Finning International Annual Report 2003

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FY2003 Annual Report · Finning International

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finning international inc.
annual report 2003

printed in canada

contents

Corporate Profile

16. Performance at a Glance

17.

Achievements

18. Report of the President and CEO

26. Review of Operations – Finning (Canada)

30. Review of Operations – Finning (UK)

32. Review of Operations – Hewden

34. Review of Operations – Finning South America

40. Review of Operations – Finning Power Systems

44. Review of Operations – Customer Support Services

46. Corporate Responsibility

48. Financial Management

51. Management’s Discussion and Analysis

69. Management’s Report to the Shareholders

69. Auditors’ Report

70. Consolidated Financial Statements

92. Ten-Year Financial Summary

94. Board of Directors

95. Corporate Officers

96. Corporate Governance

97.

Shareholder Information

(Monetary amounts in this annual report are in Canadian dollars unless otherwise noted.)

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corporate profile

Finning International Inc.
sells, rents, finances and provides
customer support services for
Caterpillar equipment and
engines, and complementary
equipment, in Western Canada,
the United Kingdom, and South
America (Argentina, Bolivia, Chile
and Uruguay). The Corporation’s
Head Office is located in
Vancouver, B.C., Canada. Finning
International Inc. is a widely-held,
publicly traded corporation,
listed on the Toronto Stock
Exchange (symbol FTT).

The moment is here: The time to take stock of our successes, and
give voice to our future vision. In 2003, we earned record revenue. We
enjoyed another year of strong earnings. And we took decisive actions
to ensure our continued growth in the years to come.

So how did we arrive at this moment? Through a clear vision of
the course before us and through an unflagging adherence to our
guiding principles, which we call the “Finning Formula”. It is
with these six tenets that we measure everything we do: our past
accomplishments, our present ventures and our opportunities to
come. Time has demonstrated their value, and we will continue
their rigorous application in every decision we make.

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[ 1 ]

[ the finning formula ]
leverage the cat brand

THE LARGEST
DISTRIBUTOR
OF CATERPILLAR
PRODUCTS
IN THE WORLD

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[ 2 ]

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[ 3 ]

[ the finning formula ]
command strong regional market shares

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[ 4 ]

ACQUISITION OF
LEX HARVEY
RAISED OUR
SHARE OF THE U.K.
MATERIALS
HANDLING MARKET

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[5 ]

[ the finning formula ]
maximize parts, service and rental revenue

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[ 6 ]

THE LEADING
EQUIPMENT
RENTAL COMPANY
IN THE U.K.

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[ 7 ]

[ the finning formula ]
solve difficult customer problems

SERVICING
EQUIPMENT
WHERE
AND WHEN
IT’S NEEDED

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[ 8 ]

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[ 9 ]

[ the finning formula ]
establish clear financial expectations throughout the organization

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[ 10 ]

SETTING
AMBITIOUS AND
ACHIEVABLE
GOALS

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[ 11 ]

[ the finning formula ]
transfer the formula to other geographies

STRATEGIC
ACQUISITIONS
AROUND
THE WORLD

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[ 12 ]

HERE

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[ 13 ]

We have long understood the importance of consistent action in
achieving consistent results. The Finning Formula, summarized below,
stands as a touchstone for critical decisions, and the clearest way to
articulate our vision for the future. It has once again proven its worth
in 2003 – whether applied across our operations or around the globe.
And as we move forward, we are proud to start from a very powerful
place: We have a proven plan, strength of purpose, and a world of
opportunity before us.

The Finning Formula
(cid:1) Leverage the CAT brand
(cid:1) Command strong regional market shares
(cid:1) Maximize parts, service and rental revenue
(cid:1) Solve difficult customer problems
(cid:1) Establish clear financial expectations

throughout the organization

(cid:1) Transfer the formula to other geographies

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[ 14 ]

FROM

HERE

WE CAN GO ANYWHERE

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[ 15 ]

performance at a glance

4.0

3.5

3.0

2.5

2.0

1.5

1.0

0.5

0.0

3.6

300

250

200

150

100

255

150

120

132

99 00

Revenue
$ (BILLIONS)

EBIT
(Earnings Before Interest and Taxes)
$ (MILLIONS)

Net Income
$ (MILLIONS)

2.00

1.50

1.00

0.50

0.00

1.71

14.3

1.5

1.2

0.9

0.6

0.3

0.0

0.79

99 00

Basic EPS
$ (Earnings Per Share)

Return On Equity
(PERCENTAGE)

Debt To Equity

350

300

250

200

150

100

Dec. 31
1998

June 30
1999

Dec. 31
1999

June 30
2000

Dec. 31
2000

June 30
2001

Dec. 31
2001

June 30
2002

Dec. 31
2002

June 30
2003

Dec. 31
2003

Finning International Inc.

S&P/TSX Index

Relative Price Performance
Finning International Inc. vs. S&P/TSX Composite Index
(DECEMBER 31, 1998 TO DECEMBER 31, 2003)

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[ 16 ]

(cid:1) Expanded South American
operations from its base in
Santiago, Chile, to the southern
cone of South America with
the acquisition of Caterpillar
dealerships in Argentina, Uruguay
and Bolivia. Expanded to a 20%
share of the United Kingdom
materials handling market with
the $213 million acquisition of
Lex Harvey Limited.
(cid:1) Completed its first-ever

international financing with a
successful 10-year unsecured
200-million Sterling Eurobond
issue, rated BBB+ by Standard
and Poor’s and listed on the
Luxembourg Stock Exchange.
(cid:1) Extended market share in the

Chilean copper mining industry
with a $55 million sale to Minera
Escondida Limitada, controlled
by BHP Billiton. This is the first
Finning transaction under the
five-year U.S.$1.5 billion global
alliance, announced in February
2003, between BHP Billiton
and Caterpillar.

(cid:1) Extended market share in the

Chilean copper mining industry
with a $12 million equipment sale
and $84 million maintenance and
repair contract with Minera El
Tesoro, part of the Antofagasta
Minerals Group.

(cid:1) Secured the Company’s first

major transaction in Argentina
since acquiring the dealership,
a $70 million equipment sale
and a $84 million five-year
maintenance and repair
contract with Barrick Gold
Corporation’s wholly-owned
subsidiary, Minera Argentina
Gold S.A., operator of the
Veladero gold project
in western Argentina.

(cid:1) Expanded the Company’s power
systems rental business from
the U.K. to continental Europe
by joining with Caterpillar and
nine other European CAT dealers
to form Energyst Rental
Solutions (SM).

(cid:1) Consolidated market share

in the Canadian oil sands with a
$30 million sale of six 797B
Caterpillar trucks to Syncrude
Canada Ltd.

(cid:1) Completed construction of a

landfill methane gas
cogeneration powerhouse in
Delta, B.C. in cooperation with its
strategic partner, Maxim Power
Corp., that will be operated and
maintained by the Company
under a multi-year agreement.
This is one of several “green”
projects Finning is pursuing
around the world.

achievements

(cid:1) Continued to deliver Caterpillar
equipment to several of the
largest infrastructure projects in
the U.K., including the construction
of the new £3.7 billion Terminal 5
at Heathrow airport.
(cid:1) Completed the sale of a

20-machine $10-million package
of Caterpillar equipment to one
of British Columbia’s leading
private logging contractors.
The transaction was the largest
single forestry equipment sale
to an independent logging
contractor in Finning’s 70 years
of operation.

(cid:1) Continued the consolidation
of the U.K. equipment rental
market by Hewden Stuart with
the $2.2 million acquisition of
Blandin Light Plant Limited
(“Blandin”), an equipment rental
company located in Jersey,
Channel Islands.

(cid:1) Completed a $30 million sale
to Movitec, Cerro Alto and ICV,
three large Chilean mining
support contractors. Deliveries
will take place from January
2004 to April 2004.

Photo: CAT machine at Hayes Forest
Services sorting yard, Port Alberni, B.C.

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[ 17 ]

report of the president and ceo

Our continuing pursuit of the fundamental business strategy that
we call the “Finning Formula” has resulted in another strong year:
a revenue increase in 2003 of 12.0% to a record $3.6 billion and net
earnings of $132.0 million.

The Finning Formula has six simple tenets whose importance to the
success of the Company cannot be understated. They are the principles
that brought us here. And they are the base upon which we will build
even greater accomplishments as we move ahead.

2003 performance

Our record revenues and our
net earnings in 2003 reflected
solid performance in all aspects
of our business.

highlights
from the past year

Our acquisitions of the Caterpillar
dealerships in Argentina,
Uruguay and Bolivia and of the
Lex Harvey materials handling
business in the United Kingdom
have contributed to revenues and
net earnings in the year. This is a
testament to the quality of these
assets and to the success of the
first stage of their integration
into the Company.

Commodity prices stimulated
copper and gold production and
mine development in South
America and increased oil and
gas drilling and oil sands mining
development in Western Canada.
We were able to conclude a
number of significant equipment
sales and service contracts in our
operations in South America and
Canada in 2003.

Overall demand for our
products was strong in 2003,
and remains strong: The
Company’s order book at
December 31, 2003 was $420
million, compared with $300
million at December 31, 2002.
Our core business performed
even better than our reported
net earnings suggest. Certain
expenses not reflective of
ongoing operations were incurred
in 2003, the largest being
$22.1 million related to the
implementation of the new DBSi
computer software system at
Finning (UK). Adjusting for these
expenses, the normalized net
earnings of the Company in 2003
increased 5.8% to $135.0 million.

2003 also saw a strong
appreciation of the Canadian
dollar against the U.S. dollar
and the pound Sterling, which
affected our revenues and
earnings when translated into
Canadian dollars. Revenue in the
U.K. from Finning (UK) and Hewden
Stuart increased 8.8% in pounds
Sterling (compared with 5.5% in
Canadian dollars), while revenue
in South America increased
42.9% in U.S. dollars (compared
with 26.4% in Canadian dollars).

Had the Canadian dollar not
appreciated during 2003, our
reported consolidated earnings
for the year would have been
$0.20 per share higher.

The Company considers good
corporate governance to be an
important factor in its ongoing
success. In 2003, Finning was
rated 1st and 4th by Canadian
Business Magazine and the Globe
and Mail respectively for its
corporate governance. As part
of our focus on corporate
governance, we announced in
January 2004 the appointment
of Michael Waites to the Board
of Directors and his appointment
to the Audit Committee as its
financial expert.

Photo: CAT 950G Loader,
Heathrow Terminal 5.

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[ 18 ]

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[ 19 ]

report of the president and ceo

The Finning Formula. We distilled our fundamental corporate strategy
into the Finning Formula in order to convey clearly that the more we
achieve in the present, the more opportunities we create for our future
success. And that success, today and every day hereafter, begins with
the firm application of the Formula’s six tenets:

leverage the cat brand

We are fortunate to be associated
with one of the most valued and
recognized brands in the world.
We are the largest CAT dealer in
the world and we aspire to be the
best. The opportunities we derive
from Caterpillar increase every
day, including new global
alliances, improvements to the
world’s leading engine and
equipment technology, and the
addition of new product lines. Our
implementation of Caterpillar’s
DBSi computer software system
at Finning (UK) will bring
significant business efficiencies
in 2004 and the years ahead. Our
adoption of the proven 6 Sigma
process will also increase the
efficiency of our operations.
Opportunities to expand beyond
our territorial dealerships in
Western Canada, the U.K. and the
Southern Cone of South America
will depend on our performance
in our existing markets.

command strong
regional market shares

solve difficult
customer problems

Customers don’t merely buy or
rent equipment. They buy or rent
solutions to help them make their
businesses more effective. We
combine our knowledge of the
customer’s business, the best
equipment for the job and a
financial and maintenance
package that meets the
customer’s specific needs.
One example in 2003 was our
$70 million equipment sale
and $84 million service contract
with Barrick Gold Corporation’s
wholly-owned subsidiary in
western Argentina. Other
examples abound throughout
the Company.

Markets in which we can best
apply our competitive advantages
to grow and prosper become our
core businesses, and in these we
have either attained or pursue
a 30% market share. We focus
on our core businesses and grow
these both internally and through
acquisitions. The Lex Harvey
acquisition is an example.
It brought us a 20% share of the
materials handling market in the
U.K., a business that fits our core
business strategy.

maximize parts, service
and rental revenue

Revenues from parts, service and
rental have one thing in common
that is critical to our business:
they bring predictable recurring
revenues and earnings to balance
the cycles inherent in selling
equipment and engines to resource
and construction industries.
Revenues from customer support
services increased 8.9% in 2003
and revenue from equipment
rental increased 10.3%. The gains
in rental revenue in 2003 came
from the Lex Harvey acquisition,
internal growth in equipment
rental across the Company and the
growth of The CAT Rental Stores
in Western Canada. Parts, service
and rental contributed 78.3% of
our gross profit in the year.

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[ 20 ]

establish clear financial
expectations throughout
the organization

Superior performance can only
be attained by everyone working
together to pursue ambitious and
achievable goals, and by
continually measuring progress
against those goals. Our three
long-term financial objectives are
15% annual revenue and earnings
growth, 20% return on equity,
and a 30% share of all markets
targeted as a core business. In
2003, our revenue grew by
12.0%, our return on equity was
14.3%, and we achieved 30%
market share in most core
businesses. We have in place
strategies to reach these goals.
When we accomplish these
objectives across the board, it will
be time to raise the bar higher.

15%Revenue and Earnings Growth
20%Return on Equity
30%Market Share

transfer the formula to
other geographies

From its origins in British
Columbia 70 years ago, Finning
has grown by acquiring
Caterpillar dealerships and
related businesses in Western
Canada, the U.K. and South
America and by applying the
business principles in these new
territories that made the parent
Company successful. But these
acquisitions didn’t only make the
Company bigger, they also
diversified the revenue stream
to reduce the cyclicality of the
economies and the industries
upon which the Company
depended. In the future, we
expect to continue this strategy.

In 2004, we believe the

economies and key commodity
prices in our dealership areas will
continue to drive strong product
demand. Internally, we are
striving to bring increased value
to our customers while improving
the efficiency of our operations.
We have dedicated this annual
report to outlining the many and
varied opportunities we expect to
generate in 2004 and beyond.
Ultimately, our corporate

strategies and the opportunities
they generate are intended to
increase value for our
shareholders and sustain a safe
and fulfilling work environment
for our employees. I am confident
we are achieving these
objectives. I extend my gratitude
to my fellow employees for their
achievements and to the Board
of Directors for its wisdom
and guidance. Their collective
efforts are responsible for
much of our success to date,
and have positioned us for great
things to come. From here we can
go anywhere.

Douglas W.G. Whitehead
President and CEO
March 26, 2004

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[ 21 ]

informe del presidente y ceo

Nuestra continua dedicación a la estrategia fundamental de negocios
que llamamos “La Fórmula Finning” ha traído como resultado otro año
positivo: un incremento de ingresos en el 2003 del 12,0%, alcanzando
un récord de $3.6 mil millones, y ganancias netas de $132,0 millones.
La Fórmula Finning está compuesta por seis simples principios a los
cuales se les debe otorgar la debida importancia con relación al éxito
de la Compañía. Son los principios que nos han permitido llegar a este
sitial, y los que forman la base sobre la cual seguiremos construyendo
a medida que avanzamos.

rendimiento en el 2003

Nuestros ingresos récord y
nuestras ganancias netas en el
2003, reflejaron una gestión sólida
en todos los aspectos del negocio.

destacables del ultimo año

Nuestras adquisiciones de los
representantes Caterpillar en
Argentina, Uruguay y Bolivia,
y de la empresa de manejo
de materiales, Lex Harvey
en el Reino Unido, contribuyeron
a nuestros ingresos y ganancias
netas del año. Esto demuestra
la calidad de estos negocios
y la exitosa integración de
ellos a la Compañía en esta
primera etapa.

Los precios de las materias

primas estimularon la producción
de cobre y oro y el desarrollo
de proyectos mineros en
Sudamérica, como también
la actividad en las industrias
de gas y petróleo en el oeste
de Canadá. Fuimos capaces de
concretar una cantidad de ventas
importantes de equipos
y contratos de mantención
en nuestras operaciones en
Sudamérica y Canadá en el 2003.

En general, la demanda por
nuestros productos se mostró
fuerte en el 2003, y la tendencia
se ha mantenido. Al 31 de
diciembre del 2003, el libro de
órdenes de la Compañía fue de
$420 millones, comparado con
$300 millones en la misma fecha
del 2002. Nuestro negocio
principal obtuvo resultados
aún más sólidos que lo que la
cifra de ganancias netas indica.
Algunos gastos no continuos
se realizaron en el 2003,
siendo el más importante
la implementación del nuevo
sistema computacional DBSi en
Finning (Reino Unido), valorizado
en $22,1 millones. Ajustando por
estos gastos no continuos,
las ganancias netas normalizadas
de la Compañía aumentaron
en un 5,8% a $135,0 millones.
Adicionalmente, el 2003
presenció el alza del dólar
canadiense comparado con el
dólar americano y la libra
esterlina, lo cuál afectó nuestros
ingresos y ganancias traducidos a
dólares canadienses. Los ingresos
de Finning en el Reino Unido y
Hewden Stuart incrementaron

un 8,8% en libras esterlinas
(comparado con un 5,5% en
dólares canadienses), mientras
que los ingresos en Sudamérica
aumentaron un 42,9% en dólares
americanos (comparado con
26,4% en dólares canadienses).
Si el dólar canadiense no hubiera
subido durante el 2003, nuestras
ganancias consolidadas por
el año hubiesen sido $0,20
por acción adicional.

La Compañía considera que
la buena gobernación corporativa
es un factor importante en su
éxito continuo. En el 2003,
Finning fue nombrado en primer
y cuarto lugar en un ranking
de gobernación corporativa por
las revistas Canadian Business
Magazine y por el Globe and Mail,
respectivamente. Como parte
de nuestra preocupación por
este tema, Michael Waites fue
nombrado al Directorio y al
Comité de Auditoria en enero
del 2004, como experto en
asuntos financieros.

Foto: Camión CAT 797B en la mina
de cobre Escondida, en Chile.

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[ 22 ]

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[ 23 ]

informe del presidente y ceo

La Fórmula Finning. Integramos nuestra estrategia corporativa
fundamental a la Formula Finning para comunicar claramente que los
logros del presente, crearán más oportunidades para un futuro exitoso.
Ese éxito, de ahora en adelante, empieza con la firme aplicación de
los seis principios de la Fórmula:

potenciar la marca cat

Tenemos la ventaja de estar
asociados con una de las marcas
más reconocidas y valoradas
del planeta. Somos el principal
representante de CAT en
el mundo y aspiramos a ser
el mejor. Las oportunidades
que nos brinda Caterpillar
crecen diariamente, incluyendo
nuevas alianzas globales,
perfeccionamiento de tecnología
de punta para motores y equipos,
y la incorporación de nuevas
líneas de productos. La puesta
en marcha del sistema de
computación DBSi de Caterpillar
en Finning Reino Unido
significará más eficiencia en
nuestro negocio durante el
presente año como en el futuro.
Adicionalmente, la adopción del
comprobado proceso 6 Sigma
mejorará la eficiencia en todas
nuestras operaciones. La
oportunidad de extender
nuestro territorio más allá
del oeste de Canadá, Reino
Unido, y el Cono Sur de
Sudamérica dependerá de los
resultados que obtengamos
en nuestros mercados actuales.

dominar un porcentaje
substancial de los mercados
regionales

Los mercados en los cuales
aplicamos mejor nuestra ventaja
competitiva para prosperar y
crecer, se convierten en nuestros
principales negocios, y hemos
logrado o apuntado a una
participación del 30% en ellos.
Ponemos énfasis en nuestros
principales negocios y los
hacemos crecer en forma interna
y a través de adquisiciones. La
compra de Lex Harvey es un buen
ejemplo, ya que nos dio un 20%
del mercado de manejo de
materiales en el Reino Unido,
un negocio que complementa
nuestra estrategia corporativa.

maximizar los ingresos
de repuestos, servicio
y alquiler

Los ingresos que resultan de
repuestos, servicio y alquiler,
tienen en común un aspecto que
es crítico para nuestro negocio:
aportan predecibles y constantes
ingresos y ganancias que
equilibran la naturaleza cíclica
de venta de equipos y motores
a industrias de recursos naturales
y construcción. Los ingresos
derivados de soporte al cliente
crecieron un 8,9% en 2003
e ingresos de alquiler de equipos
incrementaron un 10,3%.
Los aumentos en las ventas

de alquiler en el 2003 fueron
consecuencia de la adquisición
de Lex Harvey, el aumento
general de alquiler de equipos en
todas las operaciones, y el
crecimiento de los CAT Rental
Stores en el oeste de Canadá.
Repuestos, servicio y alquiler
contribuyeron en un 78,3% a
nuestra ganancia bruta en el año.

solucionar las dificultades
del cliente

Los clientes no sólo compran
y alquilan equipos sino que
compran y alquilan soluciones
para manejar sus negocios más
eficientemente. Combinamos
nuestro conocimiento del negocio,
el mejor equipo, financiamiento
y un plan de mantención
específicamente para las
necesidades de cada cliente.
Un ejemplo en 2003, fue la venta
de equipos por $70 millones
y un contrato de mantención por
$84 millones a la subsidiaria
de Barrick Gold Corporation
en el oeste de Argentina. Existen
múltiples ejemplos similares
en toda la Compañía.

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[ 24 ]

transferir la formula
a otras regiones

Desde sus orígenes hace 70 años
en la Columbia Británica, Finning
ha crecido a través de la compra
de representaciones Caterpillar
y otros negocios relacionados
en el oeste de Canadá, el Reino
Unido y Sudamérica y por aplicar
los principios que hicieron
exitosa a la empresa madre
en estos nuevos territorios.
Esas adquisiciones no sólo
expandieron, sino que
diversificaron el flujo de ingresos
de la Compañía, reduciendo
la naturaleza cíclica de las
economías e industrias de las que
dependía. En el futuro esperamos
continuar con esta estrategia.
Creemos que en el 2004,
las economías y los precios de
materias primas en los territorios
en donde operamos continuarán
manteniendo una fuerte
demanda para productos. Nos
esforzamos en entregar mayor
valor a nuestros clientes, al

establecer expectativas
financieras claras
en toda la organizacion

Un rendimiento superior sólo
se puede obtener con un esfuerzo
común para lograr objetivos
ambiciosos y alcanzables,
continuamente midiendo el
progreso comparándolo con
ellos. Nuestros tres objetivos
financieros de largo plazo son
un 15% anual de crecimiento
de ingresos y ganancias, un 20%
anual de retorno sobre capital,
y una participación de mercado
de un 30% en aquellos definidos
como mercados principales.
En el 2003, nuestros ingresos
crecieron en un 12%, el retorno
sobre capital fue de 14,3%,
y logramos una participación
de mercado del 30% en casi
todos los mercados principales.
Contamos con estrategias para
alcanzar estas metas, y cuando
logremos hacerlo en toda la
compañía, será el momento de
elevar la vara más alta.

15%crecimiento de ingresos y ganancias
20%retorno sobre capital
30%participación de mercado

mismo tiempo que mejoramos
la eficiencia de nuestras
operaciones. Hemos dedicado
este informe anual a mostrar
las múltiples y variadas
oportunidades que esperamos
generar en el 2004 como
también en el futuro.

En el fondo, nuestras
estrategias corporativas
y las oportunidades que ellas
generan apuntan a incrementar
los beneficios para nuestros
accionistas y mantener
un ambiente laboral seguro
y satisfactorio para nuestros
empleados. Estoy convencido que
estamos logrando estos objetivos.
Extiendo mi gratitud a mis
compañeros de trabajo por
sus logros y a los integrantes
del Directorio por su sabiduría
y dirección. Sus esfuerzos
conjuntos son responsables
de mucho de nuestro éxito
actual que nos ha posicionado
en un buen lugar para enfrentar
el futuro. Tenemos un horizonte
sin limites.

Douglas W. G. Whitehead
Presidente y CEO
26 de marzo, 2004

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[ 25 ]

finning [ canada ]

Finning began as the Caterpillar dealer in British Columbia in 1933
and has since acquired Canadian dealerships in Yukon Territory, Alberta,
the Northwest Territories and a portion of the Territory of Nunavut.
The Company services its Canadian dealership territory through its
division, Finning (Canada). Finning (Canada) has 41 branches and 2,717
employees with its head office located in Edmonton, Alberta.

Ian M. Reid
President, Finning (Canada)

“Our many opportunities come
from having a track record
of providing customers with
solutions that make their
businesses better, whether
on a huge scale in the oil sands
or a smaller scale through our
CAT rental stores.”

financial performance

Total revenue was $1,456.3
million, compared with $1,269.3
million in 2002, contributing
40.5% of Finning International’s
$3,593.3 million total revenue.

highlights

Maintained our strong 70% share
in the Canadian oil sands mining
equipment market with a $30
million sale of six 797B trucks,
the largest of their kind in the
world, to Syncrude Canada Ltd.

Constructed a landfill methane
gas cogeneration powerhouse in
Delta, B.C. that will be operated
and maintained by the Company
under a multi-year agreement.
Completed the sale of a 20-
machine $10-million package
of Caterpillar equipment
to one of British Columbia’s
leading private logging
contractors. The transaction
was the largest single forestry
equipment sale to an
independent logging contractor
in Finning’s 70 years of operation.

Oil Sands Mine Proposals

Company

Cost
($ billion)

Timeline

1. Syncrude Stage III

Syncrude Canada Ltd.

2. Syncrude Stage IV

Syncrude Canada Ltd.

3. Horizon

Canadian Natural

Resources Ltd.

4. Northern Lights

Synenco Energy Inc.

5. Jackpine

Shell Canada,

Chevron Canada,

Western Oil Sands

6. Virgin

BA Energy Inc.

7. Kearl Lake

Imperial Oil

$5.7

$8.5

$4.5

$5 – 8

Complete 2005

2005 – 2010

Over a decade

starting ~ 2003

2008 – 2010

2006

2012

Photo: CAT Rental Store
in Fort McMurray, Alberta.

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[ 26 ]

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[ 27 ]

finning [ canada ]

opportunities

Oil Sands mining
At the Athabasca Oil Sands
Project (AOSP), a mining,
extraction and upgrading
development that produces
155,000 barrels of bitumen per
day, the Company has established
what it considers its model for
future opportunities in this large
and growing market. In late 2002,
the Company concluded a $133
million sale with Albian Sands
Energy Inc., operator of AOSP’s
oil sands mine at Muskeg River,
for all mining machines, trucks
and support equipment. The
Company also signed a $150

million five-year customer service
contract. In 2003, Finning
established a 60-person branch
operation on site to repair and
maintain all mine site equipment
and to warehouse parts.

Oil and gas
Drilling activity in western
Canada, a major indicator of
industry growth, is forecast to be
only marginally lower in 2004
than the record pace achieved
in 2003. Longer term, the
companies proposing a $4 billion
natural gas pipeline from Canada’s
Mackenzie River Delta have
reported they are on track for
completion and begin delivery of

gas to Canadian and U.S. markets
before the end of the decade.
Finning’s opportunity is
represented by mobile earthmoving
equipment used in exploration
and preparation of drill sites and
pipeline routes; excavators and
pipe-layers used in gathering and
transmission systems; diesel and
natural gas engines used in
operation of drill rigs, pumps and
compressors; and electrical sets
for camp power generation.

Solving problems
in the forest industry
The Company has a relationship
with Canfor Corporation, the
largest producer of softwood

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[ 28 ]

lumber and one of the largest
market pulp producers in Canada,
that demonstrates how solving a
customer’s problems can bring
opportunities in the western
Canadian forest products industry.

In 1997, Canfor had an aged
equipment fleet, high repair and
maintenance costs, and machine
breakdowns resulting in lost
productivity. Finning’s solution
was called “Power by the Hour”
and provided Canfor with an
equipment replacement, and a
repair and maintenance strategy.
Finning leases equipment to

Canfor, provides preventive
maintenance and replaces aging

parts before they fail. Finning
also provides extra machines
when needed in emergencies
or at peak operating periods,
eliminating the need for Canfor
to have surplus machines
sitting idle to cover downtime
or peak contingencies.

Today the relationship is
evolving to better align with
current business realities,
more flexible lease payment
schedules and application of
used machines instead of new
machines where appropriate.
Today, 148 machines are in place
at eighteen Canfor locations in
British Columbia.

Rental
After several years of leading the
heavy construction equipment
rental market, the Company is
expanding “The CAT Rental
Store” network to become the
leader in small equipment rental
to contractors, industrial plants
and commercial operations.
During 2003, thirteen new CAT
Rental Stores were opened. At
December 31, 2003, there were
25 CAT Rental Stores in British
Columbia and Alberta, and the
Company’s objective is to achieve
market leadership in this segment.

Photo: CAT 797 trucks,
Albian Oil Sands, Alberta.

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[ 29 ]

finning [ uk ]

Finning acquired two Caterpillar dealerships in the U.K. in 1983 and a
third in 1997 to become the Caterpillar dealer for England, Scotland
and Wales operated under Finning (UK) Ltd. Finning (UK) is also the
distributor of Caterpillar-branded Sabre Perkins marine power engines
for England, Wales and Ireland and Caterpillar-branded MaK marine
engines for the U.K. and Ireland.

Stephen Mallett
Managing Director, Finning (UK) Ltd.

“We have unlimited opportunity in
the U.K. to increase market share
as we continue to add value for
customers and solve their
problems by working with
Caterpillar and applying the
Finning Formula.”

Finning (UK) acquired the Finnpave
distribution business in 2001, now
operated as its specialist surfacing
equipment division. In 2003,
Finning (UK) acquired the
majority of the assets of Lex
Harvey Limited, the largest
independent materials handling
company in the U.K. Finning (UK)
has 22 branches and 2,387
employees with its head office
located in Cannock, England.

financial performance

Total revenue was $934.2
million, compared with $828.2
million in 2002, contributing
26.0% of Finning International’s
$3,593.3 million total revenue.
In local currency, Finning (UK)’s
2003 total revenue was £409.2
million, compared with £351.7
million in 2002.

highlights

Expanded to a 20% share of the
U.K. materials handling market
with the $213 million acquisition
of Lex Harvey Limited. The
acquisition contributed revenues
for the seven-month period since
the acquisition of $109.4 million
to Finning (UK) in 2003, 11.7% of
total Finning (UK) revenues.

Continued to deliver Caterpillar

equipment to several of the
largest infrastructure projects
in the U.K., including the
construction of the new £3.7
billion Terminal 5 at Heathrow
airport. Approximately 75%
of all construction equipment
at Heathrow’s Terminal 5 is
Caterpillar. Finning customers on
the project include C.A. Blackwell,
Laing O’Rourke and its Select
Plant Hire division, and Foster
Yeoman Limited.

Received an order from AMPL,
the plant hire division of Alfred
McAlpine PLC, to supply 38

pieces of new Caterpillar
equipment, which will be used
on the A1M highway project
north of Leeds.

opportunities

Materials handling
The acquisition and integration
of Lex Harvey into Finning
(UK)’s materials handling
business will result in significant
synergies in administration,
facilities, personnel and
inventory management.
The Materials Handling

Division has 15,000 lift trucks
on long-term rental and provides
service and backup on a further
12,000 customer-owned units.
With more than 12,000 customers
and a rapidly growing short-term
rental fleet of just under 3,000
units, the Materials Handling
Division helps to provide stability
and predictability to Finning
(UK) revenues.

Finning (UK) has the only
centralized materials handling
business in the U.K. and has
increased market share in each
of the previous four years. The
new Finning National Materials
Handling Centre, called Orbital 7,
is 140,000 square feet of offices
and shops dedicated to building
custom lift trucks for special
customer needs in three weeks
from order to delivery.

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[ 30 ]

Maintenance is performed by
more than 700 engineers at
Orbital 7 and 400 resident
locations throughout the U.K.
The Company provides next-day
parts delivery on more than
18,000 items and guarantees
that a locally-based engineer
is available to provide on-site
repairs whenever necessary.

Economic growth
The U.K. government forecasts
Real Gross Domestic Product
growth of 2.5% in 2004,
compared with 2% in 2003 and
1.7% in 2002. Construction will
comprise a strong component
of this growth, providing an
opportunity for Finning to increase
market share in all its sectors.

Aggregates market growth
The U.K. government’s public and
private transport expenditures of
£180 billion over 10 years to
repair and expand the country’s
transportation infrastructure is

proceeding on plan. Aggregates
(rock, sand and gravel) are used
in the building of road and rail
beds, a market in which Finning
has a 60% share.

iso certification

Finning (UK) was the first in the
industry in the U.K. to be certified
and registered to ISO 9001
standards for quality. In 2003,
this was successfully extended to
the Company’s Finnpave
subsidiary and the Lex Harvey
business. This demonstrates to
customers that the Company is
committed to fulfilling their
quality needs, meeting applicable
regulatory requirements, and
enhancing customer satisfaction.
In June 2003, Lloyds Register
Quality Assurance also certified
and registered the Company’s
environmental management
system under the environmental
standard ISO 14001. This

demonstrates the Company
is managing its environmental
challenges in a responsible
way and is achieving
continuous improvement in
environmental performance.

new dbsi system

In early 2004, Finning (UK)
installed the customized DBSi
computer software system,
designed specifically for
Caterpillar dealers. DBSi
addresses several tactical
areas that will increase the
Company’s opportunities,
such as improved supply chain
management, greater product
customization, improved cost
controls and asset utilization,
and enhanced customer
relationship management
and service.

Photo: CAT equipment working
on site at Heathrow Terminal 5.

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[ 31 ]

hewden

Hewden, acquired by Finning International in 2001, is the leading
national equipment rental company in the United Kingdom,
with 317 locations and 3,804 employees. Hewden provides equipment
rental and contract management services to key businesses in virtually
every sector.

Nicholas B. Lloyd
Managing Director, Hewden

"Our size and national profile give
us the opportunity to grow our
business by focusing on being a
‘one-stop-shop’ for companies
that need equipment but also
want to contract out the
management, operation and/or
maintenance of their fleets."

Hewden customers can call
on a comprehensive range
of equipment and services,
including Caterpillar and other
leading construction equipment
brands. Hewden’s total customer
offer includes plant, tools,
powered access, cranes, power
generation, accommodation
and hoists, allowing the Company
to offer customers a unique
One-Stop-Shop capability.

financial performance

Total revenue was $640.8 million,
compared with $665.3 million in
2002, contributing 17.9% of Finning
International’s $3,593.3 million
total revenue. In local currency,
Hewden’s 2003 total revenue was
£280.5 million, compared with
£281.9 million in 2002.

highlights

Continued its consolidation of
the U.K. equipment rental market
with the $2.2 million acquisition
of Blandin Light Plant Limited,
an equipment rental company
located in Jersey, Channel
Islands, U.K.

Opened an “on-site” Hire Shop

at the Royal Bank of Scotland
World Headquarters construction
site at Gogarburn, Edinburgh,
the largest construction project
in Scotland. The site is managed
by Hewden’s long-standing
customer, Mace Limited.
Eventually 2,500 employees
and 200 contractors will be able
to source all their tools and
equipment from Hewden at this
£400 million, 78-acre project.

Chosen as the preferred
equipment rental supplier for
three new building projects in
London with a combined cost of
£1.2 billion to be built by Multiplex
Constructions Limited. The three
projects are the new National
Stadium at Wembley, the West

India Quay waterside development
and the White City retail
development that will be the
largest shopping mall in Europe.
The Wembley stadium and
the West India Quay will be
completed in mid-2005, the White
City mall in late 2006.

opportunities

Economic conditions
Hewden’s business is driven by
construction activity, which grew
by 4% in 2003 and is expected to
grow by a similar amount in
2004. This strong performance
has prompted equipment
manufacturers from Europe and
elsewhere, where economic
prospects are slower, to ship their
surplus equipment into the U.K.
Consequently, the U.K. equipment
rental market was very
competitive in 2003 and is
expected to remain so in 2004,
characterized by overcapacity
and downward pressure on prices.

These conditions bring

opportunities for Hewden across
several fronts:

(cid:1) Since Hewden’s objective is to

increase its market share to 30%,
it can grow by acquiring key
companies that are attractively
priced. The acquisition of Blandin
is an example.

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[ 32 ]

(cid:1) Hewden’s size and national profile
give it a competitive advantage
over smaller companies as a
“one-stop” supplier of a wide
array of equipment and services
for customers ranging from
small to large industrial and
construction companies.

(cid:1) In 2004,Hewden will be reviewing
all its operations to reduce its cost
base and enhance service delivery.

Sole supply contracts
Hewden has sole supply
contracts with large construction
companies to supply equipment,
often including operators, needed
at specific stages of large
projects, and with large and
medium-sized industrial
companies to provide, operate
and maintain their equipment
fleets on site. These contracts
benefit customers by providing
a single point of contact for
equipment rental, online

monitoring of equipment
performance and online
all-inclusive invoicing.

Construction contracts
Hewden’s sole supply contract
construction customers include:

(cid:1) The Wates Group, one of

the U.K.’s largest, privately
owned construction and
development companies;

(cid:1) Kelsey Roofing Special Projects,
the leading stadium and specialist
roofing contractor in the U.K.; and

(cid:1) Birse plc, one of the U.K.’s
leading development and
engineering companies.

Industrial contracts
Hewden’s sole supply industrial
fleet customers include:

(cid:1) British Petroleum, where Hewden
operates 24 hours a day and
seven days a week at three
refinery complexes, Grangemouth,
Hull and Coryton;

(cid:1) Fleet Support Ltd., Royal Navy

Base, Portsmouth, where Hewden
has been providing full
equipment services in a highly
sensitive and secure environment
“24 by 7” since 1998;

(cid:1) Environment Agency, where

Hewden supplies general plant
and pumps in several regions;
(cid:1) Amey plc, which rationalized
its supply chain from several
hundred suppliers to four, one
of which was Hewden; and
(cid:1) Tarmac, a subsidiary of Anglo
American, the global mining
and natural resource company,
which rationalized its supply
chain from more than
2000 suppliers to three,
including Hewden.

Photo: Hewden plant hire machine
at a railway construction site.

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[ 33 ]

finning south america

Finning has been the Caterpillar dealership for Chile since 1993. In 2003,
the Company expanded its operations in South America through the
acquisition of the CAT dealerships in Argentina, Bolivia and Uruguay,
bringing its total number of locations across the Southern Cone to 37.
Through a combined workforce of 2,456 employees, the Company
delivers products and services to key industries in this rapidly
developing region of the globe.

Brian C. Bell
President, Finning South America

"We will capitalize upon the

opportunities we have made for
the Company in the Southern Cone
of South America by applying the
Finning Formula that has made
Finning a successful company.
That means structuring
the Company and empowering
our people to ensure we are
providing unmatched value
to our customers."

financial performance

Total revenue was $562.0 million,
compared with $444.6 million
in 2002, contributing 15.6% of
Finning International’s $3,593.3
million total revenue. In U.S.
dollars, the basis for most of
the business in Finning South
America, 2003 total revenue was
U.S.$406.0 million, compared
with U.S.$284.2 million in 2002.

highlights

Completed the acquisitions
of Macrosa Del Plata S.A. and
General Machinery Co. S.A.,
the Caterpillar dealerships
in Argentina and Uruguay
respectively, in January 2003.
In April 2003, Finning completed
its acquisition of Matreq S.A., the
Caterpillar dealership in Bolivia.

Completed a $55 million

20-piece Caterpillar equipment
sale to Minera Escondida
Limitada of Chile, controlled by
BHP Billiton. This was the first
Finning transaction under the
five-year U.S.$1.5 billion global
alliance, announced in February
2003, between BHP Billiton
and Caterpillar.

Completed the first major
transaction in Argentina since
the acquisition of the dealership,

a $70 million equipment sale
and a $84 million five-year
maintenance and repair contract
with Barrick Gold Corporation’s
wholly-owned subsidiary, Minera
Argentina Gold S.A., operator
of the Veladero Gold project
in western Argentina.

Completed a $96 million

equipment sale and maintenance
contract to Minera El Tesoro, part
of the Antofagasta Minerals
Group. The El Tesoro mine is also
the first mine in Chile to install a
complete CAT MineStar System,
a wireless link between mining
machines in the pit and mine
managers in the office, enabling
real time performance monitoring.
Completed a $30 million sale

of 25 pieces of Caterpillar
equipment to Movitec,
Cerro Alto & Ingeniería Civil
Vicente (ICV), three large Chilean
mining support contractors.
Deliveries will take place from
January 2004 to April 2004.
Mining companies are
increasingly turning to support
contractors to develop mine sites
in Chile. Typically, 80% of the
fleets of these contractors are
CAT products.

Photo: CAT 325 excavator working
on the new Santiago subway line.

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[ 34 ]

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[ 35 ]

finning south america

opportunities

Economic conditions and
commodity prices
In Chile, the stability and strength
of the economy will have a
positive impact on the Company’s
opportunities. Real Gross
Domestic Product (GDP) grew by
3.3% in 2003 and is forecast to
grow by 4.5% in 2004. Mining
production and new development
has been stimulated by the
strongest copper prices since
1997 and the strongest gold
prices since the mid-1990s. The
United States - Chile Free Trade
Agreement implemented January
1, 2004 is an additional
significant stimulus.

In Argentina, business

opportunities are buoyed as the
economy continues to recover
and as inflation declines. Real
GDP grew by 7.8% in 2003, after
declining 10.9% in 2002 and
4.4% in 2001. This recovery is
forecast to continue in 2004 with
real GDP forecast to increase by
4.0%. It is also significant that
consumer prices are forecast to
increase 7.7% in 2004, after
increases of 14.3% in 2003 and
25.9% in 2002, according to the
International Monetary Fund.

Synergies from integration
Effective January 1, 2004,
Finning South America has
reorganized away from four
geographically defined business
units to three business units
defined by markets - mining,
machinery and power systems.
Management believes this new
structure optimizes the
Company’s capacity to meet
customers’ needs and provide
market-specific expertise while
capturing synergies, such as
reducing operating expenses
and inventory duplication.

New markets from integration
In addition to the $70 million
equipment sale and $84 million
five-year maintenance and repair
contract with Barrick Gold
Corporation’s project at Veladero
near the Chile-Argentina border,
Barrick has announced plans to
develop a larger ore body nearby
at Pascua-Lama.

One of the brightest sectors
of the recovering Argentinean
economy is the production and
export of agricultural products.
Finning South America is well
positioned to participate in this
recovery through international
agricultural machinery
manufacturer AGCO Corporation.
AGCO acquired the Challenger
line of agricultural equipment
from Caterpillar and is
introducing the line in South
America. Finning is now the sole
Challenger sales and service
dealer for Argentina, Bolivia,
Chile and Uruguay.

The recovery in Argentina is
also stimulating construction of
infrastructure (roads, housing
and hydro-electric dams) and
increased oil and gas drilling.
The Company expects its
general machinery, engines
and generators will compete
strongly in these markets.

In Bolivia, political uncertainty

is postponing development
of the country’s large oil and gas
reserves and urgently needed
roads, power and other
infrastructure. Bolivia will represent
a significant opportunity for
Finning South America when
political stability is restored and
economic activity encouraged.

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[ 36 ]

other opportunities

Finning South America has a
commanding market share in
the Chilean mining industry.
Management believes there are
several opportunities to grow
revenue in this region.
(cid:1) The U.S.$1.5 billion global

alliance between Caterpillar and
BHP Billiton signed in February
2003 and the subsequent $55
million sale from Finning South
America to Minera Escondida
Limitada of Chile, controlled by

BHP Billiton, has alerted other
mining companies to the
economic benefits that an
alliance with Caterpillar and
Finning could bring them.

(cid:1) Strong copper and gold prices will

ensure the development of a
large number of mining projects
in Chile and Argentina, now in
various stages of development.

(cid:1) The strong mining recovery is

increasing spending throughout
Chile on infrastructure and
general construction. Finning

South America has a 32% share
of the construction market and is
endeavouring to gain a larger
share of that growing market.

(cid:1) The CAT Rental Stores now

operate in Santiago and Calama,
Chile, and in Buenos Aires,
Argentina. The Company expects
to open several new CAT Rental
stores over the next two to three
years. In Santiago, the CAT Rental
store is supplying construction
equipment for a major highway
project being built across the city.

Copper

Gold

)
z
o
/
$
S
U
t
o
p
S
(
d
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o
G

500

400

300

200

)
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/
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n
e
c
S
U
e
r
u
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u
F
(
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C

120

100

Dec. 31
1998

June 30
1999

Dec. 31
1999

June 30
2000

Dec. 31
2000

June 30
2001

Dec. 31
2001

June 30
2002

Dec. 31
2002

June 30
2003

Dec. 31
2003

Gold and Copper Prices

Owner

Metal

Cost
(US $ Million)

Start-Up

2001

2002

2003

2004

1. Spence

BHP Billiton

copper

$ 800

2004/5

Argentina

(4.4)% (10.9)% 7.8%

4.0%

2. Veladero

Barrick

gold

$ 500

2004

Chile

3.1%

2.1%

3.3%

4.5%

3. Refugio

Kinross/Bema

gold

$ 200

2004

Uruguay

(3.3)% (10.8)% (1.0)% 4.5%

4. Cerro Casale

Placer Dome

gold, copper

$1,430

2006

Bolivia

2.7%

1.0%

3.2%

5. Pascua-Lama Barrick

gold, silver

$1,200

2006

Real GDP Growth

Mine Proposals

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[ 37 ]

finning sudamerica

Finning ha sido el representante de Caterpillar en Chile desde 1993.
En 2003, la Compañía expandió sus operaciones en Sudamérica con la
adquisición de los representantes CAT en Argentina, Bolivia y Uruguay,
llevando su cobertura en el Cono Sur a 37 localidades. A través de 2456
empleados, la Compañía provee productos y servicios a las principales
industrias de una región en pleno desarrollo.

"Aprovecharemos las

oportunidades que hemos abierto
para la Compañía en el Cono
Sur, aplicando la Fórmula
Finning que ha hecho de
Finning una compañía exitosa.
Eso significa estructurarnos
y habilitar a nuestra gente
para asegurar que proveemos
beneficios incomparables
a nuestros clientes."

Brian C. Bell
Presidente de Finning Sudamérica

rendimiento financiero

El ingreso total fue de $562,0
millones, comparado con $444,6
millones en 2002, contribuyendo
el 15,6% de los $3593,3 millones
de ingreso total de Finning
International. En dólares
americanos, la base para la
mayor parte del negocio de
Finning Sudamérica, ingreso total
fue US $406 millones en 2003,
comparado con US $284,2
millones en 2002.

acontecimientos destacables

Se concretaron las adquisiciones
de Macrosa Del Plata S.A. y
General Machinery Co. S.A., los
representantes de Caterpillar en
Argentina y Uruguay
respectivamente, en enero de
2003. En abril de 2003, Finning
completó la adquisición de
Matreq S.A., la representante de
Caterpillar en Bolivia.

Se concretó la venta por
$55 millones por un paquete
de 20 equipos a Minera Escondida
Limitada de Chile, controlada por
BHP Billiton. Esta fue la primera
transacción de Finning bajo la
alianza global por cinco años
entre BHP Billiton y Caterpillar,
valorizada en $1,5 mil millones
de dólares americanos,
anunciada en febrero del 2003.
Se concretó la primera gran

transacción en Argentina
desde la adquisición de la
representación, una venta de
equipos por $70 millones y
un contrato de mantención
y reparación por cinco años
valorizado en $84 millones con
Minera Argentina Gold S.A.,
subsidiaria de Barrick Gold
Corporation, y responsable
del proyecto Veladero Gold
en el oeste de Argentina.

Se concretó la venta de equipos

y un contrato de mantención

y reparación por $96 millones
a Minera El Tesoro, perteneciente
a Antofagasta Minerals Group.
Adicionalmente, El Tesoro es la
primera mina en Chile en instalar
el sistema completo MineStar de
CAT, tecnología inalámbrica entre
las máquinas mineras y las oficinas
de operación, lo que permite
monitorear en tiempo real el
rendimiento de cada equipo.

Se concretó la venta por $30

millones de 25 equipos
Caterpillar a Movitec, Ingeniería
Civil Vicente (ICV) y Cerro Alto,
tres grandes contratistas chilenos
de apoyo minero. Las entregas se
efectuarán entre enero y abril de
2004. Las compañías mineras
están recurriendo cada vez más a
contratistas de apoyo para
desarrollar el trabajo minero en
Chile. Típicamente, el 80% de las
flotas de estos contratistas son
compuestas por productos CAT.

oportunidades

Condiciones económicas y precios
de materia prima
En Chile, la estabilidad y solidez
de la economía tendrá un
impacto positivo en las
oportunidades para la Compañía.
El Producto Interno Bruto (PIB)
real creció en un 3,3% en 2003
y se estima que crecerá un 4,5%
en 2004. La producción minera
y nuevos proyectos se han

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[ 38 ]

estimulado con el precio más
alto, tanto del cobre desde 1997
como del oro desde mediados
de los años noventa. El Tratado
de Libre Comercio entre Estados
Unidos y Chile, implementado
el 1º de enero de 2004, es un
estímulo adicional importante.

En Argentina, las

oportunidades de negocios
emergen con la continua
recuperación de la economía
y la declinación de la inflación.
El PIB real creció en un 7,8% en
2003, después de bajas del 10,9%
en 2002 y 4,4% en 2001. Se
estima que esta recuperación
continuará durante 2004 con el
PIB real pronosticado a subir un
4.0%. Significante es la
estimación que el Índice de
Precios al Consumidor (IPC)
incremente en un 7,7% en 2004,
después de alzas de 14,3% en
2003 y 25,9% en 2002, según el
Fondo Monetario Internacional.

Sinergia en la integración
A partir del 1º de enero de
2004, Finning Sudamérica
se ha reorganizado de cuatro
unidades de negocios definidas
por territorios geográficos, a
tres unidades de negocios
definidas por mercados: minería,
maquinaria y power systems.
La gerencia cree que a través
de esta nueva estructura se
favorecerá la capacidad de la
Compañía para satisfacer las
necesidades de los clientes y
proveer soluciones específicas
a cada mercado y a la vez,
captar sinergias, como reducir
costos de operación y la
duplicidad de inventario.

Integración y nuevos mercados
Sumado a la venta de equipos por
$70 millones y el contrato por
cinco años de mantención y
reparación por $84 millones al

proyecto de Barrick Gold
Corporation en Veladero, cerca
de la frontera de Chile y
Argentina, Barrick ha anunciado
planes para desarrollar un
yacimiento mineral mayor
llamado, Pascua-Lama.

Uno de los sectores más

sobresalientes de la recuperación
económica en Argentina es la
producción y exportación de
productos agrícolas. Finning
Sudamérica está bien situada
para participar en ésta
recuperación a través del
fabricante internacional de
maquinaria agrícola AGCO
Corporation. Esta última adquirió
la línea de equipos agrícolas
Challenger de Caterpillar
y está introduciendo la línea
en Sudamérica. A partir de
este momento, Finning es
el único representante de
ventas y servicio Challenger
en Argentina, Bolivia, Chile
y Uruguay.

Adicionalmente, la

recuperación económica en
Argentina está estimulando la
construcción de infraestructura
(caminos, viviendas, represas
hidroeléctricas) y el desarrollo
de yacimientos de gas y
petróleo. La Compañía espera
que su maquinaria, sus
motores y generadores
compitan exitosamente en
esos mercados.

En Bolivia, la incertidumbre
política ha aplazado el desarrollo
de sus grandes reservas de gas
y petróleo, así como la
construcción de caminos,
generación eléctrica y otras
infraestructuras. Bolivia
representará una gran
oportunidad para Finning
Sudamérica cuando el clima
político y la actividad económica
se estabilicen.

otras oportunidades

Finning Sudamérica cuenta con
una dominante participación
de mercado en la industria
minera chilena. La Compañía
cree que hay varias oportunidades
de aumentar nuestros ingresos
en esta región.

(cid:1) La alianza global de $1,5 mil

millones de dólares americanos
entre Caterpillar y BHP Billiton,
firmada en febrero de 2003, y
la venta subsiguiente por $55
millones por Finning Sudamérica
a Minera Escondida Limitada
de Chile, controlada por BHP
Billiton, han alertado a otras
compañías mineras de los
beneficios económicos que
una alianza con Caterpillar
y Finning puede significar.
(cid:1) Precios altos para el cobre

y el oro asegurarán el desarrollo
de un gran número de proyectos
mineros en Chile y Argentina,
actualmente en distintas etapas
de desarrollo.

(cid:1) La gran recuperación minera en
Chile ha fomentado la inversión
en infraestructura
y construcción en todo el país.
Finning Sudamérica cuenta con
el 32% de participación en el
mercado de la construcción
y está procurando obtener una
mayor participación en este
creciente mercado.

(cid:1) CAT Rental Stores opera en
las ciudades de Santiago
y Calama en Chile; y en Buenos
Aires, en Argentina. Finning
Sudamérica tiene planes de
abrir varios CAT Rental Stores en
los próximos dos o tres
años. En Santiago, CAT Rental
Store abastece de equipos
para proyectos de gran
envergadura, como la
construcción de carreteras
en la ciudad.

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[ 39 ]

finning power systems

Finning Power Systems was formed in 2001 to provide a Company-
wide focus on sales and service opportunities for engines manufactured
by Caterpillar and its subsidiary companies. Power Systems provides
customers with existing and new applications in electric power
generation, marine (including pleasure craft and ocean-going vessels),
industrial applications, on-highway trucks, and the oil and gas
industry (drilling, gas compression, mud pumps).

Paul J.C. Jarvis
President, Power Systems

“Our objective is to increase
Power Systems revenues to
$1 billion in five years. We need
to transition from good to great.
In order to do that, we need
to think ‘outside the box’ and
create opportunities by being
entrepreneurial and innovative.”

financial performance

The Group’s financial results are
reported within the country
operation in which they originate.
Revenue from new power and
energy systems sales was $262.4
million, compared with $192.0
million in 2002, contributing 7.3%
of Finning International’s
$3,593.3 million total revenue.

highlights

Expanded the scope of the
Company’s power systems
European rental market from the
U.K. to continental Europe by
joining with Caterpillar and nine
other European CAT dealers to
form Energyst Rental Solutions
(SM). The transaction involved
Finning (UK) selling its power
systems rental business to
Energyst for $34 million, while
Finning International invested
$6.7 million for a 15.17%
ownership interest in Energyst.
Energyst intends to become the
industry leader by providing the
most innovative and responsive
temporary energy solutions.

Designed and built the

powerhouse and signed a 20-year
contract to operate and maintain
a landfill methane cogeneration
project in Delta, B.C. that was
developed by Finning’s strategic

partner in distributed power,
Maxim Power Corp. This is
an example of several Finning
“green” projects ongoing
around the world.

Added engines manufactured
by Caterpillar subsidiary Perkins
Engines Company Limited to
the product lineup in Western
Canada, having previously
acquired the distributorship
for Caterpillar’s Perkins and
FG Wilson brands for Chile in
2002. The Perkins brand gives
Finning access to a wide range
of diesel and gas engine
applications between five and
2,600 horsepower.

Sold $40 million of generators

to the Ministry of Defence in
the U.K.

Photo: CAT engine at the
Delta Landfill project.

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[ 41 ]

finning power systems

opportunities

“Green” projects
The Power Systems’ success with
“green” projects demonstrates
the value of its company-wide
focus and its capability to
develop innovative solutions for
customers’ problems:

(cid:1) A joint Finning-Caterpillar project
in the U.K. developed a version of
the G3520 CAT engine suitable
for generating power by burning
waste methane from landfill sites.

(cid:1) The Company’s first Canadian
landfill co-generation project
was built at Delta, B.C. Other
projects in B.C. and Alberta are
in earlier stages.

(cid:1) The first co-generation project to
utilize a G3520 gas engine in
South America will be in
Santiago, Chile, where the
Company has signed an
operational lease with Metrogas.
The project is the first of its kind
for Finning South America and is
eligible for carbon credits under
the Kyoto Protocol. The turnkey
project has an overall plant
efficiency of 82%. The Company
will maintain the entire plant for
seven years.

(cid:1) The Company has successfully
targeted a new application for
the G3520 engine in Argentina
where government environmental
regulations prohibit oil companies
from flaring waste gases
associated with oil development.
The first project is for Vintage
Petroleum, Inc. where ten G3520
engines will generate power by
burning waste gases.

(cid:1) Finning and its strategic partner

Maxim intend to target the
petroleum waste gas market in
Canada and other petroleum-
producing regions of the world.

Caterpillar ACERT™ technology
Caterpillar’s introduction in
2003 of on-road truck engines
with ACERT™ technology
(Advanced Combustion Emission
Reduction Technology) will
increase Finning’s competitive
advantage. Finning already has
the leading market share in on-
road truck engines in Western
Canada, and the ACERT engines
bring additional technical
advantages over the
competition. As CAT extends
ACERT to other applications,
Finning’s capacity
to maintain this advanced
technology gives it a competitive
advantage that will bring
significant business
opportunities.

Outside territorial dealerships
Power Systems Group
technicians’ use of CAT engines
to solve difficult customers’
problems provides Finning with
opportunities to access markets
outside its existing territorial
dealerships. Examples include
the Company’s participation
in Energyst which brings access
to the European rental power
systems marketplace. The
Company’s 36.8% equity
interest in Maxim Power Corp.
extends market access to other
areas of the world.

Photo: CAT engine application,
Northlink ferry at Aberdeen, Scotland.

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[ 43 ]

customer support services

Customer support services includes sales of parts and servicing of
equipment, as well as service contracts to customers in the form of
long-term maintenance and repair contracts. An important Company
objective is to service a high ratio of the equipment it sells.

Douglas W. Sprout
Executive Vice President,
Customer Support Services

“We want to create an environment

where we share best practices
for achieving service excellence
across the Company. It is
a key component to achieving
a successful service-oriented
corporate culture. If something
works well, we should all
be doing it that way.”

financial performance

Total revenue from customer
support services, recorded
through Finning (Canada),
Finning (UK) and Finning South
America, was $1,068.8 million,
compared with $978.3 million in
2002, contributing 29.7% of
Finning International’s $3,593.3
million total revenue.

highlights

Our continuing emphasis on
service excellence ensures that
we constantly look to find new,
innovative solutions to lower
customers’ operating costs and
increase productivity. Our variety
of services including the provision
of new, used and rebuilt parts and
components, wide ranging repair
options, customer specialists,
maintenance support systems, oil
analysis, technical advice,
customized repair and
maintenance contracts and
supply chain logistics allow us to
provide customized solutions to
meet our customers’ ever-
changing needs.

Customer specific solutions
have led to significant success in
the Canadian oil sands. Canadian
operations have grown customer
service support revenues by
135% over the last 5 years by
providing a range of services
including full maintenance and
repair contracts. The mechanical
support group in the oil sands
has grown from 60 to 161 during
this same time frame.

At Finning South America,
we have grown our long-term
maintenance and repair contracts
to approximately 30% of our
customer support revenue.

At Finning (UK)’s construction
division, we have approximately
2,800 customer support
contracts in place, an increase
of almost 15% from 2001.

Customer support centres in both
Canada and the U.K. continue to
grow and expand their services.
For example in Canada, centres
provide around-the-clock
parts support, scheduled oil
sampling results, global
maintenance system support,
invoice viewing and technical
support. In addition, these centres
have become an integral element in
the support of our safety processes
in Canada through the monitoring
by field service technicians.

The product problem
management system first
introduced into Finning (Canada)
is now fully operational in
Finning South America. This
web-based system tracks product
issues by model and machine
type enabling mechanics to
go online and determine what
specific solutions have been used
by other Finning mechanics.
Using a common system and
sharing information throughout
the operations, further increases
efficiency and effectiveness.

opportunities

6 Sigma
A disciplined methodology for
analyzing and improving processes
that translate directly into
increased profitability is being
introduced at Finning (Canada)
and Finning South America in
early 2004, and at Finning (UK)
and Hewden Stuart at a later
date. This methodology, which we
have deliberately linked to our

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[ 44 ]

corporate strategy, involves
tackling a series of small process
improvement projects, each
taking four to six months
to complete. We expect to
achieve breakthroughs in
customer service excellence
and financial performance that
may be otherwise unattainable.

Caterpillar credits its

implementation of 6 Sigma for
achieving more than US$500
million of annual benefits in only
its second year. Caterpillar is
leading 6 Sigma training for
Finning senior executives and
project leaders, and describes
6 Sigma as “more than process
improvement. It represents a
much broader cultural philosophy
to drive continuous improvement
throughout the value chain.”

Best practices
The Company has created and is
expanding a process to formalize
the sharing of best practices
throughout each of the four
operating companies and the

Power Systems group. In 2003,
workshops and teleconferences
for responsible executives began
the ongoing process of sharing
best practices in products, parts
and service. In 2004, similar
forums will be implemented for
purchasing and technical services.

Examples of numerous
best practices that began at
one operating company and
have been extended to the
others include:

(cid:1) The problem product

management system provided
by 6 Sigma.

(cid:1) A time entry system

first introduced in South
American operations is now
being transferred to Canada
for implementation in
their workshops.

(cid:1) A component planning system

developed by the rebuild
operation in Canada during
2003 is now being implemented
in South America. This system
will allow for improved

effectiveness in the
commitment and utilization
of resources in our Component
Rebuild Centres.

(cid:1) Best practices shared between
Canada, the U.K. and South
America have resulted in online
systems allowing customers to
access a wide array of
information on products and
services such as security-
protected specific information
on their own accounts, contracts
and records.

(cid:1) Parts managers in Chile have
implemented a process
to determine under what
circumstances it is more efficient
to ship specific parts by aircraft
rather than surface transport.
The goal is to reduce delivery
times to customers as well as
lowering Finning’s costs. This has
led to changes in how selected
parts are sourced by other
Company operations.

Phoro: Field mechanics working on
a 797B truck, Albian Oil Sands, Alberta.

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[ 45 ]

corporate responsibility

At Finning, we appreciate that our success is based on the success
of our customers, their employees and their communities. In return,
we strive to play an active and constructive role in the hundreds
of communities where we operate and our over 1 1,000 employees live.

Neil R. Dickinson
Vice President, Human Resources

“We are totally committed to

making Finning a safer place to
work for the benefit of all our
employees and our customers.”

community commitment

Corporate Knights Magazine Inc.
named Finning International Inc.
one of the 50 Best Corporate
Citizens in Canada in 2003. The
magazine considered community
involvement, employee relations

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[ 46 ]

and diversity, environment,
product safety and business
practices, international scope,
corporate governance and five-
year share performance.

In Canada, the Company has

chosen the United Way as its
main charitable focus. Employees
throughout Western Canada and
at the Finning International Inc.
head office in Vancouver donated
a combined $343,998 to the
2003 United Way campaign. The
Company matched that donation
achieving a total of $687,996.
The Company also supports
dozens of other community
organizations and, through its
Voluntary Involvement Fund,
contributes to organizations for
which its employees have
provided volunteer assistance or
monetary support. Finning
(Canada) also donated $25,000

to the Canadian Red Cross for
disaster relief related to the
forest fires at Kelowna, B.C.

At Finning (UK), the charitable

focus is on four organizations.
Donations in 2003 went to
Children In Need, Comic Relief,
The Lighthouse Club, and Prince’s
Trust. Company employees also
serve as volunteers for these
organizations.

At Hewden, employees and
the Company choose to support
hundreds of community
organizations with monetary
contributions, volunteers, and
donations of machines and
operators for emergencies and
special events. Included among
the varied recipients were the
Edinburgh Military Tattoo,
the Commonwealth Games
in Manchester, the BBC program
“Small Town Gardens”,

32 temporary polling stations for
local council and Welsh Assembly
elections, and the Chest, Heart
& Stroke Fund of Scotland.
In South America, the

Company’s largest charitable
effort was directed to the
Disabled Children’s Telethon to
which the Company donated
P$15,000,000 ($31,000). Paul
Batten, Vice President, Human
Resources, representing the
Company, and Carmen Gloria
Vera, representing employees,
appeared on the Telethon during
prime time to make the donations.

health and safety

We are committed to fostering
the health and safety of all our
employees. We believe a healthy
workforce contributes significantly
to Finning’s success. As employees
we take precautions to prevent
illness or injury, and we make
appropriate changes in our
behavior or work environment
that will contribute to improving
the health and safety of others
and ourselves. Our goal is to
achieve zero lost time accidents.
In 2003, we reduced our total
number of accidents by 50%
and at the same time expanded
our operations in South America
and the U.K.

Photos left to right:

1. Military Tattoo, Edinburgh, Scotland.

2. Forest Fires, Kelowna, B.C.

3. ThinkBIG Equipment Technician

Program at NAIT.

environment

employee engagement

We are committed to conducting
our business in a manner designed
to protect the environment. In
this spirit, we apply the following
principles to our attitudes,
behaviours and performance in
environmental matters:

(cid:1) Adopt environmental

management practices and
procedures that meet and exceed
the standards of each community
or region.

(cid:1) Identify, assess, and reduce

environmental risk through an
environmental audit program.

(cid:1) Educate employees on

changes to environmental laws
and regulations.

(cid:1) Use suppliers and waste

contractors that have high
environmental standards and
practices and routinely audit
their performance.

(cid:1) Ensure that future development
to our business, operations, and
facilities reflect our commitment
to environmental issues.

In the U.K., Lloyds Register
Quality Assurance certified and
registered Finning (UK)’s
environmental management
system under the environmental
standard ISO 14001. The
Company is endeavouring
to qualify for this standard in
other parts of its operations.

The Company believes that
employees who are fulfilled by
and engaged in their jobs are
more likely to utilize their natural
talents to be more productive,
more customer-focused and safer.
In 2003, we continued to work
with the Gallup Organization to
assess the level of employee
engagement. Survey data
indicates the Company is moving
in the right direction due to
considerable focus and effort
from all employees at all levels.
This important area will remain
a key pillar of our strategic effort
during 2004.

thinkBIG

Finning (Canada) and Finning
South America, in partnership
with Caterpillar, are supporting
Caterpillar’s ThinkBIG equipment
technician program at the
Northern Alberta Institute of
Technology (NAIT) in Edmonton
(began September 2003) and at
Chile’s national technical college
INACAP (beginning March 2004).
Twenty-four students will enroll
each year in each country in the
two-year program. Finning and
Caterpillar combine to provide
tools, instructors, and machinery,
and will provide job opportunities
to graduates.

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[ 47 ]

financial management

Finning achieved record revenue and strong earnings and cash flow in
2003. The Company’s balance sheet also remains strong after reflecting
the acquisitions in the year.

Wayne M. Bingham
Executive Vice President
and Chief Financial Officer

“Our investment grade status,
a patient and opportunistic
approach to acquisitions,
and sound financial management
are pillars to help us attain our
financial goals.”

highlights

Financial performance
Finning International Inc.
achieved record revenues of
$3,593.3 million, an increase
of 12.0% over 2002, and net
earnings of $132.0 million (or
$1.71 per share).

This performance was attained
despite the strengthening of the
Canadian dollar, which resulted
in the Company’s foreign-sourced
revenues and earnings translating
into fewer Canadian dollars.

In 2003, the Company incurred

certain income and expense
items that are not reflective of
ongoing operations, including
a gain of $13.8 million from the
sale of Finning (UK)’s power
rental business, and expenses
of $22.1 million related to the
implementation of the new
DBSi computer system at Finning
(UK). Adjusting for these items
results in what the Company
refers to as “normalized net
earnings”. In 2003 normalized
net earnings were $135.0 million
($1.75 per share), compared
with 2002’s normalized net
earnings of $127.6 million
($1.66 per share).

Major acquisitions
Completed the acquisitions
of Macrosa Del Plata S.A.
and General Machinery Co. S.A.,
the Caterpillar dealerships
in Argentina and Uruguay
respectively, for $43.3 million.
The purchase price of Matreq
S.A., the Caterpillar dealership in
Bolivia, was $8.9 million.

Expanded to a 20% share of the
U.K. materials handling market
with the $213 million acquisition
of Lex Harvey.

The acquisitions were funded

through debt supported by
the Company’s sound balance
sheet. These acquisitions
contributed to both the revenues
and the earnings of the Company
in 2003.

Eurobond offering
Completed the Company’s first-
ever international debt offering
with a successful 10-year 200-
million Sterling Eurobond issue,
rated BBB+ by Standard and
Poor’s and listed on the
Luxembourg Stock Exchange.
The Eurobond bears interest at
5.625% per year, payable
annually, and was priced at
99.043% of its principal amount
to yield 5.753% per year.
Proceeds were used to finance
the Lex Harvey acquisition and to
repay existing bank indebtedness.

Dividend increase
Paid an annual dividend of $0.36
cents per share ($0.09 per share
declared and distributed
quarterly), compared with the
previous year’s dividend of $0.30
per share ($0.07, $0.07, $0.08,
and $0.08 per share declared
and distributed quarterly).

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[ 48 ]

Normal course issuer bid
Announced the renewal of
the normal course issuer bid
through the facilities of the
Toronto Stock Exchange.
Under this issuer bid, Finning
can purchase up to 7.8 million
common shares during the one
year ending on December 7,
2004. All shares purchased
under the issuer bid will be
cancelled. In 2003, Finning
purchased a total of 1,338,900
common shares at an average
price of $24.51 per share.

opportunities

Focus on growth
and opportunities
The Company pursues a growth
strategy consistent with the
Finning Formula. This strategy
requires financial management
to focus on:

(cid:1) Facilitating the achievement
of the Company’s three key
long-term financial performance
objectives – 15% annual
revenue and earnings growth,
20% return on equity, and
a 30% share of all markets
the Company targets as its
core business.

(cid:1) Ensuring the Company’s
financial resources are
continually capable of seizing
acquisition opportunities that
meet its core business and
value criteria.

(cid:1) Maintaining the Company’s
credit rating and balance
sheet strength.

A new avenue for financing
The successful Eurobond issue
in 2003 demonstrated the
Company’s attractiveness to
international capital markets,
providing the Company with
new sources of financing for
future growth.

BBB+ and BBB
(high) credit ratings
The Company ended the year
with a debt to total capital ratio
of 44%, compared with 38% at
the end of 2002, reflecting
increased debt to finance the
acquisitions in 2003. The
Company retained its BBB+ long-
term credit rating from Standard
and Poor’s and its BBB (high)
long-term rating with Dominion
Bond Rating Service. The
Company has available short-term
bank credit of approximately
$1 billion to act on business
opportunities as they arise.

Expanded Management team
The financial management
team has been enhanced by
the addition of a full-time Vice
President, Corporate
Development and Strategic
Planning to reflect the Company’s
focus on strategic growth and
financial performance. In
addition, the Vice President
Corporate Controller’s
responsibilities have been
expanded to reflect increased
emphasis on financial reporting,
enterprise risk management and
corporate governance.

Dividend policy
The Board of Directors’ stated
objective of maintaining a
competitive dividend resulted in
an annual dividend increase from
$0.30 per share in 2002 to $0.36
per share in 2003. The Company
also announced an increase in its
quarterly dividend to $0.10 per
share in February 2004.

Integrating assets
Having completed a number of
major acquisitions in 2003, the
Company has a priority in 2004
to integrate the new businesses
and to pursue synergies and
efficiencies across the expanded
operations. The Company,
however, remains prepared to
pursue prudent acquisitions.

DBSi computer
software system
The new Caterpillar DBSi
computer software system was
successfully installed at Finning
(UK) in early 2004. This will be
a year where management will
lever the enhanced capabilities
of the new system.

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[ 49 ]

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[ 50 ]

management’s discussion and analysis

This discussion and analysis of Finning International Inc. (Finning or the Company) should be read in conjunction with
the consolidated financial statements and accompanying notes. The results reported herein have been prepared in
accordance with Canadian generally accepted accounting principles (GAAP) and are presented in Canadian dollars
unless otherwise stated.

results of operation

Finning’s consolidated revenues in 2003 increased 12% from 2002 to $3,593.3 million, while consolidated net income
was relatively unchanged at $132.0 million. Basic earnings per share (EPS) for 2003 was $1.71 compared with $1.72 in
2002, representing a slight decrease.

The results for the year included other net expenses that are not reflective of the Company’s ongoing operations

totaling $4.3 million pre-tax (2002: $5.6 million pre-tax other income). Excluding these items, normalized earnings
before interest and taxes (EBIT) for the year was $259.5 million (2002: $272.2 million), normalized net income was
$135.0 million (2002: $127.6 million) and normalized basic EPS was $1.75 (2002: $1.66). Please refer to Schedule One
for a summary of these items and a reconciliation of normalized (non-GAAP) results to published results.

Finning continued to deliver solid results despite the effects of a strengthening Canadian dollar, the impact of a
competitive U.K. rental hire market and higher costs for pension plans. Finning achieved record revenues in the year
reflecting the contribution from the newly acquired Caterpillar dealerships in Argentina, Uruguay and Bolivia, and the
Finning (UK) acquisition of the Lex Harvey business in 2003.

Finning’s business is geographically diversified and conducts business in multiple currencies, the most significant of
which are the US dollar, the Canadian dollar, the U.K. pound sterling and the Chilean peso. The most significant foreign
exchange impact on the Company’s net income is the translation of foreign currency based earnings into Canadian
dollars. Compared to the prior year, the Canadian dollar strengthened against all the other currencies in which the
Company transacts its business. As a result, there was a negative impact on EBIT and net income of $31.1 million and
$15.1 million, respectively.

Cash flow after changes in working capital was $384.2 million compared with $472.8 million in 2002. Depreciation

taken on the higher rental assets base ($51.9 million greater than in 2002) was offset by an additional $121.9 million
investment in working capital items mainly to support the activity in the businesses acquired during the year.
Increases in accounts receivable and other assets were a result of supporting the normal operations of the Lex Harvey
business in the U.K. and the strong December activity in Argentina. The investment in inventories supports South
American deliveries in the first quarter of 2004. Cash used for income taxes reflects the timing of tax instalments. The
Company reinvested $261.6 million (2002: $305.7 million) in revenue-earning rental and leased assets during the year.
This reduction reflects sales of the lease portfolio to Caterpillar Financial Services in the second and fourth quarters
of 2003 ($63.6 million in 2003 compared with $22.7 million in 2002). Taken together, these activities resulted in cash
flow from operating activities decreasing from $167.1 million in 2002 to $122.7 million in 2003.

consolidated quarterly results

(C$ million, except for share data)
2003

Total revenue
Net income
Earnings per common share

- basic
- diluted

(C$ million, except for share data)
2002
Total revenue
Net income
Earnings per common share

- basic
- diluted

For the three months ended

Mar-31
874.2
35 . 1

Jun-30
86 1 . 1
32.2

Sep-30
925.0
36.6

Dec-31
933.0
28. 1

Total
3,593.3
132.0

$ 0.45
$ 0.44

$ 0.42
$ 0 .4 1

$ 0.48
$ 0.47

$ 0.36
$ 0.36

$ 1 . 7 1
1.68
$

For the three months ended

Mar-31
771.5
30.7

Jun-30
797.4
34.7

Sep-30
790.9
35.6

Dec-31
847.7
31.3

Total
3,207.5
132.3

$
$

0.40
0.39

$
$

0.46
0.44

$
$

0.46
0.45

$
$

0.40
0.40

$
$

1 .72
1.68

Photo: Con-West Contracting excavator working at a construction site in Burnaby, B.C.

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[ 51 ]

management’s discussion and analysis

fourth quarter results

revenue by operation
(C$ million)
Three months ended December 31

400

350

300

250

200

150

100

378

367

221

198

188

175

146

108

Canada

South
America

Hewden

revenue by line of business
(C$ million)
Three months ended December 31

300

250

200

150

100

264

244

278

261

211

190

New
Equip

Power &
Energy

Used
Equip

Equip
Rental

CSS

Other

2003

2002

Finning’s consolidated revenues hit record levels in the fourth quarter of
2003 and increased 10% from 2002 levels to $933.0 million mainly as a
result of higher revenues in the Company’s Canadian, South American and
U.K. operations. The increase in South America and the U.K. reflects the
contribution from the newly acquired Caterpillar dealerships in Argentina,
Uruguay and Bolivia, and the Finning (UK) acquisition of the Lex Harvey
business in 2003. The Company experienced continued strength
in all core lines of business on a year over year basis for the quarter.

Net income for the fourth quarter of 2003 declined 10% to $28.1 million
and EPS for the quarter was $0.36 compared with $0.40 in 2002. Excluding
other net expenses that are not reflective of the Company’s ongoing
operations, normalized net income for the fourth quarter was $32.7
million (2002: $36.6 million) and normalized basic EPS was $0.42 (2002:
$0.47). The year over year decrease for the 3 months ended December 31
is primarily due to the negative impact of foreign exchange and lower
earnings from Hewden due to competitive pressures. There were also lower
earnings from Finning (UK) due to lower activity from the construction
business, absence of the power rentals business which was sold in the first
quarter of 2003, and a focus in the quarter on the implementation of the
DBSi system. Partially offsetting the decline in the fourth quarter of 2003
were the accretive earnings from acquisitions made in 2003.

During the fourth quarter, the Canadian dollar was stronger against

all the other currencies in which the Company transacts its business
compared with the same period last year. As a result, foreign exchange
negatively impacted EBIT and net income by $19.7 million and $9.2
million, respectively.

Cash flow after changes in working capital was $91.8 million for the three months ended December 31, 2003 compared
with $40.5 million for the same period in 2002. Cash expended on working capital items in the fourth quarter of 2003
was $34.4 million less than that in the comparable period of 2002. The Company reinvested $48.0 million (2002:
$36.7 million) in revenue-earning assets during the fourth quarter. Investment in rental assets in the fourth quarter
of 2003 was $45.2 million higher compared with the fourth quarter of 2002 while equipment leased to customers
decreased by $33.9 million reflecting the fourth quarter sale of leases to Caterpillar Financial Services Limited.

annual financial summary

The table below sets forth summary financial data for the years indicated.

(C$ million)
Revenue
Gross profit
Selling, general & administrative expenses
Normalized EBIT
Other expenses (income)
EBIT
Finance costs and interest on other indebtedness
Provision for income taxes
Non-controlling interests
Net income

2003
$ 3,593.3
1,037.6
778.1
259.5
4.3
255.2
76.9
26.6
1 9.7
$ 132.0

2002
$ 3,207.5
959.7
687.5
272.2
(5.6)
277.8
79.8
47.7
18.0
132.3

(% of Revenue)

2003

2002

28.9%
21.7%
7.2%
0.1 %
7. 1 %
2.1 %
0.7 %
0.5%
3.7%

29.9%
21 .4%
8.5%
(0.2)%
8.7%
2.5%
1.5%
0.6%
4.1 %

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[ 52 ]

management’s discussion and analysis

revenues by operating units for the year

In 2003, consolidated revenues were higher by $385.8 million when compared with the prior year. Finning
experienced continued strength in all lines of business with the exception of the leasing and finance lines of business.
The reduction in finance and lease revenues is a result of a lower finance and leased assets portfolio due to
dispositions undertaken in late 2002 and 2003 in Canada.

Finning’s order backlog has significantly increased from December 2002. Backlog for new equipment, power

systems, and material handling units at December 31, 2003 was $420 million compared with $360 million at
September 30, 2003 and $300 million at December 31, 2002.

The table below provides details of revenue by operations and lines of business for the year.

(C$ million)

2003

New mobile equipment
New power & energy systems
Used equipment
Equipment rental
Operating leases
Customer support services
Finance and other

Total

Canada

UK
$ 494.9 $ 318.2
118.1
115.9
137.4

101.8
177.4
116.1
65.4
497.1
3.6

—

244.6

—

South
America
$ 138.5
42.5
26.7
25.8
0.5
327.1
0.9

Hewden
$ 14.4

—

43.6
542.0

—

40.8

—

$ 1,456.3 $ 934.2 $ 562.0 $ 640.8
17.9%

26.0%

15.6%

Other
—
—
—
—
—
—
—
—
0.0%

Consolidated
$ 966.0
262.4
363.6
821.3
65.9
1,109.6
4.5
$3,593.3
100.0%

Revenue %
26.9%
7.3%
10.1 %
22.9%
1.8%
30.9%
0.1 %
100.0%

Revenue percentage by operations 40.5%

2002
New mobile equipment
New power & energy systems
Used equipment
Equipment rental
Operating leases
Customer support services
Finance and other

Total

Revenue percentage by operations

Finning (Canada)

391.0
73 .1
142.9
102.2
87.6
464.5
8.0
$ 1,269.3
39.6%

Canada

Hewden

Other

Consolidated

Revenue %

South
America

$ 98.4
26.7
13.8
15.8

$ 325.0
92.2
124.8
61.2

10.9

—

48.2
565.3

—

225.0

—

$ 828.2
25.8%

288.8
1 .1
$ 444.6
13.9%

40.9
—
$ 665.3
20.7%

— $ 825.3
192.0
—
329.7
—
744.5
—
87.6
—
1,019.2
—
9.2
$ 3,207.5
100.0%

0.1
0.1
0.0%

25.7%
6.0%
10.3%
23.2%
2.7%
31.8%
0.3%
100.0%

Revenues in 2003 increased 14.7% to $1,456.3 million. Revenues in 2003 exceeded 2002 levels despite the impact
of a strengthening Canadian dollar, which reduced revenues by $67.2 million in 2003 compared with 2002.

Most of the year over year increase was due to the continued strength in the mining and gas/energy sectors

resulting in an increase in the sales of new mobile equipment and new power and energy systems. The improvement
in new equipment sales continues to be supported by a strong order backlog. The volume of new orders increased
in units by 41% in 2003 but the dollar value of new orders was $12 million lower than 2002. This is a result of large
year over year increase in orders from the oilfield and construction sectors offset by lower, high dollar mining orders.
New equipment sales also increased as a result of selling equipment leased to customers to Caterpillar Financial

Services Limited during the year totaling $56.8 million ($23.4 million in 2002). Consequently, finance and lease
revenues declined by 27.8% to $69.0 million due to the reduction in the asset portfolio. Finning expects finance and
lease revenues to be lower in 2004 compared with 2003 as a result of the portfolio reduction in 2003.

Used equipment sales increased 24.1% to $177.4 million in 2003 as a result of a successful rental and lease
conversion program and sales of leased equipment to Caterpillar Financial Services Limited totaling $17.0 million
($1.9 million in 2002).

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management’s discussion and analysis

revenue by operation
(C$ million)
Twelve months ended December 31

1,500

1,456

1,269

1,200

900

600

300

934

828

641 665

562

445

Canada

South
America

Hewden

revenue by line of business
(C$ million)
Twelve months ended December 31

1,200

1,000

966

1,110

1,019

800

600

400

200

825

821

744

364 330

262

192

70 97

New
Equip

Power &
Energy

Used
Equip

Equip
Rental

CSS

Other

2003

2002

Revenues from customer support services increased 7.0% overall in 2003
compared with 2002. Volume and higher US based prices were offset
by the impact of an approximate 7.5% reduction of parts selling prices
as a result of the strengthening Canadian dollar relative to the
United States dollar.

Equipment rental revenues were 13.6% higher than 2002 reflecting

a growing rental business in Canada. At December 31, 2003, a total
of 25 CAT rental stores (2002: 12) were operating in British Columbia
and Alberta.

Finning (UK)

Revenues in 2003 were higher by 12.8% compared with the prior year
primarily due to higher rental revenues reflecting the impact of the
acquisition of the Lex Harvey business in 2003, an increase in new
equipment sales and customer support services, especially in Power
Systems. In local currency, revenues improved 16.3%. This increase was
partially offset by lower used equipment sales and the effect of translating
revenues from pound Sterling to Canadian dollars.

Rental revenues more than doubled in 2003 primarily due to Finning
(UK)’s acquisition of the Lex Harvey business effective June 1, 2003, which
contributed $109.4 million to revenues in 2003. This was offset by a $14.3
million reduction in rental revenues due to the sale of the Power Systems
rental business in the first quarter of 2003. With the addition of Lex
Harvey, rental revenue comprises 14.7% of the total revenue compared
with 7.4% in the previous year.

Total new equipment revenues in 2003 increased 4.6% from the
prior year in Canadian dollars (7.8% in local currency). This increase
was primarily due to revenues from the Power & Energy Systems line of

business which increased 28.1% in 2003 with more deliveries of air conditioning units and generators to the Electric
Power Generation Diesel sector.

Used equipment revenues declined due to lower demand from domestic and international markets.

Finning South America

Revenues from South America increased $117.4 million, or 26.4%, compared with 2002. In US dollar terms, revenues in
South America improved 42.9% over 2002. This increase was due to contributions from the 2003 acquisitions of
Caterpillar dealerships in Argentina, Uruguay and Bolivia, which contributed $142.0 million. In the Chilean operation,
revenues declined by $24.6 million, or 5.6%, compared with 2002 due to soft copper prices at the beginning of 2003
and customer deferral of equipment purchases into 2004 to take advantage of lower pricing due to the new free trade
agreement with the United States effective January 2004. South American revenues continue to strengthen due to
large equipment sales and growth in customer support services.

Revenue in 2003 improved by 13.3% in customer support services mainly due to the addition of the Argentina

dealership in 2003 as well as continued benefit from maintenance and repair agreements for existing mining customers.
Copper prices, currently at seven-year high levels, are forecast to remain strong in 2004. This will continue to drive
demand for product from large mining customers in Chile and create opportunities for our operations in South America.
Effective October 1, 2003, the Company adopted the US dollar as the functional currency of its Chilean operations.

The Company’s other operations in South America that were acquired during the year are all using the US dollar as
their functional currency. Management believes that the US dollar best portrays the underlying economic transactions
of its South American operations and reflects how the businesses are managed. The net effect of this prospective
change was to decrease net assets by $18.3 million and increase net income reported for the fourth quarter of 2003
by approximately $3.6 million.

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[ 54 ]

management’s discussion and analysis

Hewden

2003 annual revenues of $640.8 million were 3.7% lower than 2002, being impacted by the strengthening of the
Canadian dollar relative to the pound Sterling. In local currency, revenues were relatively unchanged year over year.
Revenues in 2003 continued to reflect the competitiveness in the U.K. rental hire market. While customer demand
remains strong, the rental hire market is challenged with overcapacity and downward pressure on prices.

In order to increase market share and performance, under-performing depots were closed in 2002 and 2003

and new depots were opened in more appropriate locations. As of December 31, 2003, Hewden operated 317 locations
throughout the U.K. with future expansion opportunities being predominately through complementary acquisitions.

gross profits

Gross profits increased $77.9 million (8.1%) to $1,037.6 million in 2003 compared with 2002. This increase is due
to higher gross profit provided by the Company’s Canadian, Finning (UK) and South American operations reflecting
volume increases and acquisitions offset by the negative effect of the strengthening Canadian dollar when translating
foreign currency based earnings and the negative impact of the appreciation of the Euro against pound Sterling
in the materials handling business as fleet purchases are made in Euros. As a percentage of revenue, gross margin
was lower in 2003 at 28.9% compared with 29.9% in 2002, reflecting a slight revenue mix shift to lower margined
equipment sales.

selling, general and administrative expenses

Selling, general and administrative expenses (SG&A) increased $90.6 million (13.2%) to $778.1 million in 2003
compared with 2002. As a percentage of 2003 revenue, SG&A was 21.7%, which is comparable with 21.4% in 2002.
Influencing factors included:
• higher selling costs resulting from sales volume increases and higher operating expenses supporting the rental

business ($53.6 million).

• higher general and administrative costs of $37.0 million, which included the following:

• new acquisitions which are still in the process of being integrated ($14.9 million).
• increased operating costs in Canada, Finning (UK) and Hewden due to higher pension expenses ($7.0 million).
• higher expenses for long-term incentive plans of $7.8 million. These costs are directly related to achieving the
common share price vesting hurdles established for the long-term incentive plans. The Company’s share price
increased by more than 17% over the year to $30.00 per share at December 31, 2003 which equates
to an increase in the Company’s market capitalization of over $345 million.

other expenses (income)

Other expenses (income) include items shown separately to facilitate comparison with the prior year. As a result
of these items, which are not reflective of ongoing operations, Finning recorded a pre-tax net other expense
of $4.3 million, $3.0 million after-tax in 2003. These pre-tax items included:
• costs incurred on the DBSi process reengineering project of $22.1 million (2002: $10.2 million). DBSi is the new
information technology for the Caterpillar Dealer Business System. DBSi enhancements encompass customer
relationship management, finance and administration, and supply chain management. The implementation of DBSi
was successfully completed in Finning (UK) in January 2004.

• the sale of the Finning (UK) power rental business for a gain of $13.8 million.
• the sale of surplus real estate in Canada and the U.K. for a gain of $1.8 million (2002: $15.2 million).
• $1.6 million deferred gain amortization relating to the 2001 sale of the Materials Handling business

in Canada (2002: $1.6 million).

• equity investment gain of $0.6 million (2002: loss of $1.0 million).

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[ 55 ]

management’s discussion and analysis

earnings before interest and taxes (ebit)

EBIT decreased by 8.1% to $255.2 million compared with $277.8 million in 2002 primarily due to the impact of
foreign exchange, the cost of long term incentive plans and expenses incurred in 2003 related to the DBSi software
implementation and business process reengineering project. EBIT as a percentage of revenue was 7.1% in 2003
(2002: 8.7%). Excluding DBSi costs and certain other items, 2003 normalized EBIT for the year was $259.5 million
compared with normalized 2002 EBIT of $272.2 million.

ebit by operation*
(C$ million)
Twelve months ended December 31

120

120.5

113.0

79.5

47.6 49.3

59.9

44.8

52.1

Canada

South
America

Hewden

*Excludes other expenses (income)

2003

2002

Major components of the year-to-date EBIT variance were ($ million):

2002 annual EBIT

Increase due to 2003 acquisitions
Operations — growth / cost savings
Net divestitures
Cost of long term incentive plan
Increased pension costs
Other expenses/(income) — increase in net expenses
Foreign exchange impact

2003 annual EBIT

$ 277.8
23.0
13.5
(3.3)
(7.8)
(7.0)
(9.9)
(31 .1 )
$ 255.2

The table below illustrates annual EBIT contribution by operations:

(C$ million)

2003

Revenue from external sources
Operating costs
Depreciation
Other expenses (income)
Earnings before interest and tax
EBIT as a percentage of revenue
EBIT percentage by operations

2002
Revenue from external sources
Operating costs
Depreciation
Other expenses (income)
Earnings before interest and tax
EBIT as a percentage of revenue
EBIT percentage by operations

Canada
$ 1,456.3
1,210.5
125.3

UK
$ 934.2
820.9
65.7

South
America
$ 562.0
480.0
22.1

Hewden
$ 640.8
446.9
141.8

—

$ 120.5
8.3%
47.2%

47.6
5.1%
18.7%

59.9
10.7%
23.5%

$ 52.1
8. 1 %
20.4%

Canada
$ 1,269.3
1,021.2
135.1

—

113.0
8.9%
40.7%

UK
828.2
752.8
26.1

South
America
$ 444.6
388.1
1 1 .7

Hewden
$ 665.3
443.7
142.1

—

49.3
6.0%
17.8%

44.8
10.1%
16.1%

79.5
1 1 .9%
28.6%

finance costs and interest on other indebtedness

—
20.6
—
4.3
(24.9)

Other Consolidated
$ 3,593.3
2,978.9
354.9
4.3
$ 255.2
7.1 %
100.0%

(9.8)%

0.1
14.5

Other Consolidated
$ 3,207.5
2,620.3
315.0
(5.6)
277.8
8.7%
100.0%

—
(5.6)
(8.8)

(3.2)%

Finance costs and interest on other indebtedness in 2003 was $76.9 million, or $2.9 million lower than 2002. The costs
associated with slightly higher average debt levels in 2003 compared with 2002 were more than offset by the impact
of interest rate swap contracts and the stronger Canadian dollar on foreign denominated debt. The increase in debt
levels is a result of funding the Company’s 2003 acquisitions through debt, most notably with the issuance of the
£200 million Eurobond in May 2003.

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[ 56 ]

management’s discussion and analysis

provision for income taxes

Income tax expense in 2003 amounted to $26.6 million (2002: $47.7 million), reflecting an effective tax rate of 16.8%
during the year compared with 26.5% in 2002. The lower effective tax rate reflects a lower effective Canadian tax
rate, favourable tax reassessments during 2003, and effective tax planning strategies. Management anticipates that
for 2004, the consolidated effective tax rate will return to a level approximating 22%.

non-controlling interests

The Company formed a partnership in 2001 for the purpose of raising capital to fund the acquisition of Hewden.
The private investors injected $425 million into the partnership in return for non-controlling partnership interests.
The financial position, results of operations and cash flows of the partnership are consolidated with the Company
from its date of inception. The distribution to the non-controlling partnership interests for the year was $19.7 million,
representing a yield of 4.6% compared with $18.0 million and a yield of 4.2% in 2002. The higher rates in 2003 are
due to the increase in the Canadian dollar bankers’ acceptances rate which is used in determining the distributions
to the partnership interests.

Through their partnership interest, the private investors have a preferred interest in the shares of Hewden ranking

in priority to the debt securities issued by the Company. The return to which the private investors are entitled is
limited to a quarterly distribution on their partnership interests, which is calculated with reference to Canadian dollar
bankers’ acceptances as discussed above. At the end of five years, the yield on the partnership interest will be
renegotiated. If no agreement on a new yield is reached, the private investors have the right to sell their partnership
interests. The partnership has a maximum life of 75 years but may be liquidated earlier if the partnership and the
Company fail to agree on a new yield on the partnership interest and the parties have been unable to arrange a sale
of the partnership interest to a new investor. The Company has the option of purchasing the partnership interest held
by the private investors throughout the life of the partnership for an amount equal to the capital invested in the
partnership interest by the private investors. In the event the Company does not purchase the partnership interest
and the partnership is liquidated, the Company will be required to inject funds to a maximum of approximately
$200 million if the private investors are unable to recover their investment from the sale of the shares of Hewden.
The Company’s obligation to inject these funds would rank equally with the debt securities.

No return of capital is scheduled during the life of the partnership but a partial return of capital is required

in the case of certain sales of assets by Hewden out of the ordinary course of business.

net income

Net income was relatively unchanged at $132.0 million in 2003 compared with the prior year, with basic earnings per share
in 2003 of $1.71 compared with $1.72 earned in 2002. Normalized for other items noted above, net income was $135.0
million compared with $127.6 million last year and normalized basic earnings per share increased to $1.75 from $1.66.

accounting estimates and contingencies

The preparation of financial statements in accordance with Canadian generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities,
revenues, expenses and disclosure of contingent assets and liabilities. The more significant estimates include: fair
market values for goodwill impairment tests, reserves for warranty, provisions for income tax, residual values for
leased assets and costs associated with maintenance and repair contracts.

During the year, the Company performs an assessment of goodwill by estimating the fair value of operations to
which the goodwill relates using the expected present value of future discounted cash flows, which resulted in no
indication of impairment in 2003. The Company performs impairment tests on its goodwill balances on an annual
basis or as warranted by events or circumstances. A significant portion of recorded goodwill relates to Hewden Stuart
plc, acquired in 2001.

Due to the size, complexity and nature of the Company’s operations, various legal matters are pending. In the

opinion of management, these matters will not have a material effect on the Company’s consolidated financial
position or results of operations.

Proceedings amounting to £16.6 million plus costs and interest have been brought against Hewden Tower Cranes
Limited, a subsidiary of the Company, by Yarm Road Limited and Cleveland Bridge U.K. Limited, for damages arising

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[ 57 ]

management’s discussion and analysis

from the collapse of a tower crane at the Canary Wharf site in the U.K. on May 21, 2000. The business of Hewden
Tower Cranes Limited was sold by the Company in October 2002.

On January 12, 2004, an award of £1.5 million was awarded to the plaintiff under an adjudication process that
remains binding until the matter is ruled upon by the High Court of Justice. The trial date is set for June 2004.
The Company has accounted for the adjudication decision in 2003. The outcome of this claim is uncertain and the
resultant loss, if any, to the Company is not determinable.

cash flow
(C$ million)
Cash flow after working capital changes

472.8

384.2

500

400

300

200

100

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

91.8

40.5

YTD

2003

2002

• 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

Operating cash flow (before working capital items and revenue-earning assets) was $506.1 million for the year ended
December 31, 2003, an increase of 9.9% from the 2002 comparable balance of $460.6 million. Cash flow after
changes in working capital for the year was $384.2 million, down 18.7% from 2002. Depreciation taken on the
higher rental assets base ($51.9 million greater than 2002) was offset by an additional $121.9 million investment in
working capital items mainly to support the activity in the businesses acquired during the year. Increases in accounts
receivable and other assets were a result of supporting the normal operations of the Lex Harvey business in the
U.K. and the strong December activity in Argentina. The investment in inventories supports South American deliveries
in the first quarter of 2004. Cash used for income taxes reflects the timing of tax instalments.

Excluding business acquisitions, the Company reinvested $261.6 million (2002: $305.7 million) in revenue-earning

rental and leased assets during the year. The lower net investment in 2003 reflects sales of the lease portfolio to
Caterpillar Financial Services Limited in the second and fourth quarters of 2003 ($63.6 million in 2003, compared
with $22.7 million in 2002). These activities resulted in cash flow from operating activities decreasing from $167.1
million in 2002 to $122.7 million in 2003.

Cash Used For Investing Activities

Net cash utilized for investing activities totalled $314.3 million in 2003 compared with cash provided in 2002
of $49.1 million. Cash was utilized for investing in 2003 for the following items:

• $212.7 million for the acquisition of Lex Harvey.
• $72.1 million for the acquisition of Caterpillar dealerships in Argentina, Uruguay and Bolivia.
• Operational net capital expenditures of $63.6 million, an increase from 2002 due to the capital requirements

of the new acquisitions in 2003 and operating facility enhancements.

These uses of cash in 2003 were offset by the sale of the Finning (UK) Power Systems rental business, which

generated $34.1 million in cash.

Net cash generated from investing activities in 2002 of $49.1 million was primarily from the divestiture of Hewden’s

non-core business Tower Cranes, and from the net proceeds of the sale/leaseback of the Canadian operations’
properties. This was partially offset by cash investments in Maxim Power Corporation (Maxim), Distribuidora Perkins
Chilena SAC (Diperk) in Chile and the purchase of the remaining assets of Maxxiom Limited in the U.K.

The Company’s planned capital expenditures for 2004 are projected to total $139 million (2003: $90 million) and will

be funded through operations.

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management’s discussion and analysis

Financing Activities

To complement the internally generated funds from operating and investing activities, the Company has available
approximately $1,016 million in unsecured short-term credit facilities. At the year-end, approximately $104.9 million
was drawn against the short-term facilities. The Company also has a commercial paper program for $300 million,
which can be issued against the designated short-term credit facilities amount.

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 the Company’s senior debentures and medium
term notes as BBB (high) and its commercial paper as R-2 (high). The S&P rating on long-term debt is BBB+ stable.

As at December 31, 2003 overall debt increased by $273.8 million, reflecting the increased financing requirement
for acquisitions. Short-term debt decreased by $153.2 million to $104.9 million during the year, while long-term debt
increased by $427.0 million to $983.4 million.

On May 30, 2003, Finning issued a 10-year, unsecured £200 million Eurobond. The Eurobond bears coupon interest

at 5.625% per annum, payable annually commencing May 30, 2004. The Eurobond was priced at 99.043% of its
principal amount to yield 5.753% per annum. The Eurobond is rated BBB+ by Standard and Poor’s. The Eurobond
proceeds of $449.5 million at the date of issuance were utilized to finance the acquisition of Lex Harvey as well as
repaying existing bank indebtedness.

In the fourth quarter of 2002, the Company generated cash of $88.6 million upon the sale of the majority of its
instalment notes receivable portfolio to Caterpillar Financial Services Limited. In addition, the Company entered into
a $120.0 million securitization program for its accounts receivable portfolio in Canada, described below. In December
2002, the Company sold $30.0 million as an initial amount under the program. The cash from these activities
was redeployed to fund new acquisitions and other growth initiatives. Also, in late 2002, cash was used to make
a payment of $39.7 million to fund non-registered pension plans that were previously underfunded.

The Company did not issue equity in 2003 or 2002. Share capital increased from $233.4 million in 2002 to $248.9
million at the end of 2003, reflecting the exercise of stock options for approximately 1.5 million common shares. Under
a normal course issuer bid, which began on December 3, 2002, the Company was allowed to buy back a maximum
of approximately 7.7 million shares (10% of the Company’s public float) up to December 2, 2003. The Company
undertook this issuer bid, as it believed that the current market price of its common shares did not reflect the
underlying value of the Company. The Company re-filed a normal course issuer bid on December 8, 2003, which
allows the Company to buy back up to approximately 7.8 million shares (10% of the Company’s float) between
December 8, 2003 and December 7, 2004. Finning repurchased 1,338,900 common shares during 2003 as part of
the normal course issuer bid that was in place during the year. These shares were repurchased at an average price
of $24.51 for an aggregate cost of $32.8 million which was allocated to reduce share capital by $4.0 million and
retained earnings by $28.8 million. Finning did not repurchase any common shares during 2002.

As a result of management’s confidence in the future earnings for the Company and commitment to the return
of value to its shareholders, the Company increased its quarterly dividend rate during 2002 and 2003. The quarterly
dividend rate was increased in total by 4 cents over this period. Subsequent to year-end, in February 2004 the
dividend rate was further increased by one cent to ten cents per common share.

Contractual Obligations

Principal payments on contractual obligations in each of the next five years and thereafter are as follows:

(C$ million)
Long-term debt
Operating leases
Total contractual obligations

2004

$ 235.2
63.5
$ 298.7

2005

8.8
53.1
$ 61 .9

2006

$ 78.1
42.7
$ 120.8

2007

—
34.4
$ 34.4

2008 Thereafter

$ 200.0
28.2
$ 228.2

$ 461.3
218.5
$ 679.8

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[ 59 ]

management’s discussion and analysis

Off-Balance Sheet Arrangement

Under an agreement dated November 29, 2002, the Company sold a $30.0 million co-ownership interest in a pool
of eligible non-interest bearing trade receivables to a multi-seller securitization trust. The securitization program was
not increased in 2003. Under the terms of this agreement, which expires on November 29, 2007, the Company can sell
co-ownership interests of up to $120.0 million on a revolving basis. The Company retains a subordinated interest in the
cash flows arising from the eligible receivables underlying the trust’s co-ownership interest. The trust and its investors
do not have recourse to the Company’s other assets in the event that obligors fail to pay the underlying receivables
when due. Pursuant to the agreement, the Company continues to service the pool of underlying receivables.

As at December 31, 2003, the Company is carrying a retained interest in the transferred receivables in the amount

of $9.0 million (as at December 31, 2002 – $8.2 million).

For the year ended December 31, 2003, the Company recognized a pre-tax loss of $0.9 million (December 2002:
$0.1 million) relating to these transfers. The Company estimates the fair value of its retained interest and computes
the loss on sale using a discounted cash flow model. The key assumptions underlying this model are:

Cost of funds
Weighted average life in days
Average credit loss ratio
Average dilution ratio
Servicing fee rate

Fair value of retained interest

December 31, 2003
3.08%

30.4

0.1 1 %
6.57%
2.0%

$7.7 million

Range for year ended 2003
3.05% to 3.58%
23.3 to 34.9

(0.454)% to 0.113%
4.98% to 8.27%
2.0%

The impact of an immediate 10 percent and 20 percent adverse change in the average dilution ratio on the current fair
value of the retained interest would be reductions of approximately $0.3 million and $0.5 million, respectively. The
impact of an immediate 10 percent and 20 percent adverse change in the weighted average life in days on the current
fair value of the retained interest would be reductions of approximately $0.7 million and $1.3 million, respectively. The
sensitivity of the current fair value of the retained interest or residual cash flows to an immediate 10 percent and 20
percent adverse change in each of the remaining assumptions is not significant.

Certain cash flows received from and paid to the securitization trust are noted below:

(C$ million)
For the years ended December 31

Proceeds from new securitization
Proceeds from revolving reinvestment of collections

Employee Share Purchase Plan

2003
—
29.6

$
$

2002
30.0
25.0

$
$

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. At December 31, 2003, over 66% of
Canadian employees were contributing to this plan compared with 63% at the end of 2002. During 2002, the
Company commenced an All Employee Share Purchase Ownership Plan for its employees in Finning (UK) and Hewden.
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, purchased in the open market, for every three the employee
purchases. At December 31, 2003, over 23.4% and 10.3% of eligible employees in Finning (UK) and Hewden,
respectively, were contributing to this plan. These plans may be cancelled by Finning at any time.

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[ 60 ]

management’s discussion and analysis

financial leverage

The Company’s overall debt to total capital increased from 38% at the end of 2002 to 44% at the end of 2003. This
increase in the overall debt to total capital was primarily due to the additional debt requirements to fund acquisitions,
partially offset by the Company’s continued focus on asset management programs to improve current operating asset
efficiency. The debt to total capital ratios were calculated on a fully consolidated basis including the non-controlling
interests of $425.0 million as equity.

Performance ratios utilized by the Company declined slightly in 2003. Return on assets declined from the record

2002 level of 8.9% to 8.2% reflecting the impact of acquisitions, integrations and system implementation that
occurred in 2003. Return on equity, excluding other net expenses that are not regarded as part of the core business
of the Company, declined from 15.2% to 14.7%.

financial derivatives and risk management

The Company uses various financial instruments such as interest rate swaps, cross currency swaps, forward exchange
contracts and options to manage its foreign exchange and interest rate exposures. Derivative financial instruments
are always associated with a related risk position and are never used for trading or speculative purposes.

The Company continually evaluates and manages risks associated with financial derivatives. This includes counterparty

credit exposure. The Company 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.

financial risks and uncertainties

Interest Rates

The Company’s debt portfolio is comprised of both fixed and floating rate debt instruments, with terms to maturity
ranging up to ten years. In relation to its debt financing, the Company is exposed to potential changes in interest rates,
which may cause the Company’s borrowing costs to fluctuate. Floating rate debt exposes the Company to increases
in short-term interest rates, while fixed rate debt exposes the Company to future interest rate movements upon the
debt’s maturity. Increases in current or future interest rates could result in a material adverse impact on the
Company’s financial results, by causing related finance expense to rise. Further, the fair value of the Company’s fixed
rate debt obligations may be negatively affected by declines in interest rates, thereby exposing the Company to
potential losses on early settlements or refinancing. The Company minimizes its interest rate risk by balancing its
portfolio of fixed and floating rate debt, as well as managing the term to maturity of its debt portfolio. The Company
utilizes derivative instruments, such as interest rate swaps, to adjust the balance of fixed and floating rate debt,
and to reduce its overall cost of borrowing.

Credit Risk

The Company has a large diversified customer base, and is not dependent on any single customer or group of
customers. Although there is usually no significant concentration of credit risk related to the Company’s position
in trade accounts or notes receivable, the Company does have a certain degree of credit exposure arising from its
foreign exchange and interest rate derivative contracts. There is a risk that counterparties to these derivative
contracts may default on their obligations. However, the Company minimizes this risk by ensuring there is no
excessive concentration of credit risk with any single counterparty, active credit management and monitoring,
and by dealing only with highly rated financial institutions.

Financing Arrangements

The Company requires substantial amounts of capital to finance its future growth and to refinance its outstanding
debt obligations as they come due for repayment. In addition, the Company may have financing requirements arising
from the partnership formed with Hewden’s non-controlling private investors. If the cash generated from the
Company’s business, together with the credit available under existing bank facilities, is not sufficient to fund future
capital requirements, the Company will require additional debt or equity financing in the capital markets. The
Company’s ability to access capital markets on terms that are acceptable will be dependent upon prevailing market
conditions, as well as the Company’s future financial condition. Further, the Company’s ability to increase its debt
financing may be limited by its financial covenants or its credit rating objectives. Although the Company does not

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[ 61 ]

management’s discussion and analysis

anticipate any difficulties in raising funds in the future, there can be no assurance that capital will be available on
suitable terms and conditions, or that borrowing costs and credit ratings won’t be adversely affected. In addition,
the Company’s current financing arrangements contain certain restrictive covenants that may impact the Company’s
future operating and financial flexibility.

Commodity Prices

The Company’s sales are also indirectly affected by fluctuations in commodity prices. In Canada, commodity price
movements in the forestry, metals, coal and petroleum sectors can have an impact on customers’ demands for
equipment and customer service. In Chile and Argentina, 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.

Foreign Exchange Exposure

The Company is geographically diversified, with significant investments in several different countries. The Company
transacts business in multiple currencies, the most significant of which are the US dollar, the Canadian dollar, the U.K.
pound Sterling, the Chilean peso, and the European euro. As a result, the Company has a certain degree of foreign
currency exposure with respect to items denominated in foreign currencies. The three main types of foreign exchange
risk of the Company can be categorized as follows:

Investment in Foreign Operations
All of the Company’s foreign operations are considered self-sustaining. Accordingly, assets and liabilities are
translated into Canadian dollars using the exchange rates in effect at the balance sheet dates. Any unrealized
translation gains and losses are deferred and included in a separate component of shareholders’ equity. These
cumulative currency translation adjustments are recognized in income when there has been a reduction in the net
investment of the foreign operations.

It is the Company’s objective to hedge its net foreign investments to the greatest extent possible. The Company
has hedged a significant portion of its foreign investments through foreign currency denominated loans and other
derivative contracts (forward contracts and cross currency swaps). Any exchange gains or losses arising from the
translation of the hedge instruments are deferred and accounted for in the cumulative currency translation
adjustment account. A 5% hypothetical strengthening of the Canadian dollar relative to all other currencies from the
December 2003 month end rates, assuming the same current level of hedging instruments, would result in a deferred
unrealized loss of approximately $17.9 million.

Transaction Exposure
Many of the Company’s operations purchase, sell, rent, and lease products throughout the world using different
currencies. This potential mismatch of currencies creates transactional exposure at the operational level, which may
affect the Company’s profitability as exchange rates fluctuate. It may also impact the Company’s competitive position
as relative currency movements affect the business practices and/or pricing strategies of the Company’s competitors.

It is the Company’s objective to minimize the impact of exchange rate movements and volatility in results. Each
operation manages the majority of its transactional exposure through effective sales pricing policies. The Company’s
operations also enter into forward exchange and option contracts to manage residual mismatches in foreign currency
cash flows. As a result, the foreign exchange impact on earnings with respect to transactional activity is minimal.

Translation Exposure
The most significant foreign exchange impact on the Company’s net income is the translation of foreign currency
based earnings into Canadian dollars each reporting period. All of the Company’s foreign subsidiaries report their
operating results in currencies other than the Canadian dollar. Therefore, exchange rate movements in the US dollar,
U.K. pound Sterling, and Chilean peso relative to the Canadian dollar will impact the consolidated results of the U.K.
and South American operations in Canadian dollar terms. In addition, the Company’s Canadian results are impacted
by the translation of their US dollar based earnings. The Company hedges some of its earnings translation exposure
through foreign currency denominated loans and derivative contracts associated with the net investment hedges.

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[ 62 ]

management’s discussion and analysis

Sensitivity
The sensitivity of the Company’s annual net earnings to fluctuations in average annual foreign exchange rates is
summarized in the table below. The following table assumes that the Canadian dollar strengthens 5% against the
currency noted, for a full year relative to the December 2003 month end rates, without any change in local currency
volumes or hedging activities.

Currency

December 2003
month end rates

Increase / (decrease)
in Annual Net Income ($million)

USD
GBP
CHP
EUR

1.2924
2.3066
0.002181
1.6280

(7)
(6)
2
3

The sensitivity noted above ignores the impact of exchange rate movements on other macroeconomic variables,
including overall levels of demand and relative competitive advantages. If it were possible to quantify these impacts,
the results would likely be different from the sensitivities shown above.

other key risks

Reliance on Key Supplier

The majority of the Company’s business involves the distribution and servicing of Caterpillar products. As such, the
Company’s business is highly dependent on the continued market acceptance of Caterpillar’s products. Caterpillar has
a solid reputation as a high quality manufacturer, with excellent brand recognition and high market shares in many of
the markets it serves. Caterpillar has manufacturing operations throughout the world to meet customer needs. Any
decrease in the demand for Caterpillar products could have a material adverse impact on the Company’s business,
results of operations and future prospects.

The Company is also dependent on Caterpillar for timely supply of equipment and parts. From time to time, during

periods of intense demand, Caterpillar finds it necessary to allocate its supply of particular products among its
dealers. Such allocations of supply have not in the past proven to be a significant impediment to the Company in the
conduct of its business. Any prolonged delays in product supply may adversely affect the Company’s business, results
of operations and financial condition.

Economic Conditions / Business Cyclicality

Many of the Company’s customers operate in industries that are cyclical in nature. As a result, customer demand for
the Company’s products and services may be affected by economic conditions on both a global or local level. Changes
in interest rates, foreign exchange, commodity prices, and the level of government infrastructure spending may
influence capital expenditure decisions, and ultimately the Company’s sales. The Company has mitigated some of its
exposure to variable business cycles by diversifying its business across a broad range of business activities, industry
sectors, and geographic locations. Approximately 80% of the Company’s gross margin is now generated from parts,
service, and rental activities, which are significantly less sensitive to swings in commodity prices than are equipment
sales. Notwithstanding the Company’s extensive diversification, an economic downturn may adversely impact the
Company’s operating results, particularly at a regional level.

International Operations

The Company has significant operations outside of Canada, including the United Kingdom, Chile, Argentina, Uruguay,
and Bolivia. The Company’s international subsidiaries are subject to risks normally associated with the conduct of any
business in foreign jurisdictions, including: uncertain political and economic environments; war, insurrection, and other
civil disturbances; changes in laws, regulations, and taxation; foreign currency exchange controls; and limitations on
the repatriation of earnings. These risks may limit or disrupt operations, increase costs, restrict the movement of
funds, or result in the loss of property. Although the Company closely monitors its foreign investment risks, there can
be no assurance that the Company will not be adversely affected by political and other events beyond its control.

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[ 63 ]

management’s discussion and analysis

Growth Initiatives / Integration of Acquisitions

As part of its long-term corporate strategy, the Company intends to continue growing its business through a
combination of organic growth and strategic acquisitions. The Company’s ability to successfully grow its business will
be dependent on a number of factors including: identification of accretive new business or acquisition opportunities;
negotiation of purchase agreements on satisfactory terms and prices; approval of acquisitions by Caterpillar or other
parties, including regulatory authorities; securing attractive financing arrangements; and integration of newly
acquired operations into the existing business. All of these activities may be more difficult to implement or may take
longer to execute than management anticipates. Further, any significant expansion of the business may increase the
operating complexity of the Company, and divert management attention away from regular business activities. Any
failure of the Company to manage its acquisition strategy successfully could have a material adverse impact on the
Company’s business, results of operations, and financial condition.

To date, the Company has been very successful in profitably managing its expansion efforts. The Company recently
acquired three new Caterpillar dealerships in South America and a materials handling business in the United Kingdom.
Although the Company believes integration of these operations is progressing well, there can be no assurance that the
Company will fully realize the anticipated revenues, synergies, or other intended benefits associated with these or any
other potential acquisitions in the future.

Future Warranty Claims

The Company provides warranties for most of the equipment it sells. In many cases, the warranty claim risk is
shared jointly with the equipment manufacturer. Accordingly, the Company’s liability is generally limited to the service
component of the warranty claim, while the manufacturer is responsible for providing the required parts. There
is a risk that warranty claims may increase in the future, or may be greater than management anticipates. If the
Company’s liability in respect of such claims is greater than anticipated, it may have a material adverse impact
on the Company’s business, results of operations, and financial condition.

Maintenance and Repair Contracts

The Company frequently enters into long-term maintenance and repair contracts with its customers, whereby the
Company is obligated to maintain certain fleets of equipment at various negotiated performance levels. The length
of these contracts varies significantly, often ranging up to five or more years. The contracts are generally fixed price,
although many contracts have additional provisions for inflationary adjustments. Due to the long-term nature of these
contracts, there is a risk that significant cost overruns may be incurred. If the Company has miscalculated the extent
of maintenance work required, or if actual parts and service costs increase beyond the contracted inflationary
adjustments, the contract profitability will be adversely affected. In order to mitigate this risk, the Company closely
monitors the contracts for early warning signs of cost overruns. In addition, the manufacturer may, in certain
circumstances, share in the cost overruns if profitability falls below a certain threshold. Any failure by the Company
to effectively price and manage these contracts could have a material adverse impact on the Company’s business,
results of operations and financial condition.

Information Systems and Technology

Information systems are an integral part of the Company’s business processes, including marketing of equipment
and support services, inventory and logistics, and finance. Some of these systems are integrated with Caterpillar’s
core processes and systems. In addition, Caterpillar supplies the basic dealer business system used by the Company,
as well as the new dealer business system now being implemented (DBSi). The implementation of DBSi has
been successfully completed in the Company’s Finning (UK) operations and over time, the Company expects
to implement this system in all of its other operations. The enhanced capabilities of DBSi will allow the Company
to achieve further efficiencies.

The Company is dependent on Caterpillar for future development of these systems, for support for all dealer
systems supplied by Caterpillar, and for hosting of the DBSi applications. Any disruptions in these systems or the
failure of these systems to operate as expected could, depending on the magnitude of the problem, adversely affect
the Company’s operating results by limiting the ability to effectively monitor and control the Company’s operations.

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[ 64 ]

management’s discussion and analysis

new accounting pronouncements

Stock-Based Compensation

Effective January 1, 2002, Finning adopted the recommendations of The Canadian Institute of Chartered Accountants
(CICA) with respect to stock-based compensation and other stock-based payments. The recommendations require
stock-based payments to non-employees and direct awards to employees and non-employees be accounted for using
a fair value-based method of accounting. Share appreciation rights (SAR) and similar awards to be settled in cash are
accounted for by measuring the amount by which the quoted market price exceeds the strike price at the balance
sheet date. The recommendations require the use of the fair value-based method to account for all other stock-based
transactions with employees, including stock options, for fiscal years beginning on or after January 1, 2004 with
earlier adoption encouraged.

In accordance with the recommendations of the CICA, the Company has adopted the fair value-based method of
accounting for stock options in 2003, applied on a prospective basis. The Company will continue to use the intrinsic
value-based method of accounting for stock options granted prior to January 1, 2003. As the Company had not issued
any stock option awards to employees during the years ended December 31, 2003 and 2002, the Company’s net
earnings have not been impacted by the application of the new accounting policy. As options are exercised, the
proceeds received by the Company are credited to share capital in the consolidated balance sheet.

Hedging Instruments
The CICA issued a new Accounting Guideline Hedging Relationships in December 2001, which specifies the conditions
under which hedge accounting is appropriate. The Guideline includes requirements for the identification,
documentation and designation of hedging relationships, sets standards for determining hedge effectiveness,
and establishes criteria for the discontinuance of hedge accounting.

The new guideline is effective for the Company’s 2004 year. Adoption of the guideline is not expected to have

a significant impact on the consolidated financial statements.

Asset Retirement Obligations
In February 2002 the CICA issued a new standard, Section 3110 of the CICA Handbook Asset Retirement Obligations.
It focuses on the recognition and measurement of liabilities for obligations associated with the retirement of property,
plant and equipment when those obligations result from the acquisition, construction, development or normal
operations of the assets. The standard requires the recognition of any statutory, contractual or other legal obligation,
normally when incurred. The obligations are measured initially at fair value and the resulting costs capitalized into the
carrying amount of the related asset. In subsequent periods, the liability is adjusted for the accretion of discount and
any changes in the amount or timing of the underlying future cash flows. The asset retirement cost is amortized to
income on a systematic and rational basis. Entities will be required to disclose certain key information about the liability.

The new standard is effective for fiscal years beginning on or after January 1, 2004. Finning is evaluating the

impact of adopting the new recommendations.

Impairment of Long-Lived Assets
In December 2002 the CICA issued a new standard, Section 3063 of the CICA Handbook Impairment of Long-Lived
Assets, which establishes standards for the recognition, measurement and disclosure of the impairment
of long-lived assets. Impairment of long-lived assets held for use is determined in a two-step process, with the first
step determining when an impairment is recognized and the second step measuring the amount of the impairment.
An impairment loss is recognized when the carrying amount of a long-lived asset exceeds the sum of the
undiscounted cash flows expected to result from its use and eventual disposition. An impairment loss is measured
as the amount by which the long-lived asset’s carrying amount exceeds its fair value. To test for and measure
impairment, long-lived assets are grouped at the lowest level for which identifiable cash flows are largely independent.
The new standard is effective for the Company’s 2004 year. Adoption of the recommendations is not expected to

have a significant impact on the consolidated financial statements.

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[ 65 ]

management’s discussion and analysis

market outlook

Economic conditions in the Company’s markets are improving with economic recovery expected to continue into
2004. Our medium to long-term future prospects are excellent, given the Company’s strong order backlog in most
of its operations, the large new equipment sales and maintenance contracts in Chile and Argentina and the strength
in the key economic indicators that impact the Company’s customers.

Commodity prices for copper, gold, coal and oil and gas are expected to remain strong near current levels into

2004. Strong commodity prices bode well for our customers resulting in an increase in mining activity and new
development. This is expected to provide opportunities for our operations in Canada and South America which are
already evident in our strong order backlog.

The Company expects that our 2004 results will be negatively impacted as a result of translating foreign currency

based earnings in the first and second quarters of 2004 in comparison to 2003 due to the strong Canadian dollar.

U.K. economic indicators forecast continued growth in 2004 with infrastructure spending being a strong

component of this growth. The U.K. government forecasts significant spending over the next 10 years to repair and
expand the country’s highways, rails and other transportation infrastructure. This growth will provide opportunities for
the Company and its customers. This growth has also resulted in a very competitive rental market in 2003 due to an
overcapacity of rental equipment and downward pressures on prices.

Finning (UK) has successfully completed the implementation of DBSi in early 2004, which will increase the
Company’s opportunities to improve supply chain management, cost controls, asset utilization and customer
relationship management. Acquiring the Lex Harvey business has made Finning (UK) a strong player in the materials
handling market in the U.K. Further integration of Lex Harvey as well as the pursuit of joint efficiencies with Hewden is
expected to create opportunities to improve EBIT as well as capitalizing on the infrastructure growth in the U.K.

Although the Company’s results in the first and second quarters of 2004 are expected to be negatively impacted
by foreign exchange translation and competitive pressures in the U.K. rental business, the Company has a strategy
to mitigate these issues. The Company will focus on integrating recent acquisitions and extracting synergies in the
U.K. and will continue focusing on cost controls. This, together with economic recovery in all of the Company’s
markets, will provide us with opportunities to grow.

January 27, 2004

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[ 66 ]

management’s discussion and analysis

Schedule One

description of non-gaap measures

To supplement Finning’s consolidated financial statements, Finning uses certain non-GAAP measures that do not have
standardized meaning prescribed by Canadian GAAP and are therefore unlikely to be comparable to similar measures
used by other companies. These non-GAAP measures are normalized net income, normalized basic earnings per share
and normalized EBIT, which are not an alternative to GAAP financial measures. Finning’s management believes the
non-GAAP financial measures are useful to investors because they include the same meaningful information that is
used by Finning management to assess the financial performance of the Company and its operating segments. In
order to allow the reader to view financial results in this way, occasional or other significant items, not considered
reflective of the underlying financial performance of the Company from ongoing operations, have been removed
from reported results prepared in accordance with GAAP.

Reconciliation Between Reported Fourth Quarter EBIT and Normalized Fourth Quarter EBIT

(C$ thousands)
Reported EBIT (GAAP measure)
Gain on sale of surplus properties in Canada

Three Months ended Dec 31
2002
65,404

2003
$ 54,478

Twelve Months Ended Dec 31
2002
277,783

2003
$ 255,16 8

and the U.K.

( 1 ,1 39)

(1,409)

(1,791)

(15,216)

Deferred gain on 2001 sale of the Canadian Materials

Handling business

—

(1,600)

Costs incurred on DBSi business process

reengineering project

Gain on sale of the UK Power Rental business
(Gain) loss from equity investment
Normalized EBIT (reflects non-GAAP measure)

7,691
—
(55)
$ 60,975

8,440
—
626
73,06 1

22,1 04
(13,800)
(606)
$ 259,475

10,264
—
972
$ 272,203

Reconciliation Between Reported Fourth Quarter Net Income and EPS and Normalized
Fourth Quarter Net Income and EPS

(C$ thousands, except EPS data)
Reported Net Income (GAAP measure)
Gain on sale of surplus properties in Canada

Three Months ended Dec 31
2002
31,227

2003
$ 28,079

Twelve Months Ended Dec 31
2002
132,253

2003
$ 131 ,951

and the U.K.

(800)

(810)

(1,248)

( 1 1 ,170)

Deferred gain on 2001 sale of the Canadian Materials

Handling business

Costs incurred on DBSi business process

reengineering project

Gain on sale of the UK Power Rental business
(Gain) loss from equity investment
Normalized Net Income (reflects non-GAAP measure) $
Normalized Basic EPS (reflects non-GAAP measure) $

—

(1,288)

(1,079)

5,447
—
(55)
32,671
0.42

5,527
—
626
36,570
0.47

$
$

15,352
(9,168)
(606)
$ 134,993
1.75
$

6,649
—
972
127,625
1.66

$
$

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[ 67 ]

management’s discussion and analysis

Schedule Two

selected annual information

(C$ million, except for share data)
Total revenue
Net income
Earnings per common share

– basic
– diluted
Total assets
Long-term debt ( 4 )

– current
– non-current

Cash dividends declared per common share

2003 ( 1 )

$ 3,593.3
132.0
$

1.7 1
$
$
1.68
$ 3,428.6

$
$

235.2
748.2
983.4
0.36

2002 ( 2 )

$ 3,207.5
132.3
$

$
$
$

$
$

1.72
1.68
3,162.5

42.3
5 1 4 . 1
556.4
0.30

( 3 )

2001
3,247.0
103.9

1 .37
1.34
3,116.8

133.0
540.8
673.8
0.20

$
$

$
$
$

$
$

(1) During 2003, the Company acquired the Caterpillar dealerships in Argentina, Uruguay and Bolivia and the

materials handling business of Lex Harvey in the U.K.

(2) During 2002, the Company acquired the majority of the remaining rental assets of Maxxiom Limited in the U.K.,

and acquired 100% of the voting shares of Distribuidora Perkins Chilena SAC (Diperk), in Chile.
(3) During 2001, the Company acquired Hewden, an equipment rental and related services business.
(4) During 2003, the Company issued a 10-year, unsecured £200 million Eurobond. The Eurobond bears coupon

interest at 5.625% per annum and was priced at 99.043% of its principal amount to yield 5.753% per annum.
The Eurobond proceeds of $449.5 million at the date of issuance were utilized to finance the acquisition of
Lex Harvey as well as repaying existing bank indebtedness.

outstanding share data

December 31, 2003

Common shares outstanding
Options outstanding

77,754,985
2,745,620

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 Inc.

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 a
merger, amalgamation or a similar transaction. The rights plan will expire at the termination of the Annual Meeting
of shareholders to be held in April 2005 unless it is reconfirmed by a majority of the votes cast at the meeting.
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.

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[ 68 ]

management’s report to the shareholders

The Consolidated Financial Statements and Management’s Discussion and Analysis (MD&A) 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 27, 2004.

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 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 and MD&A 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.

W. M. Bingham
Executive Vice President and Chief Financial Officer

January 27, 2004
Vancouver, BC Canada

auditors’ 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, 2003 and 2002 and the consolidated statements of income, retained earnings and cash flow for each
of the years in the two year period ended December 31, 2003. 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 audit.

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, 2003 and 2002, and the results of its operations and its cash flow for
each of the years in the two year period ended December 31, 2003 in accordance with Canadian generally accepted
accounting principles.

DELOITTE & TOUCHE LLP, Chartered Accountants

January 27, 2004
Vancouver, BC Canada

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[ 69 ]

consolidated financial statements

consolidated balance sheets as at december 31

(C$ thousands)

assets

Current assets

Cash and short-term investments
Accounts receivable
Inventories

On-hand equipment
Parts and supplies

Other assets
Future income taxes (Note 2)
Current portion of instalment notes receivable

Total current assets

Finance assets

Instalment notes receivable
Equipment leased to customers (Note 3)

Total finance assets

Rental equipment (Note 4)
Land, buildings and equipment (Note 5)
Future income taxes (Note 2)
Goodwill (Note 7)
Intangible assets (Note 7)
Other assets (Note 11)

liabilities

Current liabilities

Short-term debt (Note 9)
Accounts payable and accruals
Income tax payable
Future income taxes (Note 2)
Current portion of long-term debt (Note 9)

Total current liabilities

Long-term debt (Note 9)
Future income taxes (Note 2)

Total liabilities

Commitments and Contingencies (Notes 21 and 22)

2003

2002

66,385
481,397

34,626
465,601

438,71 5
270,984
98,379
35,133
25,944
1,416,937

7,145
97,925
105,070

1,046,1 30
287,778
39,344
393,109
9,692
130,550
$ 3,428,610

$ 1 04,91 0
848,888
8,884
5,7 1 1
235,243
1,203,636

748,1 81
93,21 2
2,045,029

402,3 1 6
248,093
107,352
15,698
13,926
1,287,6 1 2

13,410
197,1 1 5
210,525

897,891
257,200
35,863
379,866
2,300
91,290
3,162,547

258,140
868,069
39,068
8,186
42,324
1,215,787

514,051
77,349
1,807,1 87

non-controlling interests (Note 10)

425,000

shareholders’ equity

Share capital (Note 12)
Retained earnings
Cumulative currency translation adjustments (Note 13)

Total shareholders’ equity

Approved by the Directors:

248,939
775,1 1 3
(65,471)
958,581
$ 3,428,610

233,450
699,74 1
(2,831)
930,360
3,162,547

D.W.G. Whitehead, Director

C.A. Pinette, Director

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[ 70 ]

The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

consolidated financial statements

consolidated statements of income and retained earnings for the years ended december 31

(C$ thousands except per share amounts)

2003

2002

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 14)
Earnings before interest, income taxes and non-controlling interests
Finance cost and interest on other indebtedness (Notes 9 and 17)
Income before provision for income taxes and non-controlling interests
Provision for income taxes (Note 2)
Non-controlling interests (Note 10)
Net income

Retained earnings, beginning of year
Net income
Dividends on common shares
Premium on common share repurchase (Note 12)
Retained earnings, end of year

Earnings per share (Note 15)

Basic
Diluted

$ 966,042
262,352
363,549
821,315
65,925
1,109,5 71
4,54 1
3,593,295
2,555,682
1,037,61 3
778,138
4,307
255,168
76,868
178,300
26,648
19,70 1
131,951

$
$

699,741
1 31,951
(27,816)
(28,763)
775,1 1 3

1.71
1.68

$
$

825,301
192,036
329,661
744,506
87,610
1,019,184
9,188
3,207,486
2,247,760
959,726
687,523
(5,580)
277,783
79,828
197,955
47,730
17,972
132,253

590,588
132,253
(23,100)
—
699,741

1.72
1.68

Weighted average number of shares outstanding

77,326,253

76,954,609

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The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

[ 71 ]

consolidated financial statements

consolidated statements of cash flow for the years ended december 31

(C$ thousands)

operating activities

Net income
Add

Depreciation
Future income taxes
Other items
Non-controlling interests distribution

Changes in working capital items
Accounts receivable and other
Inventories – on-hand equipment
Inventories – parts and 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 from UK Power Rental sale
Divestiture of Hewden Tower Cranes business
Proceeds from Canadian property sale/leaseback
Equity investment
Acquisitions (Note 6)

Cash (used) provided by investing activities

financing activities

Decrease in short-term debt
Repayment of long-term debt
Issue of Eurobond (Note 9)
Cash funding of pension plans
Securitization of Canadian accounts receivable
Sales of notes portfolio
Non-controlling interests distribution
Issue of common shares on exercise of stock options
Repurchase of common shares
Dividends paid

Cash provided (used) by financing activities
Currency translation adjustments
Increase (decrease) in cash and short-term investments
Cash and short-term investments at beginning of year
Cash and short-term investments at end of year

Cash flows include the following elements

Interest paid
Income taxes paid

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[ 72 ]

The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

2003

2002

131,951

132,253

354,959
17,256
(17,797)
19,701
506,070

(38,828)
(37,027)
(4,593)
(5,030)
13,612
(49,994)
384,210

(312,881)
51,325
122,654

(63,600)
34,056
—
—
—
(284,805)
(314,349)

(149,700)
(29,843)
449,520
—
—
—
(19,701 )
19,538
(32,812)
(27,816)
209,186
14,268
31,759
34,626
66,385

59,900
35,297

$
$

314,993
1 1,227
(15,844)
17,972
460,601

(90,680)
29,472
(10,954)
21,664
41,148
21,553
472,804

(280,1 1 6)
(25,625)
167,063

(6,853)
—
44,2 1 9
77,049
(15,000)
(50,308)
49,107

(192,202)
(120,768)
—
(39,682)
30,000
88,606
(17,972)
21,328
—
(23,100)
(253,790)
(5,736)
(43,356)
77,982
34,626

80,563
29,420

$
$

notes to consolidated financial statements

December 31, 2003 and 2002 ($ and £ in thousands, except the number of shares and per share amounts)

1. summary of significant accounting policies

These Consolidated Financial Statements have been prepared in accordance with Canadian generally accepted
accounting principles and are presented in Canadian dollars, unless otherwise stated.

The preparation of financial statements in accordance with Canadian generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities,
revenues, expenses and disclosure of contingent assets and liabilities. Actual amounts could differ from those
estimates. The significant accounting policies used in these Consolidated Financial Statements are as follows:

(a) Principles of Consolidation

The Consolidated Financial Statements include the accounts of Finning International Inc. (“Finning” or “Company”),
which includes the division of Finning (Canada), and its wholly owned subsidiaries. Principal operating subsidiaries
include Finning (UK) Ltd., Finning Chile S.A., and Hewden Stuart plc (“Hewden”) as well as the Caterpillar dealerships
in Argentina, Uruguay and Bolivia (Note 6). In addition, Finning consolidates the partnership that was formed to fund
the acquisition of Hewden (Note 10).

For interests acquired or disposed of during the year, the results of operations are included in the consolidated

statements of income from, or up to, the date of the transaction, respectively.

(b) Currency Translation

Transactions undertaken in foreign currencies are translated into Canadian dollars at 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 designated as hedges, in which case the gain or loss is deferred and accounted
for in conjunction with the hedged asset.

Financial statements of foreign operations, all considered self-sustaining, 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 some of its investments in foreign subsidiaries using derivatives and foreign denominated
borrowings. Exchange gains or losses arising from the translation of the hedge instruments are accounted for in
cumulative currency translation adjustments.

Short-term investments, consisting of highly rated money market instruments with original maturities of three months
or less, are considered to be cash equivalents and are recorded at cost, which approximates current market value.

(d) Securitization of Trade Receivables

In 2002, the Company sold a co-ownership interest in certain present and future accounts receivable in Canada to a
securitization trust. These transactions are accounted for as sales to the extent that the Company is considered to
have surrendered control over the interest in the accounts receivables and receives proceeds from the trust, other
than a beneficial interest in the assets sold. Losses on these transactions are recognized as other expenses and are
dependent in part on the previous carrying amount of the receivable interest transferred, which is allocated between
the interest sold and the interest retained by the Company, based on their relative value at the date of the transfer.
The Company determines fair value based on the present value of future expected cash flows using management’s
best estimates of key assumptions such as discount rates, weighted average life of accounts receivable, dilution rates
and credit loss ratios. The receivable interest is transferred on a fully serviced basis. The Company recognizes a
servicing liability on the date of the transfer and amortizes this liability to income over the expected life of the
transferred receivable interest.

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[ 73 ]

notes to consolidated financial statements

(e) 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.

(f) Instalment Notes Receivables

Instalment notes receivables are recorded net of unearned finance charges.

(g) 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.

(h) 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.

(i) 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

2% - 5%
20% - 30%
25% - 30%

(j) Revenue Recognition

Revenue recognition, with the exception of cash sales, includes obtaining a written arrangement in the form of
a contract or purchase order with the customer. A fixed or determinable sales price is established with the customer
whereby ultimate collection of the revenue is reasonably assured. Revenue is recognized as performance
requirements are achieved in accordance with the following:

Revenue from sales of equipment is recognized at the time of shipment of the product to the customer

at which time title to the equipment and significant risks of ownership passes to the customer;

Revenue from power and energy systems includes construction contracts with customers that involve the design,

installation and assembly of power and energy equipment systems. Revenue is recognized on a percentage of
completion basis proportionate to the work that has been completed which is based on associated costs incurred;

Revenue from equipment rentals and operating leases is recognized in accordance with the terms of the relevant
agreement with the customer, either evenly over the term of that agreement or on a usage basis such as the number
of hours that the equipment is used; and

Revenue from customer support services includes sales of parts and servicing of equipment. For sales of parts,

revenue is recognized when the part is shipped to the customer or when the part is installed in the customer’s
equipment. For servicing of equipment, revenue is recognized as the service work is performed. Customer support
services are also offered to customers in the form of long-term maintenance and repair contracts. For these contracts,
revenue is recognized on a percentage of completion basis proportionate to the service work that has been performed
based on the parts and labour service provided. Parts revenue is recognized based on parts list price and service
revenue is recognized based on standard billing labour rates. At the completion of the contract, any remaining
deferred revenue on the contract is recognized as revenue. Any losses estimated during the term of the contract are
recognized when identified. For the materials handling business, revenue from long-term maintenance and repair
contracts is recognized on a straight-line basis over the life of the contract.

(k) Stock-Based Compensation

The Company has stock option plans and other stock-based compensation plans for directors and certain eligible
employees. Effective January 1, 2002, the Company adopted the recommendations of The Canadian Institute of
Chartered Accountants (CICA) with respect to stock-based compensation and other stock-based payments. The
recommendations require stock-based payments to non-employees and direct awards to employees and non-
employees be accounted for using a fair value-based method of accounting. Share appreciation rights (SAR) and
similar awards to be settled in cash are accounted for by measuring the amount by which the quoted market price

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[ 74 ]

notes to consolidated financial statements

exceeds the strike price at the balance sheet date. The recommendations require the use of the fair value-based
method to account for all other stock-based transactions with employees, including stock options, for fiscal years
beginning on or after January 1, 2004 with earlier adoption encouraged.

The Company accounts for SAR by measuring the amount by which the quoted market price exceeds the strike
price at the balance sheet date. Changes in the quoted market value of those shares between the date of the grant
and the measurement date result in a change in the measure of compensation for the award and is amortized over
the remaining vesting period.

In accordance with the recommendations of the CICA, the Company has adopted the fair value-based method of
accounting for stock options in 2003, applied on a prospective basis. The Company will continue to use the intrinsic
value-based method of accounting for stock options granted prior to January 1, 2003. As the Company had not issued
any stock option awards to employees during the years ended December 31, 2003 and 2002, the Company’s net
earnings have not been impacted by the application of the new accounting policy. When options are exercised, the
proceeds received by the Company are credited to share capital 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.

(l) 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 and the U.K. 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.

Past service costs from plan amendments are amortized on a straight-line basis over the expected average

remaining service life of employees active at the date of amendment.

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 active
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.

(m) Goodwill and Other Intangible Assets

Goodwill represents the excess cost of an investment over the fair value of the net assets acquired. Goodwill and
intangible assets with indefinite lives are not amortized and are subject to an annual assessment for impairment
primarily by applying a fair value-based test at the reporting unit level. The fair value is estimated using the expected
present value of future discounted cash flows. The Company also considers projected future operating results, trends
and other circumstances in making such evaluations. An impairment loss would be recognized to the extent the
carrying amount of goodwill exceeds the fair value of goodwill. Separable intangible assets that are not deemed to
have an indefinite life are amortized on a straight-line basis over their useful lives to a maximum period of ten years.
The Company did not recognize any impairment to goodwill as a result of the annual impairment assessment.

(n) Income Taxes

The asset and liability method of tax allocation is used in 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.

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[ 75 ]

notes to consolidated financial statements

(o) Guarantees and Indemnifications
Effective January 1, 2003, the Company adopted CICA Accounting Guideline 14 Disclosure of Guarantees. The
Guideline requires the guarantor to disclose information about its significant obligations under guarantees, including
the nature of the guarantee, the maximum exposure under the guarantee, the current carrying amount of any liability
for the guarantee, and any recourse provisions allowing the guarantor to recover from third parties any amounts paid
under the guarantee. See Note 23 for additional information.

(p) Derivatives

The Company utilizes derivative financial instruments in the management of its foreign currency and interest rate
exposures. The Company uses financial instruments such as interest rate swaps, cross-currency swaps, forward
exchange contracts and options as hedges against actual underlying exposures. Derivative financial instruments are
always associated with a related risk position and are never used for trading or speculative purposes. The Company’s
policy is to utilize derivative financial instruments for hedging purposes only. The Company formally documents all
relationships between hedging instruments and hedged items, as well as its risk management objective and strategy
for undertaking various hedge transactions. This process includes linking all derivatives to specific assets and
liabilities on the balance sheet or to specific firm commitments or forecasted transactions. The Company also formally
assesses, both at the hedge’s inception and on an ongoing basis, whether the derivatives that are used in hedging
transactions are highly effective in offsetting changes in fair values or cash flows of hedged items.

The Company enters into hedges of its foreign currency exposures on foreign currency denominated long-term
investments by entering into offsetting forward exchange contracts and cross-currency swap contracts, when it is
deemed appropriate. Foreign exchange translation gains and losses on foreign currency denominated derivative
financial instruments used to hedge foreign currency long-term investments are accrued under current liabilities on
the balance sheet and recognized in the cumulative currency translation account, offsetting the respective translation
losses and gains recognized on the underlying foreign currency long-term investments. The forward premium or
discount on forward foreign exchange contracts used to hedge foreign currency long-term investments is amortized
as an adjustment of interest expense over the term of the forward contract.

The Company also purchases foreign exchange forward contracts to hedge anticipated purchases in foreign
currencies and the related accounts payables. Foreign exchange translation gains and losses on foreign currency
denominated derivative financial instruments used to hedge foreign currency denominated purchases are recognized
as an adjustment of the purchase cost and related payable when the purchase is recorded.

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 interest rate swap agreements, which fix the effective interest rate and
currency of the borrowing. The Company also enters into interest rate swaps to manage its fixed and floating interest
rate exposure. The Company designates its interest rate hedge agreements as hedges of the underlying debt or asset.
Interest expense on the debt is adjusted to include the payments made or received under the interest rate swaps.

Realized and unrealized gains or losses associated with derivative instruments, which have been terminated or
cease to be effective prior to maturity, are deferred under current liabilities on the balance sheet and recognized in
income in the period in which the underlying hedged transaction is recognized. In the event a designated hedged item
is sold, extinguished or matures prior to the termination of the related derivative instrument, any realized or
unrealized gain or loss on such derivative instrument is recognized in income.

(q) Change in Functional Currency

It is management’s view that the United States dollar best portrays the economic results of all the South American
operations and thereby best achieves the objectives of foreign currency translation. As a result, effective October 1,
2003, the functional currency of the Chilean operation was changed from the Chilean peso to the United States dollar
to reflect the increased exposure to the US dollar as a result of the growth in international operations. The method
used to translate the results and financial position for items and transactions denominated in non-US currency is
described in the notes above on currency translation. The Company has applied the functional currency change for
the Chilean operation on a prospective basis as of the beginning of the fourth quarter. The net effect of this change in
functional currency for the three months ended December 31, 2003 was to decrease net assets by $18,300 and
increase the net income reported by approximately $3,587.

(r) Comparative Figures

Certain comparative figures have been reclassified to conform to the 2003 presentation.

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2. income taxes

Provision for Income Taxes
For the years ended December 31

Current income tax expense
Future income tax expense

notes to consolidated financial statements

2003
9,392
17,256
26,648

2002
36,503
1 1, 227
47,730

Reconciliation of the Company’s effective income tax rate from statutory Canadian tax rates for the years ended
December 31, 2003 and 2002 is as follows:

For the years ended December 31

Combined federal and provincial tax rates
Provision for income taxes based on the combined federal and provincial rates $
Increase/(decrease) in provision resulting from:

Lower effective rates on the losses/(earnings) of foreign subsidiaries
Large corporation tax
Income not subject to tax
Other items

Provision for income taxes

2003
37.1%
58,840

(29,206)
1,741
(433)
(4,294)
26,648

2002
38.6%
69,473

(24,411)
2,075
(2,853)
3,446
47,730

At December 31, 2003, the Company has loss carry-forwards of approximately $14,420 for income tax purposes that
expire through 2010. For financial reporting purposes a deferred tax asset of $3,195 has been recognized in respect of
these loss carry-forwards.

Future Income Tax Asset and Liability

Temporary differences and tax loss carry-forwards that give rise to future income tax assets and liabilities are
described below.
December 31

Future income tax assets

Future income tax liabilities:

Capital, rental and leased assets, inventories and reserves
Pensions
Other

Net future income tax liability

Presented on balance sheet as:

Future income tax asset - current
Future income tax asset - non-current
Future income tax liability - current
Future income tax liability - non-current

3. equipment leased to customers

December 31

Cost
Less accumulated depreciation

2003
75,156

(78 ,7 1 3)
(1 8,104)
(2,785)
(99,602)
$ (24,446)

35,1 33
39,344
(5,71 1 )
(93,212)
(24,446)

2003
159,735
(61,810)
97,925

2002
62,706

(72,699)
(18,043)
(5,938)
(96,680)
(33,974)

15,698
35,863
(8,186)
(77,349)
(33,974)

2002
309,828
(112,713)
197,1 1 5

Depreciation of equipment leased to customers for the year ended December 31, 2003 was $48,588 (2002: $61,885).

During 2003, the Company sold $63,605 of leases to Caterpillar Financial Services Limited (2002: $22,673),

earning income of $10,203 (2002: $2,679).

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[ 77 ]

notes to consolidated financial statements

4. rental equipment

December 31

Cost
Less accumulated depreciation

2003
$ 1,821,314
(775,184)
$ 1,046,130

2002
1,661,256
(763,365)
897,89 1

Depreciation of rental equipment for the year ended December 31, 2003 was $275,320 (2002: $223,460).

5. land, buildings and equipment

December 31

Land
Buildings and equipment
Less accumulated depreciation

Total land, buildings and equipment

2003
58,692
432,186
(203,100)
229,086
287,778

2002
57,464
410,1 41
(210,405)
199,736
257,200

Depreciation of buildings and equipment for the year ended December 31, 2003 was $31,051 (2002: $29,648).

During 2002, the Company sold its interest in various properties in its Canadian operation across Alberta and
British Columbia and leased them back for a 20-year term. The total proceeds were $77,049, resulting in a gain of
$10,281. This gain has been deferred and is being amortized to income over the lease term.

6. acquisitions

During 2003, the Company acquired the Caterpillar dealership operations in Argentina, Uruguay, and Bolivia and a
materials handling business in the U.K. The purchases of these operations are accounted for under the purchase
method of accounting. The allocation of the purchase price to the materials handling business in the U.K. is
preliminary and may be adjusted when additional information on asset and liability valuations becomes available.

Total assets
Total liabilities
Goodwill (Note 7)
Intangible assets (Note 7)
Net assets acquired
Less: assumed debt

Argentina and
Uruguay (a)
91,915
(37,981)
953
2,935
57,822
(14,497)

Bolivia (b)
18,043
(5,842)
2,1 2 3
—
14,324
(5,416)

UK Operations:
Lex Harvey (c)
190,871
(21,274)
38,236
4,826
212,659
—

Combined
$ 300,829
(65,097)
41,3 1 2
7,76 1
284,805
(19,91 3 )

Total purchase price

43,325

8,908

212,659

$ 264,892

(a) In January 2003, the Company completed its acquisition of 100% of the voting shares of Macrosa Del Plata S.A.
and Servicios Mineros S.A., the Caterpillar dealerships in Argentina and General Machinery Co S.A., the Caterpillar
dealership in Uruguay. The purchase price of $43,325 (US$27,951) was financed through debt. The sellers are also
entitled to additional future consideration, to a maximum of US$20,000, based on realization of certain performance
criteria over a six-year period ending December 31, 2008 for these operations. This other consideration will be
accrued as a cost of the acquisition if and when the performance criterion is achieved.

(b) In April 2003, the acquisition of 100% of the voting shares of Matreq S.A., the Bolivian Caterpillar dealership was
completed. The purchase price of $8,908 (US$6,000) was financed through debt. In addition, other consideration of
$5,938 (US$4,000) was advanced to the seller and is contingent upon certain future performance criteria of this
operation extending to the end of 2010. This other consideration is recorded in other assets.

(c) In June 2003, the Company, through its UK operation, acquired the materials handling business and majority of the
assets of Lex Harvey Limited and its associated company (Lex Harvey) from RAC plc, a publicly listed company in the
U.K. The results from Lex Harvey have been integrated and reported within the UK operation results. The aggregate
purchase price of $212,659 (£94,616) was funded through debt.

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[ 78 ]

notes to consolidated financial statements

During 2002, the Company, through Hewden, acquired the majority of the remaining rental assets of Maxxiom Limited
in the U.K. for $44,025. In April 2002, the Company, through Finning Chile S.A., acquired 100% of the voting shares of
Distribuidora Perkins Chilena SAC (Diperk), an engine and generator set distribution company located in Chile and its
complementary service operation in Chile for $6,283.

7. goodwill and other intangible assets

December 31
Goodwill

Goodwill, beginning of year
South America and Lex Harvey acquisitions
Other acquisitions
Purchase price adjustments
Divestitures
Foreign exchange translation adjustment
Goodwill, end of year

Intangible Assets

Intangible assets, beginning of year
South America and Lex Harvey acquisitions
Other acquisitions
Foreign exchange translation adjustment
Intangible assets, end of year
Accumulated amortization
Net intangible assets

2003

2002

379,866
41,312
1,963
—
(452)
(29,580)
393,109

2,300
7,76 1
1,043
(347)
10,757
(1,065)
9,692

405,744
—
1,483
(53,699)
(8,984)
35,322
379,866

—
—
2,300
—
2,300
—
2,300

During 2003, the Company acquired certain Caterpillar dealership operations in Argentina, Uruguay and Bolivia for a
total purchase price of $52,233, resulting in goodwill of $3,076 and intangible assets in Argentina, representing
customer contracts and the related customer relationships, of $2,935. The Argentina intangible assets will be
amortized over 4 years. The Company also acquired the business and assets of Lex Harvey for a total purchase price
of $212,659, resulting in goodwill of $38,236 and intangible assets, representing customer contracts and the related
customer relationships, of $4,826. The Lex Harvey intangible assets will be amortized over 10 years. Other
acquisitions in 2003 of smaller rental operations in Canada and Hewden provided goodwill of $1,963.

During 2002, the Company acquired Diperk for a net total of $6,283 with resulting goodwill of $1,459. The residual

value of goodwill in 2002 relates to acquisition of smaller rental operations in Canada.

The Company recorded various liabilities and provisions at the date of acquisition of Hewden in 2001 based on the

preliminary allocation of the purchase price. In 2002, the Company completed its assessment of the final purchase
price allocation of Hewden. The resulting purchase price adjustment reduced goodwill by $53,699.

During 2002, Hewden sold its Tower Cranes business. Tangible assets associated with the business were $22,000

and the disposal resulted in a reduction of goodwill of $8,984.

8. investments

During 2003, the Company invested $6,755 to acquire a 15.17% ownership interest in Energyst Rental Solutions (SM)
(Energyst), a newly established company offering energy rental services to national and international customers
across Europe. As part of this transaction, the Company’s UK operation sold its power rental business to Energyst for
$34,056 with a resulting after-tax gain of $9,168. The investment in Energyst is accounted for using the cost method
and is reported in other assets on the consolidated balance sheet.

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[ 79 ]

notes to consolidated financial statements

9. short-term and long-term debt

December 31

Short-term debt:
Bank indebtedness, commercial paper and other loans (a)
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
5.625 % Eurobond due May 30, 2013 (c)

Bank term facilities denominated in pound Sterling (d)
Other unsecured term loans due 2004 to 2006 (e)

Less current portion of long-term debt
Total long-term debt

(a) Bank indebtedness, commercial paper and other loans

2003

2002

104,910

258,140

75,000
150,000
75,000
200,000
461,320
—
22,1 04
983,424
235,243
$ 748 , 1 8 1

75,000
150,000
75,000
200,000
—
3 8 ,1 8 3
1 8 ,1 9 2
556, 375
42,324
514 , 05 1

The Company has available $1,016,000 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. Included in short-term debt are foreign currency amounts of US$55,190 (2002: US$6,885)
and £14,070 (2002: £89,584).
(b) Debentures

The Company’s debentures are unsecured, and interest is payable semi-annually with principal due on maturity.
(c) Eurobond

On May 30, 2003 the Company issued a 10-year unsecured £200,000 Eurobond, bearing coupon interest at 5.625%
per annum, payable annually commencing May 30, 2004. The Eurobond was priced at 99.043% of its principal
amount to yield 5.753 % per annum. Proceeds of $449,500 from the Eurobond at the date of issuance were used
to finance the acquisition of Lex Harvey and also to repay existing bank indebtedness. Unless previously redeemed
or cancelled, the Eurobond will be redeemed at its principal amount on May 30, 2013. The Eurobond is subject to early
redemption, in whole, at its principal amount, at the option of the Company in the event of certain changes in tax
legislation in Canada and/or the Province of British Columbia. The Eurobond may also be redeemed at the option
of the Company, in whole, at any time, at the redemption price indicated in the Eurobond prospectus.
(d) Bank term facilities denominated in pound Sterling

The Company had an unsecured £15,000 floating rate loan at an average interest rate of 4.21% (2002: 4.44%),
which matured May 25, 2003. During 2002, a £25,000 fixed rate loan at an interest rate of 7.675% matured.
(e) Other unsecured term loans

Other unsecured term loans primarily consist of supplier merchandising programs at a floating rate of interest
based on Canadian dollar bankers’ acceptance yields.

Covenants

The Company is required to meet various covenants with respect to its debt facilities. As at December 31, 2003,
the Company is in compliance with these covenants.

Long-Term Debt Repayments

Principal repayments on long-term debt in each of the next five years and thereafter are as follows:

2004
2005
2006
2007
2008
Thereafter

235,243
8,758
78,103
—
200,000
461,320
983,424

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[ 80 ]

notes to consolidated financial statements

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:

Bank indebtedness, commercial paper and other loans
Debentures
Eurobond
Bank term facilities

Interest on swap contracts
Amortization of deferred financing costs and other expenses

2003

8,012
37,637
15,141
931
61,721
13,074
2,073
76,868

2002

14,267
37,637
—
5,440
57,344
18,1 27
4,357
79,828

Interest expense includes interest on debt incurred for a term greater than one year of $53,832 (2002: $43,077).

10. non-controlling interests

In 2001, the Company formed a partnership with third party private investors to raise capital to fund the acquisition
of Hewden. The private investors injected $425,000 into the partnership in return for non-controlling partnership
interests. A subsidiary of the Company is the general partner in the partnership. The partnership interest is reported
as non-controlling interests on the financial statements and distributions on the partnership interest are accounted
for as distributions to non-controlling interests. The financial position, results of operations and cash flows of the
partnership are consolidated with the Company from its date of inception.

Through their partnership interest, the private investors have a preferred interest in the shares of Hewden ranking

in priority to the debt securities issued by the Company. The return to which the private investors are entitled is
limited to a quarterly distribution on their partnership interests, which is calculated with reference to Canadian dollar
bankers’ acceptances. The distributions to the non-controlling interests totalled $19,701 in 2003 (2002: $17,972). At the
end of five years, the yield on the partnership interest will be renegotiated. If no agreement on a new yield is reached,
the private investors have the right to sell their partnership interests. The partnership has a maximum life of 75 years
but may be liquidated earlier if the partnership and the Company fail to agree on a new yield on the partnership
interest and the parties have been unable to arrange a sale of the partnership interest to a new investor. The Company
has the option of purchasing the partnership interest held by the private investors throughout the life of the
partnership for an amount equal to the capital invested in the partnership interest by the private investors. In the
event the Company does not purchase the partnership interest and the partnership is liquidated, the Company will be
required to inject funds to a maximum of approximately $200,000 if the private investors are unable to recover their
investment from the sale of the shares of Hewden. The Company’s obligation to inject these funds would rank equally
with the debt securities.

No return of capital is scheduled during the life of the partnership but a partial return of capital is required in the

case of certain sales of assets by Hewden out of the ordinary course of business.

11. other assets

December 31

Accrued benefit asset
Deferred financing costs
Investment in Maxim Power Corporation
Investment in Energyst Rental Solutions
Deferred project costs
Matreq S.A. receivable US$4,000 (Note 6b)
Other

2003

51,004
25,292
14,634
5, 1 1 5
8,544
5,1 70
20,79 1
130,550

2002

50,040
1,566
14,028
6,755
3,600
—
15,30 1
91,290

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[ 81 ]

notes to consolidated financial statements

12. share capital

The Company is authorized to issue an unlimited number of preferred shares without par value, of which 4,400,000
are designated as cumulative redeemable preferred shares. The Company had no preferred shares outstanding for the
years ended December 31, 2003 and 2002.

The Company is authorized to issue an unlimited number of common shares. Common shares issued and
outstanding are:

Balance, beginning of year
Exercise of stock options
Repurchase of common shares
Balance, end of year

2003

2002

Shares
77,579,954
1,513,93 1
(1,338,900)
77,754,985

Amount
$ 233,450
19,538
(4,049)
248,939

Shares
75,81 6,263
1,763,69 1
—
77,579,954

Amount
2 12,1 2 2
21,328
—
233,450

The plan provides that one share purchase right has been issued for each common share and will trade with the

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 1,338,900 common shares during 2003 as part of normal course issuer bids. These shares
were repurchased at an average price of $24.51 for an aggregate cost of $32,812 which has been allocated to reduce
share capital by $4,049 and retained earnings by $28,763. The Company did not repurchase any common shares
during 2002.

Stock Options

The Company has several stock option plans for employees and directors, the details of which are as follows:

Options outstanding, beginning of year
Issued
Exercised
Cancelled
Options outstanding, end of year

Options
4,323,218
—
(1,513,931)
(63,667)
2,745,620

2003

2002

Weighted
average
exercise price
$ 13.20
n/a
$12.91
$ 14.55
$ 13.31

Options
6,154,442
—
(1,763,691)
(67,533)
4,323,218

Weighted
average
exercise price
$12.87
n/a
$12.04
$13.22
$13.20

Exercisable at year-end

2,516,904

$ 13.30

3,479,990

$13.22

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notes to consolidated financial statements

The following table summarizes information about the stock options outstanding at December 31, 2003:

Range of
exercise
prices

$ 9 — $12
$12 — $15
$15 — $17

Options outstanding
Weighted average
remaining
contractual
life (in years)
3.8
6.7
3.7
5.0

Number
outstanding
686,867
1,21 3,819
844,934
2,745,620

Weighted
average
exercise
price
$ 10.31
$ 12.98
$ 16.22
$ 13.31

Options exercisable
Weighted average
remaining
contractual
life (in years)
3.8
6.6
3.7
4.8

Number
outstanding
686,867
985,1 03
844,934
2,516,904

Weighted
average
exercise
price
$ 10.31
$ 12.89
$ 16.22
$ 13.30

Other Stock-Based Compensation Plans

The Company has other stock-based compensation plans in the form of deferred share unit plans and stock
appreciation rights plans that use notional units. These notional units, upon vesting, are valued based on the
Company’s common share price on the Toronto Stock Exchange and are marked to market at the end of each fiscal
quarter. Changes in the value of the units as a result of fluctuations in the Company’s share price and new issues are
recognized in selling, general and administrative expense in the consolidated statement of income with the
corresponding liability recorded on the consolidated balance sheet in accounts payable and accruals. Details of these
plans are as follows:

Directors’ Deferred Share Unit Plan A (DDSU):

Under the DDSU Plan, non-employee Directors of the Company may elect to allocate all or a portion of their cash
compensation as deferred share units. These units are fully vested upon issuance. These units accumulate dividend
equivalents in the form of additional units based on the dividends paid on the Company’s common shares. 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.

Deferred Share Unit Plan A (DSU-A):
Under the DSU-A Plan, senior executives of the Company may be awarded deferred share units as approved by the
Board of Directors. These units are fully vested upon issuance to the executives. These units accumulate dividend
equivalents in the form of additional units based on the dividends paid on the Company’s common shares. 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.

Deferred Share Unit Plan B (DSU-B):
Under the DSU-B Plan, executives of the Company may be awarded performance based deferred share units as
approved by the Board of Directors. This plan utilizes notional units that become vested partially on December 30th
of the year following the year of retirement, death or disability or at specified percentages if the Company’s common
share price exceeds, at specified levels, the common share price at the date of grant. The specified levels and
respective vesting percentages are as follows:

Grant Price
10% improvement
20% improvement
30% improvement
40% improvement

Common Share Price

Vesting %
0%
25%
50%
75%
100%

2003 Plan
$ 26.95
$ 29.65
$ 32.34
$ 35.04
$ 37.73

2002 Plan
$ 26.05
$ 28.66
$ 31.26
$ 33.87
$ 36.47

Vested deferred share units are redeemable for a period of 30 days after termination, or by December 31st of the year
following the year of retirement, death or disability. The notional deferred share units that have not vested within five
years to the date that they were granted expire. Only vested units accumulate dividend equivalents in the form of
additional units based on the dividends paid on the Company’s common shares.

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notes to consolidated financial statements

12. share capital (continued)

Details of the deferred share unit plans are as follows:
DSU-A

Units

Outstanding, beginning of year
Additions during the year
Exercised/cancelled during the year
Outstanding, end of year
Vested at year-end (1)

2003
66,740
867
—
67,607
67,607

Liability

Balance, beginning of year
Expensed during the year
Exercised/cancelled during the year
Balance, end of year

DSU-A

2003
1,705 $

323
—

$ 2,028 $

2002
65,930
810
—
66,740
66,740

2002
1,318
387
—
1,705

DSU-B

DDSU

2003
275,200
423,820
(13,254)
685,766
258,498

2002
—
275,200
—
275,200
28,050

DSU-B

2003

717 $

7,038
—

$ 7,755 $

2002
—
717
—
717

2003
95,089
38,328
(1,027)
132,390
132,390

DDSU

2003
$ 2,430 $
1,568
(26)
$ 3,972 $

2002
51,320
43,769
—
95,089
95,089

2002
1,027
1,403
—
2,430

(1) Of the DSU-B units vested at year-end, 11 units were retirement vested (2002: 28,050 units)

Share Appreciation Rights (SAR):

In 2003 and 2002, awards under the SAR Plan were granted to senior managers within Canada and the U.K. Under
the SAR Plan, awards are expensed over the vesting periods when the market price of the common shares exceeds
the strike price under the plan. Changes, either increases or decreases, in the quoted market value of those shares
between the date of grant and the measurement date result in a change in the measure of compensation for the
award and will be amortized over the remaining vesting periods. The SAR Plan uses notional units that are valued
based on the Company’s common share price on the Toronto Stock Exchange. The units are exercisable for cash
if incremental common share price thresholds are achieved or other performance measures are met.

Details of the SAR Plan are as follows:

Units

Outstanding, beginning of year
Additions during the year
Exercised/cancelled during the year
Outstanding, end of year
Exercisable, end of year

Liability

Balance, beginning of year
Expensed during the year
Exercised/cancelled during the year
Balance, end of year
Strike price

2002 issue
2003 issue

13. cumulative currency translation adjustments

December 31

Balance, beginning of year
Gain realized during the year
Translation adjustments for the year
Balance, end of year

2003
282,500
279,500
(20,879)
54 1 ,1 2 1
163,708

2003
—
1,341
( 1 1 5)
1,226

26.95

2003
(2,83 1)
(2,578)
(60,062)
(65,4 71)

2002
—
282,500
—
282,500
84,500

2002
—
—
—
—
26.05

2002
(26,847)
—
24,016
(2,831)

$
$

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[ 84 ]

notes to consolidated financial statements

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. The cumulative
currency translation adjustment for 2003 resulted from the weakening of the U.S. dollar, British pound Sterling and
Chilean peso against the Canadian dollar.

At December 31, 2003 and 2002, the exchange rates of the Canadian dollar against the following foreign
denominations were as follows:

December 31

United States dollar
British pound Sterling
Chilean peso

2003
1 .2924
2.3066
n/a (1)

2002
1.5796
2.5428
0.002192

(1) Effective October 1, 2003, the functional currency for Finning Chile S.A. was changed from the Chilean peso to
the US dollar (Note 1(q)). The exchange rate of the Canadian dollar against the Chilean peso at September 30, 2003
immediately prior to the change in functional currency was 0.002044.

14. other expenses (income)

Other expenses (income) include items shown separately to facilitate comparison with the prior year. The following
items are included in other expenses (income) for the years ended December 31:

Gain on sale of surplus properties in Canada and the U.K.
Amortization of deferred gain on 2001 sale of the

Canadian Materials Handling business

Costs incurred on DBSi business process reengineering project (a)
Gain on sale of the UK Power Rental business (Note 8)
(Gain) loss from equity investment

Tax recovery (provision) on other expenses (income)
Other expenses (income), net of tax

2003
(1,791)

(1,600)
22,104
(13,800)
(606)
4,307
1,265
3,042

2002
(15,216)

(1,600)
10,264
—
972
(5,580)
(952)
(4,628)

(a) DBSi is the new information technology for the Caterpillar Dealer Business System. DBSi enhancements include
customer relationship management, finance and administration, and supply chain management. Costs incurred relate
to the implementation of the new software and the associated business process reengineering in the Company’s UK
operation. DBSi was implemented and became operational in Finning (UK) effective January 2004.

15. 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.

2003

Basic earnings per share: net income
Effect of dilutive securities: stock options
Diluted earnings per share: net income

Income
(Numerator)
131,951
$

Shares
(Denominator)
77,326,253
1,468,380

and assumed conversions

131,951

78,794,633

2002

Basic earnings per share: net income
Effect of dilutive securities: stock options
Diluted earnings per share: net income

and assumed conversions

Income
(Numerator)

Shares
(Denominator)

132,253

76,954,609
1,984,5 3 1

132,253

78,939, 1 40

Per Share
Amount
1.71

1.68

Per Share
Amount

1 .72

1.68

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[ 85 ]

notes to consolidated financial statements

16. employee benefits

The Company and its subsidiaries in Canada and the U.K. have defined benefit pension plans and defined contribution
pension plans providing retirement benefits for most of their employees. The South American employees do not
participate in employer pension plans but are covered by country specific legislation with respect to indemnity plans.

The expense for the Company’s benefit plans, primarily for pension benefits, is as follows:
For the years ended December 31

2002

Canada

Hewden

Total

Canada

Hewden

Total

2003
UK

5,939

158

263

6,360

5,269

—

249

5,518

Defined contribution plans
Net benefit plan expense
Defined benefit plans
Current service cost,

net of employee contributions

Interest cost
Expected return on plan assets
Amortization of past service costs
Amortization of net actuarial loss (gain)
Amortization of transitional obligation (asset)
Net benefit plan expense
Total

4,566
14,903
(16,465)
298
589
1,047
4,938
$ 10,877

9,137
16,368
(17,116)
—
3,561
(1,330)
10,620
$ 10,778

3,046
8,247
(7,035)
—
902
1,700
6,860
7,123

16,749
39,518
(40,616)
298
5,052
1,417
22,418
$ 28,778

4,497
14,147
(16,461)
165
217
1,047
3,612
8,881

8,297
17,426
(18,245)
—
1,027
(1,477)
7,028
7,028

3,855
8,460
(8,450)
—
(117)
1,889
5,637
5,886

16,649
40,033
(43,156)
165
1,127
1,459
16,277
21,795

Canada

$ 212,167
6,396
14,903
(11,313)
6,688
—
—
$ 228,841

$ 320,128
12,794
16,499
(7,639)
39,161
(29,735)
—
$ 351,208

Information about the Company’s defined benefit plans is as follows:
For the years ended December 31
Accrued benefit obligation
Balance at the beginning of year
Current service cost
Interest cost
Benefits paid
Actuarial gains
Foreign exchange rate changes
Plan amendments
Balance at the end of year
Plan Assets
Fair value at the beginning of year
Actual return on plan assets
Employer contributions
Employees’ contributions
Benefits paid
Foreign exchange rate changes
Fair value at the end of year
Funded status – plan surplus (deficit)
Unamortized net actuarial loss
Unamortized past service costs
Contributions remitted after valuation date
Adjustment
Unamortized transitional obligation (asset)
Accrued benefit asset (liability) (1)

$ 255,239
22,720
13,161
3,584
(7,639)
(23,709)
$ 263,356
$ (87,852)
109,289
—
—
1,241
(13,311)
9,367

$ 220,782
18,273
3,135
1,830
(11,313)
—
$ 232,707
3,866
$
31,182
3,258
310
—
3,021
$ 41,637

Hewden

Total

Canada

Hewden

Total

$ 159,342
4,668
8,313
(4,855)
17,597
(14,801)
—
$ 170,264

$ 691,637
23,858
39,715
(23,807)
63,446
(44,536)
—
$ 750,313

$ 584,062
$ 108,041
48,480
7,487
18,847
2,551
7,012
1,598
(23,807)
(4,855)
(33,744)
(10,035)
$ 104,787
$ 600,850
$ (65,477) $ (149,463)
182,389
3,258
6,183
1,241
3,561
47,169

41,918
—
5,873
—
13,851
$ (3,835) $

$ 204,063
6,135
14,147
(16,188)
2,244
—
1,766
$ 212,167

$ 187,314
5,785
42,233
1,638
(16,188)
—
$ 220,782
8,615
$
26,582
3,555
—
—
4,068
$ 42,820

$ 267,412
12,124
17,426
(8,646)
5,625
26,187
—
$ 320,128

$ 244,801
(20,815)
12,099
3,827
(8,646)
23,973
$ 255,239
$ (64,889)
87,391
—
—
961
(16,243)
7,220

$ 128,531
5,404
8,460
(5,645)
10,006
12,586
—
$ 159,342

$ 103,155
(4,030)
2,912
1,549
(5,645)
10,100
$ 108,041
$ (51,301)
28,253
—
—
—
17,161
(5,887)

$ 600,006
23,663
40,033
(30,479)
17,875
38,773
1,766
$ 691,637

$ 535,270
(19,060)
57,244
7,014
(30,479)
34,073
$ 584,062
$ (107,575)
142,226
3,555
—
961
4,986
44,153

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

$ 707,343
541,616
$ 165,727

$ 170,264
104,787
$ 65,477

$ 351,208
263,356
$ 87,852

$ 185,871
173,473
$ 12,398

$ 159,342
108,041
51,301

$ 320,128
255,239
$ 64,889

$ 171,473
161,596
9,877

$ 650,943
524,876
$ 126,067

(1) Accrued benefit asset and liability are classified as other assets and accounts payable and accruals, respectively, on the Consolidated Balance Sheet.

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[ 86 ]

notes to consolidated financial statements

Plan assets are principally invested in the following securities at November 30, 2003:

Equity
Fixed-income

Canada
65.3%
34.7%

UK
73.8%
26.2%

Hewden
70.1 %
25.4%

For measurement purposes, assets and liabilities of the plans are measured as of November 30. Plan assets include
common shares of the Company having a fair value of $684 at December 31, 2003 (2002: $935).

The significant actuarial assumptions adopted in measuring the Company’s accrued benefit obligations are as follows:
For the years ended December 31

2003

2002

Discount rate used to determine accrued benefit obligation
Discount rate used to determine net benefit cost
Expected long-term rate of return on plan assets
Rate of compensation increase
Estimated remaining service life (years)

UK Hewden

Canada
UK Hewden
Canada
6.50% 5.75% 5.75% 7.00%
5.75% 5.75%
7.00% 5.75% 5.75% 7.00% 5.50% 6.00%
8.00% 7.25% 7.25% 8.50%
7.25% 7.25%
3.475% 3.20% 3.50%
4.10% 3.20% 3.50%
13

13 10 – 13.3

10 – 15

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[ 87 ]

notes to consolidated financial statements

17. financial instruments

The Company is subject to various financial risks including interest rate risk and foreign exchange risk. To manage this
risk, the Company uses interest rate swaps, cross-currency swaps, forward exchange contracts and options as hedges
against actual assets, liabilities, firm commitments or forecasted transactions.

The following derivative contracts were in place at December 31, 2003 and 2002:

2003

Interest Rate Swaps

Fixed/Floating Swaps:

Notional
Value

Interest Rates (1)

Fixed

Floating

Term to
Maturity

Total
Fair Value

a) Canadian $ pay fixed (1)
b) Canadian $ pay floating (1)

$
$

22,61 3
100,000

5.00%
7.40%

2.64% 1 — 4 years
4 years
5.36%

$
$

(506)
2,237

Cross-Currency Interest Rate Swap (2):
a) Buy Canadian $ (sell £228,000),

pay £ fixed

$ 498,849

8.33%

5.14%

n/a

$ (41,272)

Forward Foreign Exchange Contracts:

a) Buy US$ (sell Canadian $)
b) Sell US$ (buy Canadian $)
c) Sell £ (buy Canadian $) (3)

Notional Weighted Average
Exchange Rate
1 .3478
1 .3263
2.149 1

Value
81,269
29,000
95,560

Term to
Maturity
1 — 2 years
1 — 4 months
n/a

US $
US $
£

Total
Fair Value
(4,500)
983
(8,277)

$
$
$

2002

Interest Rate Swaps
Fixed/Floating Swaps:

Notional
Value

Interest Rates (1)

Fixed

Floating

Term to
Maturity

Total
Fair Value

a) Canadian $ pay fixed (1)
b) British £ pay fixed

$
£

39,679
100,000

5.06%
5.50%

2.84%
4.02%

1 — 6 years
10 years

$
$

(926)
(14,028)

Cross-Currency Interest Rate Swap (2):
a) Buy Canadian $ (sell £228,000),

pay £ fixed

498,849

8.33%

5.34%

n/a

(111,965)

Forward Foreign Exchange Contracts:

a) Buy US$ (sell Canadian $)
b) Sell £ (buy Canadian$) (3)

US $

Notional Weighted Average
Exchange Rate
1.5783
2 .1 49 1

Value
99,088
95,560

Term to
Maturity
1 — 2 years
n/a

Total
Fair Value
129
(29,644)

$
$

(1) For the fixed/floating Canadian $ interest rate 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 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 two years and has an open maturity
date. The contract hedges the Company’s net investment in Hewden and an amount of British pound Sterling cash
flows. $27,056 of the negative fair value, representing the mark-to-spot rate loss on the forward foreign exchange
component of the swap, has been recognized on the balance sheet in current liabilities and offset to cumulative
currency translation adjustments.

(3) The forward foreign exchange contract hedges the Company’s net investment in Hewden. $11,075 of the negative
fair value, representing the mark-to-spot rate loss on the contract, has been recognized on the balance sheet in
current liabilities and offset to cumulative currency translation adjustments.

Fair Values

The following fair value information is provided solely to comply with financial instrument disclosure requirements.
The Company cautions readers in the interpretation of the impact of these estimated 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.

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[ 88 ]

notes to consolidated financial statements

The fair value of the Company’s long-term debt is estimated as follows:
December 31

2003

2002

Long-Term Debt

Credit Risk

Book
Value
$ 983,424

Fair
Value
$1,007,579

Book
Value
$ 556,375

Fair
Value
$ 590,963

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.

18. accounts receivable securitization

Under an agreement dated November 29, 2002, the Company sold a $30,000 co-ownership interest in a pool of
eligible non-interest bearing trade receivables to a multi-seller securitization trust. Under the terms of this agreement,
which expires on November 29, 2007, the Company can sell co-ownership interests of up to $120,000 on a revolving
basis. The Company retains a subordinated interest in the cash flows arising from the eligible receivables underlying
the trust’s co-ownership interest. The trust and its investors do not have recourse to the Company’s other assets in
the event that obligors fail to pay the underlying receivables when due. Pursuant to the agreement, the Company
continues to service the pool of underlying receivables.

As at December 31, 2003, the Company is carrying a retained interest in the transferred receivables in the
amount of $9,040 (as at December 31, 2002: $8,200). The servicing liability outstanding is approximately $33
as at December 31, 2003 (as at December 31, 2002: $40).

For the year ended December 31, 2003, the Company recognized a pre-tax loss of $929 (December 2002: $127)
relating to these transfers. The Company estimates the fair value of its retained interest and computes the loss
on sale using a discounted cash flow model. The key assumptions underlying this model are:

Cost of funds
Weighted average life in days
Average credit loss ratio
Average dilution ratio
Servicing fee rate

Fair value of retained interest

December 31, 2003
3.08%
30.4
0. 1 1 %
6.57%
2.0%

$7,700

Range for year ended 2003
3.05% to 3.58%
23.3 to 34.9
(0.454)% to 0.113%
4.98% to 8.27%
2.0%

The impact of an immediate 10 percent and 20 percent adverse change in the average dilution ratio on the current fair
value of the retained interest would be reductions of approximately $263 and $525, respectively. The impact of an
immediate 10 percent and 20 percent adverse change in the weighted average life in days on the current fair value of
the retained interest would be reductions of approximately $708 and $1,298, respectively. The sensitivity of the
current fair value of the retained interest or residual cash flows to an immediate 10 percent and 20 percent adverse
change in each of the remaining assumptions is not significant.

The table below shows certain cash flows received from and paid to the securitization trust:

For the years ended December 31

Proceeds from new securitization
Proceeds from revolving reinvestment of collections

2003
—
29,567

$
$

2002
30,000
25,000

$
$

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[ 89 ]

notes to consolidated financial statements

19. 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 Inc. that has been ongoing since 1933.

20. 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, the Northwest Territories and the Yukon Territory.
• UK operations: England, Scotland, Wales, Falkland Islands and the Channel Islands. 2003 includes

Lex Harvey operations.

• South American operations: Chile, Argentina, Uruguay and Bolivia. 2002 included Chile only.
• Hewden operations: Equipment rental in the U.K.
• Other operations: corporate head office.
The reportable operating segments for the years ended December 31 are as follows:

2003
Canada
Revenue from external sources $ 1,456,357
1,210,548
Operating costs
125,332
Depreciation
—
Other expenses (income)
120,477
Earnings before interest and tax $

Finance cost and interest on other indebtedness
Provision for income taxes
Non-controlling interests

Net income
Identifiable assets
Gross capital expenditures
Rental assets acquired

$ 1,025,144
38,113
$
71,600
$

2002
Revenue from external sources
Operating costs
Depreciation
Other expenses (income)
Earnings before interest and tax $

Canada
1,269,275
1,021,205
135,134
—
112,936

Finance cost and interest on other indebtedness
Provision for income taxes
Non-controlling interests

Net income
Identifiable assets
Gross capital expenditures
Rental assets acquired

$
$
$

1,085,207
18,197
61,000

UK
934,193
820,845
65,732
—
47,616

726,576
14,276
25,571

UK
828,246
752,861
26,073
—
49,312

496,509
7,040
22,481

$
$
$

South
America
561,964
480,003
22,074
—
59,887

523,885
16,640
33,540

South
America
444,644
388,075
11,726
—
44,843

352,645
7,1 51
39,077

$
$
$

Hewden
640,757
446,873
141,822
—
52,062

$ 1,044,990
20,628
$
166,534
$

Hewden
665,266
443,665
142,060
—
79,541

1,190,020
15,038
226,068

$
$
$

Other
24
20,591
—
4,307
(24,874)

108,015
—
—

Other
55
14,484
—
(5,580)
(8,849)

38,166
—
—

$
$
$

Consolidated
$ 3,593,295
2,978,860
354,960
4,307
255,168

76,868
26,648
19,701

131,951
$
$ 3,428,610
$
89,657
$ 297,245

Consolidated
3,207,486
$
2,620,290
314,993
(5,580)
277,783

79,828
47,730
17,972

$
132,253
$ 3,162,547
47,426
$
348,626
$

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[ 90 ]

notes to consolidated financial statements

21. operating leases

Payments due under various operating lease contracts are as follows:

2004
2005
2006
2007
2008
2009 & thereafter

Total

63,462
53, 1 33
42,707
34,426
28,17 1
2 1 8,533
440,432

22. commitments and contingencies

(a) Due to the size, complexity and nature of the Company’s operations, various legal matters are pending. In the
opinion of management, these matters will not have a material effect on the Company’s consolidated financial
position or results of operations.
(b) Proceedings have been brought against Hewden Tower Cranes Limited, a subsidiary of the Company, by Yarm
Road Limited and Cleveland Bridge U.K. Limited, for damages arising from the collapse of a tower crane at the
Canary Wharf site in the U.K. on May 21, 2000. The business of Hewden Tower Cranes Limited was sold by the
Company in October 2002. The claim amounts to £16.6 million plus costs and interest. Ten preliminary issues were
heard by the High Court of Justice Queen’s Bench Division (Technology and Construction Court) in London in
October 2002. In November 2002, the Court ruled against Hewden Tower Cranes Limited on a number of key issues.
In July 2003, the Court of Appeal (Civil Division) reaffirmed the position taken by the judge of first instance.
A petition for leave to appeal the decision to the House of Lords was not allowed.

23. guarantees and indemnifications

In 2003, the Company adopted CICA Accounting Guideline 14, Disclosure of Guarantees (AcG-14) on a prospective
basis. AcG-14 supplements other disclosure requirements and as such, some of these disclosures are reported in other
notes throughout the Consolidated Financial Statements.

The Company enters into contracts with rights of return, in certain circumstances, for the repurchase of equipment

sold to customers for an amount estimated to be the future value of the fair market price at that time. As at
December 31, 2003 the total estimated value of these contracts outstanding is $142,921 coming due at periods ranging
from 2004 to 2013. Usually, the equipment at the exercise date of the contract is worth more than the contract value.
The total amount recognized as a provision against these contracts is $3,352.

The Company has also guaranteed the residual value of certain assets up to a maximum of $4,000 extending over

periods up until 2008.

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[ 91 ]

ten-year financial summary

years ended december 31 ($ in thousands except per share and per employee data)

2003

2002

2001

Revenue

Canadian operations
UK operations
South American 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 (1)

Dividends

Total common share dividends
Per common share

Cash flow after working capital changes

Per common share

Gross capital expenditures
Ratios

Asset turnover ratio
Debt to equity (2)
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
South America
Hewden
International
Total

$ 1,456,357
$ 934, 1 93
561,964
$
$ 640,757
$
24
$ 3,593,295

$ 255,1 6 8
7.1%
13 1 ,95 1
3.7%

$
$

1 .7 1
1.68

27,8 16
0.36

$ 384,210
4.94
$

89,657

1.09
0.79:1
12.33
14.3%

33.20
23.00

$
$

77,755
$ 303,078
1 1 ,1 2 9
$

2,71 7
2,387
2,456
3,804
45
1 1,409

1,269,275
828,246
444,644
665,266
55
3,207,486

1,398,623
804,084
448,005
587,482
8,849
3,247,043

277,783
8.7%
132,253
4.1%

1.72
1.68

23,100
0.30

472,804
6.09

47,426

1.05
0.60:1
11.99
15.7%

28.85
19.65

77,580
327,462
13,502

2,548
1,578
1,81 7
3,81 3
39
9,795

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
10.23
14.1%

20.35
12.10

75,816
331,230
10,60 1

2,629
1,553
1,516
4,066
39
9,803

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[ 92 ]

Financial data has been restated to incorporate common share subdivision occurring during the ten-year period.
1. 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 2003 have been stated using this method.

2. Debt to equity ratio for the 2000 result did not include the effect of the investment in Hewden Stuart.

ten-year financial summary

2000

1999

1998

1997

1996

1995

1994

1,214,516
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

1,032,922
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

15,037

20,864

1.18
1.04:1
9.02
10.5%

13.85
9.85

75,790
477,120
14,234

2,326
1,404
1,390
—
36
5,156

1.05
1.29:1
8.74
8.7%

15.40
9.00

79,737
450,113
12,031

2,271
1,364
1,259
—
60
4,954

1,1 36,91 7
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
8.52
0.5%

18.50
10.25

79,426
492,367
607

2,494
1,348
1,354
—
55
5,251

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

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

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

47,148

43,132

25,812

0.99
1.66:1
8.69
16.2%

20.50
14.43

79,091
423,565
18,874

2,496
1,720
1,228
—
50
5,494

1.04
1.50:1
7.59
16.0%

14.58
9.75

78,547
441,940
20,788

2,269
925
1,008
—
40
4,242

1.09
1.55:1
6.55
16.2%

11.63
8.63

77,442
428,674
18,961

2,228
884
941
—
34
4,087

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
5.83
14.8%

12.06
9.19

77,026
374,978
15,802

2,124
873
861
—
29
3,887

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[ 93 ]

board of directors

Ricardo Bacarreza
1, 3
Santiago, Chile

John E. Cleghorn
4, 5
Toronto, Ontario

James F. Dinning
2, 3
Calgary, Alberta

President, Proinvest S.A.,
a financial services company based
in Santiago, Chile. Director of
several international companies.
Previously, an economist
at the World Bank in Washington,
D.C. and a senior executive of a
number of banks and insurance
companies in Chile.

Chairman of the Board, SNC-Lavalin
Group Inc. Director of Canadian
Pacific Railways, Molson Inc. and
Nortel Networks. Chancellor of
Wilfred Laurier University. Previously,
executive positions with several
financial institutions, including
Chairman and Chief Executive
Officer of the Royal Bank of Canada.

Executive Vice President, TransAlta
Corporation. Director of Shaw
Communications Inc. and Western
Financial Group Inc. Previously, 11
years as a member of the Legislative
Assembly of Alberta, three cabinet
portfolios 1988 to 1997, including
Provincial Treasurer.

Conrad A. Pinette
4
Vancouver, British Columbia

Elected Chairman of the Board of
the Company in 2000. President
and Chief Operating Officer,
Lignum Limited, one of Canada’s
largest, privately held forest
products companies. Trustee of
A&W Revenue Royalties Income
Fund and Director of TimberWest
Forest Corporation.

Andrew H. Simon, OBE
1 (chairman), 4, 5
Staffordshire, England

Director of several companies,
including SGL Carbon AG,
Kaffee Partner, and Associated
British Ports plc. Previously,
Managing Director and Chairman
and Chief Executive Officer of
Evode Group of Staffordshire, an
international specialty chemicals
and materials company.

Monica E. Sloan
3, 5
Calgary, Alberta

Managing Director and Chief
Executive Officer of Intervera Ltd.
Previously, executive positions with
Kelman Technologies Inc., TELUS
Advanced Communications and
Novacorp International Consulting.

1 Member, Audit Committee

2 Member, Human Resources and Compensation Committee

3 Member, Environmental, Health and Safety Committee

4 Member, Governance Committee

5 Member, Pension Committee

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[ 94 ]

board of directors / corporate officers

Timothy S. Howden
2 (chairman), 4
Marlow, Buckinghamshire, England

Director of several companies,
including Hyperion Insurance Group,
Mahindra-British Telecom SSL plc,
and Benchmark Dental Laboratories
Ltd. Previously, senior executive
positions with several international
companies involved in the food and
household products distribution
industries.

Jefferson J. Mooney
2, 3
Vancouver,
British Columbia

Chairman and Chief Executive
Officer, A&W Food Services of
Canada Inc. Director of Cadillac
Fairview Corporation Limited.
Previously, Chairman of the Business
Council of British Columbia.

Donald S. O’Sullivan
1, 4 (chairman)
Edmonton, Alberta

President, O’Sullivan Resources Ltd.
Director of National Life Assurance
Company of Canada Ltd. Previously,
ownership and/or executive
positions with several companies.

Michael T. Waites
1
Calgary, Alberta

Douglas W.G. Whitehead
3
West Vancouver, British Columbia

John M. Willson
1, 2, 3 (chairman)
Vancouver, British Columbia

Executive Vice President and Chief
Financial Officer and Chief Executive
Officer of U.S. Network, Canadian
Pacific Railway. Previously Vice
President and Comptroller of
Canadian Pacific Railway and Vice
President and Chief Executive
Officer of Chevron Canada
Resources.

President and Chief Executive Officer
of the Company. Director of Ballard
Power Systems Inc., Terasen Inc.,
Belkorp Industries Inc. and the
Conference Board of Canada.
Previously, senior executive
positions with Fletcher Challenge
Canada, including President and
Chief Executive Officer.

Director of Nexen Inc. and Pan
American Silver Corporation.
Previously, senior executive positions
with several companies, including
President and Chief Executive Officer
of Placer Dome Inc., an international
gold mining and production company,
and President and Chief Executive
Officer of Western Canada Steel Ltd.

corporate officers

Brian C. Bell
President
Finning South America

Wayne M. Bingham
Executive Vice President
and Chief Financial Officer
Finning International Inc.

Neil R. Dickinson
Vice President,
Human Resources
Finning International Inc.

Anthony R. Guglielmin
Vice President,
Corporate Development
and Strategic Planning
Finning International Inc.

Paul J.C. Jarvis
President, Power Systems
Finning International Inc.

Nicholas B. Lloyd
Managing Director
Hewden Stuart plc.

Stephen Mallett
Managing Director
Finning (UK) Ltd.

Ian M. Reid
President
Finning (Canada)

Anna P. Marks
Vice President and
Corporate Controller
Finning International Inc.

Douglas W. Sprout
Executive Vice President,
Customer Support Services
Finning International Inc.

Conrad A. Pinette
Chairman of the Board
Finning International Inc.

John T. Struthers
Corporate Secretary
Finning International Inc.

Douglas W.G. Whitehead
President
and Chief Executive Officer
Finning International Inc.

Shelley C. Williams
Treasurer
Finning International Inc.

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[ 95 ]

corporate governance

The Board of Directors and management of Finning International Inc. consider good
governance to be an important factor in the effective operation of the Company.
The Board has overall responsibility for conduct of the business and affairs of the Company
and discharges this responsibility both directly and through delegating certain authority to
committees of the Board and to senior management of the Company.

The Corporate Governance Committee enhances corporate performance by assessing and
making recommendations regarding board effectiveness and by establishing a process for
identifying, recruiting, appointing and re-appointing directors and providing for the on-going
development of current board members. The Committee monitors the flow of information
between the board and management and, where necessary, makes recommendations on

Conrad A. Pinette
Chairman of the Board

improving these lines of communication.

The Audit Committee assists the Board in fulfilling its oversight responsibility to shareholders, potential

shareholders, the investment community and others with respect to the Company’s financial statements, financial
reporting process, systems of internal accounting and financial controls, internal audit function, external auditors’
reports and risk assessment and management. The Committee is empowered to investigate any matter, with full
access to all books, records, facilities and personnel of the Company. It is also empowered to instruct and retain
outside counsel or other experts as required.

The Human Resources and Compensation Committee plans for the continuity of executive officers and other key
employees. The committee also reviews the Company’s overall executive compensation plan to ensure it is competitive
and motivating in order to attract, retain and inspire excellence in the performance of executive officers and other
key employees. In all its deliberations, the Committee takes into account the cost of executive compensation and
the interests of shareholders.

The Environmental, Health and Safety Committee assists, encourages and counsels management to achieve the

Company’s goal of reducing accidents in the workplace through the adoption, monitoring and enforcement of policies
and procedures designed to meet or exceed the Company’s environmental, health and safety goals.

The Pension Committee reviews the design and benefits of the Company’s pension funds as well as the selection,

investment objectives and ongoing performance of the fund manager(s).

Ranked 4th of 207 companies in Canada in Globe and Mail Report on Business, September 2003 study on

corporate governance.

Ranked number 1 by Canadian Business Magazine in 2003 report on corporate governance.
Ranked in the 100th percentile (AAA+) in the Rotman School of Management of the University of Toronto 2003

study on corporate governance (“Board Shareholders Confidence Index”).

The Company’s compliance with the Toronto Stock Exchange Corporate Governance Guidelines is highlighted below:

Board responsible for overall stewardship of Company
Board constituted with majority of unrelated directors
Relationship of each director disclosed and explained
Corporate Governance Committee constituted with non-management directors
Process implemented to assess Board effectiveness
Orientation and education program provided for new directors
Board size reviewed for effective decision-making
Directors compensation reflective of risk and responsibility
Committees generally composed of non-management directors
Committee assigned to supervise corporate governance
Limits to management responsibilities defined
Board functions independently of management
Audit Committee composed only of unrelated directors and has direct communication with the Company’s auditors
System implemented for Board to engage outside advisors

Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes

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[ 96 ]

shareholder information

computershare trust
company of canada

Halifax
Computershare
1465 Brenton St., Ste. 501
P.O. Box 36012
Halifax, Nova Scotia B3J 3S9

Montreal
Computershare
Suite 700
1500 University Street
Montreal, Quebec H3A 3S8

Toronto
Computershare
100 University Avenue,
11th Floor
Toronto, Ontario M5J 2Y1

Calgary
Computershare
530 - 8th Ave. S.W., Ste. 600
Calgary, Alberta T2P 3S8

Vancouver
Computershare
510 Burrard St., 2nd Floor
Vancouver, B.C. V6C 3B9

Phone:

North America
1-800-564-6253
International
514-982-7555
Fax:

North America
1-866-249-7775
International
416-263-9524
Website:

www.computershare.com
email:

service@computershare.com

stock exchanges

The common shares of Finning International Inc. are listed on the Toronto Stock
Exchange. Symbol: FTT

auditors

Deloitte & Touche LLP
Vancouver, Canada

solicitors

Borden Ladner Gervais LLP
Vancouver, Canada

corporate head office

Suite 1000 – 666 Burrard Street
Vancouver, Canada V6C 2X8
Telephone: 604-691-6444

annual meeting

The Annual General Meeting of shareholders will be held at 11:00 a.m., April 28,
2004 at the Hyatt Regency Hotel in Vancouver.

corporate information

The Company prepares an Annual Information Form (AIF), which is filed with the
securities commission 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 website at
www.finning.com

registrar and transfer agent

Computershare Trust Company of Canada
To contact the stock transfer agent nearest to your location see listing to the right.

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 directed to Anthony R. Guglielmin,
Vice President Corporate Development and Strategic Planning.
Telephone 604-331-4937, Fax 604-331-4899, email: aguglielmin@finning.ca

forward-looking statements

This report contains forward-looking statements and information, which reflect
the current view of Finning International Inc. with respect to future events and
financial performance. Any such forward-looking statements are subject to risks
and uncertainties and Finning’s actual results of operations could differ materially
from historical results or current expectations. Finning assumes no obligation to
publicly update or revise its forward-looking statements even if experience or
future changes make it clear that any projected results expressed or implied
therein do not materialize.

Refer to Finning’s annual report, management information circular, annual
information form and other filings with the Ontario Securities Commission and
Toronto Stock Exchange, which can be found at www.sedar.com, for further
information on risks and uncertainties that could cause actual results to differ
materially from forward-looking statements contained in this report.

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[ 97 ]

FROM HERE WE CAN GO ANYWHERE

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[ 98 ]

contents

Corporate Profile

16. Performance at a Glance

17.

Achievements

18. Report of the President and CEO

26. Review of Operations – Finning (Canada)

30. Review of Operations – Finning (UK)

32. Review of Operations – Hewden

34. Review of Operations – Finning South America

40. Review of Operations – Finning Power Systems

44. Review of Operations – Customer Support Services

46. Corporate Responsibility

48. Financial Management

51. Management’s Discussion and Analysis

69. Management’s Report to the Shareholders

69. Auditors’ Report

70. Consolidated Financial Statements

92. Ten-Year Financial Summary

94. Board of Directors

95. Corporate Officers

96. Corporate Governance

97.

Shareholder Information

(Monetary amounts in this annual report are in Canadian dollars unless otherwise noted.)

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finning international inc.
annual report 2003

printed in canada