Adjusted Q2-2012 net income was C$659
million, with adjusted diluted EPS rising 19 per cent to
C$1.50 (1)
MONTREAL,
July 25, 2012 /PRNewswire/ - CN (TSX:
CNR) (NYSE: CNI) today reported its financial and operating results
for the second quarter and six-month period ended June 30, 2012.
Second-quarter 2012 highlights
- Net income was C$631 million, or
C$1.44 per diluted share, versus
year-earlier net income of C$538
million, or C$1.18 per diluted
share.
- Adjusted diluted Q2-2012 earnings per share (EPS) -- excluding
a net income tax expense of C$0.06
per diluted share -- rose 19 per cent to C$1.50. The net income tax expense resulted from
the enactment of higher provincial income tax rates, partly offset
by an income tax recovery from the recapitalization of a foreign
investment. (1)
- Revenues increased 13 per cent to C$2,543 million, while revenue ton-miles rose
eight per cent and carloadings increased four per cent.
- Operating income increased 13 per cent to C$985 million.
- The operating ratio was 61.3 per cent, unchanged from the
year-earlier.
- Free cash flow for the first six months of 2012 totalled
C$703 million, including the impact
of Q1-2012 voluntary pension plan contributions totalling
C$450 million, compared with free
cash flow of C$823 million for the
same period of 2011. (1)
Net income for first-half 2012 was C$1,406 million, or C$3.18 per diluted share, compared with net
income of C$1,206 million, or
C$2.63 per diluted share, for the
comparable period of 2011.
Adjusted net income for the first six months of 2012 --
excluding the net income tax expense of C$0.06 per diluted share, and the gain on the
sale of rail lines (C$0.57 per
diluted share) -- was C$1,182
million, with adjusted diluted EPS increasing 24 per cent to
C$2.67.
Claude Mongeau, president and
chief executive officer, said: "CN's team of railroaders continues
to deliver impressive results, converting strong volume and revenue
growth into solid bottom-line results. Our focus on maintaining a
fluid network and solid execution allowed us to further improve our
industry-leading service for the benefit of our customers and
shareholders.
"Other than grain and fertilizers, CN registered solid traffic
increases in every commodity group during the second quarter --
intermodal, automotive, coal, petroleum and chemicals, and metals
and minerals business units all registered double-digit gains in
revenue ton-miles, with the rise in volumes due in part to economic
growth, market share gains, and a labor disruption at a key
competitor."
Revised 2012 financial outlook (2)
CN's first-half financial performance and assumption of
continued positive economic conditions have prompted an upward
revision of the Company's 2012 financial outlook, last updated on
April 23, 2012.
Under its revised 2012 outlook, CN aims to:
- Deliver up to 15 per cent growth in adjusted diluted EPS for
the year, over adjusted diluted EPS of C$4.84 in 2011, despite an additional pension
expense of approximately C$100
million. This compares with CN's April outlook calling for a
full 10 per cent growth in 2012 adjusted diluted EPS.
(1)
- Generate free cash flow of approximately C$1 billion - taking into consideration a
potential C$250 million additional
voluntary pension contribution in the fourth quarter (for a
potential total voluntary pension contribution of C$700 million in 2012). This compares with CN's
April outlook calling for free cash flow in the order of
C$950 million.
(1)
Mongeau said: "Our agenda of Operational and Service Excellence
continues to gain momentum on all key fronts. If economic growth
remains on track in the second half, we should deliver another
banner year in 2012."
Foreign currency impact on results
Although CN reports its earnings in Canadian dollars, a large
portion of its revenues and expenses is denominated in U.S.
dollars. As such, the Company's results are affected by
exchange-rate fluctuations. On a constant currency basis that
excludes the impact of fluctuations in foreign currency exchange
rates, CN's second-quarter and first-half 2012 net income would
have been lower by C$13 million and
C$17 million, respectively, or by
C$0.03 and C$0.04 per diluted share, respectively.
(1)
Second-quarter 2012 revenues, traffic volumes and expenses
The 13 per cent rise in second-quarter revenues mainly resulted
from higher freight volumes, due in part to growth in North
American and Asian economies, the Company's performance above
market conditions in a number of segments, as well as increased
volumes as a result of a labor disruption at a key competitor;
freight rate increases; the impact of a higher fuel surcharge
resulting from year-over-year increases in applicable fuel prices
and higher volumes; and the positive translation impact of the
weaker Canadian dollar on U.S.-dollar-denominated revenues.
Revenues increased for metals and minerals (20 per cent),
petroleum and chemicals (19 per cent), automotive (18 per cent),
intermodal (16 per cent), coal (15 per cent), and forest products
(nine per cent). Grain and fertilizers revenues declined one per
cent.
Revenue ton-miles, measuring the relative weight and distance of
rail freight transported by CN, increased eight per cent from the
year-earlier period.
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, increased five per cent over the second quarter of
2011, driven by freight rate increases, the impact of a higher fuel
surcharge and the positive translation impact of the weaker
Canadian dollar, partly offset by an increase in the average length
of haul.
Operating expenses for the second quarter increased by 12 per
cent to C$1,558 million, mainly due
to higher labor and fringe benefits expense, increased fuel costs,
the negative translation impact of the weaker Canadian dollar on
U.S.-dollar-denominated expenses, as well as increased purchased
services and material expense.
1) See discussion and
reconciliation of non-GAAP adjusted performance-measures in the
attached supplementary schedule, Non-GAAP Measures.
2) See Forward-Looking Statements
for a summary of the key assumptions and risks regarding CN's 2012
outlook.
Forward-Looking Statements
Certain information included in this news release
constitutes "forward-looking statements" within the meaning of
the United States Private
Securities Litigation Reform Act of 1995 and under Canadian
securities laws. CN cautions that, by their nature, these
forward-looking statements involve risks, uncertainties and
assumptions. The Company 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. Such forward-looking statements are
not guarantees of future performance and involve known and unknown
risks, uncertainties and other factors which may cause the actual
results or performance of the Company or the rail industry to be
materially different from the outlook or any future results or
performance implied by such statements. To the extent that CN has
provided guidance that are non-GAAP financial measures, the Company
may not be able to provide a reconciliation to the GAAP measures,
due to unknown variables and uncertainty related to future results.
Key assumptions used in determining forward-looking information are
set forth below.
Key assumptions
CN, as referenced earlier in this news release, is
revising the 2012 financial outlook that was last updated on
April 23, 2012, in a news release
announcing the Company's first-quarter 2012 financial
results.
Current assumptions
CN's revised 2012 financial outlook is based on a
number of economic and market assumptions. The Company is
forecasting that North American industrial production for 2012 will
increase by about 3.5 per cent. For the year, CN also expects U.S.
housing starts to be approximately 750,000 units, and U.S. motor
vehicles sales to be approximately 14.5 million units. In addition,
CN is assuming the 2012/2013 U.S. grain crop will be in line with
the 2011/2012 crop year, and that the 2012/2013 Canadian grain crop
will be slightly higher than the five-year average. With the
assumptions above, CN also assumes carload growth in the mid-single
digit range, along with continued pricing improvement above
inflation. CN also assumes the Canadian-U.S. exchange rate to be
slightly below parity for 2012 and that the price of crude oil
(West Texas Intermediate) for the year to be in the range of
US$85-US$95 per barrel. In 2012, CN
plans to invest approximately C$1.8
billion in capital programs, of which more than C$1 billion will be targeted on track
infrastructure to maintain a safe and fluid railway network. In
addition, the Company will invest in projects to support a number
of productivity and growth initiatives.
Prior assumptions (as of April 23,
2012)
CN, on April 23,
2012, revised its initial 2012 financial outlook that was
issued on Jan. 24, 2012, in a news
release announcing the Company's fourth-quarter and full-year 2011
financial results. On April 23, 2012,
the Company forecast that North American industrial production for
2012 would increase by about 3.5 per cent (up from three per cent
previously forecast). CN also expected U.S. housing starts would be
approximately 750,000 units (compared with 700,000 units) and U.S.
motor vehicles sales would be approximately 14.5 million units (up
from 13.5 million units) for the year. In addition, CN assumed the
2012/2013 grain crops in both Canada and the U.S. would be in line with
five-year averages. With respect to the 2011/2012 crop, U.S. corn
and soybean production was projected to be slightly below -- and
exports were projected to be significantly below -- the prior
year's crop. Canadian 2011/2012 grain production and export
forecasts were projected to be moderately above the prior year's
crop. With these assumptions, CN also assumed carload growth in the
mid-single digit range, along with continued pricing improvement
above inflation. CN assumed the Canadian-U.S. exchange rate would
be around parity for 2012, and that the price of crude oil (West
Texas Intermediate) for the year would be in the range of
US$100 per barrel. In 2012, CN
planned to invest approximately C$1.8
billion in capital programs (up from C$1.75 billion), of which more than C$1 billion was to be targeted on track
infrastructure to maintain a safe and fluid railway network. In
addition, the Company planned to invest in projects to support a
number of productivity and growth initiatives.
Important risk factors that could affect the
forward-looking statements include, but are not limited to, the
effects of general economic and business conditions, 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 risk factors.
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
Canadian 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.
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) - unaudited |
(In millions, except per share data) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
Six months
ended |
|
|
June 30 |
|
June 30 |
|
|
|
2012 |
|
|
2011 |
|
|
2012 |
|
|
2011 |
|
|
|
Revenues |
$ |
2,543 |
|
$ |
2,260 |
|
$ |
4,889 |
|
$ |
4,344 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
Labor and fringe benefits |
|
504 |
|
|
432 |
|
|
1,013 |
|
|
905 |
|
Purchased services and
material |
|
305 |
|
|
268 |
|
|
604 |
|
|
554 |
|
Fuel |
|
379 |
|
|
353 |
|
|
755 |
|
|
680 |
|
Depreciation and amortization |
|
230 |
|
|
217 |
|
|
460 |
|
|
435 |
|
Equipment rents |
|
59 |
|
|
54 |
|
|
121 |
|
|
105 |
|
Casualty and other |
|
81 |
|
|
62 |
|
|
158 |
|
|
146 |
Total operating expenses |
|
1,558 |
|
|
1,386 |
|
|
3,111 |
|
|
2,825 |
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
985 |
|
|
874 |
|
|
1,778 |
|
|
1,519 |
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
(86) |
|
|
(85) |
|
|
(172) |
|
|
(171) |
|
|
|
|
|
|
|
|
|
|
|
|
Other income (Note 3) |
|
9 |
|
|
10 |
|
|
302 |
|
|
310 |
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
908 |
|
|
799 |
|
|
1,908 |
|
|
1,658 |
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (Note
7) |
|
(277) |
|
|
(261) |
|
|
(502) |
|
|
(452) |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
$ |
631 |
|
$ |
538 |
|
$ |
1,406 |
|
$ |
1,206 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share (Note
10) |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
$ |
1.44 |
|
$ |
1.19 |
|
$ |
3.20 |
|
$ |
2.64 |
|
Diluted |
$ |
1.44 |
|
$ |
1.18 |
|
$ |
3.18 |
|
$ |
2.63 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average number of
shares |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
437.2 |
|
|
453.9 |
|
|
439.1 |
|
|
456.1 |
|
Diluted |
|
439.5 |
|
|
457.1 |
|
|
441.5 |
|
|
459.4 |
See accompanying
notes to unaudited consolidated financial statements. |
CANADIAN NATIONAL RAILWAY COMPANY |
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(U.S. GAAP) - unaudited |
(In millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Six months ended |
|
|
|
|
June 30 |
|
|
June 30 |
|
|
2012 |
|
2011 |
|
|
2012 |
|
2011 |
|
|
|
|
|
|
|
|
|
|
Net income |
$ |
631 |
$ |
538 |
|
$ |
1,406 |
$ |
1,206 |
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income
(loss) |
|
|
|
|
|
|
|
|
|
|
Foreign exchange gain
(loss) on: |
|
|
|
|
|
|
|
|
|
|
|
Translation of the net investment
in foreign operations |
|
128 |
|
(33) |
|
|
11 |
|
(180) |
|
|
Translation of US
dollar-denominated long-term debt designated as a hedge of
the
net investment in U.S. subsidiaries |
|
(125) |
|
29 |
|
|
(13) |
|
169 |
|
Pension and other
postretirement benefit plans (Note 6) |
|
|
|
|
|
|
|
|
|
|
|
Amortization of net actuarial loss
included in net periodic benefit cost (income) |
|
31 |
|
2 |
|
|
62 |
|
4 |
|
|
Amortization of prior service cost
included in net periodic benefit cost (income) |
|
2 |
|
1 |
|
|
4 |
|
1 |
|
Derivative
instruments |
|
- |
|
- |
|
|
- |
|
(1) |
Other comprehensive income (loss)
before income taxes |
|
36 |
|
(1) |
|
|
64 |
|
(7) |
Income tax recovery (expense) |
|
9 |
|
(4) |
|
|
(14) |
|
(25) |
Other comprehensive income (loss) |
|
45 |
|
(5) |
|
|
50 |
|
(32) |
Comprehensive income |
$ |
676 |
$ |
533 |
|
$ |
1,456 |
$ |
1,174 |
See accompanying notes to unaudited
consolidated financial statements. |
|
|
|
|
|
|
|
|
|
CANADIAN NATIONAL RAILWAY COMPANY |
CONSOLIDATED BALANCE SHEET (U.S. GAAP) -
unaudited |
(In millions) |
|
|
|
|
|
|
|
|
|
|
June 30 |
|
December 31 |
|
June
30 |
|
|
2012 |
|
|
2011 |
|
|
2011 |
|
|
|
|
|
|
|
|
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
$ |
345 |
|
$ |
101 |
|
$ |
175 |
|
Restricted cash and cash equivalents (Note
4) |
|
472 |
|
|
499 |
|
|
467 |
|
Accounts receivable |
|
833 |
|
|
820 |
|
|
825 |
|
Material and supplies |
|
277 |
|
|
201 |
|
|
240 |
|
Deferred and receivable income taxes |
|
47 |
|
|
122 |
|
|
50 |
|
Other |
|
85 |
|
|
105 |
|
|
84 |
Total current assets |
|
2,059 |
|
|
1,848 |
|
|
1,841 |
|
|
|
|
|
|
|
|
|
Properties |
|
24,078 |
|
|
23,917 |
|
|
22,789 |
Intangible and other assets |
|
329 |
|
|
261 |
|
|
840 |
|
|
|
|
|
|
|
|
|
Total assets |
$ |
26,466 |
|
$ |
26,026 |
|
$ |
25,470 |
|
|
|
|
|
|
|
|
|
Liabilities and shareholders'
equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
|
Accounts payable and other |
$ |
1,609 |
|
$ |
1,580 |
|
$ |
1,452 |
|
Current portion of long-term debt (Note
4) |
|
784 |
|
|
135 |
|
|
530 |
Total current liabilities |
|
2,393 |
|
|
1,715 |
|
|
1,982 |
|
|
|
|
|
|
|
|
|
Deferred income taxes |
|
5,629 |
|
|
5,333 |
|
|
5,301 |
Pension and other postretirement
benefits, net of current portion |
|
576 |
|
|
1,095 |
|
|
510 |
Other liabilities and deferred
credits |
|
713 |
|
|
762 |
|
|
774 |
Long-term debt |
|
5,991 |
|
|
6,441 |
|
|
5,432 |
|
|
|
|
|
|
|
|
|
Shareholders' equity: |
|
|
|
|
|
|
|
|
|
Common shares |
|
4,132 |
|
|
4,141 |
|
|
4,211 |
|
Accumulated other comprehensive loss |
|
(2,789) |
|
|
(2,839) |
|
|
(1,741) |
|
Retained earnings |
|
9,821 |
|
|
9,378 |
|
|
9,001 |
|
|
|
|
|
|
|
|
|
Total shareholders' equity |
|
11,164 |
|
|
10,680 |
|
|
11,471 |
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders'
equity |
$ |
26,466 |
|
$ |
26,026 |
|
$ |
25,470 |
See accompanying notes to unaudited
consolidated financial statements. |
CANADIAN NATIONAL
RAILWAY COMPANY |
CONSOLIDATED
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (U.S.
GAAP) - unaudited |
(In
millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
Six months ended |
|
June 30 |
|
June 30 |
|
|
2012 |
|
|
2011 |
|
|
2012 |
|
|
2011 |
|
|
Common shares
(1) |
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of
period |
$ |
4,153 |
|
$ |
4,228 |
|
$ |
4,141 |
|
$ |
4,252 |
|
Stock options exercised and other |
|
22 |
|
|
34 |
|
|
78 |
|
|
56 |
|
Share repurchase programs (Note 4) |
|
(43) |
|
|
(51) |
|
|
(87) |
|
|
(97) |
Balance, end of
period |
$ |
4,132 |
|
$ |
4,211 |
|
$ |
4,132 |
|
$ |
4,211 |
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other
comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of
period |
$ |
(2,834) |
|
$ |
(1,736) |
|
$ |
(2,839) |
|
$ |
(1,709) |
|
Other comprehensive income (loss) |
|
45 |
|
|
(5) |
|
|
50 |
|
|
(32) |
Balance, end of
period |
$ |
(2,789) |
|
$ |
(1,741) |
|
$ |
(2,789) |
|
$ |
(1,741) |
|
|
|
|
|
|
|
|
|
|
|
|
Retained
earnings |
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of
period |
$ |
9,679 |
|
$ |
8,966 |
|
$ |
9,378 |
|
$ |
8,741 |
|
Net income |
|
631 |
|
|
538 |
|
|
1,406 |
|
|
1,206 |
|
Share repurchase programs (Note 4) |
|
(326) |
|
|
(356) |
|
|
(635) |
|
|
(650) |
|
Dividends |
|
(163) |
|
|
(147) |
|
|
(328) |
|
|
(296) |
Balance, end of
period |
$ |
9,821 |
|
$ |
9,001 |
|
$ |
9,821 |
|
$ |
9,001 |
See accompanying notes
to unaudited consolidated financial statements. |
|
(1) |
During the three and six months ended June 30,
2012, the Company issued 0.6 million and 1.9 million common shares,
respectively, as a result of stock options exercised and
repurchased 4.5 million and 9.2 million common shares,
respectively, under its current share repurchase program. At
June 30, 2012, the Company had 434.8 million common shares
outstanding. |
CANADIAN NATIONAL RAILWAY COMPANY |
CONSOLIDATED STATEMENT OF CASH FLOWS
(U.S. GAAP) - unaudited |
(In millions) |
|
|
|
|
|
Three months
ended |
|
Six months
ended |
|
June 30 |
|
June 30 |
|
|
2012 |
|
|
2011 |
|
|
2012 |
|
|
2011 |
|
|
|
Operating
activities |
|
|
|
|
|
|
|
|
|
|
|
Net income |
$ |
631 |
|
$ |
538 |
|
$ |
1,406 |
|
$ |
1,206 |
Adjustments to reconcile net income to net cash
provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
230 |
|
|
217 |
|
|
460 |
|
|
435 |
|
Deferred income taxes |
|
78 |
|
|
119 |
|
|
272 |
|
|
223 |
|
Gain on disposal of property (Note
3) |
|
- |
|
|
- |
|
|
(281) |
|
|
(288) |
Changes in operating assets and
liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
(56) |
|
|
(54) |
|
|
(12) |
|
|
(72) |
|
Material and supplies |
|
(15) |
|
|
(13) |
|
|
(76) |
|
|
(32) |
|
Accounts payable and other |
|
290 |
|
|
106 |
|
|
90 |
|
|
42 |
|
Other current assets |
|
19 |
|
|
3 |
|
|
(11) |
|
|
(7) |
Pensions and other, net |
|
34 |
|
|
(17) |
|
|
(512) |
|
|
(109) |
Net cash provided by operating
activities |
|
1,211 |
|
|
899 |
|
|
1,336 |
|
|
1,398 |
|
|
|
|
|
|
|
|
|
|
|
|
Investing
activities |
|
|
|
|
|
|
|
|
|
|
|
Property additions |
|
(389) |
|
|
(377) |
|
|
(613) |
|
|
(597) |
Disposal of property (Note
3) |
|
- |
|
|
- |
|
|
311 |
|
|
299 |
Change in restricted cash and cash
equivalents (Note 4) |
|
27 |
|
|
(467) |
|
|
27 |
|
|
(467) |
Other, net |
|
(4) |
|
|
3 |
|
|
(2) |
|
|
17 |
Net cash used in investing
activities |
|
(366) |
|
|
(841) |
|
|
(277) |
|
|
(748) |
|
|
|
|
|
|
|
|
|
|
|
|
Financing
activities |
|
|
|
|
|
|
|
|
|
|
|
Issuance of debt (Note 4) |
|
554 |
|
|
64 |
|
|
1,631 |
|
|
64 |
Repayment of debt |
|
(723) |
|
|
(17) |
|
|
(1,468) |
|
|
(39) |
Issuance of common shares due to exercise of stock
options and related excess tax
benefits realized |
|
19 |
|
|
31 |
|
|
73 |
|
|
51 |
Repurchase of common shares (Note
4) |
|
(369) |
|
|
(407) |
|
|
(722) |
|
|
(747) |
Dividends paid |
|
(163) |
|
|
(147) |
|
|
(328) |
|
|
(296) |
Net cash used in financing
activities |
|
(682) |
|
|
(476) |
|
|
(814) |
|
|
(967) |
Effect of foreign exchange fluctuations on US
dollar-denominated cash and
cash equivalents |
|
- |
|
|
- |
|
|
(1) |
|
|
2 |
Net increase (decrease) in cash and
cash equivalents |
|
163 |
|
|
(418) |
|
|
244 |
|
|
(315) |
Cash and cash equivalents, beginning
of period |
|
182 |
|
|
593 |
|
|
101 |
|
|
490 |
Cash and cash equivalents, end of
period |
$ |
345 |
|
$ |
175 |
|
$ |
345 |
|
$ |
175 |
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow
information |
|
|
|
|
|
|
|
|
|
|
|
|
Net cash receipts from customers and
other |
$ |
2,541 |
|
$ |
2,228 |
|
$ |
4,920 |
|
$ |
4,333 |
|
Net cash payments for: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee services, suppliers and other
expenses |
|
(1,233) |
|
|
(1,156) |
|
|
(2,767) |
|
|
(2,427) |
|
|
Interest |
|
(76) |
|
|
(75) |
|
|
(186) |
|
|
(162) |
|
|
Personal injury and other claims |
|
(14) |
|
|
(16) |
|
|
(44) |
|
|
(33) |
|
|
Pensions (Note 6) |
|
(5) |
|
|
(5) |
|
|
(558) |
|
|
(98) |
|
|
Income taxes |
|
(2) |
|
|
(77) |
|
|
(29) |
|
|
(215) |
Net cash provided by operating
activities |
$ |
1,211 |
|
$ |
899 |
|
$ |
1,336 |
|
$ |
1,398 |
See accompanying
notes to unaudited consolidated financial statements. |
CANADIAN NATIONAL RAILWAY COMPANY |
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(U.S. GAAP) |
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, 2012, December 31, 2011 and June
30, 2011, and its results of operations, changes in
shareholders' equity and cash flows for the three and six months
ended June 30, 2012 and 2011.
These unaudited Interim Consolidated Financial
Statements and Notes thereto have been prepared using accounting
policies consistent with those used in preparing the Company's 2011
Annual Consolidated Financial Statements. 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 2011 Annual Consolidated Financial Statements and Notes
thereto.
Note 2 - Accounting change
In June 2011, the
Financial Accounting Standards Board (FASB) issued Accounting
Standards Update (ASU) 2011-05, Presentation of Comprehensive
Income, giving companies the option to present the components of
net income and comprehensive income in either one or two
consecutive financial statements. ASU 2011-05 eliminates the option
to present the components of other comprehensive income in the
statement of changes in shareholders' equity. ASU 2011-05 also
requires reclassification adjustments for each component of
accumulated other comprehensive income (AOCI) in both net income
and other comprehensive income (OCI) to be separately disclosed on
the face of the financial statements. In December 2011, the FASB issued ASU 2011-12,
Deferral of the Effective Date for Amendments to the Presentation
of Reclassifications of Items Out of Accumulated Other
Comprehensive Income, which deferred the effective date to present
reclassification adjustments in net income. The effective date of
the deferral is consistent with the effective date of ASU 2011-05
which is effective for fiscal years beginning on or after
December 15, 2011. The FASB is
currently re-evaluating the requirements, with a final decision
expected in 2012. The Company has adopted the requirements of these
ASUs.
Note 3 - Disposal of property
2012 - Disposal of Bala-Oakville
In March 2012, the Company
entered into an agreement with Metrolinx to sell a segment of the
Bala and a segment of the
Oakville subdivisions in
Toronto, Ontario, together with
the rail fixtures and certain passenger agreements (collectively
the "Bala-Oakville"), for cash proceeds of $311 million before transaction costs. Under the
agreement, the Company obtained the perpetual right to operate
freight trains over the Bala-Oakville
at its then current level of operating activity, with the
possibility of increasing its operating activity for additional
consideration. The transaction resulted in a gain on disposal of
$281 million ($252 million after-tax) that was recorded in
Other income under the full accrual method of accounting for real
estate transactions.
2011 - Disposal of IC RailMarine
Terminal
In August 2011, the Company
sold substantially all of the assets of IC RailMarine Terminal
Company (ICRMT), an indirect subsidiary of the Company, to Raven
Energy, LLC, an affiliate of Foresight Energy, LLC (Foresight) and
the Cline Group (Cline), for cash proceeds of $70 million (US$73
million) before transaction costs. ICRMT is located on the
east bank of the Mississippi River and stores and transfers bulk
commodities and liquids between rail, ship and barge, serving
customers in North American and global markets. Under the sale
agreement, the Company will benefit from a 10-year rail
transportation agreement with Savatran, LLC, an affiliate of
Foresight and Cline, to haul a minimum annual volume of coal from
four Illinois mines to the ICRMT
transfer facility. The transaction resulted in a gain on disposal
of $60 million ($38 million after-tax) that was recorded in Other
income.
2011 - Disposal of Lakeshore
East
In March 2011, the Company
entered into an agreement with Metrolinx to sell a segment of the
Kingston subdivision known as the
Lakeshore East in Pickering and
Toronto, Ontario, together with
the rail fixtures and certain passenger agreements (collectively
the "Lakeshore East"), for cash proceeds of $299 million before transaction costs. Under the
agreement, the Company obtained the perpetual right to operate
freight trains over the Lakeshore East at its then current level of
operating activity, with the possibility of increasing its
operating activity for additional consideration. The transaction
resulted in a gain on disposal of $288
million ($254 million
after-tax) that was recorded in Other income under the full accrual
method of accounting for real estate transactions.
Note 4 - Financing activities
Revolving credit facility
In May 2011, the Company
entered into an $800 million
four-year revolving credit facility agreement with a consortium of
lenders. In March 2012, the agreement
was amended to extend the term to May
2017. The agreement, which contains customary terms and
conditions, allows for increases in the facility amount, up to a
maximum of $1,300 million, as well as
the option to extend the term by an additional year at each
anniversary date, subject to the consent of individual lenders. The
Company plans to use the credit facility for working capital and
general corporate purposes, including backstopping its commercial
paper program. As at June 30, 2012,
the Company had no outstanding borrowings under its revolving
credit facility (nil as at December 31,
2011).
Commercial paper
The Company has a commercial paper program, which is
backed by its revolving credit facility, enabling it to issue
commercial paper up to a maximum aggregate principal amount of
$800 million, or the US dollar
equivalent. As at June 30, 2012, the
Company had borrowings of $270
million of commercial paper ($82
million (US$81 million) as at
December 31, 2011) presented in
Current portion of long-term debt on the Consolidated Balance
Sheet. The weighted-average interest rate on these borrowings was
1.04% (0.20% as at December 31,
2011).
Bilateral letter of credit facilities and
Restricted cash and cash equivalents
In April 2011, the Company
entered into a series of three-year bilateral letter of credit
facility agreements with various banks to support its requirements
to post letters of credit in the ordinary course of business. In
March 2012, the agreements were
amended to extend the maturity by one year to April 2015 and an additional letter of credit
agreement was signed with an additional bank. Under these
agreements as amended, the Company has the option from time to time
to pledge collateral in the form of cash or cash equivalents, for a
minimum term of one month, equal to at least the face value of the
letters of credit issued. As at June 30,
2012, from a total committed amount of $559 million ($520
million as at December 31,
2011) by the various banks, the Company had letters of
credit drawn of $502 million
($499 million as at December 31, 2011). As at June 30, 2012, cash and cash equivalents of
$472 million ($499 million as at December 31, 2011) were pledged as collateral and
recorded as Restricted cash and cash equivalents on the
Consolidated Balance Sheet.
Share repurchase programs
In October 2011, the Board
of Directors of the Company approved a share repurchase program
which allows for the repurchase of up to 17.0 million common shares
between October 28, 2011 and
October 27, 2012 pursuant to a normal
course issuer bid at prevailing market prices plus brokerage fees,
or such other prices as may be permitted by the Toronto Stock Exchange.
The following table provides the activity under
such share repurchase program as well as the share repurchase
program of the prior year:
|
|
|
|
|
Three months ended June 30 |
|
Six months ended June
30 |
In millions, except per share data |
2012 |
|
2011 |
|
2012 |
|
2011 |
Number of common shares repurchased
(1) |
|
4.5 |
|
|
5.5 |
|
|
9.2 |
|
|
10.5 |
Weighted-average price per share
(2) |
$ |
82.96 |
|
$ |
74.08 |
|
$ |
78.92 |
|
$ |
71.18 |
Amount of repurchase |
$ |
369 |
|
$ |
407 |
|
$ |
722 |
|
$ |
747 |
(1) |
Includes common shares purchased in the first
quarters of 2012 and 2011 pursuant to private agreements between
the Company and arm's length third-party sellers. |
(2) |
Includes brokerage fees. |
Note 5 - Stock plans
The Company has various stock-based incentive
plans for eligible employees. A description of the Company's major
plans is provided in Note 11 - Stock plans to the Company's 2011
Annual Consolidated Financial Statements. The following table
provides total stock-based compensation expense for awards under
all plans, as well as the related tax benefit recognized in income,
for the three and six months ended June 30,
2012 and 2011.
|
|
Three months ended June 30 |
|
Six months ended June 30 |
In millions |
|
2012 |
|
2011 |
|
|
2012 |
|
2011 |
|
|
|
|
|
|
|
|
|
|
Cash settled awards |
|
|
|
|
|
|
|
|
|
Restricted share unit plan |
$ |
21 |
$ |
18 |
|
$ |
30 |
$ |
47 |
Voluntary Incentive Deferral Plan (VIDP) |
|
9 |
|
7 |
|
|
10 |
|
18 |
|
|
30 |
|
25 |
|
|
40 |
|
65 |
Stock option awards |
|
3 |
|
3 |
|
|
5 |
|
5 |
Total stock-based compensation expense |
$ |
33 |
$ |
28 |
|
$ |
45 |
$ |
70 |
Tax benefit recognized in income |
$ |
8 |
$ |
7 |
|
$ |
9 |
$ |
18 |
Cash settled awards
Following approval by the Board of Directors in
January 2012, the Company granted 0.5
million restricted share units (RSUs) to designated management
employees entitling them to receive payout in cash based on the
Company's share price. The RSUs granted by the Company are
generally scheduled for payout in cash after three years ("plan
period") and vest conditionally upon the attainment of a target
relating to return on invested capital over the plan period.
Payout is conditional upon the attainment of a
minimum share price calculated using the average of the last three
months of the plan period. In addition, commencing at various
dates, for senior and executive management employees ("executive
employees"), payout is conditional on compliance with the
conditions of their benefit plans, award or employment agreements,
including but not limited to non-compete, non-solicitation, and
non-disclosure of confidential information conditions. Current or
former executive employees who breach such conditions of their
benefit plans, award or employment agreements will forfeit the RSU
payout. Should the Company reasonably determine that a current or
former executive employee may have violated the conditions of their
benefit plans, award or employment agreements, the Company may at
its discretion change the manner of vesting of the RSUs to suspend
payout on any RSUs pending resolution of such matter.
In February 2012,
the Company's Board of Directors unanimously voted to forfeit and
cancel the RSU payout of approximately $18
million otherwise due in February
2012 to its former Chief Executive Officer (CEO) after
determining that the former CEO was likely in breach of his
non-compete and non-disclosure of confidential information
conditions contained in the former CEO's employment agreement.
Pending a final resolution of the legal proceedings, the Company,
without prejudice, has not recorded a gain from the cancellation of
the RSU payout. See Note 8 - Major commitments and contingencies to
the Company's unaudited Interim Consolidated Financial
Statements.
As at June 30,
2012, 0.1 million RSUs remained authorized for future
issuance under this plan.
The following table provides the 2012 activity
for all cash settled awards:
|
|
RSUs |
|
|
VIDP |
In millions |
Nonvested |
|
Vested |
|
|
Nonvested |
|
Vested |
Outstanding at December 31, 2011 |
0.9 |
|
0.9 |
|
|
- |
|
1.4 |
Granted (Payout) |
0.5 |
|
(0.7) |
|
|
- |
|
- |
Outstanding at June 30, 2012 |
1.4 |
|
0.2 |
(1) |
|
- |
|
1.4 |
(1) |
Consists of the units of the RSU
payout currently in dispute. See Note 8 - Major commitments and
contingencies to
the Company's unaudited Interim Consolidated Financial
Statements |
The following table provides valuation and expense information
for all cash settled awards:
|
In millions, unless otherwise
indicated |
RSUs
(1) |
|
|
VIDP (2) |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year of grant |
2012 |
|
2011 |
|
2010 |
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense recognized
over requisite service period |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30, 2012 |
$ |
6 |
|
$ |
12 |
|
$ |
12 |
|
$ |
- |
|
|
$ |
10 |
|
|
$ |
40 |
Six months ended June 30, 2011 |
|
N/A |
|
$ |
6 |
|
$ |
16 |
|
$ |
25 |
|
|
$ |
18 |
|
|
$ |
65 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2012 |
$ |
6 |
|
$ |
32 |
|
$ |
56 |
|
$ |
18 |
(3) |
|
$ |
129 |
|
|
$ |
241 |
December 31, 2011 |
|
N/A |
|
$ |
19 |
|
$ |
44 |
|
$ |
82 |
|
|
$ |
119 |
|
|
$ |
264 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value per unit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2012 ($) |
$ |
54.12 |
|
$ |
75.03 |
|
$ |
85.31 |
|
|
N/A |
|
|
$ |
86.10 |
|
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of awards vested during the
period |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30, 2012 |
$ |
- |
|
$ |
- |
|
$ |
- |
|
|
N/A |
|
|
$ |
1 |
|
|
$ |
1 |
Six months ended June 30, 2011 |
|
N/A |
|
$ |
- |
|
$ |
- |
|
$ |
- |
|
|
$ |
1 |
|
|
$ |
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested awards at June 30, 2012 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrecognized compensation cost |
$ |
18 |
|
$ |
18 |
|
$ |
8 |
|
|
N/A |
|
|
$ |
1 |
|
|
$ |
45 |
Remaining recognition period (years) |
|
2.5 |
|
|
1.5 |
|
|
0.5 |
|
|
N/A |
|
|
|
N/A |
(4) |
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumptions (5) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock price ($) |
$ |
86.10 |
|
$ |
86.10 |
|
$ |
86.10 |
|
|
N/A |
|
|
$ |
86.10 |
|
|
|
N/A |
Expected stock price volatility
(6) |
|
19% |
|
|
17% |
|
|
19% |
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
Expected term (years) (7) |
|
2.5 |
|
|
1.5 |
|
|
0.5 |
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
Risk-free interest rate (8) |
|
0.98% |
|
|
0.97% |
|
|
0.96% |
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
Dividend rate ($) (9) |
$ |
1.50 |
|
$ |
1.50 |
|
$ |
1.50 |
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
(1) |
Compensation cost is based on the
fair value of the awards at period-end using the lattice-based
valuation model that uses the assumptions as presented
herein. |
(2) |
Compensation cost is based on
intrinsic value. |
(3) |
Consists of the carrying value of
the RSU payout currently in dispute. See Note 8 - Major Commitments
and contingencies to the Company's unaudited Interim Consolidated
Financial Statements. |
(4) |
The remaining recognition period
has not been quantified as it relates solely to the 25% Company
grant and the dividends earned thereon, representing a minimal
number of units. |
(5) |
Assumptions used to determine fair
value are at June 30, 2012. |
(6) |
Based on the historical volatility
of the Company's stock over a period commensurate with the expected
term of the award. |
(7) |
Represents the remaining period of
time that awards are expected to be outstanding. |
(8) |
Based on the implied yield
available on zero-coupon government issues with an equivalent term
commensurate with the expected term of the awards. |
(9) |
Based on the annualized dividend
rate. |
Stock option awards
Following approval by the Board of Directors in
January 2012, the Company granted 0.6
million conventional stock options to designated senior management
employees. The stock option plan allows eligible employees to
acquire common shares of the Company upon vesting at a price equal
to the market value of the common shares at the date of grant. The
options are exercisable during a period not exceeding 10 years. The
right to exercise options generally accrues over a period of four
years of continuous employment. Options are not generally
exercisable during the first 12 months after the date of grant. At
June 30, 2012, 10.4 million common
shares remained authorized for future issuances under this plan.
The total number of options outstanding at June 30, 2012, including conventional and
performance-accelerated options, was 4.5 million and 1.1 million,
respectively. As at June 30, 2012,
the performance-accelerated stock options were fully vested.
The following table provides the activity of
stock option awards in 2012. The table also provides the aggregate
intrinsic value for in-the-money stock options, which represents
the value that would have been received by option holders had they
exercised their options on June 30,
2012 at the Company's closing stock price of $86.10.
|
|
|
Options
outstanding |
|
Number |
|
Weighted-average |
|
Weighted-average |
|
Aggregate |
|
of options |
|
exercise price |
|
years to expiration |
|
intrinsic value |
|
In millions |
|
|
|
|
|
|
In
millions |
Outstanding at December 31, 2011
(1) |
6.9 |
|
$ |
40.80 |
|
|
|
|
|
Granted |
0.6 |
|
$ |
76.69 |
|
|
|
|
|
Exercised |
(1.9) |
|
$ |
34.76 |
|
|
|
|
|
Outstanding at June 30, 2012
(1) |
5.6 |
|
$ |
46.63 |
|
5.3 |
|
$ |
222 |
Exercisable at June 30, 2012
(1) |
3.9 |
|
$ |
39.11 |
|
4.0 |
|
$ |
184 |
(1) |
Stock options with a US dollar exercise price have been
translated to Canadian dollars using the foreign exchange rate in
effect at the balance sheet date. |
The following table provides valuation and expense information for
all stock option awards:
In millions, unless otherwise
indicated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year of grant
|
2012 |
|
2011 |
|
2010 |
|
2009 |
|
2008 |
|
2007 |
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense recognized over requisite
service period (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30,
2012 |
$ |
2 |
|
$ |
1 |
|
$ |
1 |
|
$ |
1 |
|
$ |
- |
|
$ |
- |
|
$ |
5 |
Six months ended June 30,
2011 |
|
N/A |
|
$ |
2 |
|
$ |
1 |
|
$ |
1 |
|
$ |
1 |
|
$ |
- |
|
$ |
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value per unit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At grant date ($) |
$ |
15.48 |
|
$ |
15.66 |
|
$ |
13.09 |
|
$ |
12.60 |
|
$ |
12.44 |
|
$ |
13.37 |
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of awards vested
during the period |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30,
2012 |
$ |
- |
|
$ |
2 |
|
$ |
2 |
|
$ |
4 |
|
$ |
3 |
|
$ |
- |
|
$ |
11 |
Six months ended June 30,
2011 |
|
N/A |
|
$ |
- |
|
$ |
2 |
|
$ |
4 |
|
$ |
3 |
|
$ |
3 |
|
$ |
12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested awards at June 30,
2012 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrecognized compensation
cost |
$ |
6 |
|
$ |
4 |
|
$ |
2 |
|
$ |
1 |
|
$ |
- |
|
$ |
- |
|
$ |
13 |
Remaining recognition period
(years) |
|
3.5 |
|
|
2.5 |
|
|
1.5 |
|
|
0.5 |
|
|
- |
|
|
- |
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumptions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grant price ($) |
$ |
76.69 |
|
$ |
68.94 |
|
$ |
54.76 |
|
$ |
42.14 |
|
$ |
48.51 |
|
$ |
52.79 |
|
|
N/A |
Expected stock price
volatility (2) |
|
26% |
|
|
26% |
|
|
28% |
|
|
39% |
|
|
27% |
|
|
24% |
|
|
N/A |
Expected term (years)
(3) |
|
5.4 |
|
|
5.3 |
|
|
5.4 |
|
|
5.3 |
|
|
5.3 |
|
|
5.2 |
|
|
N/A |
Risk-free interest rate
(4) |
|
1.33% |
|
|
2.53% |
|
|
2.44% |
|
|
1.97% |
|
|
3.58% |
|
|
4.12% |
|
|
N/A |
Dividend rate ($)
(5) |
$ |
1.50 |
|
$ |
1.30 |
|
$ |
1.08 |
|
$ |
1.01 |
|
$ |
0.92 |
|
$ |
0.84 |
|
|
N/A |
(1) |
Compensation cost is
based on the grant date fair value using the Black-Scholes
option-pricing model that uses the assumptions at the grant
date. |
(2) |
Based on the average
of the historical volatility of the Company's stock over a period
commensurate with the expected term of the award and the implied
volatility from traded options on the Company's stock. |
(3) |
Represents the period
of time that awards are expected to be outstanding. The Company
uses historical data to estimate option exercise and employee
termination, and groups of employees that have similar historical
exercise behavior are considered separately. |
(4) |
Based on the implied
yield available on zero-coupon government issues with an equivalent
term commensurate with the expected term of the awards. |
(5) |
Based on the
annualized dividend rate. |
Note 6 - Pensions and other postretirement benefits
The Company has various retirement benefit plans
under which substantially all of its employees are entitled to
benefits at retirement age, generally based on compensation and
length of service and/or contributions. Senior and executive
management ("executive employees") subject to certain minimum
service and age requirements are also eligible for an additional
retirement benefit under their Special Retirement Stipend
Agreements ("SRS"), the Supplemental Executive Retirement Plan
("SERP") and/or the Defined Contribution Supplemental Executive
Retirement Plan ("DC SERP"). Executive employees who breach the
non-compete, non-solicitation and non-disclosure of confidential
information conditions of the SRS, SERP and/or DC SERP plans or
other employment agreements will forfeit the retirement benefit
under these plans. Should the Company reasonably determine that a
current or former executive employee may have violated the
conditions of their SRS, SERP, and/or DC SERP plan or other
employment agreement, the Company may at its discretion withhold or
suspend payout of the retirement benefit pending resolution of such
matter.
In February 2012,
the Company's Board of Directors unanimously voted to forfeit and
cancel the $1.5 million annual
retirement benefit otherwise due to its former CEO after
determining that the former CEO was likely in breach of the
non-compete and non-disclosure of confidential information
conditions contained in the former CEO's employment agreement.
Pending a final resolution of the legal proceedings, the Company,
without prejudice, has not recorded a settlement gain of
approximately $21 million from the
termination of the former CEO's retirement benefit plan. See Note 8
- Major commitments and contingencies to the Company's unaudited
Interim Consolidated Financial Statements.
For the three and six months ended June 30, 2012 and 2011, the components of net
periodic benefit cost (income) for pensions and other
postretirement benefits were as follows:
(a) Components
of net periodic benefit cost (income) for pensions |
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
Six months
ended |
|
June
30 |
|
June 30 |
In millions |
|
2012 |
|
2011 |
|
|
2012 |
|
2011 |
Service cost |
$ |
36 |
$ |
31 |
|
$ |
72 |
$ |
62 |
Interest cost |
|
184 |
|
196 |
|
|
368 |
|
393 |
Expected return on plan assets |
|
(248) |
|
(251) |
|
|
(496) |
|
(502) |
Amortization of prior service cost |
|
1 |
|
- |
|
|
2 |
|
- |
Recognized net actuarial loss |
|
31 |
|
2 |
|
|
62 |
|
4 |
Net periodic benefit cost (income) |
$ |
4 |
$ |
(22) |
|
$ |
8 |
$ |
(43) |
|
|
|
|
|
|
|
|
|
|
(b) Components
of net periodic benefit cost for other postretirement
benefits |
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
Six months
ended |
|
June
30 |
|
June 30 |
In millions |
|
2012 |
|
2011 |
|
|
2012 |
|
2011 |
Service cost |
$ |
1 |
$ |
1 |
|
$ |
2 |
$ |
2 |
Interest cost |
|
3 |
|
3 |
|
|
6 |
|
7 |
Amortization of prior service cost |
|
1 |
|
1 |
|
|
2 |
|
1 |
Net periodic benefit cost |
$ |
5 |
$ |
5 |
|
$ |
10 |
$ |
10 |
Company contributions to its various pension plans are made in
accordance with the applicable legislation in Canada and the
United States and are determined by actuarial valuations.
Actuarial valuations are generally required on an annual basis both
in Canada and the United States. The latest actuarial
valuations for funding purposes for the Company's Canadian pension
plans, based on a valuation date of December
31, 2011, were filed in June
2012 and identified a going concern surplus of approximately
$1.1 billion and a solvency deficit
of approximately $1.3 billion
calculated using the three year average of the Company's
hypothetical windup ratio in accordance with the Pension Benefit
Standards Regulations, 1985. Under Canadian legislation,
the solvency deficit is required to be funded through special
solvency payments, for which each annual amount is equal to one
fifth of the solvency deficit, and is re-established at each
valuation date.
In anticipation of its future funding
requirements, the Company made voluntary contributions of
$450 million in the first quarter of
2012 and $350 million in 2011 in
excess of the required contributions mainly to strengthen the
financial position of its main pension plan, the CN Pension Plan.
These voluntary contributions can be treated as a prepayment
against its required special solvency payments. As such, as at
June 30, 2012, under the Company's
current actuarial valuations, these voluntary contributions are
expected to be sufficient to meet the Company's special solvency
payment requirements for the CN Pension Plan to the end of 2014.
Since 2010, the Company has made total voluntary contributions of
$1.1 billion.
Pension contributions made in the first six
months of 2012 and 2011 of $558
million and $98 million,
respectively, mainly represent contributions to the Company's main
pension plan, the CN Pension Plan.
The Company continuously monitors the various
economic elements that affect the level of contribution it
considers necessary to maintain the financial health of its various
pension plans. Currently, the Company expects to make total
contributions in 2012 of approximately $585
million for all its pension plans, including its defined
contribution plans. These contributions are for the current service
cost as determined under its current actuarial valuations and
include voluntary contributions of $450
million made in the first quarter. In view of the
uncertainty associated with future pension plan returns and level
of interest rates in the current economic environment, the Company
is in the process of reviewing the merits of potentially
contributing an additional $250
million in 2012.
Additional information relating to the pension
plans is provided in Note 12 - Pensions and other postretirement
benefits to the Company's 2011 Annual Consolidated Financial
Statements.
Note 7 - Income taxes
The Company recorded income tax expense of
$277 million for the three months
ended June 30, 2012 and $502 million for the six months ended
June 30, 2012, compared to
$261 million and $452 million, respectively, for the same periods
in 2011. Included in the 2012 figures was a net income tax expense
of $28 million recorded in the second
quarter consisting of a $35 million
income tax expense resulting from the enactment of higher
provincial corporate income tax rates that was partly offset by a
$7 million income tax recovery
resulting from the recapitalization of a foreign investment.
Included in the 2011 figures was a net income tax expense of
$40 million recorded in the second
quarter resulting from the enactment of state corporate income tax
rate changes and other legislated state tax revisions.
Note 8 - Major commitments and
contingencies
A. Commitments
As at June 30, 2012, the
Company had commitments to acquire railroad ties, rail, freight
cars, locomotives, and other equipment and services, as well as
outstanding information technology service contracts and licenses,
at an aggregate cost of $980 million
($727 million as at December 31, 2011). The Company also has
remaining estimated commitments in relation to the acquisition of
the principal lines of the former Elgin, Joliet
and Eastern Railway Company of approximately $120 million to be spent over the next few years
for railroad infrastructure improvements, grade separation
projects, as well as commitments under a series of agreements with
individual communities and a comprehensive voluntary mitigation
program established to address surrounding municipalities'
concerns. The commitment for the grade separation projects is based
on estimated costs provided by the Surface Transportation Board
(STB) at the time of acquisition and could be subject to
adjustment. In addition, remaining implementation costs associated
with the U.S. federal government legislative requirement to
implement positive train control (PTC) by 2015 are estimated to be
approximately $185 million
(US$180 million). The Company also
has agreements with fuel suppliers to purchase approximately 67% of
its estimated remaining 2012 volume, 55% of its anticipated 2013
volume and 16% of its anticipated 2014 volume at market prices
prevailing on the date of the purchase.
B. Contingencies
In the normal course of business, the Company becomes
involved in various legal actions seeking compensatory and
occasionally punitive damages, including actions brought on behalf
of various purported classes of claimants and claims relating to
employee and third-party personal injuries, occupational disease
and property damage, arising out of harm to individuals or property
allegedly caused by, but not limited to, derailments or other
accidents.
Proceedings against former CEO
In February 2012, the
Company's Board of Directors unanimously voted to forfeit and
cancel the RSU payout of approximately $18
million, the $1.5 million
annual retirement benefit, and other benefits (collectively the
"Benefits") otherwise due to its former CEO, after determining that
the former CEO was likely in breach of his non-compete and
non-disclosure of confidential information conditions contained in
the former CEO's employment agreement. The Company's determination
was based on certain facts, including the former CEO's active
participation in concert with the largest shareholder of its major
competitor in Canada for the
express purpose of installing the former CEO as Chief Executive
Officer of the competitor; the former CEO's admission that he has
taken a personal $5 million stock
position in the competitor; and statements by the former CEO and
the largest shareholder to the effect that the former CEO has
developed a strategic plan for the operation of the Company's
competitor to make it a stronger competitor to the Company; the
Company reasonably believes that any such strategic plan would
necessarily draw upon the Company's confidential information, which
would constitute a clear and material breach of the former CEO's
employment agreement. The Company has filed legal proceedings in
the United States District Court for the Northern District of
Illinois seeking, among other
things, a declaration that the Company's termination of the
Benefits is valid. In June 2012, the
former CEO was named President and CEO and a member of the Board of
Directors of the Company's major competitor in Canada.
Liabilities can be derecognized only if the
Company is legally released from its obligation, either judicially
or by the creditor. As such, the Company, without prejudice, has
not recorded a gain of approximately $18
million from the cancellation of the former CEO's RSU payout
pending a final resolution of the legal proceedings. In addition, a
retirement benefit liability can only be terminated when the
Company is relieved of its obligation under the benefit plan. The
Company estimates the settlement gain associated with the former
CEO's retirement benefit liability to be approximately $21 million, which would be partially offset by
past accumulated actuarial losses of approximately $4 million. Pending a final resolution of the
legal proceedings, the Company, without prejudice, has not recorded
the net settlement gain that would result from the termination of
the former CEO's retirement benefit plan.
The Company is also seeking to recover
$3 million of retirement benefits
paid to the former CEO as the Company believes that the former CEO
has failed to fulfill the terms of his employment agreement as well
as reasonable legal fees and other costs. The Company has not
recognized the recovery of these amounts.
Canada
Employee injuries are governed by the workers'
compensation legislation in each province whereby employees may be
awarded either a lump sum or a future stream of payments depending
on the nature and severity of the injury. As such, the provision
for employee injury claims is discounted. In the provinces where
the Company is self-insured, costs related to employee work-related
injuries are accounted for based on actuarially developed estimates
of the ultimate cost associated with such injuries, including
compensation, health care and third-party administration costs. A
comprehensive actuarial study is generally performed at least on a
triennial basis. For all other legal actions, the Company
maintains, and regularly updates on a case-by-case basis,
provisions for such items when the expected loss is both probable
and can be reasonably estimated based on currently available
information.
United
States
Personal injury claims by the Company's employees,
including claims alleging occupational disease and work-related
injuries, are subject to the provisions of the Federal Employers'
Liability Act (FELA). Employees are compensated under FELA for
damages assessed based on a finding of fault through the U.S. jury
system or through individual settlements. As such, the provision is
undiscounted. With limited exceptions where claims are evaluated on
a case-by-case basis, the Company follows an actuarial-based
approach and accrues the expected cost for personal injury,
including asserted and unasserted occupational disease claims, and
property damage claims, based on actuarial estimates of their
ultimate cost. A comprehensive actuarial study is performed
annually.
For employee work-related injuries, including
asserted occupational disease claims, and third-party claims,
including grade crossing, trespasser and property damage claims,
the actuarial valuation considers, among other factors, the
Company's historical patterns of claims filings and payments. For
unasserted occupational disease claims, the actuarial study
includes the projection of the Company's experience into the future
considering the potentially exposed population. The Company adjusts
its liability based upon management's assessment and the results of
the study. On an ongoing basis, management reviews and compares the
assumptions inherent in the latest actuarial study with the current
claim experience and, if required, adjustments to the liability are
recorded.
As at June 30,
2012, the Company had aggregate reserves for personal injury
and other claims of $300 million, of
which $83 million was recorded as a
current liability ($310 million as at
December 31, 2011, of which
$84 million was recorded as a current
liability).
Although the Company considers such provisions
to be adequate for all its outstanding and pending claims, the
final outcome with respect to actions outstanding or pending at
June 30, 2012, or with respect to
future claims, cannot be reasonably determined. When establishing
provisions for contingent litigation, the Company considers, where
a probable loss estimate cannot be made with reasonable certainty,
a range of potential probable losses for each such matter, and
records the amount it considers the most reasonable estimate within
the range. However, when no amount within the range is a better
estimate than any other amount, the minimum amount in the range is
accrued. For matters where a loss is reasonably possible but not
probable, a range of potential losses could not be estimated due to
various factors which may include the limited availability of
facts, the lack of demand for specific damages and the fact that
proceedings were at an early stage. Based on information currently
available, the Company believes that the eventual outcome of the
actions against the Company will not, individually or in the
aggregate, have a material adverse effect on the Company's
consolidated financial position. However, due to the inherent
inability to predict with certainty unforeseeable future
developments, there can be no assurance that the ultimate
resolution of these actions will not have a material adverse effect
on the Company's results of operations, financial position or
liquidity in a particular quarter or fiscal year.
C. Environmental matters
The Company's operations are subject to numerous
federal, provincial, state, municipal and local environmental laws
and regulations in Canada and the
U.S. concerning, among other things, emissions into the air;
discharges into waters; the generation, handling, storage,
transportation, treatment and disposal of waste, hazardous
substances, and other materials; decommissioning of underground and
aboveground storage tanks; and soil and groundwater contamination.
A risk of environmental liability is inherent in railroad and
related transportation operations; real estate ownership, operation
or control; and other commercial activities of the Company with
respect to both current and past operations.
Known existing environmental
concerns
The Company has identified approximately 310 sites at
which it is or may be liable for remediation costs, in some cases
along with other potentially responsible parties, associated with
alleged contamination and is subject to environmental clean-up and
enforcement actions, including those imposed by the United States
Federal Comprehensive Environmental Response, Compensation and
Liability Act of 1980 (CERCLA), also known as the Superfund law, or
analogous state laws. CERCLA and similar state laws, in addition to
other similar Canadian and U.S. laws, generally impose joint and
several liability for clean-up and enforcement costs on current and
former owners and operators of a site, as well as those whose waste
is disposed of at the site, without regard to fault or the legality
of the original conduct. The Company has been notified that it is a
potentially responsible party for study and clean-up costs at
approximately 10 sites governed by the Superfund law (and analogous
state laws) for which investigation and remediation payments are or
will be made or are yet to be determined and, in many instances, is
one of several potentially responsible parties.
The ultimate cost of addressing these known
contaminated sites cannot be definitely established given that the
estimated environmental liability for any given site may vary
depending on the nature and extent of the contamination; the nature
of anticipated response actions, taking into account the available
clean-up techniques; evolving regulatory standards governing
environmental liability; and the number of potentially responsible
parties and their financial viability. As a result, liabilities are
recorded based on the results of a four-phase assessment conducted
on a site-by-site basis. A liability is initially recorded when
environmental assessments occur, remedial efforts are probable, and
when the costs, based on a specific plan of action in terms of the
technology to be used and the extent of the corrective action
required, can be reasonably estimated. The Company estimates the
costs related to a particular site using cost scenarios established
by external consultants based on the extent of contamination and
expected costs for remedial efforts. In the case of multiple
parties, the Company accrues its allocable share of liability
taking into account the Company's alleged responsibility, the
number of potentially responsible parties and their ability to pay
their respective share of the liability. Adjustments to initial
estimates are recorded as additional information becomes
available.
The Company's provision for specific
environmental sites is undiscounted and includes costs for
remediation and restoration of sites, as well as monitoring costs.
Environmental accruals, which are classified as Casualty and other
in the Consolidated Statement of Income, include amounts for newly
identified sites or contaminants as well as adjustments to initial
estimates. Recoveries of environmental remediation costs from other
parties are recorded as assets when their receipt is deemed
probable.
As at June 30,
2012, the Company had aggregate accruals for environmental
costs of $120 million, of which
$34 million was recorded as a current
liability ($152 million as at
December 31, 2011, of which
$63 million was recorded as a current
liability). The Company anticipates that the majority of the
liability at June 30, 2012 will be
paid out over the next five years. However, some costs may be paid
out over a longer period. In situations where the Company expects
to recover certain accrued remediation costs associated with
alleged contamination, a receivable is recorded in Intangible and
other assets for such recoverable amount. Based on the information
currently available, the Company considers its provisions to be
adequate.
Unknown existing environmental
concerns
While the Company believes that it has identified the
costs likely to be incurred for environmental matters in the next
several years based on known information, the discovery of new
facts, future changes in laws, the possibility of releases of
hazardous materials into the environment and the Company's ongoing
efforts to identify potential environmental liabilities that may be
associated with its properties may result in the identification of
additional environmental liabilities and related costs. The
magnitude of such additional liabilities and the costs of complying
with future environmental laws and containing or remediating
contamination cannot be reasonably estimated due to many factors,
including:
(i) |
the lack of specific technical
information available with respect to many sites; |
(ii) |
the absence of any government
authority, third-party orders, or claims with respect to particular
sites; |
(iii) |
the potential for new or changed laws
and regulations and for development of new remediation technologies
and uncertainty regarding the timing of the work with respect to
particular sites; and |
(iv) |
the determination of the Company's
liability in proportion to other potentially responsible parties
and the ability to recover costs from any third parties with
respect to particular sites. |
Therefore, the likelihood of any such costs being incurred or
whether such costs would be material to the Company cannot be
determined at this time. There can thus be no assurance that
liabilities or costs related to environmental matters will not be
incurred in the future, or will not have a material adverse effect
on the Company's financial position or results of operations in a
particular quarter or fiscal year, or that the Company's liquidity
will not be adversely impacted by such liabilities or costs,
although management believes, based on current information, that
the costs to address environmental matters will not have a material
adverse effect on the Company's financial position or liquidity.
Costs related to any unknown existing or future contamination will
be accrued in the period in which they become probable and
reasonably estimable.
D. Guarantees and
indemnifications
In the normal course of business, the Company,
including certain of its subsidiaries, enters into agreements that
may involve providing guarantees or indemnifications to third
parties and others, which may extend beyond the term of the
agreements. These include, but are not limited to, residual value
guarantees on operating leases, standby letters of credit and
surety and other bonds, and indemnifications that are customary for
the type of transaction or for the railway business.
The Company is required to recognize a liability
for the fair value of the obligation undertaken in issuing certain
guarantees on the date the guarantee is issued or modified. In
addition, where the Company expects to make a payment in respect of
a guarantee, a liability will be recognized to the extent that one
has not yet been recognized.
(i) Guarantee of residual values of operating
leases
The Company has guaranteed a portion of the residual
values of certain of its assets under operating leases with expiry
dates between 2012 and 2020, for the benefit of the lessor. If the
fair value of the assets, at the end of their respective lease
term, is less than the fair value, as estimated at the inception of
the lease, then the Company must, under certain conditions,
compensate the lessor for the shortfall. At June 30, 2012, the maximum exposure in respect of
these guarantees was $137 million.
There are no recourse provisions to recover any amounts from third
parties.
(ii) Other guarantees
As at June 30, 2012, the
Company, including certain of its subsidiaries, has granted
$502 million of irrevocable standby
letters of credit and $11 million of
surety and other bonds, issued by highly rated financial
institutions, to third parties to indemnify them in the event the
Company does not perform its contractual obligations. As at
June 30, 2012, the maximum potential
liability under these guarantee instruments was $513 million, of which $442 million related to workers' compensation and
other employee benefit liabilities and $71
million related to equipment under leases and other
liabilities. The letters of credit were drawn on the Company's
bilateral letter of credit facilities. The Company has not recorded
a liability as at June 30, 2012 with
respect to these guarantee instruments as they relate to the
Company's future performance and the Company does not expect to
make any payments under these guarantee instruments. The majority
of the guarantee instruments mature at various dates between 2012
and 2015.
(iii) General indemnifications
In the normal course of business, the Company has provided
indemnifications, customary for the type of transaction or for the
railway business, in various agreements with third parties,
including indemnification provisions where the Company would be
required to indemnify third parties and others. Indemnifications
are found in various types of contracts with third parties which
include, but are not limited to:
|
(a) |
contracts granting the Company the
right to use or enter upon property owned by third parties such as
leases, easements, trackage rights and sidetrack agreements; |
|
(b) |
contracts granting rights to others
to use the Company's property, such as leases, licenses and
easements; |
|
(c) |
contracts for the sale of
assets; |
|
(d) |
contracts for the acquisition of
services; |
|
(e) |
financing agreements; |
|
(f) |
trust indentures, fiscal agency
agreements, underwriting agreements or similar agreements relating
to debt or equity securities of the Company and engagement
agreements with financial advisors; |
|
(g) |
transfer agent and registrar
agreements in respect of the Company's securities; |
|
(h) |
trust and other agreements relating
to pension plans and other plans, including those establishing
trust funds to secure payment to certain officers and senior
employees of special retirement compensation arrangements; |
|
(i) |
pension transfer agreements; |
|
(j) |
master agreements with financial
institutions governing derivative transactions; |
|
(k) |
settlement agreements with insurance
companies or other third parties whereby such insurer or third
party has been indemnified for any present or future claims
relating to insurance policies, incidents or events covered by the
settlement agreements; and |
|
(l) |
acquisition agreements. |
To the extent of any actual claims under these agreements, the
Company maintains provisions for such items, which it considers to
be adequate. Due to the nature of the indemnification clauses, the
maximum exposure for future payments may be material. However, such
exposure cannot be reasonably determined.
During the period, the Company entered into
various indemnification contracts with third parties for which the
maximum exposure for future payments cannot be reasonably
determined. As a result, the Company was unable to determine the
fair value of these guarantees and accordingly, no liability was
recorded. There are no recourse provisions to recover any amounts
from third parties.
Note 9 - Financial instruments
For financial assets and liabilities measured at
fair value on a recurring basis, fair value is the price the
Company would receive to sell an asset or pay to transfer a
liability in an orderly transaction with a market participant at
the measurement date. In the absence of active markets for
identical assets or liabilities, such measurements involve
developing assumptions based on market observable data and, in the
absence of such data, internal information that is believed to be
consistent with what market participants would use in a
hypothetical transaction that occurs at the measurement date.
Observable inputs reflect market data obtained from independent
sources, while unobservable inputs reflect the Company's market
assumptions. Preference is given to observable inputs. These two
types of inputs create the following fair value hierarchy:
Level 1: |
Quoted prices for identical
instruments in active markets. |
Level 2: |
Quoted prices for similar instruments
in active markets; quoted prices for identical or similar
instruments in markets that are not active; and model-derived
valuations whose inputs are observable or whose significant value
drivers are observable. |
Level 3: |
Significant inputs to the valuation
model are unobservable. |
The Company uses the following methods and assumptions to estimate
the fair value of each class of financial instruments for which the
carrying amounts are included in the Consolidated Balance Sheet
under the following captions:
(i) Cash and cash equivalents, Restricted
cash and cash equivalents, Accounts receivable, Other current
assets, Accounts payable and other:
The carrying amounts approximate fair value because of the
short maturity of these instruments. Cash and cash equivalents and
Restricted cash and cash equivalents include highly liquid
investments purchased three months or less from maturity and are
classified as Level 1. Accounts receivable, Other current assets,
and Accounts payable and other are classified as Level 2 as they
may not be priced using quoted prices, but rather determined from
market observable information.
(ii) Intangible and other
assets:
Included in Intangible and other assets are equity
investments for which the carrying value approximates the fair
value, with the exception of certain cost investments for which the
fair value is estimated based on the Company's proportionate share
of the underlying net assets. Intangible and other assets are
classified as Level 3 as their fair value is based on significant
unobservable inputs.
(iii) Debt:
The fair value of the Company's debt is estimated based on
the quoted market prices for the same or similar debt instruments,
as well as discounted cash flows using current interest rates for
debt with similar terms, company rating, and remaining maturity.
Debt is classified as Level 2 as it may not be priced using quoted
prices for identical instruments in active markets, but rather
determined from quoted prices for similar instruments in active
markets.
The following table presents the carrying
amounts and estimated fair values of the Company's financial
instruments as at June 30, 2012 and
December 31, 2011 for which the
carrying values on the Consolidated Balance Sheet are different
from their fair values:
In millions |
June 30, 2012 |
|
December 31,
2011 |
|
|
Carrying |
|
Fair |
|
Carrying |
|
Fair |
|
|
amount |
|
value |
|
amount |
|
value |
Financial assets |
|
|
|
|
|
|
|
|
|
|
|
|
Investments |
$ |
30 |
|
$ |
125 |
|
$ |
31 |
|
$ |
126 |
Financial liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
Total debt |
$ |
6,775 |
|
$ |
8,293 |
|
$ |
6,576 |
|
$ |
7,978 |
Note 10 - Earnings per share
The following table provides a reconciliation between basic and
diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
Six months
ended |
|
June 30 |
|
June 30 |
In millions, except per share data |
|
2012 |
|
|
2011 |
|
|
2012 |
|
|
2011 |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
$ |
631 |
|
$ |
538 |
|
$ |
1,406 |
|
$ |
1,206 |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding |
|
437.2 |
|
|
453.9 |
|
|
439.1 |
|
|
456.1 |
Effect of stock options |
|
2.3 |
|
|
3.2 |
|
|
2.4 |
|
|
3.3 |
Weighted-average diluted shares outstanding |
|
439.5 |
|
|
457.1 |
|
|
441.5 |
|
|
459.4 |
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share |
$ |
1.44 |
|
$ |
1.19 |
|
$ |
3.20 |
|
$ |
2.64 |
Diluted earnings per share |
$ |
1.44 |
|
$ |
1.18 |
|
$ |
3.18 |
|
$ |
2.63 |
Basic earnings per share are calculated based on
the weighted-average number of common shares outstanding over each
period. Diluted earnings per share are calculated based on the
weighted-average diluted shares outstanding using the treasury
stock method, which assumes that any proceeds received from the
exercise of in-the-money stock options would be used to purchase
common shares at the average market price for the period. The
weighted-average number of stock options that were not included in
the calculation of diluted earnings per share, as their inclusion
would have had an anti-dilutive impact, was 0.1 million for both
the three and six months ended June 30,
2012, and 0.1 million for both the corresponding periods in
2011.
Note 11 - Comparative figures
Certain figures previously reported in 2011 have been
reclassified to conform with the basis of presentation adopted in
2012.
CANADIAN NATIONAL RAILWAY COMPANY |
SELECTED RAILROAD STATISTICS (U.S. GAAP)
- unaudited |
|
|
Three months ended |
|
Six months ended |
|
June 30 |
|
June 30 |
|
2012 |
|
2011 |
|
2012 |
|
2011 |
|
|
|
|
Statistical operating data |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rail freight revenues ($ millions) |
2,274 |
|
2,016 |
|
4,421 |
|
3,920 |
Gross ton miles (GTM) (millions) |
96,886 |
|
89,615 |
|
189,479 |
|
176,282 |
Revenue ton miles (RTM) (millions) |
50,324 |
|
46,683 |
|
99,373 |
|
92,836 |
Carloads (thousands) |
1,286 |
|
1,234 |
|
2,491 |
|
2,380 |
Route miles (includes Canada and the U.S.)
(1) |
20,000 |
|
20,500 |
|
20,000 |
|
20,500 |
Employees (end of period) |
23,736 |
|
23,431 |
|
23,736 |
|
23,431 |
Employees (average for the period) |
23,745 |
|
23,169 |
|
23,473 |
|
22,789 |
|
|
|
|
|
|
|
|
Productivity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating ratio (%) |
61.3 |
|
61.3 |
|
63.6 |
|
65.0 |
Rail freight revenue per RTM (cents) |
4.52 |
|
4.32 |
|
4.45 |
|
4.22 |
Rail freight revenue per carload ($) |
1,768 |
|
1,634 |
|
1,775 |
|
1,647 |
Operating expenses per GTM (cents) |
1.61 |
|
1.55 |
|
1.64 |
|
1.60 |
Labor and fringe benefits expense per GTM
(cents) |
0.52 |
|
0.48 |
|
0.53 |
|
0.51 |
GTMs per average number of employees
(thousands) |
4,080 |
|
3,868 |
|
8,072 |
|
7,735 |
Diesel fuel consumed (US gallons in millions) |
97.4 |
|
91.3 |
|
194.3 |
|
184.2 |
Average fuel price ($/US gallon) |
3.41 |
|
3.42 |
|
3.47 |
|
3.31 |
GTMs per US gallon of fuel consumed |
995 |
|
982 |
|
975 |
|
957 |
|
|
|
|
|
|
|
|
Safety indicators |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Injury frequency rate per 200,000 person hours
(2) |
1.35 |
|
1.71 |
|
1.29 |
|
1.58 |
Accident rate per million train miles
(2) |
2.19 |
|
2.44 |
|
2.18 |
|
2.36 |
|
|
|
|
|
|
|
|
Financial ratio |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt-to-total capitalization ratio (% at end of
period) (3) |
37.8 |
|
34.2 |
|
37.8 |
|
34.2 |
(1) |
Rounded to the nearest hundred miles. |
(2) |
Based on Federal Railroad Administration (FRA)
reporting criteria. |
(3) |
Debt-to-total capitalization is calculated as
total long-term debt plus current portion of long-term debt,
divided by the sum of total debt plus total shareholders'
equity. |
Certain of the 2011 comparative figures have been restated to
conform with the 2012 presentation. Such statistical data and
related productivity measures are based on estimated data available
at such time and are subject to change as more complete information
becomes available.
CANADIAN NATIONAL RAILWAY COMPANY |
SUPPLEMENTARY INFORMATION (U.S. GAAP) -
unaudited |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30 |
|
Six months ended June 30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% Change at |
|
|
|
|
|
|
|
% Change at |
|
|
|
|
|
|
|
constant |
|
|
|
|
|
|
|
constant |
|
|
|
|
|
% Change |
|
currency |
|
|
|
|
|
% Change |
|
currency |
|
2012 |
|
2011 |
|
Fav (Unfav) |
|
Fav (Unfav)
(1) |
|
2012 |
|
2011 |
|
Fav (Unfav) |
|
Fav (Unfav)
(1) |
|
|
Revenues (millions of dollars) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Petroleum and chemicals |
405 |
|
340 |
|
19% |
|
16% |
|
797 |
|
682 |
|
17% |
|
15% |
Metals and minerals |
293 |
|
245 |
|
20% |
|
16% |
|
566 |
|
454 |
|
25% |
|
22% |
Forest products |
344 |
|
317 |
|
9% |
|
6% |
|
672 |
|
616 |
|
9% |
|
7% |
Coal |
187 |
|
162 |
|
15% |
|
13% |
|
354 |
|
303 |
|
17% |
|
15% |
Grain and fertilizers |
366 |
|
368 |
|
(1%) |
|
(3%) |
|
763 |
|
774 |
|
(1%) |
|
(3%) |
Intermodal |
526 |
|
454 |
|
16% |
|
15% |
|
986 |
|
846 |
|
17% |
|
16% |
Automotive |
153 |
|
130 |
|
18% |
|
15% |
|
283 |
|
245 |
|
16% |
|
13% |
Total rail freight revenues |
2,274 |
|
2,016 |
|
13% |
|
10% |
|
4,421 |
|
3,920 |
|
13% |
|
11% |
Other revenues |
269 |
|
244 |
|
10% |
|
8% |
|
468 |
|
424 |
|
10% |
|
9% |
Total revenues |
2,543 |
|
2,260 |
|
13% |
|
10% |
|
4,889 |
|
4,344 |
|
13% |
|
11% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue ton miles (millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Petroleum and chemicals |
8,967 |
|
7,847 |
|
14% |
|
14% |
|
17,834 |
|
16,076 |
|
11% |
|
11% |
Metals and minerals |
5,069 |
|
4,611 |
|
10% |
|
10% |
|
10,007 |
|
8,568 |
|
17% |
|
17% |
Forest products |
7,522 |
|
7,302 |
|
3% |
|
3% |
|
14,988 |
|
14,433 |
|
4% |
|
4% |
Coal |
6,091 |
|
5,330 |
|
14% |
|
14% |
|
11,600 |
|
9,949 |
|
17% |
|
17% |
Grain and fertilizers |
10,616 |
|
11,157 |
|
(5%) |
|
(5%) |
|
22,197 |
|
24,116 |
|
(8%) |
|
(8%) |
Intermodal |
11,272 |
|
9,756 |
|
16% |
|
16% |
|
21,290 |
|
18,374 |
|
16% |
|
16% |
Automotive |
787 |
|
680 |
|
16% |
|
16% |
|
1,457 |
|
1,320 |
|
10% |
|
10% |
|
50,324 |
|
46,683 |
|
8% |
|
8% |
|
99,373 |
|
92,836 |
|
7% |
|
7% |
Rail freight revenue / RTM
(cents) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total rail freight revenue per RTM |
4.52 |
|
4.32 |
|
5% |
|
2% |
|
4.45 |
|
4.22 |
|
5% |
|
4% |
Commodity groups: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Petroleum and chemicals |
4.52 |
|
4.33 |
|
4% |
|
1% |
|
4.47 |
|
4.24 |
|
5% |
|
3% |
Metals and minerals |
5.78 |
|
5.31 |
|
9% |
|
5% |
|
5.66 |
|
5.30 |
|
7% |
|
5% |
Forest products |
4.57 |
|
4.34 |
|
5% |
|
3% |
|
4.48 |
|
4.27 |
|
5% |
|
3% |
Coal |
3.07 |
|
3.04 |
|
1% |
|
(1%) |
|
3.05 |
|
3.05 |
|
- |
|
(1%) |
Grain and fertilizers |
3.45 |
|
3.30 |
|
5% |
|
2% |
|
3.44 |
|
3.21 |
|
7% |
|
6% |
Intermodal |
4.67 |
|
4.65 |
|
- |
|
(1%) |
|
4.63 |
|
4.60 |
|
1% |
|
- |
Automotive |
19.44 |
|
19.12 |
|
2% |
|
(1%) |
|
19.42 |
|
18.56 |
|
5% |
|
2% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carloads (thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Petroleum and chemicals |
146 |
|
138 |
|
6% |
|
6% |
|
292 |
|
278 |
|
5% |
|
5% |
Metals and minerals |
268 |
|
265 |
|
1% |
|
1% |
|
513 |
|
480 |
|
7% |
|
7% |
Forest products |
113 |
|
113 |
|
- |
|
- |
|
225 |
|
221 |
|
2% |
|
2% |
Coal |
109 |
|
113 |
|
(4%) |
|
(4%) |
|
215 |
|
232 |
|
(7%) |
|
(7%) |
Grain and fertilizers |
139 |
|
145 |
|
(4%) |
|
(4%) |
|
282 |
|
305 |
|
(8%) |
|
(8%) |
Intermodal |
451 |
|
400 |
|
13% |
|
13% |
|
850 |
|
752 |
|
13% |
|
13% |
Automotive |
60 |
|
60 |
|
- |
|
- |
|
114 |
|
112 |
|
2% |
|
2% |
|
1,286 |
|
1,234 |
|
4% |
|
4% |
|
2,491 |
|
2,380 |
|
5% |
|
5% |
Rail freight revenue / carload
(dollars) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total rail freight revenue per carload |
1,768 |
|
1,634 |
|
8% |
|
6% |
|
1,775 |
|
1,647 |
|
8% |
|
6% |
Commodity groups: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Petroleum and chemicals |
2,774 |
|
2,464 |
|
13% |
|
10% |
|
2,729 |
|
2,453 |
|
11% |
|
9% |
Metals and minerals |
1,093 |
|
925 |
|
18% |
|
15% |
|
1,103 |
|
946 |
|
17% |
|
14% |
Forest products |
3,044 |
|
2,805 |
|
9% |
|
6% |
|
2,987 |
|
2,787 |
|
7% |
|
5% |
Coal |
1,716 |
|
1,434 |
|
20% |
|
17% |
|
1,647 |
|
1,306 |
|
26% |
|
24% |
Grain and fertilizers |
2,633 |
|
2,538 |
|
4% |
|
1% |
|
2,706 |
|
2,538 |
|
7% |
|
5% |
Intermodal |
1,166 |
|
1,135 |
|
3% |
|
2% |
|
1,160 |
|
1,125 |
|
3% |
|
2% |
Automotive |
2,550 |
|
2,167 |
|
18% |
|
15% |
|
2,482 |
|
2,188 |
|
13% |
|
11% |
(1) |
See supplementary schedule entitled Non-GAAP Measures for an
explanation of this Non-GAAP measure. |
Such statistical data and related productivity
measures are based on estimated data available at such time and are
subject to change as more complete information becomes
available.
CANADIAN NATIONAL RAILWAY COMPANY
|
NON-GAAP MEASURES - unaudited |
Adjusted performance measures
For the three and six months ended June 30, 2012, the Company reported adjusted net
income of $659 million, or
$1.50 per diluted share and
$1,182 million, or $2.67 per diluted share, respectively. The
adjusted figures for the three and six months ended June 30, 2012 exclude a net income tax expense of
$28 million ($0.06 per diluted share) consisting of a
$35 million income tax expense
resulting from the enactment of higher provincial corporate income
tax rates that was partly offset by a $7
million income tax recovery resulting from the
recapitalization of a foreign investment. The adjusted figures for
the six months ended June 30, 2012
also exclude the gain on disposal of a segment of the Bala and a segment of the Oakville subdivisions of $281 million, or $252
million after-tax ($0.57 per
diluted share).
For the three and six months ended June 30, 2011, the Company reported adjusted net
income of $578 million, or
$1.26 per diluted share and
$992 million, or $2.16 per diluted share, respectively. The
adjusted figures for the three and six months ended June 30, 2011 exclude a net income tax expense of
$40 million ($0.08 per diluted share) resulting from the
enactment of state corporate income tax rate changes and other
legislated state tax revisions. The adjusted figures for the six
months ended June 30, 2011 also
exclude a gain on disposal of a segment of the Company's
Kingston subdivision of
$288 million, or $254 million after-tax ($0.55 per diluted share).
Management believes that adjusted net income and
adjusted earnings per share are useful measures of performance that
can facilitate period-to-period comparisons, as they exclude items
that do not necessarily arise as part of the normal day-to-day
operations of the Company and could distort the analysis of trends
in business performance. The exclusion of such items in adjusted
net income and adjusted earnings per share does not, however, imply
that such items are necessarily non-recurring. These adjusted
measures do not have any standardized meaning prescribed by GAAP
and may, therefore, not be comparable to similar measures presented
by other companies. The reader is advised to read all information
provided in the Company's 2012 unaudited Interim Consolidated
Financial Statements and Notes thereto. The following tables
provide a reconciliation of net income and earnings per share, as
reported for the three and six months ended June 30, 2012 and 2011, to the adjusted
performance measures presented herein.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
Six months ended |
|
|
June 30, 2012 |
|
June 30, 2012 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In millions, except per share data |
|
Reported |
|
Adjustments |
|
Adjusted |
|
Reported |
|
Adjustments |
|
Adjusted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
2,543 |
|
$ |
- |
|
$ |
2,543 |
|
$ |
4,889 |
|
$ |
- |
|
$ |
4,889 |
Operating expenses |
|
|
1,558 |
|
|
- |
|
|
1,558 |
|
|
3,111 |
|
|
- |
|
|
3,111 |
Operating income |
|
|
985 |
|
|
- |
|
|
985 |
|
|
1,778 |
|
|
- |
|
|
1,778 |
Interest expense |
|
|
(86) |
|
|
- |
|
|
(86) |
|
|
(172) |
|
|
- |
|
|
(172) |
Other income |
|
|
9 |
|
|
- |
|
|
9 |
|
|
302 |
|
|
(281) |
|
|
21 |
Income before income taxes |
|
|
908 |
|
|
- |
|
|
908 |
|
|
1,908 |
|
|
(281) |
|
|
1,627 |
Income tax expense |
|
|
(277) |
|
|
28 |
|
|
(249) |
|
|
(502) |
|
|
57 |
|
|
(445) |
Net income |
|
$ |
631 |
|
$ |
28 |
|
$ |
659 |
|
$ |
1,406 |
|
$ |
(224) |
|
$ |
1,182 |
Operating ratio |
|
|
61.3% |
|
|
|
|
|
61.3% |
|
|
63.6% |
|
|
|
|
|
63.6% |
Basic earnings per share |
|
$ |
1.44 |
|
$ |
0.06 |
|
$ |
1.50 |
|
$ |
3.20 |
|
$ |
(0.51) |
|
$ |
2.69 |
Diluted earnings per share |
|
$ |
1.44 |
|
$ |
0.06 |
|
$ |
1.50 |
|
$ |
3.18 |
|
$ |
(0.51) |
|
$ |
2.67 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months
ended |
|
Six months
ended |
|
|
June 30, 2011 |
|
June 30, 2011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In millions, except per share data |
|
Reported |
|
Adjustments |
|
Adjusted |
|
Reported |
|
Adjustments |
|
Adjusted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
2,260 |
|
$ |
- |
|
$ |
2,260 |
|
$ |
4,344 |
|
$ |
- |
|
$ |
4,344 |
Operating expenses |
|
|
1,386 |
|
|
- |
|
|
1,386 |
|
|
2,825 |
|
|
- |
|
|
2,825 |
Operating income |
|
|
874 |
|
|
- |
|
|
874 |
|
|
1,519 |
|
|
- |
|
|
1,519 |
Interest expense |
|
|
(85) |
|
|
- |
|
|
(85) |
|
|
(171) |
|
|
- |
|
|
(171) |
Other income |
|
|
10 |
|
|
- |
|
|
10 |
|
|
310 |
|
|
(288) |
|
|
22 |
Income before income taxes |
|
|
799 |
|
|
- |
|
|
799 |
|
|
1,658 |
|
|
(288) |
|
|
1,370 |
Income tax expense |
|
|
(261) |
|
|
40 |
|
|
(221) |
|
|
(452) |
|
|
74 |
|
|
(378) |
Net income |
|
$ |
538 |
|
$ |
40 |
|
$ |
578 |
|
$ |
1,206 |
|
$ |
(214) |
|
$ |
992 |
Operating ratio |
|
|
61.3% |
|
|
|
|
|
61.3% |
|
|
65.0% |
|
|
|
|
|
65.0% |
Basic earnings per share |
|
$ |
1.19 |
|
$ |
0.08 |
|
$ |
1.27 |
|
$ |
2.64 |
|
$ |
(0.47) |
|
$ |
2.17 |
Diluted earnings per share |
|
$ |
1.18 |
|
$ |
0.08 |
|
$ |
1.26 |
|
$ |
2.63 |
|
$ |
(0.47) |
|
$ |
2.16 |
Constant currency
Although CN conducts its business and reports
its earnings in Canadian dollars, a large portion of revenues and
expenses is denominated in US dollars. As such, the Company's
results are affected by exchange-rate fluctuations.
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 may,
therefore, 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 of the prior
year. The average foreign exchange rate for both the three and six
months ended June 30, 2012 was
$1.01 per US$1.00, and $0.97
and $0.98 per US$1.00, respectively, for the three and six
months ended June 30, 2011.
On a constant currency basis, the Company's 2012
second quarter and first half net income would have been lower by
$13 million and $17 million, respectively, or $0.03 and $0.04 per
diluted share, respectively. The following table presents a
reconciliation of 2012 net income as reported to net income on a
constant currency basis:
|
|
|
|
|
|
|
|
Three months ended |
|
Six months ended |
In millions |
June 30, 2012 |
|
June 30, 2012 |
|
|
|
|
|
Net income, as reported |
$ |
631 |
|
$ |
1,406 |
|
|
|
|
|
|
|
Add back: |
|
|
|
|
|
|
Positive impact due to the
weakening Canadian dollar included in net income |
|
(10) |
|
|
(13) |
Add: |
|
|
|
|
|
|
Decrease due to the weakening
Canadian dollar on additional year-over-year US$ net income |
|
(3) |
|
|
(4) |
Impact of foreign exchange using
constant currency rates |
|
(13) |
|
|
(17) |
Net income, on a constant currency
basis |
$ |
618 |
|
$ |
1,389 |
Free cash flow
The Company generated $655 million and $703
million of free cash flow for the three and six months ended
June 30, 2012, respectively, compared
to $378 million and $823 million for the same periods in 2011,
respectively. Free cash flow does not have any standardized meaning
prescribed by GAAP and may, therefore, not be comparable to similar
measures presented by other companies. The Company believes that
free cash flow is a useful measure of performance as it
demonstrates the Company's ability to generate cash after the
payment of capital expenditures and dividends. The Company defines
free cash flow as the sum of net cash provided by operating
activities, adjusted for changes in cash and cash equivalents
resulting from foreign exchange fluctuations; and net cash used in
investing activities, adjusted for changes in restricted cash and
cash equivalents, if any, the impact of major acquisitions, if any;
and the payment of dividends, calculated as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months
ended |
|
Six months
ended |
|
June
30 |
|
June
30 |
In millions |
2012 |
|
2011 |
|
2012 |
|
2011 |
|
|
|
|
|
|
|
|
|
Net cash provided by operating
activities |
$ |
1,211 |
|
$ |
899 |
|
$ |
1,336 |
|
$ |
1,398 |
Net cash used in investing
activities |
|
(366) |
|
|
(841) |
|
|
(277) |
|
|
(748) |
Net cash provided before financing
activities |
|
845 |
|
|
58 |
|
|
1,059 |
|
|
650 |
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments: |
|
|
|
|
|
|
|
|
|
|
|
|
Dividends paid |
|
(163) |
|
|
(147) |
|
|
(328) |
|
|
(296) |
|
Change in restricted cash and cash
equivalents |
|
(27) |
|
|
467 |
|
|
(27) |
|
|
467 |
|
Effect of foreign exchange fluctuations on US
dollar-denominated cash and cash equivalents |
|
- |
|
|
- |
|
|
(1) |
|
|
2 |
Free cash flow |
$ |
655 |
|
$ |
378 |
|
$ |
703 |
|
$ |
823 |
SOURCE CN