CALGARY — Canadian Pacific Railway reported net income of $169 million for second-quarter 2002, an increase of $43 million, or 35 per cent over net income in the second quarter of 2001. Diluted earnings per share were $1.06 for the quarter ended June 30, 2002, compared with diluted earnings per share of $0.79 in the same period of 2001.
The results include the effect of recent changes in the Canadian accounting standard for the treatment of exchange gains and losses on foreign denominated debt applied retroactively. The standard no longer allows the deferral and amortization of unrealized foreign exchange gains or losses on long-term debt and as a result, fluctuations in the exchange rates between Canadian and U.S. currencies more readily impact reported current earnings. CPR reported a foreign exchange gain on long-term debt of $58 million (nil tax impact due to unbenefited capital loss carry forwards) in the second quarter of 2002, compared with a gain of $31 million ($29 million after tax) for the same period a year earlier.
Excluding the foreign exchange gain on long-term debt in 2001 and 2002, net income in the second quarter this year was $111 million, an increase of 16 per cent over net income of $96 million in the same period of 2001. Diluted earnings per share for the quarter on this basis were $0.70, compared with $0.61 in the second quarter of 2001. (See note on non-GAAP earnings measures below).
Second-quarter operating income was $219 million, an increase of $13 million, or 7 per cent over the second quarter of 2001. CPR’s operating ratio for the quarter improved 1.6 percentage points to 76.3 per cent from 77.9 per cent.
Robert Ritchie, President and Chief Executive Officer, said: “We began the quarter knowing it would be challenging and again turned in a solid performance – our fifth consecutive quarter of operating income improvement, excluding non-recurring items. There were strong revenue increases in our intermodal and automotive lines of business. Canadian grain volumes were down due to the impact of last year’s drought on the prairies.”
CPR drove operating expenses down $22 million, or 3 per cent to $704 million in the second quarter. The improvement reflected aggressive cost-reduction initiatives across all areas of the business as well as easing world oil prices. Compensation and benefits expenses were down $9 million, or 3 per cent as cost-cutting programs more than offset the impact of wage and benefit improvements. Purchased services and materials expenses together decreased by $2 million, or 1 per cent. Fuel expenses dropped $13 million, or 13 per cent reflecting the decline in fuel prices. Depreciation expenses were up 3 per cent reflecting CPR’s ongoing investment in assets. Operating expenses per gross ton-mile and per revenue ton-mile improved 1 per cent in second-quarter 2002, reflecting the positive impact of productivity improvements.
Revenue in second-quarter 2002 was $923 million, a decrease of $9 million, or 1 per cent compared with the same period a year earlier. In the bulk sector, grain revenues declined 15 per cent as volumes fell due to last year’s poor crop in the Canadian prairies. Revenues from industrial products were down 5 per cent due to plant closures and a soft market for steel. Automotive revenues increased 11 per cent as CPR secured several new contracts and continued to benefit from strong consumer demand for vehicles. Improved economic conditions and traffic from new customers drove up intermodal revenues by 8 per cent.
“The declines in our bulk sector were mostly due to a combination of weather conditions and timing issues,” Mr. Ritchie said. “We expect reduced U.S. coal volumes in the second quarter to be made up through the remainder of the year. We’re pleased with the increase in import-export container traffic and in the automotive business where the market is strong for the models CPR moves.”
For the first half of 2002, net income was $305 million, an increase of $145 million over the same period last year. Diluted earnings per share were $1.91, compared with $1.01 in the first half of 2001.
Results in the first half of 2002 include a $72-million tax benefit stemming from a favourable court ruling related to prior years’ taxes, as well as a $54-million (nil tax impact) foreign exchange gain on long-term debt. Results in the first half of 2001 include $16 million ($9 million after tax) in spin-off related and incentive compensation charges, a $19-million income tax recovery, and a $10-million ($7 million after tax) foreign exchange loss on long-term debt. Excluding these items, net income for the first half of 2002 was $179 million, an increase of $21 million over the first half of 2001. Year-to-date diluted earnings per share were $1.12 compared with $1.00 in the same period of 2001. (See note on non-GAAP earnings measures below).
Operating income for the first six months of 2002 was $395 million, an increase of $37 million over operating income of $358 million, excluding spin-off related costs of $16 million in the same period last year. CPR’s operating ratio was 78 per cent, an improvement of 2.7 percentage points, excluding 2001 spin-off related costs.
Operating expenses in the first half of 2002 were $1,403 million, down 6 per cent from operating expenses excluding spin-off related costs in the same period last year. The improvement was largely due to lower fuel prices, cost containment initiatives and lower workload. Revenue for the six months ended June 30, 2002, was $1,798 million, down 3 per cent compared with the same period last year. Most of the decrease was attributable to lower grain revenues caused by drought conditions on the Canadian prairies.