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A series of factors combined to make second-quarter 2003 a less-than-stellar reporting period for Canadian National Railway Co., but CN execs say they're still pretty positive about the Class I's near-term profit-making prospects.

For the quarter, CN recorded revenues of 1.04 billion (U.S. dollars), a 5.5 percent decline compared with the same 2002 period. The railroad posted net income of $172.9 million, a 12.9 percent decrease compared with the same 2002 period, and operating income of $309.7 million, an 11 percent decline compared with the same period last year. The Class I also recorded a 70.1 operating ratio, compared with 68.4 for the same 2002 period.

The significantly stronger Canadian dollar didn't help. For the quarter, the Canadian dollar's 11 percent year-over-year appreciation relative to the U.S. dollar affected the conversion of the Class I's U.S. dollar-denominated revenues and expenses into Canadian dollars — and reduced CN's second-quarter revenues, operating income and net income by about $90 million, $25 million, and $11 million, respectively.

"If you exclude this impact on our business, CN's revenues would have increased slightly, and four of the company's seven business units would have posted revenue gains," said President and Chief Executive Officer E. Hunter Harrison in a July 22 prepared statement.

Which is why Harrison and other CN execs remain relatively optimistic about the railroad's near-term prospects. They cite strong forest products and intermodal results ("Our intermodal unit remained a stand-out, benefiting from new business and the discipline of our Intermodal Excellence initiative," Harrison said), coupled with a "tight cost focus" that partially offset the stronger Canadian dollar, reduced grain traffic and higher fuel expense. Meanwhile, CN recorded free cash flow of $169 million, up from $164 million for the same period last year.

"CN management kept its eye on the ball during the quarter, extracting maximum value from our franchise amid a host of major challenges," Harrison said, adding that the 2003-2004 Canadian grain crop actually "could be a good one" due to precipitation levels on the Prairies in Western Canada. "We are guardedly optimistic about the company's prospects for the balance of the year and into 2004."