Did CP beat expectations and grow earnings in Q2 2018?

Results were mixed on a reported basis. Revenue grew 7% and adjusted diluted EPS rose 14% to C$3.16, but reported diluted EPS fell 7% to C$3.04. The reported decline reflects a non-cash C$44 million foreign exchange loss on U.S. dollar-denominated debt, partly offset by a C$21 million deferred tax recovery. The filing does not include analyst consensus, so a beat or miss cannot be confirmed from this document alone.

What drove the deterioration in operating ratio?

The operating ratio rose 140 basis points to 64.2%. Fuel expense increased 44% to C$230 million, driven by a 38% increase in average fuel price to US$2.79 per gallon and higher volumes. Compensation and benefits rose 2% and purchased services were up 3%. Labour negotiations and strike notices also disrupted service in the quarter, which weighed on network efficiency.

Is the labour dispute resolved?

CP reached tentative long-term agreements with both the Teamsters Canada Rail Conference and the International Brotherhood of Electrical Workers. These are tentative and still subject to ratification, so the filing does not confirm final resolution. Management expects labour stability to support the second half of 2018.

What are the main legal risks from the Lac-Mégantic derailment?

The Québec Attorney General seeks C$315 million, and a certified class action, a C$14 million subrogated insurer claim, and a US$6 million-plus Carmack claim are also pending. Consolidated liability proceedings in Québec are scheduled to begin in mid-September 2019. CP denies liability and says the outcome cannot be predicted, but it does not expect a material adverse effect on its financial position or results.

How is CP's balance sheet and capital allocation positioned?

Total debt was roughly C$8.5 billion at quarter-end, and the company issued US$500 million of 10-year notes while repaying about US$275 million and C$375 million of maturing debt. Cash fell to C$51 million, but CP retains an undrawn US$1.0 billion revolver. Share repurchases of C$559 million year-to-date and a 16% dividend increase to C$0.65 per quarter signal continued capital returns to shareholders.

CP 8-K: Earnings & Results

01—Abstract

Summary

Summary of the 8-K filed July 18, 2018. Cited figures are marked; the original filing is the authoritative source.

Canadian Pacific Railway (CP) reported second-quarter 2018 results on July 18, 2018, showing revenue growth of 7% to $1.75 billion^a (C$) and a 14% rise in adjusted diluted EPS to $3.16, while reported diluted EPS fell 7% to $3.04.

Volumes rose, with revenue ton-miles up 4%^b and carloads up 2%, and freight revenue grew 7% (9% on an FX-adjusted basis), led by energy, chemicals and plastics (+29%), intermodal (+7%) and potash (+6%). Growth was offset by a 140 basis point deterioration in operating ratio to 64.2%, driven largely by fuel costs (up 44% on higher prices and volumes) and compensation costs tied to labour negotiations and strike-related service disruptions. Management described the quarter as a good one that positions the company for a stronger second half, citing tentative long-term labour agreements with the Teamsters Canada Rail Conference and the IBEW.

Reported EPS was depressed by a $44 million^c non-cash foreign exchange loss on U.S. dollar-denominated debt, partly offset by a $21 million deferred tax recovery from state tax rate reductions in Iowa and Missouri. Excluding these items, adjusted results were the stronger story. Balance sheet activity included a $500 million (US$) 4.000% 10-year note issuance, repayment of maturing notes, a $1.0 billion (US$) revolver extension to 2023, and continued share repurchases of C$559 million year-to-date (2.5 million shares).

Cash on hand declined sharply to C$51 million^d, and free cash for the quarter was C$331 million versus C$274 million a year earlier. The filing also flags ongoing legal exposure from the 2013 Lac-Mégantic derailment, including a Québec provincial action seeking C$315 million and a consolidated liability trial scheduled for mid-September 2019.

CP denies liability and states the matters are not expected to have a material adverse effect on financial position, though the outcome cannot be predicted. The company is also adopting several accounting standards, including ASC 842 for leases, expected to materially increase right-of-use assets and lease liabilities from 2019, with no material impact on net income.

02—Key points

Key Highlights

Revenue rose 7% to C$1.75 billion, with freight revenue up 9% on a constant-currency basis, led by energy, chemicals and plastics (+29%) and intermodal (+7%).
Adjusted diluted EPS grew 14% to C$3.16 versus C$2.77, while reported diluted EPS declined 7% to C$3.04 due to a C$44 million FX loss on U.S. dollar debt.
Operating ratio deteriorated 140 basis points to 64.2% (restated 62.8% in the prior-year quarter), pressured by fuel expense up 44% on higher prices and volumes.
Labour risk eased with tentative long-term agreements reached with the Teamsters Canada Rail Conference and the IBEW after strike notices disrupted service.
Issued US$500 million 4.000% 10-year notes due 2028 and extended the US$2.0 billion revolver to June 2023; year-to-date share repurchases totalled C$559 million.
Quarter-end cash fell to C$51 million from C$338 million at year-end, while free cash rose to C$331 million from C$274 million.
Lac-Mégantic litigation continues, with a Québec action seeking C$315 million and a consolidated liability trial set for mid-September 2019; CP denies liability.

03—Questions

Frequently Asked Questions

Did CP beat expectations and grow earnings in Q2 2018?
Results were mixed on a reported basis. Revenue grew 7% and adjusted diluted EPS rose 14% to C$3.16, but reported diluted EPS fell 7% to C$3.04. The reported decline reflects a non-cash C$44 million foreign exchange loss on U.S. dollar-denominated debt, partly offset by a C$21 million deferred tax recovery. The filing does not include analyst consensus, so a beat or miss cannot be confirmed from this document alone.
What drove the deterioration in operating ratio?
The operating ratio rose 140 basis points to 64.2%. Fuel expense increased 44% to C$230 million, driven by a 38% increase in average fuel price to US$2.79 per gallon and higher volumes. Compensation and benefits rose 2% and purchased services were up 3%. Labour negotiations and strike notices also disrupted service in the quarter, which weighed on network efficiency.
Is the labour dispute resolved?
CP reached tentative long-term agreements with both the Teamsters Canada Rail Conference and the International Brotherhood of Electrical Workers. These are tentative and still subject to ratification, so the filing does not confirm final resolution. Management expects labour stability to support the second half of 2018.
What are the main legal risks from the Lac-Mégantic derailment?
The Québec Attorney General seeks C$315 million, and a certified class action, a C$14 million subrogated insurer claim, and a US$6 million-plus Carmack claim are also pending. Consolidated liability proceedings in Québec are scheduled to begin in mid-September 2019. CP denies liability and says the outcome cannot be predicted, but it does not expect a material adverse effect on its financial position or results.
How is CP's balance sheet and capital allocation positioned?
Total debt was roughly C$8.5 billion at quarter-end, and the company issued US$500 million of 10-year notes while repaying about US$275 million and C$375 million of maturing debt. Cash fell to C$51 million, but CP retains an undrawn US$1.0 billion revolver. Share repurchases of C$559 million year-to-date and a 16% dividend increase to C$0.65 per quarter signal continued capital returns to shareholders.

04—Continue

← View all 8-K filings