MONTREAL, July 20 /PRNewswire-FirstCall/ - CN (TSX: CNR)(NYSE: CNI) today reported its financial and operating results for the second quarter ended June 30, 2009.
Second-quarter 2009 highlights
- Net income declined to C$387 million, or C$0.82 per diluted share, from
year-earlier net income of C$459 million, or C$0.95 per diluted share,
as a result of depressed North American and global economies driving
lower volumes.
- Revenues declined 15 per cent to C$1,781 million, carloads declined
22 per cent to 928,000, and revenue ton-miles declined 14 per cent,
with weakness in almost all market segments.
- Operating expenses declined 14 per cent to C$1,198 million, reflecting
a significant reduction in year-over-year fuel prices and extensive
cost-containment measures in response to lower traffic.
- Operating income declined 18 per cent to C$583 million, while the
operating ratio increased by one percentage point to 67.3 per cent.
- Six-month 2009 free cash flow increased to C$463 million from
C$225 million generated during the first-half of 2008.(1)
CN's second-quarter 2009 net income included:
- A deferred income tax recovery of C$28 million ($0.06 per diluted
share), of which C$12 million (C$0.03 per diluted share) resulted from
the enactment of a lower provincial corporate income tax rate and
C$16 million (C$0.03 per diluted share) resulted from the
re-capitalization of a foreign investment.
- Costs of C$2 million after-tax (nil per diluted share) related to the
acquisition of the principal rail lines of the Elgin, Joliet and
Eastern Railway Company (EJ&E).
Excluding these items, CN reported adjusted second-quarter 2009 net income of C$361 million, or C$0.76 per diluted share.(1)
The strengthening of the U.S. dollar affected the conversion of the Company's U.S.-dollar-denominated revenues and expenses, increasing second-quarter 2009 net income by C$15 million, or C$0.03 per diluted share.
CN's second-quarter 2008 net income also included a deferred income tax recovery of C$23 million (C$0.05 per diluted share) resulting from the enactment of lower provincial corporate income tax rates. Excluding that item, adjusted second-quarter 2008 net income was C$436 million, or C$0.90 per diluted share.(1)
E. Hunter Harrison, president and chief executive officer, said: 'The second quarter of 2009 saw a continuation of significant weakness in most of our commodity groups as a result of the current recession in North America and difficult global economic conditions, with all groups but coal registering double-digit declines in carloadings. The biggest declines were in metals and minerals shipments, principally on account of a sharp reduction in short-haul iron ore movements in northern Minnesota, and in automotive and forest products traffic. Intermodal, grain and fertilizers, and petroleum and chemicals saw lesser declines. Coal was a bright spot, however, as a result of higher U.S. shipments resulting from our acquisition of the EJ E.
'While the current economic environment continues to affect our business significantly and we remain focused on adjusting expenses accordingly, we see some signs that several markets are stabilizing and we hope the economy will begin to recover in the second half of this year. CN's solid cost structure and operational expertise will position us well to meet the challenges and opportunities that lie ahead.'
Second-quarter 2009 revenues, traffic volumes and expenses
The 15 per cent decline in second-quarter 2009 revenues resulted from significantly lower volumes in almost all markets as a result of prevailing economic conditions in the North American and global economies, and a lower fuel surcharge due to year-over-year decreases in applicable fuel prices as well as lower volumes. Partly offsetting these factors were the positive translation impact of the weaker Canadian dollar on U.S.-dollar-denominated revenues, freight rate increases, and a positive change in traffic mix.
Second-quarter 2009 carloadings declined 22 per cent to 928,000 from 1,188 thousand in the year-earlier period. Revenue ton-miles, measuring the relative weight and distance of rail freight transported by CN, declined by 14 per cent from second-quarter 2008.
Rail freight revenue per revenue ton-mile, a measurement of yield defined as revenue earned on the movement of a ton of freight over one mile, was flat in the second quarter of 2009 when compared to the same period of 2008. The positive translation impact of the weaker Canadian dollar and freight rate increases were entirely offset during the quarter by the impact of a lower fuel surcharge and an increase in the average length of haul.
The 14 per cent decline in second-quarter 2009 operating expenses was primarily due to lower fuel costs and reduced expenses for purchased services and material and labor, partly reflecting the impact of reduced freight volumes and management's cost-reduction initiatives. These factors were partially offset by the negative translation impact of the weaker Canadian dollar on U.S.-dollar-denominated expenses.
(1) Please see discussion and reconciliation of non-GAAP adjusted
performance measures in the attached supplementary schedule, Non-GAAP
Measures.
Forward-Looking Statements
This news release contains forward-looking statements. CN cautions that, by their nature, forward-looking statements involve risk, uncertainties and assumptions. Implicit in these statements, particularly in respect of long-term growth opportunities, is the Company's assumption that such growth opportunities are less affected by the current situation in the North American and global economies. The Company cautions that its assumptions may not materialize and that the current economic conditions render such assumptions, although reasonable at the time they were made, subject to greater uncertainty. The Company cautions that its results could differ materially from those expressed or implied in such forward-looking statements. Important factors that could cause such differences include, but are not limited to, the effects of adverse general economic and business conditions, including the current deep recession in the North American economy and the global economic contraction in 2009, industry competition, inflation, currency and interest rate fluctuations, changes in fuel prices, legislative and/or regulatory developments, compliance with environmental laws and regulations, actions by regulators, various events which could disrupt operations, including natural events such as severe weather, droughts, floods and earthquakes, labor negotiations and disruptions, environmental claims, uncertainties of investigations, proceedings or other types of claims and litigation, risks and liabilities arising from derailments, and other risks detailed from time to time in reports filed by CN with securities regulators in Canada and the United States. Reference should be made to 'Management's Discussion and Analysis' in CN's annual and interim reports, Annual Information Form and Form 40-F filed with Canadian and U.S. securities regulators, available on CN's website, for a summary of major risks.
CN assumes no obligation to update or revise forward-looking statements to reflect future events, changes in circumstances, or changes in beliefs, unless required by applicable laws. In the event CN does update any forward-looking statement, no inference should be made that CN will make additional updates with respect to that statement, related matters, or any other forward-looking statement.
CN - Canadian National Railway Company and its operating railway subsidiaries - spans Canada and mid-America, from the Atlantic and Pacific oceans to the Gulf of Mexico, serving the ports of Vancouver, Prince Rupert, B.C., Montreal, Halifax, New Orleans, and Mobile, Ala., and the key metropolitan areas of Toronto, Buffalo, Chicago, Detroit, Duluth, Minn./Superior, Wis., Green Bay, Wis., Minneapolis/St. Paul, Memphis, and Jackson, Miss., with connections to all points in North America. For more information on CN, visit the Company's website at www.cn.ca.
CANADIAN NATIONAL RAILWAY COMPANY
CONSOLIDATED STATEMENT OF INCOME (U.S. GAAP)
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(In millions, except per share data)
Three months ended Six months ended
June 30 June 30
---------------------- ---------------------
2009 2008 2009 2008
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(Unaudited)
Revenues $ 1,781 $ 2,098 $ 3,640 $ 4,025
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Operating expenses
Labor and fringe benefits 413 392 867 853
Purchased services and
material 253 283 544 568
Fuel 174 399 356 709
Depreciation and
amortization 199 176 402 351
Equipment rents 70 60 152 124
Casualty and other 89 81 255 190
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Total operating expenses 1,198 1,391 2,576 2,795
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Operating income 583 707 1,064 1,230
Interest expense (108) (87) (220) (173)
Other income (Note 3) 9 9 170 3
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Income before income taxes 484 629 1,014 1,060
Income tax expense (Note 7) (97) (170) (203) (290)
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Net income $ 387 $ 459 $ 811 $ 770
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Earnings per share
(Note 10)
Basic $ 0.83 $ 0.96 $ 1.73 $ 1.61
Diluted $ 0.82 $ 0.95 $ 1.72 $ 1.59
Weighted-average number
of shares
Basic 468.7 476.4 468.5 479.6
Diluted 473.0 482.0 472.7 485.3
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See accompanying notes to unaudited consolidated financial statements.
CANADIAN NATIONAL RAILWAY COMPANY
CONSOLIDATED BALANCE SHEET (U.S. GAAP)
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(In millions)
June 30 December 31 June 30
2009 2008 2008
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(Unaudited) (Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 431 $ 413 $ 161
Accounts receivable (Note 4) 865 913 843
Material and supplies 258 200 217
Deferred income taxes 113 98 67
Other 96 132 88
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1,763 1,756 1,376
Properties 23,160 23,203 20,864
Intangible and other assets 1,814 1,761 2,113
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Total assets $ 26,737 $ 26,720 $ 24,353
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Liabilities and shareholders' equity
Current liabilities:
Accounts payable and other $ 1,270 $ 1,386 $ 1,289
Current portion of long-term debt 506 506 85
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1,776 1,892 1,374
Deferred income taxes 5,443 5,511 5,100
Other liabilities and deferred
credits 1,319 1,353 1,381
Long-term debt (Note 4) 7,093 7,405 6,389
Shareholders' equity:
Common shares 4,203 4,179 4,208
Accumulated other comprehensive
loss (207) (155) (1)
Retained earnings 7,110 6,535 5,902
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11,106 10,559 10,109
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Total liabilities and shareholders'
equity $ 26,737 $ 26,720 $ 24,353
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See accompanying notes to unaudited consolidated financial statements.
CANADIAN NATIONAL RAILWAY COMPANY
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (U.S. GAAP)
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(In millions)
Three months ended Six months ended
June 30 June 30
---------------------- ---------------------
2009 2008 2009 2008
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(Unaudited)
Common shares (1)
Balance, beginning of
period $ 4,188 $ 4,241 $ 4,179 $ 4,283
Stock options
exercised and other 15 19 24 42
Share repurchase
programs (Note 4) - (52) - (117)
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Balance, end of period $ 4,203 $ 4,208 $ 4,203 $ 4,208
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Accumulated other
comprehensive loss
Balance, beginning of
period $ (126) $ 9 $ (155) $ (31)
Other comprehensive
income (loss):
Unrealized foreign
exchange gain (loss) on:
Translation of the net
investment in foreign
operations (583) (47) (332) 140
Translation of U.S.
dollar-denominated
long-term debt
designated as a hedge
of the net investment
in U.S. subsidiaries 580 41 322 (141)
Pension and other
postretirement benefit
plans (Note 6):
Amortization of net
actuarial loss (gain)
included in net periodic
benefit cost (income) 1 (1) 1 (2)
Amortization of prior
service cost included
in net periodic benefit
cost (income) - 6 1 12
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Other comprehensive income
(loss) before income taxes (2) (1) (8) 9
Income tax recovery
(expense) (79) (9) (44) 21
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Other comprehensive income
(loss) (81) (10) (52) 30
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Balance, end of period $ (207) $ (1) $ (207) $ (1)
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Retained earnings
Balance, beginning of
period $ 6,841 $ 5,823 $ 6,535 $ 5,925
Net income 387 459 811 770
Share repurchase
programs (Note 4) - (271) - (573)
Dividends (118) (109) (236) (220)
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Balance, end of period $ 7,110 $ 5,902 $ 7,110 $ 5,902
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See accompanying notes to unaudited consolidated financial statements.
(1) During the three and six months ended June 30, 2009, the Company
issued 0.6 million and 0.8 million common shares, respectively, as a
result of stock options exercised. At June 30, 2009, the Company had
469.0 million common shares outstanding.
CANADIAN NATIONAL RAILWAY COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS (U.S. GAAP)
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(In millions)
Three months ended Six months ended
June 30 June 30
---------------------- ---------------------
2009 2008 2009 2008
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(Unaudited)
Operating activities
Net income $ 387 $ 459 $ 811 $ 770
Adjustments to reconcile
net income to net cash
provided from operating
activities:
Depreciation and
amortization 199 176 402 351
Deferred income taxes 40 89 50 114
Gain on disposal of
property (Note 3) - - (157) -
Other changes in:
Accounts receivable 28 (233) 29 (468)
Material and supplies 4 (6) (49) (54)
Accounts payable and
other (9) (39) (141) (98)
Other current assets 5 22 41 51
Other (22) (59) (36) (92)
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Cash provided from
operating activities 632 409 950 574
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Investing activities
Property additions (309) (352) (496) (529)
Acquisitions, net of cash
acquired (Note 3) - - (373) -
Disposal of property
(Note 3) 40 - 150 -
Other, net 33 9 37 20
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Cash used by investing
activities (236) (343) (682) (509)
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Financing activities
Issuance of long-term debt - 1,597 1,440 2,652
Reduction of long-term debt (187) (1,418) (1,459) (1,998)
Issuance of common shares
due to exercise of stock
options and related excess
tax benefits realized 13 16 15 34
Repurchase of common shares - (323) - (690)
Dividends paid (118) (109) (236) (220)
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Cash used by financing
activities (292) (237) (240) (222)
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Effect of foreign exchange
fluctuations on U.S.
dollar-denominated cash
and cash equivalents (22) (2) (10) 8
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Net increase (decrease) in
cash and cash equivalents 82 (173) 18 (149)
Cash and cash equivalents,
beginning of period 349 334 413 310
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Cash and cash equivalents,
end of period $ 431 $ 161 $ 431 $ 161
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Supplemental cash flow
information
Net cash receipts from
customers and other $ 1,834 $ 1,886 $ 3,738 $ 3,634
Net cash payments for:
Employee services,
suppliers and other
expenses (970) (1,215) (2,332) (2,554)
Interest (93) (90) (199) (190)
Workforce reductions (4) (6) (8) (12)
Personal injury and
other claims (35) (18) (65) (44)
Pensions (28) (31) (28) (53)
Income taxes (72) (117) (156) (207)
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Cash provided from
operating activities $ 632 $ 409 $ 950 $ 574
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See accompanying notes to unaudited consolidated financial statements.
CANADIAN NATIONAL RAILWAY COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (U.S. GAAP)
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Note 1 - Basis of presentation
In management's opinion, the accompanying unaudited Interim Consolidated Financial Statements and Notes thereto, expressed in Canadian dollars, and prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP) for interim financial statements, contain all adjustments (consisting of normal recurring accruals) necessary to present fairly Canadian National Railway Company's (the Company) financial position as at June 30, 2009, December 31, 2008, and June 30, 2008, and its results of operations, changes in shareholders' equity and cash flows for the three and six months ended June 30, 2009 and 2008.
These unaudited Interim Consolidated Financial Statements and Notes thereto have been prepared using accounting policies consistent with those used in preparing the Company's 2008 Annual Consolidated Financial Statements, except as disclosed in Note 2 - Accounting change. While management believes that the disclosures presented are adequate to make the information not misleading, these unaudited Interim Consolidated Financial Statements and Notes thereto should be read in conjunction with the Company's Interim Management's Discussion and Analysis (MD A) and the 2008 Annual Consolidated Financial Statements and Notes thereto.
These unaudited Interim Consolidated Financial Statements and Notes thereto were approved by the Company's Board of Directors and issued on July 20, 2009. As at such date, there were no material subsequent events affecting any conditions that existed at the date of the balance sheet, including any estimates inherent in the process of preparing the financial statements.
Note 2 - Accounting change
On January 1, 2009, the Company adopted Statement of Financial Accounting Standards (SFAS) # 141 (R), 'Business Combinations,' which became effective for acquisitions with an acquisition date on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. Until December 31, 2008, the Company was subject to the requirements of SFAS # 141, 'Business Combinations,' which required that acquisition-related costs be included as part of the purchase cost of an acquired business. As such, the Company had reported acquisition-related costs in Other current assets pending the closing of its acquisition of the Elgin, Joliet and Eastern Railway Company (EJ E), which had been subject to an extensive U.S. Surface Transportation Board (STB) approval process. On January 31, 2009, the Company completed its acquisition of the EJ E and accounted for the acquisition under SFAS # 141 (R). The Company incurred acquisition-related costs, including costs to obtain regulatory approval, of approximately $49 million, of which $3 million was incurred in the second quarter of 2009. These costs were expensed and reported in Casualty and other in the Consolidated Statement of Income for the six months ended June 30, 2009 pursuant to SFAS # 141 (R) requirements. At the time of adoption, this change in accounting policy had the effect of decreasing net income by $28 million ($0.06 per basic or diluted earnings per share) and Other current assets by $46 million. This change had no effect on the Consolidated Statement of Cash Flows. Disclosures prescribed by SFAS # 141 (R) are presented in Note 3 - Acquisition and disposal of property.
Note 3 - Acquisition and disposal of property
Acquisition of Elgin, Joliet and Eastern Railway Company
On January 31, 2009, the Company acquired the principal rail lines of the EJ E for a total cash consideration of U.S.$300 million (Cdn$373 million), paid with cash on hand. The EJ E is a short-line railway previously owned by U.S. Steel Corporation (U.S. Steel) that operates over 198 miles of track and serves steel mills, petrochemical customers, utility plants and distribution centers in Illinois and Indiana, as well as connects with all the major railroads entering Chicago. Under the terms of the acquisition agreement, the Company acquired substantially all of the railroad operations of EJ E, except those that support the Gary Works site in northwest Indiana and the steelmaking operations of U.S. Steel. The acquisition is expected to drive new efficiencies and operating improvements on CN's network as a result of streamlined rail operations and reduced congestion in the Chicago area.
The Company and EJ E had entered into the acquisition agreement on September 25, 2007, and the Company had filed an application for authorization of the transaction with the STB on October 30, 2007. Following an extensive regulatory approval process, which included an Environmental Impact Statement (EIS) that resulted in conditions imposed to mitigate municipalities' concerns regarding increased rail activity, expected along the EJ E line, the STB approved the transaction on December 24, 2008. The STB also imposed a five-year monitoring and oversight condition, during which the Company is required to file with the STB monthly operational reports as well as quarterly reports on the implementation status of the STB-imposed mitigation conditions. This permits the STB to take further action if there is a material change in the facts and circumstances upon which it relied in imposing the specific mitigation conditions. Over the next few years, the Company has committed to spend approximately U.S.$100 million for railroad infrastructure improvements and over U.S.$60 million under a series of agreements with individual communities, a comprehensive voluntary mitigation program that addresses municipalities' concerns, and additional STB-imposed conditions that the Company has accepted with one exception. The Company has filed an appeal challenging the STB's condition requiring the installation of grade separations at two locations along the EJ E at Company funding levels significantly beyond prior STB practice. Although the STB granted the Company's application to acquire control of the EJ E, challenges have since been made by certain communities as to the sufficiency of the EIS which, if successful, could result in further consideration of the environmental impact of the transaction and mitigation conditions imposed. The Company strongly disputes the merit of these challenges, and has intervened in support of the STB's defense against them.
