003, versus $47 million in Q3 2002. Excluding FX on long-term debt and non-recurring items, income fell to $99 million from $108 million, and diluted EPS on that basis fell to $0.62 from $0.68. Operating income declined 7% to $209 million, and the operating ratio widened to 76.9% from 75.6%, as the stronger Canadian dollar reduced revenue by $53 million and operating income by $17 million.

Operationally, the quarter showed volume growth: freight volumes rose 5%^c (RTMs up 5.2%), driven by grain, sulphur and fertilizers, and intermodal. Management highlighted a grain recovery, a coal rebound expected in Q4, and productivity gains such as a 5% improvement in employee productivity. The company added 35 high-capacity locomotives early and is expanding its grain car fleet by about 2,800 cars.

Management also accelerated Western Canada track work, which had a short-term negative effect on network fluidity. Year-to-date results are considerably weaker. Net income fell 39% to $226 million^d ($1.42 diluted EPS) from $370 million, driven by a $228.5 million pre-tax ($150 million after-tax) special charge in Q2 2003 for eliminating 820 positions and writing down the Delaware & Hudson (Northeastern U.S.) operations.

Excluding the special charge and FX on debt, nine-month income declined to $224 million from $287 million. Year-to-date operating ratio excluding the special charge deteriorated to 80.8% from 77.2%, pressured by high fuel prices, severe winter conditions and derailments. The filing also includes Canadian securities-commission coverage-ratio disclosures tied to CPR's Medium Term Note program.

02—Key points

Key Highlights

Q3 2003 net income rose 45% to $95 million ($0.59 diluted EPS), but this was driven by a much smaller FX loss on long-term debt ($4M vs. $47M).
Excluding FX on long-term debt and non-recurring items, Q3 income fell 8% to $99 million and diluted EPS fell to $0.62 from $0.68.
Freight volumes (RTMs) rose 5% in Q3, led by grain, sulphur and fertilizers, and intermodal; the stronger Canadian dollar cut revenue by $53 million and operating income by $17 million.
Operating income declined 7% to $209 million; the operating ratio worsened to 76.9% from 75.6%.
YTD net income fell 39% to $226 million ($1.42 diluted EPS) due to a $150 million after-tax special charge in Q2 for 820 job eliminations and the Northeastern U.S. (D&H) write-down.
YTD operating ratio excluding the special charge rose to 80.8% from 77.2%, reflecting fuel costs up 14%, a seven-week traffic controller strike, severe winter weather and derailments.
Management expects a Q4 rebound in grain and a coal volume recovery; CPR has added 35 locomotives and is expanding its grain car fleet by about 2,800 cars.

03—Questions

Frequently Asked Questions

Why did reported Q3 2003 net income increase 45% if underlying earnings declined?
The increase was driven mainly by foreign exchange. CPR recorded a $4 million FX loss on long-term debt in Q3 2003, compared with $47 million in Q3 2002, as the Canadian dollar strengthened against the U.S. dollar. Excluding FX on long-term debt and non-recurring items, income fell 8% to $99 million from $108 million.
How is the stronger Canadian dollar affecting CPR's operations?
The 13% year-over-year appreciation of the Canadian dollar reduced Q3 revenue by $53 million and operating expenses by $36 million, for a net $17 million hit to operating income. Because CPR has substantial U.S.-dollar revenues and expenses, currency movements translate directly into reported Canadian-dollar results.
What was the special charge in 2003 and what does it mean for future costs?
In Q2 2003, CPR took a $228.5 million pre-tax ($150 million after-tax) special charge. It comprises a $105.5 million accrual for eliminating 820 positions by 2005, a $116 million write-down of the Delaware & Hudson operations, and a $7 million write-off of non-beneficial investments. Management expects labour savings of about $11 million in 2003, $43 million in 2004, $58 million in 2005 and $62 million thereafter. The D&H is being restructured to improve its economic performance.
What operational risks and labour issues remain?
The collective agreement with running-trades employees (CCROU) expired December 31, 2002, and negotiations are suspended pending a Canada Industrial Relations Board decision on a United Transportation Union application, with resumption not expected before 2004. Agreements with the Brotherhood of Maintenance of Way Employees and the United Steel Workers expire December 31, 2003. Fuel prices, weather and the Canadian dollar's sustainability are also cited as uncertainties.
What is the company's financial position and capital structure?
At September 30, 2003, total assets were $9,926 million and the net-debt-to-net-debt-plus-equity ratio improved to 46.6% from 49.6% a year earlier. CPR issued $350 million of 4.9% medium-term notes in July 2003 and US$250 million of debt in March 2003. Cash and short-term investments rose to $360 million, and the company's unsecured long-term debt is rated Baa2 (Moody's), BBB (S&P) and BBB (DBRS).

04—Continue

← View all 8-K filings