CP reports record fourth quarter and full-year earnings

CALGARY, Jan. 21, 2016 /PRNewswire/ - Canadian Pacific Railway Limited (TSX: CP) (NYSE: CP) today announced fourth-quarter reported diluted earnings per share of C$2.08 and adjusted diluted earnings per share of $2.72, the highest ever for the period. For the full year, reported diluted earnings per share were $8.40 while adjusted diluted earnings per share climbed to a record $10.10, a 19-percent improvement over 2014's adjusted EPS of $8.50.

CP's commitment to operational efficiency produced a fourth-quarter adjusted and reported operating ratio of 59.8 percent, matching the record-setting performance of a year ago. For 2015, CP posted a best-ever full-year adjusted and reported operating ratio of 61 and 60 percent, beating the previous record, set in 2014, by 370 and 470 basis points, respectively.

"Thanks to our committed, hard-working employees across the network we have produced a record low operating ratio along with record earnings per share," said E. Hunter Harrison, CP's Chief Executive Officer. "Despite challenging economic conditions and lower commodity prices, we continue to focus on what we can control – lowering costs, creating efficiencies and improving service."

FULL-YEAR 2015 HIGHLIGHTS

• Record revenues of $6.71 billion
• Adjusted operating ratio improved to a record 61 percent; reported operating ratio of 60 percent
• Adjusted diluted EPS rose 19 percent to a record $10.10 from $8.50 in 2014; reported diluted earnings per share were $8.40
• Record free cash of $1.16 billion, an increase of 59 percent

"While the North American economy braces itself for more headwinds, we remain optimistic about the future and CP's continued growth," said Harrison. "Despite the challenges, we expect 2016 to bring an operating ratio below 59 while generating double-digit EPS growth – a testament to the strength of our operating model and plan for the future."

2016 FULL-YEAR GUIDANCE

• Operating ratio below 59 percent
• Double-digit EPS growth from full-year 2015 adjusted diluted EPS of $10.10
• Capital expenditures of approximately $1.1 billion

Non-GAAP Measures

For further information regarding non-GAAP measures, including reconciliations to the nearest GAAP measures, see the attached supplementary schedule Non-GAAP Measures.

Conference Call Access/Webcast

CP will discuss its results with the financial community in a conference call beginning at 11 a.m. eastern time (9 a.m. mountain time) on January 21, 2016.

Conference Call Access

Toronto participants dial in number: 1-647-427-7450 
Operator assisted toll free dial in number: 1-888-231-8191 
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 http://www.cpr.ca/en/investors/earnings-releases 

A replay of the fourth-quarter conference call will be available by phone through to 
February 18, 2016 at 416-849-0833 or toll free 1-855-859-2056, password 35670003.

Access to the webcast and audio file of the presentation will be made available at: http://www.cpr.ca/en/investors/earnings-releases

Note on forward-looking information

This news release contains certain forward-looking information within the meaning of applicable securities laws relating, but not limited, to our operations, growth, priorities and plans, anticipated financial performance, business prospects, planned capital expenditures, programs and strategies. This forward-looking information also 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. To the extent that CP has provided guidance using non-GAAP financial measures, the Company may not be able to provide a reconciliation to a GAAP measure, due to unknown variables and uncertainty related to future results.

Undue reliance should not be placed on forward-looking information as actual results may differ materially from the forward-looking information. Forward-looking information is not a guarantee of future performance. By its nature, CP's forward-looking information involves numerous assumptions, 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; general North American and global economic, credit and business conditions; risks in agricultural production such as weather conditions and insect populations; the availability and price of energy commodities; the effects of competition and pricing pressures; industry capacity; shifts in market demand; changes in commodity prices; uncertainty surrounding timing and volumes of commodities being shipped via CP; inflation; changes in laws and regulations, including regulation of rates; changes in taxes and tax rates; potential increases in maintenance and operating costs; uncertainties of investigations, proceedings or other types of claims and litigation; labour disputes; risks and liabilities arising from derailments; transportation of dangerous goods; timing of completion of capital and maintenance projects; currency and interest rate fluctuations; effects of changes in market conditions and discount rates on the financial position of pension plans and investments; and various events that could disrupt operations, including severe weather, droughts, floods, avalanches and earthquakes as well as security threats and governmental response to them, and technological changes. 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 "Management's Discussion and Analysis" and "Risk Factors" in CP's annual and interim reports, which are available on EDGAR at www.sec.gov and on SEDAR at www.sedar.com. Readers are cautioned not to place undue reliance on forward-looking information. Forward-looking information is based on current expectations, estimates and projections and it is possible that predictions, forecasts, projections, and other forms of forward-looking information will not be achieved by CP. Except as required by law, CP undertakes no obligation to update publicly or otherwise revise any forward-looking information, whether as a result of new information, future events or otherwise.

About Canadian Pacific

Canadian Pacific Railway Limited (TSX:CP)(NYSE:CP) is a transcontinental railway in Canada and the United States with direct links to eight major ports, including Vancouver and Montreal, providing 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 www.cpr.ca to see the rail advantages of CP.

NOTES TO INTERIM CONSOLIDATED FINANCIAL INFORMATION
December 31, 2015
(unaudited)

1  Basis of presentation

This unaudited interim consolidated financial information of Canadian Pacific Railway Limited ("CP" or "the Company"), expressed in Canadian dollars, reflects management's estimates and assumptions that are necessary for their fair presentation in conformity with accounting principles generally accepted 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 2014 annual consolidated financial statements and 2015 consolidated interim financial statements. The accounting policies used are consistent with the accounting policies used in preparing the 2014 annual consolidated financial statements, except for the accounting changes discussed in Note 2.

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 unaudited interim consolidated financial information includes all adjustments (consisting of normal and recurring adjustments) necessary to present fairly such information.

2  Accounting changes

Implemented in 2015               

Balance Sheet Classification of Deferred Taxes               

In November 2015, the FASB issued ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes, an amendment to FASB ASC Topic 740. The amendments remove the requirement to separate deferred income tax liabilities and assets into current and non-current amounts in the balance sheet. The recognition and measurement guidance for deferred tax assets and liabilities are not affected by the amendments. This ASU is effective prospectively or retrospectively for all periods presented for fiscal years, and interim periods within those years, beginning after December 15, 2016. Early adoption was permitted. The Company retrospectively adopted the provisions of this ASU during the fourth quarter of 2015.

As a result of the adoption of ASU 2015-17, the comparative period has been adjusted for the retrospective change in accounting principle with a reclassification of $56 million of current "Deferred income tax assets" against long-term "Deferred income tax liabilities" as at December 31, 2014. The Company is able to net these amounts as deferred tax liabilities exceed deferred tax assets in all tax jurisdictions. There was no impact on the income statement as a result of the adoption of the provisions of this ASU during the year ended December 31, 2015 and comparative periods.

3  Other income and charges

4  Shareholders' equity

On March 11, 2014, the Company announced a new share repurchase program to implement a normal course issuer bid ("NCIB") to purchase, for cancellation, up to 5.3 million common shares before March 16, 2015. On September 29, 2014, the Company announced the amendment of the bid to increase the maximum number of its common shares that may be purchased from 5.3 million to 12.7 million of its outstanding common shares. The Company completed the purchase of 10.5 million common shares in 2014 and an additional 2.2 million common shares in the first quarter of 2015 prior to the March 16, 2015 expiry date of the program.

On March 16, 2015, the Company announced the renewal of its NCIB, commencing March 18, 2015, to purchase up to 9.14 million of its outstanding common shares for cancellation before March 17, 2016. On August 31, 2015, the Company amended the NCIB to increase the maximum number of its common shares that may be purchased from 9.14 million to 11.9 million of its outstanding common shares.  As at December 31, 2015, the Company had purchased 11.3 million common shares for $2,258 million under this current NCIB program.

All purchases are made in accordance with the bid at prevalent market prices plus brokerage fees, or such other prices that may be permitted by the Toronto Stock Exchange, with consideration allocated to share capital up to the average carrying amount of the shares, and any excess allocated to retained earnings. The following table provides the activities under the share repurchase program:

5  Pension and other benefits

The remeasurement of the Company's pensions and post-retirement benefits plans at December 31, 2015 resulted in net actuarial gains of $791 million. These gains were largely due to higher discount rates at the remeasurement date and favourable 2015 investment returns, which resulted in a decrease in "Pensions and other benefits" liabilities of $5 million and a $786 million increase in "Pension asset". In addition, the net actuarial gains increased other comprehensive income by $583 million and increased "Deferred income taxes" by $208 million in the fourth quarter of 2015. The Company used an average discount rate of 4.22% at December 31, 2015 (2014 - 4.09%) for its pensions and post-retirement benefits plans.

Non-GAAP Measures - Unaudited

The Company presents non-GAAP measures and cash flow information to provide a basis for evaluating underlying earnings and liquidity trends in the Company's business that can be compared with the results of operations in prior periods.  In addition, these non-GAAP measures facilitate a multi-period assessment of long-term profitability allowing management and other external users of the Company's consolidated financial information to compare profitability on a long-term basis, including assessing future profitability, with that of the Company's peers.

These non-GAAP measures have no standardized meaning and are not defined by GAAP and, therefore, may not be comparable to similar measures presented by other companies.  The presentation of these non-GAAP measures is not intended to be considered in isolation from, or as a substitute for or as superior to, the financial information presented in accordance with GAAP.

Adjusted Performance Measures
The Company uses adjusted operating income, adjusted income, adjusted diluted earnings per share and adjusted operating ratio to evaluate the Company's operating performance and for planning and forecasting future business operations and future profitability.  Management believes that these non-GAAP measures provide meaningful supplemental information regarding operating results because they exclude certain significant items that are not considered indicative of future financial trends either by nature or amount.  As a result management excludes these items when assessing operational performance, allocating resources and preparing annual budgets.  These significant items may include, but are not limited to, restructuring and asset impairment charges, individually significant gains and losses from sales of assets and other items outside the control of management.  These items may not be non-recurring.  However, management believes that excluding these significant items from GAAP results provides a better understanding of the Company's consolidated financial performance when performing a multi-period assessment including assessing the likelihood of future results.  Accordingly, these non-GAAP financial measures may provide insight to investors and other external users of our consolidated financial information into the motivation and decision-making of management in operating the business.

Significant items that impacted reported fourth-quarter 2015 and 2014 earnings include:

2015:

• $115 million non-cash loss ($100 million after-tax) due to foreign exchange ("FX") translation on U.S. dollar-denominated long-term debt which unfavourably impacted Diluted EPS by 64 cents;

2014:

• $12 million non-cash loss ($9 million after-tax) due to FX translation on U.S. dollar-denominated long-term debt which unfavourably impacted Diluted EPS by 5 cents.

In addition to the fourth quarter significant items discussed above other items that impacted full year 2015 and 2014 earnings include:

2015:

• In the third quarter, a $128 million non-cash loss ($111 million after tax) due to FX translation of the Company's U.S. dollar-denominated debt which unfavourably impacted Diluted EPS by 69 cents;
• In the third quarter, a $68 million gain ($42 million after tax) related to the sale of Delaware and Hudson Railway south of Schenectady ("D&H South") which favourably impacted Diluted EPS by 26 cents;
• In the third quarter, a $47 million charge ($35 million after tax) related to the early redemption premium on notes which unfavourably impacted Diluted EPS by 22 cents;
• In the second quarter, a $10 million non-cash gain ($9 million after-tax) due to FX translation on U.S. dollar-denominated debt which favourably impacted Diluted EPS by 5 cents;
• In the second quarter, an income tax expense of $23 million as a result of the change in the Alberta provincial corporate income tax rate which unfavourably impacted Diluted EPS by 14 cents;
• In the first quarter, a $64 million non-cash loss ($55 million after-tax) due to FX translation on U.S. dollar-denominated debt which unfavourably impacted Diluted EPS by 34 cents;

2014:

• In the first quarter, $4 million ($3 million after-tax) experience gains from the 2012 labour restructuring initiative, which favourably impacted diluted EPS by 1 cent.

Reconciliation of Non-GAAP performance measures to GAAP performance measures
The following tables reconcile Adjusted operating income, Adjusted income, Adjusted EPS and Adjusted operating ratio to Operating income, Net income, Diluted earnings per share and Operating ratio, respectively.

Free Cash
Free cash is calculated as cash provided by operating activities, less cash used in investing activities, excluding changes in restricted cash and cash equivalents and investment balances used to collateralize letters of credit, and dividends paid, adjusted for changes in cash and cash equivalents balances resulting from FX fluctuations. Free cash is a measure that management considers to be an indicator of liquidity.  We believe that free cash is useful to investors and other external users of our consolidated financial information as it assists with the evaluation of the Company's ability to generate cash from its operations without incurring additional external financing.  Positive free cash indicates the amount of cash available for reinvestment in the business, or cash that can be returned to investors through increased dividends, stock repurchase programs, debt retirements or a combination of these.  Conversely, negative free cash indicates the amount of cash that must be raised from investors through new debt or equity issues, reduction in available cash balances or a combination of these. Free cash should be considered in addition to, rather than as a substitute for, cash provided by operating activities.

Foreign Exchange Adjusted Variance
Foreign exchange adjusted variance ("FX adj. variance") allows certain financial 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.  Financial results at constant currency are obtained by translating the comparable period of the prior year results denominated in U.S. dollars at the foreign exchange rates of the current period.  Measures at constant currency are considered non-GAAP measures and do not have any standardized meanings prescribed by GAAP and, therefore, are unlikely to be comparable to similar measures presented by other companies.

SOURCE Canadian Pacific