Quarter caps strong 2017 performance with
top line growth of
over C$1 billion; record
investments planned in 2018 to deliver future
growth
MONTREAL, Jan. 23,
2018 /PRNewswire/ - CN (TSX: CNR) (NYSE: CNI) today
reported its financial and operating results for the fourth quarter
and year ended Dec. 31, 2017.
Financial results highlights
Fourth-quarter 2017 compared to fourth-quarter 2016
- Net income increased by 156 per cent to C$2,611 million, and diluted earnings per share
(EPS) increased by 164 per cent to C$3.48. Included in net income was a deferred
income tax recovery of C$1,764
million (C$2.35 per diluted
share) resulting from the enactment of a lower U.S. federal
corporate income tax rate.
- Adjusted net income decreased by six per cent to C$897 million, and adjusted diluted EPS decreased
by two per cent to C$1.20.
(1)
- Operating income decreased by seven per cent to C$1,301 million.
- Revenues increased by two per cent to C$3,285 million.
- Revenue ton-miles (RTMs) increased by one per cent and
carloadings increased by seven per cent.
- Operating expenses increased by nine per cent to C$1,984 million.
- Operating ratio of 60.4 per cent, an increase of 3.8
points.
Full-year 2017 compared to full-year
2016
- Net income increased by 51 per cent to C$5,484 million, and diluted EPS increased by 55
per cent to C$7.24. Included in net
income was a deferred income tax recovery of C$1,764 million (C$2.33 per diluted share) resulting from the
enactment of a lower U.S. federal corporate income tax rate.
- Adjusted net income increased by six per cent to C$3,778 million, and adjusted diluted EPS
increased by nine per cent to C$4.99.
(1)
- Operating income increased by five per cent to C$5,558 million.
- Revenues increased by eight per cent to C$13,041 million.
- RTMs increased by 11 per cent and carloadings increased by 10
per cent.
- Operating expenses increased by 11 per cent to C$7,483 million.
- Operating ratio of 57.4 per cent, an increase of 1.5
points.
- Free cash flow (1) was C$2,778 million, compared with C$2,520 million for 2016.
"Our growth continues to outpace the
strengthening economy, and I am pleased with the results our
dedicated team generated in 2017," said Luc Jobin, CN president and
chief executive officer. "Throughout the year we faced rapidly
changing market demands and in the fourth quarter dealt with
challenging operating conditions, including harsh early winter
weather across the network, impacting our performance.
"We remain focused on operational efficiency and
providing quality service to our customers," Jobin continued. "In
2018 we are adding new train crews and increasing our capital
program to a record C$3.2 billion as
we invest in locomotives and build additional capacity for
resiliency."
2018 outlook, capital program and increased
dividend (2)
"As the economic backdrop remains favourable in North America, we expect to see continued
volume growth in 2018," said Jobin.
CN aims to deliver adjusted diluted EPS in the
range of C$5.25 to C$5.40 this year compared to adjusted diluted EPS
of C$4.99 in 2017. (1)
CN will continue to invest in the safety and
efficiency of its network with a capital program in 2018 of
C$3.2 billion. The program is
highlighted by approximately $700
million for investments to increase capacity, including the
acquisition of 60 new locomotives, track infrastructure expansion,
and improvements at intermodal terminals. The capital program also
includes approximately C$1.6 billion
for track infrastructure maintenance supporting safety and
efficiency, and approximately C$400
million for continued installation of Positive Train Control
in the United States.
The Company's Board of Directors today approved a
10 per cent increase to CN's 2018 quarterly cash dividend,
effective for the first quarter of 2018.
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. The fluctuation of the Canadian dollar relative to the
U.S. dollar affects the conversion of the Company's
U.S.-dollar-denominated revenues and expenses. On a constant
currency basis, (1) CN's net income for the three months
and year ended Dec. 31, 2017 would
have been higher by C$26 million
(C$0.03 per diluted share) and
C$42 million (C$0.06 per diluted share),
respectively.
Fourth-quarter 2017 revenues, traffic volumes
and expenses
Revenues for the quarter increased by two per cent to C$3,285 million, when compared to the same period
in 2016. Revenues increased for metals and minerals (20 per cent),
intermodal (13 per cent), coal (seven per cent) and automotive (one
per cent). Revenues declined for grain and fertilizers (10 per
cent), petroleum and chemicals (five per cent), forest products
(two per cent) and other revenues (one per cent).
The increase in revenues was mainly attributable
to higher international container traffic via the ports of
Prince Rupert and Vancouver, and increased volumes of frac sand;
freight rate increases; and higher applicable fuel surcharge rates.
These factors were partly offset by the negative translation impact
of a stronger Canadian dollar; lower export volumes of U.S.
soybeans and reduced shipments of crude oil.
Carloadings for the quarter increased by seven
per cent to 1,461 thousand.
RTMs, measuring the relative weight and distance
of rail freight transported by CN, increased by one per cent. Rail
freight revenue per RTM also increased by one per cent.
Operating expenses for the quarter increased by
nine per cent to C$1,984 million,
mainly due to higher costs from increased volumes; challenging
operating conditions, including harsh early winter weather; and
higher fuel prices; partly offset by the positive translation
impact of a stronger Canadian dollar.
Full-year 2017 revenues, traffic volumes and
expenses
Revenues for 2017 increased by eight per cent to C$13,041 million, when compared to 2016. Revenues
increased for metals and minerals (25 per cent), coal (23 per
cent), intermodal (12 per cent), automotive (nine per cent), grain
and fertilizers (six per cent), other revenues (five per cent), and
petroleum and chemicals (two per cent). Revenues declined for
forest products (one per cent).
The increase in revenues was mainly attributable
to higher volumes of traffic in overseas intermodal, frac sand,
coal and petroleum coke exports, and Canadian grain; freight rate
increases; and higher applicable fuel surcharge rates; partly
offset by the negative translation impact of a stronger Canadian
dollar.
Carloadings increased by 10 per cent to 5,737
thousand.
RTMs increased by 11 per cent. Rail freight
revenue per RTM decreased by two per cent, mainly driven by an
increase in the average length of haul and the negative translation
impact of a stronger Canadian dollar; partly offset by freight rate
increases and higher applicable fuel surcharge.
Operating expenses increased by 11 per cent to
C$7,483 million, mainly due to higher
costs from increased volumes and higher fuel prices, partly offset
by the positive translation impact of a stronger Canadian
dollar.
(1) Non-GAAP Measures
CN reports its
financial results in accordance with United States generally accepted accounting
principles (GAAP). CN also uses non-GAAP measures in this news
release that do not have any standardized meaning prescribed by
GAAP, including adjusted performance measures, constant currency,
and free cash flow. These non-GAAP measures may not be comparable
to similar measures presented by other companies. For further
details of these non-GAAP measures, including a reconciliation to
the most directly comparable GAAP financial measures, refer to the
attached supplementary schedule, Non-GAAP Measures.
CN's full-year adjusted EPS outlook
(2) excludes the expected impact of certain income and
expense items. However, management cannot individually quantify on
a forward-looking basis the impact of these items on its EPS
because these items, which could be significant, are difficult to
predict and may be highly variable. As a result, CN does not
provide a corresponding GAAP measure for, or reconciliation to, its
adjusted EPS outlook.
(2) Forward-Looking
Statements
Certain statements included in this news
release constitute "forward-looking statements" within the meaning
of the United States Private Securities Litigation Reform Act of
1995 and under Canadian securities laws. By their nature,
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. Forward-looking statements may be
identified by the use of terminology such as "believes," "expects,"
"anticipates," "assumes," "outlook," "plans," "targets," or other
similar words.
2018 key assumptions
CN has
made a number of economic and market assumptions in preparing its
2018 outlook. The Company assumes that North American industrial
production for the year will increase in the range of two to three
per cent, and assumes U.S. housing starts in the range of 1.25
million units and U.S. motor vehicle sales of approximately 17
million units. For the 2017/2018 crop year, the grain crops in both
Canada and the United States were above their respective
three-year averages. The Company assumes that the 2018/2019 grain
crops in both Canada and
the United States will be in line
with their respective three-year averages. CN assumes total RTMs in
2018 will increase in the range of three to five per cent versus
2017. CN expects continued pricing above inflation. CN assumes that
in 2018 the value of the Canadian dollar in U.S. currency will be
approximately $0.80, and that the
average price of crude oil (West Texas Intermediate) will be in the
range of US$60 to US$70 per barrel. In 2018, CN plans to invest
approximately C$3.2 billion in its
capital program, of which C$1.6
billion is targeted toward track infrastructure
maintenance.
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 to be materially different from the
outlook or any future results or performance implied by such
statements. Accordingly, readers are advised not to place undue
reliance on forward-looking statements. Important risk factors that
could affect the forward-looking statements 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; increases in maintenance and
operating costs; security threats; reliance on technology and
related cybersecurity risk; trade restrictions or other changes to
international trade arrangements; transportation of hazardous
materials; various events which could disrupt operations, including
natural events such as severe weather, droughts, fires, floods and
earthquakes; climate change; labor negotiations and disruptions;
environmental claims; uncertainties of investigations, proceedings
or other types of claims and litigation; risks and liabilities
arising from derailments; timing and completion of capital
programs; and other risks detailed from time to time in reports
filed by CN with securities regulators in Canada and the
United States. Reference should 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 and available on CN's website, for a
description of major risk factors.
Forward-looking statements reflect information as
of the date on which they are made. CN assumes no obligation to
update or revise forward-looking statements to reflect future
events, changes in circumstances, or changes in beliefs, unless
required by applicable securities laws. In the event CN does update
any forward-looking statement, no inference should be made that CN
will make additional updates with respect to that statement,
related matters, or any other forward-looking statement.
This earnings news release is available on the
Company's website at www.cn.ca/financial-results and on SEDAR at
www.sedar.com as well as on the U.S. Securities and Exchange
Commission's website at www.sec.gov through EDGAR.
CN is a true backbone of the economy whose team
of approximately 24,000 railroaders transports more than
C$250 billion worth of goods annually
for a wide range of business sectors, ranging from resource
products to manufactured products to consumer goods, across a rail
network of approximately 20,000 route-miles spanning Canada and mid-America. CN – Canadian National
Railway Company, along with its operating railway subsidiaries –
serves the cities and ports of Vancouver, Prince
Rupert, B.C., Montreal,
Halifax, New Orleans, and Mobile, Ala., and the metropolitan areas of
Toronto, Edmonton, Winnipeg, Calgary, Chicago, Memphis, Detroit, Duluth,
Minn./Superior, Wis., and
Jackson, Miss., with connections
to all points in North America.
For more information about CN, visit the Company's website at
www.cn.ca.
Selected Railroad Statistics – unaudited
|
Three months ended
December 31
|
|
Year ended
December 31
|
|
2017
|
2016
|
|
2017
|
2016
|
Financial
measures
|
|
|
|
|
|
Key financial
performance indicators (1)
|
|
|
|
|
|
Total revenues ($
millions)
|
3,285
|
3,217
|
|
13,041
|
12,037
|
Rail freight revenues
($ millions)
|
3,091
|
3,022
|
|
12,293
|
11,326
|
Operating income
($ millions)
|
1,301
|
1,395
|
|
5,558
|
5,312
|
Net income ($
millions)
|
2,611
|
1,018
|
|
5,484
|
3,640
|
Diluted earnings per
share ($)
|
3.48
|
1.32
|
|
7.24
|
4.67
|
Adjusted diluted
earnings per share ($) (2)
|
1.20
|
1.23
|
|
4.99
|
4.59
|
Free cash flow ($
millions) (2)
|
457
|
777
|
|
2,778
|
2,520
|
Gross property
additions ($ millions)
|
908
|
723
|
|
2,703
|
2,752
|
Share repurchases
($ millions)
|
456
|
446
|
|
2,000
|
2,000
|
Dividends per share
($)
|
0.4125
|
0.3750
|
|
1.6500
|
1.5000
|
Financial
position (1)
|
|
|
|
|
|
Total assets ($
millions)
|
37,629
|
37,057
|
|
37,629
|
37,057
|
Total liabilities
($ millions)
|
20,973
|
22,216
|
|
20,973
|
22,216
|
Shareholders' equity
($ millions)
|
16,656
|
14,841
|
|
16,656
|
14,841
|
Financial
ratio
|
|
|
|
|
|
Operating ratio
(%)
|
60.4
|
56.6
|
|
57.4
|
55.9
|
Operational
measures (3)
|
|
|
|
|
|
Statistical
operating data
|
|
|
|
|
|
Gross ton miles
(GTMs) (millions)
|
117,599
|
114,424
|
|
469,200
|
423,426
|
Revenue ton
miles (RTMs) (millions)
|
59,477
|
58,906
|
|
237,098
|
214,327
|
Carloads
(thousands)
|
1,461
|
1,369
|
|
5,737
|
5,205
|
Route miles
(includes Canada and the U.S.)
|
19,500
|
19,600
|
|
19,500
|
19,600
|
Employees (end of
period)
|
23,945
|
22,249
|
|
23,945
|
22,249
|
Employees (average
for the period)
|
23,859
|
22,231
|
|
23,074
|
22,322
|
Key operating
measures
|
|
|
|
|
|
Rail freight revenue
per RTM (cents)
|
5.20
|
5.13
|
|
5.18
|
5.28
|
Rail freight revenue
per carload ($)
|
2,116
|
2,207
|
|
2,143
|
2,176
|
GTMs per average
number of employees (thousands)
|
4,929
|
5,147
|
|
20,335
|
18,969
|
Operating expenses
per GTM (cents)
|
1.69
|
1.59
|
|
1.59
|
1.59
|
Labor and fringe
benefits expense per GTM (cents)
|
0.50
|
0.49
|
|
0.47
|
0.50
|
Diesel fuel consumed
(US gallons in millions)
|
112.2
|
107.3
|
|
441.4
|
398.9
|
Average fuel price
($/US gallon)
|
2.98
|
2.58
|
|
2.74
|
2.34
|
GTMs per US gallon of
fuel consumed
|
1,048
|
1,066
|
|
1,063
|
1,061
|
Terminal dwell
(hours)
|
18.4
|
14.5
|
|
16.2
|
14.0
|
Train velocity
(miles per hour)
|
23.8
|
26.6
|
|
25.3
|
27.3
|
Safety
indicators (4)
|
|
|
|
|
|
Injury frequency rate
(per 200,000 person hours)
|
2.16
|
1.75
|
|
1.83
|
1.70
|
Accident rate (per
million train miles)
|
2.18
|
1.71
|
|
1.83
|
1.42
|
(1)
|
Amounts expressed
in Canadian dollars and prepared in accordance with United States
generally accepted accounting principles (GAAP), unless otherwise
noted.
|
(2)
|
See supplementary
schedule entitled Non-GAAP Measures for an explanation of these
non-GAAP measures.
|
(3)
|
Statistical
operating data, key operating measures and safety indicators are
unaudited and based on estimated data available at such time and
are subject to change as more complete information becomes
available. Definitions of these indicators are provided on CN's
website, www.cn.ca/glossary.
|
(4)
|
Based on Federal
Railroad Administration (FRA) reporting
criteria.
|
Supplementary Information – unaudited
|
Three months ended
December 31
|
Year ended
December 31
|
|
|
|
|
|
|
|
|
|
|
2017
|
2016
|
% Change
Fav (Unfav)
|
% Change
at
constant
currency
Fav (Unfav)
(1)
|
2017
|
2016
|
% Change
Fav (Unfav)
|
% Change at
constant
currency
Fav (Unfav)
(1)
|
Revenues ($
millions) (2)
|
|
|
|
|
|
|
|
|
Petroleum and
chemicals
|
543
|
572
|
(5%)
|
(2%)
|
2,208
|
2,174
|
2%
|
3%
|
Metals and
minerals
|
377
|
313
|
20%
|
25%
|
1,523
|
1,218
|
25%
|
27%
|
Forest
products
|
437
|
447
|
(2%)
|
1%
|
1,788
|
1,797
|
(1%)
|
1%
|
Coal
|
145
|
136
|
7%
|
9%
|
535
|
434
|
23%
|
25%
|
Grain and
fertilizers
|
585
|
647
|
(10%)
|
(7%)
|
2,214
|
2,098
|
6%
|
7%
|
Intermodal
|
816
|
720
|
13%
|
15%
|
3,200
|
2,846
|
12%
|
13%
|
Automotive
|
188
|
187
|
1%
|
5%
|
825
|
759
|
9%
|
10%
|
Total rail freight
revenues
|
3,091
|
3,022
|
2%
|
5%
|
12,293
|
11,326
|
9%
|
10%
|
Other
revenues
|
194
|
195
|
(1%)
|
3%
|
748
|
711
|
5%
|
6%
|
Total
revenues
|
3,285
|
3,217
|
2%
|
5%
|
13,041
|
12,037
|
8%
|
10%
|
Revenue ton miles
(RTMs) (millions) (3)
|
|
|
|
|
|
|
|
|
Petroleum and
chemicals
|
10,697
|
11,803
|
(9%)
|
(9%)
|
44,375
|
43,395
|
2%
|
2%
|
Metals and
minerals
|
6,833
|
5,593
|
22%
|
22%
|
27,938
|
20,233
|
38%
|
38%
|
Forest
products
|
7,418
|
7,751
|
(4%)
|
(4%)
|
30,510
|
31,401
|
(3%)
|
(3%)
|
Coal
|
3,866
|
3,446
|
12%
|
12%
|
14,539
|
11,032
|
32%
|
32%
|
Grain and
fertilizers
|
14,590
|
16,203
|
(10%)
|
(10%)
|
56,123
|
51,485
|
9%
|
9%
|
Intermodal
|
15,127
|
13,194
|
15%
|
15%
|
59,356
|
53,056
|
12%
|
12%
|
Automotive
|
946
|
916
|
3%
|
3%
|
4,257
|
3,725
|
14%
|
14%
|
Total
RTMs
|
59,477
|
58,906
|
1%
|
1%
|
237,098
|
214,327
|
11%
|
11%
|
Rail freight
revenue / RTM (cents) (2) (3)
|
|
|
|
|
|
|
|
|
Petroleum and
chemicals
|
5.08
|
4.85
|
5%
|
8%
|
4.98
|
5.01
|
(1%)
|
1%
|
Metals and
minerals
|
5.52
|
5.60
|
(1%)
|
3%
|
5.45
|
6.02
|
(9%)
|
(8%)
|
Forest
products
|
5.89
|
5.77
|
2%
|
6%
|
5.86
|
5.72
|
2%
|
4%
|
Coal
|
3.75
|
3.95
|
(5%)
|
(3%)
|
3.68
|
3.93
|
(6%)
|
(5%)
|
Grain and
fertilizers
|
4.01
|
3.99
|
1%
|
3%
|
3.94
|
4.07
|
(3%)
|
(2%)
|
Intermodal
|
5.39
|
5.46
|
(1%)
|
1%
|
5.39
|
5.36
|
1%
|
1%
|
Automotive
|
19.87
|
20.41
|
(3%)
|
2%
|
19.38
|
20.38
|
(5%)
|
(3%)
|
Total rail freight
revenue / RTM
|
5.20
|
5.13
|
1%
|
4%
|
5.18
|
5.28
|
(2%)
|
(1%)
|
Carloads
(thousands) (3)
|
|
|
|
|
|
|
|
|
Petroleum and
chemicals
|
154
|
156
|
(1%)
|
(1%)
|
614
|
599
|
3%
|
3%
|
Metals and
minerals
|
257
|
230
|
12%
|
12%
|
995
|
807
|
23%
|
23%
|
Forest
products
|
102
|
108
|
(6%)
|
(6%)
|
424
|
440
|
(4%)
|
(4%)
|
Coal
|
76
|
92
|
(17%)
|
(17%)
|
303
|
333
|
(9%)
|
(9%)
|
Grain and
fertilizers
|
161
|
177
|
(9%)
|
(9%)
|
619
|
602
|
3%
|
3%
|
Intermodal
|
647
|
541
|
20%
|
20%
|
2,514
|
2,163
|
16%
|
16%
|
Automotive
|
64
|
65
|
(2%)
|
(2%)
|
268
|
261
|
3%
|
3%
|
Total
carloads
|
1,461
|
1,369
|
7%
|
7%
|
5,737
|
5,205
|
10%
|
10%
|
Rail freight
revenue / carload ($) (2) (3)
|
|
|
|
|
|
|
|
|
Petroleum and
chemicals
|
3,526
|
3,667
|
(4%)
|
-
|
3,596
|
3,629
|
(1%)
|
1%
|
Metals and
minerals
|
1,467
|
1,361
|
8%
|
12%
|
1,531
|
1,509
|
1%
|
3%
|
Forest
products
|
4,284
|
4,139
|
4%
|
7%
|
4,217
|
4,084
|
3%
|
5%
|
Coal
|
1,908
|
1,478
|
29%
|
32%
|
1,766
|
1,303
|
36%
|
37%
|
Grain and
fertilizers
|
3,634
|
3,655
|
(1%)
|
2%
|
3,577
|
3,485
|
3%
|
4%
|
Intermodal
|
1,261
|
1,331
|
(5%)
|
(4%)
|
1,273
|
1,316
|
(3%)
|
(3%)
|
Automotive
|
2,938
|
2,877
|
2%
|
6%
|
3,078
|
2,908
|
6%
|
8%
|
Total rail freight
revenue / carload
|
2,116
|
2,207
|
(4%)
|
(1%)
|
2,143
|
2,176
|
(2%)
|
-
|
|
(1)
|
See supplementary
schedule entitled Non-GAAP Measures for an explanation of this
non-GAAP measure.
|
(2)
|
Amounts expressed
in Canadian dollars.
|
(3)
|
Statistical
operating data and related key operating measures are unaudited and
based on estimated data available at such time and are subject to
change as more complete information becomes
available.
|
Non-GAAP Measures – unaudited
In this supplementary schedule, the word "Company" or "CN" means
Canadian National Railway Company and, as the context requires, its
wholly-owned subsidiaries. Financial information included in this
schedule is expressed in Canadian dollars, unless otherwise
noted.
CN reports its financial results in accordance with United States generally accepted accounting
principles (GAAP). The Company also uses non-GAAP measures that do
not have any standardized meaning prescribed by GAAP, including
adjusted performance measures, constant currency, free cash flow,
and adjusted debt-to-adjusted EBITDA multiple. These non-GAAP
measures may not be comparable to similar measures presented by
other companies. From management's perspective, these non-GAAP
measures are useful measures of performance and provide investors
with supplementary information to assess the Company's results of
operations and liquidity. These non-GAAP measures should not be
considered in isolation or as a substitute for financial measures
prepared in accordance with GAAP.
Adjusted performance measures
Management believes that adjusted net income 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 CN's normal day-to-day
operations and could distort the analysis of trends in business
performance. Management uses these measures, which exclude certain
income and expense items in its results that management believes
are not reflective of CN's underlying business operations, to set
performance goals and as a means to measure CN's performance. The
exclusion of items in adjusted net income and adjusted earnings per
share does not, however, imply that these items are necessarily
non-recurring. These measures do not have any standardized meaning
prescribed by GAAP and therefore, may not be comparable to similar
measures presented by other companies.
For the three months and year ended December 31, 2017, the Company reported adjusted
net income of $897 million, or
$1.20 per diluted share, and
$3,778 million, or $4.99 per diluted share, respectively. The
adjusted figures for the year ended December
31, 2017 exclude a net deferred income tax recovery of
$1,706 million ($2.25 per diluted share) consisting of the
following:
- in the fourth quarter, a deferred income tax recovery of
$1,764 million ($2.35 per diluted share for the quarter and
$2.33 per diluted share for the year)
resulting from the enactment of a lower federal corporate income
tax rate due to the U.S. Tax Cuts and Jobs Act ("U.S. Tax
Reform") and a deferred income tax expense of $50 million ($0.07
per diluted share) resulting from the enactment of higher
provincial corporate income tax rates;
- in the third quarter, a deferred income tax expense of
$31 million ($0.04 per diluted share) resulting from the
enactment of a higher state corporate income tax rate;
- in the second quarter, a deferred income tax recovery of
$18 million ($0.02 per diluted share) resulting from the
enactment of a lower provincial corporate income tax rate; and
- in the first quarter, a deferred income tax recovery of
$5 million ($0.01 per diluted share) resulting from the
enactment of a lower provincial corporate income tax rate.
For the three months and year ended December 31, 2016, the Company reported adjusted
net income of $952 million, or
$1.23 per diluted share and
$3,581 million, or $4.59 per diluted share, respectively. The
adjusted figures for the year ended December
31, 2016 exclude a gain on disposal of track leading into
Montreal's Central Station,
together with the rail fixtures (collectively the "Viaduc du Sud"),
of $76 million, or $66 million after-tax ($0.09 per diluted share) in the fourth quarter
and a deferred income tax expense of $7
million ($0.01 per diluted
share) in the second quarter, resulting from the enactment of a
higher provincial corporate income tax rate.
The following table provides a reconciliation of net income and
earnings per share, as reported for the three months and years
ended December 31, 2017 and 2016, to
the adjusted performance measures presented herein:
|
Three months ended
December 31
|
Year ended
December 31
|
In millions,
except per share data
|
2017
|
2016
|
2017
|
2016
|
Net income as
reported
|
$
|
2,611
|
$
|
1,018
|
$
|
5,484
|
$
|
3,640
|
Adjustments:
|
|
|
|
|
|
|
|
|
|
Other
income
|
|
-
|
|
(76)
|
|
-
|
|
(76)
|
|
Income tax expense
(recovery)
|
|
(1,714)
|
|
10
|
|
(1,706)
|
|
17
|
Adjusted net
income
|
$
|
897
|
$
|
952
|
$
|
3,778
|
$
|
3,581
|
Basic earnings per
share as reported
|
$
|
3.50
|
$
|
1.33
|
$
|
7.28
|
$
|
4.69
|
Impact of
adjustments, per share
|
|
(2.29)
|
|
(0.09)
|
|
(2.26)
|
|
(0.08)
|
Adjusted basic
earnings per share
|
$
|
1.21
|
$
|
1.24
|
$
|
5.02
|
$
|
4.61
|
Diluted earnings per
share as reported
|
$
|
3.48
|
$
|
1.32
|
$
|
7.24
|
$
|
4.67
|
Impact of
adjustments, per share
|
|
(2.28)
|
|
(0.09)
|
|
(2.25)
|
|
(0.08)
|
Adjusted diluted
earnings per share
|
$
|
1.20
|
$
|
1.23
|
$
|
4.99
|
$
|
4.59
|
Constant currency
Financial results at constant currency allow results to be
viewed without the impact of fluctuations in foreign currency
exchange rates, thereby facilitating period-to-period comparisons
in the analysis of trends in business performance. Measures at
constant currency are considered non-GAAP measures and do not have
any standardized meaning prescribed by GAAP and therefore, may not
be comparable to similar measures presented by other companies.
Financial results at constant currency are obtained by translating
the current period results denominated in US dollars at the foreign
exchange rates of the comparable period in the prior year. The
average foreign exchange rates were $1.27 and $1.30 per
US$1.00, respectively, for the three
months and year ended December 31,
2017, and $1.33 per
US$1.00 for both the three months and
year ended December 31, 2016.
On a constant currency basis, the Company's net income for the
three months and year ended December 31,
2017 would have been higher by $26
million ($0.03 per diluted
share) and $42 million ($0.06 per diluted share), respectively.
Free cash flow
Management believes that free cash flow is a useful measure of
liquidity as it demonstrates the Company's ability to generate cash
for debt obligations and for discretionary uses such as payment of
dividends, share repurchases, and strategic opportunities. The
Company defines its free cash flow measure as the difference
between net cash provided by operating activities and net cash used
in investing activities; adjusted for the impact of major
acquisitions, if any. Free cash flow does not have any standardized
meaning prescribed by GAAP and therefore, may not be comparable to
similar measures presented by other companies.
The following table provides a reconciliation of net cash
provided by operating activities as reported for the three months
and years ended December 31, 2017 and
2016, to free cash flow:
|
Three months ended
December 31
|
Year ended
December 31
|
In
millions
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Net cash provided by
operating activities
|
$
|
1,349
|
$
|
1,378
|
$
|
5,516
|
$
|
5,202
|
Net cash used in
investing activities (1)
|
|
(892)
|
|
(601)
|
|
(2,738)
|
|
(2,682)
|
Free cash
flow
|
$
|
457
|
$
|
777
|
$
|
2,778
|
$
|
2,520
|
|
(1)
|
As a result of the
retrospective adoption of Accounting Standards Update 2016-18 in
the first quarter of 2017, changes in restricted cash and cash
equivalents are no longer classified as investing activities within
the Consolidated Statements of Cash Flows and are no longer
included as an adjustment in the Company's definition of free cash
flow. There is no impact to free cash flow resulting from this
reclassification.
|
Adjusted debt-to-adjusted EBITDA multiple
Management believes that the adjusted debt-to-adjusted earnings
before interest, income taxes, depreciation and amortization
(EBITDA) multiple is a useful credit measure because it reflects
the Company's ability to service its debt and other long term
obligations. The Company calculates the adjusted debt-to-adjusted
EBITDA multiple as adjusted debt divided by adjusted EBITDA. These
measures do not have any standardized meaning prescribed by GAAP
and therefore, may not be comparable to similar measures presented
by other companies.
The following table provides a reconciliation of debt and net
income to the adjusted measures presented below, which have been
used to calculate the adjusted debt-to-adjusted EBITDA
multiple:
In millions,
unless otherwise indicated
|
As at and for the
year ended December 31,
|
|
2017
|
|
2016
|
Debt
|
|
|
$
|
10,828
|
$
|
10,937
|
Adjustment:
Present value of operating lease commitments
(1)
|
|
478
|
|
533
|
Adjusted
debt
|
|
|
$
|
11,306
|
$
|
11,470
|
|
|
|
|
|
|
|
Net income
|
|
|
$
|
5,484
|
$
|
3,640
|
Interest
expense
|
|
|
|
481
|
|
480
|
Income tax expense
(recovery)
|
|
|
|
(395)
|
|
1,287
|
Depreciation and
amortization
|
|
|
|
1,281
|
|
1,225
|
EBITDA
|
|
|
|
6,851
|
|
6,632
|
Adjustments:
|
|
|
|
|
|
|
|
Other
income
|
|
|
|
(12)
|
|
(95)
|
|
Deemed interest on
operating leases
|
|
|
|
22
|
|
24
|
Adjusted
EBITDA
|
|
|
$
|
6,861
|
$
|
6,561
|
Adjusted
debt-to-adjusted EBITDA multiple (times)
|
|
|
1.65
|
|
1.75
|
|
(1)
|
The operating
lease commitments have been discounted using the Company's implicit
interest rate for each of the periods presented.
|
Consolidated Statements of Income – unaudited
|
Three months
ended
|
Year
ended
|
|
December
31
|
December
31
|
In millions,
except per share data
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Revenues
|
$
|
3,285
|
$
|
3,217
|
$
|
13,041
|
$
|
12,037
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
|
|
|
|
|
|
Labor and fringe
benefits
|
|
589
|
|
565
|
|
2,221
|
|
2,119
|
Purchased services
and material
|
|
473
|
|
428
|
|
1,769
|
|
1,592
|
Fuel
|
|
379
|
|
312
|
|
1,362
|
|
1,051
|
Depreciation and
amortization
|
|
316
|
|
310
|
|
1,281
|
|
1,225
|
Equipment
rents
|
|
107
|
|
96
|
|
418
|
|
375
|
Casualty and
other
|
|
120
|
|
111
|
|
432
|
|
363
|
Total operating
expenses
|
|
1,984
|
|
1,822
|
|
7,483
|
|
6,725
|
Operating
income
|
|
1,301
|
|
1,395
|
|
5,558
|
|
5,312
|
Interest
expense
|
|
(117)
|
|
(123)
|
|
(481)
|
|
(480)
|
Other
income
|
|
4
|
|
91
|
|
12
|
|
95
|
Income before
income taxes
|
|
1,188
|
|
1,363
|
|
5,089
|
|
4,927
|
Income tax recovery
(expense) (Note 3)
|
|
1,423
|
|
(345)
|
|
395
|
|
(1,287)
|
Net
income
|
$
|
2,611
|
$
|
1,018
|
$
|
5,484
|
$
|
3,640
|
|
|
|
|
|
|
|
|
|
Earnings per
share
|
|
|
|
|
|
|
|
|
Basic
|
$
|
3.50
|
$
|
1.33
|
$
|
7.28
|
$
|
4.69
|
Diluted
|
$
|
3.48
|
$
|
1.32
|
$
|
7.24
|
$
|
4.67
|
|
|
|
|
|
|
|
|
|
Weighted-average
number of shares
|
|
|
|
|
|
|
|
|
Basic
|
|
746.2
|
|
766.7
|
|
753.6
|
|
776.0
|
Diluted
|
|
750.0
|
|
770.1
|
|
757.3
|
|
779.2
|
|
|
|
|
|
|
|
|
|
Dividends declared
per share
|
$
|
0.4125
|
$
|
0.3750
|
$
|
1.6500
|
$
|
1.5000
|
|
|
|
|
|
|
|
|
|
See accompanying
notes to unaudited consolidated financial
statements.
|
Consolidated Statements of Comprehensive Income –
unaudited
|
Three months
ended
|
Year
ended
|
|
December
31
|
December
31
|
In
millions
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Net income
|
$
|
2,611
|
$
|
1,018
|
$
|
5,484
|
$
|
3,640
|
Other
comprehensive income (loss)
|
|
|
|
|
|
|
|
|
Net gain (loss) on
foreign currency translation
|
|
(6)
|
|
57
|
|
(197)
|
|
(45)
|
Net change in pension
and other postretirement benefit plans
|
|
(361)
|
|
(826)
|
|
(224)
|
|
(694)
|
Other
comprehensive loss before income taxes
|
|
(367)
|
|
(769)
|
|
(421)
|
|
(739)
|
Income tax recovery
(expense)
|
|
105
|
|
242
|
|
(5)
|
|
148
|
Other
comprehensive loss
|
|
(262)
|
|
(527)
|
|
(426)
|
|
(591)
|
Comprehensive
income
|
$
|
2,349
|
$
|
491
|
$
|
5,058
|
$
|
3,049
|
|
|
|
|
|
|
|
|
|
See accompanying
notes to unaudited consolidated financial
statements.
|
Consolidated Balance Sheets – unaudited
|
December
31
|
December
31
|
In
millions
|
|
2017
|
|
2016
|
Assets
|
|
|
|
|
Current
assets
|
|
|
|
|
Cash and cash
equivalents
|
$
|
70
|
$
|
176
|
Restricted cash and
cash equivalents
|
|
483
|
|
496
|
Accounts
receivable
|
|
984
|
|
875
|
Material and
supplies
|
|
424
|
|
363
|
Other current
assets
|
|
229
|
|
197
|
Total current
assets
|
|
2,190
|
|
2,107
|
Properties
|
|
34,189
|
|
33,755
|
Pension
asset
|
|
994
|
|
907
|
Intangible and other
assets
|
|
256
|
|
288
|
Total
assets
|
$
|
37,629
|
$
|
37,057
|
Liabilities and
shareholders' equity
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
Accounts payable and
other
|
$
|
1,903
|
$
|
1,519
|
Current portion of
long-term debt
|
|
2,080
|
|
1,489
|
Total current
liabilities
|
|
3,983
|
|
3,008
|
Deferred income
taxes
|
|
6,953
|
|
8,473
|
Other liabilities and
deferred credits
|
|
590
|
|
593
|
Pension and other
postretirement benefits
|
|
699
|
|
694
|
Long-term
debt
|
|
8,748
|
|
9,448
|
Shareholders'
equity
|
|
|
|
|
Common
shares
|
|
3,780
|
|
3,730
|
Common shares in
Share Trusts
|
|
(168)
|
|
(137)
|
Additional paid-in
capital
|
|
242
|
|
364
|
Accumulated other
comprehensive loss
|
|
(2,784)
|
|
(2,358)
|
Retained
earnings
|
|
15,586
|
|
13,242
|
Total
shareholders' equity
|
|
16,656
|
|
14,841
|
Total
liabilities and shareholders' equity
|
$
|
37,629
|
$
|
37,057
|
|
|
|
|
|
See accompanying
notes to unaudited consolidated financial
statements.
|
Consolidated Statements of Changes in Shareholders' Equity -
unaudited
|
Number
of
common
shares
|
Common
shares
|
Common
shares
in
Share
Trusts
|
Additional
paid-in
capital
|
Accumulated
other
comprehensive
loss
|
Retained
earnings
|
Total
shareholders'
equity
|
|
|
Outstanding
|
Share
Trusts
|
In
millions
|
Balance at
December 31, 2015
|
787.2
|
1.4
|
$
|
3,705
|
$
|
(100)
|
$
|
475
|
$
|
(1,767)
|
$
|
12,637
|
$
|
14,950
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
3,640
|
|
3,640
|
Stock options
exercised
|
1.6
|
|
|
73
|
|
|
|
(12)
|
|
|
|
|
|
61
|
Settlement of equity
settled awards
|
|
|
|
79
|
|
|
|
(138)
|
|
|
|
|
|
(59)
|
Stock-based
compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
other
|
|
|
|
|
|
|
|
62
|
|
|
|
(3)
|
|
59
|
Repurchase of common
shares
|
(26.4)
|
|
|
(127)
|
|
|
|
|
|
|
|
(1,873)
|
|
(2,000)
|
Share purchases by
Share Trusts
|
(0.7)
|
0.7
|
|
|
|
(60)
|
|
|
|
|
|
|
|
(60)
|
Share settlements by
Share Trusts
|
0.3
|
(0.3)
|
|
|
|
23
|
|
(23)
|
|
|
|
|
|
-
|
Other comprehensive
loss
|
|
|
|
|
|
|
|
|
|
(591)
|
|
|
|
(591)
|
Dividends ($1.50 per
share)
|
|
|
|
|
|
|
|
|
|
|
|
(1,159)
|
|
(1,159)
|
Balance at
December 31, 2016
|
762.0
|
1.8
|
|
3,730
|
|
(137)
|
|
364
|
|
(2,358)
|
|
13,242
|
|
14,841
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
5,484
|
|
5,484
|
Stock options
exercised
|
1.2
|
|
|
68
|
|
|
|
(10)
|
|
|
|
|
|
58
|
Settlement of equity
settled awards
|
|
|
|
84
|
|
|
|
(166)
|
|
|
|
|
|
(82)
|
Stock-based
compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and other
|
|
|
|
|
|
|
|
78
|
|
|
|
(3)
|
|
75
|
Repurchase of common
shares
|
(20.4)
|
|
|
(102)
|
|
|
|
|
|
|
|
(1,898)
|
|
(2,000)
|
Share purchases by
Share Trusts
|
(0.5)
|
0.5
|
|
|
|
(55)
|
|
|
|
|
|
|
|
(55)
|
Share settlements by
Share Trusts
|
0.3
|
(0.3)
|
|
|
|
24
|
|
(24)
|
|
|
|
|
|
-
|
Other comprehensive
loss
|
|
|
|
|
|
|
|
|
|
(426)
|
|
|
|
(426)
|
Dividends ($1.65 per
share)
|
|
|
|
|
|
|
|
|
|
|
|
(1,239)
|
|
(1,239)
|
Balance at
December 31, 2017
|
742.6
|
2.0
|
$
|
3,780
|
$
|
(168)
|
$
|
242
|
$
|
(2,784)
|
$
|
15,586
|
$
|
16,656
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying
notes to unaudited consolidated financial
statements.
|
Consolidated Statements of Cash Flows - unaudited
|
|
Three months
ended
|
Year
ended
|
|
|
December
31
|
December
31
|
In
millions
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Operating
activities
|
|
|
|
|
|
|
|
|
Net income
|
$
|
2,611
|
$
|
1,018
|
$
|
5,484
|
$
|
3,640
|
Adjustments to
reconcile net income to net cash
|
|
|
|
|
|
|
|
|
provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
Depreciation and
amortization
|
|
316
|
|
310
|
|
1,281
|
|
1,225
|
|
Deferred income
taxes
|
|
(1,603)
|
|
240
|
|
(1,195)
|
|
704
|
|
Gain on disposal of
property
|
|
-
|
|
(76)
|
|
-
|
|
(76)
|
Changes in operating
assets and liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
3
|
|
5
|
|
(125)
|
|
(3)
|
|
Material and
supplies
|
|
(2)
|
|
44
|
|
(70)
|
|
(2)
|
|
Accounts payable and
other
|
|
118
|
|
(76)
|
|
418
|
|
(51)
|
|
Other current
assets
|
|
(61)
|
|
(20)
|
|
(80)
|
|
21
|
Pensions and other,
net
|
|
(33)
|
|
(67)
|
|
(197)
|
|
(256)
|
Net cash provided
by operating activities
|
|
1,349
|
|
1,378
|
|
5,516
|
|
5,202
|
Investing
activities
|
|
|
|
|
|
|
|
|
Property
additions
|
|
(878)
|
|
(666)
|
|
(2,673)
|
|
(2,695)
|
Disposal of
property
|
|
-
|
|
85
|
|
-
|
|
85
|
Other, net
|
|
(14)
|
|
(20)
|
|
(65)
|
|
(72)
|
Net cash used in
investing activities (1)
|
|
(892)
|
|
(601)
|
|
(2,738)
|
|
(2,682)
|
Financing
activities
|
|
|
|
|
|
|
|
|
Issuance of
debt
|
|
423
|
|
-
|
|
916
|
|
1,509
|
Repayment of
debt
|
|
(777)
|
|
(439)
|
|
(841)
|
|
(955)
|
Net issuance of
commercial paper
|
|
662
|
|
401
|
|
379
|
|
137
|
Settlement of foreign
exchange forward contracts on long-term debt
|
|
15
|
|
(6)
|
|
(15)
|
|
(21)
|
Issuance of common
shares for stock options exercised
|
|
20
|
|
15
|
|
58
|
|
61
|
Withholding taxes
remitted on the net settlement of equity settled awards
|
|
(2)
|
|
(4)
|
|
(57)
|
|
(44)
|
Repurchase of common
shares
|
|
(473)
|
|
(446)
|
|
(2,016)
|
|
(1,992)
|
Purchase of common
shares for settlement of equity settled awards
|
|
(3)
|
|
(1)
|
|
(25)
|
|
(15)
|
Purchase of common
shares by Share Trusts
|
|
(55)
|
|
(60)
|
|
(55)
|
|
(60)
|
Dividends
paid
|
|
(307)
|
|
(287)
|
|
(1,239)
|
|
(1,159)
|
Net cash used in
financing activities
|
|
(497)
|
|
(827)
|
|
(2,895)
|
|
(2,539)
|
Effect of foreign
exchange fluctuations on US dollar-denominated
|
|
|
|
|
|
|
|
|
|
cash, cash
equivalents, restricted cash, and restricted cash
equivalents
|
|
2
|
|
7
|
|
(2)
|
|
15
|
Net decrease in
cash, cash equivalents, restricted cash,
|
|
|
|
|
|
|
|
|
|
and restricted
cash equivalents (1)
|
|
(38)
|
|
(43)
|
|
(119)
|
|
(4)
|
Cash, cash
equivalents, restricted cash, and restricted cash
|
|
|
|
|
|
|
|
|
|
equivalents,
beginning of period (1)
|
|
591
|
|
715
|
|
672
|
|
676
|
Cash, cash
equivalents, restricted cash, and restricted
cash
|
|
|
|
|
|
|
|
|
|
equivalents,
end of period (1)
|
$
|
553
|
$
|
672
|
$
|
553
|
$
|
672
|
Cash and cash
equivalents, end of period
|
$
|
70
|
$
|
176
|
$
|
70
|
$
|
176
|
Restricted cash and
cash equivalents, end of period
|
|
483
|
|
496
|
|
483
|
|
496
|
Cash, cash
equivalents, restricted cash, and restricted
cash
|
|
|
|
|
|
|
|
|
|
equivalents,
end of period (1)
|
$
|
553
|
$
|
672
|
$
|
553
|
$
|
672
|
Supplemental cash
flow information
|
|
|
|
|
|
|
|
|
Interest
paid
|
$
|
(104)
|
$
|
(113)
|
$
|
(477)
|
$
|
(470)
|
Income taxes
paid
|
$
|
(214)
|
$
|
(87)
|
$
|
(712)
|
$
|
(653)
|
|
|
(1)
|
The Company
adopted Accounting Standards Update 2016-18 in the first quarter of
2017 on a retrospective basis. Comparative balances have been
reclassified to conform to the current presentation. See Note 2 –
Recent accounting pronouncements for additional
information.
|
|
|
See accompanying
notes to unaudited consolidated financial
statements.
|
Notes to Unaudited Consolidated Financial Statements
1 – Basis of presentation
In these notes, the word "Company" or "CN" means, Canadian
National Railway Company and, as the context requires, its
wholly-owned subsidiaries.
The accompanying unaudited Interim Consolidated Financial
Statements, expressed in Canadian dollars, have been prepared in
accordance with United States
generally accepted accounting principles (GAAP) for interim
financial statements. Accordingly, they do not include all of the
disclosures required by GAAP for complete financial statements. In
management's opinion, all adjustments (consisting of normal
recurring accruals) considered necessary for fair presentation have
been included. Interim operating results are not necessarily
indicative of the results that may be expected for the full
year.
These unaudited Interim Consolidated Financial Statements have
been prepared using accounting policies consistent with those used
in preparing CN's 2016 Annual Consolidated Financial Statements,
except as disclosed in Note 2 - Recent accounting
pronouncements, and should be read in conjunction with
such statements and Notes thereto.
2 – Recent accounting pronouncements
The following recent Accounting Standards Update (ASU) issued by
the Financial Accounting Standards Board was adopted by the Company
during the current year:
Standard
|
Description
|
Impact
|
ASU 2016-18,
Statement of Cash Flows (Topic 230): Restricted Cash
|
Requires that a
statement of cash flows explain the change during the period in the
total of cash, cash equivalents, and amounts generally described as
restricted cash or restricted cash equivalents.
|
The Company elected
to early adopt the amendments of this ASU in the first quarter of
2017 on a retrospective basis. As a result of the adoption of this
ASU, changes in restricted cash and cash equivalents are no longer
classified as investing activities, and the Company's Consolidated
Statements of Cash Flows now explain the change during the period
in the total of cash, cash equivalents, restricted cash, and
restricted cash equivalents.
|
3 – Income taxes
U.S. Tax Cuts and Job Act
On December 22, 2017, the President of the United States signed into law the Tax Cuts
and Jobs Act ("U.S. Tax Reform"). The U.S. Tax Reform reduces the
U.S. federal corporate income tax rate from 35% to 21%, effective
as of January 1, 2018. The U.S. Tax
Reform also allows for immediate capital expensing of new
investments in certain qualified depreciable assets made after
September 27, 2017, which will be
phased down starting in year 2023. As a result of the U.S. Tax
Reform, the Company's net deferred income tax liability decreased
by $1,764 million.
The U.S. Tax Reform introduces other important changes to U.S.
corporate income tax laws that may significantly affect CN in
future years including, the creation of a new Base Erosion
Anti-abuse Tax (BEAT) that subjects certain payments from U.S.
corporations to foreign related parties to additional taxes, and
limitations to the deduction for net interest expense incurred by
U.S. corporations. Future regulations and interpretations to be
issued by U.S. authorities may also impact the Company's estimates
and assumptions used in calculating its income tax provisions.
SOURCE CN