CALGARY — Canadian Pacific Railway yesterday reported, in a press release, net income of $65 million for third-quarter 2002, a decrease of $49 million, or 43 per cent from net income reported in the third quarter of 2001. Diluted earnings per share were $0.41 for the quarter ended September 30, 2002, compared with $0.72 in the same period of 2001. The decline was largely attributable to income from non-recurring items in the third quarter last year, and higher foreign exchange losses on long- term debt in the third quarter this year.
Excluding foreign exchange losses on long-term debt in both years, and last year’s non-recurring items, net income of $108 million in third-quarter 2002 was up $10 million or 10 per cent over the same period of 2001. On this basis, diluted earnings per share for third-quarter 2002 were $0.68, compared with $0.62 in third-quarter 2001, a growth of 10 per cent (see note on non- GAAP earnings measures below).
CPR reported a foreign exchange loss on long-term debt of $47 million ($43 million after tax) in the third quarter of 2002, compared with a loss of $26 million ($21 million after tax) for the same period a year earlier. The results of the prior year’s quarter also include non-recurring items of $7 million ($4 million after tax) related to spin-off and incentive compensation charges, a $7-million ($4 million after tax) bridge financing fee related to the spin-off, and a $45-million future income tax recovery.
Robert Ritchie, President and Chief Executive Officer, said: “CPR produced another solid quarter – part of a very strong year-to-date performance. With the close of the third quarter, CPR marked its first year as an independent company. Our results show that we have unlocked value in CPR and met the goal of our spin-off from Canadian Pacific Limited. We were tested by events beyond our control, including the 9/11 terrorist attacks on the U.S., economic uncertainty, and a severe drought on the Canadian prairies, but we overcame these challenges and demonstrated that CPR can perform well in adverse circumstances.”
Third-quarter 2002 operating income was $224 million, up $2 million over the same period last year, excluding the non-recurring items in last year’s third quarter. CPR’s operating ratio for the third quarter on this basis was 75.6 per cent, compared with 75.3 per cent in the same quarter last year.
Revenue in the third quarter of 2002 was $917 million, an increase of $19 million or 2 per cent compared with the same period in 2001. Intermodal was the leading growth performer, increasing $27 million or 13 per cent, reflecting improvement in international traffic through East and West coast ports. Sulphur and fertilizers revenue was up $14 million or 18 per cent, driven by higher potash volumes and favourable timing for fertilizer shipments.
Grain revenue declined $19 million or 10 per cent, largely due to a drought-induced shortfall in grain production in the 2001 crop year. Coal revenues were down $12 million or 10 per cent, reflecting weaker metallurgical coal sales to export markets, partially offset by higher thermal coal volumes in the U.S.
“We met these revenue challenges and generated growth during the quarter in other areas of the business to more than offset the declines in grain and coal,” Mr. Ritchie said. “Excluding the decline in grain caused by drought alone, CPR produced revenue growth of 5 per cent.”
Operating expenses in the third quarter were $694 million, an increase of $18 million or 3 per cent, excluding non-recurring items from last year’s quarter. The increase partially reflected a shift to higher volumes of non- bulk shipments and timing of expenses. Compensation and benefits expense rose $13 million or 5 per cent due to wage increases, higher health and welfare costs, increased train miles and expenses associated with CPR’s employee stock purchase plan. Materials expense rose $11 million or 36 per cent, with most of the increase due to lower-than-normal expense levels in last year’s quarter. The cost of equipment rents declined $10 million or 15 per cent, reflecting ongoing improvement in asset utilization and one-time benefits in the quarter. Fuel expenses dropped $3 million or 4 per cent due to CPR’s hedging program, lower refining margins and lower consumption rates, despite an increase in workload.
Benefits from lower income tax rates in the third quarter of 2002 more than offset increased interest expense caused by higher debt levels related to CPR’s spin-off last year. Excluding the tax impact on non-recurring items and foreign exchange losses on long-term debt, CPR’s tax rate for the quarter declined to 32 per cent, from 41 per cent in third-quarter 2001.
“CPR continued to generate productivity improvements,” Mr. Ritchie said. “Employee productivity, as measured by gross ton-miles of freight handled, was a third-quarter record. Freight car utilization was up 6 per cent. Fuel consumption rates dropped to their lowest level ever.
“Our first objective is to run a safe railway, and I’m pleased to report CPR continues to make progress in this area and leads the industry in train safety. Our commitment to safety was acutely demonstrated earlier this year when CPR’s adherence to the practices and principles of Responsible Care® was verified by an independent team of auditors,” Mr. Ritchie said. Verification is a requirement of all partners in Responsible Care®, the largest industrial environmental, health and safety initiative in North America.
FIRST NINE MONTHS
Year-to-date, net income was $370 million, an increase of $96 million or 35 per cent over the first three quarters of 2001. Diluted earnings per share were $2.33, up 35 per cent compared with $1.73 in the same period last year.
Excluding non-recurring items and foreign exchange gains and losses on long-term debt, net income for the first nine months of 2002 was $287 million, an increase of $31 million or 12 per cent over the same period of 2001. Diluted earnings per share on this basis were $1.81, compared with $1.61 in the same period last year, an increase of 12 per cent. Operating income for the first nine months of 2002 was $619 million, up $39 million over the same period last year, excluding last year’s non-recurring items. On this basis, CPR’s operating ratio was 77.2 per cent, an improvement of 1.7 percentage points.
Results in the first nine months of 2002 include a $72-million tax benefit stemming from a favourable court ruling related to prior years’ taxes as well as a $7-million ($11 million after tax) net foreign exchange gain on long-term debt. Results in the first nine months of 2001 include $23 million ($13 million after tax) in spin-off related and incentive compensation charges, a $7-million ($4 million after tax) bridge financing fee, a $64-million future income tax recovery, and a $36-million ($28 million after tax) foreign exchange loss on long-term debt.
Year-to-date, revenue was $2,715 million, down 1 per cent from the first nine months of 2001. Strong growth in the intermodal, automotive, sulphur and fertilizers, and forest products businesses largely offset a 15-per cent decline in grain revenue caused by the drought conditions, as well as smaller declines in coal and industrial products. Nine-month operating expenses in 2002 were $2,097 million, a decline of 3 per cent from the same period last year, excluding last year’s non-recurring items. Fuel expense dropped 15 per cent largely as a result of lower fuel prices and volumes. Expenses fell in all other areas except depreciation and amortization, which increased 5 per cent due to ongoing capital additions to property.
OUTLOOK
“Though crop yield, quality and timing of shipments remain wild cards, there are more favourable growing conditions in some areas of our grain gathering region in the present 2002 crop year,” Mr. Ritchie said. “Metallurgical coal volumes are expected to continue to be affected by weaker export sales. However, assuming continued growth in other business sectors and the economy remains relatively stable, CPR expects to achieve its target of earnings per share growth in the 3 per cent to 5 per cent range for 2002.”
CPR’s 14,000-mile network serves the principal centres of Canada, from Montreal to Vancouver, and the U.S. Northeast and Midwest regions. CPR’s track feeds directly into the Chicago hub from the East and West coasts. Alliances with other carriers extend CPR’s market reach beyond its own network and into the major business centres of Mexico. For more information, visit CPR’s website at www.cpr.ca.