(Definitions of non-GAAP terms are at the end of this report. All
dollar amounts are US$ unless noted) GATWICK, UK, Aug. 11
/PRNewswire-FirstCall/ -- CP Ships Limited today announced
unaudited operating income of US $47 million for the second quarter
and $76 million for first half 2005, double that for first half
2004. Net income after a $6 million mark-to-market charge on
outstanding foreign exchange hedge contracts and a one-time charge
of $3 million for the settlement of an industry pension fund
deficit was $33 million for the quarter against $3 million in 2004
and basic earnings per share was $0.37. Net income would have been
$42 million and earnings per share $0.47 before these items.
FINANCIAL HIGHLIGHTS -------------------- Unaudited $ millions
unless Three months Six months otherwise indicated to 30th June to
30th June 2005 2004 2005 2004 Volume(A) (teu thousands) 581 570
1,114 1,132 Revenue 1,063 903 2,029 1,717 Average revenue per teu
($)(B) 1,828 1,584 1,820 1,517 Average freight rate per teu ($)(C)
1,167 1,003 1,151 982 Cost per teu ($)(D) 1,564 1,407 1,580 1,388
EBITDA(E) 75 55 132 98 Operating income 47 26 76 37 Net income 33 3
48 6 Earnings per share basic ($) 0.37 0.03 0.53 0.07 Dividend per
share ($) 0.06 0.04 0.12 0.08 Free cash flow(F) 58 20 144 35
SUMMARY ------- - Revenue up 18% and average revenue per teu up 15%
from second quarter 2004 - Volume for the quarter up 2% on second
quarter 2004 - Average freight rate up 16% from second quarter 2004
and 3% from first quarter 2005 - Cost per teu up 11% from same
quarter 2004 but down 2% from first quarter 2005 - EBITDA for
second quarter $75 million, up from $55 million in second quarter
2004 - Operating income $47 million a quarterly record and up $21
million from second quarter 2004 - Net income $33 million, up from
$3 million in 2004; first half $48 million against $6 million -
Basic earnings per share $0.37 and after adjustments $0.47 - Free
cash flow $58 million against $20 million in 2004; $144 million for
the first half against $35 million COMMENT ------- "Our strong
start to 2005 has continued into the second quarter with net income
exceeding our own expectations. Volume was higher than the same
quarter last year after the slight decline in the first quarter and
freight rates continue to improve, up 3% from first quarter," said
Chief Executive Ray Miles. He added "TransAtlantic had a good
quarter with average freight rates up 8% overall from first quarter
and improving during the quarter with June up 12% over first
quarter average, exceeding our previously announced target of 10%.
In Australasia and Latin America profits were well ahead of 2004.
However, Asia results did not meet our expectations." OUTLOOK
------- The following section contains forward-looking statements
and investors should read the cautions under the heading
"Forward-Looking Statements." We expect overall volume for 2005 to
be similar to 2004 and average freight rates to continue to improve
in the second half. We are raising our previous basic earnings per
share guidance for 2005 to a range between $1.40 to $1.60 from
$1.30 to $1.50. In the TransAtlantic, we expect operating income to
continue to improve, despite higher costs, by building on freight
rate increases achieved in the second quarter and on recent July
increases. Our solid performance is expected to continue in
Australasia and Latin America. In Asia, we expect operating results
to improve in the second half with continuing volume growth
although freight rates are unlikely to increase much and ship
network costs will be higher until expensive short-term charters
are replaced. Unit cost increases for the second half are expected
to be relatively modest against the first half. Our cost
assumptions include a higher average fuel price of $233 per tonne
(Rotterdam Barges Index) up from $202 per tonne assumed in first
quarter outlook, and average exchange rates of US$ to Canadian
$1.20, Euro 0.77 and GB Pound 0.54. The estimated adverse impact of
the Vancouver truckers strike is included in our earnings guidance.
REVIEW OF OPERATIONS Revenue ------- Revenue for the quarter at
$1.06 billion was up 18% from $903 million reported in the second
quarter 2004 on increased volume and freight rates. Volume was 2%
higher driven by improvements in Latin America and Asia while
average revenue per teu increased by 15% from $1,584 to $1,828 over
the same quarter last year and 1% from $1,812 in the first quarter
2005. Average freight rates were up 16% from second quarter 2004
and 3% from first quarter while inland transport and other revenue
increased 15% over second quarter last year and 7% from first
quarter. For the first half 2005, volume was slightly lower than
same period 2004 as the improvements in second quarter only partly
offset the effects of schedule delays, service restructuring and
programs to improve cargo mix in the first quarter. Revenue for the
first half 2005 was $2.0 billion, up 18%, with average freight
rates up 17% and inland transport and other revenue 15% higher over
the same period 2004. Expenses -------- Total expenses for the
quarter of $1.02 billion were up $139 million or 16% from $877
million in the same quarter 2004 due to higher volume and increases
in unit operating costs. Total container shipping expenses at $843
million were up 15% from $733 million while general and
administrative expenses were $124 million, $16 million higher than
the same quarter 2004. Overhead expenses included a one-time $3
million charge relating to the Merchant Navy Officers Pension Fund
following a recent UK court decision which resulted in certain
shipping industry employers being held liable for a shortfall in
this defined benefit pension scheme in which CP Ships used to be a
participating employer. Cost per teu at $1,564 increased 11% from
second quarter 2004 but was down 2% from first quarter 2005.
Compared with second quarter 2004, inland and other variable costs
increased 4% and fixed costs 7%, which was all attributable to
higher ship costs. Fuel was up $23 million and charter costs $16
million from second quarter last year. Most of the 16 charter
renewals anticipated in 2005 have now been concluded with an
estimated increase in comparable charter cost of $30 million for
2005, up slightly from the previous estimate of $28 million. The
estimated incremental cost in 2005 of the 2004 renewals remains at
$16 million. An exchange loss of $21 million was recorded for the
quarter, compared with a $7 million loss in second quarter 2004,
being an unusually high $15 million loss arising from foreign
currency receivables and payables settled in the quarter and the
translation of quarter-end balance sheet foreign currency
denominated assets and liabilities and a $6 million unrealized
exchange loss from the mark-to-market of hedging contracts
outstanding at the end of the quarter. A further $2 million
exchange loss was realized on hedge contracts settled in the
quarter recorded in container shipping operations expenses. This
compared to a $1 million realized loss in second quarter 2004.
There was no adverse effect in the quarter from congestion or from
the Vancouver Truckers Association strike which started at the end
of June. However, we anticipate some loss of local truck volume
through Vancouver in the third quarter. Rail operations, which
service the majority of our business through Vancouver, continue to
operate normally. The estimated adverse impact on operating income
is $0.5 million per week until the strike is resolved. For the
first half of 2005, total expenses were $1.95 billion, up 16% from
the first half 2004. Within fixed costs, fuel expenses before
hedging increased $32 million and charter expenses were up $29
million. There was a $7 million loss from mark-to-market of
currency hedges and a $13 million exchange loss from settlement of
transactions and balance sheet exchange revaluation compared to a
total $1 million loss in the first half last year. Operating Income
---------------- Second quarter operating income was $47 million,
up $21 million from $26 million in the same quarter last year with
higher revenue continuing to outpace higher costs. Operating income
for the first half of the year at $76 million was double the $37
million in the first half of 2004. Other Consolidated Income
Statement Items ----------------------------------------- Net
interest expense for the quarter was $11 million, consistent with
first quarter 2005 but significantly lower than $21 million for the
second quarter 2004 which included a $9 million non-cash charge
from fair valuing interest rate swap agreements which did not
qualify for hedge accounting under accounting rules that were
effective from 1st January 2004. For the first half 2005, interest
expense was $22 million compared to $28 million in the same period
2004. Income tax was $3 million for the quarter and $6 million for
the half year compared to $2 million and $3 million respectively
for the comparable periods in 2004. Net Income ---------- Net
income available to common shareholders was $33 million, or $0.37
basic earnings per share, for the quarter, up significantly from $3
million, or $0.03 basic earnings per share, for the same period in
2004 mainly from improved operating performance. For the second
quarter 2005, net income was $33 million after the $6 million
mark-to-market charge on outstanding foreign exchange hedges and
the one-time charge of $3 million for final settlement of the
liability relating to an industry pension fund deficit. Net income
would have been $42 million before these items. For the first six
months net income was $48 million, or $0.53 basic earnings per
share, up $42 million from $6 million or $0.07 basic earnings per
share in the same period 2004. TRANSACTION DISCUSSIONS CP Ships
Limited has confirmed that it is in discussions regarding a
possible transaction. There is no assurance that a transaction will
result from these discussions and no further comment will be
forthcoming unless the situation warrants. BRAND STRATEGY At the
end of April, CP Ships announced plans to re-brand its seven
container shipping services under the single CP Ships name. The
decision to adopt a single brand responded to customer requests to
simplify the business. A single CP Ships brand also permits
streamlining of corporate structure, further improvement of
accounting and related business processes and information systems,
cost savings, strengthened company culture as well as more close
alignment of communication with all stakeholders. Completion of the
re-branding project is expected early in 2006. LOGISTICS
ACQUISITIONS During the second quarter, CP Ships further expanded
its logistics services through the acquisition of Borg
International Freight Services, based in Quebec, Canada and Paul
Bellack based in Philadelphia, USA for a combined consideration of
$7 million of which approximately 50% is contingent on financial
performance. SHIP FLEET EXPANSION The first two of nine 4250 teu
ships ordered in 2003 from Seaspan Container Lines of Vancouver
will be deployed in the US East Coast - India service. CP Kanha
will be deployed mid-October followed by CP Corbett in January
2006. All nine ships are being chartered for up to 12 years at
about $19,000 per day. CP Kanha and CP Corbett will replace three
smaller, more expensive short-term chartered ships in our Indian
trades and will increase capacity, reduce operating costs and
improve service. The remaining seven ships are on schedule for
delivery one each in first, second and third quarters 2006, two in
fourth quarter and one each in first and second quarters 2007.
BUSINESS SEGMENT REVIEW TransAtlantic Market --------------------
Revenue for the quarter at $506 million was 15% higher than the
second quarter 2004 with higher freight rates, up 8% from first
quarter and 12% in June compared to first quarter, exceeding our
previously announced target of 10%, and more than offsetting
slightly lower volume. Expenses for the quarter were $485 million,
up $52 million on second quarter last year due to higher variable
costs per teu and fuel price. Operating income at $21 million was
up from $8 million in second quarter last year, with improved trade
lane supply-demand balance due mainly to the now completed
restructuring of capacity in the Montreal Gateway as well as
stronger trade lane conditions both of which led to higher average
freight rates. Operating income for the first half 2005 at $24
million improved significantly compared to $6 million last year
with higher revenues more than offsetting higher unit costs and
slightly lower volume. Australasian Market -------------------
Revenue at $167 million for the quarter was 14% higher than the
same quarter last year with higher average freight rates, up 18%
from second quarter 2004 and 6% from first quarter, more than
offsetting slightly lower volume and higher ship costs. Operating
income at $9 million for the quarter was up from $6 million in same
period 2004. First half 2005 at $18 million was also higher than
first half 2004 at $16 million. Latin American Market
--------------------- Revenue at $121 million for the second
quarter was 36% higher than the second quarter 2004 with average
freight rates up 23% from second quarter last year and 2% from
first quarter 2005. Continuing strong trade lane conditions and
extra capacity added last year also led to a 10% increase in
volume. Unit costs increased over second quarter 2004 due to higher
unit variable costs and expansion of services. Operating income for
the quarter was $12 million, up from $5 million in second quarter
2004. For the half year, operating income was $22 million compared
to $6 million in the same period last year reflecting stronger
trade lane conditions, higher volume and improved freight rates.
Asian Market ------------ Revenue for the quarter was $226 million,
an increase of 18% over second quarter 2004 with volume up 14% and
average freight rates 8% higher, partly offset by higher ship
costs. Operating income at $3 million, although better than the
break-even result in the second quarter 2004, was disappointing
with both weaker freight rates, down 3% overall from first quarter,
and lower volume than expected in the lead legs of all trade lanes.
Several initiatives have been taken to improve our services,
including the start of weekly sailings in Asia-Australia in August
and the planned deployment of two 4250 teu ships in India by early
next year. We are reviewing opportunities to improve the efficiency
of our Asia-Americas services. For the half year, operating income
was $6 million against a loss of $1 million a year ago with higher
volume and average freight rates more than offsetting higher costs.
Other Activities ---------------- Operating income for the quarter
was $2 million against $7 million in the second quarter 2004 with
improved results from Montreal Terminals offset by weaker
performance in the North America-South Africa trade lane and the
one- time $3 million charge relating to an industry pension fund
deficit. The weaker second quarter contributed to lower operating
income for the half year at $6 million compared to $10 million last
year. NON-CASH WORKING CAPITAL Net non-cash working capital fell by
$7 million in the second quarter, compared to an increase of $9
million in the same period 2004, due mainly to an increase in
current liabilities of $32 million from 31st March 2005 partly
offset by an increase in current assets of $30 million. For the
first six months of 2005, non-cash working capital fell by $53
million, compared to an increase of $23 million in the same period
2004, due mainly to an increase in current liabilities of $72
million. PROPERTY, PLANT & EQUIPMENT Additions to property,
plant and equipment in the second quarter was $28 million including
$7 million for the final 500 of 3,000 temperature- controlled
containers ordered during 2004, $10 million for information systems
and terminal equipment and $8 million for the first 3,500 of 19,500
dry-van containers ordered earlier this year. For the first six
months of the year, additions were $43 million, including $22
million for containers, $10 million for information systems and $5
million for terminal equipment. As previously announced, CP Ships
has ordered, at a total cost of $106 million, a further 3,000
temperature-controlled and 19,500 dry-van containers, of which
3,500 were delivered in second quarter. The remaining dry-vans and
all of the temperature-controlled containers are due for delivery
through the second half. This investment will replace old or
expensive leased containers and help meet previously stated
objectives to double carryings in the higher margin refrigerated
cargo market over the next five years. Financing has been arranged
under capital leases to finance investment in containers and
terminal equipment. SHIP FLEET The ship fleet was 82 ships on 30th
June 2005, up from 81 ships on 31st March 2005 due mainly to a
temporary addition of a ship during restructuring of Indian
services. COMMON SHARES At close of business on 9th August 2005,
there were 90,448,468 common shares outstanding. LIQUIDITY AND
CAPITAL RESOURCES Cash and cash equivalents increased by $119
million to $254 million at the end of the quarter from $135 million
at 31st December 2004. Cash generated from operations in the
quarter was $72 million, up $44 million on the same period 2004 due
to both an improvement in net income and in non-cash working
capital. Cash from operations for the first six months of 2005 was
$168 million, up $115 million on same period 2004. Cash outflow on
financing activities was $11 million during the second quarter 2005
compared to $35 million in the same period last year, mainly from
reduced levels of debt repayment. During the second quarter 2005,
$7 million of short-term debt associated with the
temperature-controlled containers was refinanced by capital leases.
Cash applied to financing activities for the first six months of
2005 was $19 million compared to $51 million in the same period
2004. During the second quarter, $20 million was spent on investing
activities, up from $13 million in the same period 2004. Cash spent
on capital additions was $13 million, up $4 million on the same
period last year and included $5 million investment in terminal
equipment, which was refinanced subsequent to the quarter end under
a seven-year capital lease. Cash expenditure for investing
activities also included $6 million for logistics acquisitions,
including payment of deferred consideration related to the previous
acquisition of ROE Logistics. Cash applied to investing activities
for the six months ended 30th June 2005 was $30 million compared to
$23 million in 2004. Free cash flow for the second quarter 2005 was
$58 million compared to $20 million in the second quarter 2004 due
primarily to higher net income. Debt at $570 million on 30th June
2005 was up by $6 million on 31st December 2004 due to the
commencement during second quarter 2005 of the final sub-leases
under the $46 million lease for the first 3,000
temperature-controlled containers ordered last year, net of modest
debt repayment. During April, a second $46 million committed credit
facility was arranged to finance 100% of the second order of 3,000
temperature-controlled containers and a $60 million committed
credit facility was arranged to finance the 19,500 dry-van
containers. Both facilities are available until 21st December 2005
with an average commitment fee of 0.4% per year of the undrawn
amount payable during the delivery period. The facilities are each
split into four equal sized sub-leases, each of which must commence
prior to the facility expiring. Each lease is for eight years,
amortizes to a 10% balloon payment, grants CP Ships a purchase
option at expiry and is priced at 3-month US$ 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 $525 million revolving credit facility. At 30th June 2005, CP
Ships was in compliance with its covenants and expects to remain in
compliance throughout 2005 based on current projections. It had no
dividend or debt arrears. Credit Ratings - At 30th June 2005 and
10th August 2005, Standard and Poor's corporate rating was BBB-
with an outlook of "negative." Moody's senior implied rating
remains Ba2 and outlook "stable." The 10 3/8% senior notes are
rated BB+ by Standard and Poor's and Ba3 by Moody's and the 4%
convertible senior subordinated notes BB+ and B1 respectively. In
the event that the corporate rating from Standard and Poor's was to
decrease by two notches to BB, a default, unless remedied,
including by prepayment of the facility, would be triggered under a
container sale and leaseback agreement. A default would lead to
cross default of certain other debt facilities, including the
revolving credit facilities. FINANCIAL INSTRUMENTS Foreign Currency
Exchange Risk Management -----------------------------------------
Revenue is denominated primarily in US$, 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 second quarter 2005, about
40% of Canadian $, 25% of Euro and 32% of GB Pound cost exposures
were hedged resulting in a realized $2 million loss compared with a
loss of $1 million in the same period 2004. At the end of the
quarter, CP Ships had a number of foreign exchange hedging
contracts in place which provide an economic hedge against part of
the anticipated Canadian $, Euro and GB Pound cost exposures for
the rest of 2005. The hedge contracts did not qualify for hedge
accounting and as such the movement in market value has to be
recognized in the profit and loss statement. At 30th June 2005, the
contracts had a negative market value of $4 million compared to a
positive value of $2 million at the end of the first quarter 2005
resulting in a $6 million non-cash charge against profit for the
quarter. The hedges in place at 30th June 2005 and at 10th August
2005 have the following coverage against expected cost exposure in
the hedged currencies for the remainder of 2005, and at the ranges
indicated: Contracts in place at 30th June and at 10th August 2005
1 US$ buys Hedge % Range
-------------------------------------------------------------------------
Canadian $ 40 1.22 - 1.23 Euro 25 0.76 - 0.77 GB Pound 32 0.53 -
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 $5 million; a 1% increase in the US$ exchange
rate would increase operating income by $5 million. Interest Rate
Risk Management ----------------------------- At 30th June 2005,
taking account of fixed to floating interest rate swaps on the
ten-year senior notes, $349 million or 61% of gross debt was at
floating rates linked to US$ LIBOR. The average margin over LIBOR
on the floating debt was 3.6%. 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 second quarter, 386,000
tonnes of bunker fuel were consumed at an average price of $231 per
tonne compared to 382,000 tonnes at $171 in the same period 2004.
For the first six months, 775,000 tonnes of bunker fuel were
consumed at an average price of $203 per tonne compared to 759,000
tonnes at $165 in first half 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 hedging gain of $4 million for the second
quarter 2005 compared to $1 million gain in the same period 2004.
For the first six months, a hedging gain of $6 million was
recognized compared to a loss of $1 million in the same period
2004. At 30th June 2005, approximately 20% of anticipated fuel
price exposure is covered in a range of $156 - $173 per tonne for
the remainder of 2005. The hedges are 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 and
before hedging, of a 5% movement in CP Ships second quarter 2005
average bunker fuel price would be $18 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. 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. In addition, a new US
lawsuit was filed on 1st August 2005 by a single shareholder of CP
Ships stock. All ten 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 LLC 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 vigorous 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 brands with effect from 1st January 2004. One of the two
remaining brands was transferred to SAP from 1st April 2005. The
final brand is on an earlier version of SAP but is anticipated to
be transitioned to new SAP by the end of 2005. A 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. CP Ships believes that the
implementation of SAP and other initiatives has and will continue
to significantly enhance its financial controls. In connection with
the preparation of the second 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 30th June 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 second 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 a dividend
for the second quarter 2005 of $0.06 per common share, payable on
6th September to shareholders of record on 23rd August. CRITICAL
ACCOUNTING POLICIES AND ESTIMATES Accounting policies used which
are critical 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 the 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 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 11th August 2005 at 3:00 pm EDT, 8:00 pm
London, UK BST. The conference call will be webcast live on the CP
Ships website (http://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 (800) 289-0572
(toll-free in Canada and the US). ADDITIONAL INFORMATION Additional
information, including the 2004 Annual Report, may be found on
SEDAR, http://www.sedar.com/, EDGAR at
http://www.sec.gov/edgar.shtml or on the CP Ships website.
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 a
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,
forecasts 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. QUARTERLY RESULTS 2005, 2004
and 2003 Unaudited US$ millions except volume and per Q2 Q1 Q4 Q3
Q2 Q1 Q4 Q3 Q2 share amounts 2005 2005 2004 2004 2004 2004 2003
2003 2003
-------------------------------------------------------------------------
Volume (teu 000s) TransAtlantic 299 280 292 306 305 294 301 287 305
Australasia 67 65 74 72 73 74 78 79 73 Latin America 67 62 65 63 61
58 63 63 60 Asia 143 121 133 131 126 126 119 114 111 Other 5 5 4 6
5 10 8 11 9 ------------------------------------------------------
581 533 568 578 570 562 569 554 558
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Revenue TransAtlantic 506 459 458 449 441 406 428 400 401
Australasia 167 153 152 150 146 132 136 133 129 Latin America 121
113 112 107 89 79 80 78 75 Asia 226 206 227 224 192 170 167 172 158
Other 43 35 39 36 35 27 27 33 28
------------------------------------------------------ 1,063 966
988 966 903 814 838 816 791
------------------------------------------------------
------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Expenses TransAtlantic 485 456 444 444 433 408 397 387 381
Australasia 158 144 143 143 140 122 131 126 123 Latin America 109
103 107 95 84 78 76 74 72 Asia 223 203 214 213 192 171 175 164 156
Other 41 31 34 30 28 24 23 27 25
------------------------------------------------------ 1,016 937
942 925 877 803 802 778 757
------------------------------------------------------
------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Operating income/ (loss) TransAtlantic 21 3 14 5 8 (2) 31 13 20
Australasia 9 9 9 7 6 10 5 7 6 Latin America 12 10 5 12 5 1 4 4 3
Asia 3 3 13 11 0 (1) (8) 8 2 Other 2 4 5 6 7 3 4 6 3
------------------------------------------------------ 47 29 46 41
26 11 36 38 34
------------------------------------------------------
------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Analysis of expenses Container shipping operations 843 790 806 789
733 667 668 630 621 General and administrative 124 120 109 101 108
110 107 113 108 Depreciation and amortization 28 28 32 31 29 32 33
29 29 Other 21 (1) (5) 4 7 (6) (6) 6 (1)
------------------------------------------------------ 1,016 937
942 925 877 803 802 778 757
------------------------------------------------------
------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Net income 33 15 32 31 3 3 28 27 23
------------------------------------------------------
------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Earnings per common share Basic 0.37 0.17 0.35 0.34 0.03 0.03 0.31
0.30 0.26 Diluted 0.36 0.16 0.35 0.33 0.03 0.03 0.30 0.29 0.25
-------------------------------------------------------------------------
-------------------------------------------------------------------------
OPERATING DATA Unaudited EBITDA Q2 Q1 Q4 Q3 Q2 Q1 Q4 Q3 Q2 US$
millions 2005 2005 2004 2004 2004 2004 2003 2003 2003
-------------------------------------------------------------------------
75 57 78 72 55 43 69 67 63
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Free cash flow US$ millions
-------------------------------------------------------------------------
58 86 51 95 20 15 80 25 1
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Quarterly freight rate changes Percentage change(1)
-------------------------------------------------------------------------
TransAtlantic 8 3 8 0 1 (3) 3 5 5 Australasia 6 13 0 (1) 0 6 6 2 3
Latin America 2 3 5 10 11 0 3 (6) 1 Asia (3) (1) 0 13 10 (5) (8) 7
9 ------------------------------------------------------ 3 3 4 6 4
(2) (1) 7 5
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Operating lease rentals US$ millions
-------------------------------------------------------------------------
Ships 67 62 66 59 51 49 49 44 44 Containers 38 38 39 40 36 38 37 39
39 Other 9 9 9 8 9 8 7 10 8
-------------------------------------------------------------------------
114 109 114 107 96 95 93 93 91
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Earnings Coverage(G) Q2 Q1 Q4 Q3 Q2 Q1 Ratio 2005 2005 2004 2004
2004 2004 -------------------------------------------------------
3.9 3.6 3.2 3.0 3.0 3.1 Ships Number of ships employed at 30th June
2005 82 Nominal capacity of ships employed at 30th June 2005 in teu
195,300 -------------------------------------------------
------------------------------------------------- Containers Fleet
in teu at 30th June 2005 441,000
-------------------------------------------------
------------------------------------------------- (1) Percentage
increase/(decrease) compared with previous quarter in average
freight rates. CONSOLIDATED STATEMENTS OF INCOME Unaudited Three
months Six months US$ millions except to 30th June to 30th June per
share amounts 2005 2004 2005 2004
-------------------------------------------------------------------------
Revenue Container shipping operations 1,063 903 2,029 1,717
Expenses Container shipping operations 843 733 1,633 1,400 General
and administrative 124 108 244 218 Depreciation and amortization of
intangible assets 28 29 56 61 Currency exchange loss 21 7 20 1
--------------------------------------- 1,016 877 1,953 1,680
Operating income 47 26 76 37 Interest expense, net (note 3) (11)
(21) (22) (28) --------------------------------------- Income
before income tax 36 5 54 9 Income tax expense (note 4) (3) (2) (6)
(3) --------------------------------------- Net income available to
common shareholders $ 33 $ 3 $ 48 $ 6
---------------------------------------
--------------------------------------- Average number of common
shares outstanding (millions) (note 10) 90.1 89.9 90.0 89.9
Earnings per common share basic (note 10) $ 0.37 $ 0.03 $ 0.53 $
0.07 Earnings per common share diluted (note 10) $ 0.36 $ 0.03 $
0.52 $ 0.06 CONSOLIDATED STATEMENTS OF RETAINED EARNINGS Unaudited
Three months Six months US$ millions to 30th June to 30th June 2005
2004 2005 2004
-------------------------------------------------------------------------
Balance, beginning of period 645 577 633 579 Adoption of new
accounting policy - (note 2) - - 1 (1)
--------------------------------------- Retained earnings,
beginning of period as restated 645 577 634 578 Net income
available to common shareholders 33 3 48 6
--------------------------------------- 678 580 682 584 Dividends
on common shares (5) (3) (9) (7)
--------------------------------------- Balance, 30th June $ 673 $
577 $ 673 $ 577 ---------------------------------------
--------------------------------------- See accompanying notes to
the interim consolidated financial statements CONSOLIDATED BALANCE
SHEETS Unaudited 30th June 31st December US$ millions 2005 2004
-------------------------------------------------------------------------
Assets Current assets Cash and cash equivalents 254 135 Accounts
receivable 474 473 Prepaid expenses 66 54 Inventory 37 26
------------------------- 831 688 Property, plant and equipment
1,166 1,181 Deferred charges 45 49 Goodwill 609 608 Future income
tax assets 6 7 Other assets and intangible assets 37 37
------------------------- $ 2,694 $ 2,570 -------------------------
------------------------- Liabilities Current liabilities Accounts
payable and accrued liabilities 698 626 Long-term debt due within
one year (note 7) 20 19 ------------------------- 718 645 Long-term
liabilities Long-term debt due after one year (note 7) 550 545
Future income tax liabilities 7 8 Other long-term liabilities (note
2) 10 - ------------------------- 567 553 Shareholders' equity
Common share capital 686 689 Other equity 29 29 Contributed surplus
15 14 Retained earnings 673 633 Cumulative foreign currency
translation adjustments 6 7 ------------------------- 1,409 1,372
------------------------- $ 2,694 $ 2,570 -------------------------
------------------------- See accompanying notes to the interim
consolidated financial statements CONSOLIDATED STATEMENTS OF CASH
FLOW Unaudited Three months Six months US$ millions to 30th June to
30th June 2005 2004 2005 2004
-------------------------------------------------------------------------
Operating activities Net income 33 3 48 6 Depreciation and
amortization of intangible assets 28 29 56 61 Future income tax
benefit - - - (1) Amortization and write-off of deferred charges 4
3 8 10 Stock-based compensation (1) 3 1 5 Accretion of convertible
notes 1 1 2 1 Other 1 (2) 1 (5)
--------------------------------------- 66 37 116 77
Decrease/(increase) in non-cash working capital (note 9) 7 (9) 53
(23) --------------------------------------- Cash from operations
before exceptional payments 73 28 169 54 Exceptional item related
payments (note 6) (1) - (1) (1)
--------------------------------------- Cash inflow from operations
72 28 168 53 Financing activities Increase in share capital - 1 1 1
Convertible notes issued - - - 200 (Decrease)/increase in long-term
debt - (1) - 75 Repayment of long-term debt (5) (30) (10) (309)
Increase in deferred financing costs (1) (2) (1) (10) Financing
costs allocated to other equity - - - (1) Common share dividends
paid (5) (3) (9) (7) --------------------------------------- Cash
outflow from financing activities (11) (35) (19) (51) Investing
activities Additions to property, plant and equipment (13) (9) (21)
(18) Increase in deferred dry-dock costs (1) - (3) (2) Acquisition
of businesses and payment of deferred consideration (6) (5) (6) (5)
Decrease in other assets - 1 - 1 Proceeds from disposal of
property, plant and equipment - - - 1
--------------------------------------- Cash outflow from investing
activities (20) (13) (30) (23) Cash position(2) Increase/(decrease)
in cash and cash equivalents 41 (20) 119 (21) Cash and cash
equivalents at beginning of period 213 74 135 75
--------------------------------------- Cash and cash equivalents
at end of period $ 254 $ 54 $ 254 $ 54
---------------------------------------
--------------------------------------- (2) 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 SEGMENT INFORMATION Unaudited
Three months Six months US$ millions to 30th June to 30th June 2005
2004 2005 2004
-------------------------------------------------------------------------
Revenue TransAtlantic 506 441 965 847 Australasia 167 146 320 278
Latin America 121 89 234 168 Asia 226 192 432 362 Other 43 35 78 62
--------------------------------------- $ 1,063 $ 903 $ 2,029 $
1,717 ---------------------------------------
--------------------------------------- Expenses TransAtlantic 485
433 941 841 Australasia 158 140 302 262 Latin America 109 84 212
162 Asia 223 192 426 363 Other 41 28 72 52
--------------------------------------- $ 1,016 $ 877 $ 1,953 $
1,680 ---------------------------------------
--------------------------------------- Operating income/(loss)
TransAtlantic 21 8 24 6 Australasia 9 6 18 16 Latin America 12 5 22
6 Asia 3 - 6 (1) Other 2 7 6 10
--------------------------------------- $ 47 $ 26 $ 76 $ 37
---------------------------------------
--------------------------------------- NOTES TO 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, 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 benefits and stock-based
compensation. Actual results may differ from these estimates. The
financial data presented in this document is for the second quarter
2005, being the three months ended 30th June 2005, and for the six
months ended 30th June 2005. These periods are compared to the
corresponding periods in the previous year being the second quarter
2004 (three months ended 30th June 2004) and the six months ended
30th June 2004 respectively 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: - the equity is not sufficient to permit that entity to
finance its activities without external support, or - 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 $7
million, an increase of long-term liabilities of $10 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 $1 million to contributed surplus in the trusts. The
opening balance of retained earnings has been adjusted to reflect
this change. As at 30th June 2005 there were 216,311 shares held in
treasury. 3. Interest Expense (net) Three months Six months US$
millions to 30th June to 30th June 2005 2004 2005 2004
-------------------------------------------------------------------------
Interest expense 13 11 24 19 Interest income (2) - (3) - Financial
instrument fair value adjustment - 9 - 4 Amortization and write-off
of deferred financing costs - 1 1 5
--------------------------------------- Interest expense (net) $ 11
$ 21 $ 22 $ 28 ---------------------------------------
--------------------------------------- Interest expense includes a
$1 million benefit for the three months ended 30th June 2005 (2004:
$1 million) and a $1 million benefit for the six months ended 30th
June 2005 (2004: $2 million) for accrued interest received as a
result of swapping the fixed 10 3/8% senior notes to a floating
interest of US$ LIBOR+5.77%. The interest rate swap agreements in
place during first six months of 2004 did not qualify for hedge
accounting under AcG-13. For the six months ended 30th June 2004,
the financial instrument fair value adjustment of $4 million is
comprised of a benefit of $5 million for the three months ended
31st March 2004 offset by a charge of $9 million for the three
months ended 30th June 2004. These contracts were terminated during
third quarter 2004 and replaced with new contracts which qualified
under AcG-13. There was no fair value adjustment for second quarter
2005. During the six months ended 30th June 2004, there was a
write-off of deferred financing costs of $4 million related to the
financing costs previously deferred in respect to revolving credit
facilities which were terminated in that period. There have been no
similar costs written off during 2005. 4. Income Tax Expense Three
months Six months US$ millions to 30th June to 30th June 2005 2004
2005 2004
-------------------------------------------------------------------------
Current income tax expense 3 2 6 4 Future income tax benefit - - -
(1) --------------------------------------- Income tax expense, net
$ 3 $ 2 $ 6 $ 3 ---------------------------------------
--------------------------------------- Income tax expense for the
six months to 30th June 2005 includes $1 million related to prior
periods. 5. Business Acquisitions In second quarter 2005, CP Ships
further expanded its logistic services with the acquisition of all
the outstanding shares of Borg International Freight Services and
Paul Bellack Inc. for an aggregate consideration of $7 million.
Cash consideration of $3 million has been paid and contingent
consideration of $4 million is payable in 2006 and 2007, depending
on the achievement of financial targets. On a preliminary basis,
the estimated fair value of the tangible net assets acquired was $1
million, with the remainder of $2 million consideration paid
allocated to goodwill and other intangible assets. Other intangible
assets of $1 million relates to customer based intangible assets.
The contingent consideration, if any, will be recorded as
additional goodwill in the period of payment. Following the terms
of the acquisition of ROE Logistics in the second quarter 2004,
payment of contingent consideration of $3 million was made in the
quarter. 6. Exceptional Items In 2003, an exceptional charge of $10
million arose from organizational restructuring in Europe and
mainly comprised consolidation of the UK management activities of
Canada Maritime, Cast and Contship Containerlines resulting in the
closure of certain UK offices. The charge included staff related
costs of $7 million and expenses relating to redundant office
leases of $3 million. This restructuring was substantially complete
at 31st December 2003. At 30th June 2005, nil remained to be spent
for redundant office leases to 2008. 7. Long-Term Debt 30th June
31st December US$ millions 2005 2004
-------------------------------------------------------------------------
Long-term debt 4% convertible senior subordinated notes 176 174 10
3/8% senior notes due 2012 197 197 Long-term loans 26 30
------------------------- 399 401 Capital leases 171 163
------------------------- 570 564 Amounts due within one year (20)
(19) ------------------------- Amounts due after one year $ 550 $
545 ------------------------- ------------------------- Bank Loans
- Bank loans comprise a $525 million five-year multi-currency
revolving credit facility secured by certain owned ships. None of
the facility, which was fully available, was drawn at 30th June
2005. The facility is committed until March 2009 and bears interest
at a margin, which depends on the corporate credit rating, over US$
LIBOR. As at 30th June 2005 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 30th June 2005, capital leases
consist of ship leases of $116 million (31st December 2004: $126
million), container leases of $53 million (31st December 2004: $34
million), of which $44 million (31st December 2004: $23 million)
relates to the temperature-controlled container sub-leases, and
other leases of $2 million (31st December 2004: $3 million).
Covenants - At 30th June 2005, CP Ships was in compliance with its
financial covenants and corporate credit rating requirements and
had no dividend or debt arrears. 8. Stock-Based Compensation During
the three months ended 30th June 2005, the vesting of 356,894 stock
options was deferred from May 2005 to August 2005. There were
34,200 options and 27,979 restricted shares exercised during the
quarter. In addition, 19,000 restricted shares and 23,500 options
were forfeited. During the three months ended 30th June 2005 it was
determined that the company would not achieve the financial
performance criteria necessary for 231,744 restricted shares to
vest in December 2006, and as a result $2 million previously
included as stock based compensation expense during 2004 and 2005
was recognized as income in the current period. During the quarter,
expense of $1 million was recognized on other stock plans for a net
impact of $(1) million for the three months ended 30th June 2005
and $1 million for the six months ended 30th June 2005 ($3 million
for the three months ended 30th June 2004 and $5 million for the
six months ended 30th June 2004). 9. Supplemental Cash Flow
Information (a) Changes in non-cash working capital Three months
Six months to 30th June to 30th June US$ millions 2005 2004 2005
2004
-------------------------------------------------------------------------
Decrease/(increase) in current assets: Accounts receivable (9) 8
(1) 11 Prepaid expenses (10) 2 (12) (16) Inventory (11) (3) (11) -
Increase/(decrease) in current liabilities: Accounts payable and
accrued liabilities 32 (9) 72 (11) Other changes in non-cash
working capital Exceptional item related payments 1 - 1 1
Acquisition related payments 3 - 3 - Acquisition of ROE Logistics -
(8) - (8) Accrued liability for deferred financing costs - 1 - -
Other changes in non-cash working capital 1 - 1 -
--------------------------------------- $ 7 $ (9) $ 53 $ (23)
---------------------------------------
--------------------------------------- (b) Non-cash transactions
excluded from the consolidated statements of cash flow Three months
Six months US$ millions to 30th June to 30th June 2005 2004 2005
2004
-------------------------------------------------------------------------
Increase in property, plant and equipment 15 - 22 - Increase in
other assets from trust assets 3 - 7 - Decrease in short-term debt
7 - - - Capital lease obligations included in long-term debt (22) -
(22) - Increase in deferred compensation obligation from trusts (3)
- (10) - Decrease in share capital for treasury stock - - 3 -
--------------------------------------- - - - -
---------------------------------------
--------------------------------------- During the quarter capital
leases of $22 million commenced related to 1,500
temperature-controlled containers. 500 of these containers at a
cost of $7 million had been financed with short-term debt during
first quarter 2005 and the lessor repaid this debt as part of the
leasing transaction in the second quarter. During the year, CP
Ships consolidated two trusts related to employee remuneration
which are considered variable interest entities under AcG-15. The
non-cash transaction resulted in increases in other long-term
assets and liabilities. 10. Earnings Per Share Basic earnings per
share is net income divided by the weighted average number of
shares outstanding. Diluted earnings per 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 shares is as follows: Three
months Six months Millions of shares to 30th June to 30th June 2005
2004 2005 2004
-------------------------------------------------------------------------
Weighted average number of common shares used in calculating basic
earnings per share 90.1 89.9 90.0 89.9
--------------------------------------- Effect of dilutive
securities - stock options 0.3 1.1 0.3 1.1 - unvested restricted
shares 1.8 1.9 1.8 1.9 ---------------------------------------
Weighted average number of common shares used in calculating
diluted earnings per share 92.2 92.9 92.1 92.9
---------------------------------------
--------------------------------------- For the three and six
months ended 30th June 2005 and 2004, the convertible notes, which
were convertible into 7.9 million common shares, were not included
in the computation of diluted earnings per common share because the
contingent conversion conditions have not been met during the
periods. 11. Pensions The total benefit cost for the three months
ended 30th June 2005 is $6 million (2004: $2 million) and for the
six months ended 30th June 2005 is $9 million (2004: $5 million).
During the quarter $3 million was recognized relating to a
shortfall in the Merchant Navy Officers Pension Fund (MNOPF), an
industry wide defined benefit scheme in the United Kingdom, in
which a CP Ships subsidiary previously participated. A recent court
case took place to determine the allocation of deficit payments of
the MNOPF between a number of shipping industry employers. A
judgement was delivered which determined that all current and
historic employers should contribute towards the benefits accrued
by all of their employees. CP Ships' share of the actuarial deficit
is estimated to be 0.73% or $3 million. It is likely that payment
will be required as either a lump sum or in yearly instalments over
a ten-year period. This amount has been accrued as at 30th June
2005. 12. Contingent Liabilities Six class action lawsuits in the
US and three in Canada have been filed against CP Ships. In
addition, a seventh US action was filed on 1st August 2005 by a
single shareholder of CP Ships stock. These lawsuits, which relate
to the restatement of historical financial results are at a
preliminary stage and to date no class has been certified. Six of
the seven US lawsuits have been transferred to a single
jurisdiction for coordinated or consolidated pre-trial proceedings.
The seventh lawsuit is also expected to be transferred. 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 $115 million) against it and
certain of its subsidiaries relating to the termination of
contracts for stevedoring and related services. The group does not
believe it will incur any liability, and accordingly, no provision
has been made in the financial statements with respect to this
matter other than for legal costs. As a result of the Lykes Lines
Limited, LLC (Lykes) contract with the US Department of
Transportation in respect to its new Maritime Security Program
(MSP), Liberty Global Logistics LLC filed a complaint on 18th March
2005 in the US District Court for the Eastern District of New York
against the Maritime Administration and the United States of
America challenging the MSP awards made in January 2005 to Lykes
and others. There are several defences to this complaint and it is
presently anticipated that it will have no effect on the award of
MSP to Lykes. 13. Differences between Accounting Principles
Generally Accepted in Canada and the United States (a) Consolidated
Statements of Income and Shareholders' Equity The following is a
reconciliation of net income under Canadian GAAP to net income
under US GAAP: Unaudited Three months Six months US$ millions
except to 30th June to 30th June per share amounts 2005 2004 2005
2004
-------------------------------------------------------------------------
Net income - Canadian GAAP 33 3 48 6 US GAAP adjustments: Embedded
derivatives (2) (1) 2 8 Interest rate swaps 7 - 2 - Foreign
currency contracts - - - (1) Bunker fuel price contracts 1 - 11 1
Stock-based compensation (2) - (3) 1 Ships - 1 1 1 Capitalized
interest - - (1) - Restructuring costs - - - (1) Interest expense -
convertible notes 1 2 2 2 Tax effect of US GAAP adjustments - - - -
--------------------------------------- Net income - US GAAP 38 5
62 17 Other comprehensive income Foreign currency translation
adjustments (1) (2) (1) (6) Comprehensive income - US GAAP $ 37 $ 3
$ 61 $ 11 ---------------------------------------
--------------------------------------- Earnings per common share -
basic ($) Canadian GAAP $ 0.37 $ 0.03 $ 0.53 $ 0.07 US GAAP $ 0.42
$ 0.06 $ 0.69 $ 0.19 Average number of common shares outstanding
-basic (millions) Canadian GAAP 90.1 89.9 90.0 89.9 US GAAP 90.1
89.8 90.0 89.7 Earnings per common share - diluted ($) Canadian
GAAP $ 0.36 $ 0.03 $ 0.52 $ 0.06 US GAAP $ 0.38 $ 0.05 $ 0.62 $
0.18 Average number of common shares outstanding - diluted
(millions) Canadian GAAP 92.2 92.9 92.1 92.9 US GAAP 100.1 92.9
100.0 92.9 Reconciliation of equity under Canadian GAAP to equity
under US GAAP: Unaudited 30th June 31st December US$ millions 2005
2004
-------------------------------------------------------------------------
Equity - Canadian GAAP 1,409 1,372 US GAAP adjustments: Embedded
derivatives (2) (4) Interest rate swaps 3 1 Foreign currency
contracts 1 1 Bunker fuel price contracts 10 (1)
Acquisition-related costs (44) (44) Pension costs (8) (8)
Stock-based compensation (4) (1) Ships (20) (21) Capitalized
interest 3 4 Restructuring costs 2 2 Treasury stock - Rabbi Trust -
(2) Interest expense - convertible notes 6 4 Other equity -
convertible notes (29) (29) Tax effect of US GAAP adjustments - -
------------------------- Total US GAAP adjustments (82) (98)
------------------------- Equity - US GAAP $ 1,327 $ 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. In May 2005, the FASB issued
SFAS No. 154, Accounting changes and Error Corrections ("SFAS
154"), as part of an effort to conform to international accounting
standards. SFAS No. 154 replaces APB Opinion No. 20 "Accounting
Changes" and SFAS No. 3, "Reporting Accounting Changes in Interim
Financial Statements." SFAS 154 provides guidance on the accounting
for and reporting of accounting changes and error corrections. It
requires retrospective application to prior periods' financial
statements of changes in accounting principle, unless it is
impracticable to determine either the period-specific effects or
the cumulative effects of the change. SFAS 154 is effective for
accounting changes and corrections or errors made in fiscal year
beginning after 1st January 2006. The adoption of SFAS No. 154 is
not anticipated to have a material effect on our financial position
or results of operations. (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 Six months US$ millions except to
30th June to 30th June per share amounts 2005 2004 2005 2004
-------------------------------------------------------------------------
Net income - US GAAP, as reported 38 5 62 17 Add: Stock-based
compensation expense determined under the intrinsic value method:
(1) 3 3 4 Less: Stock-based compensation expense determined under
the fair value method: - (2) (1) (5)
--------------------------------------- Pro-forma net income - US
GAAP $ 37 $ 6 $ 64 $ 16 ---------------------------------------
Pro-forma earnings per share basic $ 0.41 $ 0.07 $ 0.71 $ 0.18
Pro-forma earnings per share diluted $ 0.37 $ 0.06 $ 0.62 $ 0.17
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). KEY NON-GAAP OPERATING PERFORMANCE
MEASURES ------------------------------------------- In this
quarterly report, we have identified key non-GAAP operating
performance indicators which we use to measure overall business
performance: - Sales volume - Revenue per teu - Average freight
rate - Cost per teu - EBITDA - Free cash flow - Earnings coverage
Please refer to 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 standardized 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 standardized meaning
under Canadian GAAP and may not be comparable with similar measures
used by others. (F) 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 Six months Unaudited to 30th June to 30th
June US$ millions 2005 2004 2005 2004
-------------------------------------------------------------------------
Cash inflow from operations 72 28 168 53 Less: Investing activities
(20) (13) (30) (23) Acquisition of business 6 5 6 5
--------------------------------------- Free cash flow 58 20 144 35
---------------------------------------
--------------------------------------- (G) 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. 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 38 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. At 30th June 2005,
CP Ships' vessel fleet was 82 ships and its container fleet 441,000
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
http://www.cpships.com/. DATASOURCE: CP Ships CONTACT: Investors,
Jeremy Lee, VP Investor Relations and Public Affairs, Telephone:
(514) 934-5254; Media, Elizabeth Canna, VP Group Communications,
Telephone: +44 (0)1293 861 921 or +41 (0)79 691 3764
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