01—Abstract
Summary
Summary of the 6-K filed March 17, 2004. Cited figures are marked; the original filing is the authoritative source.
This Form 6-K, furnished by Canadian Pacific Railway Limited (CP) in March 2004, is primarily a shareholder package rather than a discrete event disclosure.
It bundles the Notice of Annual Meeting (April 20, 2004), the Management Proxy Circular, the proxy form, the Chairman's and President's 2003 letters, the 2003 Annual Report, and two regulatory letters (earnings coverage ratios and the PwC consent). The most investor-relevant content is the 2003 Annual Report: revenue was essentially flat at C$3,660.7 milliona, but operating income before special items fell to C$740.6 million from C$856.5 million, driven mainly by the stronger Canadian dollar, severe winter weather, derailments and high fuel prices. Diluted EPS was C$2.51 on a reported basis, but only C$2.11 before FX on long-term debt and other specified items, down from C$2.56.
The reported earnings were flattered by a C$209.5 millionb non-cash FX gain on U.S.-dollar debt, while the underlying business was weaker. Management recorded a C$228.5 million special charge to eliminate 820 positions by end-2005 and write down the Delaware & Hudson, and a C$28.9 million loss on transferring IT assets to IBM. Free cash after dividends was negative C$475.4 million, reflecting an extra C$300 million pension contribution.
Management guided 2004 revenue growth of 4%c to 6% excluding FX, a 1.5% to 2% yield increase, and a normalized tax rate of 33% to 35%. Net-debt-to-capitalization improved to 46.8%. For shareholders, the filing also shows governance and pay details.
Directors held 51,797 shares and 47,850 DSUs. The CEO's 2003 salary was C$750,000,d and no corporate incentive payout was made. The annual meeting on April 20, 2004 will elect 11 directors and appoint PricewaterhouseCoopers as auditors.
02—Key points
Key Highlights
- Revenue was flat at C$3,660.7M (2003) vs C$3,665.6M (2002), as volume growth (carloads +4%, RTMs +6%) was offset by roughly C$192M of FX impact from the ~11% Canadian dollar appreciation.
- Operating income before other specified items fell 13.5% to C$740.6M; operating ratio deteriorated to 79.8% from 76.6%.
- Reported net income was C$398.7M (diluted EPS C$2.51), but C$209.5M of that came from a non-cash FX gain on U.S.-dollar long-term debt; EPS before FX and specified items was C$2.11, down from C$2.56.
- C$228.5M special charge for labour restructuring and D&H asset impairment, plus a C$28.9M loss on the IBM computing-infrastructure outsourcing, to eliminate 820 positions by end-2005.
- Free cash after dividends was negative C$475.4M, driven by a C$300M voluntary pension contribution; net debt to net debt plus equity improved to 46.8%.
- 2004 guidance: revenue growth of 4% to 6% excluding FX, yield growth of 1.5% to 2%, and a normalized tax rate of 33% to 35%; capital spending of C$670M to C$710M.
- Annual meeting on April 20, 2004 (record date March 9, 2004) covers director elections, auditor appointment (PwC), and receipt of the 2003 financials; 158.7M shares outstanding.
03—Questions
Frequently Asked Questions
Did CP's 2003 earnings really improve, given the reported EPS of C$2.51?
Not on an underlying basis. Reported diluted EPS of C$2.51 was down from C$3.11 in 2002, but it included a C$224.4M after-tax non-cash FX gain on U.S.-dollar debt. Before FX on long-term debt and other specified items, diluted EPS was C$2.11, down from C$2.56, reflecting the strong Canadian dollar, weather, derailments and high fuel costs.
What are the main restructuring and one-time costs investors should understand?
The C$228.5M special charge covers a productivity program to eliminate 820 job positions by 2005 (C$105.5M of labour accruals plus a C$116.1M write-down of the Delaware & Hudson). A separate C$28.9M pre-tax loss arose from transferring computing assets to IBM under a seven-year, C$200M outsourcing agreement. Management expects compensation savings of about C$38M in 2004 and C$53M in 2005.
How much cash is CP generating after dividends, and why is it negative?
Free cash after dividends was negative C$475.4M in 2003, versus positive C$131.7M in 2002. The main drivers were a voluntary C$300M pension contribution in December 2003 (a prepayment of 2004–2005 requirements), lower net income, and higher capital spending. Management expects a moderately positive free cash balance in 2004, supported by higher earnings and lower pension contributions (about C$122M expected in 2004).
What does 2004 look like according to management?
Management targets revenue growth of 4% to 6% excluding FX impact, yield growth of 1.5% (possibly 2%), and a normalized effective tax rate of 33% to 35%. Capital spending is projected at C$670M to C$710M. Risks flagged include Canadian dollar strength, fuel prices, infrastructure capacity constraints, and the pending BC Rail sale to CN.
What is the shareholder vote and governance picture at the April 2004 meeting?
Shareholders will elect 11 directors (Tim Faithfull is new; Viscount Weir retires and the board shrinks from 12 to 11), appoint PricewaterhouseCoopers as auditors, and receive the 2003 financials. Ten of the 11 nominees are independent; CEO Robert Ritchie is the exception. CEO salary was C$750,000 for 2003, and no corporate incentive payout was approved because the operating income threshold was not met.
04—Continue