Why did Canadian Pacific's reported net income drop so sharply in Q1 2004?

The decline was mainly accounting-driven. CP recorded a $13.3 million foreign exchange loss on its U.S. dollar-denominated long-term debt in Q1 2004, compared with a $70.8 million gain in Q1 2003, as the Canadian dollar strengthened. Excluding that item, net income was roughly flat to slightly higher year over year.

How did operations perform despite the weather and avalanche disruptions?

Operations held up reasonably well. Revenue ton-miles rose 10% and total revenue rose 0.9% to $886.6 million, but operating income was $116.0 million versus $117.9 million, as the stronger Canadian dollar and about $25 million in weather and avalanche costs offset volume growth. Management said the business rebounded strongly in March.

What is the outlook for 2004?

CP expects 2004 revenue to grow 4% to 6% over 2003 and targets diluted EPS growth of 5% to 10% excluding FX on long-term debt, relative to restated 2003 EPS of $2.07. The forecast assumes an exchange rate of C$1.33 per U.S. dollar and WTI crude at US$33 per barrel, and management expects FX headwinds to ease from Q2 if currency levels hold.

How is the stronger Canadian dollar affecting CP's results?

Because a large share of CP's revenues and expenses are denominated in U.S. dollars, a stronger Canadian dollar reduces both reported revenue and costs and cuts operating income more than proportionally. In Q1 2004 the impact was about $59 million on revenue, $46 million on operating expenses, and $13 million on operating income, or about $0.02 per diluted share after tax.

Are there capacity constraints or capital spending plans investors should watch?

Yes. Management expects capacity to remain tight in some western corridors in the medium term, particularly for bulk and intermodal traffic. CP plans to add 41 high-performance locomotives in Q2 2004 and 25 more in Q4 2004, and it reported $499 million in multi-year capital commitments, mainly for locomotive overhauls, plus $140.1 million in Q1 capital additions.

CP 8-K SEC Disclosure — Apr 27, 2004

01—Abstract

Summary

Summary of the 6-K filed April 27, 2004. Cited figures are marked; the original filing is the authoritative source.

Canadian Pacific Railway (CP) reported first-quarter 2004 results on April 27, 2004, showing a sharp decline in reported net income to $23.5 million^a ($0.15 diluted EPS) from $101.9 million ($0.64) a year earlier.

The drop was driven almost entirely by a $13.3 million^b foreign exchange loss on long-term debt, compared with a $70.8 million gain in Q1 2003. Excluding that non-GAAP item, net income was $37.8 million and EPS $0.24, slightly ahead of the prior-year $0.23, despite a roughly $25 million hit from severe weather and a major January avalanche in the western corridors. Underlying operations showed strength.

Freight volumes (revenue ton-miles) rose 10%, revenue rose 1% to $886.6 million^c, and operating income was roughly flat at $116.0 million. A stronger Canadian dollar (up about 16% year over year against the U.S. dollar) reduced revenues by about $59 million and operating income by about $13 million. Management described a sharp demand surge, with March revenue ton-miles up 17% from February, and said the momentum carried into the second quarter.

Management guided to 2004 revenue growth of 4% to 6% and diluted EPS growth (excluding FX on long-term debt) of 5% to 10% over restated 2003 EPS of $2.07^d. Guidance assumes an exchange rate of C$1.33 per U.S. dollar and WTI crude at US$33 per barrel.

The filing also notes restatements of 2003 comparatives for asset retirement obligations and stock option expensing, which had only minimal impact on Q1 2003 net income (a $0.4 million decrease). Investors should note that management is also tracking capacity constraints in the western network and a 2004 capex program that includes 41 locomotives in Q2 and 25 more in Q4.

02—Key points

Key Highlights

Reported net income fell 77% to $23.5 million ($0.15 diluted EPS) from $101.9 million ($0.64), primarily due to a $13.3 million FX loss on long-term debt versus a $70.8 million gain a year earlier.
Excluding FX on long-term debt, net income was $37.8 million and EPS $0.24, versus $0.23 in Q1 2003, a 4.3% increase (non-GAAP).
Revenue ton-miles rose 10% and carloads rose 10.7%, with intermodal revenue up 12% and bulk commodity revenue up 5%, offset by a 10% decline in merchandise revenue largely due to the stronger Canadian dollar.
Operating income was $116.0 million versus $117.9 million, and the operating ratio worsened slightly to 86.9% from 86.6%, with the strong Canadian dollar reducing operating income by about $13 million.
Weather and an avalanche in January cost roughly $25 million in operating income and about $0.10 per share, but March revenue ton-miles rose 17% over February, and that momentum carried into Q2.
2004 guidance: revenue growth of 4% to 6% and diluted EPS growth of 5% to 10% (excluding FX on LTD) over restated 2003 EPS of $2.07, assuming C$1.33/US$ and US$33/bbl WTI.
Long-term debt rose to $3.56 billion from $3.35 billion at year-end 2003, partly from a US$145 million 5.41% senior secured locomotive financing due 2024; cash rose to $260.8 million.

03—Questions

Frequently Asked Questions

Why did Canadian Pacific's reported net income drop so sharply in Q1 2004?
The decline was mainly accounting-driven. CP recorded a $13.3 million foreign exchange loss on its U.S. dollar-denominated long-term debt in Q1 2004, compared with a $70.8 million gain in Q1 2003, as the Canadian dollar strengthened. Excluding that item, net income was roughly flat to slightly higher year over year.
How did operations perform despite the weather and avalanche disruptions?
Operations held up reasonably well. Revenue ton-miles rose 10% and total revenue rose 0.9% to $886.6 million, but operating income was $116.0 million versus $117.9 million, as the stronger Canadian dollar and about $25 million in weather and avalanche costs offset volume growth. Management said the business rebounded strongly in March.
What is the outlook for 2004?
CP expects 2004 revenue to grow 4% to 6% over 2003 and targets diluted EPS growth of 5% to 10% excluding FX on long-term debt, relative to restated 2003 EPS of $2.07. The forecast assumes an exchange rate of C$1.33 per U.S. dollar and WTI crude at US$33 per barrel, and management expects FX headwinds to ease from Q2 if currency levels hold.
How is the stronger Canadian dollar affecting CP's results?
Because a large share of CP's revenues and expenses are denominated in U.S. dollars, a stronger Canadian dollar reduces both reported revenue and costs and cuts operating income more than proportionally. In Q1 2004 the impact was about $59 million on revenue, $46 million on operating expenses, and $13 million on operating income, or about $0.02 per diluted share after tax.
Are there capacity constraints or capital spending plans investors should watch?
Yes. Management expects capacity to remain tight in some western corridors in the medium term, particularly for bulk and intermodal traffic. CP plans to add 41 high-performance locomotives in Q2 2004 and 25 more in Q4 2004, and it reported $499 million in multi-year capital commitments, mainly for locomotive overhauls, plus $140.1 million in Q1 capital additions.

04—Continue

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