Why did reported EPS decline while operating performance improved so much?

Reported diluted EPS fell to C$2.98 from C$3.09 mainly because CP recorded a C$215 million non-cash foreign exchange loss on U.S.-dollar-denominated debt and lease liabilities, after the Canadian dollar weakened against the U.S. dollar. Excluding that item, which CP treats as a significant non-GAAP adjustment, adjusted diluted EPS rose 58% to C$4.42. The FX loss is a translation effect and does not reflect cash operating performance.

What does the revised 2020 guidance imply for investors?

CP expects volume measured in revenue ton-miles to decline by mid-single digits in 2020 and adjusted diluted EPS to be roughly flat versus 2019's C$16.44. Guidance assumes a USD/CAD exchange rate of 1.40, a 25% effective tax rate, and about C$40 million lower net periodic benefit recovery than in 2019. Management emphasized that these assumptions depend on the ongoing COVID-19 impact on demand and the broader economy, so the outlook carries significant uncertainty.

Is CP's balance sheet and liquidity under pressure?

Leverage rose: long-term debt including current maturities reached C$10.07 billion at March 31, 2020, up from C$8.76 billion at year-end 2019. Adjusted net debt to adjusted EBITDA was 2.5x, comparable to 2.6x a year earlier. Cash rose to C$247 million, and the company issued new long-term notes and drew on its revolving credit facility and commercial paper. Management described the company as in a strong position on both balance sheet and liquidity, although it continued share buybacks of C$501 million during the quarter.

What operating metrics support the strong Q1 result?

Total revenue ton-miles rose 9% and freight revenue per RTM increased 6%. Average terminal dwell improved to 6.2 hours from 7.9, average train speed increased to 21.6 mph from 21.1, and the FRA train accident rate fell 39%. Energy, chemicals and plastics revenue increased 56%, with intermodal up 7%, grain up 10%, and coal down 5%. Operating expenses fell 1% to C$1.21 billion, helped by a 13% decline in purchased services and other costs.

Does this 8-K raise any new legal or regulatory concerns?

The filing restates CP's existing Lac-Megantic litigation disclosure. Several actions remain pending, including the Quebec Attorney General's claim for C$315 million, a class action, and subrogated insurer claims. These are consolidated for a joint liability trial scheduled to begin September 28, 2020. CP denies liability and is vigorously defending the claims, and it notes that the potential outcome cannot be determined at this stage. The filing also notes that the SEC's amendments to guarantor disclosure rules will affect future condensed consolidating financial information disclosures.

CP 8-K: Earnings & Results

01—Abstract

Summary

Summary of the 8-K filed April 21, 2020. Cited figures are marked; the original filing is the authoritative source.

Canadian Pacific Railway (CP) reported first-quarter 2020 results on April 21, 2020 that were strong on the operating line but muddied by a large non-cash foreign exchange loss.

Revenue rose 16% to a Q1 record C$2.04 billion^a, operating income climbed 54% to C$834 million, and the operating ratio improved 1,010 basis points to a record-low 59.2%. Reported diluted EPS fell 4% to C$2.98, but adjusted diluted EPS rose 58% to C$4.42. The gap is largely the C$215 million FX translation loss on U.S.-dollar-denominated debt and lease liabilities, which reduced reported EPS by about C$1.44 (or C$1.57 pre-tax per the non-GAAP reconciliation).

Operating fundamentals were solid, with freight revenue up 16%, RTMs up 9%, and average train speed and terminal dwell both improving. The bigger news for investors is the guidance cut tied to COVID-19. CP now expects 2020 volume measured in revenue ton-miles to fall by mid-single digits and adjusted diluted EPS to be roughly flat versus 2019's C$16.44^b.

Management maintained its C$1.6 billion^c capital expenditure plan and assumed a USD/CAD rate of 1.40 and a 25% effective tax rate. Liquidity was reinforced by new unsecured notes (US$500 million 10-year and C$300 million 30-year), though net debt rose and share repurchases of C$501 million continued. Adjusted net debt to adjusted EBITDA stood at 2.5x, and cash rose to C$247 million.

The filing itself is a Form 8-K furnishing the earnings press release as Exhibit 99.1 under Item 2.02. The information is not deemed filed under Section 18 of the Exchange Act. The attached interim financials were unaudited, and the filing also flagged the pending Lac-Megantic litigation, with a joint liability trial scheduled for September 28, 2020.

02—Key points

Key Highlights

Record Q1 revenue of C$2.04 billion, up 16% year over year, driven by Energy, chemicals and plastics (+56%) and Grain (+10%).
Record-low Q1 operating ratio of 59.2%, an improvement of 1,010 basis points from 69.3%; operating income rose 54% to C$834 million.
Reported diluted EPS fell 4% to C$2.98 because of a C$215 million non-cash FX loss on U.S.-dollar debt and lease liabilities; adjusted diluted EPS rose 58% to C$4.42.
2020 guidance cut: revenue ton-miles now expected down mid-single digits and adjusted diluted EPS roughly flat versus 2019's C$16.44, reflecting COVID-19 demand impacts.
Capital expenditure plan maintained at C$1.6 billion, with management using available track time to position the network for recovery.
Balance sheet activity: issued US$500 million 2.05% 10-year and C$300 million 3.05% 30-year notes; repurchased C$501 million of shares; adjusted net debt to EBITDA at 2.5x.
Ongoing Lac-Megantic litigation remains a contingent risk, with a consolidated joint liability trial set for September 28, 2020.

03—Questions

Frequently Asked Questions

Why did reported EPS decline while operating performance improved so much?
Reported diluted EPS fell to C$2.98 from C$3.09 mainly because CP recorded a C$215 million non-cash foreign exchange loss on U.S.-dollar-denominated debt and lease liabilities, after the Canadian dollar weakened against the U.S. dollar. Excluding that item, which CP treats as a significant non-GAAP adjustment, adjusted diluted EPS rose 58% to C$4.42. The FX loss is a translation effect and does not reflect cash operating performance.
What does the revised 2020 guidance imply for investors?
CP expects volume measured in revenue ton-miles to decline by mid-single digits in 2020 and adjusted diluted EPS to be roughly flat versus 2019's C$16.44. Guidance assumes a USD/CAD exchange rate of 1.40, a 25% effective tax rate, and about C$40 million lower net periodic benefit recovery than in 2019. Management emphasized that these assumptions depend on the ongoing COVID-19 impact on demand and the broader economy, so the outlook carries significant uncertainty.
Is CP's balance sheet and liquidity under pressure?
Leverage rose: long-term debt including current maturities reached C$10.07 billion at March 31, 2020, up from C$8.76 billion at year-end 2019. Adjusted net debt to adjusted EBITDA was 2.5x, comparable to 2.6x a year earlier. Cash rose to C$247 million, and the company issued new long-term notes and drew on its revolving credit facility and commercial paper. Management described the company as in a strong position on both balance sheet and liquidity, although it continued share buybacks of C$501 million during the quarter.
What operating metrics support the strong Q1 result?
Total revenue ton-miles rose 9% and freight revenue per RTM increased 6%. Average terminal dwell improved to 6.2 hours from 7.9, average train speed increased to 21.6 mph from 21.1, and the FRA train accident rate fell 39%. Energy, chemicals and plastics revenue increased 56%, with intermodal up 7%, grain up 10%, and coal down 5%. Operating expenses fell 1% to C$1.21 billion, helped by a 13% decline in purchased services and other costs.
Does this 8-K raise any new legal or regulatory concerns?
The filing restates CP's existing Lac-Megantic litigation disclosure. Several actions remain pending, including the Quebec Attorney General's claim for C$315 million, a class action, and subrogated insurer claims. These are consolidated for a joint liability trial scheduled to begin September 28, 2020. CP denies liability and is vigorously defending the claims, and it notes that the potential outcome cannot be determined at this stage. The filing also notes that the SEC's amendments to guarantor disclosure rules will affect future condensed consolidating financial information disclosures.

04—Continue

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