SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 6-K
REPORT OF FOREIGN PRIVATE ISSUER
PURSUANT TO RULE 13a-16 OR 15d-16 OF
THE SECURITIES EXCHANGE ACT OF 1934
For the month of May, 2005
CP SHIPS LIMITED
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(Translation of Registrant's Name Into English)
2 City Place, Beehive Ring Road, Gatwick, West Sussex, RH6 0PA, United Kingdom
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(Address of Principal Executive Offices)
Indicate by check mark whether the registrant files or will file
annual reports under cover of Form 20-F or Form 40-F.
Form 20-F [_] Form 40-F [X]
---
Indicate by check mark whether the registrant by furnishing the
information contained in this form is also thereby furnishing the information
to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act
of 1934.
Yes [_] No [X]
---
(If "Yes" is marked, indicate below the file number assigned to the
registrant in connection with Rule 12g3-2(b): 82-____________.
This report furnished on Form 6-K shall be incorporated by reference into
each of the following Registration Statements under the Securities Act of 1933
of the registrant:
Form S-8 No. 333-13954
Page 1 of 36 Pages
Exhibits Index appears on Page 3
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CP SHIPS LIMITED
(Registrant)
Date: 10 May 2005
By: /s/ JOHN M. BAKER
-------------------------------
Name: John M. Baker
Title: Secretary
Exhibits Index
The following is a list of Exhibits included as part of this Report on Form
6-K.
Description of Exhibit Page
- ---------------------- ----
10.1 Press Release of CP Ships Limited "CP SHIPS 4
TO APPOINT NIGEL RICH AS NEW CHAIRMAN"
dated 9 May 2005
10.2 Press Release of CP Ships Limited "CP SHIPS 6
REPORTS STRONG FIRST QUARTER RESULTS"
dated 9 May 2005
Exhibit 10.1
CP Ships [GRAPHIC OMMITTED]
CP SHIPS TO APPOINT NIGEL RICH AS NEW CHAIRMAN
GATWICK, UK (9th May 2005)--The Board of CP Ships Limited today announced that
it intends to appoint Nigel Rich as non-executive Chairman. It also confirmed
that Ray Miles will continue to exercise overall executive responsibility as
acting Chief Executive Officer until the appointment of a new CEO.
"I am delighted that Nigel has agreed to become Chairman. We will benefit
greatly from his experience," said Ray Miles. "And I will support him and the
company fully until I step down as a director of CP Ships after a new CEO is
on board, " said Ray Miles.
Nigel Rich has been a non-executive director of CP Ships since it was publicly
listed in 2001 and is currently Chairman of Exel, the UK-listed global
logistics business. He is also a director of Pacific Assets Trust and was
formerly Chairman of Hamptons Group, a real estate services company, and has
previously been a director of Granada and Harvey Nichols. He spent 20 years
with the Jardine Matheson group in Asia and was its CEO from 1989 to 1994.
Ray Miles was CEO of CP Ships from 1988 to May 2004 when he became Chairman,
but resumed executive responsibility in December 2004 when his successor as
CEO resigned. He will chair the Annual Meeting of Shareholders on 10th May in
Toronto.
If elected as a director at the Annual Meeting, Mr Rich would become Chairman
immediately thereafter.
-ends-
ABOUT CP SHIPS
One of the world's leading container shipping companies, CP Ships provides
international container transportation services in four key regional markets:
TransAtlantic, Australasia, Latin America and Asia. Within these markets CP
Ships operates 39 services in 22 trade lanes, most of which are served by two
or more of its seven brands: ANZDL, Canada Maritime, Cast, Contship
Containerlines, Italia Line, Lykes Lines and TMM Lines. On 28th April 2005, CP
Ships announced it will re-brand its services under the CP Ships name and
retire these brands by the end of 2005. At 31st March 2005, CP Ships' vessel
fleet was 81 ships and its container fleet 454,000 teu. Volume in 2004 was 2.3
million teu, more than 80% of which was North American exports or imports. CP
Ships also owns Montreal Gateway Terminals, which operates one of the largest
marine container terminal facilities in Canada. CP Ships is listed on the
Toronto and New York stock exchanges under the symbol TEU and also in the
S&P/TSX 60 Index of top
4
Canadian publicly listed companies. For further information visit the CP Ships
website at www.cpships.com.
FORWARD LOOKING STATEMENTS
This press release contains certain forward-looking information and statements
within the meaning of the United States Private Securities Litigation Reform
Act of 1995 relating, but not limited to, operations, anticipated or
prospective financial performance, results of operations, business prospects
and strategies of CP Ships. Forward-looking information typically contains
statements with words such as "consider", "anticipate", "believe", "expect",
"plan", "intend", "likely" or similar words suggesting future outcomes or
statements regarding an outlook on future changes in volumes, freight rates,
costs, achievable cost savings, the estimated amounts and timing of capital
expenditures, anticipated future debt levels and incentive fees or revenue, or
other expectations, beliefs, plans, objectives, assumptions, intentions or
statements about future events or performance. Readers should be aware that
these statements are subject to known and unknown risks, uncertainties and
other factors that could cause actual results to differ materially from those
suggested by the forward-looking statements.
Although CP Ships believes it has reasonable basis for making the forecasts or
projections included in this press release, readers are cautioned not to place
undue reliance on such forward-looking information. By its nature, the
forward-looking information of CP Ships involves numerous assumptions,
inherent risks and uncertainties, both general and specific, that contribute
to the possibility that the predictions, forecast and other forward-looking
statements will not occur. These factors include, but are not limited to,
changes in business strategies; general global, political and economic and
business conditions, including the length and severity of any economic
slowdown in the countries and regions where CP Ships operates, including
seasonality, particularly in the United States, Canada, Latin America,
Australasia, Asia and Europe; the effects of competition and pricing
pressures; changes in freight rates; industry over-capacity; changes in demand
for container shipping; availability and cost of chartered ships; changes in
laws and regulations, including tax, environmental, employment, competition,
anti-terrorism and trade laws; difficulties in achieving cost savings;
currency exposures and exchange rate fluctuations, fuel price and interest
rate fluctuations; changes in access to capital markets and other sources of
financing; various events which could disrupt operations, including war, acts
of terrorism, severe weather conditions and external labour unrest, all of
which may be beyond CP Ships' insurance coverage; compliance with security
measures by governmental and industry trade practice groups, the outcome of
civil litigation related to CP Ships' restatement of financial results and the
impact of any resulting legal judgments, settlements and expenses, and CP
Ships' anticipation of and success in managing the risks associated with the
foregoing.
The above list of important factors affecting forward-looking information is
not exhaustive, and reference should be made to the other risks discussed in
CP Ships' filings with Canadian securities regulatory authorities and the US
Securities and Exchange Commission. CP Ships undertakes no obligation, except
as required by law, to update publicly or otherwise revise any forward-looking
information, whether as a result of new information, future events or
otherwise, or the above list of factors affecting this information.
CONTACTS
Investors
Jeremy Lee, VP Investor Relations & Public Affairs
Telephone: + 1 514 934 5254
Media
Elizabeth Canna, VP Group Communications
Telephone: +44 (0)1293 861 921 or +41 (0)79 691 3764
5
Exhibit 10.2
CP Ships [GRAPHIC OMMITTED]
CP SHIPS REPORTS STRONG FIRST QUARTER 2005 RESULTS
(Definitions of non-GAAP terms are listed at the end of this report. All
dollar amounts are in US$ unless otherwise noted).
GATWICK, UK (9th May 2005) - CP Ships Limited today announced unaudited
operating income of $29 million for the first quarter 2005, more than double
first quarter 2004. Net income was $15 million against $3 million. The
quarterly dividend has been increased from $0.04 to $0.06 per share.
FINANCIAL HIGHLIGHTS
- --------------------
(unaudited)
($ millions unless otherwise indicated) Q1 2005 Q1 2004
Sales volume(A) (teu thousands) 533 562
Revenue 966 814
Average revenue per teu ($/teu)(B) 1,812 1,449
Average freight rate(C) 1,133 960
Cost per teu ($/teu)(D) 1,599 1,369
EBITDA(E) 57 43
Operating income 29 11
Net income 15 3
Earnings per share basic ($/share) 0.17 0.03
Dividends ($/share) 0.06 0.04
Free cash flow(G) 79 15
SUMMARY
- -------
o Revenue up 19% and average revenue per teu up 25% from first quarter 2004
o Volume 5% lower than first quarter 2004 due mainly to schedule delays
and service restructuring
o Average freight rate up 18% from first quarter 2004 and 3% from fourth
quarter
o Cost per teu up 17% from first quarter 2004 and 3% from fourth quarter
o Operating income $29 million, up $18 million from $11 million in first
quarter 2004
o Net income $15 million up from $3 million in first quarter 2004
o EBITDA $57 million up from $43 million
o Basic earnings per share $0.17, significantly up on $0.03 for first
quarter 2004
o Free cash flow $79 million up significantly from $15 million in first
quarter 2004
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"The strong finish to 2004 has continued into 2005 with a solid performance in
our seasonally weak first quarter," said Chairman Ray Miles. "Our aim to
improve freight rates in 2005 is off to a good start, outweighing the adverse
impact of lower volume due mainly to schedule delays and service
restructuring," he added. "TransAtlantic operating profit was higher with
first quarter freight rates continuing to improve upon the 8% increase
achieved in fourth quarter. Australasia results were stable with higher
freight rates offsetting lower volume. Latin America results were strong,
building on the freight rate increases achieved last year. In Asia,
Asia-Americas volume was softer than we expected, although freight rates were
largely unchanged, when usually they decline in the seasonally weaker first
quarter."
OUTLOOK
- -------
The following section contains forward-looking statements and investors should
read the cautions under the heading "Forward-Looking Statements."
As we anticipate current industry and market conditions to continue, we expect
2005 net income to be substantially higher than in 2004 with a basic earnings
per share in a range between $1.30 to $1.50. Volume is expected to grow
modestly and freight rates to continue to increase. In the TransAtlantic, we
expect operating income to improve significantly for the rest of the year
based on expected improvements in average freight rates from April increases
of as much as 10% by end of the second quarter compared to first quarter
levels. The better trade lane supply/ demand balance is expected to generate
further freight rate improvement in the second half. In Australasia, our solid
performance is expected to continue. Latin American volume is expected to
increase moderately with further freight rate improvement. In Asia, we
anticipate strong volume growth, albeit at a more moderate level than in 2004
and further freight rate improvement. Unit costs are expected to increase
further although at a much lower rate than in 2004. Our cost assumptions
include a higher average fuel price of $202 per tonne (Rotterdam Barges
Index), up from $175 per tonne average in first quarter, and average exchange
rates of US$ to Canadian $1.20, Euro 0.74 and GB Pound 0.53, reflecting a
weaker US$ than originally assumed in our earlier guidance for 2005.
7
REVIEW OF OPERATIONS
Revenue
- -------
Revenue at $966 million was up 19% from the $814 million reported in first
quarter 2004. Volume at 533,000 teu was 5% lower due mainly to schedule
delays, service restructuring and programs to improve cargo mix. Average
revenue per teu increased by 25% from $1,449 to $1,812 over the same quarter
last year and 4% from $1,738 in the fourth quarter. Average freight rates were
up 18% from first quarter 2004 and 3% from fourth quarter while inland and
other revenue per teu increased 21% from first quarter but was 2% lower than
fourth quarter.
Expenses
- --------
Total expenses for the quarter of $937 million increased $134 million or 17%
from $803 million in the same quarter 2004 due to continuing increases in
operating costs, including the impact of the weaker US$.
Total container shipping expenses for the quarter were up 19% to $791 million
due to higher operating costs. General and administrative costs at $120
million were up $10 million from the same quarter last year and up $11 million
over fourth quarter 2004.
Cost per teu at $1,599 was up 17% compared to first quarter 2004. Inland
transport and other variable costs represented about 9% of the increase and
fixed costs the remaining 8%%. Within fixed costs, lower volume caused
3% and higher charter costs 4%.
Cost per teu increased 3% from fourth quarter 2004 with variable costs flat
but lower volume accounting for the 3% increase in unit fixed costs, which
were otherwise flat with fourth quarter.
Charter costs were up $13 million in first quarter 2005 compared to the same
period last year. Most of the 16 charter renewals anticipated in 2005 have now
been concluded with an estimated increase in comparable charter cost of $28
million for 2005. In addition, the estimated incremental cost in 2005 of the
2004 charter renewals is now expected to be $16 million.
During first quarter 2005, the adverse impact of the weaker US$ on operating
costs before hedging was $14 million compared with first quarter 2004, which
was offset by a $7 million positive impact on revenue. There was an exchange
gain of $2 million, compared with a $6 million gain in first quarter 2004,
from foreign currency receivables and payables settled in the quarter and the
translation of the quarter-end balance sheet foreign currency denominated
assets and liabilities.
We expect cost reduction programs to partly offset the impact of increased
unit costs in 2005. Our 2005 program is expected to deliver about $30 million
of annualized savings, of which about $20 million will impact 2005 results. In
addition, we expect incremental savings of about $25 million from the 2004
cost reduction program. Congestion at marine terminals eased during the
quarter and there was generally sufficient supply of rail and truck capacity
in North America and Europe. However, there remains a risk of congestion
developing during the year as industry volume recovers after the seasonally
weaker first quarter.
8
Operating Income
- ----------------
First quarter operating income was $29 million, up $18 million from the $11
million in first quarter 2004, with significantly higher revenue more than
offsetting higher costs.
Other Consolidated Income Statement Items
- -----------------------------------------
Net interest expense was $11 million compared to $7 million in first quarter
2004 due to higher interest rates on our floating rate debt being partially
offset by higher interest income. Interest expense includes non-cash items of
$2 million in respect to amortization of deferred charges and accretion of
convertible bond notes compared to a gain of $1 million in first quarter 2004.
Income tax at $3 million for the quarter was up by $2 million on the same
quarter 2004.
Net Income
- ----------
First quarter net income available to common shareholders was $15 million, or
$0.17 basic earnings per share. This compares with $3 million, or $0.03 per
share in the same period 2004 and $32 million or $0.35 per share in fourth
quarter 2004.
BRAND STRATEGY
At the end of April, we announced plans to re-brand our container shipping
services under the CP Ships name and retire our seven operating brands by the
end of the year. Our decision to adopt a single brand is in response to
customers wanting us to simplify the way they do business with us. A single CP
Ships brand will also allow us to streamline our corporate structure, improve
further our accounting and related business processes and information systems,
save costs, strengthen our company culture as well as more closely align how
we communicate with all of our customers.
9
LOGISTICS ACQUISITION
On 4th May, CP Ships announced the acquisition of Borg International Freight
Services, a small logistics company specializing in ocean and air freight
forwarding. This is a continuation of our plan to selectively develop
logistics services as a way of leveraging strong regional market positions and
adding value to core container services.
BUSINESS SEGMENT REVIEW
TransAtlantic Market
- --------------------
Revenue at $459 million was 13% higher than first quarter 2004. Average
revenue per teu increased by 19% with freight rates up 13% compared to first
quarter and 3% higher than fourth quarter 2004. Volume was 5% lower than the
same period last year, due mainly to schedule delays, port omissions to
restore schedule integrity, and service restructuring.
Expenses were $48 million higher due mainly to higher variable costs per teu,
essentially for inlands. Ship costs also increased due mainly to increased
charter costs.
Operating income at $3 million improved significantly over the loss in the
first quarter 2004 of $2 million with higher revenue more than covering higher
costs.
The previously announced restructuring of capacity in the Montreal Gateway is
on track. Two of the three new chartered ice-strengthened 1600 teu ships were
deployed in one of our North Europe services during the quarter, replacing two
owned ice-strengthened 2400 teu ships which were redeployed to the West Coast
North America- Mediterranean trade lane. The third ship is being deployed in
May.
After the end of the quarter, we announced an agreement to charter a fixed
number of slots to CMA CGM on one of our North Europe Montreal Gateway
services. The agreement started at the end of April about the same time as CMA
CGM withdrew its own tonnage from the trade. The restructuring of trade lane
capacity is expected to further improve the supply/demand balance and lead to
greater operating efficiencies.
Australasian Market
- -------------------
Revenue at $153 million was significantly higher than first quarter 2004
mainly due to higher inland and other revenue. Higher freight rates, which
were up 11% on first quarter 2004 , offset reduced volume, down 12%, due to
fewer sailings and weaker Australasian exports. Unit costs were also up with
higher inland and terminal expenses and higher ship network costs due to less
volume and increased charter expenses. Operating income at $9 million was
slightly lower than the same quarter last year.
10
Latin American Market
- ---------------------
Revenue at $113 million was up $34 million from first quarter 2004. Volume was
7% higher due to additional services and continuing strong trade lane
conditions. Freight rates increased 34% compared to first quarter 2004 and 3%
from fourth quarter, building on the freight rate increases achieved during
last year. Expenses were also up due to the addition of new services and an
increase in variable costs. Operating income of $10 million was significantly
up from $1 million in first quarter 2004.
Asian Market
- ------------
Revenue was 21% higher at $206 million than first quarter 2004. Freight rates
were essentially unchanged from fourth quarter, a positive development as
freight rates usually decline in the first quarter for seasonal reasons, and
increased 22% over first quarter 2004. Volume was down mainly due to
significantly lower exports to Asia and weaker than expected import volume
from China. Expenses increased against first quarter 2004 due to the addition
of new services and increases in unit variable costs. Operating income was $3
million, up from a $1 million operating loss in first quarter 2004.
Other Activities
- ----------------
Operating income improved over first quarter 2004 by 21% to $4 million with
improved performance from Montreal Gateway Terminals due to higher volume and
the contribution from ROE Logistics acquired in April last year.
NON-CASH WORKING CAPITAL
Net non-cash working capital fell by $46 million in the first quarter,
compared to an increase of $14 million in the same quarter last year. The
improvement in first quarter was largely due to a decrease in current assets
and an increase in current liabilities.
CAPITAL EXPENDITURE
Capital expenditure in the first quarter was $15 million, including $7 million
for 1,500 40-ft temperature-controlled containers ordered in third quarter
2004 and $5 million on information systems. By the end of the first quarter,
2,500 of the 3,000 temperature-controlled containers had been delivered with
the final 500 received in early April 2005. The containers were financed by
eight-year capital lease after the quarter end.
As previously announced, CP Ships plans to build a further 3,000
temperature-controlled and 19,500 dry-van containers for delivery during
second half 2005. Orders were placed with the manufacturers during April 2005
at a total cost of $106 million. Financing under two eight-year capital leases
has been arranged. The temperature-controlled container investment will
replace about 2,000 old or expensive leased containers and help meet our
11
previously stated objective to double our carryings in this higher margin
market over the next five years. The new dry-vans will replace old worn-out
leased containers.
SHIP FLEET
The ship fleet was 81 ships on 31st March, up from 79 ships on 31st December
2004 due mainly to the temporary addition of ships during restructuring of
services in the TransAtlantic.
COMMON SHARES
At close of business on 6th May 2005, there were 90,400,525 common shares
outstanding.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents increased by $78 million to $213 million at the end
of the quarter from $135 million at 31st December 2004. Cash from operations
was $96 million, up $71 million from the same quarter 2004 due to higher net
income and an improvement in non-cash working capital.
There was cash used of $1 million from financing activities during the quarter
compared to cash used of $16 million in first quarter 2004. An increase in
short-term debt for the purchase of temperature-controlled containers, pending
their financing under eight-year capital leases, was offset by repayment of
long-term debt and dividends paid during the quarter.
Cash used in investing activities increased by $7 million against first
quarter 2004. Capital expenditure, at $15 million, was $6 million greater than
in first quarter 2004. In addition, dry-docking expenses were flat at $2
million.
Free cash flow for the first quarter 2005 was $79 million compared to $15
million in first quarter 2004 due primarily to higher cash from operations
including the positive movement in non-cash working capital.
Debt of $565 million at 31st March 2005 was up from $564 million at 31st
December 2004, with increased short-term borrowings for the
temperature-controlled containers offsetting the repayment of long-term
borrowings from operating cash flow.
During April, a further $15 million was borrowed under the $46 million
committed credit facility to finance the final 1,000 temperature-controlled
containers enabling the facility to be converted on 29th April 2005 into the
third and fourth temperature-controlled container leases. Each of these leases
is for eight years, amortizes to a 10% balloon payment, grants CP Ships a
purchase option at expiry and is priced at 3-month US$ LIBOR+1.25%.
Also during April, we arranged a second $46 million committed credit facility
to finance 100% of the investment in a second order of 3,000
temperature-controlled containers and a $60 million committed credit facility
to finance the
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19,500 dry-van containers. Both facilities are available until 21st December
2005 with an average commitment fee of 0.4% per year of the undrawn amount
payable during the delivery period. The facilities are each split into four
equal sized sub-leases, each of which must commence prior to the facility
expiring. Each lease is for eight years, amortizes to a 10% balloon payment,
grants CP Ships a purchase option at expiry and is priced at 3-month US$
LIBOR+1.15%. The leases contain a number of cross default provisions and
financial and operational covenants which are similar to those contained in
the $525 million revolving credit facility.
At 31st March 2005, CP Ships was in compliance with its covenants and had no
dividend or debt arrears. CP Ships expects to remain in compliance throughout
2005 based on current projections.
Credit Ratings - Standard and Poor's continues with CP Ships corporate rating
of BBB- and an outlook of "negative." Moody's senior implied rating remains
Ba2 and the outlook as "stable." The 10 3/8% senior notes are rated BB+ by
Standard and Poor's and Ba3 by Moody's and the 4% convertible senior
subordinated notes BB+ and B1 respectively. In the event that the corporate
rating from Standard and Poor's was to decrease to BB, a default, unless
remedied, including by prepayment of the facility, would be triggered under a
container sale and leaseback agreement. A default would lead to cross default
of certain other debt facilities, including the revolving credit facilities.
FINANCIAL INSTRUMENTS
Foreign Currency Exchange Risk Management
- -----------------------------------------
Revenue is denominated primarily in US$, but CP Ships is exposed to a net
foreign currency exchange risk through local operating costs. The most
significant currency exposures are Euro, Canadian $, Mexican Peso, and GB
Pound.
During the first quarter 2005, about 37% of Canadian $, 32% of Euro and 33% of
GB Pound cost exposures were hedged resulting in a $2 million gain compared
with a loss of $1 million in the same period 2004.
At 31st December 2004, a $3 million gain was recognized relating to foreign
exchange contracts that did not qualify for hedge accounting. During the first
quarter, the contracts expired with a market value of $2 million resulting in
a loss of $1 million being recognized . At 31st March 2005, a gain of $2
million was recognized relating to foreign exchange contracts that did not
qualify for hedge accounting compared to nil in first quarter 2004.
At the end of the first quarter, economic hedges were in place to cover some
of the anticipated exposures for the remainder of 2005 using a combination of
forward contracts and put and call options.
The hedges for the Canadian $, Euro and GB Pound in place at 31st March 2005
and at 9th May 2005 have the following coverage against expected cost exposure
for the remainder of 2005 in the hedged currencies, and at the ranges
indicated:
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Contracts in place at 31st March 2005
and 9th May 2005
1 US$ buys Hedge % Range
- --------------------------------- ------------------ -----------------
Canadian $ 40 1.24 - 1.27
Euro 25 0.79 - 0.81
GB Pound 32 0.54 - 0.56
The estimated impact before hedging of a 1% decrease in the US$ exchange rate
against all of the Euro, Canadian $, Mexican Peso, and GB Pound combined
exposures would be to decrease annual operating income by $6 million; a 1%
increase in the US$ exchange rate would increase operating income by $6
million.
Interest Rate Risk Management
- -----------------------------
At 31st March 2005, taking account of fixed to floating interest rate swaps on
the ten-year senior notes, $336 million or 63% of debt was at floating rates
linked to US$ LIBOR. The average margin over LIBOR on the floating debt was
3.7%. The remaining borrowings were fixed at an average rate of 4.5%. Net of
cash and cash equivalents, the estimated effect of a 1% increase in US$ LIBOR
would be to decrease annual net income by $1 million.
Fuel Price Risk Management
- --------------------------
During the first quarter, 390,000 tonnes of bunker fuel were consumed at an
average price of $175 per tonne compared to 380,000 tonnes at $161 in the same
period 2004.
To manage up to 50% of anticipated exposure to movements in the price of
bunker fuel, a range of instruments is used including swaps and put and call
options resulting in a $1 million gain during the first quarter 2005 compared
to $2 million loss in the same period 2004.
At 31st March 2005, approximately 20% of anticipated exposure is covered in a
range of $156-$173 per tonne for the remainder of 2005. The hedges were
written against the Rotterdam 3.5% Barges Index and are before delivery costs.
The estimated impact on annual operating income based on 2004 fuel purchases
before hedging of a 5% movement in CP Ships first quarter 2005 average bunker
fuel price would be $14 million, although up to 50% of any price increase is
estimated to be recoverable through fuel surcharges with a delay of two to
three months.
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Off-Balance Sheet Arrangements
- ------------------------------
No off-balance sheet arrangements, including guarantee contracts, retained or
contingent interests, derivative instruments and variable interest entities,
were entered into during the quarter which have, or are reasonably likely to
have, a current or future material effect on financial results.
LITIGATION UPDATE
As previously reported, six class action lawsuits in the US and three in
Canada have been filed against CP Ships and certain directors and officers.
The actions are in respect to CP Ships' restatements of previously reported
financial results. CP Ships has retained counsel and is in the process of
defending these claims. The outcome and amount of these claims are not yet
determinable and accordingly, no provision has been made in the financial
statements.
Liberty Global Logistics filed a complaint on 18th March 2005 in the US
District Court for the Eastern District of New York against the US Maritime
Administration and the United States of America challenging the Maritime
Security Program awards made in January 2005 to Lykes Lines and others. The
company is participating in the rigorous defence of this complaint.
CONTROLS AND PROCEDURES
Disclosure controls and procedures are defined by the US Securities and
Exchange Commission as those controls and procedures that are designed to
ensure that information required to be disclosed in CP Ships filings under the
Securities Exchange Act of 1934 is recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange
Commission rules and forms.
CP Ships has, consistent with management's ongoing efforts to rationalize
legacy accounting systems and to improve financial reporting and disclosure
controls and procedures, introduced a new SAP financial accounting system in
the majority of its shipping lines with effect from 1st January 2004. One of
the two remaining lines was transferred to SAP from 1st April 2005 and the
other line's implementation is anticipated to be completed mid 2005.
CP Ships believes that its implementation of SAP has and will continue to
significantly enhance its financial controls.
A new permanent Business Controls group, led by Vice President Business
Controls, was established at the end of 2004. This group's mandate is to build
on initial improvements to internal controls following the restatement last
year of financial results for 2002, 2003 and first quarter 2004, with
particular focus on those controls involving the recording and monitoring of
accruals for costs and the review and reconciliation of balances. It
coordinates closely with a separate team whose task is to ensure compliance by
the end of 2006 with reporting on internal financial controls required under
Section 404 of the US Sarbanes-Oxley Act.
15
In connection with the preparation of the first quarter 2005 interim financial
statements, management has evaluated CP Ships' disclosure controls and
procedures and has concluded that such disclosure controls and procedures were
effective as at 31st March 2005. Other than the implementation of improvements
and processes described above, including SAP and the development of the
Business Controls group, there has been no change in internal controls during
first quarter 2005 that has materially affected, or is reasonably likely to
materially affect, CP Ships' internal control over financial reporting.
DIVIDEND
The Board of Directors has declared an increased dividend for the first
quarter 2005 of $0.06 per common share, payable on 2nd June to shareholders of
record on 20th May.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Critical accounting policies used in preparing the unaudited interim
consolidated financial statements are discussed in the Management's Discussion
and Analysis included in our 2004 Annual Report, except as disclosed in note 2
to the unaudited interim consolidated financial statements. The preparation of
our consolidated financial statements in accordance with Canadian GAAP
requires judgement and the use of estimates that affect the reported amounts.
A substantial proportion of CP Ships' container shipping operations costs such
as for inland transport and empty container positioning has to be estimated
for each period and is included in the period end balance sheet as accruals.
Actual results may differ from these estimates.
CHANGE IN ACCOUNTING POLICIES
Changes in accounting polices in preparing the unaudited interim consolidated
financial statements are detailed in note 2 of the interim financial
statements.
CONFERENCE CALL AND PRESENTATION
Management will discuss this report in a conference call and presentation with
the investment community on 10th May 2005 at 3:00pm Eastern Daylight Time. The
conference call will be webcast live on the CP Ships website
(www.cpships.com), where it will also be available in archive. In addition,
parties may participate in the conference call on a listen-only basis by
calling 1 (888) 208-1815 (toll free in Canada and the US).
ADDITIONAL INFORMATION
Additional information, including the 2004 Annual Report, may be found on
SEDAR, www.sedar.com, EDGAR at www.sec.gov/edgar.shtml or on the CP Ships
website.
16
FORWARD-LOOKING STATEMENTS
This report contains certain forward-looking information and statements within
the meaning of the United States Private Securities Litigation Reform Act of
1995 relating but not limited to, operations, anticipated or prospective
financial performance, results of operations, business prospects and
strategies of CP Ships. Forward-looking information typically contains
statements with words such as "consider", "anticipate", "believe", "expect",
"plan", "intend", "likely" or similar words suggesting future outcomes or
statements regarding an outlook on future changes in volumes, freight rates,
costs, achievable cost savings, the estimated amounts and timing of capital
expenditures, anticipated future debt levels and incentive fees or revenue, or
other expectations, beliefs, plans, objectives, assumptions, intentions or
statements about future events or performance. Readers should be aware that
these statements are subject to known and unknown risks, uncertainties and
other factors that could cause actual results to differ materially from those
suggested by the forward-looking statements.
Although CP Ships believes it has reasonable basis for making the forecasts or
projections included in this report , readers are cautioned not to place undue
reliance on such forward-looking information. By its nature, the
forward-looking information of CP Ships involves numerous assumptions,
inherent risks and uncertainties, both general and specific, that contribute
to the possibility that the predictions, forecast and other forward-looking
statements will not occur. These factors include, but are not limited to,
changes in business strategies; general global, political and economic and
business conditions, including the length and severity of any economic
slowdown in the countries and regions where CP Ships operates, including
seasonality, particularly in the United States, Canada, Latin America,
Australasia, Asia and Europe; the effects of competition and pricing
pressures; changes in freight rates; industry over-capacity; changes in demand
for container shipping; congestion; availability and cost of chartered ships;
changes in laws and regulations, including tax, environmental, employment,
competition, anti-terrorism and trade laws; difficulties in achieving cost
savings; currency exposures and exchange rate fluctuations, fuel price and
interest rate fluctuations; changes in access to capital markets and other
sources of financing; various events which could disrupt operations, including
war, acts of terrorism, severe weather conditions and external labour unrest,
all of which may be beyond CP Ships' insurance coverage; compliance with
security measures by governmental and industry trade practice groups, the
outcome of civil litigation related to CP Ships' restatement of financial
results and the impact of any resulting legal judgments, settlements and
expenses, and CP Ships' anticipation of and success in managing the risks
associated with the foregoing.
The above list of important factors affecting forward-looking information is
not exhaustive, and reference should be made to the other risks discussed in
CP Ships' filings with Canadian securities regulatory authorities and the US
Securities and Exchange Commission. CP Ships undertakes no obligation, except
as required by law, to update publicly or otherwise revise any forward-looking
information, whether as a result of new information, future events or
otherwise, or the above list of factors affecting this information.
17
QUARTERLY RESULTS 2005, 2004 and 2003
Unaudited Q1 Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1
US$ millions except volume 2005 2004 2004 2004 2004 2003 2003 2003 2003
- --------------------------------------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Volume (teu 000s)
TransAtlantic 280 292 306 305 294 301 287 305 270
Australasia 65 74 72 73 74 78 79 73 74
Latin America 62 65 63 61 58 63 63 60 53
Asia 121 133 131 126 126 119 114 111 109
Other 5 4 6 5 10 8 11 9 8
-----------------------------------------------------------------------------------------
533 568 578 570 562 569 554 558 514
- ---------------------------------------------------------------------------------------------------------------------------------
Revenue
TransAtlantic 459 458 449 441 406 428 400 401 344
Australasia 153 152 150 146 132 136 133 129 117
Latin America 113 112 107 89 79 80 78 75 64
Asia 206 227 224 192 170 167 172 158 138
Other 35 39 36 35 27 27 33 28 22
-----------------------------------------------------------------------------------------
966 988 966 903 814 838 816 791 685
=========================================================================================
- ---------------------------------------------------------------------------------------------------------------------------------
Expenses
TransAtlantic 456 444 444 433 408 397 387 381 343
Australasia 144 143 143 140 122 131 126 123 111
Latin America 103 107 95 84 78 76 74 72 64
Asia 203 214 213 192 171 175 164 156 152
Other 31 34 30 28 24 23 27 25 21
-----------------------------------------------------------------------------------------
937 942 925 877 803 802 778 757 691
=========================================================================================
- ---------------------------------------------------------------------------------------------------------------------------------
Operating income/(loss)(1)
TransAtlantic 3 14 5 8 (2) 31 13 20 1
Australasia 9 9 7 6 10 5 7 6 6
Latin America 10 5 12 5 1 4 4 3 0
Asia 3 13 11 0 (1) (8) 8 2 (14)
Other 4 5 6 7 3 4 6 3 1
-----------------------------------------------------------------------------------------
29 46 41 26 11 36 38 34 (6)
=========================================================================================
- ---------------------------------------------------------------------------------------------------------------------------------
Analysis of expenses
Container shipping operations 791 803 789 733 667 668 630 621 568
General and administrative 120 109 101 108 110 107 113 108 96
Depreciation and amortization 28 32 31 29 32 33 29 29 28
Other (2) (2) 4 7 (6) (6) 6 (1) (1)
-----------------------------------------------------------------------------------------
937 942 925 877 803 802 778 757 691
- ---------------------------------------------------------------------------------------------------------------------------------
(1) Before exceptional charge of $10 million in Q1 2003. Refer to the 2004
Annual Financial Statements.
18
OPERATING DATA
Unaudited
EBITDA Q1 Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1
US$ millions 2005 2004 2004 2004 2004 2003 2003 2003 2003
- ---------------------------------------------------------------------------------------------------------------------------------
57 78 72 55 43 69 67 63 22
=================================================================================================================================
Free cash flow
US$ millions
- ---------------------------------------------------------------------------------------------------------------------------------
79 51 95 20 15 80 25 1 (102)
=================================================================================================================================
Quarterly freight rate changes
Percentage change(2)
- ---------------------------------------------------------------------------------------------------------------------------------
TransAtlantic 3 8 0 1 (3) 3 5 5 (1)
Australasia 13 0 (1) 0 6 6 2 3 3
Latin America 3 5 10 11 0 3 (6) 1 (3)
Asia (1) 0 13 10 (5) (8) 7 9 (5)
-----------------------------------------------------------------------------------------
Total percentage change 3 4 6 4 (2) (1) 7 5 (2)
=================================================================================================================================
Operating lease rentals
US$ millions
- ---------------------------------------------------------------------------------------------------------------------------------
Ships 62 66 59 51 49 49 44 44 40
Containers 38 39 40 36 38 37 39 39 38
Other 9 9 8 9 8 7 10 8 7
-----------------------------------------------------------------------------------------
109 114 107 96 95 93 93 91 85
=================================================================================================================================
Earnings coverage(I) Q1 Q4 Q3 Q2
Ratio 2005 2004 2004 2004
- ---------------------------------------------------------------------------------
3.6 3.2 3.0 3.0
=================================================================================
Ships
Number of ships employed at 31st March 2005 81
Nominal capacity of ships employed at 31st March 2005 in teu 194,800
================================================================================
Containers
Fleet in teu at 31st March 2005 454,000
================================================================================
(2) Percentage increase/(decrease) compared with previous quarter.
Asia-Europe is excluded from Q2 2003 onward.
19
INTERIM CONSOLIDATED STATEMENTS OF INCOME
Unaudited Three months
US$ millions except per share amounts to 31st March
2005 2004
- --------------------------------------------------------------------------------------------
Revenue
Container shipping operations 966 814
Expenses
Container shipping operations 791 667
General and administrative 120 110
Depreciation and amortization of intangible assets 28 32
Currency exchange (gain) (2) (6)
--------------------------
937 803
Operating income 29 11
Interest expense, net (note 3) (11) (7)
--------------------------
Income before income tax 18 4
Income tax expense (note 4) (3) (1)
--------------------------
Net income available to common shareholders $ 15 $ 3
==========================
Average number of common shares outstanding (millions)
(note 9) 90.2 89.9
Earnings per common share - basic (note 9) $ 0.17 $ 0.03
Earnings per common share - diluted (note 9) $ 0.16 $ 0.03
INTERIM CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
Unaudited Three months
US$ millions To 31st March
2005 2004
- ------------------------------------------------------------------------- --------------
Balance, beginning of period 633 579
Adoption of new accounting policy - (note 2) 1 (1)
-----------------------
Retained earnings, beginning of period as restated 634 578
Net income 15 3
Dividends on common shares (4) (4)
-----------------------
Balance, 31st December $ 645 $ 577
=======================
See accompanying notes to the interim consolidated financial statements
20
INTERIM CONSOLIDATED BALANCE SHEETS
Unaudited 31st March 2005 31st December 2004
US$ millions
- -------------------------------------------------------------------------------------------------------
Assets
Current assets
Cash and cash equivalents 213 135
Accounts receivable 465 473
Prepaid expenses 56 54
Inventory 26 26
--------------------------------------------
760 688
Property, plant and equipment 1,167 1,181
Deferred charges 47 49
Goodwill 608 608
Future income tax assets 6 7
Other assets and intangible assets 39 37
--------------------------------------------
$ 2,627 $ 2,570
============================================
Liabilities
Current liabilities
Accounts payable and accrued liabilities 666 626
Short-term debt (note 5) 7 -
Long-term debt due within one year (note 6) 16 19
--------------------------------------------
689 645
Long-term liabilities
Long-term debt due after one year (note 6) 542 545
Future income tax liabilities 7 8
Other long-term liabilities (note 2) 7 -
--------------------------------------------
556 553
Shareholders' equity
Common share capital 685 689
Other equity 29 29
Contributed surplus 16 14
Retained earnings 645 633
Cumulative foreign currency translation adjustments 7 7
--------------------------------------------
1,382 1,372
--------------------------------------------
$ 2,627 $ 2,570
============================================
See accompanying notes to the interim consolidated financial statements
21
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOW
Unaudited Three months
US$ millions to 31st March
2005 2004
- -----------------------------------------------------------------------------------------------------
Operating activities
Net income 15 3
Depreciation and amortization of intangible assets 28 32
Future income tax benefit - (1)
Amortization of deferred charges 4 7
Stock-based compensation 2 2
Accretion of convertible notes 1 -
Other - (3)
----------------------------
50 40
Decrease/(increase) in non-cash working capital (note 8) 46 (14)
----------------------------
Cash from operations before exceptional payments 96 26
Exceptional item payments - (1)
----------------------------
Cash from operations 96 25
Financing activities
Convertible notes issued - 200
Increase in short-term debt 7 -
Increase in long-term debt - 76
Repayment of long-term debt (5) (279)
Increase in deferred financing costs - (8)
Decrease in share capital 1 -
Financing costs allocated to other equity - (1)
Common share dividends paid (4) (4)
----------------------------
Cash on financing activities (1) (16)
Investing activities
Additions to property, plant and equipment (15) (9)
Increase in deferred dry-dock costs (2) (2)
Proceeds from disposal of property, plant and equipment - 1
----------------------------
Cash on investing activities (17) (10)
Cash position(3)
Increase/(decrease) in cash and cash equivalents 78 (1)
Cash and cash equivalents at beginning of period 135 75
----------------------------
Cash and cash equivalents at end of period $ 213 $ 74
============================
(3) Cash and cash equivalents comprises cash and temporary investments with
a maximum maturity of three months.
See accompanying notes to the interim consolidated financial statements
22
SEGMENT INFORMATION
Unaudited Three months
US$ millions to 31st March
2005 2004
- ------------------------------------------------------------------------
Revenue
TransAtlantic 459 406
Australasia 153 132
Latin America 113 79
Asia 206 170
Other 35 27
-------------------------------
$ 966 $ 814
===============================
Expenses
TransAtlantic 456 408
Australasia 144 122
Latin America 103 78
Asia 203 171
Other 31 24
-------------------------------
$ 937 $ 803
===============================
Operating income/(loss)
TransAtlantic 3 (2)
Australasia 9 10
Latin America 10 1
Asia 3 (1)
Other 4 3
-------------------------------
$ 29 $ 11
===============================
23
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
US$ millions
1. Basis of Presentation
These interim consolidated financial statements have been prepared using
accounting policies, other than those set out in note 2 to these interim
consolidated financial statements, that are consistent with the policies used
in preparing the 2004 annual consolidated financial statements, including that
certain of the comparative amounts have been reclassified to conform with the
presentation adopted currently.
The interim financial statements do not include all of the financial statement
disclosures included in the annual financial statements prepared in accordance
with Canadian generally accepted accounting principles (GAAP) and therefore
should be read in conjunction with the most recent annual financial
statements.
The results of operations for the interim period are not necessarily
indicative of the operating results for the full year due to business
seasonality. Although peak shipping periods differ in some of the market
segments, consolidated revenue and operating income have historically
generally been lower during the first quarter.
The preparation of financial statements requires that management make
estimates in reporting the amounts of certain revenues and expenses for each
financial year and certain assets and liabilities at the end of each financial
year. On an ongoing basis, management reviews its estimates, including those
related to revenue, accruals for costs incurred but not billed by vendors, bad
debts, potential impairment and useful lives of assets, income taxes, certain
other accrued liabilities, pensions and post retirement bene?ts and
stock-based compensation. Actual results may differ from these estimates.
The financial data presented in this document is for the first quarter 2005,
being the three months ended 31st March 2005. This period is compared to the
corresponding period in the previous year being the first quarter 2004 (three
months ended 31st March 2004) unless otherwise stated.
2. Change in Accounting Policies
Variable Interest Entities - On 1st January 2005, CP Ships adopted the
Canadian Institute of Chartered Accountants' (CICA) new accounting
requirements on the consolidation of variable interest entities (VIEs) under
Accounting Guideline 15 (AcG-15), "Consolidation of Variable Interest
Entities." AcG-15 is harmonized with US GAAP and provides guidance on the
consolidation of VIEs. VIEs are characterized as entities in which:
o the equity is not sufficient to permit that entity to finance its
activities without external support, or
o equity investors lack either voting control, an obligation to absorb
expected losses or the right to receive expected residual returns.
Where a reporting entity is deemed to have a variable interest in such an
entity, and where that interest will absorb a majority of the VIE's expected
losses, receive a majority of the VIE's expected returns, or both, the
reporting entity is the `primary beneficiary', and must consolidate the VIE.
As a result, CP Ships must consolidate certain trust vehicles that were
created to hold awards of shares to employees. The trust vehicles must be
consolidated as if AcG-15 was effective when the conditions were first met for
CP Ships to be the primary beneficiary.
Beginning 1st January 2005, CP Ships consolidated two trusts created by CP
Ships to facilitate employee remuneration. The assets and liabilities of these
VIEs have been grouped under other long-term assets and liabilities. There was
no impact on revenues during the quarter. The impact on the Consolidated
Balance Sheet on 1st January 2005 was an increase in cash of $1 million and
other assets of $4 million, an increase of long-term liabilities of $7 million
and a decrease in shareholders' equity of $2 million. The impact on
shareholders' equity includes a $4 million reduction to share capital for
shares held in treasury for employees as part of their employee remuneration.
This is offset by an increase of $1 million to retained earnings as a result
of retrospective application for earnings and $1 million to contributed
surplus in the trusts. The opening balance of retained earnings has been
adjusted to reflect this change. As at 31st of March 2005 there were 352,265
shares held in treasury.
24
3. Interest Expense, net
Three months
to 31st March
US$ millions 2005 2004
- --------------------------------------------------------------------------------------------
Interest expense 11 8
Interest income (1) -
Financial instruments fair value adjustment - (5)
Amortization and write-off of deferred financing costs 1 4
----------------------------
Interest expense, net $ 11 $ 7
============================
Interest expense includes a nil benefit (2004: $1 million) for accrued
interest received as a result of swapping the fixed 10 3/8% senior notes to
floating interest of US$ LIBOR+5.77%. The interest rate swap agreements in
place during first quarter 2004 did not qualify for hedge accounting under
AcG-13 resulting in a fair value adjustment of $5 million. These contracts
were terminated during third quarter 2004 and replaced with new contracts
which qualified under AcG-13. The fair value adjusted for first quarter 2005
was nil.
During first quarter 2004, CP Ships terminated a number of revolving credit
facilities and wrote off $4 million of previously deferred financing costs. No
similar costs were written off during the first quarter 2005.
4. Income Tax Expense
Three months
to 31st March
US$ millions 2005 2004
- ------------------------------------------------------------------------
Current income tax expense 3 2
Future income tax benefit - (1)
------------------------------
Income tax expense, net $ 3 $ 1
==============================
Income tax expense in the current quarter includes $1 million related to prior
periods.
5. Short-Term Debt
During fourth quarter 2004, CP Ships entered into a $46 million committed
credit facility to fund 100% of its investment in 3,000 temperature-controlled
containers. The facility is priced at 3-month US$ LIBOR+1.25%, is available
until 30th June 2005 with a commitment fee of 1/24th of the undrawn amount
payable during this period and is split into four sub-leases each of 750
units. At 31st December 2004 the first 1,500 containers had been financed
under the facility resulting in the commencement of the first two long-term
sub-leases (note 6). During first quarter 2005, a further 500 units were
financed leaving $15 million of the facility available and undrawn at 31st
March 2005. During April 2005, the remaining 1,000 units were financed
resulting in the cancellation of the facility and commencement of the third
and fourth long-term sub-leases on 29th April 2005.
25
6. Long-Term Debt
US$ millions 31st March 2005 31st December 2004
- --------------------------------------------------------------------------------------------------
Long-term debt
4% convertible senior subordinated notes 175 174
10 3/8% senior notes due 2012 197 197
Long-term loans 28 30
-----------------------------------------------
400 401
Capital leases 158 163
-----------------------------------------------
558 564
Amounts due within one year (16) (19)
-----------------------------------------------
Amounts due after one year $ 542 $ 545
===============================================
Bank Loans - Bank loans comprise a $525 million five-year multi-currency
revolving credit facility secured by certain owned ships. Of the facility, nil
was drawn at 31st March 2005 and $525 million was available to be drawn. The
facility is committed until March 2009 and bears interest at a margin, which
depends on the corporate credit rating, over US$ LIBOR. As at 31st March the
applicable margin was 1.10%. In the event that more than 50% of the facility
is drawn the applicable margin is increased by 0.15%. A commitment fee of 40%
of the applicable margin is payable on the undrawn portion of the facility.
Capital Leases - At 31st March 2005, capital leases consist of ship leases of
$123 million (31st December 2004: $126 million), container leases of $33
million (31st December 2004: $34 million) of which $22 million (31st December
2004: $23 million) relates to the temperature-controlled sub-leases and other
leases of $2 million (31st December 2004: $3 million)
Covenants - At 31st March 2005, CP Ships was in compliance with its financial
covenants and had no dividend or debt arrears.
7. Stock-Based Compensation
During the three months to 31st March 2005, employees were granted 208,678
restricted shares and 208,678 stock options vesting in February 2008. Half of
the restricted shares and all of the stock options are contingent on the
achievement by CP Ships of certain performance criteria.
Stock-based compensation awards granted after 1st January 2002 are accounted
for using the fair value method of accounting. Stock options granted prior to
1st January 2002 are excluded from the fair value assessment under Canadian
GAAP.
Stock-based compensation expense of $1 million was recognized for the three
months ended 31st March 2005 ($2 million for the three months ended 31st March
2004).
26
8. Supplemental Cash Flow Information
(a) Changes in non-cash working capital
Three months
to 31st March
US$ millions 2005 2004
- -------------------------------------------------------------------------------
Decrease/(increase) in current assets:
Accounts receivable 8 3
Prepaid expenses (2) (18)
Inventory - 3
Increase/(decrease) in current liabilities:
Accounts payable and accrued liabilities 40 (2)
Other changes in non-cash working capital
Accrued liability for deferred financing costs - (1)
Exceptional item related payments - 1
---------------------------
$ 46 $ (14)
===========================
(b) Non-cash transactions excluded from the consolidated statements of cash
flow
Three months
US$ millions to 31st March
2005 2004
- -------------------------------------------------------------------------------
Increase in other assets on trust assets (4) -
Increase in deferred compensation obligation from trusts 7 -
Decrease in share capital for treasury stock (3) -
27
9. Earnings Per Share
Basic earnings per common share is computed by dividing net income by the
weighted average number of common shares outstanding. Diluted earnings per
common share reflect the potential dilution that could occur if dilutive stock
options and non-vested restricted shares were exercised using the treasury
stock method, and shares issuable on conversion of convertible notes were
issued using the `if converted method'. A reconciliation of the weighted
average number of common shares used to calculate basic and diluted earnings
per common share is as follows:
Three months
to 31st March
Millions of shares 2005 2004
- ---------------------------------------------------------------------------------------------
Weighted average number of common shares used in
calculating basic earnings per share 90.2 89.9
----------------------------
Effect of dilutive securities - stock options 0.6 1.3
- unvested restricted shares 1.8 1.8
----------------------------
Weighted average number of common shares used in
calculating diluted earnings per share 92.6 93.0
============================
For the three months ended 31st March 2005 and 2004, the 4% convertible senior
subordinated notes, which are convertible into 7.9 million common shares under
certain conditions, were not included in the computation of diluted earnings
per common share because the contingent conversion conditions were not met
during the periods.
10. Pensions
The total benefit cost for the three months ended 31st March 2005 was $3
million (2004: $3 million).
11. Contingent Liabilities
Six class action lawsuits in the US and three in Canada have been filed
against CP Ships. These proceedings, which relate to the restatement of
historical financial results for first quarter 2004 and the years 2003 and
2002, are at a preliminary stage and to date no class has been certified. Five
of the six US lawsuits have been transferred to a single jurisdiction of
coordinated or consolidated pretrial proceedings. The sixth lawsuit is
expected to be transferred shortly. In the three Canadian proceedings, a
statement of claim has been filed but no further steps toward certification
have been taken. The proceedings allege claims against CP Ships and certain of
its directors and officers arising from the restatement. CP Ships has retained
counsel and is in the process of defending these claims. The outcome and
amount of these claims are not yet determinable and accordingly, no provision
has been made in these financial statements with respect to these matters.
The group is defending an action in Belgium that was initiated in 1999
totalling approximately Euro 89 million (US $115 million) against it and its
subsidiary relating to the termination of contracts for stevedoring and
related services. The group does not believe it will incur any liability, and
accordingly, no provision has been made in the financial statements with
respect to this matter other than for legal costs.
As a result of the Lykes Lines Limited, LLC (Lykes) contract with the US
Department of Transportation in respect to its new Maritime Security Program
(MSP), Liberty Global Logistics LLC filed a complaint on 18th March 2005 in
the US District Court for the Eastern District of New York against the
Maritime Administration and the United States of America challenging the MSP
awards made in January 2005 to Lykes and others. There are several defences to
this complaint and it is presently anticipated that it will have no effect on
the award of MSP to Lykes.
28
12. Subsequent Events
Subsequent to 31st March 2005, CP Ships entered into a contract to build
19,500 dry-vans and a further 3,000 40-ft temperature-controlled containers
for a total consideration of $106 million. The containers are expected to be
delivered between May and December 2005. The dry-van and
temperature-controlled container investments have been financed under separate
eight-year capital leases at 3-month US$ LIBOR+1.15%.
On 4th May 2005, CP Ships announced the acquisition of Borg International
Freight Services. Based in Montreal, Borg specializes in ocean and air freight
forwarding and employs 22 people. Its annual gross revenue in 2004 was US $14
million.
29
13. Differences between Accounting Principles Generally Accepted in Canada and
the United States
(a) Consolidated Statements of Income and Shareholders' Equity
The following is a reconciliation of net income under Canadian GAAP to net
income under US GAAP:
Unaudited Three months
US$ millions except per share amounts to 31st March
2005 2004
- ----------------------------------------------------------------------------------------
Net income - Canadian GAAP 15 3
US GAAP adjustments:
Embedded derivatives 4 9
Interest rate swaps (5) -
Foreign currency contracts - (1)
Bunker fuel price contracts 10 1
Stock-based compensation (1) 1
Ships 1 -
Capitalized interest (1) -
Restructuring costs - (1)
Interest expense - convertible notes 1 -
Tax effect of US GAAP adjustments - -
---------------------------
Net income - US GAAP 24 12
Other comprehensive income
Foreign currency translation adjustments - (4)
Comprehensive income - US GAAP $ 24 $ 8
===========================
Earnings per common share - basic ($ per share)
Canadian GAAP $ 0.17 $ 0.03
US GAAP $ 0.27 $ 0.13
Average number of common shares outstanding -basic
(millions)
Canadian GAAP 90.2 89.9
US GAAP 90.2 89.7
Earnings per common share - diluted ($ per share)
Canadian GAAP $ 0.16 $ 0.03
US GAAP $ 0.24 $ 0.13
Average number of common shares outstanding - diluted
(millions)
Canadian GAAP 92.6 93.0
US GAAP 100.5 93.0
30
Reconciliation of equity under Canadian GAAP to equity under US GAAP:
Unaudited 31st March 31st December
US$ millions 2005 2004
- -------------------------------------------------------------------------------------------------
Equity - Canadian GAAP 1,382 1,372
US GAAP adjustments:
Embedded derivatives - (4)
Interest rate swaps (4) 1
Foreign currency contracts 1 1
Bunker fuel price contracts 9 (1)
Acquisition-related costs (44) (44)
Pension costs (8) (8)
Stock-based compensation (2) (1)
Ships (20) (21)
Capitalized interest 3 4
Restructuring costs 2 2
Treasury stock - Rabbi Trust - (2)
Interest expense - convertible notes 5 4
Other equity - convertible notes (29) (29)
Tax effect of US GAAP adjustments -
-------------------------------------------
Total US GAAP adjustments (87) $ (98)
-------------------------------------------
Equity - US GAAP $1,295 $ 1,274
===========================================
(b) Summary of Differences
The most recent annual financial statements describe material differences
between Canadian GAAP and US GAAP applicable to the company as at 31st
December 2004. There are no differences applicable for the first time in 2005.
(c) Recent US Accounting Pronouncements
On 15th April 2005, the US Securities and Exchange Commission (SEC) announced
that it would provide for a phased-in implementation process for FASB
Statement No. 123(R), Share Based Payment (SFAS 123(R)). The SEC would require
that registrants adopt SFAS 123(R)'s fair value method of accounting for
share-based payments to employees no later that the beginning of the first
fiscal year after 15th June 2005. CP Ships now plans to adopt SFAS 123(R)
effective 1st January 2006.
31
(d) Additional US GAAP Disclosures
Under the CP Ships Employee Stock Option Plan (ESOP) and the Directors Stock
Option Plan (DSOP) options may be granted to key employees and directors to
purchase CP Ships common shares at a price normally based on the market value
of the shares on or immediately prior to the grant date. Each option may be
exercised after three years and no later than ten years after the grant date.
Under US GAAP CP Ships applies the intrinsic value method of accounting for
its options granted to employees. If CP Ships had determined compensation cost
based on the fair value at the grant date for employee share options in
accordance with FASB Statement No. 123, "Accounting for Stock-Based
Compensation." net income and net income per share would have changed to the
pro forma amounts indicated below.
Three Months to 31st
March
($ million except per share amounts) 2005 2004
------------- -------------
Net income - US GAAP, as reported 24 12
Add: Stock-based compensation expense determined under the
intrinsic value method: 2 1
Less: Stock-based compensation expense determined under the
fair value method: (1) (2)
---------------------------
Pro-forma net income - US GAAP $ 25 $ 11
Pro-forma earnings per share basic $ 0.28 $0.12
Pro-forma earnings per share diluted $ 0.29 $0.12
The basic and diluted earnings per share based on net income - US GAAP, as
reported, and the weighted average number of shares in issue are given in note
13(a).
32
KEY NON-GAAP OPERATING PERFORMANCE MEASURES
In our 2004 Annual report, we identified six key non-GAAP operating
performance indicators which we use to measure overall business performance: o
Sales volume
o Average freight rates
o Cost per teu
o EBITDA
o ROCE
o Net debt to capital
Subsequent to the release of our 2004 Annual Report, it was determined to also
use revenue per teu and free cash flow as key performance indicators.
Please refer to page 24 of our 2004 Annual Report and the following
definitions for more information on each of these performance measurements.
DEFINITIONS OF NON-GAAP TERMS (Note: The following should be read in
conjunction with the 2004 annual financial statements.)
(A) Sales volume is measured in teu. As well as directly contributing to
revenue, volume drives economies of scale and, within each individual trade
lane, directly impacts cost competitiveness and efficiency. Sales volume does
not have a standardized meaning under Canadian GAAP and may not be comparable
with similar measures used by others.
(B)Revenue per teu is total revenue divided by total volume in teu and is
considered to be a meaningful measure of the unit price for total
transportation services including ocean freight, inland transport services and
other revenue . Revenue per teu does not have a standardized meaning under
Canadian GAAP and may not be comparable with similar measures used by others.
(C)Average freight rate for CP Ships overall is total revenue less inland,
slot charter and other miscellaneous revenue divided by volume in teu. Average
freight rate for each market segment is the simple average of the average
freight rates for each direction, Westbound and Eastbound or Southbound and
Northbound. Average freight rate for each direction is the total revenue by
direction, (eg Westbound) less inland, slot charter and other miscellaneous
revenue divided by the equivalent total volume in teu. Average freight rate,
which we consider to be a meaningful indicator of the unit price for ocean
transportation services, does not have a standard meaning under Canadian GAAP
and may not be comparable with similar measures used by others.
(D)Cost per teu is total costs divided by volume in teu. Total costs comprise
total expenses before currency exchange gains or losses other than from
hedging, diminution in value of property, plant and equipment and gains or
losses on disposal of property, plant and equipment, after deducting slot
charter revenue. Cost per teu, which we consider to be a meaningful measure of
the underlying cost movements and the effectiveness with which costs are being
managed, does not have a standardized meaning under Canadian GAAP and may not
be comparable with similar measures used by others.
(E)EBITDA is earnings before interest, tax, depreciation, amortization,
exceptional items and minority interests and equals operating income before
exceptional items plus depreciation and amortization. EBITDA, which we
consider to be a meaningful measure of operating performance, particularly the
ability to generate cash, does not have a standard meaning under Canadian GAAP
and may not be comparable with similar measures used by others.
(F)Return on capital employed (ROCE) equals operating income before
exceptional items divided by average capital employed. Average capital
employed is the simple average of balance sheet capital employed at 31st March
of the current and prior year. Capital employed comprises shareholders'
equity, total long-term debt and future
33
income tax liabilities, less cash and cash equivalents. ROCE, which we
consider to be a meaningful measure of the efficiency with which capital is
being utilized, does not have a standardized meaning under Canadian GAAP and
may not be comparable with similar measures used by others.
(G)Free cash flow is cash from operations after payments for exceptional
items, less investing activities and adjusted for acquisitions. Free cash
flow, which we consider to be a meaningful measure of operating performance as
it demonstrates the company's ability to generate cash after the payment for
capital expenditures, does not have a standardized meaning under Canadian
GAAP, and may not be comparable with similar measures used by others.
Three months
Unaudited to 31st March
US$ millions 2005 2004
- -----------------------------------------------------------------------------
Cash inflow from operations 96 25
Less:
Investing activities (17) (10)
----------------------------
Free cash flow $ 79 $ 15
============================
(H)Net debt to capital is net debt divided by capital, where net debt equals
total debt less cash and cash equivalents, and capital equals shareholders'
equity plus net debt. Net debt to capital, which we consider to be a
meaningful measure of leverage, does not have a standardized meaning under
Canadian GAAP and may not be comparable with similar measures used by others.
(I)Earnings coverage is calculated on a 12-month trailing basis as the ratio
of net income before interest and income tax expense divided by the interest
expense on total long-term debt, calculated using applicable period end
interest rates.
-ends-
ABOUT CP SHIPS
One of the world's leading container shipping companies, CP Ships provides
international container transportation services in four key regional markets:
TransAtlantic, Australasia, Latin America and Asia. Within these markets CP
Ships operates 39 services in 22 trade lanes, most of which are served by two
or more of its seven brands: ANZDL, Canada Maritime, Cast, Contship
Containerlines, Italia Line, Lykes Lines and TMM Lines. On 28th April 2005, CP
Ships announced it will re-brand its services under the CP Ships name and
retire these brands by the end of 2005. At 31st March 2005, CP Ships' vessel
fleet was 81ships and its container fleet 454,000 teu. Volume in 2004 was 2.3
million teu, more than 80% of which was North American exports or imports. CP
Ships also owns Montreal Gateway Terminals, which operates one of the largest
marine container terminal facilities in Canada. CP Ships is listed on the
Toronto and New York stock exchanges under the symbol TEU and also in the
S&P/TSX 60 Index of top Canadian publicly listed companies. For further
information visit the CP Ships website at www.cpships.com.
CONTACTS
Investors
Jeremy Lee, VP Investor Relations and Public Affairs
Telephone: + 1 514 934 5254
Media
Elizabeth Canna, VP Group Communications
Telephone: +44 (0)1293 861 921 or +41 (0)79 691 3764