CPKC(US:CP)2024-04-24 13:18PART I - FINANCIAL INFORMATION This section presents the company's unaudited interim consolidated financial statements and management's discussion and analysis for the first quarter Financial Statements This section presents the unaudited Interim Consolidated Financial Statements for Canadian Pacific Kansas City Limited for the three months ended March 31, 2024, compared to the same period in 2023, reflecting the KCS consolidation - The financial statements for the three months ended March 31, 2024, include Kansas City Southern (KCS) as a consolidated subsidiary, while the comparative period in 2023 reports the company's 100% interest in KCS as an equity-method investment12 Interim Consolidated Statements of Income Q1 2024 income statements show significant revenue growth driven by KCS consolidation, despite a slight decrease in net income attributable to controlling shareholders Q1 2024 vs Q1 2023 Income Statement Highlights (in CAD millions, except per share data) | Metric | Q1 2024 | Q1 2023 | | :--- | :--- | :--- | | Total Revenues | $3,520 | $2,266 | | Operating Income | $1,149 | $829 | | Net Income Attributable to Controlling Shareholders | $775 | $800 | | Diluted Earnings Per Share | $0.83 | $0.86 | Interim Consolidated Balance Sheets As of March 31, 2024, total assets increased to $81.67 billion, primarily driven by properties and goodwill, with corresponding increases in liabilities and equity Balance Sheet Summary (in CAD millions) | Metric | March 31, 2024 | December 31, 2023 | | :--- | :--- | :--- | | Total Assets | $81,668 | $79,902 | | Total Liabilities | $37,907 | $37,491 | | Total Equity | $43,761 | $42,411 | Interim Consolidated Statements of Cash Flows In Q1 2024, net cash from operating activities increased, while cash used in investing activities rose and cash used in financing activities decreased Q1 2024 vs Q1 2023 Cash Flow Summary (in CAD millions) | Activity | Q1 2024 | Q1 2023 | | :--- | :--- | :--- | | Net Cash from Operating Activities | $1,015 | $881 | | Net Cash used in Investing Activities | ($542) | ($401) | | Net Cash used in Financing Activities | ($431) | ($645) | | Cash and Cash Equivalents at End of Period | $519 | $290 | Notes to Interim Consolidated Financial Statements The notes provide detailed explanations of financial statements, including revenue disaggregation, KCS acquisition accounting, debt details, and contingency updates Q1 2024 Freight Revenues by Commodity (in CAD millions) | Commodity | Q1 2024 Revenue | Q1 2023 Revenue | | :--- | :--- | :--- | | Grain | $730 | $515 | | Energy, chemicals and plastics | $702 | $366 | | Intermodal | $638 | $492 | | Metals, minerals and consumer products | $440 | $233 | | Automotive | $265 | $125 | | Coal | $209 | $155 | | Forest products | $202 | $103 | | Potash | $137 | $132 | | Fertilizers and sulphur | $104 | $96 | | Total Freight Revenues | $3,427 | $2,217 | - The accounting for the KCS acquisition was finalized on April 13, 2024, with measurement period adjustments resulting in a final goodwill value of $17.632 billion313234 - The company is involved in multiple legal proceedings related to the 2013 Lac-Mégantic derailment, with an appeal ongoing despite a December 2022 dismissal of claims against the company626667 Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) The MD&A provides management's perspective on Q1 2024 financial results, focusing on the KCS acquisition's impact on performance, expenses, liquidity, and non-GAAP measures Executive Summary The executive summary highlights Q1 2024 diluted EPS and operating ratio, reflecting the full consolidation impact of KCS Q1 2024 Key Performance Metrics | Metric | Q1 2024 | Q1 2023 | Change | | :--- | :--- | :--- | :--- | | Diluted EPS | $0.83 | $0.86 | -3% | | Core adjusted combined diluted EPS | $0.93 | $0.90 | +3% | | Operating Ratio | 67.4% | 63.4% | +400 bps | | Core adjusted combined operating ratio | 64.0% | 63.5% | +50 bps | Results of Operations Q1 2024 results show significant revenue and operating expense increases, primarily driven by the KCS acquisition and higher freight rates Q1 2024 vs Q1 2023 Revenue & Volume Metrics | Metric | Q1 2024 | Q1 2023 | % Change | | :--- | :--- | :--- | :--- | | Total Revenues (in CAD millions) | $3,520 | $2,266 | 55% | | Carloads (in thousands) | 1,072.6 | 679.5 | 58% | | Revenue Ton-Miles (in millions) | 51,838 | 37,549 | 38% | Q1 2024 vs Q1 2023 Operating Expenses (in CAD millions) | Expense Category | Q1 2024 | Q1 2023 | % Change | | :--- | :--- | :--- | :--- | | Compensation and benefits | $690 | $438 | 58% | | Fuel | $458 | $326 | 40% | | Depreciation and amortization | $467 | $225 | 108% | | Purchased services and other | $580 | $346 | 68% | | Total Operating Expenses | $2,371 | $1,437 | 65% | - Net interest expense increased by 34% to $206 million, primarily due to interest on debt assumed from KCS and higher interest on commercial paper117 Liquidity and Capital Resources The company's liquidity, primarily from operations, commercial paper, and credit facilities, is deemed adequate, supported by investment-grade credit ratings - Cash provided by operating activities increased by 15% to $1,015 million in Q1 2024, mainly due to higher cash-generating income from the KCS acquisition133 - Cash used in financing activities decreased by 33% to $431 million, primarily due to lower principal repayments on long-term debt compared to the prior-year period135 Credit Ratings as at March 31, 2024 | Agency | Long-term Debt | Commercial Paper | Outlook | | :--- | :--- | :--- | :--- | | Standard & Poor's | BBB+ | A-2 | Stable | | Moody's | Baa2 | P-2 | Positive | Non-GAAP Measures This section reconciles non-GAAP measures like Core adjusted combined diluted EPS and operating ratio, providing a clearer view of underlying performance by excluding significant items Reconciliation of Diluted EPS to Core Adjusted Combined Diluted EPS | Description | Q1 2024 | Q1 2023 | | :--- | :--- | :--- | | CPKC diluted earnings per share as reported | $0.83 | $0.86 | | Adjustments for significant items & KCS purchase accounting (net of tax) | $0.10 | $0.04 | | Core adjusted combined diluted earnings per share | $0.93 | $0.90 | Reconciliation of Operating Ratio to Core Adjusted Combined Operating Ratio | Description | Q1 2024 | Q1 2023 | | :--- | :--- | :--- | | CPKC operating ratio as reported | 67.4% | 63.4% | | KCS pre-control date adjustments | — | 3.1% | | Combined Operating Ratio | 67.4% | 66.5% | | Less: Adjustments for significant items & KCS purchase accounting | 3.4% | 3.0% | | Core adjusted combined operating ratio | 64.0% | 63.5% | Quantitative and Qualitative Disclosures about Market Risk The company is exposed to market risks from interest rate and foreign exchange fluctuations, which are managed through various strategies - A hypothetical one percentage point decrease in interest rates as at March 31, 2024, would result in an increase of approximately $1.8 billion to the fair value of the Company's debt174 Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of March 31, 2024, with no material changes in internal control over financial reporting - Based on an evaluation as of March 31, 2024, the CEO and CFO concluded that the company's disclosure controls and procedures were effective176 - No changes in internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, internal controls were identified in Q1 2024177 PART II - OTHER INFORMATION This section details legal proceedings, risk factors, and equity security sales, providing additional disclosures Legal Proceedings This section refers to Note 14 for details on contingencies and discloses an ongoing inquiry from the U.S. EPA regarding Clean Air Act compliance - The company is responding to an inquiry from the U.S. EPA regarding compliance with the Clean Air Act's mobile source provisions, with ongoing discussions with the DOJ to resolve the matter179 Risk Factors There have been no material changes to the risk factors previously disclosed in the company's 2023 Annual Report on Form 10-K - No material changes to risk factors from the 2023 Annual Report on Form 10-K are reported180 Unregistered Sales of Equity Securities and Use of Proceeds The company has suspended its share repurchase program in connection with the KCS transaction and did not have an active program as of March 31, 2024 - Share repurchases were suspended due to the KCS transaction, and no active program was in place as of March 31, 2024180