Class I Financial Performance 2020

Trains Magazine General Discussion
1

Here are several interesting 2020 financial metrics for the seven Class I railroads for information and discussion:

FY20 Results of Revenue, Net Income, Net Income as % of Revenue, and Operating Ratio

BNSF - $20.869 billion Revenue, $5.161 billion Net Income, 24.73% of Revenue, and 61.6 OR

CN - $12.819 billion Revenue, $3.562 billion Net Income, 25.78% of Revenue, and 65.4 OR

CP - $ 7.710 billion Revenue, $2.444 billion Net Income, 31.70% of Revenue, and 57.1 OR

CSX- $10.582 billion Revenue, $2.765 billion Net Income, 26.12% of Revenue, and 58.8 OR

KCS- $ 2.633 billion Revenue, $0.619 billion Net Income, 23.51% of Revenue, and 61.9 OR

NS- $ 9.942 billion Revenue, $2.013 billion Net Income, 20.25% of Revenue, and 69.3 OR

UP- $19.533 billion Revenue, $5.349 billion Net Income, 27.38% of Revenue, and 59.9 OR

2

Surprised at the NS numbers - across the board.

3

I’m most surprised about UP’s numbers…UP was late and last to the PSR party…and look at that OR.

4

Considering the ‘pressure’ that is being placed on Operating Ratio at present - I view the numbers from all carriers with suspicion.

5

That’s painting with a pretty broad brush of alleged financial fraud.

6

I have seen ‘sharp’ pencils before. OR falls into the area we have been discussing of ‘cost accounting’. Published cost accounting can be anything the story teller thinks he can get the story consumer to believe.

7

Back when I was working in the weather field, I was involved with upper air (weather balloon) observations. The observers working on the temperature data (a graph, plotted in real time from the instrument package) would sometimes “trend” the data by tilting the pencil from one side to the other as they traced the temp data. Much easier than plotting multiple points, etc.

As many have said on this topic over time, accountants can make the numbers say what they want.

8

Not necessarily fraud. There are different accepted accounting procedures that can produce different outcomes.

I remember reading in Trains years ago about one railroad applying for a government backed loan. The railroad submitted their paperwork showing they had made money the last year or whatever the time period used was. The government going over the same numbers using a different method said they lost money. A third independent concern used a different method and said they broke even. The same numbers crunched three different ways, all using acceptable but different methods came up with three different conclusions.

UP was already on the path to a lower OR before Black Rock took charge and demanded faster changes. We had G-55+0 before the Unified 2020 Plan.

I read once that the executive (maybe all management, although many lower managers no longer get them) bonuses aren’t counted toward the OR. If they were, I would think it might raise the OR a tad or

9

I still have memories of the fifties when I worked for the “STANDARD RAILROAD OF THE WORLD”, the PRR and thinking things are bad, they can’t get much worse. We all know how that played out. While I think the class I’s are in better finacial shape than the PRR was, I don’t have the faith that the money people are all above cooking the books. So I do not put all my investments in any one stock. But it will be fun to watch this play out

10

Accountants adhere to Generally Accepted Accounting Principles for the United States. They don’t make the numbers say whatever they or management want them to say.

Financial statements usually are prepared by the company’s staff accountants. In the case of a public corporation, as well as most private corporations, they are audited by external auditors. In addition, they may be audited by regulators, i.e., SEC, PUC, etc. Moreover, their corporate tax returns are examined closely by the IRS.

GAAP accounting and IRS accounting or even regulatory accounting are somewhat different. The variances are usually attributable to timing differences that usually reverse over time.

Accounting rules allow for a variety of estimates, i.e., uncollectible receivables, reserve valuations, asset service lives, salvage values, etc. Moreover, the rules allow for different accounting methods, i.e., inventory valuation, depreciation, amortization, etc. Most of the different methods result in the same outcomes over time. Once adopted estimates and methods must be consistent unless there is compelling evidence that a change is warranted.

The most important financial statement is the Statement of Cash Flows. It shows how cash, which

11

Follow up to JPS1. Some corporate accountants are formerly CPAs who maintain their license after they have left for the corporate world. The American Institute of Certified Public Accountants maintains a stringent code of ethics that all of us CPAs must live by. If we stray from that there can be serious consequences, including potentially legal. Following GAAP - the accounting rules - is non-negotiable.

12

GAAP has more than enough wiggle room to slant reports to a desired result, And the CPA’s are in the clear.

13

Spot on! I never worked in public accounting; I went straight from school to the corporate world. The company emphasized the importance of the CPA and other certifications. I got my CPA several years after beginning employment.

Most of the accountants that I worked with were very conscientious; they took their role and the ethical requirements that go with it very seriously.

I worked for a Fortune 200 Corporation. I was the chief accountant for one of the corporation’s operating companies as well as a corporate audit director and chief auditor of one of the company’s oversea subsidiaries. We had approximately 450 accounting employees, of which 260 were CPAs. I was never asked to or intimidated to bend the accounting rules by anyone in management or on the board of directors.

14

severe penalties exist for falsifying financial records…I believe a CFO and CEO can face personal liabilities and prison for violating Sarbane Oxley rules.

Will take a look at CN a little later when I have more time.

Ed

15

ENRON, Theranos, Madoff the list goes on and on. Financial chicanery is as old as time.

16

And they represent what percentage of the companies, accountants, CFOs, CEOs, Chief Accountants, etc. in the United States?

Every organization or profession has outliers. To conclude that they are representative of the whole population or even a neddle moving minority is a statistical fallacy. It is illogical.

17

You never know until they get caught!

18

It’s possible to pull off shenanigans without breaking any laws. Move this money into that account, write off certain moneys, etc.

I believe someone earlier in the thread pointed out that three agencies looked at one set of figures and came up with three different results.

Figures lie, and liars figure.

And to quote Disraeli - there’s lies, damned lies, and statistics.

19

I am sure you are correct. I wondered at the time if the surprisingly frequent changes of CFO during the EHH reign at Canadian Pacific were due to what he may have been pushing them to do. They were all relatively short term.

But as others have pointed out, there is wiggle room within the strict rules that any competent accountant can use without compromising even the highest of ethics. I am talking about shading the results, not gross misstatements. Choose the best year to write off a large capital asset and show a massive loss when fighting for regulatory changes from a government. The cash flow is still solidly in the black, about the same as the previous and succeeding quite profitable years, but that year end number looks terrible.

20

I am embarked on a fool’s earn, but I will have one last go at it. Rules govern the writing off of an asset. And they set out how to value that asset. It is not just something management can decide to do on a whim.