Finning International
Annual Report 2001

Plain-text annual report

FINNING INTERNATIONAL INC. 2001 ANNUAL REPORT GROWING AND DIVERSIFYING ARE FINNING Printed in Canada DIVERSIFICANDO SOMOS FINNING CRECIENDO Y Contents 2 Performance at a Glance 26 Review of Operations – Chile 3 Corporate Profile 32 Our Global Partners 5 President’s Report to the Shareholders 36 Management Discussion and Analysis 11 Financial Highlights 47 Management’s Report to the Shareholders 13 Review of Operations – Customer Support Services 47 Auditors’ Report 15 Review of Operations – Power Systems 48 Consolidated Financial Statements 16 Review of Operations – Canada 68 Ten-Year Financial Summary 20 Review of Operations – United Kingdom 70 Corporate Information 24 Review of Operations – Hewden Stuart 72 Shareholder Information On the Cover The scope of Caterpillar’s broad product line is illustrated by the world’s largest mining truck, the 797, and a mini excavator that serves the building construction markets. Truck sales and compact equipment rentals were key to Finning International’s growth in 2001. Inside Cover The geographic diversity of the countries Finning International serves is depicted in these scenes. From left, Mount Rundle in the Rockies of Western Canada, the Yorkshire Moors in Northern England and Easter Island west of Chile. GROWING A strong record of growth and delivery of shareholder value: Revenue growth of 32 percent to $3.2 billion. Earnings growth of 46.2 percent to $241.6 million EBIT. Reduction in debt: equity ratio. Profitable for 69 consecutive years. Five major acquisitions over the past 20 years. Outperformed the TSE 300 over the past 20 years. Diversifying globally to better serve new and existing markets: Increasing products and services as Caterpillar’s best global business partner. Dramatic expansion to serve diverse industries in three countries. A leader in short term rentals for equipment and supplies. Less reliant on equipment sales to the cyclical resource industries. Over half of revenue and 80 percent of gross margin generated from more economically predictable sectors – rental services, The Finning Commitment To our Customers customer support and finance. Diverse, highly skilled workforce of 9,800. We will be Caterpillar’s best global business partner, providing unrivalled services DIVERSIFYING that earn customer loyalty. To our Shareholders Industry leadership through: • Continuous growth in shareholder value. • The best solutions and value for our customers. • Competitive advantage through innovation. • Continuous growth in market share. To our Employees WE CARE. WE EMPOWER. • We depend on ourselves and each • We expect the best of each other. other for our safety and well being. • We encourage and value learning, WE COMMUNICATE. innovation, and personal growth. • We rely on open, honest, and effective WE TRUST. communication to work together. • We work at building honest, • All contributions have value. constructive relationships with WE TAKE RESPONSIBILITY. customers, suppliers, and colleagues. • Responsibility and accountability WE DO OUR BEST. are rewarded. • We continuously strive to make • Together, we shape the Finning Finning the best place to work. of tomorrow. Employee Commitment “My job is to make our customers and our company successful” $15.75 $12.10 $16.95 $18.30 $20.00 1-Jan-01 31-Mar-01 30-Jun-01 30-Sep-01 31-Dec-01 Finning Int Inc TSE 300 2001 Finning Share Price Outperforms the TSE 300 HIGHLIGHTS 12 Months Ended - December 31 Revenue EBIT Net Income Cashflow After Working Capital Changes Basic EPS Diluted EPS ( $ i n m i l l i o n s, ex c e p t E P S d a t a ) 2001 3,247.0 241.6 103.9 445.6 1.37 1.34 2000 2,460.0 165.3 73.4 357.8 0.95 0.94 2001 Performance at a Glance $1.32 $1.37 $0.95 $0.75 0.04 1997 1998 1999 2000 2001 Basic EPS 216.6 103.7 103.9 241.6 16.2% 165.3 148.9 82.7 73.4 59.6 14.1% 10.5% 8.7% 1997 1998 1999 2000 2001 1997 1998 1999 2000 2001 1997 1998 1999 2000 2001 Earnings Before Interest and Taxes (EBIT) ( $ i n m i l l i o n s ) Net Income ( $ i n m i l l i o n s ) Return on Equity 3.2 0.5% 438.2 445.6 0.97 0.90 357.8 253.9 200.4 0.47 0.20 0.21 1.66 1.67 1.29 1.04 0.87 1997 1998 1999 2000 2001 1997 1998 1999 2000 2001 1997 1998 1999 2000 2001 Cashflow After Working Capital Changes ( $ i n m i l l i o n s ) Operating Debt to Equity Total Debt to Equity 2 FINNING INTERNATIONAL INC. – 2001 ANNUAL REPORT F I N N I N G I N T E R N AT I O N A L I N C . Corporate Profile Finning International Inc. is a widely held public corporation based in Vancouver, British Columbia. Finning International is one of the world’s largest Caterpillar equipment dealers, with extensive operations in Western Canada, the United Kingdom and Chile. Finning (Canada) Finning (UK) Ltd. Hewden Stuart Finning (Canada) sells, rents, leases and finances Caterpillar and complementary equipment and provides customer support services throughout British Columbia, Alberta, the Yukon Territory and the Northwest Territories. It carries the complete line of Finning (UK) Ltd. sells and rents Hewden Stuart is the U.K. leader in Caterpillar and complementary equipment equipment rental and associated services. and provides customer support services It specializes in general hire, tool hire and throughout England, Scotland, Wales and lifting hire. Hewden supplies a wide range the Channel Islands, and through an of make and models of equipment for agency agreement sells Caterpillar rental customers, including the Caterpillar equipment and parts in the Falkland compact line of equipment. Caterpillar products. Complementary Islands. Based in Glasgow, Scotland, Hewden equipment includes Svedala Reedrill rock drills, CompAir LeROI air compressors, Kaldnes Scandlog log handlers, Risley Associated product lines include: operates from 350 locations in the U.K. materials handling equipment and has 4,066 employees. manufactured by Mitsubishi Caterpillar feller bunchers, Wagner log stackers and Forklift Europe B.V., Caterpillar branded Finning Chile chip dozers, LeeBoy motor graders and paving products, Barber Greene, Gomaco and Rosco paving products, Amida light towers and John Henry rock drills. Finning (Canada) based in Edmonton, Alberta is represented by 31 branches, 6 depots and 33 residencies. There are 2,629 employees in Canadian operations. warehouse equipment manufactured by Finning Chile sells and rents Caterpillar Rocla of Finland and the Caterpillar Olympian power generating systems and complementary equipment and provides customer support services manufactured by F.G. Wilson in Ireland, throughout Chile. Complementary product business and distribution rights for Sabre lines include Ingersoll Rand air Perkins marine power products and Bitelli compressors and drills and Denharco paving machines. Finning (UK) is headquartered in Cannock, Staffordshire. There are 15 forestry equipment. Finning Chile is headquartered in Santiago and has 1,516 employees. There branches, and 8 depots serving the United are 7 branches and 33 depots throughout Kingdom. Finning (UK) has 1,553 the country. employees. 2001 ANNUAL REPORT – FINNING INTERNATIONAL INC. 3 L E T T E R T O T H E S H A R E H O L D E R S President’s Report “We achieved our objectives of record financial returns and growth in equipment rentals, customer support services and Doug Whitehead visits the Cat Rental Store in Santiago, Chile. Finning International Inc. expanded its rental service operations globally in 2001. power systems.” Douglas W.G. Whitehead President and Chief Executive Officer We surpassed expectations in 2001 as Both Finning (Canada) and Finning Our pledge to earn our customers’ Finning International set new records for (UK) set new revenue records while loyalty by providing the best solutions for revenue, profits and cash flow. The Finning Chile improved operating earnings their equipment needs, was rewarded successful acquisition of Hewden Stuart in ensuring the company was profitable for through the signing of several major the United Kingdom, which dramatically the 69th consecutive year. increased our equipment rental business, combined with greater productivity in all operations, powered us to new levels of Economic Impact on Customers customer service agreements. These contracts for the sales, servicing and maintenance of Caterpillar fleets were finalized or underway at all three country success. These results were achieved in the operations. These agreements added We showed significant financial face of a global economic decline that to the strategic alliances Finning improvement over 2000 with revenue impacted many of our customers in the International already enjoyed with growth of 32 percent to $3.25 billion and resource industries. Lumber, coal and gold customers across a broad range of an earnings increase of 41.6 percent to prices were relatively weak throughout industries. $103.9 million. 2001, while pulp, newsprint and copper Our commitment to customers could We delivered on our commitment to be prices declined in the last half of the year. not have been achieved without the Caterpillar’s best global business partner, Despite these challenges, we winning partnership between Finning and by diversifying our sources of earnings, capitalized on our opportunities, Caterpillar Inc., manufacturer of the and by achieving market share growth. particularly in the United Kingdom where world’s best heavy equipment. Our focus on fast growing segments of government infrastructure spending our business resulted in a 22.9 percent generated major demand for heavy Cat Expands Lines jump in power systems revenue, a equipment and in Alberta where oil sands Caterpillar’s commitment to expanded 13.5 percent improvement in parts and investment continued at a robust level. production of innovative mobile and power service revenue and a four-fold increase in equipment rental activity. Versatile and productive in tight spaces, Caterpillar’s mini rubber track excavator, owned by McDonald Trucking, works on residential site in West Vancouver, B.C. systems equipment enabled Finning to take advantage of market potential in such areas as the building construction industry, rental services, engines and related products. Our investment in Hewden Stuart was strengthened by the availability of Caterpillar compact machines that increased rental opportunities. 2001 ANNUAL REPORT – FINNING INTERNATIONAL INC. 5 P r e s i d e n t ’s R e p o r t t o t h e S h a r e h o l d e r s Our strategy to increase our market Asset Reduction share of the fast growing power systems business resulted in the formation of a separate international power systems group. Jack Carthy was appointed President, Power Systems, based in Vancouver. Jack is responsible for Power Systems operations in Canada, the U.K. and Chile, interfacing with Caterpillar and driving the growth of this business. Jack was replaced as Managing Director of Finning (UK) by Steve Mallett, formerly Vice-President of Customer Support Services for Canadian operations. With these appointments, we continued to build a talented group of internationally trained managers and executives. Our ongoing focus on asset management and core business activity resulted in the disposition of surplus properties in Canada and the U.K. and the sale of our materials handling division in Western Canada. In the short run, the sale proceeds were used to reduce debt and fund our share repurchase program. In the long term, we have ensured financial flexibility as we pursue opportunities to grow our core business both domestically and internationally. Late in the year, the company gifted 18.6 acres of its Great Northern Way property in Vancouver to four British Columbia post-secondary institutions. The BC Institute of Technology, Emily Carr Institute of Art and Design, University of BC and Simon Fraser University share equally in the land valued at $33.8 million. We believe in the need to reinvest in the community that has supported our growth over many decades. This gift assists these world-class institutions to educate many talented people and provide us with skilled employees in the future. Teaming up on the Birmingham Northern Relief Road project in the U.K., a Caterpillar excavator loads a Cat articulated truck. P r e s i d e n t ’s R e p o r t t o t h e S h a r e h o l d e r s As the year closed, Finning completed Although the economic outlook for its move from the Great Northern Way 2002 is far from bright, we do expect to property to its international offices in maintain the same level of profitability downtown Vancouver. The balance of its reached in 2001. The Finning Finning (Canada) employees relocated to management team will be moving ahead our expanded Surrey facilities, now the as we accelerate investment in the ever- largest branch in BC. growing power systems, rental and Improved Productivity customer support businesses. We will shift resources from slower growth geographic All employees contributed to our record locations to high growth areas. We will financial results and improved safety pursue acquisitions that will propel the performance. In fact, lost time accidents company forward. dropped by one third over the previous year. We are especially grateful to the Hewden Stuart employees who have embraced the Finning culture and performance expectations. Once again, our dedicated employees have shown their commitment to making Finning and our customers successful. Bob Steinkey of Environmental Builders gets operating tips on a Caterpillar compact excavator from Florence Blais, manager of the Cat Rental Store in Grand Prairie, Alberta. Finning opened seven rentals facilities and has nine more planned. 2001 ANNUAL REPORT – FINNING INTERNATIONAL INC. 7 C A R TA A L O S A C C I O N I S TA S Reporte del Presidente financieros y de crecimiento en arriendo de equipos, soporte al “Logramos un récord de nuestros objetivos de retornos cliente y sistemas de potencia.” Douglas W.G. Whitehead Presidente y Director Ejecutivo En 2001, excedimos las expectativas Nuestro enfoque en segmentos de A pesar de estos desafíos, en la medida que Finning International rápido crecimiento de nuestro negocio se capitalizamos nuestras oportunidades, logró nuevos récords de ventas, tradujo en una alza del 22,9 por ciento en sobre todo en el Reino Unido donde los rentabilidad y flujo de liquidez. La exitosa ventas de Sistemas de Potencia, una gastos en infraestructura del gobierno adquisición de Hewden Stuart en el Reino mejora del 13,5 por ciento en ventas de generaron una demanda importante para Unido, que aumentó considerablemente repuestos y servicios, y un incremento equipos pesados, y en Alberta donde la nuestro negocio de arriendo de equipo, cuádruple en la actividad de arriendo inversión en las arenas petrolíferas junto a una mayor productividad en todas de equipos. continuó a un gran nivel. Nuestro las operaciones, nos llevó a obtener Finning (Canadá) y Finning (Reino compromiso de ganar la lealtad de nuevos niveles de éxito. Unido) alcanzaron nuevos récords de nuestros clientes proporcionando las Demostramos una significativa mejora venta en tanto que Finning Chile mejoró mejores soluciones para sus necesidades financiera en comparación al año 2000 sus ganancias operacionales y aseguró la de equipos fue recompensado con la con un crecimiento de ventas del 32 por rentabilidad de la empresa por 69° año firma de varios acuerdos importantes de ciento a $3,25 mil millones y un aumento consecutivo. en las ganancias de un 41,6 por ciento a $103,9 millones. Cumplimos con nuestro compromiso Impacto Económico sobre Clientes soporte. Estos contratos, para la venta y mantenimiento de flotas Caterpillar fueron concluidos o en curso en las tres operaciones Finning. Estos acuerdos se de ser el mejor socio en el negocio global Estos resultados fueron alcanzados suman a las alianzas estratégicas que de Caterpillar, diversificando nuestras pese a una baja económica global que Finning sostiene con un amplio rango de fuentes de ganancias, y logrando un afectó a muchos de nuestros clientes de clientes en distintas industrias. crecimiento en la participación de la industria primaria. Los precios de la El compromiso con nuestros clientes mercado. madera de construcción, carbón y del oro no se habría podido alcanzar sin la sólida fueron relativamente débiles durante el alianza entre Finning y Caterpillar Inc., 2001, mientras que los precios de la fabricante del mejor equipo pesado del pulpa, papel de prensa y del cobre, mundo. bajaron en la última mitad del año. 8 FINNING INTERNATIONAL INC. – 2001 ANNUAL REPORT R e p o r t e d e l p r e s i d e n t e p a r a l o s a c c i o n i s t a s Cat Expande su Línea Reducción de los Activos Productividad Mejorada El compromiso de Caterpillar de Nuestro constante enfoque en el Todos los empleados contribuyeron al ampliar su producción de equipos manejo de activos y la actividad principal récord de nuestros resultados financieros innovadores de sistemas de potencia ha del negocio resultó en la disposición de y a la mejora en nuestra gestión de permitido a Finning aprovechar el propiedades de sobra en Canadá y el seguridad. De hecho, los accidentes con potencial de mercado en áreas tales como Reino Unido, y a la venta de nuestra tiempo perdido bajaron en un tercio la industria de la construcción de edificios, división de manejo de materiales en comparado con el año anterior. Estamos servicios de arriendo, motores y productos Canadá occidental. En el corto plazo, los especialmente agradecidos de los relacionados. Nuestra inversión en ingresos de estas ventas fueron utilizados empleados de Hewden Stuart, quienes Hewden Stuart fue afianzada por la para la reducción de deuda y para han asumido la cultura Finning y las disponibilidad de las máquinas compactas financiar nuestro programa de recompra expectativas de gestión. Nuevamente, Caterpillar que aumentaron oportunidades de acciones. Al largo plazo, hemos nuestros empleados han demostrado su de arriendo. asegurado una flexibilidad financiera compromiso de asegurar el éxito de Nuestra estrategia para aumentar mientras perseguimos oportunidades de Finning y sus clientes. nuestra participación en el mercado hacer crecer nuestro principal negocio Aunque la perspectiva económica para creciente de sistemas de potencia dio nacional e internacionalmente. 2002 está lejos de ser espectacular, lugar a la formación de un grupo A fines de año, la empresa obsequió esperamos mantener el mismo nivel de independiente, internacional de sistemas 18,6 acres (7.53 hectáreas) de su rentabilidad alcanzado en el 2001. El de potencia. Jack Carthy fue designado propiedad Great Northern Way, en equipo gerencial de Finning seguirá como Presidente, Power Systems, basado Vancouver a cuatro instituciones de adelante, en tanto aceleramos inversiones en Vancouver. Jack es responsable de las enseñanza superior. El British Columbia en los negocios de sistemas de potencia, operaciones de Power Systems en Instituto de Tecnología, Emily Carr arriendo y soporte al cliente. Trasladamos Canadá, Reino Unido y Chile, Instituto de Arte y Diseño, la Universidad recursos desde regiones geográficas de conduciendo el crecimiento de este de British Columbia y la Universidad lento crecimiento a áreas de mayor negocio a través del nexo con Caterpillar. Simon Fraser comparten en partes iguales crecimiento. Buscaremos adquisiciones Jack fue reemplazado como Gerente el terreno valorado en $33,8 millones. que impulsen a la compañía hacía Director de Finning (UK) por Steve Mallett, Creemos en la necesidad de invertir en adelante. el anterior Vicepresidente de Servicios de la comunidad que ha apoyado nuestro Soporte al Cliente en Canadá. Con estos crecimiento durante muchas décadas. nombramientos, continuamos Este obsequio asiste a estas instituciones construyendo un grupo talentoso de de primer nivel en la educación de gerentes y ejecutivos entrenados muchos individuos con talento para internacionalmente. proveernos de personal capacitado en el futuro. Hacia fin de año Finning terminó su traslado desde las instalaciones en Great Northern Way a sus oficinas Internacionales en el centro de Vancouver. El resto de sus empleados (Finning Canadá) fueron mudados a las amplias instalaciones de Surrey, la sucursal de mayor tamaño en British Columbia. 2001 ANNUAL REPORT – FINNING INTERNATIONAL INC. 9 10 FINNING INTERNATIONAL INC. – 2001 ANNUAL REPORT F I N N I N G I N T E R N AT I O N A L I N C . Financial Highlights “Our financial performance showed significant improvements in all key segments.” Richard T. Mahler Executive Vice President and Chief Financial Officer Rick Mahler with Kelly Cardwell, Human Resources Manager, at new corporate headquarters in downtown Vancouver. Revenues increased by 32 percent to Hewden Stuart was fully integrated $3.2 billion, up from $2.5 billion the into Finning’s financial control and previous year. Earnings before interest reporting system. and tax was a record $241.6 million, a We commenced implementation of the jump of 46.2 percent. Net income reached Khalix system that integrates planning and a record high of $103.9 million, up 41.6 budgeting, corporate reporting and percent. consolidation on a single server for global We improved our overall debt: equity operational access. ratio to 0.87 from 1.04. Three of four of our operations saw the Earnings per share were $1.37, up introduction of new finance directors, all of 44.2 percent compared to $0.95. whom replaced directors who had moved Cash flow, after working capital on to operating roles within the company. charges, increased 24.5 percent to a These financial improvements provided historic high of $445.6 million. us with the ability to take advantage of future opportunities to enhance value for Key Finance Initiatives our shareholders. We launched an innovative financing structure that added $425 million in equity. We disposed of $100 million of non- core operating and under utilized real estate assets. The company completed a successful $200 million Medium Term Note issue. In early 2002, we concluded a $79 million sale/leaseback agreement on our Canadian real estate properties. Education leaders were on hand when Finning International announced it was gifting 18.6 acres of its Great Northern Way property in Vancouver to four post secondary institutions. From left, Martha Piper, University of BC; Michael Stevenson, Simon Fraser University; Doug Whitehead, Mechanic Javier León services a backhoe Finning International; Tony Knowles, BC loader at the Cat Rental Store service shop Institute of Technology; Ron Burnett, Emily in Santiago. Carr Institute of Art and Design. 2001 ANNUAL REPORT – FINNING INTERNATIONAL INC. 11 12 FINNING INTERNATIONAL INC. – 2001 ANNUAL REPORT R E V I E W O F O P E R AT I O N S Customer Support Services “Our programs led to lower operating costs and increased productivity for customers as we enhanced sales opportunities for our Brian Bell with sophisticated testing equipment at Finning’s scientific oil analysis facility in Surrey, B.C. global operations.” Brian C. Bell Executive Vice President Customer Support Services We accomplished our global objectives movement of the UK dealership to a Training to improve safety performance, streamline regional hub-and-spoke distribution model Caterpillar’s expanding product line key customer support functions and asset is another example of the restructuring and Finning’s growing service technology management, expand services through that we have conducted to improve technology and upgrade employee training customer service. Several other business require constant training to meet our standards of customer support. We programs. process reviews were launched to improve identified employee skills development As a result of these achievements, our our effectiveness in other support areas, overall customer support business grew such as warranty and transportation of 13.5 percent. parts and equipment. Customer Satisfaction We enhanced customer services throughout our operations by reducing warranty costs, ensuring faster delivery of parts, and improving turnaround times on rebuild and repair of equipment. Customer satisfaction surveys, which measure overall customer satisfaction with our parts and service operations, show 95 percent of customers in Canada are either satisfied or very satisfied with Finning’s service. In response to the data collected in these surveys, we restructured our customer service functions to respond even faster and more efficiently to the needs of our customers. The continued Infra red spectrometer automatically tests equipment oil samples at Finning’s S.O.S. Technology Advances in technology assisted our customers by providing online reporting systems and faster and more efficient communication services. For example, in Canada, customers can view their invoices at our Canadian website as well as oil and education as one of the key areas for improvement in order to increase customer satisfaction and loyalty. These training initiatives include a Caterpillar- sponsored program that identifies skill requirements of service technicians for specific job functions. It outlines educational programs and career paths to achieve these requirements. Along with this and other programs, the result will improve overall employee performance sample results from their equipment tested and establish high standards for our at our laboratory. A global satellite system, customer support. Safety Overall, lost time accidents decreased by 33 percent. Diligent adherence to safety standard and awareness programs has paid off throughout the company. which enables Finning to upload information from customer machines and our rental fleet, gives access to equipment location, maintenance status and servicing needs. In the United Kingdom, a regional call center centralizes dispatch of field engineers, parts orders and complete machine information. The benefits were lower operating and maintenance costs, increased productivity, more sales opportunities and greater customer laboratory. Customers can now review fluid satisfaction. test results online. 2001 ANNUAL REPORT – FINNING INTERNATIONAL INC. 13 R E V I E W O F O P E R AT I O N S Power Systems strategy developed to gain a greater “New records were set and a unique global share of the power systems business.” Jack A. Carthy President, Power Systems Jack Carthy (right) chats with customer Wes Vermeulen, President of West Bay SonShip Yachts Ltd. on Vancouver waterfront. A pivotal year for Power Systems was Major activity in the oil and gas fields Target Growth highlighted by record sales, products and of Western Canada resulted in record service expansion and formation of an demand for our core products. Our truck International organization that integrates engine market share reached a record all three country operations. high of nearly 50 percent for heavy duty New prime power and energy systems and 40 percent for mid-range models. The newly formed Finning International Power Systems Group met in September to develop a unique strategy and business plan aimed at capitalizing on Caterpillar’s projected growth in engine and related volumes reached $238 million, an Rental activities in power generation markets. The strategic plan establishes a market-focused international organization to leverage our expertise across the countries in which we operate and to double or triple Power Systems revenue in the next five years. As a leading provider of power and energy systems, we will also use our technical expertise, integrated support services, innovation and global reach to provide the highest value for our customers, opportunities for our employees and return for our shareholders. increase of 22.8 percent over the previous grew substantially and our customer year. Revenue from power generation, support services for power systems rentals, customer service and used markets were up, partially as a result of equipment contributed an additional additional revenues from the recently $130 million. acquired MaK product line in the United Sales growth in both direct prime Kingdom and CIPA Limitada, a former products and customer support services, rental market competitor in Chile. dramatic increases in truck and marine engine market share, and new acquisitions Added Value were the major contributors to our global We succeeded in selling marine success. engines to the tugboat and salmon fishing industries and provided high value added products for prime power in Chile. The strong demand for Caterpillar power systems products worldwide created a major increase in our customer support revenues as Finning technical expertise was required for service and maintenance of engines and power generation installations. Cutting through West Coast waters, this 58- foot motor yacht built by West Bay SonShip Yachts Ltd. of Delta is powered by Caterpillar 3406E marine engine rated at 800 horsepower. 2001 ANNUAL REPORT – FINNING INTERNATIONAL INC. 15 2001 ANNUAL REPORT – FINNING INTERNATIONAL INC. 15 R E V I E W O F O P E R AT I O N S Canada “Big machine deliveries and compact equipment sales and rentals were the main contributors to our revenue and market Ian Reid (right) and production mechanic Derrick Bradley inspect wheel from a Cat 793 truck in Edmonton Service Shop. share success.” Ian M. Reid President and Chief Operating Officer High demand for Caterpillar’s largest Some 83 Caterpillar mid sized tractors, We delivered 333 Caterpillar compact equipment, increased governmental sales the D7R and D6M, equipped with machines, up from 260 the previous year. and an aggressive penetration into the environmentally sensitive low ground Some 190 skid steer loaders, an increase rental services business helped generate pressure tracks were supplied to oilpatch of 50 units, were supplied to the Cat record revenues and overall market share contractors. Rental Stores and subdivision and utility for Finning (Canada). contractors. We achieved $1.4 billion in revenue Demand for Services from $1.2 billion the previous year. The demand for service and Excavator Sales Grow Unit deliveries of new equipment grew maintenance of these new and existing Construction sales increased by 20 while overall market share exceeded 40 percent. Parts revenue increased 11.9 percent and service revenue by 11.7 percent. Major investment in the Alberta oilsands, which continued to thrive in 2001, resulted in strong deliveries of equipment used in the petroleum industries. equipment fleets, which includes over 100 percent, due mainly to the success of the Cat 789 off-highway trucks, brought 80 Cat 300 series excavators. Finning additional Finning employees to Fort delivered 64 model 330B and 53 model McMurray. The company expanded 320 excavators to construction and oil and facilities in the oilsands and Edmonton to gas contractors. Sales of this series are meet customer support needs. anticipated to grow with the market entry In total, 151 machines valued at $190 of Cat’s largest excavator, the 385 model, million were delivered to the mining in 2002. industry, compared to 105 units at $126 The Cat 535 skidder, introduced in Oilsands customers purchased 19 of million the previous year. 2000, gained wide acceptance with BC Caterpillar’s largest trucks, the 380-ton Governmental sales also show interior contractors, helping increase our 797, bringing the total number of these off- dramatic growth with 150 machines valued forest industry market share to 30 percent highway vehicles working in northeast at $41.8 million delivered, compared to despite lower unit sales. This skidder Alberta to 39, the heaviest concentration 107 units at $27.6 million. increases production while working in anywhere in the world. This number is expected to reach 60 when trucks on order are delivered in 2002. The oilsands, with over $50 million of announced projects, presents a tremendous opportunity for us over the next several years. 16 FINNING INTERNATIONAL INC. – 2001 ANNUAL REPORT difficult terrain. Lost time accidents dropped by 26 percent as employees continued their focus on safety. Pages 17 & 18 - Canada fold-out FOLD A Caterpillar 320C works at a construction site for DeFord Contracting of Edmonton. Cat’s 300 Series excavators helped Finning build construction market share. Pages 19 & 20 - Canada/Customer Service fold-out FOLD R E V I E W O F O P E R AT I O N S United Kingdom “Revenues from quarrying, waste management, plant hire and materials handling equipment sales boosted our Steve Mallett joins apprentice mechanic Lance Armstrong in checking transmission components at Finning (UK) headquarters in Cannock. overall performance.” Stephen Mallett Managing Director Increased activity in several leading Big Fleet Agreement Plant Hire Up markets and the government’s accelerated spending on infrastructure projects contributed to improved results. Finning (UK) revenue increased 17.8% to $804 million compared to $682 million in 2000. The construction and materials handling operations made significant gains in market share. New equipment grew 16.2 percent and used equipment revenue jumped by 34.8 percent. The rental market saw moderate growth of 6.6 percent. Customer support revenue grew by 15.8 percent, which included a 12 percent increase in part sales. Revenue from the MaK and Sabre Perkins engine lines and the paving equipment operation Finnpave exceeded revenue expectations by over 40 percent. Finning (UK) acquired distribution rights for the engine operations, both subsidiaries of Caterpillar, and purchased the paving business in 2000. A major long-term fleet supply Plant hire deliveries were up by 60 agreement between Finning (UK) and percent, largely due to the Birmingham "Biffa, the UK’s largest single supplier of Relief Road infrastructure project in integrated waste management services" Northern England. This included a $28 generated $5.7 million in sales and total million delivery to a major plant hire customer service support. Another $10 customer. Deliveries to the Finning-owned million in equipment will be delivered in Hewden Stuart, which rents equipment to 2002 as part of the six-year agreement its customers, contributed to the growth in valued at $32 million. It provides for the this sector. supply, repair and maintenance of over 65 The market share of materials Caterpillar waste handler machines handling equipment jumped significantly including 15 landfill compactors. with a 45 percent increase in deliveries. Equipment deliveries to the quarrying, Many of those units were supplied to plant hire and materials handling national accounts. industries showed strong growth. Our focus on increasing service Quarrying business grew by 96.8 revenues resulted in customer support percent as the government initiated its agreements, which help reduce machine 10-year, $400 billion investment in downtime and increase productivity, being improving roads and railways. This growth sold on 43 percent of all new equipment. included a $13 million equipment sale to These agreements contract Finning (UK) a single aggregate producer. as the supplier of parts and service. Lost time accidents declined by 48 percent as employees continued their emphasis on workplace safety. Caterpillar 906 loader moves sawdust to conveyor belt at Edson, Alberta. North American Shavings Ltd. grades and packages shavings and sawdust from local mills for use at horse racing tracks and stables. 20 FINNING INTERNATIONAL INC. – 2001 ANNUAL REPORT Pages 21 & 22 - UK fold-out FOLD Caterpillar’s largest tractor, the D11R, rips and dozes sand and gravel mix that contains extremely hard layers of sandstone. The machine, owned by Stokey Plant Hire Ltd., is working on contract at Tarmac’s Croxden quarry at Cheadle, Staffordshire, the largest sand and gravel operation in Europe. Pages 23 & 24 - UK/Hewden Stuart fold-out FOLD R E V I E W O F O P E R AT I O N S F I N N I N G I N T E R N AT I O N A L I N C . Hewden Stuart “Our investment in Caterpillar’s compact equipment and acquisition of a new product line expanded our sales and support capabilities.” Paul J.C. Jarvis Chief Executive Paul Jarvis (foreground), and Peter Milo (left), Hewden Stuart depot manager at Redditch, meet with project manager Ian Kelly of the Birmingham Northern Relief Road, one of the UK government’s major infrastructure initiatives. Hewden Stuart contributed to Hewden developed its own strong Hewden retained strong focus on Finning’s financial success with revenue partnership with Caterpillar. The Cat balance sheet management, generated a of $587 million. Acquired in early 2001, products acquired and rented to positive cash flow and increased Hewden Stuart adapted to Finning’s customers by Hewden were well received productivity while many of its public strategic direction and business by the markets it serves. A significant ownership competitors struggled in the processes while remaining focused on its investment in Caterpillar equipment face of significantly reduced share prices. key markets and customer base. during the year included the UK A review of its 350 locations As the UK leader in equipment rentals introduction of some 150 skid steer throughout the UK resulted in some and associated services, Hewden loaders. continued to expand sales and support services, mainly to the construction, petro-chemical engineering and manufacturing industries. restructuring of its depot network, with the closure of 15 depots and the Key Acquisition opening of 7. Capital investments expansion included acquiring the materials handling equipment of Maxxiom Limited, comprising of 640 units. Hewden took major internal initiatives through improved employee health and safety standards, strategies for growth, investment in new computer technology and aggressive management development programs. Synergies with Finning (UK) aimed at cost savings and improved customer service were explored and several productivity initiatives were launched. Clay drainage pipes frame a Caterpillar lift truck with 3,500 kg lifting capacity at Travis Perkins Trading Co. Ltd. builders merchant yard in Leicester, UK. 24 FINNING INTERNATIONAL INC. – 2001 ANNUAL REPORT Hewden Stuart rental equipment, such as this Caterpillar telehandler that moves and lifts material, is transported quickly to meet customer job demands throughout the UK. R E V I E W O F O P E R AT I O N S Chile Nick Lloyd (right) watches as mechanic Daniel Bravo checks on newly inserted valve guides on a Caterpillar engine in Finning Chile’s Santiago service department. “The copper mine industry’s ongoing need for large Caterpillar trucks and our penetration into rental equipment markets were among the highlights of the year.” Nicholas B. Lloyd President and Chief Executive Officer Finning Chile improved its market Minera Los Pelambres ordered The purchase of "Yrarent", a local share in all major industries and moved another six 797s, valued at approximately company, expands the Cat Rental Store rapidly to become a leader in the $32 million, for delivery in 2002. capabilities and makes it the leader in equipment rentals business, despite a An agreement was finalized with work platform rentals. The acquisition slight decline in revenue to $448 million Compañía Minera Cerro Colorado provides exclusive distribution rights for from $474 million in the previous year. (BHP- Billiton) for a $48 million package Genie brand products in the Chilean Our focus on major mining customer consisting of 13 Caterpillar 789C mining market. needs resulted in a gain in industry sales trucks and auxiliary equipment that will Two important agreements were and increased market share. Service work on the mine’s expansion. formalised during 2001. A new four-year revenue grew by 13 percent while parts revenue dropped slightly as some Unit Sales Up collective agreement with the company's two employee unions was signed in customers made less use of their Facing weak markets for both December of 2001. Additionally, Finning equipment fleets due to lower copper construction and forestry equipment, Chile and Caterpillar reached agreement prices. Finning Chile successfully increased unit on the establishment of a two-year, Caterpillar’s largest mining truck, the sales while building market share for degree program being developed initially 380-ton 797, is in growing demand by specific models, including medium and for service technicians. The project mining interests exploring and developing heavy-wheel loaders, medium-sized includes a purpose-built facility planned new sites. The number of these trucks graders and excavators and small skid- for 2002, with the first enrolment now in operation or on order stands steer loaders. beginning in March of 2003. at 27. To date, sales and orders for these In general construction, market share Lost time accidents figures showed trucks and support equipment totals decreased slightly but strong sales of modest improvement. Frequency rates $143 million. compact machines, primarily skid steer rose slightly but the severity rate dropped loaders, raised market share for these by 21 percent. Big Fleet Sales products. In 2001, eleven 797s were delivered – six to Minera Escondida, three to Minera Rental Expansion excellence. This achievement brings Finning Chile to a world class standard of safety Los Pelambres and two units configured As the rental of equipment became an for high-altitude operation to Compañía integral part of its business, Finning Chile Minera Dona Ines de Collahuasi SCM. planned the formation of a rentals This latter sale, the first to Collahuasi, equipment division, acquired an industrial generated revenues of $9 million. supply company and relocated its flagship Cat Rental Store to new premises. 26 FINNING INTERNATIONAL INC. – 2001 ANNUAL REPORT Pages 27 & 28 - Chile fold-out FOLD Two Cat 797 trucks pass at the Minera Los Pelambres operation in northern Chile. The Chilean owned mine, located 3600 meters above sea level, has among the lowest cost production of any copper mine in the world. Some 80 Finning employees work at the on-site service facility. Dos camiones Cat 797 se cruzan en Minera Los Pelambres, ubicada a 3.600 metros de altura en el norte de Chile, y cuyos propietarios son chilenos. La mina de cobre presenta uno de los costos de producción más bajos del mundo. Alrededor de 80 empleados Finning prestan servicio en esta faena. Pages 29 & 30 - Chile Spanish fold-out FOLD R e s e ñ a d e C h i l e Chile camiones Caterpillar y nuestra penetración en los mercados de “La necesidad por parte de la industria minera por los grandes arriendo de equipos fueron los hechos destacados del año.” Nicholas B. Lloyd President and Chief Executive Officer Finning Chile mejoró su participación Ventas de Flotas Mayores En el 2001 once 797s fueron Suben las Ventas por Unidad de mercado en todas las principales industrias y avanzó rápidamente para convertirse en líder del negocio de arriendos. Observamos una leve baja en las ventas de $474 millones en el año anterior a $448 millones. Nuestro enfoque en las necesidades de nuestros principales clientes mineros nos llevó a un aumento en las ventas a esa industria y a una mayor participación de mercado. Las ventas por concepto de servicio técnico crecieron en 13 por ciento, mientras que las ventas de repuestos disminuyeron levemente debido a que algunos clientes utilizaron menos sus flotas de equipos a causa de los deprimidos precios de cobre. La demanda por el camión más grande de Caterpillar, el 797 con una capacidad de 380 toneladas, está creciendo por el interés del sector minero explorando y desarrollando depósitos nuevos. Actualmente, existen 27 de estos camiones solicitados o en operación. A la fecha, las ventas y encargos por estos camiones y equipos de apoyo alcanzan los $143 millones. entregados – seis a Minera Escondida, Enfrentando mercados débiles para tres a Minera Los Pelambres y dos equipos de construcción y forestal, unidades configuradas para operación a Finning Chile exitosamente incrementó gran altitud a Compañía Minera Doña las ventas por unidad, y paralelamente, Inés de Collahuasi SCM. Esta última generó una mayor participación de venta, la primera a Collahuasi, generó mercado para modelos específicos, ingresos de $9 millones. incluyendo los cargadores de ruedas Minera Los Pelambres solicitó otros medianos y pesados, motoniveladoras y seis 797, valorados en aproximadamente excavadoras medianas, y minicargadores $32 millones, para ser entregados en pequeños. el 2002. En el área de construcción general, la Se concluyó un acuerdo con la participación de mercado disminuyó Compañía Minera Cerro Colorado levemente, pero fuertes ventas de los (BHP-Billiton) por un grupo de 13 productos compactos, especialmente camiones mineros 789C y equipo auxiliar, minicargadores, aumentando la valorado en $48 millones, que serán participación en este segmento. utilizados en la expansión de la mina. Expansión en Arriendo En la medida que el arriendo de equipos se fue transformando en una parte integral de su negocio, Finning Chile planeó la formación de una división de arriendo de equipos, adquirió una compañía de suministro industrial y trasladó su Cat Rental Store a nuevas instalaciones. Vehicle tail lights make colorful display as a shovel loads a Cat 797 truck working at Minera Los Pelambres copper mine in Chile. Luces de operación presentan un escenario colorido mientras que una pala carga un Cat 797 trabajando en la mina de cobre, Minera Los Pelambres, en Chile. 30 FINNING INTERNATIONAL INC. – 2001 ANNUAL REPORT La adquisición de "Yrarent", una Las cifras de accidentes con tiempo compañía local, amplía las capacidades perdido mostraron una leve mejora. Los del Cat Rental Store y lo hace líder en índices de frecuencia subieron levemente, arriendo de plataformas de trabajo. La pero el índice de severidad bajó en un 21 compra otorga los derechos exclusivos de por ciento. Este logro lleva a Finning distribución de los productos de la marca Chile a un estándar mundial de excelencia Genie en el mercado chileno. en seguridad. Dos importantes acuerdos fueron formalizados durante el 2001. En diciembre del 2001 se firmó un nuevo convenio colectivo de cuatro años con los dos sindicatos de la empresa. Adicionalmente, Finning Chile y Caterpillar llegaron a un acuerdo para el establecimiento de un programa de grado de dos años, que será desarrollado inicialmente para técnicos de servicio. El proyecto incluye una edificación a medida previsto para el año 2002, con la primera inscripción comenzando en marzo del 2003. R e s e ñ a d e C h i l e One of three Cat 525 skidders owned by contractor Leonida Poo Ltda. works in Monterey pine forests of southern Chile. This type of pine is 30 to 40 centimeters at the butt when reaching maturity in about 20 years. Uno de tres arrastradores de troncos Cat 525 del contratista Leonida Poo Ltda., trabaja en un bosque de pino Monterrey en el sur de Chile. Esta variedad de pino alcanza los 30 a 40 centímetros de base, y alcanza su madurez en 20 años. 2001 ANNUAL REPORT – FINNING INTERNATIONAL INC. 31 Our Global Partners A SASIPA Ltda. mechanic checks out the Caterpillar 3516 generator set that supplies power to the 3500 residents of Easter Island, located 3700 km west of continental Chile. This Caterpillar 3612 engine, rated at 3335 horsepower, is one of three such installations that power a gas compression plant at Rio Alto’s Galloway operation near Edson, Alberta. Ice crystals form over giant Caterpillar 797 truck being loaded at Syncrude operation in the Alberta oil sands. Finning delivered 19 of these trucks to oil patch customers in 2001. Santiago Branch mechanic Raúl Silva loads up for field service duties. “Purpose unites us; Passion moves us” is the slogan promoting Finning Chile’s customer support philosophy. Skid steer machines, part of Caterpillar’s compact equipment line, are opening new sales and rentals opportunities for Finning in the United Kingdom, Chile and Western Canada. Finning focus on customer support sees Al Lindholm, field service mechanic, re-tension tracks on Cat machine at customer worksite in Edmonton, Alberta. Two new Caterpillar 836G compactors move and compact garbage at a landfill site operated by Biffa Waste Services Ltd. at Risley in Cheshire, U.K. The machines were part of $32 million agreement with Finning (UK) to supply and support Biffa’s waste handling fleet. P r e s i d e n t ’s R e p o r t t o t h e S h a r e h o l d e r s Management Discussion and Analysis Revenue by Activity 2001 30% 28% 3% 7% 21% 11% New Mobile Equipment New Power & Energy Systems Used Equipment Equipment Rental Leasing & Financing Customer Support 2000 M a n a g e m e n t D i s c u s s i o n a n d A n a l y s i s M a n a g e m e n t D i s c u s s i o n a n d A n a l y s i s Results of operations Finning International achieved record revenues and net income from operating activities in 2001. Consolidated revenues increased 32.0% to $3,247.0 million, whereas consolidated net income increased 41.6% to $103.9 million. Earnings per share for the year 2001 were $1.37 compared with $0.95 in 2000, representing a 44.2% increase. Excluding the impact of non-operating items included in "Other Expenses/(Income)" (see note 12), EBIT for the year was $259.8 million, net income was $107.2 million and Basic EPS was $1.41. These results showed improvement over the comparable prior year (higher by 60.9%, 52.2%, and 55.4%, respectively). Cash flow after changes in working capital was $445.6 million compared with $357.8 million in 2000. The Company reinvested $311.7 million in revenue-earning rental and lease assets during the year. The table below sets forth summary financial data for the years indicated. Revenue Gross profit Selling, general & administrative expenses Amortization of goodwill Other expenses/(income) EBIT 34% 32% Finance costs and interest on other indebtedness Provision for income taxes Non-controlling interests Net income 2001 2000 2001 2000 ($ million) ($ million) (% of Revenue) 3,247.0 2,460.0 904.7 634.9 10.0 18.2 624.4 461.0 1.9 (3.8) 241.6 165.3 85.6 29.0 23.1 103.9 58.6 33.3 - 73.4 27.9% 19.6% 0.3% 0.6% 7.4% 2.6% 0.9% 0.7% 3.2% 25.4% 18.7% 0.1% -0.2% 6.7% 2.4% 1.4% 0.0% 3.0% 5% 8% During the year, the Company completed the acquisition for Hewden Stuart Plc., a leader in the equipment rental industry in the U.K. The Company formed a partnership for the purpose of raising equity capital to fund the acquisition of Hewden. Third party investors injected $425 million of capital into the partnership for a non-controlling partnership interest. In 2001, the Company also acquired complementary businesses in Canada, the U.K. and 7% 14% Chile in the equipment rental and distribution business. The Company also divested its material handling business in Canada. This business provided sales, rentals and servicing of new and used forklifts and high-reach equipment. New Mobile Equipment New Power & Energy Systems Used Equipment Equipment Rental Leasing & Financing Customer Support Tons of overburden drops from a giant Caterpillar 380-ton 797 truck at Minera Los Pelambres copper mine in Chile. 2001 ANNUAL REPORT – FINNING INTERNATIONAL INC. 37 M a n a g e m e n t D i s c u s s i o n a n d A n a l y s i s Revenues In 2001, consolidated revenues were higher by $787.0 million with Canadian and UK operations achieving record revenues. A significant part of this increase was due to the inclusion of Hewden ($587.4 million). Revenues in the Canadian and the UK operations were higher by $184.1 and $121.9 million respectively. Revenues were lower by $26.1 million in Chile. Reported revenues were also lower in Universal Machinery Services as the operations of this division were merged with the existing country operations during the year. The table below provides details of revenue by operations and lines of business. 2001 (dollars in thousands) New mobile equipment New power & energy systems Used equipment Equipment rental Operating leases Customer support services Finance and other Total Canada UK Chile Hewden Other Consolidated % Revenue $ 404,239 $342,991 $140,287 $ 8,959 $ 140,705 185,679 107,100 95,715 81,470 116,260 52,716 - 16,112 28,036 13,112 - - 24,653 518,145 - 452,573 210,647 250,026 35,735 12,612 - 432 - - - 1,105 129 - 7,332 283 $ 896,466 238,287 355,733 691,202 95,715 956,313 13,327 27.6% 7.3% 11.0% 21.3% 2.9% 29.5% 0.4% $1,398,623 $804,084 $448,005 $587,482 $ 8,849 $3,247,043 100.0% Revenue percentage by operations 43.1% 24.8% 13.8% 18.1% 0.3% 2000 (dollars in thousands) New mobile equipment New power & energy systems Used equipment Equipment rental Operating leases Customer support services Finance and other Total $ 344,290 $287,377 $164,836 $ 104,321 148,459 100,202 98,451 78,463 85,171 49,461 - 11,122 31,145 14,882 - 405,782 181,690 245,966 13,011 - 6,194 $1,214,516 $682,162 $474,145 $ Revenue percentage by operations 49.4% 27.7% 19.3% - - - - - - - - - $ - - 77,959 2,225 - 8,806 219 $ 796,503 193,906 342,734 166,770 98,451 842,244 19,424 32.4% 7.9% 13.9% 6.8% 4.0% 34.2% 0.8% $ 89,209 $2,460,032 100.0% 3.6% Canada Led by buoyant mining sales from the oil sands, Finning (Canada) achieved record revenues of $1,398.6 million. Both equipment and customer service revenues increased. Unit deliveries into the mining sector increased 44% over the prior year. The momentum in the energy sector is expected to continue as the Company secured a new contract from Albian Sands Energy Inc. to supply equipment worth over $100 million over 2002 and 2003. Equipment rental revenues increased as management focused on the development of the CAT Rental Stores. In addition to the seven rental stores opened in 2001, nine stores are to be added either by green-fielding or through acquisitions in the near future. New power & energy systems sales also achieved record levels fo the year. Strong demand in the gas compression, electric power, drilling and truck markets combined to deliver 34.9% increase in revenues. 38 FINNING INTERNATIONAL INC. – 2001 ANNUAL REPORT Revenue by Operations 2001 18% 43% United Kingdom M a n a g e m e n t D i s c u s s i o n a n d A n a l y s i s 14% 25% Canada UK Chile Hewden 2000 4% 19% 49% 28% Canada UK Chile UMS Record revenues in the U.K. were achieved primarily as a result of renewed infrastructure spending in the country, most notably on the Birmingham Northern Relief Road. In addition, the acquisition of Finnpave, a paving equipment specialist, contributed to the increased construction equipment revenues. Partially offsetting, was the lower sales activity due to the outbreak of foot & mouth disease which showed capital purchases. The outlook for the construction sector remains positive spurred on by a large contract signed in December with a large integrated waste management services supplier to supply 65 Caterpillar machines in 2002. Materials handling sales increased due to the supply of machines to national accounts. The power systems strength in the industrial business was somewhat offset by a weak internet service provider business. Used equipment revenues increased by 36.5%, though there was a slowdown in the fourth quarter due to the softening of the U.S. market which reduced the export of used construction equipment. Customer support services revenue increased due to marketing programs and inclusion of recently acquired MaK (late 2000) and Finnpave (2001) businesses. Chile Revenues were lower by $26.1 million, mainly for new equipment as some customers deferred or reduced their purchases as copper prices languished in 2001. The 797 mining truck continued to make inroads in the Chilean mining market. This market provides a long-term source of service and parts business to the Chilean operation. New orders for six trucks were placed in late December for delivery to the minesites beginning 2002, however, the depressed copper price may reduce production in Chile and customers may continue to defer purchases into 2003. While the construction market remained subdued during the year, the Chilean Chamber of Commerce expects a slight recovery in 2002. Pulp prices were also lower in 2001 and resulted in a drop in export activity. Despite this, the Company has been able to increase its market share in both the construction and forestry markets. Power and energy system sales were higher as a result of some large projects and acquisition of CIPA and Yrarent. As a result of these acquisitions, the Company now has a leadership position in the Chilean power systems market. Hewden The first year for Hewden under Finning ownership has met management’s expectations. Hewden derives rental revenues from its rental services, tool hire and lifting hire divisions through approximately 350 branches in the U.K. Revenues achieved after eleven months of operations were $587.5 million. There was a net reduction of eight depots over last year, as underperforming depots were closed and new openings in more appropriate locations were created. The foot and mouth crisis led to a higher utilisation of Hewden rental equipment in mid 2001 as the Company supported the efforts to contain the crisis. During the year, the Company also expanded its operations by acquiring assets from Maxxiom (640 units valued at approximately $20 million) which assisted in achieving additional revenues. Other During the year, the Company merged its international used equipment and parts operations (UMS) into the existing country operations. 2001 ANNUAL REPORT – FINNING INTERNATIONAL INC. 39 M a n a g e m e n t D i s c u s s i o n a n d A n a l y s i s Gross profits Gross profits increased $280.3 million (44.9%) to $904.7 million in 2001 compared with 2000. This increase was substantially attributable to the inclusion of Hewden during the year. As a percentage of revenue, gross profit was higher at 27.9% compared with 25.4% in 2000 mainly due to inclusion of high gross profit rental activities at Hewden. Gross profit as a percentage of revenue was lower in Canada due to adverse exchange rate impact and fleet sales in the oil-sands sector. It was marginally lower in the U.K. mainly as a result of a shift in the sales mix and it was higher in Chile due to better performing service contracts. Selling, general and administrative expenses Selling, general and administrative expenses increased $173.9 million (37.7%) to $634.9 million in 2001 compared with 2000 due to volume increases and inclusion of Hewden, with its extensive branch structure supporting the rental market. As a percentage of revenue, these expenses were higher at 19.6% compared with 18.7% in 2000, due mainly to Hewden’s higher cost structure. Selling, general and administrative expenses as a percentage of revenue was lower in Canada and the UK due to operating leverage and focus on cost control. It was higher in Chile as a result of the volume shift towards the customer support services which deliver a higher gross margin but have a higher selling, general and administrative component. Other expenses were lower as the international used equipment and parts operations were merged into the existing country operations. Amortization of goodwill Amortization of goodwill increased by $8.1 million primarily due to the amortization of goodwill on the acquisition of Hewden. In 2002, with the change in accounting treatment of goodwill, amortization of goodwill will not occur but be replaced by an annual assessment for impairment (for more details see Note 1, Notes to Consolidated Financial Statements). Other expenses/(income) Other expenses/(income) include non-operating or occasional items shown separately to facilitate comparison with last year. As a result of the transactions described below, the Company recorded a net non-operating expense of $18.2 million for the year. As a result of the tax recovery of $14.9 million thereon, the net income impact was $3.3 million. During the year, the Company recorded restructuring charges of $14.2 million related to the planned closure, consolidation or downsizing of some branches in the U.K. and Canada to achieve operating efficiencies. Additional restructuring charges of $10.2 million were recorded in 2001 related to the winding up of international Universal Machinery Services and merging it with the existing country operations. The Company donated its head office property located in Vancouver to post secondary institutions. This donation was valued at $33.8 million. The property had a book value of $4.3 million and the donation expense was offset by a deemed gain of $29.5 million, resulting in a net donation expense of $4.3 million. The Company also sold surplus real estate in Canada and the U.K. for a gain on $8.7 million During the year, the Company sold the business previously carried out by its Materials Handling Division and its subsidiary Interior Lift Truck Services Inc. in Canada for $65.0 million and recognized a gain of $3.6 million on cash received and deferred a gain of $10.2 million in 40 FINNING INTERNATIONAL INC. – 2001 ANNUAL REPORT Operating Income (EBIT) by Operations (dollars in millions) Consolidated 241.6 165.3 2001 2000 Canada 131.9 119.2 2001 2000 UK 32.1 27.6 2001 2000 Chile 38.7 29.3 2001 2000 Hewden 73.9 0 2000 2001 M a n a g e m e n t D i s c u s s i o n a n d A n a l y s i s respect of promissory notes received. This gain on sale was partially offset by $2.5 million loss on the sale of the attachment services business in Canada. The Company also reduced its net investment in its UK subsidiary by GBP 21 million. As a result of this transaction, a foreign exchange gain of $0.7 million was realized. Earnings before interest and taxes (EBIT): EBIT increased by 46.2% to $241.6 million due to inclusion of Hewden and significant increases in all the operations. EBIT as a percentage of revenue was 7.4% in 2001 compared with 6.7% in 2000. The improvement was even more significant (8.0% vs. 6.6%), when normalized for non-recurring items. The table below illustrates EBIT contribution by operations: Canada UK Chile Hewden Other Consolidated 2001 (dollars in thousands) Revenue from external sources $1,398,623 $ 804,084 $ 448,005 $ 587,482 $ 8,849 $3,247,043 Operating costs Depreciation Amortization of goodwill Other expense/(income) 1,114,242 151,438 1,082 748,848 22,113 1,035 399,377 9,950 - 380,677 125,032 7,852 25,570 2,668,714 - - 18,226 308,533 9,969 18,226 Earnings before interest and tax $ 131,861 $ 32,088 $ 38,678 $ 73,921 $ (34,947) $ 241,601 9.4% 4.0% 8.6% 12.6% 7.4% 2000 (dollars in thousands) Revenue from external sources $1,214,516 $ 682,162 $ 474,145 $ Operating costs Depreciation Amortization of goodwill Other expense/(income) 947,015 147,300 1,012 629,309 24,389 843 435,877 8,987 - Earnings before interest and tax $ 119,189 $ 27,621 $ 29,281 $ - - - - - $ 89,209 $2,460,032 103,826 2,116,027 - - (3,789) 180,676 1,855 (3,789) $ (10,828) $ 165,263 9.8% 4.0% 6.2% 0.0% 6.7% Finance costs and interest on other indebtedness Finance costs and interest on other indebtedness increased by $27.0 million to $85.6 million in 2001 compared with 2000, mainly as debt increased to finance the Hewden acquisition. Provision for income taxes Income tax expense in 2001 amounted to $29.0 million, reflecting an effective tax rate of 21.8% during the year compared with 31.2% in 2000. Normalized for non-recurring items discussed earlier, the effective tax rate for the two years was 29.0% and 31.6% respectively. The decrease in the Company’s effective tax rate is mainly due to higher proportion of income being generated in lower tax jurisdictions and lower Canadian tax rates. 2001 ANNUAL REPORT – FINNING INTERNATIONAL INC. 41 M a n a g e m e n t D i s c u s s i o n a n d A n a l y s i s Non-controlling interests In the first quarter of 2001, Finning formed a partnership for the purpose of raising capital to fund the acquisition of Hewden. Finning is the general partner in this partnership. Third party investors injected $425.0 million of capital into the partnership for a non-controlling partnership interest. The partnership interests are entitled to a quarterly distribution on their capital account. The distribution for the year was $23.1 million, representing a yield of 6.1%. Net income Net income improved by 41.6% to $103.9 million in 2001 compared to a year earlier, resulting in a 44.2% increase in basic earnings per share to $1.37. Normalized for non-recurring items discussed earlier, basic earnings per share rose to $1.41 or 55.4%. Liquidity and Capital Resources Management of the Company assesses liquidity in terms of its ability to generate sufficient cash flow to fund its operations. Net cash flow is affected by the following items: • operating activities, including the level of accounts receivable, inventories, accounts payable, rental equipment and financing provided to customers; • investing activities, including acquisitions of complementary businesses, and capital expenditure; and • external financing, including bank credit facilities, commercial paper and other capital market activities, providing both short and long-term financing. Cash flow from operating activities Cash provided after changes in working capital was $445.6 million compared with $357.8 million in 2000. During 2001, $311.7 million was reinvested ($117.1 million in 2000) in revenue earning assets and as a result, cash flow from operating activities was $133.9 million in 2001 compared with $240.6 million in 2000. Cash used for investing activities Cash used in investing activities totalled $610.7 million. This included $642.9 million for acquisitions (2000 - $218.0 million) and $22.3 million for capital assets (2000 - $11.9 million) offset by $54.5 million received on the sale of the materials handling business in Canada (2000 – nil). Financing activities To complement the internally generated funds from operating and investing activities, the Company has available approximately $1,147.4 million in unsecured short-term credit facilities and $75.0 million in unsecured term facilities. The Company also has a commercial paper program for $300.0 million, which can be issued against the designated short-term credit facilities amount. At the year-end, approximately $483.9 million, including commercial paper, was drawn against the bank facilities. Longer-term capital resources are provided by direct access to capital markets. The Company is rated by both Standard & Poor’s (S&P) and Dominion Bond Rating Service (DBRS). DBRS rates Finning’s senior debentures and medium term notes BBB (high) and its commercial paper R-2 (high). The respective S&P rating is BBB, with a positive outlook and A-2. 42 FINNING INTERNATIONAL INC. – 2001 ANNUAL REPORT M a n a g e m e n t D i s c u s s i o n a n d A n a l y s i s During 2001, overall debt increased by $103.5 million. Short-term debt decreased by $25.8 million to $372.4 million during the year while long-term debt increased by $129.3 million from $544.4 million to $673.7 million. The acquisition of Hewden was financed on February 7, 2001, with $425.0 million being recorded as a non-controlling interest. The Company refinanced $200.0 million of short-term bank debt associated with the Hewden acquisition with a debenture issue under its Medium Term Note program on June 19, 2001. The Company did not have any equity issues in 2001. Share capital increased from $200.6 million in 2000 to $212.1 million at the end of 2001, reflecting the exercise of stock options into 1.5 million common shares offset by the repurchase of 1.5 million common shares as part of a normal course issuer bid. Under the current normal course issuer bid agreement, the Company is allowed to buy back a maximum of 7.6 million shares up to September 24, 2002. The Company has an employee share purchase plan for its Canadian employees. Under the terms of this plan, eligible employees may purchase common shares of the Company in the open market at market value. The Company pays a portion of the purchase price to a maximum of 2% of employee earnings. The plan may be cancelled by Finning at any time. At December 31, 2001, over 67% of Canadian employees were contributing to this plan compared with 65% at the end of 2000. During 2001, the Company launched an All Employees Share Purchase Ownership Plan for its employees in Finning (UK) and Hewden, which will commence in January, 2002. Under the terms of this plan, employees may contribute up to 10% of their salary to a maximum of £125.00 per month. The Company will provide one common share for every three the employee purchases. Financial Leverage The Company’s operations consist of three major components, namely its operating (new and used equipment sales and customer support services), equipment rental activities and finance (equipment leasing and financing). Each of these major components has a different risk profile. Accordingly, Finning applies a different capital structure and financial leverage to each component based on industry norms. The finance assets and rental assets are supported by a combination of debt and equity. Finning applies a debt to equity ratio of 7:1 to its finance operation and 5:1 to its rental operation. Total debt, non-controlling interests and shareholders' equity is allocated to the operating, finance, rental activities and non-controlling interests. Future income taxes are allocated based on the assets and liabilities assigned to the operating, finance and rental activities. In 2000, the debt to equity ratios were calculated excluding the investment in Hewden ($218.1 million removed from assets and short-term debt). In 2001, the debt to equity ratios were calculated on a fully consolidated basis including the non-controlling interest of $425.0 million as equity. The Company’s overall debt to equity ratio improved from 1.04 at the end of 2000 to 0.87 at the end of 2001. Debt to equity ratio for its operating activities (excluding finance and rental activities and the non-controlling interests) at 0.21 was at a similar level to 2000. This continued improvement in the overall debt to equity ratio was primarily due to the Company’s focused asset management program to improve current operating asset efficiency and short-term borrowings. The Company achieved an improvement in receivables collections, inventory turnover and earnings in 2001 as a result of the program. 2001 ANNUAL REPORT – FINNING INTERNATIONAL INC. 43 M a n a g e m e n t D i s c u s s i o n a n d A n a l y s i s The table below compares financial leverage and operating debt to equity ratio for the Company as at the end of 2001 with the corresponding ratios for 2000. As at Dec. 31, 2001 (dollars in thousands) Total assets Payables and accruals Future income taxes, net Liabilities Net investment Short & long term debt Non-controlling interests Shareholders’ equity Operations Rental Interest Finance Consolidated Non-controlling $1,237,174 $1,000,915 $ 425,000 $ 372,867 $3,035,956 523,140 (20,535) 502,605 242,531 27,875 270,406 - - - 3,702 12,278 15,980 769,373 19,618 788,991 $ 734,569 $ 730,509 $ 425,000 $ 356,887 $2,246,965 $ 125,068 $ 608,758 $ - $ 312,276 $1,046,102 609,501 121,752 - 44,611 425,000 425,000 775,863 Total debt and shareholders’ equity $ 734,569 $ 730,510 $ 425,000 $ 356,887 $2,246,965 Debt to equity 0.21 5.00 As at Dec. 31, 2000 (dollars in thousands) Total assets Payables and accruals Future income taxes, net Liabilities Net investment Short & long term debt Shareholders’ equity Total debt and shareholders’ equity Debt to equity $1,180,287 $ 347,339 $ 482,328 (15,722) 466,606 14,466 11,240 25,706 $ 713,681 $ 321,633 $ 117,298 $ 268,028 596,383 53,605 $ 713,681 $ 321,633 0.20 5.00 $ $ $ - - - - - - - - - - 7.00 0.87 $ 404,500 $1,932,126 3,328 13,431 16,759 500,122 8,949 509,071 $ 387,741 $1,423,055 $ 339,273 $ 724,599 48,468 698,456 $ 387,741 $1,423,055 7.00 1.04 Note: In the 2000 ratios, the investment in Hewden and debt associated therewith was not included as the acquisition had not been completed by year-end. Financial Derivatives and Risk Management The Company uses various financial instruments such as interest rate swaps, forward exchange contracts and options as hedges against actual assets or liabilities. Derivative financial instruments are always associated with a related risk position. For example, the Company has a policy of arranging its financing such that the fixed rate financing offered to its customers is matched by fixed rate borrowings. As well, the portfolio is matched on currency and term. Finning enters into swap agreements, which fix the effective interest rate and currency of the borrowing. This is an effective and flexible method of matching fixed rate terms provided to customers with fixed rate debt obligations. Finning continually evaluates and manages risks associated with financial derivatives. This includes counterparty credit exposure. Finning manages its credit exposure by ensuring there is no substantial concentration of credit risk with a single counterparty, and by dealing only with highly rated financial institutions as counterparties. 44 FINNING INTERNATIONAL INC. – 2001 ANNUAL REPORT M a n a g e m e n t D i s c u s s i o n a n d A n a l y s i s Operating Debt to Equity Ratio 0.97 0.90 0.47 Financial Risks and Uncertainties The Company’s financial performance may be influenced either favourably or adversely by fluctuations in foreign exchange, commodity prices and interest rates. The Company is subject to four main direct sources of foreign exchange risk: transaction, translation, economic and competitive. The first source of foreign exchange risk, transaction risk, relates to fluctuations in the purchase price of inventory. The Company’s operations in 0.20 0.21 Canada and Chile source the majority of their products from the United States and, as a 1997 1998 1999 2000 2001 Total Debt to Equity Ratio 1.66 1.67 1.29 1.04 0.87 1997 1998 1999 2000 2001 consequence, exchange rate movements affect the transaction price for most equipment and parts. Finning is generally able to manage this risk through adjustments in the pricing of its product sales, and through the use of financial derivatives. Finning uses a combination of forward, option or spot strategies to manage the foreign exchange transaction exposure. The second source of foreign exchange risk, translation risk, relates to the fact that the Company’s U.K. and Chilean operations are recorded in its financial statements in Canadian dollars, while those operations conduct business primarily in British pounds in the U.K., and Chilean pesos and U.S. dollars in Chile. Changes in the British pound, Chilean peso and U.S. dollar to the Canadian dollar exchange rate directly affect the financial performance in Canadian dollars of the Company’s U.K. and Chilean operations. The Company hedges its investments in some of its foreign subsidiaries by borrowing funds in the foreign currency or with long-term cross currency swaps and forwards. The third source of foreign exchange risk, economic risk, is characterized by the risk associated with cash flows from subsidiary companies. To minimize fluctuations in the amount received in GBP currency dividends from its Hewden subsidiary, Finning has entered into a long-term cross currency interest rate swap that fixes the foreign exchange rate on a certain amount of dividends received. The fourth foreign exchange risk is competitive risk. This is where the currency of the competing firms continues to depreciate against the currency that the Company sources its inventory. For example, if the US dollar appreciates against the Canadian dollar and if the Company’s competitors source their inventory in Canada, the Company’s price to the customers will have to increase if margins are to be maintained even as the competitors’ prices remain the same. The Company’s sales are also indirectly affected by fluctuations in commodity prices and exchange rates. In Canada, commodity price movements in the forestry, metals and petroleum sectors can have an impact on customers’ demands for equipment and customer service. In Chile, significant fluctuations in the price of copper and gold can have similar effects. In the U.K., lower prices for thermal coal may reduce equipment demand in that sector. In addition, the strength of the British pound and/or Canadian dollar relative to other currencies may result in lower activity levels in the used equipment market and increased competition from competitive imports. The Company borrows at both fixed and floating interest rates. The floating rate debt portion exposes the Company to increases in short-term interest rates. The Company could eliminate this risk by fixing all of its debt. However, this is not efficient in terms of the interest rate risk and return efficient frontier. The Company can incur lower interest rate costs while maintaining the same risk profile by funding a portion of its debt with floating interest rates. The Company uses interest rate swaps to manage its floating rate exposure. 2001 ANNUAL REPORT – FINNING INTERNATIONAL INC. 45 Finning Power Systems supplied turnkey operation for Viridor Waste Management’s Pilsworth power plant near Manchester, U.K. The three-kilowatt power generation package, enough to supply 3,000 homes, consists of three Cat 3516 generator sets that are powered by methane from adjacent garbage site. Geoff Craven, Northern Area Plant Supervisor, takes reading from engine. Management’s Report to the Shareholders The Consolidated Financial Statements of the Company have been prepared by management in accordance with Canadian generally accepted accounting principles and necessarily include some amounts that are based on management's best estimates and judgement of all information available up to January 30, 2002. The Company maintains an accounting system and related controls to provide management with reasonable assurance that transactions are executed and recorded in accordance with its authorizations, that assets are properly safeguarded and accounted for, and that financial records are reliable for preparation of financial statements. The Company's independent auditors, appointed by the shareholders, express an opinion as to whether management's financial statements present fairly the Company's financial position, operating results and cash flow in accordance with Canadian generally accepted accounting principles. The Audit Committee of the Board of Directors, consisting solely of outside directors, meets regularly during the year with financial officers of the Company and the external auditors to review internal accounting controls, risk management, audit results, quarterly financial results and accounting principles and practices. In addition, the Audit Committee reports its findings to the Board of Directors which reviews and approves the Consolidated Financial Statements contained in this Annual Report. The financial statements have, in management's opinion, been properly prepared within reasonable limits of materiality and within the framework of the accounting policies summarized in Note 1 of the Notes to Consolidated Financial Statements. Financial information elsewhere in this Annual Report is consistent with that in the financial statements. January 30, 2002 Vancouver, BC Canada R. T. Mahler Executive Vice President and Chief Financial Officer Auditor’s Report To the Shareholders of Finning International Inc.: We have audited the consolidated balance sheets of Finning International Inc. (a Canadian corporation) as at December 31, 2001 and 2000 and the consolidated statements of income and retained earnings and cash flow for the years then ended. These Consolidated Financial Statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these Consolidated Financial Statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the Consolidated Financial Statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the Consolidated Financial Statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall Consolidated Financial Statement presentation. In our opinion, these Consolidated Financial Statements present fairly, in all material respects, the financial position of the Company as at December 31, 2001 and 2000 and the results of its operations and cash flow for the years then ended in accordance with Canadian generally accepted accounting principles. January 30, 2002 Vancouver, BC Canada ARTHUR ANDERSEN LLP Chartered Accountants 2001 ANNUAL REPORT – FINNING INTERNATIONAL INC. 47 A s a t D e c e m b e r 3 1 ( $ i n t h o u s a n d s ) Consolidated Balance Sheets Assets Current assets 2001 2000 Accounts receivable and other $ 513,599 $ 375,208 Inventories On-hand equipment Parts and supplies Current portion of instalment notes receivable 418,672 237,557 67,350 395,420 203,579 66,476 Total current assets 1,237,178 1,040,683 Finance assets Instalment notes receivable Equipment leased to customers (Note 2) Total finance assets Rental equipment (Note 3) Land, buildings and equipment (Note 4) Investment (Note 5) Future income taxes (Note 14) Goodwill (Note 7) Liabilities Current liabilities Short-term debt (Note 8) Accounts payable and accruals Income tax payable Current portion of long-term debt (Note 8) Total current liabilities Long-term debt (Note 8) Future income taxes (Note 14) Total liabilities Non-controlling interests (Note 6) Shareholders’ equity Share capital (Note 10) Retained earnings Cumulative currency translation adjustments (Note 11) Total shareholders’ equity Approved by the Directors: 70,468 233,375 303,843 776,832 312,359 - 2,825 405,744 72,569 253,949 326,518 311,019 189,961 218,050 7,465 63,945 $ 3,038,781 $ 2,157,641 $ 372,360 $ 398,208 758,009 11,364 132,986 1,274,719 540,756 22,443 1,837,918 495,239 4,883 67,224 965,554 477,217 16,414 1,459,185 425,000 - 212,122 590,588 (26,847) 775,863 200,629 521,569 (23,742) 698,456 $ 3,038,781 $ 2,157,641 D.W.G. Whitehead, Director C.A. Pinette, Director 48 FINNING INTERNATIONAL INC. – 2001 ANNUAL REPORT The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. Consolidated Statements of Income and Retained Earnings Fo r t h e ye a r s e n d e d D e c e m b e r 3 1 ( $ i n t h o u s a n d s, ex c e p t p e r s h a r e a m o u n t s ) Revenue New mobile equipment New power & energy systems Used equipment Equipment rental Operating leases Customer support services Finance and other Total revenue Cost of sales Gross profit Selling, general and administrative expenses Other expenses/(income) (Note 12) Income before interest, income taxes, non-controlling 2001 2000 $ 896,466 $ 796,503 238,287 355,733 691,202 95,715 956,313 13,327 3,247,043 2,342,308 904,735 634,939 18,226 193,906 342,734 166,770 98,451 842,244 19,424 2,460,032 1,835,644 624,388 461,059 (3,789) interests and amortization of goodwill 251,570 167,118 Finance cost and interest on other indebtedness (Notes 8 and 9) 85,550 58,552 Income before provision for income taxes, non-controlling interests and amortization of goodwill Provision for income taxes (Note 14) Non-controlling interests (Note 6) Amortization of goodwill (Note 7) Net income available to shareholders Retained earnings, beginning of year Dividends on common shares Premium on common share repurchase (Note 10) 166,020 29,021 23,113 9,969 103,917 521,569 (15,155) (19,742) 108,566 33,320 - 1,855 73,391 502,028 (15,452) (38,398) Retained earnings, end of year $ 590,589 $ 521,569 Earnings per share (Note 16) Basic Diluted Basic before amortization of goodwill Diluted before amortization of goodwill $ $ $ $ 1.37 1.34 1.50 1.47 $ $ $ $ 0.95 0.94 0.97 0.96 Weighted average number of shares outstanding 75,854,866 77,436,109 The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 2001 ANNUAL REPORT – FINNING INTERNATIONAL INC. 49 Consolidated Statements of Cash Flow Fo r t h e ye a r s e n d e d D e c e m b e r 3 1 ( $ i n t h o u s a n d s ) Operating Activities Net income Add Depreciation Amortization of goodwill Future income taxes Other items Non-controlling interests distribution Changes in working capital items Accounts receivable and other Inventories – On-hand equipment Inventories – Parts & supplies Instalment notes receivable Accounts payable and accruals Income taxes Cash provided after changes in working capital items Rental equipment, net of disposals Equipment leased to customers, net of disposals Cash flow from operating activities Investing Activities Net cash invested in land, buildings and equipment Proceeds on sale of Canadian Materials Handling business Acquisitions Aggregate purchase price Assumed debt on acquisition of Hewden Less: Initial investment in Hewden Cash used for investing activities Financing Activities Repayment of long-term debt Issue of debenture Non-controlling interests Non-controlling interests distribution Issue of common shares on exercise of stock options Repurchase of common shares Dividends paid Currency translation adjustments Cash provided by/(used for) financing activities Decrease/(increase) in short-term debt Short-term debt at beginning of year Short-term debt at end of year Cash flows include the following elements Interest paid Income taxes paid 2001 2000 $ 103,917 $ 73,391 308,533 9,969 (2,943) (7,634) 23,113 434,955 15,785 (29,665) (29,116) 866 65,009 (12,211) 445,623 (259,385) (52,318) 133,920 (22,257) 54,502 (750,486) (110,493) 218,050 (610,684) (73,611) 200,000 425,000 (23,113) 15,459 (23,708) (15,155) (2,260) 502,612 25,848 398,208 180,676 1,855 1,774 892 - 258,588 (7,840) 4,502 27,678 (20,074) 78,939 15,987 357,780 (68,581) (48,584) 240,615 (11,893) - - - (218,050) (229,943) (42,746) - - - 1,472 (49,196) (15,452) 2,681 (103,241) (92,569) 305,639 $ 372,360 $ 398,208 $ $ 86,148 32,243 $ $ 59,610 14,461 50 FINNING INTERNATIONAL INC. – 2001 ANNUAL REPORT The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. D e c e m b e r 3 1 , 2 0 0 1 a n d 2 0 0 0 ( $ a n d £ i n t h o u s a n d s, ex c e p t t h e n u m b e r o f s h a r e s a n d p e r s h a r e a m o u n t s ) Notes to Consolidated Financial Statements 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES These Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in Canada that require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Actual amounts could differ from those estimates. The significant accounting policies used in these Consolidated Financial Statements are as follows: Principles of Consolidation The Consolidated Financial Statements include the accounts of Finning International Inc. ("Finning" or "Company") and its wholly owned subsidiaries. In addition, Finning consolidates the partnership that was formed to fund the acquisition of Hewden Stuart. Principal operating subsidiaries include Finning (UK) Ltd, Finning Chile S.A. and Hewden Stuart Plc. Currency Translation Transactions undertaken in foreign currencies are translated into Canadian dollars at approximate exchange rates prevailing at the time the transactions occurred. Account balances denominated in foreign currencies are translated into Canadian dollars as follows: Monetary assets and liabilities are translated at exchange rates in effect at the balance sheet dates and non-monetary items are translated at historical exchange rates. Exchange gains and losses are included in income except where the exchange gain or loss arises from the translation of monetary liabilities considered to be hedges, in which case the gain or loss is deferred and accounted for in conjunction with the hedged asset. Financial statements of self-sustaining foreign operations are translated into Canadian dollars as follows: Assets and liabilities are translated using the exchange rates in effect at the balance sheet dates. Revenue and expense items are translated at average exchange rates prevailing during the period that the transactions occurred. Unrealized translation gains and losses are deferred and included as a separate component of shareholders' equity. These cumulative currency translation adjustments are recognized in income when there is a reduction in the net investment in the self-sustaining foreign operation. The Company has hedged its investments in some of its foreign subsidiaries by borrowing funds in foreign currency. Exchange gains or losses arising from the translation of the hedge instruments are accounted for in the cumulative currency translation adjustments. Inventories Inventories are stated at the lower of cost and net realizable value. Cost is determined on a specific item basis for on-hand equipment. For approximately two-thirds of parts and supplies, cost is determined on a first-in, first-out basis. An average cost basis is used for the remainder. Instalment Notes Receivables Instalment notes receivables are recorded net of unearned finance charges. Equipment Leased to Customers Depreciation of equipment leased to customers is provided in equal monthly amounts over the terms of the individual leases after recognizing the estimated residual value of each unit at the end of each lease. 2001 ANNUAL REPORT – FINNING INTERNATIONAL INC. 51 N o t e s t o C o n s o l i d a t e d F i n a n c i a l S t a t e m e n t s Rental Equipment Rental equipment is recorded at cost, net of accumulated depreciation. Cost is determined on a specific item basis. Rental equipment is depreciated to its estimated residual value over its estimated useful life on a straight line or on an actual usage basis. Land, Buildings and Equipment Land, buildings and equipment are recorded at cost, net of accumulated depreciation. Buildings and equipment are depreciated over their estimated useful lives on either a declining balance or straight line basis using the following annual rates: Buildings General equipment Automotive equipment Revenue Recognition 2%- 5% 20%-30% 25%-30% Revenue from sales of products and services is recognized at the time of shipment of products to, and performance of services for, customers. Equipment lease and rental revenue is recognized over the term of the lease or rental. Finance income is recognized as earned. Stock-Based Compensation The Company has several stock option plans and other stock-based compensation plans for directors and certain eligible employees. The Company follows the intrinsic value method of accounting for stock options. Since the exercise price is set at an amount equal to the weighted average trading price on the day prior to the grant of the stock options, no compensation expense is recognized on the day of the grant. When options are exercised, the proceeds received by the Company are credited to common shares in the consolidated balance sheet. Changes in the Company’s obligations under other stock-based compensation plans, which arise from fluctuations in the market price of the Company’s common shares underlying these compensation plans, are recorded in selling, general and administrative expense in the consolidated statement of income with a corresponding accrual in the consolidated balance sheet. Employee Benefits The Company and its subsidiaries have a number of defined benefit and defined contribution plans providing pension and other benefits to most of its employees in the Canadian, the UK and the Hewden operations. The Company accrues its obligations under employee benefit plans and the related costs, net of plan assets and has adopted the following policies: Defined benefit plans: For the purpose of calculating the expected return on plan assets, those assets are valued at fair value. The cost of pensions and other retirement benefits is determined by independent actuaries using the projected benefit method prorated on service and management’s best estimates of expected plan investment performance, salary escalation, retirement ages of employees and expected health care costs. Adjustments arising from plan amendments, changes in assumptions and the excess of net actuarial gains or losses over 10% of the greater of the benefit obligation and the fair value of the plan assets are amortized on a straight line basis over the expected average remaining service life of the employees covered by the plans. The Company adopted the recommendations of section 3461 of the CICA handbook in 2000 on a prospective basis. The transitional balance as a result of this change in the accounting policy is being amortized over the expected average remaining service life of the employees covered by the plans. Defined contribution plans: The cost of pension benefits includes the current service cost based on a fixed percentage of member earnings for the year. 52 FINNING INTERNATIONAL INC. – 2001 ANNUAL REPORT N o t e s t o C o n s o l i d a t e d F i n a n c i a l S t a t e m e n t s Goodwill Goodwill acquired on the acquisition of subsidiaries is amortized to income on a straight line basis over 40 years. Goodwill is evaluated annually, and is written down when the undiscounted future earnings of the related business are less than its carrying amount. In July 2001, the CICA issued new accounting standards with CICA Handbook Section 3062, Goodwill and Other Intangible Assets. Under the new standards, goodwill will no longer be subject to amortization over its estimated useful life. Instead, goodwill will be subject to, at a minimum, an annual assessment for impairment by applying a fair-value based test at the reporting unit level. An impairment loss would be recognized to the extent the carrying amount of goodwill exceeds the implied fair value. The Company will adopt the provisions of this new standard beginning on January 1, 2002. The adoption will have no cash impact on the Company’s financial statements. Income Taxes The Company uses the liability method of accounting for income taxes. Under this method, temporary differences arising from the difference between the tax basis of an asset and a liability and its carrying amount on the balance sheet are used to calculate future income tax assets or liabilities. Future income tax assets or liabilities are calculated using tax rates anticipated to be in effect in the periods that the temporary differences are expected to reverse. The effect of a change in income tax rates on future income tax assets and liabilities is recognized in income in the period that the change occurs. Statement of Cash Flow Short-term debt forms an integral part of the Company’s cash management; accordingly, cash flows are represented by changes in short-term debt. Prior Year Comparatives Certain prior year amounts have been reclassified to conform to the 2001 presentation. 2. EQUIPMENT LEASED TO CUSTOMERS Cost Less accumulated depreciation 2001 2000 $ $ 385,198 (151,823) 233,375 $ $ 393,604 (139,655) 253,949 Depreciation of equipment leased to customers for the year ended December 31, 2001 was $67,643 (2000: $66,709). 3. RENTAL EQUIPMENT Cost Less accumulated depreciation 2001 2000 $ 1,486,025 (709,193) $ 776,832 $ $ 418,304 (107,285) 311,019 Depreciation of rental equipment for the year ended December 31, 2001 was $213,798 (2000: $96,168). 2001 ANNUAL REPORT – FINNING INTERNATIONAL INC. 53 N o t e s t o C o n s o l i d a t e d F i n a n c i a l S t a t e m e n t s 4. LAND, BUILDINGS AND EQUIPMENT 2001 2000 Land $ 77,811 $ 47,017 Buildings and equipment Less accumulated depreciation Total land, buildings and equipment 450,732 (216,184) $ $ 234,548 312,359 302,215 (159,271) $ $ 142,944 189,961 Depreciation of buildings and equipment for the year ended December 31, 2001 was $27,092 (2000: $17,799). Subsequent to December 31, 2001, the Company arranged to sell its interest in various properties across Alberta and British Columbia for $78,770 and lease it back for a 20 year term. The estimated gain on the sale is $14,643, which will be deferred and amortized over the lease term. The Company’s obligation under the lease is estimated as follows: 2002 to 2006 $ 8,064 per annum 2007 and thereafter $146,810 5. ACQUISITION OF HEWDEN STUART At December 31, 2000 Finning had an investment in Hewden of $218,050 representing 29.4% of the issued ordinary share capital. The Consolidated Financial Statements give effect to the acquisition of the remaining 70.6% of Hewden which was completed on January 26, 2001. Hewden is in the equipment rental and related services business, operating throughout Scotland, England, Wales and Northern Ireland. The results of Hewden’s operations have been included in the Company’s Consolidated Financial Statements from January 26, 2001. The purchase of Hewden is accounted for under the purchase method of accounting. The aggregate purchase price of $729,111 (including acquisition costs of $19,700 ) was paid in cash. Goodwill arising on the acquisition is amortized on a straight-line basis over its estimated useful life of 40 years. The net assets acquired at their fair values comprised the following: Net assets acquired Total assets Total liabilities Net assets acquired Goodwill Total purchase price $ 704,995 307,968 397,027 332,084 $ 729,111 54 FINNING INTERNATIONAL INC. – 2001 ANNUAL REPORT N o t e s t o C o n s o l i d a t e d F i n a n c i a l S t a t e m e n t s 6. NON CONTROLLING INTERESTS In the first quarter of 2001, Finning formed a partnership for the purpose of raising equity capital to fund the acquisition of Hewden Stuart. Finning is the general partner in this partnership. Third party investors injected $425,000 of capital into the partnership for a non-controlling partnership interest. The partnership interests are entitled to a quarterly distribution on their capital account and distributions to the non-controlling interests totaled $23,113 in 2001. The partnership has a seventy-five year life, but could be liquidated in certain circumstances. No return of capital is scheduled during the life of the partnership. The partnership interests and the partnership distributions are accounted for as non-controlling interests on the consolidated balance sheet and on the consolidated statement of income. The financial position, results of operations and cash flows of the partnership is consolidated with Finning from its date of inception. 7. GOODWILL 2001 2000 Purchased goodwill, beginning of year $ 77,777 $ 88,619 Goodwill on acquisitions during the year 339,069 4,195 Reduction in goodwill in recognition of future income tax asset Reduction in goodwill on divestitures during the year Foreign exchange translation adjustment Purchased goodwill, end of year Accumulated amortization, beginning of year Amortization for the year Reduction in accumulated amortization of goodwill Accumulated amortization, end of year (10,878) (563) 24,078 429,483 (13,832) (9,969) 62 (23,739) (15,257) - 220 77,777 (14,260) (1,855) 2,283 (13,832) Net purchased goodwill $ 405,744 $ 63,945 Acquisitions are accounted for under the purchase method. The excess of the cost of the acquisitions over the amounts assigned to the identifiable assets acquired less the liabilities assumed is assigned to goodwill. During the year the Company acquired Hewden Stuart and several other smaller operations in Canada, the U.K. and Chile for $760,603 (Hewden $729,111; others $31,492). Goodwill on these acquisitions comprised of $332,084 for Hewden Stuart and $6,985 for other acquisitions. During 2000, the Company acquired two marine products distribution businesses operating in the U.K. and Ireland, namely MaK parts and service operations and Sabre Perkins operations for $6,168 with resulting goodwill of $4,195. During the year, the Company adjusted its goodwill by $10,878 to recognize a previously unrecognized future income tax asset with respect to tax loss carry-forwards resulting from the purchase of Leverton in 1997. As a result of the Company changing its method of accounting for income taxes in 2000, the Company adjusted its goodwill in 2000 to recognize a previously unrecognized future income tax asset with respect to tax loss carry-forwards for $12,974 that was acquired from the purchase of Finning Chile in 1993. 2001 ANNUAL REPORT – FINNING INTERNATIONAL INC. 55 N o t e s t o C o n s o l i d a t e d F i n a n c i a l S t a t e m e n t s 8. SHORT-TERM AND LONG-TERM DEBT Short-term debt: Bank indebtedness, commercial paper and other loans (a) $ 372,360 $ 398,208 2001 2000 Long-term debt: Debentures (b) 8.35% due March 22, 2004 7.75% due November 1, 2004 6.60% due December 8, 2006 7.40% due June 19, 2008 75,000 150,000 75,000 200,000 75,000 150,000 75,000 - Bank term facilities (c) 72,032 134,291 Bank term facilities denominated in pound sterling (d) 92,640 89,728 Other unsecured loans denominated in U.S. dollars and Chilean pesos, maturing between 2002 and 2004 Less current portion of long-term debt 9,070 673,742 132,986 20,422 544,441 67,224 Total long-term debt $ 540,756 $ 477,217 (a) Bank indebtedness, commercial paper and other loans The Company has available $1,147,400 in unsecured short-term credit facilities. Borrowings under the credit facilities are at floating rates of interest at a margin over Canadian dollar bankers' acceptance yields, and U.S. and U.K. LIBOR rates. In addition, the Company has a Canadian commercial paper program for $300,000 which can be issued against the available credit amount. Other loans include supplier merchandising programs. Included in short-term debt are foreign currency amounts of US $6,000 (2000: US $26,599) and £57,429 (2000: £22,256). (b) Debentures The Company's debentures are unsecured, and interest is payable semi-annually with principal due on maturity. (c) Bank term facilities The Company has available $75,000 in an unsecured term facility. Borrowing under the term facility is at a floating rate of interest which averaged 5.18% in 2001 (2000: 6.24%). This facility expires on December 31, 2002. (d) Bank term facilities denominated in pound sterling The pound sterling term facilities are unsecured and are comprised of a £15,000 floating rate loan at an average interest rate of 5.75% (2000: 6.63%), maturing May 25, 2003; and a £25,000 fixed rate loan at 7.675%, maturing May 8, 2002. These loans have been used to hedge the Company's investment in Finning (UK) Ltd. Covenants The Company is required to meet various covenants with respect to its debt facilities. As at December 31, 2001, the Company is in compliance with these covenants. 56 FINNING INTERNATIONAL INC. – 2001 ANNUAL REPORT N o t e s t o C o n s o l i d a t e d F i n a n c i a l S t a t e m e n t s Long-Term Debt Repayments Principal repayments on long-term debt in each of the next five years and thereafter are as follows: 2002 2003 2004 2005 2006 Thereafter $ 132,986 37,748 228,008 - 75,000 200,000 $ 673,742 Finance Cost and Interest Finance cost and interest on other indebtedness as shown on the consolidated statement of income is comprised of the following elements: Interest on debt securities: Debentures Bank indebtedness, commercial paper and other loans Bank term facilities Interest on swap contracts Amortization of deferred financing costs and other expenses 2001 2000 $ 30,744 $ 21,708 33,432 13,175 77,351 4,107 4,092 25,127 11,508 58,343 (1,022) 1,231 $ 85,550 $ 58,552 Interest expense includes interest on debt incurred for a term greater than one year of $41,468 (2000: $36,935). 9. FINANCIAL INSTRUMENTS The Company uses derivative financial instruments as part of an overall risk management strategy to manage the underlying financial and economic risks of the Company and to achieve lower cost financing. The Company uses derivative financial instruments to manage the mix of fixed and floating interest rate exposure, to manage foreign exchange exposure, and to diversify sources of financing. Interest Rate Risk Management The Company has a policy of arranging its financing so that the fixed rate financing offered to its customers on its lease and notes portfolio is matched by fixed rate borrowings. As well, the portfolio is matched on currency and term. To meet this objective, the Company enters into swap agreements, which fix the effective interest rate and currency of the borrowing. Swaps are contractual agreements between two counterparties to exchange a series of cash flows. For interest rate swaps, counterparties generally exchange fixed and floating interest payments based on a notional value in a single currency. For cross- currency interest rate swaps, principal amounts and fixed and floating interest payments are exchanged in different currencies. 2001 ANNUAL REPORT – FINNING INTERNATIONAL INC. 57 N o t e s t o C o n s o l i d a t e d F i n a n c i a l S t a t e m e n t s Additionally, the Company uses interest rate swaps to manage its fixed and floating interest rate exposure. The following interest rate contracts were in place at December 31, 2001 and 2000. Interest Rate Swaps 2001 Fixed/Floating Swaps (a) Canadian $ receive fixed (b) Canadian $ pay fixed Cross-Currency Interest Rate Swap (2) Notional Value Interest Rates (1) Fixed Floating Term To Maturity Fair Value Fav/(Unfav) $ 225,000 $ 74,389 7.37% 5.05% 5.24% 2 to 5 years 2.09% 1 to 6 years $ (1,326) $ (1,561) (a) Buy Canadian $ (against £ 228,000) $ 498,849 4.59% 8.33% n/a $ (39,118) (1) For the fixed/floating Canadian $ swaps, the fixed interest rates represent the weighted average interest rates which the Company is contractually committed to pay/receive until the swap matures. The floating interest rates represent the average effective interest rates at the balance sheet date and vary over time. (2) The interest rate on the cross currency interest rate swap contract is reset in 4 years. The swap has an open maturity date and hedges the Company’s investment in Hewden Stuart. 2000 At December 31, 2000, interest rate swap agreements having a notional principal of $80,043 at weighted average fixed pay rate of 5.69% were outstanding. These agreements expire on various dates between 2001 and 2005. Additionally, the Company had an interest rate swap agreement outstanding at a notional principal of $150,000. The Company received a fixed rate of 7.75% and paid a floating bankers’ acceptances based rate determined quarterly. This rate was 7.00% at December 31, 2000. The fair value adjustment of these interest rate swap agreements as at December 31, 2000 was $4,597 in favour of the Company, taking into account interest rates in effect at the time. Foreign Exchange Risk Management The Company manages foreign exchange risk by matching assets with related liabilities, through adjustments in the pricing of its product sales, and through the use of derivative instruments such as forward exchange contracts. Forward exchange contracts are contractual agreements to either buy or sell a specified currency at a specific price and date in the future. Such contracts are used to hedge foreign currency denominated investments and foreign currency denominated inventory purchases. The following foreign currency contracts were in place at December 31, 2001 and 2000. Forward Foreign Exchange Contracts 2001 Notional Weighted Average Term to Fair Value Value Exchange Rate Maturity Fav/(Unfav) (a) Buy US $ (against Canadian $) (b) Buy EURO (against £) (c) Sell £ (against Canadian $) (1) US$ EUR £ 71,239 19,517 95,560 1.5787 1.6264 2.1491 1-2 years 1 year n/a 991 (107) (4,276) (1) The forward foreign exchange contract hedges the Company’s investment in Hewden Stuart. 2000 At December 31, 2000, the Company had forward exchange contracts to sell £ 95,560 and option contracts to purchase £ 227,000 to hedge exchange exposure on its investment in Hewden Stuart. The fair value adjustment of these foreign exchange contracts as at December 31, 2000 was $3,797 in favour of the Company. 58 FINNING INTERNATIONAL INC. – 2001 ANNUAL REPORT N o t e s t o C o n s o l i d a t e d F i n a n c i a l S t a t e m e n t s Fair Values The fair value of financial instruments is determined by reference to quoted market prices for actual or similar instruments, where available, or by estimates derived using present value or other valuation techniques. The estimated fair values of interest rate swaps and foreign exchange contracts are reported above. The fair value of accounts receivable, notes receivable, short-term debt, accounts payable and accruals approximates their recorded values due to the short-term maturities of these instruments. The fair value of the Company’s long term debt is as follows: 2001 2000 Book Value Fair Value Book Value Fair Value $ 673,742 $ 692,014 $ 544,441 $ 545,903 Long-Term Debt Credit Risk The Company operates internationally as a full service provider (selling, servicing, renting and financing) of heavy equipment and related products. The Company is not dependent on any single customer or group of customers. There is no concentration of credit risk related to the Company's position in trade accounts or notes receivables. Credit risk is minimized because of the diversification of the Company's operations, as well as its large customer base and its geographical dispersion. The credit risk of the foreign currency contracts and interest rate swap agreements arises from the possibility that the counterparties to the agreements or contracts may default on their obligations; however, the Company does not anticipate such an event to occur. In order to minimize this risk, the Company enters into such agreements only with highly rated financial institutions. 10. SHARE CAPITAL AUTHORIZED Unlimited Preferred shares without par of which 4,400,000 are designated as Cumulative Redeemable Preferred shares Unlimited Common shares ISSUED AND OUTSTANDING Common Shares Balance, beginning of year Exercise of stock options Repurchase of common shares 2001 2000 Shares Amount Shares Amount 75,790,463 1,483,100 (1,457,300) 75,816,263 $ 200,629 79,736,877 $ 209,955 15,459 (3,966) 147,406 (4,093,820) 1,472 (10,798) $ 212,122 75,790,463 $ 200,629 2001 ANNUAL REPORT – FINNING INTERNATIONAL INC. 59 N o t e s t o C o n s o l i d a t e d F i n a n c i a l S t a t e m e n t s A shareholders' rights plan is in place which is intended to provide all holders of common shares with the opportunity to receive full and fair value for all of their shares in the event a third party attempts to acquire a significant interest in the Company. The Company's dealership agreements with subsidiaries of Caterpillar Inc. are fundamental to its business and any change in control must be approved by Caterpillar. The plan provides that one share purchase right has been issued for each common share and will trade with the common shares until such time as any person or group, other than a permitted bidder, bids to acquire or acquires 20% or more of the Company's common shares. The rights may also be triggered by a third party proposal for merger, amalgamation or a similar transaction. The rights plan will expire at the termination of the Annual Meeting of shareholders to be held in 2002. The plan will not be triggered if a bid meets certain criteria (a permitted bidder). These criteria include that: • the offer is made for all outstanding voting shares of the Company; • more than 50% of the voting shares have been tendered by independent shareholders pursuant to the Takeover Bid (voting shares tendered may be withdrawn until taken up and paid for); and • the Takeover Bid expires not less than 60 days after the date of the bid circular. Repurchase of Common Shares The Company repurchased 1,457,300 common shares during 2001 (4,093,820 shares in 2000) as part of normal course issuer bids. These shares were repurchased at an average price of $16.27 ($12.02 in 2000) for an aggregate cost of $23,708 ($49,196 in 2000) which has been allocated to reduce share capital by $3,966 ($10,798 in 2000) and retained earnings by $19,742 ($38,398 in 2000). Stock Options The Company has several stock option plans for employees and directors, the details of which are as follows: 2001 2000 Weighted average exercise price $ 12.21 $ 13.37 $ 10.38 $ 11.09 $ 12.87 Options 5,932,918 1,085,917 (147,406) (252,988) 6,618,441 Weighted average exercise price $ 12.07 $ 12.45 $ $ 9.98 11.20 $ 12.21 Options 6,618,441 1,073,500 (1,483,100) (54,399) 6,154,442 Options outstanding, beginning of year Issued Exercised Cancelled Options outstanding, end of year Exercisable at year end 4,125,978 $ 13.05 4,494,635 $ 12.25 60 FINNING INTERNATIONAL INC. – 2001 ANNUAL REPORT N o t e s t o C o n s o l i d a t e d F i n a n c i a l S t a t e m e n t s The following table summarizes information about the stock options outstanding at December 31, 2001: Options outstanding Options exercisable Weighted average Weighted average remaining Weighted remaining Weighted Number outstanding 126,062 2,170,680 2,012,084 1,845,616 6,154,442 contractual life (in) years) 1.0 4.5 8.5 4.9 5.9 average exercise price $ 6.62 $ 10.31 $ 12.94 $ 16.22 $ 12.87 Number outstanding 126,062 1,841,434 312,866 1,845,616 4,125,978 contractual life (in) years) 1.0 4.0 8.0 4.9 4.6 average exercise price $ 6.62 $ 10.42 $ 12.45 $ 16.22 $ 13.05 Range of exercise prices $ 6 - $ 9 $ 9 - $12 $12 - $15 $15 - $17 Other Stock-Based Compensation Plans The Company has other stock-based compensation plans, deferred share unit plans, that use notional units that are valued based on the Company’s common share price on the Toronto Stock Exchange. These units accumulate dividend equivalents in the form of additional units based on the dividends paid on the Company’s common shares. Changes in the value of the units as a result of fluctuations in the Company’s share price and new issues for the year ended December 31, 2001 totaled $2,125 (2000: $220), which was recognized in selling, general and administrative expense in the consolidated statement of income. Details of these plans are as follows: Deferred Share Unit Plan (DSU) - Under the DSU Plan, senior executives of the Company may be awarded deferred share units as approved by the Board of Directors. Units are redeemable only following termination of employment and must be redeemed by December 31st of the year following the year in which the termination occurred. As at December 31, 2001 there were 65,930 units outstanding. Directors’ Deferred Share Unit Plan (DDSU) - Under the DDSU Plan, non-employee Directors of the Company may elect to allocate all or a portion of their compensation, which includes fees and an annual award of common share options and deferred share units for that fiscal year, as deferred share units. Units are redeemable only following termination of service on the Board of Directors and must be redeemed by December 31st of the year following the year in which the termination occurred. As at December 31, 2001 there were 51,320 units outstanding. 2001 ANNUAL REPORT – FINNING INTERNATIONAL INC. 61 N o t e s t o C o n s o l i d a t e d F i n a n c i a l S t a t e m e n t s 11. CUMULATIVE CURRENCY TRANSLATION ADJUSTMENTS 2001 2000 Balance, beginning of year Gain realized during the year Translation adjustments for the year $ (23,742) $ (15,388) (746) (2,359) - (8,354) Balance, end of year $ (26,847) $ (23,742) Translation gains or losses on the consolidation of foreign subsidiaries financial statements are accumulated in this account. Translation adjustments arise as a result of fluctuations in foreign currency exchange rates. At December 31, 2001, 2000, and 1999, the Canadian dollar exchange rates against the British pound sterling were 2.3160, 2.2432 and 2.3314 respectively, and the Chilean peso exchange rates against the Canadian dollar were 415, 382 and 367 respectively. The cumulative currency translation adjustment for 2001 resulted from the weakening of the Chilean peso and the strengthening of the pound sterling against the Canadian dollar. 12. OTHER EXPENSES/(INCOME) Other expenses/(income) include non-operating and/or occasional items shown separately to facilitate comparison with the prior year. The following items are included in Other expenses/(income): 2001 2000 Restructuring of branch network in the U.K. and $ 24,484 $ - Canada and integration of Universal Machinery Services operations into the Canadian, Chilean and UK operations. Gain on disposal of Vancouver headquarters property to institutions of higher learning (29,503) Donation expense for property donated to institutions of high learning in Vancouver, Canada 33,787 - - Gain on disposal of surplus real estate in Canada and the U.K. (8,725) (3,789) Gain on sale of the Canadian Materials Handling business Loss on sale of non-core attachment services businesses in Canada Non-operating foreign exchange gain on reduction in the net investment in a self-sustaining foreign operation (3,571) 2,500 (746) - - - $ 18,226 $ (3,789) 62 FINNING INTERNATIONAL INC. – 2001 ANNUAL REPORT N o t e s t o C o n s o l i d a t e d F i n a n c i a l S t a t e m e n t s 13. EMPLOYEE BENEFITS 2001 2000 Canada UK Hewden Total Total The expense for the Company’s benefit plans, primarily for pension benefits, is as follows: Defined contribution plans Current service cost Net benefit plan expense Defined benefit plans $ $ 4,510 4,510 $ $ - - Current service cost, net of employee contributions $ 4,170 $ 10,267 Interest cost Expected return on plan assets Amortization of past service costs Amortization of net actuarial (gain)/loss Amortization of transition obligation/(asset) Net benefit plan expense Defined contribution plan expense Defined benefit plan expense Total 13,890 (16,654) 165 (368) 1,144 2,348 4,510 2,348 6,858 $ $ $ 15,540 (19,183) - - (1,295) 5,329 - 5,329 5,329 $ $ $ $ $ $ $ $ $ 164 164 $ $ 4,674 4,674 $ $ 3,896 3,896 3,960 7,256 (9,118) - (676) 1,577 2,999 164 2,999 3,163 $ 18,398 $ 14,589 36,686 (44,955) 165 (1,044) 1,426 $ 10,676 $ 4,674 10,676 $ $ 28,253 (34,912) - - (163) 7,767 3,896 7,767 $ 15,350 $ 11,663 Information about the Company’s defined benefit plans is as follows: Accrued benefit obligation Balance at the beginning of year (1) $ 191,614 $ 287,076 $ 131,414 $ 610,104 $ 463,727 Canada UK Hewden Total Total Current service cost Interest cost Benefits paid Actuarial gains Foreign exchange rate changes Plan amendments Balance at the end of year Plan Assets 5,965 13,890 (11,788) 4,095 - 2,119 10,267 15,540 (4,348) (51,198) 8,236 1,839 3,960 7,256 (4,354) (11,182) - 1,437 20,192 36,686 (20,490) (58,285) 8,236 5,395 18,874 28,253 (17,723) (3,810) (10,631) - $ 205,895 $ 267,412 $ 128,531 $ 601,838 $ 478,690 Fair value at the beginning of year (1) $ 196,527 $ 284,591 $ 132,709 $ 613,827 $ 485,137 Actual return on plan assets Employer contributions Employees’ contributions Benefits paid Foreign exchange rate changes Fair value at the end of year 751 - 1,824 (11,788) - (49,201) (29,392) (77,842) 4,515 1,839 (4,348) 7,405 2,756 1,436 (4,354) - 7,271 5,099 (20,490) 7,405 13,927 6,786 4,285 (17,723) (11,294) $ 187,314 $ 244,801 $ 103,155 $ 535,270 $ 481,118 (1) The defined benefit plans of Hewden were assumed by the Company on January 26, 2001. 2001 ANNUAL REPORT – FINNING INTERNATIONAL INC. 63 N o t e s t o C o n s o l i d a t e d F i n a n c i a l S t a t e m e n t s 2001 2000 Canada UK Hewden Total Total Funded status – plan surplus/(deficit) $ (18,581) $ (22,611) $ (25,376) $ (66,568) $ 2,428 Unamortized net actuarial loss Unamortized past service costs Adjustment Unamortized transitional obligation/(asset) Accrued benefit asset/(liability) net of $ valuation allowance 15,712 1,954 - 5,116 4,201 5,146 60,691 17,118 39,833 - 1,397 (16,140) - - 17,351 $ 2,479 $ (2,879) $ 1,954 1,397 6,327 3,801 - - (10,677) $ 8,869 Included in the above accrued benefit obligation and fair value of plan assets at the year-end are the following amounts in respect of plans that are not fully funded: Accrued benefit obligation Fair value of plan assets Funded status – plan deficit $ 25,077 $ 267,412 $ 122,669 $ 415,158 $ 21,283 6,294 244,801 96,542 347,637 8,930 $ 18,783 $ 22,611 $ 26,127 $ 67,521 $ 12,353 The significant actuarial assumptions adopted in measuring the Company’s accrued benefit obligations are as follows: Discount Rate Expected long-term rate of return on plan assets Rate of compensation increase Estimated Remaining Service Life (Years) 7.0% 8.5% 3.4% 2-13.3 5.5% 6.8% 4.5% 14 6.0% 7.5% 3.8% 13 Plan assets include common shares of the Company having a fair value of $920 at December 31, 2001 (2000: $906). 14. INCOME TAXES Provision for Income Taxes Current income tax expense Future income tax expense/(recovery) 2001 2000 $ 40,763 (11,742) $ 29,021 $ 30,886 2,434 $ 33,320 64 FINNING INTERNATIONAL INC. – 2001 ANNUAL REPORT N o t e s t o C o n s o l i d a t e d F i n a n c i a l S t a t e m e n t s Reconciliation of the Company’s effective income tax rate from statutory Canadian tax rates for the years ended December 31, 2001 and 2000 is as follows: 2001 2000 Combined federal and provincial tax rates 41.91% 43.79% Provision for income taxes based on the combined federal and provincial rates $ 55,715 $ 46,729 Increase/(decrease) in provision resulting from: Lower effective rates on the losses/(earnings) of foreign subsidiaries (23,503) (15,823) Amortization of goodwill and increase in assigned asset value Large corporation tax Income not subject to tax Other items 763 2,101 (8,598) 2,543 431 1,651 (694) 1,026 Provision for income taxes $ 29,021 $ 33,320 Future Income Tax Asset and Liability Temporary differences and tax loss carry-forwards that give rise to future income tax assets and liabilities as at December 31, 2001 and 2000 are described below. Future income tax assets: Tax loss carry-forwards and other $ 2,825 $ 7,465 2001 2000 Future income tax liabilities: Capital, rental and leased assets, inventories and reserves Pensions Other $ (19,184) $ (8,009) (2,505) (754) (3,349) (5,056) $ (22,443) $ (16,414) 15. OPERATING LEASES Payments due under various operating lease contracts are as follows: 2002 2003 2004 2005 2006 2007 & thereafter $ 55,549 45,957 33,804 27,601 17,636 65,460 Total $ 246,007 2001 ANNUAL REPORT – FINNING INTERNATIONAL INC. 65 N o t e s t o C o n s o l i d a t e d F i n a n c i a l S t a t e m e n t s 16. EARNINGS PER SHARE Basic earnings per share is calculated by dividing net income available to the shareholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share is calculated to reflect the dilutive effect of exercising outstanding stock options by application of the treasury stock method. Income Shares (Numerator) (Denominator) Per Share Amount 2001 Basic earnings per share: Income available to common shareholders $ 103,917 75,854,866 $ 1.37 Effect of dilutive securities: Stock options Diluted earnings per share: Income available to common shareholders - 1,507,044 - and assumed conversions $ 103,917 77,361,910 $ 1.34 2000 Basic earnings per share: Income available to common shareholders $ 73,391 77,436,109 $ 0.95 Effect of dilutive securities: Stock options Diluted earnings per share: Income available to common shareholders - 704,950 - and assumed conversions $ 73,391 78,141,059 $ 0.94 17. ECONOMIC RELATIONSHIPS The Company distributes and services heavy equipment and related products. The Company has dealership agreements with numerous equipment manufacturers, of which the most significant are with subsidiaries of Caterpillar Inc. Distribution and servicing of Caterpillar products account for the major portion of the Company's operations. Finning has a strong relationship with Caterpillar that has been ongoing since 1933. 66 FINNING INTERNATIONAL INC. – 2001 ANNUAL REPORT N o t e s t o C o n s o l i d a t e d F i n a n c i a l S t a t e m e n t s 18. SEGMENTED INFORMATION The Company and its subsidiaries have operated primarily in one industry during the year, that being the selling, servicing, renting and financing of heavy equipment and related products. Operating units are as follows: • Canadian operations: British Columbia, Alberta, most of the Northwest Territories and the Yukon. • U.K. operations: England, Scotland, Wales, Falkland Islands and the Channel Islands. • Chilean operations: throughout the country. • Hewden operations: Equipment rental in the U.K. • Other includes corporate head office operations. Universal Machinery Services operations were also included for 2000 and part of 2001. The reportable operating segments are: 2001 Canada UK Chile Hewden Other Consolidated Revenue from external sources $ 1,398,623 $ 804,084 $ 448,005 $ 587,482 $ 8,849 $ 3,247,043 Operating costs Depreciation Amortization of goodwill Other expenses/(income) 1,114,242 151,438 1,082 748,848 22,113 1,035 399,377 9,950 - 380,677 125,032 7,852 25,570 2,668,714 - - 18,226 308,533 9,969 18,226 Earnings before interest and tax $ 131,861 $ 32,088 $ 38,678 $ 73,921 $ (34,947) $ 241,601 Finance cost and interest on other indebtedness Non-controlling interests Provision for income taxes Net income 85,550 23,113 29,021 $ 103,917 Identifiable assets Capital expenditures $ 1,301,166 $ 420,135 $ 237,761 $ 1,079,719 $ 19,514 $ 6,443 $ 5,071 $ 20,152 $ $ - - $ 3,038,781 $ 51,180 2000 Revenue from external sources $ 1,214,516 $ 682,162 $ 474,145 $ Operating costs Depreciation Amortization of goodwill Other expenses/(income) 947,015 147,300 1,012 629,309 24,389 843 435,877 8,987 - Earnings before interest and tax $ 119,189 $ 27,621 $ 29,281 $ Finance cost and interest on other indebtedness Provision for income taxes Net income Identifiable assets Capital expenditures $ 1,195,607 $ 433,161 $ 226,422 $ 7,851 $ 3,862 $ 3,324 $ $ - - - - - - - $ 89,209 $ 2,460,032 103,826 2,116,027 - - (3,789) 180,676 1,855 (3,789) $ (10,828) $ 165,263 58,552 33,320 73,391 $ $ 302,451 $ 2,157,641 $ - $ 15,037 2001 ANNUAL REPORT – FINNING INTERNATIONAL INC. 67 Ten-Year Financial Summary Ye a r s e n d e d D e c e m b e r 3 1 ( $ i n t h o u s a n d s. ex c e p t p e r s h a r e d a t a ) Assets Revenue Canadian operations UK operations Chilean operations Hewden operations International operations Total consolidated Earnings before interest and taxes As a percent of revenue Net income As a percent of revenue Earnings Per Common Share Basic Diluted (2) Dividends Total common share Per common share Cash flow after working capital changes Cash flow per share Gross capital expenditures Ratios Asset turnover ratio Debt to equity (3) Liabilities to equity (3) Operating debt to equity (excluding finance and rental activities (1) (3) Book value per common share Return on average shareholders’ equity Common Share Price High Low Common shares outstanding (thousands) Revenue per employee Net income per employee Number of Employees Canada UK Chile Hewden International Total 2001 2000 1999 1998 $1,398,623 $ 804,084 $ 448,005 $ 587,482 $ 8,849 $3,247,043 $ 241,601 7.4% $ 103,917 3.2% $ $ $ $ 1.37 1.34 15,155 0.20 $ 445,623 $ $ 5.88 51,180 1.25 0.87:1 1.53:1 0.21:1 $ 10.23 14.1% $ $ 20.35 12.10 75,816 $ 331,230 $ 10,601 2,629 1,553 1,516 4,066 39 9,803 1,214,516 1,032,922 1,136,917 682,162 474,145 - 89,209 2,460,032 165,263 6.7% 73,391 3.0% 0.95 0.94 15,452 0.20 357,780 4.72 15,284 1.18 1.04:1 1.75:1 0.20:1 9.02 10.5% 13.85 9.85 75,790 477,120 14,234 2,326 1,404 1,390 - 36 5,156 712,941 377,777 - 106,221 2,229,861 148,912 6.7% 59,600 2.7% 0.75 0.74 15,919 0.20 438,232 5.50 20,864 1.05 1.29:1 1.90:1 0.47:1 8.74 8.7% 15.40 9.00 79,737 450,113 12,031 2,271 1,364 1,259 - 60 4,954 793,020 503,505 - 151,979 2,585,421 82,729 3.2% 3,185 0.1% 0.04 0.04 15,868 0.20 253,891 3.20 44,176 1.13 1.67:1 2.29:1 0.97:1 8.52 0.5% 18.50 10.25 79,426 492,367 607 2,494 1,348 1,354 - 55 5,251 Financial data has been restated to incorporate common share subdivision occurring during the ten-year period. 1. Assumes a debt to equity ratio of 7:1 in the finance operations and 5:1 in the rental operation. 68 FINNING INTERNATIONAL INC. – 2001 ANNUAL REPORT Te n - Ye a r F i n a n c i a l S u m m a r y 1997 1996 1995 1994 1993 1992 1,146,406 565,376 514,068 - 101,214 2,327,064 216,625 9.3% 103,695 4.5% 1.32 1.27 15,761 0.20 200,397 2.53 47,148 0.99 1.66:1 2.37:1 0.90:1 8.69 16.2% 20.50 14.43 79,091 423,565 18,874 2,496 1,720 1,228 - 50 5,494 926,653 437,949 408,616 - 101,491 1,874,709 188,404 10.0% 88,184 4.7% 1.13 1.09 15,600 0.20 153,887 1.96 43,132 1.04 1.50:1 1.97:1 0.59:1 7.59 16.0% 14.58 9.75 78,547 441,940 20,788 2,269 925 1,008 - 40 4,242 923,275 416,034 350,650 - 62,032 1,751,991 174,397 10.0% 77,493 4.4% 1.00 0.98 15,451 0.20 16,341 0.21 25,812 1.09 1.55:1 2.11:1 0.61:1 6.55 16.2% 11.63 8.63 77,442 428,674 18,961 838,680 338,499 241,221 - 39,138 1,457,538 136,748 9.4% 61,421 4.2% 0.80 0.78 9,985 0.13 69,735 0.91 16,641 1.06 1.35:1 1.99:1 0.43:1 5.83 14.8% 12.06 9.19 77,026 374,978 15,802 675,490 258,235 74,464 - 34,768 1,042,957 71,305 6.8% 22,271 2.1% 0.30 0.30 6,592 0.09 96,738 1.27 13,752 0.95 1.23:1 1.80:1 0.39:1 5.00 6.5% 10.88 5.88 76,266 283,875 6,062 2,228 2,124 2,025 884 941 - 34 873 861 - 29 863 759 - 27 553,316 251,909 - - 27,512 832,737 46,981 5.6% 2,878 0.3% 0.03 0.03 5,042 0.08 48,540 0.72 7,025 0.86 1.59:1 2.03:1 0.66:1 4.58 0.9% 7.25 5.25 67,370 281,425 973 2,004 930 - - 25 4,087 3,887 3,674 2,959 2. In 2000, the diluted earnings per share calculation was changed to reflect the dilutive effect of exercising outstanding stock options by application of the treasury stock method. Diluted earnings per share for the years ended 1999 to 2001 have been stated using this method. 3. Equity ratios for the 2000 result did not include the effect of the investment in Hewden Stuart. 2001 ANNUAL REPORT – FINNING INTERNATIONAL INC. 69 Corporate Information Board of Directors Ricardo Bacarreza Presidente Proinvest S.A. Santiago, Chile John E. Cleghorn Company Director Toronto, Ontario James F. (Jim) Dinning Executive Vice President Sustainable Development & External Relations TransAlta Corp. Calgary, Alberta Timothy S. Howden Company Director Marlow, Buckinghamshire England Nicholas B. Lloyd President and Chief Executive Officer Finning Chile S.A. Vitacura, Chile Jefferson J. Mooney Chairman, President and Chief Executive Officer A&W Food Services of Canada, Inc. North Vancouver, B.C. Donald S. O’Sullivan President O’Sullivan Resources Ltd. Edmonton, Alberta Conrad A. Pinette President and Chief Operating Officer Lignum Limited Vancouver, B.C. Andrew H. Simon Executive Vice Chairman Diamant Boart S.A. Staffordshire, England Monica E. Sloan Independent Management and Strategy Consultant and Associate, Deloitte Consulting Calgary, Alberta Douglas W.G. Whitehead President and Chief Executive Officer Finning International Inc. Coquitlam, B.C. John M. Willson Company Director Vancouver, B.C. 70 FINNING INTERNATIONAL INC. – 2001 ANNUAL REPORT C o r p o r a t e I n fo r m a t i o n Officers Brian C. Bell Committees Management Pension Committee Executive Vice President, Customer Support Services Finning International Inc. A.R. Guglielmin R.T. Mahler Jack A. Carthy President, Power Systems Finning International Inc. Anthony R. Guglielmin Vice President and Corporate Treasurer Finning International Inc. Paul J.C. Jarvis Chief Executive Hewden Stuart Plc. Nicholas B. Lloyd President and Chief Executive Officer Finning Chile S.A. Richard T. Mahler Board Pension Committee A.H. Simon, Chairman J.E. Cleghorn Audit Committee J.F. Dinning, Chairman R. Bacarreza J.E. Cleghorn A.H. Simon M.E. Sloan Human Resources & Compensation Committee T.S. Howden, Chairman J.J. Mooney D.S. O’Sullivan J.M. Willson Executive Vice President and Chief Financial Officer Governance Committee Finning International Inc. D.S. O’Sullivan, Chairman J.F. Dinning T.S. Howden C.A. Pinette J.M. Willson Environmental, Health & Safety Committee J.M. Willson, Chairman R. Bacarreza J.J. Mooney M.E. Sloan D.W.G. Whitehead Stephen Mallett Managing Director Finning (UK) Ltd. Conrad A. Pinette Chairman of the Board Finning International Inc. Ian M. Reid President and Chief Operating Officer Finning (Canada) John T. Struthers Corporate Secretary Finning International Inc. Douglas W.G. Whitehead President and Chief Executive Officer Finning International Inc. 2001 ANNUAL REPORT – FINNING INTERNATIONAL INC. 71 Shareholder Information Stock Exchanges The common shares of Finning International Inc. are listed on the Toronto Stock Exchange. (Symbol: FTT) Computershare Trust Company of Canada Auditors Arthur Andersen LLP., Chartered Accountants, Vancouver, Canada Solicitors Borden Ladner Gervais LLP., Barristers and Solicitors Vancouver, Canada Corporate Head Office Suite 1000 - 666 Burrard Street Vancouver, Canada, V6C 2X8 (604) 691-6444 Annual Meeting The Annual Meeting of the shareholders will be held at 11:00 a.m., April 24, 2002 at the Fairmont Waterfront Hotel, Vancouver. Corporate Information The Company prepares an Annual Information Form (AIF) which is filed with the securities commissions or similar bodies in all of the provinces of Canada. Copies of the AIF and Annual and Quarterly Reports are available to shareholders and other interested parties on request or can be accessed directly from Finning’s home page on the Internet at http://www.finning.com. Registrar and Transfer Agent Computershare Trust Company of Canada. To contact the stock transfer office nearest to your location, see listing. Investor Inquiries Inquiries relating to shares or dividends should be directed to the Company’s Registrar and Transfer Agent. Inquiries relating to the Company’s operating activities and financial information should be addressed to Anthony R. Guglielmin, Vice President and Corporate Treasurer, (604) 331-4937, Fax (604) 331-4852, e-mail: aguglielmin@finning.ca Halifax Computershare 1465 Brenton St., Ste. 501 P.O. Box 36012 Halifax, Nova Scotia B3J 3S9 Tel: 902-420-2211 Fax: 902-420-2764 Montreal Computershare 1800 McGill College Ave., 6th Floor Montreal, Quebec H3A 3K9 Tel: 1-800-564-6253 Fax: 514-982-7635 Toronto Computershare 100 University Ave., 11th Floor Toronto, Ontario M5J 2Y1 Tel: 1-800-663-9097 Fax: 416-981-9507 Calgary Computershare 530 - 8th Ave. S.W., Ste. 600 Calgary, Alberta T2P 3S8 Tel: 1-888-267-6555 Fax: 403-267-6592 Vancouver Computershare 510 Burrard St., 2nd Floor Vancouver, B.C. V6C 3B9 Tel: 1-888-861-5566 Fax: 604-661-9480 Website: www.computershare.com email: caregistryinfo@computershare.com 72 FINNING INTERNATIONAL INC. – 2001 ANNUAL REPORT 

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