CN (TSX: CNR, NYSE: CNI) today reported its financial and operating
results for the third quarter ended September 30, 2021, showing
strong performance across nearly all key metrics, with adjusted
diluted earnings per share ("EPS") of C$1.52, up 10 per cent, an
adjusted operating ratio of 59.0 per cent, an improvement of 90
basis points, and revenues of C$3.6 billion, up five per cent over
the third quarter of 2020. For the same period, the Company
reported a 72 per cent year-over-year increase in diluted EPS to
C$2.37 and an operating ratio of 62.7 per cent.
Financial results
highlightsThird-quarter 2021 compared to
third-quarter 2020
- Revenues of C$3,591 million, an
increase of C$182 million or five per cent.
- Operating income of C$1,341
million, a decrease of two per cent, and adjusted operating income
of C$1,471 million, an increase of eight per cent on an adjusted
basis. (1)
- Diluted EPS of C$2.37, an increase
of 72 per cent, and adjusted diluted EPS of C$1.52, an increase of
10 per cent. (1)
- Operating ratio of 62.7 per cent,
an increase of 2.8 points, and adjusted operating ratio of 59.0 per
cent, an improvement of 0.9 points. (1)
- Operating income and operating
ratio were impacted by transaction-related costs for the terminated
CN merger agreement with KCS, a workforce reduction provision, and
advisory fees related to shareholder matters. (1)
- For the nine months ended September
30, 2021, after accounting for all direct and incremental expenses
as well as income generated from the merger termination fee, CN
recorded additional income of C$705 million (C$616 million
after-tax), as a result of its strategic decision to bid for
KCS.
- Free cash flow for the first nine months of 2021 was C$2,034
million compared to C$2,087 million for the same period in 2020.
(1)
“CN’s dedicated railroaders produced strong
financial and operating results this quarter, despite headwinds
from severe wildfires in Western Canada that caused a prolonged
disruption to CN’s main line to Vancouver in July. We are proud of
the team’s efforts and dedication, as well as the progress we are
making on executing our strategic plan. This includes delivering
immediate shareholder value while maintaining our long-term
commitment to safety, customer service and sustainable value
creation. Our entire organization is highly confident that the
investments we have made in safety, technology and capacity over
the past three years will support the Company in delivering
enhanced financial results in the last quarter of this year, as
well as in 2022 and beyond. Similarly, we believe that we are well
positioned to achieve our targets of C$700 million of additional
operating income and a 57 per cent operating ratio for 2022. We are
already seeing solid progress toward these goals and are working to
continue to deliver results to benefit all CN shareholders.”
- JJ Ruest, President and Chief
Executive Officer, CN
Operating
performanceThird-quarter 2021 compared to
third-quarter 2020Operating performance improved in the
third quarter of 2021 when compared to the same period in 2020.
Gross ton miles (GTMs) decreased as operations were impacted by
reduced volumes of Canadian grain, compared to record volumes in
the third quarter of 2020. The Company continued to focus on
efficiency and network fluidity, resulting in significant
improvements in Through network train speed, Through dwell and Car
velocity. The Company also achieved an all-time record Fuel
efficiency.
- Federal Railroad Association (FRA)
injury frequency rate improved by seven per cent and the accident
rate increased by 21 per cent, respectively.
- Fuel efficiency improved by one per
cent to 0.84 US gallons of locomotive fuel consumed per 1,000
GTMs.
- Train length (in feet) decreased by
three per cent.
- Through dwell (entire railroad,
hours) improved by 20 per cent.
- Car velocity (car miles per day)
improved by 17 per cent.
- Through network train speed (mph)
increased by 11 per cent.
Reaffirming 2021 financial outlook
(2)CN expects to deliver 10 per cent adjusted diluted EPS
growth, versus 2020 adjusted diluted EPS of C$5.31(1). CN now
assumes total revenue ton miles (RTMs) in 2021 will increase in the
low single-digit range versus 2020 (compared to its September 17,
2021 assumption of an increase in the mid single-digit range).
Furthermore, CN is still targeting free cash flow in the range of
C$3.0 billion to C$3.3 billion in 2021 compared to C$3.2 billion in
2020.
Delivering value for
shareholdersAs previously announced on September 17, CN
has resumed share repurchases under the plan previously approved by
CN’s Board of Directors in January 2021 and expects to complete the
remaining C$1.1 billion of share repurchases under the plan by the
end of January 2022.
Third-quarter 2021 revenues, traffic
volumes and expensesThe five per cent increase in revenues
for the third quarter of 2021, when compared to the same period in
2020, was mainly due to freight rate increases, higher applicable
fuel surcharge rates, and an increase in intermodal ancillary
services. These gains were partially offset by the negative
translation impact of a stronger Canadian dollar and lower volumes
of Canadian grain in terms of RTMs, compared to record volumes in
the third quarter of 2020.
RTMs, measuring the relative weight and distance
of freight transported by CN, declined by one per cent compared to
the year-earlier period. Freight revenue per RTM increased by six
per cent compared to the year-earlier period, mainly driven by a
significant decrease in the average length of haul, freight rate
increases and higher applicable fuel surcharge rates; partly offset
by the negative translation impact of a stronger Canadian
dollar.
Operating expenses for the third quarter of 2021
increased by ten per cent to C$2,250 million, mainly driven by
higher fuel costs due to rising fuel prices, C$84 million of
transaction-related costs resulting from the terminated CN Merger
Agreement with KCS and higher incentive compensation compared to
significantly lower levels of incentive compensation in 2020 due to
below-target results stemming from the impact of COVID-19, partly
offset by the positive translation impact of a stronger Canadian
dollar.
(1) Non-GAAP MeasuresCN reports
its financial results in accordance with United States generally
accepted accounting principles (GAAP). CN also uses non-GAAP
measures in this news release that do not have any standardized
meaning prescribed by GAAP, such as adjusted performance measures.
These non-GAAP measures may not be comparable to similar measures
presented by other companies. For further details of these non-GAAP
measures, including a reconciliation to the most directly
comparable GAAP financial measures, refer to the attached
supplementary schedule, Non-GAAP Measures.
CN's full-year adjusted diluted EPS outlook (2)
excludes the expected impact of certain income and expense items.
However, management cannot individually quantify on a
forward-looking basis the impact of these items on its EPS because
these items, which could be significant, are difficult to predict
and may be highly variable. As a result, CN does not provide a
corresponding GAAP measure for, or reconciliation to, its adjusted
diluted EPS outlook.
(2) Forward-Looking
StatementsCertain statements included in this news release
constitute "forward-looking statements" within the meaning of the
United States Private Securities Litigation Reform Act of 1995 and
under Canadian securities laws, including statements based on
management’s assessment and assumptions and publicly available
information with respect to CN. By their nature, forward-looking
statements involve risks, uncertainties and assumptions. CN
cautions that its assumptions may not materialize and that current
economic conditions render such assumptions, although reasonable at
the time they were made, subject to greater uncertainty.
Forward-looking statements may be identified by the use of
terminology such as "believes," "expects," "anticipates,"
"assumes," "outlook," "plans," "targets", or other similar
words.
Forward-looking statements are not guarantees of
future performance and involve risks, uncertainties and other
factors which may cause actual results, performance or achievements
of CN to be materially different from the outlook or any future
results, performance or achievements implied by such statements.
Accordingly, readers are advised not to place undue reliance on
forward-looking statements. Important risk factors that could
affect the forward-looking statements in this news release include,
but are not limited to: the duration and effects of the COVID-19
pandemic, general economic and business conditions, particularly in
the context of the COVID-19 pandemic; 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;
increases in maintenance and operating costs; security threats;
reliance on technology and related cybersecurity risk; trade
restrictions or other changes to international trade arrangements;
transportation of hazardous materials; various events which could
disrupt operations, including illegal blockades of rail networks,
and natural events such as severe weather, droughts, fires, floods
and earthquakes; climate change; labor negotiations and
disruptions; environmental claims; uncertainties of investigations,
proceedings or other types of claims and litigation; risks and
liabilities arising from derailments; timing and completion of
capital programs; and other risks detailed from time to time in
reports filed by CN with securities regulators in Canada and the
United States. Reference should also be made to Management’s
Discussion and Analysis (MD&A) in CN’s annual and interim
reports, Annual Information Form and Form 40-F, filed with Canadian
and U.S. securities regulators and available on CN’s website, for a
description of major risk factors relating to CN.
Forward-looking statements reflect information
as of the date on which they are made. 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 securities 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.
2021 key assumptionsCN has made
a number of economic and market assumptions in preparing its 2021
outlook. The Company assumes that North American industrial
production for the year will increase in the high single-digit
range and assumes U.S. housing starts of approximately 1.45 million
units and U.S. motor vehicle sales of approximately 16 million
units. For the 2020/2021 crop year, the grain crop in Canada was
above its three-year average and the U.S. grain crop was in line
with its three-year average. The Company assumes that the 2021/2022
grain crop in Canada will be below the three-year average and now
assumes that the 2021/2022 grain crop in the United States will be
in line with the three-year average (compared to its September 17,
2021 assumption that it would be below the three-year average). CN
now assumes total RTMs in 2021 will increase in the low
single-digit range versus 2020 (compared to its September 17, 2021
assumption of an increase in the mid single-digit range). CN
assumes continued pricing above rail inflation. CN assumes that in
2021, the value of the Canadian dollar in U.S. currency will be
approximately $0.80, and that in 2021 the average price of crude
oil (West Texas Intermediate) will be approximately US$60 per
barrel. In 2021, CN plans to invest approximately C$3.0 billion in
its capital program, of which C$1.6 billion is targeted toward
track and railway infrastructure maintenance.
2022 key assumptionsCN has made
a number of economic and market assumptions in preparing its 2022
targets. The Company assumes that North American industrial
production for 2022 will increase in the mid single-digit range in
2022 and assumes U.S. housing starts of approximately 1.57 million
units and U.S. motor vehicle sales of approximately 16.9 million
units. The Company assumes that the 2021/2022 grain crop in Canada
will be below the three-year average and now assumes that the
2021/2022 grain crop in the United States will be in line with the
three-year average (compared to its September 17, 2021 assumption
that it would be below the three-year average). CN assumes total
RTMs in 2022 will increase in the low single-digit range versus
2021. CN assumes continued pricing above rail inflation. CN assumes
that in 2022, the value of the Canadian dollar in U.S. currency
will be approximately $0.80, and that in 2022 the average price of
crude oil (West Texas Intermediate) will be approximately US$65 per
barrel.
About CNCN is a world-class
transportation leader and trade-enabler. Essential to the economy,
to the customers, and to the communities it serves, CN safely
transports more than 300 million tons of natural resources,
manufactured products, and finished goods throughout North America
every year. As the only railroad connecting Canada’s Eastern and
Western coasts with the U.S. South through a 19,500-mile rail
network, CN and its affiliates have been contributing to community
prosperity and sustainable trade since 1919. CN is committed to
programs supporting social responsibility and environmental
stewardship.
Contacts: |
|
Media |
Investment
Community |
Mathieu Gaudreault |
Paul Butcher |
Senior Advisor |
Vice-President |
Media Relations |
Investor Relations |
1 (833) 946-3342 |
(514) 399-0052 |
media@cn.ca |
investor.relations@cn.ca |
|
|
Selected Railroad Statistics – unaudited
|
Three months ended September 30 |
Nine months ended September 30 |
|
2021 |
2020 |
2021 |
2020 |
Financial
measures |
|
|
|
|
Key financial
performance indicators (1) |
|
|
|
|
Total revenues ($
millions) |
3,591 |
3,409 |
10,724 |
10,163 |
Freight revenues ($
millions) |
3,427 |
3,249 |
10,302 |
9,711 |
Operating income ($
millions) |
1,341 |
1,366 |
4,050 |
3,366 |
Adjusted operating income ($
millions) (2) |
1,471 |
1,366 |
4,043 |
3,852 |
Net income ($ millions) |
1,685 |
985 |
3,693 |
2,541 |
Adjusted net income ($
millions) (2) |
1,079 |
985 |
3,009 |
2,763 |
Diluted earnings per share
($) |
2.37 |
1.38 |
5.19 |
3.56 |
Adjusted diluted earnings per
share ($) (2) |
1.52 |
1.38 |
4.23 |
3.87 |
Free cash flow ($ millions)
(2) |
754 |
506 |
2,034 |
2,087 |
Gross property additions ($
millions) |
836 |
691 |
1,977 |
2,008 |
Share repurchases ($
millions) |
109 |
— |
523 |
379 |
Dividends per share ($) |
0.615 |
0.575 |
1.845 |
1.725 |
Financial
position (1) |
|
|
|
|
Total assets ($ millions) |
47,762 |
45,158 |
47,762 |
45,158 |
Total liabilities ($
millions) |
26,102 |
25,845 |
26,102 |
25,845 |
Shareholders' equity ($ millions) |
21,660 |
19,313 |
21,660 |
19,313 |
Financial
ratio |
|
|
|
|
Operating ratio (%) |
62.7 |
59.9 |
62.2 |
66.9 |
Adjusted operating ratio (%) (2) |
59.0 |
59.9 |
62.3 |
62.1 |
Operational
measures (3) |
|
|
|
|
Statistical operating
data |
|
|
|
|
Gross ton miles (GTMs)
(millions) |
110,690 |
113,693 |
348,205 |
330,058 |
Revenue ton miles (RTMs)
(millions) |
55,875 |
56,296 |
176,575 |
167,183 |
Carloads (thousands) |
1,427 |
1,440 |
4,327 |
4,069 |
Route miles (includes Canada
and the U.S.) |
19,500 |
19,500 |
19,500 |
19,500 |
Employees (end of period) |
23,765 |
24,008 |
23,765 |
24,008 |
Employees (average for the period) |
24,312 |
23,177 |
24,410 |
23,624 |
Key operating
measures |
|
|
|
|
Freight revenue per RTM
(cents) |
6.13 |
5.77 |
5.83 |
5.81 |
Freight revenue per carload
($) |
2,402 |
2,256 |
2,381 |
2,387 |
GTMs per average number of
employees (thousands) |
4,553 |
4,905 |
14,265 |
13,971 |
Operating expenses per GTM
(cents) |
2.03 |
1.80 |
1.92 |
2.06 |
Labor and fringe benefits
expense per GTM (cents) |
0.66 |
0.58 |
0.63 |
0.60 |
Diesel fuel consumed (US
gallons in millions) |
92.9 |
97.2 |
301.1 |
296.3 |
Average fuel price ($ per US
gallon) |
3.33 |
2.27 |
3.14 |
2.44 |
Fuel efficiency (US gallons of
locomotive fuel consumed per 1,000 GTMs) |
0.84 |
0.85 |
0.86 |
0.90 |
Train weight (tons) |
9,729 |
9,635 |
9,656 |
9,543 |
Train length (feet) |
8,677 |
8,987 |
8,581 |
8,596 |
Car velocity (car miles per
day) |
201 |
172 |
194 |
181 |
Through dwell (entire
railroad, hours) |
7.7 |
9.6 |
7.9 |
8.8 |
Through network train speed
(miles per hour) |
19.7 |
17.8 |
19.0 |
18.5 |
Locomotive utilization (trailing GTMs per total horsepower) |
195 |
199 |
199 |
194 |
Safety
indicators (4) |
|
|
|
|
Injury frequency rate (per
200,000 person hours) |
1.42 |
1.52 |
1.34 |
1.75 |
Accident rate (per million train miles) |
2.05 |
1.70 |
1.78 |
1.96 |
(1) |
Amounts expressed in Canadian dollars and prepared in accordance
with United States generally accepted accounting principles (GAAP),
unless otherwise noted. |
(2) |
See supplementary schedule entitled Non-GAAP Measures for an
explanation of these non-GAAP measures. |
(3) |
Statistical operating data, key operating measures and safety
indicators are unaudited and based on estimated data available at
such time and are subject to change as more complete information
becomes available. Definitions of gross ton miles, fuel efficiency,
train weight, train length, car velocity, through dwell and through
network train speed are included within the Company’s Management’s
Discussion and Analysis. Definitions of all other indicators are
provided on CN's website, www.cn.ca/glossary. |
(4) |
Based on Federal Railroad Administration (FRA) reporting
criteria. |
Supplementary Information – unaudited
|
Three months ended September 30 |
Nine months ended September 30 |
|
2021 |
2020 |
% ChangeFav (Unfav) |
|
% Change at constantcurrencyFav (Unfav) (1) |
|
2021 |
2020 |
% ChangeFav (Unfav) |
|
% Change at constant currency Fav (Unfav) (1) |
|
Revenues ($
millions) (2) |
|
|
|
|
|
|
|
|
Petroleum and chemicals |
715 |
591 |
21 |
% |
25 |
% |
2,061 |
1,967 |
5 |
% |
10 |
% |
Metals and minerals |
410 |
342 |
20 |
% |
25 |
% |
1,155 |
1,055 |
9 |
% |
16 |
% |
Forest products |
425 |
421 |
1 |
% |
5 |
% |
1,305 |
1,267 |
3 |
% |
9 |
% |
Coal |
169 |
118 |
43 |
% |
47 |
% |
453 |
401 |
13 |
% |
17 |
% |
Grain and fertilizers |
510 |
608 |
(16 |
%) |
(14 |
%) |
1,832 |
1,867 |
(2 |
%) |
2 |
% |
Intermodal |
1,061 |
992 |
7 |
% |
9 |
% |
3,066 |
2,715 |
13 |
% |
16 |
% |
Automotive |
137 |
177 |
(23 |
%) |
(19 |
%) |
430 |
439 |
(2 |
%) |
4 |
% |
Total freight revenues |
3,427 |
3,249 |
5 |
% |
9 |
% |
10,302 |
9,711 |
6 |
% |
11 |
% |
Other
revenues |
164 |
160 |
3 |
% |
7 |
% |
422 |
452 |
(7 |
%) |
(1 |
%) |
Total
revenues |
3,591 |
3,409 |
5 |
% |
9 |
% |
10,724 |
10,163 |
6 |
% |
10 |
% |
Revenue ton miles
(RTMs) (millions) (3) |
|
|
|
|
|
|
|
|
Petroleum and chemicals |
10,695 |
9,398 |
14 |
% |
14 |
% |
31,481 |
31,918 |
(1 |
%) |
(1 |
%) |
Metals and minerals |
7,181 |
5,419 |
33 |
% |
33 |
% |
20,126 |
15,776 |
28 |
% |
28 |
% |
Forest products |
6,234 |
6,552 |
(5 |
%) |
(5 |
%) |
19,861 |
18,903 |
5 |
% |
5 |
% |
Coal |
5,189 |
3,667 |
42 |
% |
42 |
% |
13,863 |
11,987 |
16 |
% |
16 |
% |
Grain and fertilizers |
11,774 |
14,565 |
(19 |
%) |
(19 |
%) |
44,537 |
43,826 |
2 |
% |
2 |
% |
Intermodal |
14,241 |
15,916 |
(11 |
%) |
(11 |
%) |
44,883 |
42,835 |
5 |
% |
5 |
% |
Automotive |
561 |
779 |
(28 |
%) |
(28 |
%) |
1,824 |
1,938 |
(6 |
%) |
(6 |
%) |
Total
RTMs |
55,875 |
56,296 |
(1 |
%) |
(1 |
%) |
176,575 |
167,183 |
6 |
% |
6 |
% |
Freight revenue / RTM
(cents) (2) (3) |
|
|
|
|
|
|
|
|
Petroleum and chemicals |
6.69 |
6.29 |
6 |
% |
10 |
% |
6.55 |
6.16 |
6 |
% |
12 |
% |
Metals and minerals |
5.71 |
6.31 |
(10 |
%) |
(5 |
%) |
5.74 |
6.69 |
(14 |
%) |
(9 |
%) |
Forest products |
6.82 |
6.43 |
6 |
% |
11 |
% |
6.57 |
6.70 |
(2 |
%) |
4 |
% |
Coal |
3.26 |
3.22 |
1 |
% |
3 |
% |
3.27 |
3.35 |
(2 |
%) |
1 |
% |
Grain and fertilizers |
4.33 |
4.17 |
4 |
% |
7 |
% |
4.11 |
4.26 |
(4 |
%) |
— |
% |
Intermodal |
7.45 |
6.23 |
20 |
% |
22 |
% |
6.83 |
6.34 |
8 |
% |
11 |
% |
Automotive |
24.42 |
22.72 |
7 |
% |
12 |
% |
23.57 |
22.65 |
4 |
% |
11 |
% |
Total
freight revenue / RTM |
6.13 |
5.77 |
6 |
% |
10 |
% |
5.83 |
5.81 |
— |
% |
5 |
% |
Carloads
(thousands) (3) |
|
|
|
|
|
|
|
|
Petroleum and chemicals |
150 |
138 |
9 |
% |
9 |
% |
443 |
442 |
— |
% |
— |
% |
Metals and minerals |
266 |
236 |
13 |
% |
13 |
% |
730 |
694 |
5 |
% |
5 |
% |
Forest products |
82 |
84 |
(2 |
%) |
(2 |
%) |
258 |
255 |
1 |
% |
1 |
% |
Coal |
109 |
68 |
60 |
% |
60 |
% |
278 |
216 |
29 |
% |
29 |
% |
Grain and fertilizers |
131 |
162 |
(19 |
%) |
(19 |
%) |
469 |
474 |
(1 |
%) |
(1 |
%) |
Intermodal |
649 |
694 |
(6 |
%) |
(6 |
%) |
2,016 |
1,851 |
9 |
% |
9 |
% |
Automotive |
40 |
58 |
(31 |
%) |
(31 |
%) |
133 |
137 |
(3 |
%) |
(3 |
%) |
Total
carloads |
1,427 |
1,440 |
(1 |
%) |
(1 |
%) |
4,327 |
4,069 |
6 |
% |
6 |
% |
Freight revenue /
carload ($) (2) (3) |
|
|
|
|
|
|
|
|
Petroleum and chemicals |
4,767 |
4,283 |
11 |
% |
15 |
% |
4,652 |
4,450 |
5 |
% |
10 |
% |
Metals and minerals |
1,541 |
1,449 |
6 |
% |
11 |
% |
1,582 |
1,520 |
4 |
% |
11 |
% |
Forest products |
5,183 |
5,012 |
3 |
% |
8 |
% |
5,058 |
4,969 |
2 |
% |
8 |
% |
Coal |
1,550 |
1,735 |
(11 |
%) |
(9 |
%) |
1,629 |
1,856 |
(12 |
%) |
(9 |
%) |
Grain and fertilizers |
3,893 |
3,753 |
4 |
% |
7 |
% |
3,906 |
3,939 |
(1 |
%) |
3 |
% |
Intermodal |
1,635 |
1,429 |
14 |
% |
17 |
% |
1,521 |
1,467 |
4 |
% |
6 |
% |
Automotive |
3,425 |
3,052 |
12 |
% |
17 |
% |
3,233 |
3,204 |
1 |
% |
7 |
% |
Total
freight revenue / carload |
2,402 |
2,256 |
6 |
% |
10 |
% |
2,381 |
2,387 |
— |
% |
4 |
% |
(1) |
See supplementary schedule entitled Non-GAAP Measures for an
explanation of this non-GAAP measure. |
(2) |
Amounts expressed in Canadian dollars. |
(3) |
Statistical operating data and related key operating measures are
unaudited and based on estimated data available at such time and
are subject to change as more complete information becomes
available. |
Non-GAAP Measures – unaudited
In this supplementary schedule, the "Company" or
"CN" refers to Canadian National Railway Company, together with its
wholly-owned subsidiaries. Financial information included in this
schedule is expressed in Canadian dollars, unless otherwise
noted.
CN reports its financial results in accordance
with United States generally accepted accounting principles (GAAP).
The Company also uses non-GAAP measures that do not have any
standardized meaning prescribed by GAAP, including adjusted
performance measures, constant currency, free cash flow and
adjusted debt-to-adjusted earnings before interest, income taxes,
depreciation and amortization (EBITDA) multiple. These non-GAAP
measures may not be comparable to similar measures presented by
other companies. From management's perspective, these non-GAAP
measures are useful measures of performance and provide investors
with supplementary information to assess the Company's results of
operations and liquidity. These non-GAAP measures should not be
considered in isolation or as a substitute for financial measures
prepared in accordance with GAAP.
Adjusted performance measures
Management believes that adjusted net income,
adjusted earnings per share, adjusted operating income and adjusted
operating ratio are useful measures of performance that can
facilitate period-to-period comparisons, as they exclude items that
do not necessarily arise as part of CN's normal day-to-day
operations and could distort the analysis of trends in business
performance. These items may include, but are not limited to,
restructuring charges, advisory fees related to shareholder
matters, losses and recoveries from assets held for sale, gains and
losses on asset disposals, transaction-related costs and financing
fees, merger termination fees, the effect of tax law changes and
rate enactments and certain items outside the control of
management. Management uses adjusted performance measures, which
exclude certain income and expense items in its results that
management believes are not reflective of CN's underlying business
operations, to set performance goals and as a means to measure CN's
performance. The exclusion of such income and expense items in
these measures does not, however, imply that these items are
necessarily non-recurring. These measures do not have any
standardized meaning prescribed by GAAP and therefore, may not be
comparable to similar measures presented by other companies.
For the three and nine months ended September
30, 2021, the Company's adjusted net income was $1,079 million, or
$1.52 per diluted share, and $3,009 million, or $4.23 per diluted
share, respectively. The adjusted figures exclude:
- employee termination benefits and severance costs related to a
workforce reduction program of $39 million, or $29 million
after-tax ($0.04 per diluted share) recorded in the third quarter
in Labor and fringe benefits within the Consolidated Statements of
Income;
- advisory fees related to shareholder matters of $7 million, or
$5 million after-tax ($0.01 per diluted share) recorded in the
third quarter in Casualty and other within the Consolidated
Statements of Income;
- the recovery of $137 million, or $102 million after-tax ($0.14
per diluted share) recorded in the first quarter related to the
loss on assets held for sale in the second quarter of 2020, to
reflect an agreement for the sale of on-going rail operations,
certain non-core rail lines in Wisconsin, Michigan and Ontario to a
short line operator;
- transaction-related costs, consisting of an advance to Kansas
City Southern ("KCS") and a related refund, net of transaction
costs, of $84 million, or $70 million after-tax ($0.10 per diluted
share), recorded in the third quarter resulting from the terminated
CN Merger Agreement with KCS;
- amortization of bridge financing and other fees of $65 million,
or $60 million after-tax ($0.08 per diluted share) recorded in the
third quarter and $32 million, or $24 million after-tax ($0.03 per
diluted share) recorded in the second quarter, resulting from the
KCS transaction, recorded in Interest expense within the
Consolidated Statements of Income; and
- merger termination fee paid by KCS to CN of $886 million, or
$770 million after-tax ($1.08 per diluted share or $1.09 per basic
share), recorded in the third quarter resulting from KCS' notice of
termination of the CN Merger Agreement with KCS.
For the nine months ended September 30, 2020,
the Company's adjusted net income was $2,763 million, or $3.87 per
diluted share, which excludes a loss of $486 million, or $363
million after-tax ($0.51 per diluted share) in the second quarter,
resulting from the Company's decision to market for sale for
on-going rail operations, certain non-core lines in Wisconsin,
Michigan and Ontario, and a current income tax recovery of $141
million ($0.20 per diluted share) in the first quarter resulting
from the enactment of the Coronavirus Aid, Relief, and Economic
Security (CARES) Act, a U.S. tax-and-spending package aimed at
providing additional stimulus to address the economic impact of the
COVID-19 pandemic.
The following table provides a reconciliation of
net income and earnings per share in accordance with GAAP, as
reported for the three and nine months ended September 30, 2021 and
2020, to the non-GAAP adjusted performance measures presented
herein:
|
Three months ended September 30 |
Nine months ended September 30 |
In
millions, except per share data |
2021 |
|
2020 |
2021 |
|
2020 |
|
Net income |
$ |
1,685 |
|
$ |
985 |
$ |
3,693 |
|
$ |
2,541 |
|
Adjustments: |
|
|
|
|
Workforce reduction program |
39 |
|
— |
39 |
|
— |
|
Advisory fees related to shareholder matters |
7 |
|
— |
7 |
|
— |
|
Loss (recovery) on assets held for sale |
— |
|
— |
(137 |
) |
486 |
|
Transaction-related costs |
84 |
|
— |
84 |
|
— |
|
Amortization of bridge financing and other fees |
65 |
|
— |
97 |
|
— |
|
Merger termination fee |
(886 |
) |
— |
(886 |
) |
— |
|
Income tax expense (recovery) (1) |
85 |
|
— |
112 |
|
(264 |
) |
Adjusted net income |
$ |
1,079 |
|
$ |
985 |
$ |
3,009 |
|
$ |
2,763 |
|
Basic earnings per share |
$ |
2.38 |
|
$ |
1.39 |
$ |
5.21 |
|
$ |
3.57 |
|
Impact
of adjustments, per share |
(0.86 |
) |
— |
(0.97 |
) |
0.31 |
|
Adjusted basic earnings per share |
$ |
1.52 |
|
$ |
1.39 |
$ |
4.24 |
|
$ |
3.88 |
|
Diluted earnings per
share |
$ |
2.37 |
|
$ |
1.38 |
$ |
5.19 |
|
$ |
3.56 |
|
Impact
of adjustments, per share |
(0.85 |
) |
— |
(0.96 |
) |
0.31 |
|
Adjusted diluted earnings per share |
$ |
1.52 |
|
$ |
1.38 |
$ |
4.23 |
|
$ |
3.87 |
|
(1) |
Includes the tax impact of: (i) adjustments based on the nature of
the item for tax purposes and related tax rates in the applicable
jurisdiction; or (ii) tax law changes and rate enactments. |
The following table provides a reconciliation of
operating income and operating ratio in accordance with GAAP, as
reported for the three and nine months ended September 30, 2021 and
2020, to the non-GAAP adjusted performance measures presented
herein:
|
Three months ended September 30 |
Nine months ended September 30 |
In millions, except
percentage |
2021 |
|
2020 |
|
2021 |
|
2020 |
|
Operating income |
$ |
1,341 |
|
$ |
1,366 |
|
$ |
4,050 |
|
$ |
3,366 |
|
Operating expense
adjustments: |
|
|
|
|
Workforce reduction program |
39 |
|
— |
|
39 |
|
— |
|
Advisory fees related to shareholder matters |
7 |
|
— |
|
7 |
|
— |
|
Loss (recovery) on assets held for sale |
— |
|
— |
|
(137 |
) |
486 |
|
Transaction-related costs |
84 |
|
— |
|
84 |
|
— |
|
Adjusted operating income |
$ |
1,471 |
|
$ |
1,366 |
|
$ |
4,043 |
|
$ |
3,852 |
|
Operating ratio (1) |
62.7 |
% |
59.9 |
% |
62.2 |
% |
66.9 |
% |
Impact of adjustments |
(3.7 |
)pts |
— |
|
0.1 |
pts |
(4.8 |
)pts |
Adjusted operating ratio |
59.0 |
% |
59.9 |
% |
62.3 |
% |
62.1 |
% |
(1) |
The operating ratio is defined as operating expenses as a
percentage of revenues. |
Constant currency
Financial results at constant currency allow
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.
Measures at constant currency are considered non-GAAP measures and
do not have any standardized meaning prescribed by GAAP and
therefore, may not be comparable to similar measures presented by
other companies. Financial results at constant currency are
obtained by translating the current period results denominated in
US dollars at the foreign exchange rates of the comparable period
in the prior year. The average foreign exchange rates were $1.26
and $1.25 per US$1.00 for the three and nine months ended September
30, 2021, respectively, and $1.33 and $1.35 per US$1.00 for the
three and nine months ended September 30, 2020, respectively.
On a constant currency basis, the Company's net
income for the three and nine months ended September 30, 2021 would
have been higher by $29 million ($0.04 per diluted share) and
$139 million ($0.20 per diluted share), respectively.
Free cash flow
Management believes that free cash flow is a
useful measure of liquidity as it demonstrates the Company's
ability to generate cash for debt obligations and for discretionary
uses such as payment of dividends, share repurchases, and strategic
opportunities. The Company defines its free cash flow measure as
the difference between net cash provided by (used in) operating
activities and net cash used in investing activities, adjusted for
the impact of business acquisitions and merger transaction-related
payments and cash receipts related to the KCS transaction. Free
cash flow does not have any standardized meaning prescribed by GAAP
and therefore, may not be comparable to similar measures presented
by other companies.
The following table provides a reconciliation of
net cash provided by operating activities in accordance with GAAP,
as reported for the three and nine months ended September 30, 2021
and 2020, to the non-GAAP free cash flow presented herein:
|
Three months ended September 30 |
Nine months ended September 30 |
In
millions |
2021 |
|
2020 |
|
2021 |
|
2020 |
|
Net cash provided by operating activities |
$ |
2,458 |
|
$ |
1,220 |
|
$ |
4,885 |
|
$ |
4,157 |
|
Net
cash provided by (used in) investing activities |
42 |
|
(722 |
) |
(2,013 |
) |
(2,078 |
) |
Net cash provided before
financing activities |
2,500 |
|
498 |
|
2,872 |
|
2,079 |
|
Adjustments: |
|
|
|
|
Transaction-related costs (1) |
26 |
|
— |
|
89 |
|
— |
|
Advance for acquisition (2) |
— |
|
— |
|
845 |
|
— |
|
Refund of advance for acquisition |
(886 |
) |
— |
|
(886 |
) |
— |
|
Merger termination fee |
(886 |
) |
— |
|
(886 |
) |
— |
|
Acquisition, net of cash acquired (3) |
— |
|
8 |
|
— |
|
8 |
|
Total
adjustments |
(1,746 |
) |
8 |
|
(838 |
) |
8 |
|
Free
cash flow |
$ |
754 |
|
$ |
506 |
|
$ |
2,034 |
|
$ |
2,087 |
|
(1) |
Relates to Transaction-related costs of $125 million, of which $63
million was paid in the second quarter and $26 million was paid in
the third quarter. As at September 30, 2021, $36 million remained
to be paid. See Note 3 - Acquisition to CN's unaudited Interim
Consolidated Financial Statements for additional information. |
(2) |
Relates to the advance paid to KCS of US$700 million ($845
million). See Note 3 - Acquisition to CN's unaudited Interim
Consolidated Financial Statements for additional information. |
(3) |
Relates to the acquisition of H&R Transport Limited
("H&R"). See Note 3 - Business combinations to the Company’s
2020 Annual Consolidated Financial Statements for additional
information. |
Adjusted debt-to-adjusted EBITDA
multiple
Management believes that the adjusted
debt-to-adjusted EBITDA multiple is a useful credit measure because
it reflects the Company's ability to service its debt and other
long-term obligations. The Company calculates the adjusted
debt-to-adjusted EBITDA multiple as adjusted debt divided by
adjusted EBITDA. Adjusted debt is defined as Long-term debt and
Current portion of long-term debt as reported on the Company’s
Consolidated Balance Sheets adjusted for operating lease
liabilities, including current portion and pension plans in
deficiency recognized on the Company's Consolidated Balance Sheets.
Adjusted EBITDA excludes non-GAAP adjustments that impact Operating
income, as well as the Merger termination fee, Other income, Other
components of net periodic benefit income and Operating lease
costs. These measures do not have any standardized meaning
prescribed by GAAP and therefore, may not be comparable to similar
measures presented by other companies.
The following table provides a reconciliation of
debt and net income in accordance with GAAP, reported as at and for
the twelve months ended September 30, 2021 and 2020, to the
adjusted measures presented herein, which have been used to
calculate the non-GAAP adjusted debt-to-adjusted EBITDA
multiple:
In millions, unless otherwise indicated |
As at and for the twelve months ended September 30, |
|
2021 |
|
|
2020 |
|
Debt |
|
$ |
13,556 |
|
$ |
13,786 |
|
Adjustments: |
|
|
|
|
|
|
Operating lease liabilities, including current portion |
|
430 |
|
|
434 |
|
Pension plans in deficiency |
|
545 |
|
|
521 |
|
Adjusted debt |
|
$ |
14,531 |
|
$ |
14,741 |
|
Net income |
|
$ |
4,714 |
|
$ |
3,414 |
|
Interest expense |
|
619 |
|
|
556 |
|
Income tax expense |
|
1,402 |
|
|
936 |
|
Depreciation and
amortization |
|
1,617 |
|
|
1,574 |
|
EBITDA |
|
8,352 |
|
|
6,480 |
|
Adjustments: |
|
|
|
|
|
|
Workforce reduction program (1) |
|
39 |
|
|
— |
|
Advisory fees related to shareholder matters (2) |
|
7 |
|
|
— |
|
Loss (recovery) on assets held for sale |
|
(137 |
) |
|
486 |
|
Transaction-related costs |
|
84 |
|
|
— |
|
Merger termination fee |
|
(886 |
) |
|
— |
|
Other income |
|
(22 |
) |
|
(8 |
) |
Other components of net periodic benefit income |
|
(366 |
) |
|
(314 |
) |
Operating lease cost |
|
130 |
|
|
152 |
|
Adjusted EBITDA |
|
$ |
7,201 |
|
$ |
6,796 |
|
Adjusted debt-to-adjusted EBITDA multiple (times) |
|
2.02 |
|
|
2.17 |
|
(1) |
Relates to employee termination benefits and severance costs
related to a workforce reduction program, recorded in Labor and
fringe benefits within the Consolidated Statements of Income. |
(2) |
Relates to advisory fees related to shareholder matters recorded in
Casualty and other within the Consolidated Statements of
Income. |
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