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CP reports strong Q2 results; momentum accelerating in second half of the year

·19 min read
Cision

CALGARY, AB, July 28, 2022 /PRNewswire/ - Canadian Pacific Railway Limited (TSX: CP) (NYSE: CP) today announced its second-quarter 2022 results, including revenues of $2.20 billion, reported operating ratio ("OR") of 60.6 percent, adjusted OR1 of 59.7 percent, reported diluted earnings per share ("EPS") of $0.82 and core adjusted diluted EPS1 of $0.95.

"After a challenging first quarter of the year, I'm proud of the resiliency and discipline the CP team demonstrated to deliver these results," said Keith Creel, CP President and CEO. "They continue to display the grit and tenacity it takes to run a world-class North American railroad and deliver for our customers."

Second-quarter highlights

  • Revenues increased by 7 percent to $2.20 billion from $2.05 billion last year

  • Reported OR increased by 50 basis points to 60.6 percent from 60.1 percent last year

  • Adjusted OR1 increased by 440 basis points to 59.7 percent from 55.3 percent last year

  • Reported diluted EPS was $0.82, a 56 percent decrease from last year

  • Core adjusted diluted EPS1, excluding significant items and Kansas City Southern ("KCS") purchase accounting, was $0.95, an 8 percent decrease from last year

"The strong demand environment for North American goods and commodities, coupled with our own unique growth initiatives and the promising upcoming Canadian grain crop, gives me confidence that we will continue to see momentum build into the back half of 2022 and beyond," said Creel.

CP is continuing to progress towards creating the first single-line rail network linking the U.S., Mexico and Canada by combining with KCS, subject to U.S. Surface Transportation Board approval.

"Our proposed combination with KCS will connect customers to new markets, enhance competition in the U.S. rail network and drive economic growth across North America," Creel said. "As we continue to progress toward this historic combination, our excitement about the opportunities ahead with the combined companies continues to grow."

1

These measures have no standardized meanings prescribed by accounting principles generally accepted in the United States of America ("GAAP") and, therefore, may not be comparable to similar measures presented by other companies. For information regarding non-GAAP measures, including reconciliations to the most comparable GAAP measures, see the attached supplementary schedule Non-GAAP Measures.

Conference Call Details
CP will discuss its results with the financial community in a conference call beginning at 8:30 a.m. ET (6:30 a.m. MT) on July 28, 2022.

Conference Call Access
Canada and U.S.: 866-831-8713
International: 203-518-9822
*Conference ID: CPQ222
Callers should dial in 10 minutes prior to the call.

Webcast
We encourage you to access the webcast and presentation material in the Investors section of CP's website at investor.cpr.ca.

A replay of the second-quarter conference call will be available by phone through to Aug. 4, 2022 at 800-839-6910 (Canada/U.S.) or 402-220-6058 (International).

Note on forward-looking information
This news release may contain certain forward-looking information and forward-looking statements (collectively, "forward-looking information") within the meaning of applicable securities laws. Forward-looking information includes, but is not limited to, statements concerning expectations, beliefs, plans, goals, objectives, assumptions and statements about possible future events, conditions, and results of operations or performance. Forward-looking information may contain statements with words or headings such as "financial expectations", "key assumptions", "anticipate", "believe", "expect", "plan", "will", "outlook", "should" or similar words suggesting future outcomes. This news release contains forward-looking information relating, but not limited to statements concerning, cost control efforts, the success of our business, changes to economic and industry conditions, the status of the CP-KCS transaction, including related regulatory approvals, and the opportunities arising there from, our operations, priorities and plans, anticipated financial and operational performance, business prospects and demand for our services and growth opportunities.

The forward-looking information that may be in this news release is based on current expectations, estimates, projections and assumptions, having regard to CP's experience and its perception of historical trends, and includes, but is not limited to, expectations, estimates, projections and assumptions relating to: changes in business strategies, North American and global economic growth; commodity demand growth; sustainable industrial and agricultural production; commodity prices and interest rates; performance of our assets and equipment; sufficiency of our budgeted capital expenditures in carrying out our business plan; geopolitical conditions, applicable laws, regulations and government policies; the availability and cost of labour, services and infrastructure; the satisfaction by third parties of their obligations to CP; and the anticipated impacts of the COVID-19 pandemic on CP businesses, operating results, cash flows and/or financial condition. Although CP believes the expectations, estimates, projections and assumptions reflected in the forward-looking information presented herein are reasonable as of the date hereof, there can be no assurance that they will prove to be correct. Current conditions, economic and otherwise, render assumptions, although reasonable when made, subject to greater uncertainty.

Undue reliance should not be placed on forward-looking information as actual results may differ materially from those expressed or implied by forward-looking information. By its nature, CP's forward-looking information involves inherent risks and uncertainties that could cause actual results to differ materially from the forward looking information, including, but not limited to, the following factors: changes in business strategies and strategic opportunities; general Canadian, U.S., Mexican and global social, economic, political, credit and business conditions; risks associated with agricultural production such as weather conditions and insect populations; the availability and price of energy commodities; the effects of competition and pricing pressures, including competition from other rail carriers, trucking companies and maritime shippers in Canada, the U.S. and Mexico; North American and global economic growth; industry capacity; shifts in market demand; changes in commodity prices and commodity demand; uncertainty surrounding timing and volumes of commodities being shipped via CP; inflation; geopolitical instability; changes in laws, regulations and government policies, including regulation of rates; changes in taxes and tax rates; potential increases in maintenance and operating costs; changes in fuel prices; disruption in fuel supplies; uncertainties of investigations, proceedings or other types of claims and litigation; compliance with environmental regulations; labour disputes; changes in labour costs and labour difficulties; risks and liabilities arising from derailments; transportation of dangerous goods; timing of completion of capital and maintenance projects; sufficiency of budgeted capital expenditures in carrying out business plans; services and infrastructure; the satisfaction by third parties of their obligations; currency and interest rate fluctuations; exchange rates; effects of changes in market conditions and discount rates on the financial position of pension plans and investments; trade restrictions or other changes to international trade arrangements; the effects of current and future multinational trade agreements on the level of trade among Canada, the U.S. and Mexico; climate change and the market and regulatory responses to climate change; anticipated in-service dates; success of hedging activities; operational performance and reliability; customer, regulatory and other stakeholder approvals and support; regulatory and legislative decisions and actions; the adverse impact of any termination or revocation by the Mexican government of Kansas City Southern de México, S.A. de C.V.'s Concession; public opinion; various events that could disrupt operations, including severe weather, such as droughts, floods, avalanches and earthquakes, and cybersecurity attacks, as well as security threats and governmental response to them, and technological changes; acts of terrorism, war or other acts of violence or crime or risk of such activities; insurance coverage limitations; material adverse changes in economic and industry conditions, including the availability of short and long-term financing; the pandemic created by the outbreak of COVID-19 and its variants and resulting effects on economic conditions, the demand environment for logistics requirements and energy prices, restrictions imposed by public health authorities or governments, fiscal and monetary policy responses by governments and financial institutions, and disruptions to global supply chains; the realization of anticipated benefits and synergies of the CP-KCS transaction and the timing thereof; the success of integration plans for KCS; the focus of management time and attention on the CP-KCS transaction and other disruptions arising from the transaction; estimated future dividends; financial strength and flexibility; debt and equity market conditions, including the ability to access capital markets on favourable terms or at all; cost of debt and equity capital; and the ability of the management of the Company to execute key priorities, including those in connection with the CP-KCS transaction. The foregoing list of factors is not exhaustive. These and other factors are detailed from time to time in reports filed by CP with securities regulators in Canada and the United States. Reference should be made to "Item 1A - Risk Factors" and "Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations - Forward-Looking Statements" in CP's annual and interim reports on Form 10-K and 10-Q.

Any forward-looking information contained in this news release is made as of the date hereof. Except as required by law, CP undertakes no obligation to update publicly or otherwise revise any forward-looking information, or the foregoing assumptions and risks affecting such forward-looking information, whether as a result of new information, future events or otherwise.

About Canadian Pacific
Canadian Pacific is a transcontinental railway in Canada and the United States with direct links to major ports on the west and east coasts. CP provides North American customers a competitive rail service with access to key markets in every corner of the globe. CP is growing with its customers, offering a suite of freight transportation services, logistics solutions and supply chain expertise. Visit cpr.ca to see the rail advantages of CP. CP-IR

FINANCIAL STATEMENTS

INTERIM CONSOLIDATED STATEMENTS OF INCOME
(unaudited)


For the three months
ended June 30

For the six months
ended June 30

(in millions of Canadian dollars, except share and per share data)

2022

2021

2022

2021

Revenues (Note 3)





Freight

$ 2,154

$ 2,008

$ 3,950

$ 3,926

Non-freight

48

46

90

87

Total revenues

2,202

2,054

4,040

4,013

Operating expenses





Compensation and benefits

348

379

761

784

Fuel

370

218

643

424

Materials

63

54

125

113

Equipment rents

29

28

64

61

Depreciation and amortization

211

200

421

402

Purchased services and other (Note 10)

313

355

623

629

Total operating expenses

1,334

1,234

2,637

2,413






Operating income

868

820

1,403

1,600

Less:





Equity earnings of Kansas City Southern (Note 10)

(208)

(406)

Other expense (Note 4, 10)

7

157

6

129

Merger termination fee (Note 10)

(845)

(845)

Other components of net periodic benefit recovery (Note 15)

(101)

(96)

(202)

(191)

Net interest expense

160

101

320

211

Income before income tax expense

1,010

1,503

1,685

2,296

Income tax expense (Note 5)

245

257

330

448

Net income

$ 765

$ 1,246

$ 1,355

$ 1,848






Earnings per share (Note 6)





Basic earnings per share

$ 0.82

$ 1.87

$ 1.46

$ 2.77

Diluted earnings per share

$ 0.82

$ 1.86

$

1.45

$ 2.76






Weighted-average number of shares (millions) (Note 6)





Basic

929.9

666.7

929.8

666.6

Diluted

932.6

669.9

932.7

669.8






Dividends declared per share

$ 0.190

$ 0.190

$ 0.380

$ 0.380

See Notes to Interim Consolidated Financial Statements.


INTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)


For the three months
ended June 30

For the six months
ended June 30

(in millions of Canadian dollars)

2022

2021

2022

2021

Net income

$ 765

$ 1,246

$ 1,355

$ 1,848

Net gain in foreign currency translation adjustments, net of hedging
activities

719

10

383

20

Change in derivatives designated as cash flow hedges

2

(97)

3

(72)

Change in pension and post-retirement defined benefit plans

38

52

77

105

Equity accounted investments

73

135

Other comprehensive income (loss) before income taxes

832

(35)

598

53

Income tax recovery (expense) on above items

2

(34)

(30)

Other comprehensive income (loss) (Note 7)

834

(35)

564

23

Comprehensive income

$ 1,599

$ 1,211

$ 1,919

$ 1,871

See Notes to Interim Consolidated Financial Statements.

INTERIM CONSOLIDATED BALANCE SHEETS AS AT
(unaudited)


June 30

December 31

(in millions of Canadian dollars)

2022

2021

Assets



Current assets



Cash and cash equivalents

$ 154

$ 69

Restricted cash and cash equivalents

13

Accounts receivable, net (Note 8)

962

819

Materials and supplies

271

235

Other current assets

224

216


1,611

1,352

Investment in Kansas City Southern (Note 11)

43,203

42,309

Investments

217

209

Properties

21,502

21,200

Goodwill and intangible assets

374

371

Pension asset

2,538

2,317

Other assets

429

419

Total assets

$ 69,874

$ 68,177

Liabilities and shareholders' equity



Current liabilities



Accounts payable and accrued liabilities

$ 1,511

$ 1,609

Long-term debt maturing within one year (Note 12, 13)

1,698

1,550


3,209

3,159

Pension and other benefit liabilities

724

718

Other long-term liabilities

509

542

Long-term debt (Note 12, 13)

18,372

18,577

Deferred income taxes

11,646

11,352

Total liabilities

34,460

34,348

Shareholders' equity



Share capital

25,488

25,475

Additional paid-in capital

73

66

Accumulated other comprehensive loss (Note 7)

(1,539)

(2,103)

Retained earnings

11,392

10,391


35,414

33,829

Total liabilities and shareholders' equity

$ 69,874

$ 68,177

See Contingencies (Note 17).

See Notes to Interim Consolidated Financial Statements.

INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)


For the three months
ended June 30

For the six months
ended June 30

(in millions of Canadian dollars)

2022

2021

2022

2021

Operating activities





Net income

$ 765

$ 1,246

$ 1,355

$ 1,848

Reconciliation of net income to cash provided by operating activities:





Depreciation and amortization

211

200

421

402

Deferred income tax expense (Note 5)

114

9

113

60

Pension recovery and funding (Note 15)

(72)

(65)

(144)

(126)

Equity earnings of Kansas City Southern (Note 10)

(208)

(406)

Foreign exchange gain on debt and lease liabilities (Note 4)

(52)

(85)

Dividend from Kansas City Southern (Note 10)

334

Other operating activities, net

(16)

52

(99)

(36)

Change in non-cash working capital balances related to operations

(87)

564

(254)

473

Cash provided by operating activities

707

1,954

1,320

2,536

Investing activities





Additions to properties

(370)

(416)

(596)

(739)

Proceeds from sale of properties and other assets

11

12

26

49

Other

(3)

(1)

2

(1)

Cash used in investing activities

(362)

(405)

(568)

(691)

Financing activities





Dividends paid

(176)

(126)

(353)

(253)

Issuance of CP Common Shares

1

8

9

16

Repayment of long-term debt, excluding commercial paper (Note 12)

(10)

(10)

(552)

(31)

Repayment of term loan (Note 12)

(132)

(132)

Net issuance (repayment) of commercial paper (Note 11)

20

(872)

340

(779)

Acquisition-related financing fees (Note 10)

(12)

(45)

Other

(4)

(4)

Cash used in financing activities

(297)

(1,016)

(688)

(1,096)

Effect of foreign currency fluctuations on U.S. dollar-denominated
cash and cash equivalents

8

(1)

8

(4)

Cash position





Increase in cash, cash equivalents, and restricted cash

56

532

72

745

Cash, cash equivalents, and restricted cash at beginning of period

98

360

82

147

Cash and cash equivalents at end of period

$ 154

$ 892

$ 154

$ 892

Supplemental disclosures of cash flow information:





Income taxes paid

$ 93

$ 139

$ 252

$ 272

Interest paid

$ 169

$ 57

$ 319

$ 212

See Notes to Interim Consolidated Financial Statements.

INTERIM CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(unaudited)


For the three months ended June 30

(in millions of Canadian dollars except per
share data)


Common
Shares (in
millions)


Share

capital

Additional

paid-in

capital

Accumulated

other

comprehensive

loss

Retained

earnings

Total

shareholders'

equity

Balance as at April 1, 2022


929.9


$ 25,486

$ 68

$ (2,373)

$ 10,804

$ 33,985

Net income



765

765

Other comprehensive income (Note 7)



834

834

Dividends declared ($0.190 per share)



(177)

(177)

Effect of stock-based compensation expense



5

5

Shares issued under stock option plan


0.1


2

2

Balance as at June 30, 2022


930.0


$ 25,488

$ 73

$ (1,539)

$ 11,392

$ 35,414

Balance as at April 1, 2021


666.6


$ 1,993

$ 58

$ (2,756)

$ 8,571

$ 7,866

Net income



1,246

1,246

Other comprehensive loss (Note 7)



(35)

(35)

Dividends declared ($0.190 per share)



(127)

(127)

Effect of stock-based compensation expense



7

7

Shares issued under stock option plan


0.2


10

(2)

8

Balance as at June 30, 2021


666.8


$ 2,003

$ 63

$ (2,791)

$ 9,690

$ 8,965


For the six months ended June 30

(in millions of Canadian dollars except per
share data)


Common
Shares (in
millions)


Share

capital

Additional

paid-in

capital

Accumulated

other

comprehensive

loss

Retained

earnings

Total

shareholders'

equity

Balance as at January 1, 2022


929.7


$ 25,475

$ 66

$ (2,103)

$ 10,391

$ 33,829

Net income



1,355

1,355

Other comprehensive income (Note 7)



564

564

Dividends declared ($0.380 per share)



(354)

(354)

Effect of stock-based compensation expense



12

12

Shares issued for Kansas City Southern
acquisition



(2)

(2)

Shares issued under stock option plan


0.3


13

(3)

10

Balance as at June 30, 2022


930.0


$ 25,488

$ 73

$ (1,539)

$ 11,392

$ 35,414

Balance as at January 1, 2021


666.3


$ 1,983

$ 55

$ (2,814)

$ 8,095

$ 7,319

Net income



1,848

1,848

Other comprehensive income (Note 7)



23

23

Dividends declared ($0.380 per share)



(253)

(253)

Effect of stock-based compensation
expense



12

12

Shares issued under stock option plan


0.5


20

(4)

16

Balance as at June 30, 2021


666.8


$ 2,003

$ 63

$ (2,791)

$ 9,690

$ 8,965

See Notes to Interim Consolidated Financial Statements.

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2022
(unaudited)

1 Basis of presentation

These unaudited Interim Consolidated Financial Statements ("Interim Consolidated Financial Statements") of Canadian Pacific Railway Limited ("CPRL") and its subsidiaries (collectively, "CP", or "the Company"), expressed in Canadian dollars, reflect management's estimates and assumptions that are necessary for their fair presentation in conformity with generally accepted accounting principles in the United States of America ("GAAP"). They do not include all disclosures required under GAAP for annual financial statements and should be read in conjunction with the 2021 annual Consolidated Financial Statements and notes included in CP's 2021 Annual Report on Form 10-K. The accounting policies used are consistent with the accounting policies used in preparing the 2021 annual Consolidated Financial Statements.

CP's operations can be affected by seasonal fluctuations such as changes in customer demand and weather-related issues. This seasonality could impact quarter-over-quarter comparisons.

In management's opinion, the Interim Consolidated Financial Statements include all adjustments (consisting of normal and recurring adjustments) necessary to present fairly such information. Interim results are not necessarily indicative of the results expected for the fiscal year.

2 Accounting changes

Implemented in 2022

Government Assistance

On January 1, 2022, the Company adopted the new Accounting Standards Update ("ASU") 2021-10, issued by the Financial Accounting Standards Board ("FASB"), and all related amendments under FASB Accounting Standards Codification ("ASC") Topic 832, Government Assistance. The amendment is made to increase transparency by introducing specific disclosure requirements for entities who apply a grant or contribution model by analogy to account for transactions with a government. This update is applied to government assistance transactions within the scope of this amendment that are in the financial statements at the date of initial application and prospectively to new transactions entered into after initial application. See Note 9 for further discussion on government assistance.

All other accounting pronouncements that became effective during the period covered by the Interim Consolidated Financial Statements did not have a material impact on the Company's Consolidated Financial Statements and related disclosures.

Future changes

Contract Assets and Contract Liabilities Acquired in a Business Combination

In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805), Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. This amendment introduces the requirement for an acquirer to recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with the requirements of FASB ASC Topic 606, Revenue from Contracts with Customers, rather than at fair value. This amendment will be effective prospectively from January 1, 2023, with early adoption permitted. The Company is currently assessing the impact of this amendment.

All other accounting pronouncements recently issued, but not effective until after June 30, 2022, have been assessed and are not expected to have a material impact on the Company's Consolidated Financial Statements and related disclosures.

3 Revenues

The following table disaggregates the Company's revenues from contracts with customers by major source:


For the three months
ended June 30

For the six months
ended June 30

(in millions of Canadian dollars)

2022

2021

2022

2021

Freight





Grain

$ 370

$ 444

$ 730

$ 892

Coal

163

170

302

333

Potash

171

134

275

235

Fertilizers and sulphur

85

78

163

155

Forest products

104

90

190

170

Energy, chemicals and plastics

340

369

650

757

Metals, minerals and consumer products

228

180

409

339

Automotive

120

98

211

206

Intermodal

573

445

1,020

839

Total freight revenues

2,154

2,008

3,950

3,926

Non-freight excluding leasing revenues

27

26

49

50

Revenues from contracts with customers

2,181

2,034

3,999

3,976

Leasing revenues

21

20

41

37

Total revenues

$ 2,202

$ 2,054

$ 4,040

$ 4,013

Contract liabilities

Contract liabilities represent payments received for performance obligations not yet satisfied and relate to deferred revenue and are presented as components of "Accounts payable and accrued liabilities" and "Other long-term liabilities" on the Company's Interim Consolidated Balance Sheets.

The following table summarizes the changes in contract liabilities:


For the three months
ended June 30

For the six months
ended June 30

(in millions of Canadian dollars)

2022

2021

2022

2021

Opening balance

$ 67

$ 114

$ 67

$ 61

Revenue recognized that was included in the contract liability balance
at the beginning of the period

(7)

(19)

(11)

(23)

Increase due to consideration received, net of revenue recognized
during the period

9

150

13

207

Closing balance

$ 69

$ 245

$ 69

$ 245

4 Other expense


For the three months
ended June 30

For the six months
ended June 30

(in millions of Canadian dollars)

2022

2021

2022

2021

Foreign exchange gain on debt and lease liabilities

$ —

$ (52)

$ —

$ (85)

Other foreign exchange gains

...