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Canadian Pacific Railway Co.$238.91($2.80)(1.16%)

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 CP reports record fourth-quarter and record full-year results on the strength of its operating model and disciplined approach in the marketplace
   Thursday, January 18, 2018 4:01:00 PM ET

Canadian Pacific Railway Limited (TSX: CP) (CP ) today announced its best ever fourth-quarter, with revenues up 5 percent to $1.71 billion and an operating ratio of 56.1 percent.

Fourth-quarter diluted earnings per share ("EPS") increased 159 percent to $6.77 from $2.61, which includes an income tax recovery of $527 million, primarily as a result of U.S. tax reform net of Canadian provincial tax rate increases. Adjusted diluted EPS rose 6 percent to a new quarterly record of $3.22 from $3.04.

FOURTH-QUARTER 2017 RESULTS

-- Revenues up 5 percent to $1.71 billion from $1.64 billion

-- Operating ratio improved by 10 basis points to 56.1 percent

-- Adjusted diluted EPS rose 6 percent to $3.22 from $3.04

"The fourth quarter was a record by almost every measure and should be celebrated by the men and women in the CP family who work hard every day to deliver for our customers and shareholders," said Keith Creel, CP President and CEO. "2017 was a positive year where we continued to build the foundation for sustainable long-term growth by enhancing our service offering, strengthening our team of professional railroaders, and furthering strategic partnerships with customers."

A disciplined growth strategy combined with the fundamentals of precision railroading also produced full-year diluted EPS of $16.44, up 55 percent from $10.63 and full-year adjusted diluted EPS of $11.39, an increase of 11 percent from $10.29. The full-year reported operating ratio was 57.4 percent and adjusted operating ratio was a record 58.2 percent.

FULL-YEAR 2017 RESULTS

-- Revenues increased 5 percent to $6.55 billion from $6.23 billion

-- Adjusted operating ratio improved by 40 basis-points to a record 58.2 percent from 58.6 percent

-- Adjusted diluted EPS rose 11 percent to $11.39 from $10.29

CP’s personal injury rate improved 1 percent and its FRA accident frequency improved 12 percent, making 2017 the 12th consecutive year CP has led the industry with the lowest FRA-reportable train accident frequency.

"Over the course of 2017 we built momentum thanks to our strategic approach to growth combined with our continued focus on operational excellence," Creel said. "That momentum has us well positioned to start 2018 and we look forward to delivering another year of record results in a safe and disciplined manner."

2018 FULL-YEAR GUIDANCE

"With a 2018 plan that balances strategic growth with continued productivity improvement, CP expects revenue growth in the mid-single digits and adjusted diluted EPS growth to be in the low double-digits," said Creel. "I have never been more excited about the potential for CP as we write the next chapter in our compelling story, one focused on sustainable, profitable growth."

CP’s expectations for adjusted diluted EPS growth in 2018 are based on adjusted diluted EPS of $11.39 in 2017. CP assumes the Canadian-to-U.S. dollar exchange rate will be in the range of 1.25 to 1.30 and expects an effective tax rate of 24.5 to 25 percent. As CP continues to invest in service, productivity and safety, the company plans to invest between $1.35 billion to $1.5 billion in capital programs in 2018.

CP will discuss its results with the financial community in a conference call beginning at 4:30 p.m. eastern time (2:30 p.m. mountain time) on January 18th, 2018.

Conference Call Access

Toronto participants dial in number: 1-647-427-7450

Operator assisted toll free dial in number: 1-888-231-8191

Callers should dial in 10 minutes prior to the call.

Webcast

We encourage you to access the webcast and presentation material at investor.cpr.ca

A replay of the fourth-quarter conference call will be available by phone through to February 18, 2018 at 416-849-0833 or toll free 1-855-859-2056, password 5695276.

Access to the webcast and audio file of the presentation will be made available at investor.cpr.ca

Non-GAAP Measures

For information regarding non-GAAP measures, including reconciliations to the nearest GAAP measures, see the attached supplementary schedule Non-GAAP Measures. In this news release, CP has provided a forward looking non-GAAP measure. It is not practicable to provide a reconciliation to a forward-looking reported diluted EPS, the most comparable GAAP measure, due to unknown variables and uncertainty related to future results.

Note on forward-looking information

This news release contains certain forward-looking information within the meaning of applicable securities laws relating, but not limited, to our operations, priorities and plans, anticipated financial performance, including our 2018 full-year guidance, business prospects, planned capital expenditures, programs and strategies. This forward-looking information also includes, but is not limited to, statements concerning expectations, beliefs, plans, goals, objectives, assumptions and statements about possible future events, conditions, and results of operations or performance. Forward-looking information may contain statements with words or headings such as "financial expectations", "key assumptions", "anticipate", "believe", "expect", "plan", "will", "outlook", "should" or similar words suggesting future outcomes. To the extent that CP has provided guidance using non-GAAP financial measures, the Company may not be able to provide a reconciliation to a GAAP measure, due to unknown variables and uncertainty related to future results.

Undue reliance should not be placed on forward-looking information as actual results may differ materially from the forward-looking information. Forward-looking information is not a guarantee of future performance. By its nature, CP’s forward-looking information involves numerous assumptions, inherent risks and uncertainties that could cause actual results to differ materially from the forward looking information, including but not limited to the following factors: changes to the assumptions upon which the 2018 full-year guidance is based, as set out in CP’s annual and interim reports on Form 10-K and 10-Q; changes in business strategies; general North American and global economic, credit and business conditions; risks in agricultural production such as weather conditions and insect populations; the availability and price of energy commodities; the effects of competition and pricing pressures; industry capacity; shifts in market demand; changes in commodity prices; uncertainty surrounding timing and volumes of commodities being shipped via CP; inflation; changes in laws and regulations, including regulation of rates; changes in taxes and tax rates; potential increases in maintenance and operating costs; uncertainties of investigations, proceedings or other types of claims and litigation; labour disputes; risks and liabilities arising from derailments; transportation of dangerous goods; timing of completion of capital and maintenance projects; currency and interest rate fluctuations; effects of changes in market conditions and discount rates on the financial position of pension plans and investments; and various events that could disrupt operations, including severe weather, droughts, floods, avalanches and earthquakes as well as security threats and governmental response to them, and technological changes. The foregoing list of factors is not exhaustive. These and other factors are detailed from time to time in reports filed by CP with securities regulators in Canada and the United States. Reference should be made to "Item 1A - Risk Factors" and "Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations - Forward-Looking Information" in CP’s annual and interim reports on Form 10-K and 10-Q. Readers are cautioned not to place undue reliance on forward-looking information. Forward looking information is based on current expectations, estimates and projections and it is possible that predictions, forecasts, projections, and other forms of forward-looking information will not be achieved by CP. Except as required by law, CP undertakes no obligation to update publicly or otherwise revise any forward-looking information, whether as a result of new information, future events or otherwise.

About Canadian Pacific

Canadian Pacific is a transcontinental railway in Canada and the United States with direct links to major ports on the west and east coasts, providing North American customers a competitive rail service with access to key markets in every corner of the globe. CP is growing with its customers, offering a suite of freight transportation services, logistics solutions and supply chain expertise. Visit cpr.ca to see the rail advantages of CP. CP-IR

FINANCIAL INFORMATION

INTERIM CONSOLIDATED STATEMENTS OF INCOME (unaudited)

                                                                         For the three months      For the year ended
                                                                         ended December 31         December 31
(in millions of Canadian dollars, except share and per share data)       2017         2016         2017        2016
Revenues
                                  Freight                                $     1,667  $     1,596  $    6,375  $    6,060
                                  Non-freight                            46           41           179         172
Total revenues                                                           1,713        1,637        6,554       6,232
Operating expenses
                                  Compensation and benefits              269          282          1,035       1,189
                                  Fuel                                   197          173          677         567
                                  Materials                              48           47           190         180
                                  Equipment rents                        34           41           142         173
                                  Depreciation and amortization          168          162          661         640
                                  Purchased services and other (Note 2)  244          215          1,056       905
Total operating expenses                                                 960          920          3,761       3,654
Operating income                                                         753          717          2,793       2,578
Less:
                                  Other income and charges (Note 3)      16           74           (178)       (45)
                                  Net interest expense                   116          116          473         471
Income before income tax (recovery) expense                              621          527          2,498       2,152
                                  Income tax (recovery) expense (Note 4) (363)        143          93          553
Net income                                                               $     984    $     384    $    2,405  $    1,599
Earnings per share
                                  Basic earnings per share               $     6.79   $     2.63   $    16.49  $    10.69
                                  Diluted earnings per share             $     6.77   $     2.61   $    16.44  $    10.63
Weighted-average number of shares (millions)
                                  Basic                                  145.0        146.3        145.9       149.6
                                  Diluted                                145.4        147.3        146.3       150.5
Dividends declared per share                                             $     0.5625 $     0.5000 $    2.1875 $    1.8500
See Notes to Interim Consolidated Financial Information.

INTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)

                                                                                                                  For the three months    For the year ended
                                                                                                                  ended December 31       December 31
(in millions of Canadian dollars)                                                                                 2017        2016        2017       2016
Net income                                                                                                        $     984   $     384   $    2,405 $    1,599
                           Net (loss) gain in foreign currency translation adjustments, net of hedging activities (14)        (15)        24         18
                           Change in derivatives designated as cash flow hedges                                   8           73          19         (2)
                           Change in pension and post-retirement defined benefit plans                            (33)        (571)       80         (434)
Other comprehensive (loss) income before income taxes                                                             (39)        (513)       123        (418)
Income tax recovery (expense) on above items                                                                      13          147         (65)       96
Other comprehensive (loss) income                                                                                 (26)        (366)       58         (322)
Comprehensive income                                                                                              $     958   $     18    $    2,463 $    1,277
See Notes to Interim Consolidated Financial Information.

INTERIM CONSOLIDATED BALANCE SHEETS AS AT (unaudited)

                                                               December 31  December 31
(in millions of Canadian dollars)                              2017         2016
Assets
Current assets
                      Cash and cash equivalents                $     338    $     164
                      Accounts receivable, net                 687          591
                      Materials and supplies                   152          184
                      Other current assets                     97           70
                                                               1,274        1,009
Investments                                                    182          194
Properties                                                     17,016       16,689
Goodwill and intangible assets                                 187          202
Pension asset                                                  1,407        1,070
Other assets                                                   69           57
Total assets                                                   $     20,135 $     19,221
Liabilities and shareholders’ equity
Current liabilities
                      Accounts payable and accrued liabilities $     1,238  $     1,322
                      Long-term debt maturing within one year  746          25
                                                               1,984        1,347
Pension and other benefit liabilities                          749          734
Other long-term liabilities                                    231          284
Long-term debt                                                 7,413        8,659
Deferred income taxes                                          3,321        3,571
Total liabilities                                              13,698       14,595
Shareholders’ equity
                      Share capital                            2,032        2,002
                      Additional paid-in capital               43           52
                      Accumulated other comprehensive loss     (1,741)      (1,799)
                      Retained earnings                        6,103        4,371
                                                               6,437        4,626
Total liabilities and shareholders’ equity                     $     20,135 $     19,221
See Notes to Interim Consolidated Financial Information.

INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

                                                                         For the three months    For the year ended
                                                                         ended December 31       December 31
(in millions of Canadian dollars)                                        2017        2016        2017       2016
Operating activities
Net income                                                               $     984   $     384   $    2,405 $    1,599
Reconciliation of net income to cash provided by operating activities:
                                    Depreciation and amortization        168         162         661        640
                                    Deferred income taxes                (378)       87          (210)      320
                                    Pension funding in excess of expense (59)        (33)        (237)      (138)
Foreign exchange loss (gain) on long-term debt (Note 3)                  14          74          (186)      (79)
Other operating activities, net                                          (25)        (68)        (113)      (198)
Change in non-cash working capital balances related to operations        29          162         (138)      (55)
Cash provided by operating activities                                    733         768         2,182      2,089
Investing activities
Additions to properties                                                  (445)       (280)       (1,340)    (1,182)
Proceeds from sale of properties and other assets                        13          29          42         116
Other                                                                    (2)         (1)         3          (3)
Cash used in investing activities                                        (434)       (252)       (1,295)    (1,069)
Financing activities
Dividends paid                                                           (81)        (73)        (310)      (255)
Issuance of CP Common Shares                                             6           7           45         21
Purchase of CP Common Shares                                             (13)        (10)        (381)      (1,210)
Repayment of long-term debt, excluding commercial paper                  (15)        (8)         (32)       (38)
Net repayment of commercial paper                                        --          (374)       --         (8)
Settlement of forward starting swaps                                     --          --          (22)       --
Other                                                                    --          --          --         (3)
Cash used in financing activities                                        (103)       (458)       (700)      (1,493)
Effect of foreign currency fluctuations on U.S. dollar-denominated       --          3           (13)       (13)
cash and cash equivalents
Cash position
Increase (decrease) in cash and cash equivalents                         196         61          174        (486)
Cash and cash equivalents at beginning of period                         142         103         164        650
Cash and cash equivalents at end of period                               $     338   $     164   $    338   $    164
Supplemental disclosures of cash flow information:
Income taxes paid                                                        $     61    $     48    $    425   $    322
Interest paid                                                            $     90    $     93    $    475   $    488
See Notes to Interim Consolidated Financial Information.

INTERIM CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (unaudited)

(in millions of Canadian dollars, except                         Common      Share     Additional  Accumulated    Retained   Total
common share amounts)                                            shares (in  capital   paid-in     other          earnings   shareholders’
                                                                 millions)             capital     comprehensive             equity
                                                                                                   loss
Balance at January 1, 2017                                       146.3       $   2,002 $     52    $      (1,799) $    4,371 $      4,626
                     Net income                                  --          --        --          --             2,405      2,405
                     Other comprehensive income                  --          --        --          58             --         58
                     Dividends declared                          --          --        --          --             (319)      (319)
                     Effect of stock-based compensation expense  --          --        3           --             --         3
                     CP Common Shares repurchased                (1.9)       (27)      --          --             (354)      (381)
                     Shares issued under stock option plan       0.5         57        (12)        --             --         45
Balance at December 31, 2017                                     144.9       $   2,032 $     43    $      (1,741) $    6,103 $      6,437
Balance at January 1, 2016                                       153.0       $   2,058 $     43    $      (1,477) $    4,172 $      4,796
                     Net income                                  --          --        --          --             1,599      1,599
                     Other comprehensive income                  --          --        --          (322)          --         (322)
                     Dividends declared                          --          --        --          --             (274)      (274)
                     Effect of stock-based compensation expense  --          --        14          --             --         14
                     CP Common Shares repurchased                (6.9)       (84)      --          --             (1,126)    (1,210)
                     Shares issued under stock option plan       0.2         28        (5)         --             --         23
Balance at December 31, 2016                                     146.3       $   2,002 $     52    $      (1,799) $    4,371 $      4,626
See Notes to Interim Consolidated Financial Information.

NOTES TO INTERIM CONSOLIDATED FINANCIAL INFORMATION December 31, 2017 (unaudited)

1 Basis of presentation

This unaudited interim consolidated financial information of Canadian Pacific Railway Limited ("CP", or "the Company"), expressed in Canadian dollars, reflect management’s estimates and assumptions that are necessary for their fair presentation in conformity with generally accepted accounting principles in the United States of America ("GAAP"). They do not include all disclosures required under GAAP for annual financial statements and should be read in conjunction with the 2016 annual consolidated financial statements and notes included in CP’s 2016 Annual Report on Form 10-K and 2017 interim consolidated financial statements. The accounting policies used are consistent with the accounting policies used in preparing the 2016 annual consolidated financial statements.

CP’s operations can be affected by seasonal fluctuations such as changes in customer demand and weather-related issues. This seasonality could impact quarter-over-quarter comparisons.

In management’s opinion, the unaudited interim consolidated financial information includes all adjustments (consisting of normal and recurring adjustments) necessary to present fairly such information.

2 Dispositions of properties

During the fourth quarter of 2016, the Company completed the sale of its Obico rail yard, for gross proceeds of $38 million. The Company recorded a gain on sale of $37 million before tax ($33 million after tax) within "Purchased services and other" in the interim consolidated statement of income.

3 Other income and charges

                                               For the three months ended December 31  For the year ended December 31
(in millions of Canadian dollars)              2017                2016                2017            2016
Foreign exchange loss (gain) on long-term debt $         14        $         74        $       (186)   $       (79)
Other foreign exchange gains                   (2)                 --                  (7)             (5)
Legal settlement                               --                  --                  --              25
Insurance recovery of legal settlement         --                  --                  (10)            --
Charge on hedge roll and de-designation        --                  --                  13              --
Other                                          4                   --                  12              14
Total other income and charges                 $         16        $         74        $       (178)   $       (45)

4 Income taxes

On December 22, 2017, the United States ("U.S.") enacted the "Tax Cuts and Jobs Act" which has been commonly referred to as U.S. tax reform. A significant change under this reform is the reduction of US federal statutory corporate income tax rate from 35% to 21% beginning in 2018. As a result of this and other tax rate increases in the provinces of British Columbia and Saskatchewan, the Company revalued its deferred income tax balances accordingly. The revaluation of deferred tax associated with rate changes total a net recovery of $527 million in the fourth quarter of 2017 (fourth quarter of 2016 - $nil) reducing income tax expense of the period.

For the full year in 2017, revaluations of deferred tax balances associated with changes in rates total a net recovery of $541 million (2016 - $nil).

These recoveries are estimated based on the Company’s initial analysis of the Tax Cuts and Jobs Act. Given the significant complexity of this act these estimates are subject to adjustment if further guidance becomes available.

Summary of Rail Data

                                                                    Fourth Quarter                       Year
Financial (millions, except per share data)                         2017     2016     Total    %         2017     2016     Total    %
                                                                                      Change   Change                      Change   Change
Revenues
                      Freight                                       $  1,667 $  1,596 $   71   4         $  6,375 $  6,060 $   315  5
                      Non-freight                                   46       41       5        12        179      172      7        4
Total revenues                                                      1,713    1,637    76       5         6,554    6,232    322      5
Operating expenses
                      Compensation and benefits                     269      282      (13)     (5)       1,035    1,189    (154)    (13)
                      Fuel                                          197      173      24       14        677      567      110      19
                      Materials                                     48       47       1        2         190      180      10       6
                      Equipment rents                               34       41       (7)      (17)      142      173      (31)     (18)
                      Depreciation and amortization                 168      162      6        4         661      640      21       3
                      Purchased services and other                  244      215      29       13        1,056    905      151      17
Total operating expenses                                            960      920      40       4         3,761    3,654    107      3
Operating income                                                    753      717      36       5         2,793    2,578    215      8
Less:
                      Other income and charges                      16       74       (58)     (78)      (178)    (45)     (133)    296
                      Net interest expense                          116      116      --       --        473      471      2        --
Income before income tax (recovery) expense                         621      527      94       18        2,498    2,152    346      16
                      Income tax (recovery) expense                 (363)    143      (506)    (354)     93       553      (460)    (83)
Net income                                                          $  984   $  384   $   600  156       $  2,405 $  1,599 $   806  50
Operating ratio (%)                                                 56.1     56.2     (0.1)    (10) bps  57.4     58.6     (1.2)    (120) bps
                      Basic earnings per share                      $  6.79  $  2.63  $   4.16 158       $  16.49 $  10.69 $   5.80 54
                      Diluted earnings per share                    $  6.77  $  2.61  $   4.16 159       $  16.44 $  10.63 $   5.81 55
Shares Outstanding
                      Weighted average number of shares outstanding 145.0    146.3    (1.3)    (1)       145.9    149.6    (3.7)    (2)
                      (millions)
                      Weighted average number of diluted shares     145.4    147.3    (1.9)    (1)       146.3    150.5    (4.2)    (3)
                      outstanding (millions)
Foreign Exchange
                      Average foreign exchange rate (US$/Canadian$) 0.79     0.75     0.04     5         0.77     0.75     0.02     3
                      Average foreign exchange rate (Canadian$/US$) 1.27     1.33     (0.06)   (5)       1.30     1.33     (0.03)   (2)

Summary of Rail Data (Page 2)

                                          Fourth Quarter                               Year
Commodity Data(1)                         2017     2016     Total    %      FX         2017     2016     Total   %      FX
                                                            Change   Change Adjusted                     Change  Change Adjusted
                                                                            %                                           %
                                                                            Change(2)                                   Change(2)
Freight Revenues (millions)
- Grain                                   $  425   $  439   $   (14) (3)    (1)        $  1,532 $  1,480 $   52  4      5
- Coal                                    153      152      1        1      1          631      606      25      4      4
- Potash                                  101      96       5        5      9          411      338      73      22     23
- Fertilizers and sulphur                 60       66       (6)      (9)    (6)        241      284      (43)    (15)   (14)
- Forest products                         63       63       --       --     3          265      275      (10)    (4)    (2)
- Energy, chemicals and plastics          247      214      33       15     20         898      852      46      5      7
- Metals, minerals, and consumer products 187      149      38       26     30         739      564      175     31     33
- Automotive                              70       80       (10)     (13)   (9)        293      350      (57)    (16)   (15)
- Intermodal                              361      337      24       7      8          1,365    1,311    54      4      5
Total Freight Revenues                    $  1,667 $  1,596 $   71   4      7          $  6,375 $  6,060 $   315 5      6
Freight Revenue per Revenue Ton-Miles
(RTM) (cents)
- Grain                                   4.21     4.17     0.04     1      3          4.10     4.01     0.09    2      4
- Coal                                    2.82     2.70     0.12     4      5          2.78     2.73     0.05    2      2
- Potash                                  2.62     2.49     0.13     5      8          2.61     2.38     0.23    10     11
- Fertilizers and sulphur                 5.91     6.68     (0.77)   (12)   (9)        6.27     6.87     (0.60)  (9)    (8)
- Forest products                         5.79     5.86     (0.07)   (1)    3          5.92     5.86     0.06    1      3
- Energy, chemicals and plastics          4.10     4.53     (0.43)   (9)    (6)        4.21     4.48     (0.27)  (6)    (4)
- Metals, minerals, and consumer products 6.32     6.59     (0.27)   (4)    --         6.44     6.77     (0.33)  (5)    (3)
- Automotive                              22.91    22.31    0.60     3      7          22.15    21.02    1.13    5      7
- Intermodal                              5.65     5.41     0.24     4      6          5.62     5.27     0.35    7      7
Total Freight Revenue per RTM             4.49     4.48     0.01     --     3          4.47     4.46     0.01    --     1
Freight Revenue per Carload
- Grain                                   $  3,690 $  3,659 $   31   1      3          $  3,477 $  3,426 $   51  1      3
- Coal                                    2,106    1,932    174      9      10         2,061    1,984    77      4      4
- Potash                                  2,916    2,973    (57)     (2)    1          2,988    2,904    84      3      4
- Fertilizers and sulphur                 4,118    4,593    (475)    (10)   (8)        4,178    4,769    (591)   (12)   (11)
- Forest products                         3,974    4,158    (184)    (4)    --         4,036    4,157    (121)   (3)    (1)
- Energy, chemicals and plastics          3,271    3,302    (31)     (1)    3          3,333    3,410    (77)    (2)    --
- Metals, minerals, and consumer products 2,911    2,964    (53)     (2)    2          2,894    2,888    6       --     2
- Automotive                              2,776    3,006    (230)    (8)    (4)        2,785    2,825    (40)    (1)    --
- Intermodal                              1,384    1,368    16       1      2          1,370    1,342    28      2      3
Total Freight Revenue per Carload         $  2,455 $  2,462 $   (7)  --     2          $  2,420 $  2,400 $   20  1      2
(1) In the first quarter of 2017, CP revised the grouping of revenues, and aggregated certain lines of business where "Canadian Grain" and "U.S. Grain" were aggregated into the line of business "Grain"; "Chemicals and Plastics" and "Crude" were aggregated into the line of business "Energy, Chemicals and Plastics"; and "Domestic Intermodal" and "International Intermodal" were aggregated into the line of business "Intermodal". Prior period figures have been aggregated accordingly.
(2) This earnings measure has no standardized meaning prescribed by GAAP and, therefore, is unlikely to be comparable to similar measures presented by other companies. This measure is defined and reconciled in Non-GAAP Measures of this Earnings Release.

Summary of Rail Data (Page 3)

                                          Fourth Quarter               Year
Commodity Data (Continued)(1)             2017   2016   Total  %       2017    2016    Total  %
                                                        Change Change                  Change Change
Millions of RTM
- Grain                                   10,103 10,488 (385)  (4)     37,377  36,892  485    1
- Coal                                    5,430  5,631  (201)  (4)     22,660  22,171  489    2
- Potash                                  3,832  3,842  (10)   --      15,751  14,175  1,576  11
- Fertilizers and sulphur                 1,012  996    16     2       3,849   4,140   (291)  (7)
- Forest products                         1,094  1,072  22     2       4,484   4,691   (207)  (4)
- Energy, chemicals and plastics          6,025  4,726  1,299  27      21,327  19,021  2,306  12
- Metals, minerals, and consumer products 2,956  2,271  685    30      11,468  8,338   3,130  38
- Automotive                              305    362    (57)   (16)    1,321   1,667   (346)  (21)
- Intermodal                              6,402  6,223  179    3       24,303  24,857  (554)  (2)
Total RTMs                                37,159 35,611 1,548  4       142,540 135,952 6,588  5
Carloads (thousands)(2)
- Grain                                   115.1  119.7  (4.6)  (4)     440.7   431.9   8.8    2
- Coal                                    72.7   78.6   (5.9)  (8)     306.0   305.3   0.7    --
- Potash                                  34.5   32.2   2.3    7       137.4   116.4   21.0   18
- Fertilizers and sulphur                 14.5   14.4   0.1    1       57.7    59.6    (1.9)  (3)
- Forest products                         16.0   15.1   0.9    6       65.8    66.1    (0.3)  --
- Energy, chemicals and plastics          75.5   64.9   10.6   16      269.5   250.0   19.5   8
- Metals, minerals, and consumer products 64.2   50.4   13.8   27      255.3   195.3   60.0   31
- Automotive                              25.2   26.9   (1.7)  (6)     105.1   124.1   (19.0) (15)
- Intermodal                              261.3  246.0  15.3   6       996.7   976.2   20.5   2
Total Carloads                            679.0  648.2  30.8   5       2,634.2 2,524.9 109.3  4
                              Fourth Quarter                            Year
                              2017   2016   Total    %      FX          2017     2016     Total     %      FX
                                            Change   Change Adjusted %                    Change    Change Adjusted %
                                                            Change(3)                                      Change(3)
Operating Expenses (millions)
Compensation and benefits     $  269 $  282 $   (13) (5)    (3)         $  1,035 $  1,189 $   (154) (13)   (12)
Fuel                          197    173    24       14     19          677      567      110       19     22
Materials                     48     47     1        2      4           190      180      10        6      7
Equipment rents               34     41     (7)      (17)   (15)        142      173      (31)      (18)   (17)
Depreciation and amortization 168    162    6        4      5           661      640      21        3      4
Purchased services and other  244    215    29       13     16          1,056    905      151       17     18
Total Operating Expenses      $  960 $  920 $   40   4      7           $  3,761 $  3,654 $   107   3      4
(1) In the first quarter of 2017, CP revised the grouping of revenues, and aggregated certain lines of business where "Canadian Grain" and "U.S. Grain" were aggregated into the line of business "Grain"; "Chemicals and Plastics" and "Crude" were aggregated into the line of business "Energy, Chemicals and Plastics"; and "Domestic Intermodal" and "International Intermodal" were aggregated into the line of business "Intermodal". Prior period figures have been aggregated accordingly.
(2) Certain figures have been revised to conform with current presentation.
(3) This earnings measure has no standardized meaning prescribed by GAAP and, therefore, is unlikely to be comparable to similar measures presented by other companies. This measure is defined and reconciled in Non-GAAP Measures of this Earnings Release.

Summary of Rail Data (Page 4)

                                                       Fourth Quarter                 Year
                                                       2017   2016 (1) Total  %       2017 (1) 2016 (1) Total  %
                                                                       Change Change                    Change Change
Operations Performance
Gross ton-miles ("GTMs") (millions)                    65,296 62,233   3,063  5       252,195  242,694  9,501  4
Train miles (thousands)                                7,845  7,748    97     1       30,632   30,373   259    1
Average train weight - excluding local traffic (tons)  8,897  8,588    309    4       8,806    8,614    192    2
Average train length - excluding local traffic (feet)  7,276  7,100    176    2       7,214    7,217    (3)    --
Average terminal dwell (hours)                         6.9    6.4      0.5    8       6.6      6.7      (0.1)  (1)
Average train speed (mph)(2)                           21.9   22.9     (1.0)  (4)     22.6     23.5     (0.9)  (4)
Fuel efficiency(3)                                     0.984  0.996    (0.012)(1)     0.980    0.980    --     --
U.S. gallons of locomotive fuel consumed (millions)(4) 63.9   61.6     2.3    4       245.3    236.2    9.1    4
Average fuel price (U.S. dollars per U.S. gallon)      2.43   2.01     0.42   21      2.16     1.80     0.36   20
Total employees (average)(5)                           12,165 11,803   362    3       12,034   12,082   (48)   --
Total employees (end of period)(5)                     12,163 11,653   510    4       12,163   11,653   510    4
Workforce (end of period)(6)                           12,242 11,698   544    5       12,242   11,698   544    5
Safety
FRA personal injuries per 200,000 employee-hours       1.69   2.02     (0.33) (16)    1.65     1.67     (0.02) (1)
FRA train accidents per million train miles            0.94   1.19     (0.25) (21)    0.99     1.12     (0.13) (12)
(1) Certain previously reported quarterly figures have been revised to conform with current presentation or have been updated to reflect new information as certain operating statistics are estimated and can continue to be updated as actuals settle.
(2) Average train speed is defined as a measure of the line-haul movement from origin to destination including terminal dwell hours. It excludes delay time related to customer or foreign railways, and also excludes the time and distance traveled by: i) trains used in or around CP’s yards; ii) passenger trains; and iii) trains used for repairing track.
(3) Fuel efficiency is defined as U.S. gallons of locomotive fuel consumed per 1,000 GTMs - freight and yard.
(4) Includes gallons of fuel consumed from freight, yard and commuter service but excludes fuel used in capital projects and other non-freight activities.
(5) An employee is defined as an individual currently engaged in full-time or part-time employment with CP.
(6) Workforce is defined as total employees plus contractors and consultants.

Non-GAAP Measures - Unaudited

The Company presents non-GAAP measures and cash flow information to provide a basis for evaluating underlying earnings and liquidity trends in the Company’s business that can be compared with the results of operations in prior periods. In addition, these non-GAAP measures facilitate a multi-period assessment of long-term profitability allowing management and other external users of the Company’s consolidated financial information to compare profitability on a long-term basis, including assessing future profitability, with that of the Company’s peers.

These non-GAAP measures have no standardized meaning and are not defined by GAAP and, therefore, may not be comparable to similar measures presented by other companies. The presentation of these non-GAAP measures is not intended to be considered in isolation from, as a substitute for, or as superior to, the financial information presented in accordance with GAAP.

Adjusted Performance Measures

The Company uses Adjusted income, Adjusted diluted earnings per share, Adjusted operating income and Adjusted operating ratio to evaluate the Company’s operating performance and for planning and forecasting future business operations and future profitability. These non-GAAP measures provide meaningful supplemental information regarding operating results because they exclude certain significant items that are not considered indicative of future financial trends either by nature or amount. As a result, these items are excluded for management assessment of operational performance, allocation of resources and preparation of annual budgets. These significant items may include, but are not limited to, restructuring and asset impairment charges, individually significant gains and losses from sales of assets, and certain items outside the control of management. These items may not be non-recurring. However, excluding these significant items from GAAP results allows for a consistent understanding of the Company’s consolidated financial performance when performing a multi-period assessment including assessing the likelihood of future results. Accordingly, these non-GAAP financial measures may provide insight to investors and other external users of the Company’s consolidated financial information.

Significant items that impact reported earnings for 2017 and 2016 include:

2017:

-- in the second quarter, a charge on hedge roll and de-designation of $13 million ($10 million after deferred tax) that unfavourably impacted Diluted EPS by 7 cents;

-- in the second quarter, an insurance recovery of a legal settlement of $10 million ($7 million after current tax) that favourably impacted Diluted EPS by 5 cents;

-- in the first quarter, a management transition recovery of $51 million related to the retirement of Mr. E. Hunter Harrison as CEO of CP ($39 million after deferred tax) that favourably impacted Diluted EPS by 27 cents;

-- during the course of the year, a net deferred tax recovery of $541 million as a result of the changes in income tax rates as follows:

-- in the fourth quarter, a deferred tax recovery of $527 million, primarily due to the U.S. tax reform, that favourably impacted Diluted EPS by $3.63;

-- in the third quarter, a deferred tax expense of $3 million as a result of the change in the Illinois state corporate income tax rate change that unfavourably impacted Diluted EPS by 2 cents;

-- in the second quarter, a deferred tax recovery of $17 million as a result of the change in the Saskatchewan provincial corporate income tax rate that favourably impacted Diluted EPS by 12 cents; and

-- during the course of the year, a net non-cash gain of $186 million ($162 million after deferred tax) due to FX translation of the Company’s U.S. dollar-denominated debt as follows:

-- in the fourth quarter, a $14 million loss ($12 million after deferred tax) that unfavourably impacted Diluted EPS by 8 cents;

-- in the third quarter, a $105 million gain ($91 million after deferred tax) that favourably impacted Diluted EPS by 62 cents;

-- in the second quarter, a $67 million gain ($59 million after deferred tax) that favourably impacted Diluted EPS by 40 cents; and

-- in the first quarter, a $28 million gain ($24 million after deferred tax) that favourably impacted Diluted EPS by 16 cents.

2016:

-- in the third quarter, a $25 million expense ($18 million after current tax) related to a legal settlement that unfavourably impacted Diluted EPS by 12 cents; and

-- during the course of the year, a net non-cash gain of $79 million ($68 million after deferred tax) due to FX translation of the Company’s U.S. dollar-denominated debt as follows:

-- in the fourth quarter, a $74 million loss ($64 million after deferred tax) that unfavourably impacted Diluted EPS by 43 cents;

-- in the third quarter, a $46 million loss ($40 million after deferred tax) that unfavourably impacted Diluted EPS by 27 cents;

-- in the second quarter, an $18 million gain ($16 million after deferred tax) that favourably impacted Diluted EPS by 10 cents; and

-- in the first quarter, a $181 million gain ($156 million after deferred tax) that favourably impacted Diluted EPS by $1.01.

2018 Outlook

With a 2018 plan that balances strategic growth with continued productivity improvement, CP expects revenue growth in the mid-single digits and adjusted diluted EPS growth to be in the low double-digits. CP’s expectations for adjusted diluted EPS growth in 2018 are based on adjusted diluted EPS of $11.39 in 2017. CP assumes the Canadian-to-U.S. dollar exchange rate will be in the range of $1.25 to $1.30 and expects an effective tax rate in the range of 24.5 to 25 percent. As CP continues to invest in service, productivity and safety, the company plans to invest between $1.35 billion to $1.5 billion in capital programs in 2018.

Adjusted diluted EPS is defined and discussed further below. Although CP has provided a forward-looking non-GAAP measure, it is not practicable to provide a reconciliation to a forward-looking reported diluted EPS, the most comparable GAAP measure, due to unknown variables and uncertainty related to future results. These unknown variables may include unpredicted transactions of significant value. In past years, CP has recognized significant asset impairment charges and management transition costs related to senior executives. These or other similar, large unforeseen transactions affect diluted EPS but may be excluded from CP’s Adjusted diluted EPS. Additionally, the Canadian-to-U.S. dollar exchange rate is unpredictable and can have a significant impact on CP’s reported results but may be excluded from CP’s Adjusted diluted EPS. In particular, CP excludes the foreign exchange impact of translating the Company’s U.S. dollar denominated long-term debt from Adjusted diluted EPS. Please see note on forward-looking information for further discussion.

Reconciliation of GAAP Performance Measures to Non-GAAP Performance Measures

The following tables reconcile the most directly comparable measures presented in accordance with GAAP to the non-GAAP measures for the periods ended December 31, 2017 and 2016:

Adjusted income is calculated as Net income reported on a GAAP basis less significant items.

                                                                          For the three months    For the year ended
                                                                          ended December 31       December 31
(in millions)                                                             2017        2016        2017       2016
Net income as reported                                                    $     984   $     384   $    2,405 $    1,599
Less significant items (pretax):
                 Management transition recovery                           --          --          51         --
                 Impact of FX translation on U.S. dollar-denominated debt (14)        (74)        186        79
                 Charge on hedge roll and de-designation                  --          --          (13)       --
                 Legal settlement charge                                  --          --          --         (25)
                 Insurance recovery of legal settlement                   --          --          10         --
                 Income tax rate changes                                  527         --          541        --
Add:
                 Tax effect of adjustments(1)                             (2)         (10)        36         4
Adjusted income                                                           $     469   $     448   $    1,666 $    1,549
(1) The tax effect of adjustments was calculated as the pretax effect of the adjustments multiplied by the effective tax rate for each of the above items for the periods presented.

Adjusted diluted earnings per share is calculated using Adjusted income, as defined above, divided by the weighted-average diluted shares outstanding during the period as determined in accordance with GAAP.

                                                                             For the three months    For the year ended
                                                                             ended December 31       December 31
                                                                             2017        2016        2017       2016
Diluted earnings per share as reported                                       $     6.77  $     2.61  $    16.44 $    10.63
Less significant items:
                    Management transition recovery                           --          --          0.35       --
                    Impact of FX translation on U.S. dollar-denominated debt (0.09)      (0.50)      1.27       0.53
                    Charge on hedge roll and de-designation                  --          --          (0.09)     --
                    Legal settlement charge                                  --          --          --         (0.17)
                    Insurance recovery of legal settlement                   --          --          0.07       --
                    Income tax rate changes                                  3.63        --          3.70       --
Add:
                    Tax effect of adjustments(1)                             (0.01)      (0.07)      0.25       0.02
Adjusted diluted earnings per share                                          $     3.22  $     3.04  $    11.39 $    10.29
(1) The tax effect of adjustments was calculated as the pretax effect of the adjustments multiplied by the effective tax rate for each of the above items for the periods presented.

Adjusted operating income is calculated as Operating income reported on a GAAP basis less significant items.

                                              For the three months    For the year ended
                                              ended December 31       December 31
(in millions)                                 2017        2016        2017       2016
Operating income as reported                  $     753   $     717   $    2,793 $    2,578
Less significant item:
               Management transition recovery --          --          51         --
Adjusted operating income                     $     753   $     717   $    2,742 $    2,578

Adjusted operating ratio excludes those significant items that are reported within Operating income.

                                             For the three months  For the year ended
                                             ended December 31     December 31
                                             2017       2016       2017      2016
Operating ratio as reported                  56.1%      56.2%      57.4%     58.6%
Less significant item:
              Management transition recovery --%        --%        (0.8)%    --%
Adjusted operating ratio                     56.1%      56.2%      58.2%     58.6%

Free Cash

Free cash is calculated as Cash provided by operating activities, less Cash used in investing activities, adjusted for changes in Cash and cash equivalents balances resulting from FX fluctuations. Free cash is a measure that management considers to be an indicator of liquidity. Free cash is useful to investors and other external users of the consolidated financial statements as it assists with the evaluation of the Company’s ability to generate cash from its operations without incurring additional external financing. Positive Free cash indicates the amount of cash available for reinvestment in the business, or cash that can be returned to investors through dividends, stock repurchase programs, debt retirements or a combination of these. Conversely, negative Free cash indicates the amount of cash that must be raised from investors through new debt or equity issues, reduction in available cash balances or a combination of these. Free cash should be considered in addition to, rather than as a substitute for, Cash provided by operating activities.

Reconciliation of Cash Provided by Operating Activities to Free Cash

                                                                                             For the three months    For the year ended
                                                                                             ended December 31       December 31
(in millions)                                                                                2017        2016        2017       2016
Cash provided by operating activities                                                        $     733   $     768   $    2,182 $    2,089
Cash used in investing activities                                                            (434)       (252)       (1,295)    (1,069)
Effect of foreign currency fluctuations on U.S. dollar-denominated cash and cash equivalents --          3           (13)       (13)
Free cash                                                                                    $     299   $     519   $    874   $    1,007

FX Adjusted Variance

FX adjusted variance allows certain financial results to be viewed without the impact of fluctuations in foreign currency exchange rates, thereby facilitating period to period comparisons in the analysis of trends in business performance. Financial result variances at constant currency are obtained by translating the comparable period of the prior year results denominated in U.S. dollars at the foreign exchange rates of the current period.

                              For the three months ended December 31
(in millions)                 Reported   Reported   Variance  FX Adjusted FX Adjusted
                              2017       2016       due to FX 2016        % Change
Freight revenues              $    1,667 $    1,596 $    (38) $     1,558 7
Non-freight revenues          46         41         (1)       40          15
Total revenues                1,713      1,637      (39)      1,598       7
Compensation and benefits     269        282        (5)       277         (3)
Fuel                          197        173        (7)       166         19
Materials                     48         47         (1)       46          4
Equipment rents               34         41         (1)       40          (15)
Depreciation and amortization 168        162        (2)       160         5
Purchased services and other  244        215        (5)       210         16
Total operating expenses      960        920        (21)      899         7
Operating income              $    753   $    717   $    (18) $     699   8
                              For the year ended December 31
(in millions)                 Reported  Reported  Variance  FX AdjustedFX Adjusted
                              2017      2016      due to FX 2016       % Change
Freight revenues              $  6,375  $  6,060  $   (67)  $   5,993  6
Non-freight revenues          179       172       (1)       171        5
Total revenues                6,554     6,232     (68)      6,164      6
Compensation and benefits     1,035     1,189     (9)       1,180      (12)
Fuel                          677       567       (10)      557        22
Materials                     190       180       (2)       178        7
Equipment rents               142       173       (2)       171        (17)
Depreciation and amortization 661       640       (3)       637        4
Purchased services and other  1,056     905       (10)      895        18
Total operating expenses      3,761     3,654     (36)      3,618      4
Operating income              $  2,793  $  2,578  $   (32)  $   2,546  10

Reconciliation of Net Income to Earnings before interest and tax, Adjusted earnings before interest and tax and Adjusted earnings before interest, tax, depreciation and amortization

EBIT is calculated as Operating income, less Other income and charges. Adjusted EBIT excludes significant items reported in Operating income and Other income and charges. Adjusted EBITDA is calculated as Adjusted EBIT plus Depreciation and amortization, net periodic pension and other benefit cost other than current service costs, and operating lease expense.

                                                                                              For the year ended December 31
(in millions)                                                                                 2017           2016
Net income as reported                                                                        $      2,405   $      1,599
Add:
                 Net interest expense                                                         473            471
                 Income tax expense                                                           93             553
EBIT                                                                                          2,971          2,623
Less significant items (pretax):
                 Charge on hedge roll and de-designation                                      (13)           --
                 Management transition recovery                                               51             --
                 Legal settlement charge                                                      --             (25)
                 Insurance recovery of legal settlement                                       10             --
                 Impact of FX translation on U.S. dollar-denominated debt                     186            79
Adjusted EBIT                                                                                 2,737          2,569
Less:
                 Net periodic pension and other benefit cost other than current service costs 274            167
                 Operating lease expense                                                      (104)          (111)
                 Depreciation and amortization                                                (661)          (640)
Adjusted EBITDA                                                                               $      3,228   $      3,153

Adjusted Net Debt to Adjusted EBITDA Ratio

Adjusted net debt is defined as Long-term debt, Long-term debt maturing within one year and Short-term borrowing as reported on the Company’s Consolidated Balance Sheets adjusted for pension plans deficit, the net present value of operating leases, which is discounted by the Company’s effective interest rate for each of the years presented, and Cash and cash equivalents. Adjusted net debt to Adjusted EBITDA ratio is calculated as Adjusted net debt divided by Adjusted EBITDA. The Adjusted net debt to Adjusted EBITDA ratio is a key credit measure used to assess the Company’s financial capacity. The ratio provides information on the Company’s ability to service its debt and other long-term obligations.

Reconciliation of Long-term Debt to Adjusted Net Debt

(in millions)                                                                       2017      2016
Long-term debt including long term debt maturing within one year as at December 31  $  8,159  $  8,684
Less:
                                          Pension plans in deficit                  (278)     (273)
                                          Net present value of operating leases(1)  (281)     (361)
                                          Cash and cash equivalents                 338       164
Adjusted net debt as at December 31                                                 $  8,380  $  9,154

(1) Operating leases were discounted at the Company’s effective interest rate for each of the years presented.

Calculation of Adjusted Net Debt to Adjusted EBITDA Ratio

(in millions, except for ratios)               2017   2016
Adjusted net debt as at December 31            8,380  9,154
Adjusted EBITDA for the year ended December 31 3,228  3,153
Adjusted net debt to Adjusted EBITDA ratio     2.6    2.9

SOURCE Canadian Pacific

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