(Canadian Pacific issued the following news release on January 30.)
CALGARY — Canadian Pacific announced its fourth-quarter and full year 2006 results today. For the full year, net income for 2006 was $796 million, which included a tax benefit of $176 million as a result of a decrease in Canadian federal and provincial income tax rates. This was an increase in net income of 47 per cent over 2005. Diluted earnings per share was $5.02 for the full year 2006, an increase of 48 per cent over 2005.
SUMMARY OF FULL-YEAR 2006 COMPARED WITH FULL-YEAR 2005
Excluding foreign exchange gains and losses on long-term debt and other specified items:
– Diluted earnings per share was $3.95, an increase of 20 per cent.
– Operating income was $ 1.129 billion, a full year record, and an
increase of 13 per cent.
– Operating ratio was 75.4 per cent, which was an improvement of
180 basis points.
– Revenue grew 4 per cent to $4.583 billion, with operating expenses
increasing by only 2 per cent.
“I’m pleased with the financial results,” said Fred Green, President and CEO, “We focused on cost containment and improving the fluidity of our operations, and, with our diversified customer portfolio, we delivered strong results while overcoming a drop in coal revenues of $137 million. As well, I am particularly delighted with our team’s improvement on the safety front. We reduced personal injuries by 17 per cent and train accidents by 39 per cent over 2005, again making CP one of the safest railroads in North America.”
SUMMARY OF 4TH QUARTER 2006 COMPARED WITH 4TH QUARTER 2005
Net income for the fourth-quarter was $146 million, an increase of 6 per cent.
Excluding foreign exchange losses on long-term debt and other specified items:
– Diluted earnings per share was $1.15, an increase of 7.5 per cent.
– Operating ratio improved by 80 basis points to 73.1 per cent.
– Income increased 6 per cent to $181 million.
– Total revenue grew 2 per cent and operating expenses were up less
than 1 per cent.
“We are well positioned to continue to deliver on our commitments in 2007,” said Mr. Green. “Our Integrated Operating Plan has significantly improved fluidity, allowing us to respond quickly and adjust our operations to changes in traffic volumes. Through our continued focus on execution excellence, we are improving the efficiency of our business, keeping CP on track to be the safest, most fluid railway in North America.”
Freight revenues in the fourth-quarter were $1.152 billion, with grain increasing 16.5 per cent over fourth-quarter 2005 and sulphur and fertilizers growing 19 per cent. Industrial and consumer products and intermodal showed modest growth. This was offset in part, primarily by a 16 per cent decrease in coal.
Operating expenses, excluding other specified items, for the quarter were up less than 1 per cent. Increases due to inflation and volumes were largely offset by improved operating efficiencies and reductions in management staff.
2007 OUTLOOK
“It is early in the year and there are many factors in play,” said Mr. Green. “Rail fundamentals remain strong, although our Operating team has been tested with very tough winter operating conditions and there is softening in some sectors of the North American economy. At the same time, we are seeing fluctuating fuel prices and a weakening Canadian dollar. I am confident we will hit our stride in 2007 and CP’s outlook for diluted earnings per share in 2007 remains in the range of $4.30 to $4.45, an increase of 9 to 13 per cent respectively, over the 2006 diluted EPS which was $3.95, (excluding foreign exchange gains and losses on long-term debt and other specified items).”
CP expects to grow revenue in the range of 4 per cent to 6 per cent in 2007. Capital investment is anticipated to be between $885 million and $895 million and free cash, after dividends, is now expected to exceed $250 million in 2007. This outlook assumes oil prices averaging US$58 per barrel and an average currency exchange rate of $1.15 per U.S. dollar (US$0.87).
RESTATEMENT OF COMPARATIVE FIGURES FOR 2005
Prior period comparative figures have been restated for retroactively applied accounting changes. The CICA issued Emerging Issues Committee Abstract “Stock-Based Compensation for Employees Eligible to Retire Before the Vesting Date” (“EIC 162”) which became effective for the year ended December 31, 2006 and has been applied retroactively with restatement of prior periods. The compensation cost attributable to stock-based awards is recognized over the period from the grant date to the date the employees become eligible to retire when this is shorter than the vesting period. The adoption of EIC 162 resulted in a decrease in reported “Compensation and benefits” expense for the three months ended December 31, 2006 by $0.6 million (three months ended December 31, 2005 – $2.0 million) and for the year ended December 31, 2006 by $1.2 million (year ended December 31, 2005 – $0.2 million). Note 2 to the financial statements describes adoption of EIC 162.
FOREIGN EXCHANGE GAINS AND LOSSES ON LONG-TERM DEBT AND OTHER SPECIFIED ITEMS
Results for full-year 2006 included a foreign exchange loss of $0.1 million ($7 million after tax) on long-term debt, compared with a gain of $45 million ($22 million after tax) on long-term debt in 2005. Results for the fourth quarter of 2006 included a foreign exchange loss of $45 million ($35 million after tax), compared with a loss of $1 million ($5 million after tax) in the same period of 2005.
Other specified items in 2006 were related to a future income tax benefit of $176 million as a result of a decrease in Canadian federal and provincial income tax rates that occurred in the second quarter of 2006.
Other specified items in 2005 were related to a special charge and a partial reduction of a special charge originally taken in 2004, which had a net impact of $10 million ($8 million after tax) in 2005. CP began in 2005 a program to reduce management and administrative staff by approximately 400. These reductions, which were completed during the third quarter of 2006, resulted in a special charge of $44 million ($28 million after tax) in the fourth quarter of 2005. This special charge was partially offset by a reduction, booked in the third quarter of 2005, of $34 million ($21 million after tax) to a special charge of $91 million ($55 million after tax) taken in 2004 for environmental remediation of a property in the United States. The reduction reflected a settlement of litigation related to remediation of the environmental contamination.
Presentation of non-GAAP earnings
CP presents non-GAAP earnings in this news release to provide a basis for evaluating underlying earnings and liquidity trends in its business that can be compared with prior periods’ results of operations. These non-GAAP earnings exclude foreign currency translation effects on long-term debt, which can be volatile and short term, and other specified items, which are not among CP’s normal ongoing revenues and operating expenses. The impact of volatile short-term rate fluctuations on foreign-denominated debt is only realized when long-term debt matures or is settled. A reconciliation of income, excluding foreign exchange gains and losses on long-term debt and other specified items, to net income as presented in the financial statements is detailed in the attached Summary of Rail Data.
Free cash after dividends is calculated as cash provided by operating activities, less cash used in investing activities and dividends.
Earnings that exclude foreign exchange currency translation effect on long-term debt and other specified items, and free cash after dividends, as described in this news release, have no standardized meanings and are not defined by Canadian generally accepted accounting principles and, therefore, are unlikely to be comparable to similar measures presented by other companies.
Other specified items are material transactions that may include, but are not limited to, restructuring and asset impairment charges, gains and losses on non-routine sales of assets, unusual income tax adjustments, and other items that do not typify normal business activities. In 2006, the only other specified item was an income tax benefit of $176 million, or $1.09 per share, as a result of tax rate reductions.
Canadian Pacific, through the ingenuity of its employees located across Canada and in the United States, intends to be the safest, and most fluid railway in North America. Our people are the key to delivering innovative transportation solutions to our customers and to ensuring the safe operation of our trains through the more than 900 communities where we operate. Our combined ingenuity makes Canadian Pacific a better place to work, rail a better way to ship, and North America a better place to live. Come and visit us at www.cpr.ca to see how we can put our ingenuity to work for you. Canadian Pacific is proud to be the official rail freight services provider for the Vancouver 2010 Olympic and Paralympic Winter Games.