Finning International Annual Report 2006

FY2006 Annual Report · Finning International

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FINNING INTERNATIONAL INC. 2006 ANNUAL REPORT

Finning At A Glance
Financial Highlights
Letter to Shareholders
Chairman’s Letter
Customer Solutions
Financial Management
Canada
South America

2
4
6
10
12
14
16
20

United Kingdom
Power Systems
Financial Report
Board of Directors
Corporate Ofﬁ cers
Corporate Governance
Shareholder Information

24
28
30
84
85
86
Inside Back Cover

MONETARY AMOUNTS IN THIS ANNUAL REPORT ARE IN CANADIAN DOLLARS UNLESS OTHERWISE NOTED

Capitalizing on continued growth, Finning

topped all past performance records in

2006*. Revenues exceeded $5 billion,

net income totalled $241 million, and

earnings per share rose to $2.69. Key

to our success is our on-going focus

on complete customer solutions. With

renewed commitment to enhancing our

parts and service capabilities, empowering

our employees and maximizing customer

satisfaction, we continue to lead Finning

P
in the only direction that counts: U

*Financial information from continuing operations

2006 FINNING INTERNATIONAL INC. 1

FINNING AT A GLANCE

The Finning Advantage –

(cid:961) Highly engaged employees committed to service
(cid:961) Extensive customer support infrastructure

Finning International Inc. is the world’s largest Caterpillar equipment dealer. The Company sells, rents and provides customer support
services for Caterpillar equipment and engines in western Canada, the United Kingdom and South America (Chile, Argentina, Bolivia and
Uruguay). Finning also owns Hewden, the largest equipment rental business in the U.K. Headquartered in Vancouver, British Columbia,
Canada, Finning International Inc. is a widely-held, publicly-traded corporation, listed on the Toronto Stock Exchange (symbol FTT).

TERRITORY

EMPLOYEES

LOCATIONS

INDUSTRIES SERVED

CANADA

- Finning (Canada)

- OEM

British Columbia, Alberta,

Yukon, the Northwest

Territories and a portion

of Nunavut

4,100

80 locations and presence

in 84 communities

SOUTH AMERICA

Chile, Argentina, Bolivia,

Uruguay

3,860

64 locations

UNITED KINGDOM

- Heavy Construction

- General Construction

- Power Systems

- Hewden Rental

England, Scotland, Wales

4,840

22 dealership branches

330 rental depots

Mining (including oil sands),

construction, oil & gas,

forestry, pipeline

Mining, construction, oil

& gas, forestry

Construction, mining,

quarrying, waste

management, engineering,

petrochemical,

manufacturing,

telecommunications,

utilities and plant hire

POWER SYSTEMS

Caterpillar and associated brands

All Finning territories

engine sales and service

Number of employees and locations are recorded within

the other Finning divisions

Oil & gas, on-highway trucks,

marine, industrial, electric

power, construction

Complete Customer Solutions

(cid:961) Caterpillar equipment (cid:961) World-class component
remanufacturing & rebuild facilities (cid:961) Financial strength

2006 ACHIEVEMENTS

OPPORTUNITIES

(cid:129) Record earnings from continuing operations - $2.59(1)

(cid:129) Record order backlog of $1.5 billion as at December 31, 2006

per share, up 36% from 2005

(cid:129) Record revenues - $5 billion

(cid:129) Growth in higher margin parts and service business

-Target $2.7 billion in customer support services revenue by

(cid:129) Customer support services revenue up by 17% from 2005

2010, supported by a highly engaged workforce

(cid:129) Proﬁ tability, measured by EBIT margin, improved in all

(cid:129) Fleet expansion and replacement in the mining industry

dealership operations

(including oil sands)

(cid:129) Return on capital from Finning (Canada) and FINSA exceeded

(cid:129) Strong general construction markets in all territories

risk adjusted target returns

(cid:129) Improved results from restructured UK operations

(cid:129) Proﬁ tability from UK Dealership improved signiﬁ cantly

(cid:129) Strong demand for electric power generation in all Finning

(cid:129) Divested the Materials Handling division in the U.K.

regions

(cid:129) Increased quarterly dividend by 23% to $0.16 per share (seven

(cid:129) Focus on proﬁ tability and return on capital in all operations

increases in ﬁ ve years)

(cid:129) Reduced debt to total capital ratio to 42% from 47%

(cid:129) Hired over 1,800 new employees

(cid:129) Maintained excellent safety performance: LTI(2)

frequency – 0.80

(cid:129) Completed $60 million by 2006 program to generate $64

million in ongoing annual cost savings

OUR MISSION
Great people
Great solutions
Great results

OUR VISION
We will be Caterpillar’s
best global business
partner providing unrivalled
services that earn customer
loyalty

TOTAL SHAREHOLDER
RETURN GOAL
15% per annum

(1)Adjusted for gains on sale of assets and costs associated with early debt redemption
(2)LTI is measured as the number of lost time injuries per 200,000 work hours

2006 FINNING INTERNATIONAL INC. 3

FINANCIAL HIGHLIGHTS

YEAR ENDED DECEMBER 31
($ MILLIONS, EXCEPT PER SHARE AMOUNTS)

OPERATING DATA FROM CONTINUING OPERATIONS
Revenue
Earnings Before Interest & Income Taxes (EBIT)
Net Income
Basic Earnings Per Share (EPS)
Return on Equity (%)
Cash Flow from Operations After Working Capital Items

BALANCE SHEET DATA
Total Assets
Invested Capital
Total Shareholders’ Equity
Debt to Total Capital

2006

2005

2004

5,047.3
387.8
240.8
2.69
15.8%
460.2

4,200.8
2,787.9
1,624.4
42%

4,542.5
277.3
169.5
1.91
11.8%
478.8

3,736.4
2,644.7
1,413.0
47%

3,836.2
271.9
114.9
1.45
11.0%
247.4

3,804.0
2,694.1
1,326.2
51%

REVENUE ($ BILLIONS)

EBIT ($ MILLIONS)

NET INCOME ($ MILLIONS)

BASIC EPS ($)

5.05

4.54

3.84

3.59

3.21

6.0

5.0

4.0

3.0

2.0

1.0

0.0

400

350

388

300

278

277

272

255

250

200

150

100

241

169

132

115

250

200

150

100

2.69

1.91

1.72

1.71

1.45

3.0

2.5

2.0

1.5

1.0

0.5

0.0

2002 2003 2004 2005 2006

The above charts represent results from continuing operations. The results of operations of the U.K. Materials Handling Division have been reclassiﬁ ed as discontinued
operations for 2004, 2005 and 2006.

FINANCIAL PERFORMANCE BY
CONTINUING OPERATIONS
($ MILLIONS)

CANADA

SOUTH AMERICA

HEWDEN

POWER SYSTEMS*

*Power Systems revenues are included within the other Finning divisions

REVENUE BY MAJOR LINES OF BUSINESS -
CONTINUING OPERATIONS
($ MILLIONS)

NEW MOBILE EQUIPMENT

NEW POWER & ENERGY SYSTEMS

USED EQUIPMENT

EQUIPMENT RENTAL

REVENUE

EBIT

2006

233.3

108.9

34.9

44.2

2005

149.9

93.3

13.5

49.8

2006

2,612.6

1,009.9

796.1

628.7

694.1

2006

1,738.7

419.9

407.7

849.6

2005

2,049.7

1,007.3

830.4

655.1

610.1

2005

1,551.7

359.0

403.4

851.4

CUSTOMER SUPPORT SERVICES

1,608.7

1,368.9

REVENUE PERCENTAGE BY OPERATIONS

12.4%

15.8%

20.0%

51.8%

CANADA
SOUTH AMERICA
UK
HEWDEN

11.4%

9.0%

60.2%

28.1%

EBIT PERCENTAGE BY OPERATIONS*

CANADA
SOUTH AMERICA
UK
HEWDEN

*EBIT excludes corporate operating costs and other expenses

2006 FINNING INTERNATIONAL INC. 5

LETTER TO SHAREHOLDERS

TO OUR SHAREHOLDERS:
2006 was a superb year for Finning, for our
employees and our shareholders. I am very
proud of how our employees consistently
rise to the challenges in this period of
extraordinary growth. And the growth
is set to continue, as our new equipment
order book exceeds $1.5 billion, a record
level.

With a bright outlook for the future,
strong operating and ﬁ nancial performance
and an increased dividend, we provided our
shareholders with a total return of 30%
in 2006.

RECORD RESULTS
In 2006, Finning’s revenues crossed the
$5 billion mark as our business continued
to prosper, driven by strong market
conditions in all our territories. Our basic
earnings per share from both continuing
and discontinued operations increased
23% over the prior year. If we look at just
continuing operations, earnings per share,
after adjusting for non-operating items
increased 36% over 2005 levels ($2.59
vs. $1.91) and delivered a 15.3% return
on shareholders’ equity. In 2006 we also
increased our quarterly dividend by 23% to
$0.16 per share.

What made 2006 especially gratifying is
the improved level of proﬁ tability achieved
by most of our operations. EBIT margins
increased at all operations but Hewden,
where the margin held steady. We are
particularly proud of this improvement in
proﬁ tability given the expense headwinds
that we faced over the past two to three
years.

Record business growth continued on
all fronts in western Canada and South
America. Commodity prices remained
strong throughout 2006 and underpinned
very good demand for heavy equipment in
these regions. Overall economic expansion
supported construction spending, which
also continued to grow at attractive rates.
Operations in Canada and South America

delivered excellent operating results.
Our UK operations also made solid
progress in improving ﬁ nancial
performance. Proﬁ tability at our UK
dealership increased considerably as cost
savings were implemented and strategic
initiatives began to pay off.

In 2006, Finning began to show its true
earning power as the growing population of
Caterpillar equipment in our service areas
generated increasing amounts of parts
and service business. Revenue from this
important and proﬁ table customer support
category was up over 17% compared to
2005. We expect this growth to continue
into the future.

PROGRESS IN THE U.K.
A key focus for Finning in 2006 was to
improve the performance of our UK
operations. I am pleased to report that
we have made signiﬁ cant progress in
repositioning this business to earn better
returns, provide better service to our
customers and meet Caterpillar’s goal of
higher market share going forward.

In September, we announced the
divestiture of our UK Materials Handling
business. In November, we announced the
restructuring of the remaining operations
into four lines of business and appointed a
new leadership team. The new structure,
which is described in greater detail on
page 25 of this report, will allow our UK
businesses to focus more closely on their
Caterpillar related strengths. Financial
results of our UK operations showed
improvement in the second half of 2006,
and we believe we are on track to making
meaningful and sustainable headway in this
territory.

strategic plan focuses on delivering
customer solutions, developing our people
and leveraging information technology to
support our growing business.

Our primary business is providing
customer solutions that maximize
equipment uptime while minimizing
costs. Finning excels at delivering
complete solutions that include supplying
the appropriate equipment, adding a
comprehensive servicing plan, arranging
ﬁ nancing, and in some cases, purchasing the
equipment at the end of the job. Finning
adds customer value at each step.

Our goal is to increase our share of the
servicing business in all our markets. We
have been very successful at linking an
on-going parts and service revenue stream
with our equipment sales to the mining
business. We have an excellent opportunity
to lever our customer service expertise
into other industries, and provide
complete solutions to general construction
and smaller equipment customers. Our
updated strategy calls for doubling
customer support services revenue by
2010 to $2.7 billion from 2005 levels, and
achieving a 15% compound annual growth
rate in revenue from this line of business.

Winning a larger share of the customer
support market will involve developing
an even greater service mentality and
becoming a service company that sells
equipment. “We service what we sell” was
Earl B. Finning’s early philosophy when he
founded the Company, and we will foster
this approach even further by focusing on
“total customer solutions” that will earn
customer loyalty to Finning and our service
offering.

CUSTOMER SOLUTIONS - THE HEART
OF OUR NEW STRATEGIC PLAN
During 2006, our senior executive team
met bi-monthly to review our strategic
direction and develop a new 5-year plan to
position Finning for growth. The updated

The key to building a service-focused
organization is highly engaged employees
who are committed to customer service
excellence – a tough challenge in today’s
supply-constrained labour market. A
focused investment in information

P
U
CUSTOMER SERVICE

RAMPING

“In 2006, Finning began to show its
true earning power as the growing
population of Caterpillar equipment
in our service areas generated
increasing amounts of parts and
service business. Revenue from this
important and proﬁ table customer
support category was up over 17%
compared to 2005. We expect this
growth to continue into the future.”

Doug Whitehead
PRESIDENT & CEO

2006 FINNING INTERNATIONAL INC. 7

LETTER TO SHAREHOLDERS CONTINUED

2006 RETURN TO SHAREHOLDERS
In 2006, Finning’s common shares provided shareholders with a
capital gain of 29% and dividends totaling $0.55 per share. Total
return to shareholders was 30%.

Share value (excluding dividends) has grown at an annual
compound growth rate as follows:

5 years - 19%
10 years - 13%
20 years - 14%

RELATIVE PRICE PERFORMANCE
FINNING INTERNATIONAL INC. VS. S&P/TSX COMPOSITE INDEX
Dec. 31, 2001 to Dec. 31, 2006

250

200

150

100

31-Dec-01

31-Dec-02

31-Dec-03

31-Dec-04

31-Dec-05

31-Dec-06

Finning International Inc.

S&P/TSX Composite Index

technology will support this evolution
in our service culture and help us
deliver solutions to satisfy increasingly
sophisticated customer needs.

FURTHER GROWTH
Over the years, we have built one of the
largest and most comprehensive customer
support capabilities in the heavy equipment
business. In addition to our extensive
branch network throughout western
Canada, the southern cone of South
America and the United Kingdom, we
have invested substantially in component
remanufacturing as well as improved parts
warehousing and distribution systems. Our
OEM remanufacturing facility in Edmonton
and component and truck rebuilding
centres in Antofagasta, Chile play key roles
in servicing our large equipment customers
and have the capacity to support the
growing demand for component
remanufacturing and entire truck rebuilds.
To fulﬁ ll increased demand for customer
service, we hired over 1,800 new
employees company-wide in 2006. Finning
has also developed comprehensive training

programs for new mechanics to ensure
we give our people the right knowledge
and tools to provide superior service and
complete solutions to our customers.
Engaged employees are the foundation for
delivering on our strategic goals as outlined
in our new mission statement: Great People,
Great Solutions, Great Results.

LOOKING AHEAD
Our large current order backlog, up 60%
from December 2005, reﬂ ects growing
demand for new equipment and provides
good visibility for revenue levels in 2007
and early 2008. We have also announced
signiﬁ cant orders for new ﬂ eets of large
mining trucks for delivery in 2009 and
2010, which gives us further conﬁ dence in
the outlook for the next several years.

Commodity prices, while down from
peak levels, remain strong. The outlook
for those industries with exposure to
commodities in our service territories
continues to be attractive. The mining
operations in our western Canadian and
South American territories will continue

to earn very good returns given current
commodity prices. The level of capital
investment in new mining projects and
expansion of existing mines remains
high sustaining demand for new and
replacement equipment. Finning mining
customers operate one of the largest
populations of Caterpillar equipment in
the world. These sizable ﬂ eets generate
considerable on-going opportunities for
parts, services, maintenance and rebuilds.

In addition, robust economic growth
in western Canada and South America
continues to drive infrastructure and
general construction spending.

Finally, the construction market in the
U.K. is expected to grow at a reasonable
rate supporting modest growth in our
operations in this region.

EXECUTIVE TEAM

Ian M. Reid
PRESIDENT
FINNING (CANADA)

Juan Carlos Villegas
PRESIDENT
FINNING SOUTH AMERICA

Andy S. Fraser
MANAGING DIRECTOR
FINNING GROUP, UK

Stephen Mallett
PRESIDENT
FINNING POWER SYSTEMS

Michael T. Waites
EXECUTIVE VICE PRESIDENT
& CHIEF FINANCIAL OFFICER

Nadine J. Block
SENIOR VICE PRESIDENT
CORPORATE HUMAN RESOURCES

AN OUTSTANDING TEAM
Finning owes its success to over 12,800 employees. Our strong results are a testament to their hard work and ability to meet the needs
of our customers. Despite so many new employees joining Finning, we are pleased to report that we were able to maintain our overall
safety performance. Safety is a key element of our service culture, and we work hard to provide the safest possible workplace for
everyone at Finning.

I’d also like to acknowledge the strong relationship and support from Caterpillar, our key strategic partner. The combination of Caterpillar
equipment and Finning service is a partnership for success that we continue to build upon.

In addition, I’d like to welcome three new individuals to the Finning Board of Directors: John Reid, Bruce Turner and Kathleen O’Neill. I
also thank Mike Waites for his service on the Board, and at the same time, formally welcome him as Executive Vice President and Chief
Financial Ofﬁ cer of Finning. Mike resigned from the Board in early 2006 when he accepted the role of CFO.

To summarize, 2006 was an extremely rewarding year. We are optimistic looking forward to 2007 as we continue to build upon our past
achievements and capitalize on opportunities that will drive our results in the only direction that counts: UP.

Sincerely,
FINNING INTERNATIONAL INC.

Douglas W.G. Whitehead
President & Chief Executive Ofﬁ cer

2006 FINNING INTERNATIONAL INC. 9

FINNING BOARD OF DIRECTORS

Conrad A. Pinette
CHAIRMAN OF THE BOARD

Douglas W.G. Whitehead
PRESIDENT & CEO

Donald S. O’Sullivan

John M. Reid

Kathleen M. O’Neill

Timothy S. Howden

“Finning delivered outstanding results for its shareholders in 2006.
On behalf of the Board of Directors, I thank all Finning employees
around the world for their dedication to delivering unrivalled
service to our customers and for their contribution to the
Company’s success.”

CHAIRMAN’S LETTER

Ricardo Bacarreza

Bruce L. Turner

Jefferson J. Mooney

Andrew H. Simon

John M. Willson

James F. Dinning

Excellence in corporate governance as
well as a culture of integrity and respect
for all of the Company’s stakeholders are
fundamental to Finning’s business.

The Finning Board of Directors is a
highly experienced and balanced team
of corporate leaders with diverse
international backgrounds and strong
commitment to Company stewardship. The
Board continuously evaluates and improves
our governance processes to ensure
they are effective and drive appropriate
conduct.

During 2006, the composition of the
Finning Board has undergone some
changes. On behalf of the Board of
Directors, I would like to thank Mike
Waites for his valuable contributions.
Mike resigned in May 2006 and accepted
the position of Executive Vice President
and Chief Financial Ofﬁ cer of Finning
International Inc.

I would also like to welcome three new
independent directors to the Finning
Board: John M. Reid, Bruce L. Turner and
Kathleen M. O’ Neill. Mr. Reid and Mr.
Turner bring considerable expertise from
the energy and mining industries. Ms.
O’ Neill, an FCA (Fellow of the Institute of
Chartered Accountants), was appointed to
the Board on February 13, 2007 and was
designated the “ﬁ nancial expert” on the
Audit Committee. Further changes to the
Board are expected in 2007 as a result of
normal turn-over in membership.

Last year, I mentioned that one of the key
issues the Board would monitor closely in
2006 was the progress of the turnaround
of the UK operations. Our Board is
encouraged by the signiﬁ cant operational
improvements at the UK dealership, the
organizational changes put in place and the
strategic initiatives implemented during
2006. The Board will continue to closely
oversee management’s progress in bringing
Finning’s UK operations up to desired
proﬁ tability levels.

Finning delivered outstanding results
for its shareholders in 2006. On behalf
of the Board of Directors, I thank all
Finning employees around the world for
their dedication to delivering unrivalled
service to our customers and for their
contribution to the Company’s success.

For a more complete discussion of
our corporate governance policies and
practices, I encourage you to review the
Finning management proxy circular and to
visit the corporate governance section of
our website.

On behalf of the entire Board,

Conrad A. Pinette
Chairman of the Board

2006 FINNING INTERNATIONAL INC. 11

FOCUS ON CUSTOMER SOLUTIONS

SERVICE TRUCK - CANNOCK OFFICE, FINNING (UK)

We service what we sell. This has been our motto since
Earl B. Finning founded Finning Tractor & Equipment in
Vancouver in 1933. Today, our updated strategic goal is to
earn and maintain customer loyalty by delivering outstanding
customer solutions in all our markets.

P
U

CLOSE WITH CUSTOMERS

Finning has always taken pride in being
a customer focused company with an
extensive capability to provide parts,
maintenance and repair services to
operators of heavy equipment. The key
to our success lies in building long-term
customer relationships by meeting the
equipment needs of customers and
delivering unrivalled service solutions
that lower operating costs and increase
productivity.

STRATEGIC APPROACH
TO CUSTOMER SERVICE
Expanding our customer support business
has always been an important part of
Finning’s fundamental strategy. Parts
and service work brings in predictable,
recurring revenues and earnings that
balance the inherently cyclical nature
of selling equipment to resource based
industries. It is also the more proﬁ table
part of our business contributing higher
margin revenues and driving our earnings
performance.

Over the past ﬁ ve years we have achieved
an 11% compound annual growth rate
in customer support revenues as a
result of our focus on capturing parts
and service opportunities on a larger
share of the equipment we sell. We have
been particularly successful in building
partnerships with our mining customers in
Canada and South America to deliver the
most comprehensive maintenance services.

To increase our customer service
capabilities Finning has developed
an extensive service infrastructure,
including a large branch network, modern
component remanufacturing centres, parts
distribution centres as well as customer
support centres that operate 24 hours a
day, 365 days a year. We are expanding
our equipment rebuild capabilities
which transform a “high hour” piece of
equipment into a “like-new” product with
the latest design features and technology,
complete with a full warranty identical to
that of new Caterpillar equipment. Our

updated 5-year strategic plan highlights the
customer support business as a primary
growth driver for Finning and focuses on
growing our parts and service business
in all markets and industries. Our target
is to achieve $2.7 billion in revenue from
customer support services by 2010, a
doubling of the 2005 revenue and a 15%
compound annual growth in this line of
business over ﬁ ve years.

information technology (IT) system that
provides our customer facing employees
with reliable tools and information.

Our goal is to implement cost-efﬁ cient
yet highly functional IT solutions that
support our parts and service offering.
Improvements in IT will enable Finning to
become more efﬁ cient and proactive in
meeting customer needs.

To capture a larger share of the available
customer support market we will
enhance our customer service offering,
providing complete service solutions to
customers in all industries. We aim to
deliver customized equipment and service
packages to operators of all types of
Caterpillar equipment, from the largest
mining ﬂ eets to smaller construction
machinery, as well as power solutions.

ELEVATING EMPLOYEE ENGAGEMENT
Our people play a key role in building long
lasting partnerships by truly understanding
unique customer needs and delivering
customized service solutions in a timely
manner. Engaged employees are vital to
service excellence, and we have developed
many initiatives to enhance employee
engagement and foster a service culture
throughout the entire organization. This
is a challenge in the current, constrained
labour market where demand for skilled
employees, including heavy equipment
technicians, has outpaced supply. To
address the tight labour market, Finning
has made our “People Strategy” a
high priority. We are actively applying
innovative practices in hiring, training and
engaging our employees. Our continued
focus on investing in training programs will
ensure a future supply of skilled employees
trained to the highest standards to provide
our customers with complete solutions.

ADVANCING INFORMATION
TECHNOLOGY
Delivering unrivalled customer solutions
in our global operations can be
complemented with a modern, versatile

EARNING CUSTOMER LOYALTY
While new equipment sales are critical to
our business, our customers aren’t simply
buying a machine; they are purchasing a
complete solution to make their business
more efﬁ cient and successful. This high
level of customer satisfaction with Finning’s
service offering is an important driver of
our future new equipment sales, which
in turn expands the machine population
in our territories. Given the large and
growing base of Caterpillar equipment in
the ﬁ eld today, Finning is in an excellent
position to capitalize on proﬁ table parts
and service business and achieve the
targets laid out in our strategic plan.

CUSTOMER SUPPORT SERVICES REVENUE
($ MILLIONS)

1,750

1,500

1,250

1,000

750

500

250

1,609

1,369

1,237

1,110

1,019

2002 2003 2004 2005 2006

2006 FINNING INTERNATIONAL INC. 13

FINANCIAL MANAGEMENT

“Our determined focus on proﬁ tability paid off in 2006 as EBIT margins
improved considerably in most of our operating units. Supported by
excellent growth in revenue and earnings as well as a healthy ﬁ nancial
position, Finning is set to continue to prosper.”

Mike Waites

Executive Vice President & Chief Financial Ofﬁ cer

1. RECORD FINANCIAL RESULTS
2006 earnings from continuing and
discontinued operations were $2.28 per
share, up 23% from 2005. Earnings from
continuing operations increased to $2.59
per share, up 36% over last year after
adjusting for non-operating items in 2006
including:
(cid:129) a gain on the sale of real estate in
Edmonton - $0.12 per share
(cid:129) a gain on the disposition of a non-core
business line by OEM - $0.05 per
share and
(cid:129) costs related to the early, partial
redemption of our GBP Eurobond
- $0.07 per share

2. FOCUS ON PROFITABILITY
One of our primary internal measures
of proﬁ tability is EBIT margin, and each
operation is responsible for meeting its
revenue and EBIT targets. In 2006, a
continued focus on expense control and
pricing discipline resulted in improved EBIT
margins as shown below for all operations
except Hewden, which was just under
2005 levels.

3. DIVIDEND INCREASED AGAIN
We believe that an attractive and growing
dividend represents an important part of
total shareholder return. During 2006,
quarterly dividends rose 23% from $0.13
to $0.16 per share, the seventh dividend
increase in ﬁ ve years. To the extent that
earnings growth allows, and subject to
the Board’s approval, we plan to continue
raising shareholder dividends.

Canada
South America
UK
Hewden
Consolidated

2006
8.2%*
10.8%
4.4%
7.0%
7.3%*

2005
7.3%
9.3%
1.6%
7.6%
6.1%

*Adjusted for non-operating items

4. STRONG FINANCIAL POSITION
Finning’s ﬁ nancial position is sound. The
strong operating results combined with
debt reductions continue to strengthen
our balance sheet and provide us with
considerable ﬁ nancial ﬂ exibility. Debt to
total capital is 42%, down from 47% in
December 2005, and our investment grade
debt ratings were reconﬁ rmed in 2006.

$0.70

$0.60

$0.50

$0.40

$0.36

$0.30

$0.64*

$0.55

$0.44

$0.40

$0.30

$0.20

$0.10

$0.0

2002 2003 2004 2005 2006 2007

* Indicated Dividend

ANNUAL DIVIDEND PER SHARE
5 YEAR COMPOUND ANNUAL GROWTH RATE = 16.4%

6. $60 MILLION BY 2006 COST
SAVINGS PROGRAM EXCEEDS TARGET
The program successfully generated $64
million in ongoing annual cost savings
from some 85 separate initiatives that
were implemented throughout Finning.
Many of these projects were evaluated
and the savings measured under the
6-Sigma methodology. The training of
6-Sigma experts in Finning is on-going
in all operations, so that we can
continue applying this methodology to
improve processes and generate further
cost savings.

7. ACHIEVING GOVERNANCE
REQUIREMENTS
Finning is committed to a strong culture
of corporate governance and effective
risk management. We have designed
appropriate disclosure controls and
procedures as well as internal controls
over ﬁ nancial reporting. This provides
reasonable assurance that relevant
information is gathered and disclosed
publicly and also ensures ﬁ nancial reporting
is reliable and in accordance with generally
accepted accounting principles in Canada.

5. CASH FLOW REINVESTED TO
GROW THE BUSINESS
Cash from operating activities totaled
a healthy $599 million in 2006, up 13%
from $529 million in 2005 reﬂ ecting
improved proﬁ tability and strong growth in
operations.

Strong growth, in turn, requires
investment, so Finning reinvested
approximately $139 million net in
working capital in the form of higher new
equipment and parts inventories. A further
$344 million net was invested in additional
rental ﬂ eets, mainly in western Canada, as
well as in funding “rental purchase options”
(RPOs). These are term rental agreements
with customers that include an option to
purchase the equipment, usually in 3-6
months. Most RPO contracts originate
in Canada, and based on past experience,
about 80% become purchases at maturity.
Gross capital expenditures totaled $89
million in 2006.

These uses of cash reﬂ ect the rapid
growth of our business. Once the growth
rate begins to moderate, the free cash
generated by the business is expected to
increase considerably.

2006 FINNING INTERNATIONAL INC. 15

CANADA

797 HAUL TRUCK - ALBIAN SANDS, ALBERTA

GRADER - ALBIAN SANDS, ALBERTA

TRUCK SHOP - ALBIAN SANDS, ALBERTA

ALBIAN SANDS, ALBERTA, CANADA

P
U

HOLDING OUR LEAD

RECORD PERFORMANCE CONTINUES
Our Canadian operations delivered
another year of exceptionally strong
results as the demand for equipment, parts
and service continued to grow across all
sectors, driven by attractive commodity
prices and robust economic conditions in
British Columbia, Alberta and the north.

2006 revenues exceeded $2.6 billion, up
27% from 2005. Proﬁ tability also reached
record levels, with EBIT(1) increasing 43%
to $215 million.

Excellent growth in new equipment sales,
up 39% from 2005, continued to add to
our expanding Caterpillar ﬂ eet supporting
future parts and service business. The
Canadian operations also achieved a 23%
increase in customer support services
revenue in 2006, the result of our strong
focus on customer service excellence and a
growing population of equipment requiring
parts and service.

In 2006, the Canadian operations
successfully addressed the challenges
associated with equipment and parts
shortages as well as the unprecedented
demand for skilled mechanics. We kept
costs under control and translated strong
revenue growth to a bottom line that
contributed 60% to Finning International’s
consolidated EBIT.

DELIVERING SUPERIOR SERVICE
Continuously improving the quality of our
customer service enabled Finning (Canada)
to achieve a 14% annual growth rate in
parts and service over the last ﬁ ve years
and build lasting partnerships with our
customers.

In addition to our extensive branch
network, recent initiatives to invest in
OEM Remanufacturing and improve
parts warehousing and distribution have
signiﬁ cantly elevated our capabilities in
servicing Caterpillar equipment. In the
mining industry, we partner with some
of our customers through Maintenance

(1)Excluding gains on sale of assets

and Repair Contracts to maximize
equipment uptime. Growing demand for
parts and service in other industries, such
as construction, also presents excellent
opportunities for Finning to apply product
support expertise and add signiﬁ cant value
for our customers.

To support a growing business and changing
customer needs, Finning is also focusing on
technology to connect customers directly
to Finning service centres. In 2006, Finning
(Canada)’s Customer Support Centre
responded to almost 690,000 calls.

As the population of Caterpillar equipment
continues to increase in this region, our
Canadian operations are well positioned to
capture related parts and service business
by offering complete service solutions that
minimize customer costs.

UNPRECEDENTED DEMAND
FOR PEOPLE
Our service personnel had an extremely
busy 2006 responding to an upsurge in
demand for parts and service, a 24%
increase over 2005 total service hours.

To continue providing quality customer
service in this strong growth environment,
Finning (Canada) hired over 1,000
employees in 2006 and achieved very
good progress on its people strategy
aimed at recruiting, training, retaining and
engaging quality people. We were also
very successful in applying innovative hiring
practices such as the “Wanted Tour” which
traveled across Canada recruiting heavy
equipment technicians.

Finning continues our tradition of
supporting the Caterpillar Dealer Service
Technician program, ThinkBIG, in
collaboration with the Northern Alberta
Institute of Technology and Caterpillar.
On average, ThinkBIG has the capacity to
graduate 24 technicians each year, and the
majority choose to work for Finning.

2006 revenues exceeded
$2.6 billion, up 27% from
2005. Proﬁ tability also
reached record levels, with
EBIT(1) increasing 43% to
$215 million.

In 2007, Finning (Canada) will continue its
successful national recruiting program. We
expect to see signiﬁ cant headcount growth
as we focus on seizing opportunities in
parts and service and enhancing our service
culture.

EXCELLENT GROWTH PROSPECTS
Western Canada’s economy remains very
strong, largely as a result of high levels
of capital investment from resource-
based industries. Mining, non-residential
construction and public infrastructure
projects are the busiest areas of economic
activity.

We anticipate that continued strength in
new equipment sales and our focus on
customer solutions will accelerate product
support revenue growth in 2007 and
beyond. With a record order backlog
and an outstanding team of people
delivering unrivalled customer service,
our Canadian operations are poised for
another record year.

CANADA - HEADCOUNT

4,106

4,000

3,316

2,936

3,000

2,717

2,548

2,000

1,000

2002 2003 2004 2005 2006

2006 FINNING INTERNATIONAL INC. 17

CANADA CONTINUED

MINING
Strong growth continues in the mining
sector driven by growing global demand
for oil and minerals that is predicted
to keep commodity prices at attractive
levels for the foreseeable future. Capital
investment continues to ﬂ ow into
expansions of existing mines and the
development of new projects, both in
the oil sands and conventional mining.
Oil sands production using the truck
and shovel method is estimated to reach
2.5 million barrels per day by 2015, a
four-fold increase over 2005 levels of
625,000 barrels per day(1). Estimated
costs of all announced and proposed oil
sands expansion projects currently total
approximately $100 billion(1). B.C. mining
industry expenditures also continue to
grow, with 25 new projects currently in
the permitting process.

The mining industry in western Canada
represents a tremendous growth
opportunity for Finning, both in new
equipment sales and the parts and service
business. Our mining related revenues
are increasing, as we continue to build
on our leading position in equipment
and service solutions. Mining customers
accounted for 26% of all new equipment
deliveries in 2006. The Caterpillar mining
ﬂ eet in western Canada reached 1,354
units in 2006. About a quarter of this ﬂ eet
is operated by Finning customers in the
oil sands in some of the most challenging
weather and ground conditions, including
100 Cat 797 trucks – the largest 797
population in the world.

Finning has made signiﬁ cant investments in
customer service capabilities to maximize
equipment performance for our mining
customers. Over 400 employees work
around the clock at our three oil sands
locations. 34 service bays totaling 125,000
sq. ft. enable Finning mechanics to work
concurrently on 16 Cat 797 trucks and
additional support equipment. Our parts
warehouses at Albian, Mildred Lake and
Fort McMurray total 75,000 sq. ft. stocking
13,500 line items of parts inventory.

(1)Alberta Energy and Utilities Board
(2)Canadian Construction Association
(3)Canadian Association of Petroleum Producers

Our OEM remanufacturing facility
is another key element in enhancing
Finning’s product support capabilities
for customers operating large Cat
equipment. Remanufacturing provides
“like new” components supported by a
full warranty, resulting in considerable
savings on components, which lowers the
overall cost of owning and operating Cat
equipment. OEM’s modern 286,000 sq. ft.
facility currently employs 300 people and
has the physical capacity to double output
with nominal additional investment. Our
ability to accommodate growing demand
for remanufacturing from the oil sands and
other mining operations is important to
Finning’s future success in servicing our
heavy equipment customers.

CONSTRUCTION
Finning experienced another solid year
servicing the construction industry in
B.C. and Alberta, as government spending
on major public infrastructure upgrades
continued, non-residential construction
remained strong, and projects associated
with the 2010 Winter Olympics in
Vancouver started to pick up pace.
Construction customers accounted for
24% of all new equipment deliveries in
2006.

The construction market in western
Canada is expected to remain very active
into 2007 driven by healthy economies
in B.C. and Alberta and increased
investment in non-residential construction
that is expected to grow by about 4%(2).
This provides Finning with a good
opportunity to continue expanding the Cat
construction ﬂ eets and grow our market
share of parts and service to customers
operating medium and small-sized
equipment.

CONVENTIONAL OIL AND GAS
Finning’s territory in Canada hosts one
of the most active oil and gas markets in
North America with well completions
reaching approximately 22,000 (3) in 2006,
roughly double the amount of a decade
ago. New equipment deliveries to our
petroleum customers accounted for 17%

of the total new equipment sales in 2006.
While 2007 forecasts call for a slight drop
in the number of wells drilled to around
19,000 (3), Finning’s involvement in all
stages of exploration, development and
production of these projects continues to
present a large business opportunity.

FORESTRY
Finning experienced good demand for
forestry equipment in 2006 from the
highly mechanized softwood lumber
industry in the B.C. interior and Alberta.
British Columbia is expected to increase
its harvest to record levels over the next
four years in an effort to salvage tens of
thousands of hectares of forest that has
been infested by the mountain pine beetle.
Forestry continues to be an important
market accounting for 8% of total new
equipment deliveries in 2006.

PIPELINE
Global demand for new pipeline capacity
is driving opportunities for PipeLine
Machinery International (PLM), the global
Caterpillar pipeline equipment dealer in
which Finning has a 25% share. PLM’s global
revenue reached $173 million in 2006 and
is expected to grow by over 40% in 2007.

The existing export pipelines that support
current oil production out of the oil
sands are running near capacity. The next
few years will see increased activity in
some large pipeline expansion projects in
western Canada.

THE CAT RENTAL STORE
Finning operates 30 Cat Rental Stores in
western Canada, the third largest rental
network in the region. The Cat Rental
Store operations posted very strong
results in 2006 with revenues up by
35% and EBIT rising by 60% over 2005.
This excellent performance is a result of
increased utilization rates, on-going focus
on cost efﬁ ciencies and the acquisition of
three additional rental stores. The general
rental markets in B.C. and Alberta are
estimated by Finning to be approximately
$600 million, and growth is expected
to continue.

With a record order backlog and an outstanding team
of people delivering unrivalled customer service, our
Canadian operations are poised for another record year.

EXCAVATOR - ALBIAN SANDS, ALBERTA, CANADA

CANADA REVENUE
($ MILLIONS)

CANADA EBIT*
($ MILLIONS)

2,613

2,050

3,000

2,500

2,000

1,563

1,456

1,500

1,269

1,000

500

2002 2003 2004 2005 2006

250.0

200.0

150.0

100.0

50.0

215.1

149.9

131.6

120.5

112.9

2002 2003 2004 2005 2006

*2006 EBIT excludes gains
on sale of assets

2006 FINNING INTERNATIONAL INC. 19

SOUTH AMERICA

TRUCK SHOP - ESCONDIDA COPPER MINE, CHILE

LAS REJAS, SANTIAGO, CHILE

PARTS DISTRIBUTION CENTRE - ANTOFAGASTA, CHILE

ESCONDIDA COPPER MINE, ATACAMA DESERT, CHILE

SERVICE DRIVES EARNINGS

P
U

CUSTOMER SERVICE DRIVES 2006
PERFORMANCE
Finning South America achieved record
earnings performance in 2006 as a result
of strong growth in customer support
services, improved price realization and
cost management. EBIT increased by 17%
from 2005 to a record $109 million as
parts and service revenues grew by 18%,
contributing almost half of total revenue
from Finning South America. In local
currency (USD), EBIT increased by 25%
while parts and service revenue rose
by 26%.

As expected, new mining equipment
deliveries softened in 2006, which slowed
total revenue growth to 7% in local
currency compared to last year. However,
new equipment revenues are projected
to accelerate again in 2007 with the next
wave of mining equipment deliveries from
our record order backlog.

Since 2003, Finning South America has
capitalized on the tremendous growth
in the mining and general machinery
sectors driven primarily by global demand
for copper and the resulting economic
growth in Chile and Argentina. Over
this time, Finning has successfully tackled
the challenge of merging four different
dealerships into one integrated operation
and establishing a shared service centre,
all while expanding service capabilities to
meet growing customer needs.

In 2006, Finning opened a service facility
at La Negra, near Antofagasta, Chile
to rebuild and overhaul large mining
equipment. Over 500 new mechanics out
of a total 866 new hires joined the Finning
service team last year, and an improved
technician development program was
initiated to train equipment mechanics to
our high standards. Finning South America
also introduced a new organizational
structure to support a more efﬁ cient and
customer focused organization.

DELIVERING CUSTOMER SOLUTIONS
Finning continues to build on an
outstanding reputation for providing the
best equipment and service solutions
to over 20,000 customers in mining,
construction, oil & gas, forestry and
electric power throughout the southern
cone of South America. Over the past 13
years, Finning has formed an extensive
customer service network including 24
branches servicing general machinery and
power systems, 18 on-site branches at
customer mines, two component rebuild
centres, two parts distribution centres and
12 Cat Rental Stores.

Finning South America customer support
revenues have grown rapidly over the last
ﬁ ve years as high levels of new equipment
sales continued to add to the growing
Caterpillar ﬂ eet generating further demand
for parts and service. Our good ﬁ nancial
results from South America in 2006
demonstrate how the customer support
business contributes to earnings stability in
times of moderate new equipment sales.

A part of Finning South America’s 5-year
strategic plan is to continue to grow the
parts and service business by offering
superior service and complete customer
solutions, with a target of a 60% market
share in machinery and power systems and
a 95% market share in the mining industry.

To reach these growth targets, Finning
South America continues to invest in a
highly skilled labour force and build its
customer service capability in the region.
We are proceeding with an expanded
parts distribution centre in Antofagasta
to accommodate the growing demand for
parts and components. As well, expansion
plans are going ahead at our truck rebuild
facility in La Negra.

Our good ﬁ nancial results
from South America in
2006 demonstrate how the
customer support business
contributes to earnings
stability in times of moderate
new equipment sales.

ATTRACTING THE BEST PEOPLE
To achieve its growth objectives, Finning
South America will require an estimated
750 additional people in 2007. Finning is
actively involved in developing its own
educational program for key service
positions including mechanics, supervisors,
technicians and senior technicians. In
collaboration with local colleges, we have
expanded Finning University, a learning
and development framework that offers
a number of technician, support staff and
management programs. Enrolment in
these various programs currently stands at
about 350 people and is expected to triple
over the next ﬁ ve years.

SOUTH AMERICA - HEADCOUNT

3,865

3,377

3,203

2,456

4,000

3,500

3,000

2,500

2,000

1,817

1,500

1,000

500

2002 2003 2004 2005 2006

2006 FINNING INTERNATIONAL INC. 21

SOUTH AMERICA CONTINUED

EXCELLENT GROWTH PROSPECTS
The southern cone of South America is
richly endowed with large deposits of
mineral resources that lend themselves to
low-cost truck and shovel mining practices.
The Chilean copper industry is particularly
attractive to investors given current high
metal prices and economic stability in
this country. Capital investment in mining
production in Chile from 2006 to 2010
is expected to total US $11 billion for
copper mining and US $2 billion for gold
mining(1). Mineral exploration expenditures
have tripled since 2002 in tandem with
increasing metal prices(2).

Mining driven economic growth in
Chile and Argentina leads to increased
expenditures on infrastructure and general
construction projects as well as growing
demand for electric power generation.
This regional economic expansion provides
excellent opportunities for Finning to grow
our market share in general machinery and
power systems.

The current order backlog for new
equipment is at record levels pointing to
continued growth in new equipment sales
for the years ahead. Further strength in
product support revenues is driven by the
large and expanding Cat ﬂ eet in this region
as well as our organization-wide focus on
delivering complete customer solutions.

MINING
Mining represents about 60% of Finning
South America’s current revenue and
provides excellent opportunities for long-
term growth in both new equipment sales
and customer support.

Mining expansion in this territory is driven
by attractive commodity prices and low
operating costs. Chile, the world’s largest
and lowest-cost copper producing region,
has over 50 long-life mines in operation.
Argentina is an emerging mining region
with six mines currently in production and
large areas with rich mineral exploration
potential.

Finning mining customers in South America
operate one of the largest Cat ﬂ eets –
over 1,000 machines, including 63 Cat 797
trucks. Finning South America currently
has 14 long-term maintenance contracts
with large mining customers to provide
comprehensive equipment maintenance
services.

The La Negra service centre opened in
2006 to increase capacity to rebuild and
overhaul major mining equipment. This
facility provides Caterpillar Certiﬁ ed
Rebuilds, overhauls, structural welding
repairs and new equipment preparation.
Current estimates indicate that over
500 machines in the Chilean mines have
over 30,000 hours in operation, and will
require major component replacements
or rebuilds in the near future. In 2007, 17
off highway mining trucks are scheduled to
undergo complete rebuilds. These trucks
have been fully used in their “ﬁ rst life”
and will now be rebuilt into “like new”
machines, complete with a full warranty
and at approximately 60% of the cost of a
new truck.

During 2006, two of Finning’s service
shops located at customers’ mine sites
were certiﬁ ed by Caterpillar to the Cat
“5 Star Contamination Control” standard,
the highest possible level. These are the
only two mine shops in the world to
have obtained this maximum rating from
Caterpillar.

Contamination control has been proven
to signiﬁ cantly extend component life in
large mining vehicles and ensure maximum
reliability and performance from major
repairs. Our commitment to maintain
the highest standard of contamination
control is an excellent example of Finning’s
dedication to providing complete customer
solutions that reduce equipment life
cycle costs.

Throughout 2006, Finning maintained
leadership in providing heavy equipment
and related service solutions for the
Chilean mining industry. As the
tremendous growth potential of this

mining region continues to unfold, Finning
is committed to ramping up our service
capacity, growing our workforce, investing
in new facilities and fostering our service
culture across the organization.

CONSTRUCTION
Construction and General Machinery, is
also an important and growing market
accounting for approximately one third of
total Finning revenues in South America.
In 2006, our construction equipment sales
were up by over 8% in local currency
driven by increasing levels of activity in
heavy construction, general construction
and forestry.

The construction industries in Chile and
Argentina are expected to remain strong
due to rising investment in infrastructure,
public works projects and general
construction. Growing Caterpillar ﬂ eets
of construction machinery in this region
during the last several years will also create
ongoing demand for signiﬁ cant parts and
service business.

FORESTRY
Forestry continues to be an important
market for Finning South America in
both new equipment sales and parts and
service. Finning provides a complete
line of mechanical harvesting products
ideally suited for eucalyptus plantations in
southern Chile, Argentina and Uruguay. In
addition to eucalyptus harvesting, Finning
also delivers equipment and customer
support to mill-yards and silviculture
operations, as well as loading, hauling
and road-building sectors of the forest
industry.

There is growing interest among Finning’s
forestry customers in Chile to secure full
maintenance and repair contracts, much
like what has become a standard in the
mining industry. This shift from “do-it-
myself” maintenance provides Finning with
a substantial parts and product support
opportunity.

(1)Chilean Copper Commission
(2)Metals Economic Group

Mining-driven economic expansion supports strong
growth in construction markets and electric power
development.

WHEEL LOADER - ESCONDIDA COPPER MINE, CHILE

SOUTH AMERICA REVENUE
($ MILLIONS)

SOUTH AMERICA EBIT
($ MILLIONS)

1,007 1,010

870

1,200

1,000

800

600

562

445

400

200

2002 2003 2004 2005 2006

120.0

100.0

80.0

60.0

40.0

20.0

108.9

93.3

83.0

59.9

44.8

2002 2003 2004 2005 2006

2006 FINNING INTERNATIONAL INC. 23

UNITED KINGDOM

LANDFILL COMPACTOR - CANNOCK, U.K.

STOCKTON, U.K.

STOKE-ON-KENT, U.K.

SCRAP LOADER - STOKE, U.K.

P
U

TO THE CHALLENGE

2006 PERFORMANCE IMPROVES
In 2006, Finning made substantial progress
in improving the proﬁ tability of our
Caterpillar dealership in the U.K. While
more remains to be done, the ﬁ nancial
results were considerably better. Revenue
in local currency (GBP) was marginally
higher, although down 4% in Canadian
dollars. However, EBIT from continuing
operations more than doubled from
$13.5 million to $34.9 million, reﬂ ecting
increased customer support services
revenue and strong cost controls, which
decreased operating expenditures by $59
million from 2005. Overall proﬁ tability,
as measured by EBIT margin, more
than doubled from 1.6% in 2005 to 4.4%
in 2006.

Hewden revenue was 1% higher in local
currency, down 4% in Canadian dollars.
EBIT declined from $49.8 million to
$44.2 million reﬂ ecting overhead costs of
programs undertaken in 2006 to enhance
customer service and design and build a
new management information system,
which will be implemented in 2007.
Hewden realized savings in operating costs
again in 2006, which decreased by $17
million from 2005.

STRATEGIC REPOSITIONING
During 2006, Finning undertook a full
strategic review of its businesses in the
U.K. Following that review, a number
of changes were implemented including
the disposition of the Materials Handling
division, the restructuring of our remaining
operations into four distinct lines of
business, as well as changes to the senior
management team. The resulting new
business structure and senior management
team better align our human and physical
resources with market opportunities in
the U.K. Finning continues to examine and
assess our business model in the U.K. as
we pursue our goal to build market share,
grow the customer service business and
improve returns on invested capital.

MATERIALS HANDLING SOLD - FOCUS
ON CORE CAT BUSINESS
We determined that the materials handling
or forklift truck distribution business was
no longer a core business for Finning. In
September 2006, this division was sold
and the ﬁ nancial results of prior periods
classiﬁ ed as discontinued operations.

The disposition of the Materials Handling
division was an important step in our
revised strategic plan, which focuses
Finning’s investment in the U.K. market
on the Caterpillar product line and related
parts, service and equipment rental
opportunities.

FOUR LINES OF BUSINESS
Late in 2006, the U.K. businesses were
restructured into the following four lines
of business, reporting to one U.K.-based
senior executive:

1. Heavy and Core Construction

Equipment

2. Power Systems

3. General Construction Equipment

4. Hewden Equipment Rental

The four business units serve different
customer groups. The new structure
allows each unit to tailor its business
practices to the needs of its customers and
lets the operating management establish
the best approach for maximizing returns
for each business line. Over time, the four
lines of business will be supported by a
single business support operation that
will provide head ofﬁ ce services, allowing
synergies among the business units.

The Heavy and Core Construction
Equipment sector is Finning’s traditional
business in the U.K. This group sells and
supports the larger Caterpillar equipment
used in sectors such as coal mining,
quarrying, waste management, and large
construction projects. These customers
require a complete solution capability,
which includes sales, ﬁ nancing, parts,

In 2006, Finning made
substantial progress in
improving the proﬁ tability of
our Caterpillar dealership in
the U.K.

service, component rebuild and disposition
of used equipment as ﬂ eets get replaced.
2006 was a much-improved year for this
business. While new equipment revenues
in local currency were only marginally
higher in 2006, EBIT was up considerably
as a result of a growing parts and service
contribution and very good focus on
cost control. The outlook for 2007 is for
further growth in new equipment and parts
and service revenues.

The Power Systems group provides
Caterpillar engine and power generation
product sales and service to customers in
the electric power generation, offshore
petroleum, marine and industrial markets.
This group is also a full solutions business,
providing extensive engineering capabilities
to meet customer needs. 2006 results
were very good reﬂ ecting strength in all
market sectors, especially electric power
generation with the completion of ﬁ ve
separate projects for Greenpark Energy.
The outlook for 2007 remains attractive.

FINNING GROUP, UK REVENUE
FROM CONTINUING OPERATIONS*
($ MILLIONS)

1,800

1,620

1,440

1,260

1,080

900

720

540

360

180

HEWDEN

FINNING (UK)

1,575

1,493

1,485

1,425

1,403

2002 2003 2004 2005 2006

*The results of operations of the U.K. Materials Handling Division have been reclassiﬁ ed as discontinued operations for 2004, 2005 and 2006.

2006 FINNING INTERNATIONAL INC. 25

UNITED KINGDOM CONTINUED

The General Construction Equipment
group sells and services small and medium
sized Caterpillar equipment, primarily for
the construction market. A large amount
of the construction equipment in the
U.K. is rented by contractors, making the
equipment rental companies important
customers for this line of business. Newly
formed in 2006, this division works closely
with Caterpillar to provide an efﬁ cient
and cost-effective distribution network
for small and medium sized products. A
new Finning servicing and distribution
centre is being established, adjacent to
the Caterpillar factory in the U.K. that
assembles most of this equipment. Under
the new structure, we expect to achieve
signiﬁ cant growth in unit sales in 2007 and
beyond.

The Hewden Equipment Rental group
is the largest equipment rental operation
in the U.K. The rental offering includes
a wide variety of equipment such as
Caterpillar construction equipment,
powered access equipment, a broad
selection of tools, smaller Caterpillar
electric power generators, mobile cranes,
construction site accommodation and
hoists. Hewden is also the major provider
of rental equipment to the petrochemical
and industrial sector through its Hewden
Services division. Hewden’s product lines
are directed to professional contractors
and construction companies, and the
extensive branch network puts Hewden
equipment in easy reach of the majority of
the U.K.’s construction activity.

During 2006, Hewden reorganized its
sales force to meet the growing customer
demand for a single point of contact for
all equipment rental needs. In addition,
Hewden rationalized its mobile crane
business to align the ﬂ eet with our core
general construction customers’ needs for
cranes of up to 100 tons.

Hewden is in the ﬁ nal stages of
implementing a new information system
designed to signiﬁ cantly improve
management’s access to operating and
ﬁ nancial information. The new system will

improve our ability to measure customer
and product proﬁ tability, as well as
improve rental inventory management,
pricing discipline and customer billing,
and ultimately enhance customer service.
The ﬁ rst components of this system were
successfully rolled out in January 2007, and
the business support and branch systems
are expected to become fully operational
by summer 2007.

Hewden plays an increasingly important
role in providing Finning and Caterpillar
with access to the large U.K. construction
equipment rental market. With over 4,100
Cat general construction machines in its
ﬂ eet, Hewden will also provide a signiﬁ cant
source of used equipment and parts and
service opportunities for our General
Construction division.

CATERPILLAR SUPPORT
Caterpillar is an important part of Finning’s
strategy in the U.K., which is aligned with
Caterpillar’s long term strategy – Vision
2020. Caterpillar has agreed to provide
support in growing our U.K. business
and improving proﬁ tability by enhancing
the value proposition that we deliver to
customers in the U.K.

GROWING OUR SERVICE BUSINESS
Parts and service revenues increased
by 10% in local currency over 2005 as
our initiatives to “move closer to our
customer” began to pay off. The U.K.
dealership operations are now structured
to serve customers on a regional basis,
delivering more personalized product
support. Our regional sales and customer
support teams work more closely with
their local customers to meet speciﬁ c
equipment needs and deliver customized
service solutions.

An enhanced focus on proactive
maintenance, rebuild work and customer
service agreements will support further
growth in parts and service and position
Finning as a complete solutions provider
with a strong local presence across
the U.K.

HEALTHY CONSTRUCTION INDUSTRY
Total construction output in the U.K.
increased once again in 2006, supported
by a healthy economy, and driven primarily
by public and private housing construction,
government investment in infrastructure
and transportation improvements, and
building upgrades. Major construction
projects currently underway include
preparations for the 2012 Summer
Olympics in London, expansions to
Heathrow and Luton airports, and the
Thames Gateway Region project. The
Thames Gateway project is a major
redevelopment project in east London
estimated to be the largest residential
building program undertaken in the U.K. in
the past 50 years, with about 200,000 new
homes expected to be built.

The U.K. construction industry is one of
the largest in the world, generating steady
demand for construction equipment for
purchase and rent, as well as related parts
and service business. Construction output
is expected to continue to grow in 2007.

ATTRACTIVE OUTLOOK
The expected economic growth in the
U.K. in 2007 will support healthy demand
for equipment, parts and service from the
numerous industries we serve. In addition
to the construction market, Finning is
well positioned to beneﬁ t from growing
demand from coal mining and quarrying
operations, waste management, electric
power generation and other industrial
customers relying on equipment solutions.
Our new equipment order backlog is
currently at a record level and is expected
to remain strong through 2007.

With a number of business improvements
still underway, Caterpillar’s continuing
support and our strong commitment
to deliver the best customer solutions
in the U.K. market, we expect further
improvement in the performance of our
U.K. based businesses in 2007.

The expected economic growth in the U.K. in 2007 will
support healthy demand for equipment, parts and service
from the numerous industries we serve.

TELEHANDLER - HARTLEPOOLE DOCKS, U.K.

U.K. CONSTRUCTION MARKET TOTAL OUTPUT*
(£ MILLIONS AT 2000 PRICES)

80,000

75,000

70,000

65,000

60,000

2002 2003 2004 2005 2006

*U.K. DEPARTMENT OF TRADE
& INDUSTRY

2006 FINNING INTERNATIONAL INC. 27

POWER SYSTEMS

MOLYMET - SANTIAGO, CHILE

CATERPILLAR GENERATOR - SANTIAGO, CHILE

RNLI LIFEBOAT - UK

MOLYMET - SANTIAGO, CHILE

P
U

SURGE IN DEMAND

STRONG 2006 PERFORMANCE
Finning Power Systems(1) revenues rose
14% in 2006. Favourable market conditions
in our territories and strong demand for
engines used in natural gas compression,
electric power generation (EPG), industrial
and marine applications, and “green
energy” initiatives boosted our ﬁ nancial
performance worldwide.

DELIVERING COMPLETE “POWER”
SOLUTIONS
Finning Power Systems has built a solid
reputation for providing complete
solutions to customers. Our EPG services
extend beyond engine sales, incorporating
design, engineering, packaging, installation,
maintenance and operations expertise. We
provide innovative solutions to challenges
such as mines-gas fuelled power generation
in the U.K. and remote, primary power
installations at arctic diamond mines in
Canada’s Northwest Territories.

MaK – NEW SERVICE TERRITORIES
Finning recently secured exclusive new
distribution and service rights for MaK
marine engines, which power ocean going
vessels. Adding to our territories in B.C.
and Chile, we now serve the west coast
of the U.S. (executed through a strategic
alliance with NC Power Systems Co.,
the Caterpillar Power Systems dealer
for Washington State and Alaska), all of
Mexico and Central America, plus Peru,
Argentina and Uruguay. This geographic
reach signiﬁ cantly expands Finning’s
presence in the commercial marine market.

CANADA – DIVERSE OPPORTUNITY
Canada currently represents over 50% of
Finning’s global Power Systems revenues
and is a major growth area.

Demand for large engines for oil and gas
applications in Alberta and northeastern
B.C. softened somewhat, however, overall
demand for gas compression engines
in this region remains strong. Drilling
activity, while down from its peak, is
expected to continue at historically high

levels. Signiﬁ cant expansion in the oil
and gas industry over the last several
years resulted in a large installed engine
population that is expected to yield
ongoing opportunities for parts and
service.

Increasing mining activity in B.C. and
expansion of diamond operations in the
Northwest Territories continue to fuel
demand for primary power generation in
remote locations.

In addition, Caterpillar’s strong market
share for heavy duty “on-highway” truck
engines in western Canada drives an
important parts and service opportunity.

SOUTH AMERICA – GROWING
DEMAND FOR EPG
Our Power Systems operations in Chile
and Argentina posted another solid year in
2006, delivering solutions for primary and
standby power applications.

Chile and Argentina’s economic growth
drives increasing demand for electric
power which is difﬁ cult to supply due
to lack of hydro electricity in the region
and uncertainty surrounding natural
gas reserves in Argentina and Bolivia.
This presents a large opportunity for
diesel ﬁ red power generation and peak
shaving applications used during periods
of high demand. Energy shortages in
these countries are expected to persist
for several years creating opportunities
for Finning in both new engine sales and
customer support services.

UK – OUTSTANDING RESULTS
Our UK Power Systems operations
achieved exceptional results in 2006,
exceeding our internal targets for revenue
and EBIT growth in local currency, and
contributing about 32% to Finning’s total
Power Systems revenue for the year.

The highlight was delivering a complete
solution to the Greenpark Energy project.
We designed, built and now operate and

Our commitment to
enhanced service and
engineering capabilities
ensures our competitive
advantage and potential for
new opportunities.

maintain ﬁ ve mines-gas fuelled electric
power generation sites for this customer.
The sites, located at former coal mines,
continuously produce 24 MW of electricity.
The number of similar power generation
projects is expected to increase in the next
few years, driven by U.K.’s “green energy”
legislation. Additional Greenpark projects
are currently in the planning and licensing
process.

Finning’s unique expertise and capability
to deliver complete customer solutions
will support future success in serving the
important EPG market.

Other power systems markets in the U.K.
remained strong through 2006 led by solid
demand for marine engines for pleasure
craft and engines for industrial applications
as well as conventional electric power
generation. We expect this diversiﬁ ed
market to continue its attractive growth.

POWER SYSTEMS REVENUE(1)
($ MILLIONS)

800

700

600

500

400

363

694

610

479

456

300

200

100

2002 2003 2004 2005 2006

(1)Power Systems results are reported within the other Finning divisions

2006 FINNING INTERNATIONAL INC. 29

FINANCIAL REPORT

Management’s Discussion & Analysis
31
Management’s Report to the Shareholders 53
53
Auditors’ Report
54
Consolidated Financial Statements
82
Ten Year Financial Summary

MANAGEMENT’S DISCUSSION & ANALYSIS

This discussion and analysis of Finning International Inc. (Finning or the Company) should be read in conjunction with the consolidated ﬁ nancial
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 OPERATIONS

The results from continuing operations include the performance of acquired businesses from the date of their purchase and exclude results
from operations that have been disposed or are classiﬁ ed as discontinued. Results from operations that qualify as discontinued operations have
been reclassiﬁ ed to that category for all periods presented unless otherwise noted. Please see the section entitled “Discontinued Operations”
for a discussion of these operations.

FOURTH QUARTER OVERVIEW

($ MILLIONS)

Q4 2006

Q4 2005

Q4 2006

Q4 2005

(% OF REVENUE)

Revenue
Gross proﬁ t
Selling, general & administrative expenses
Other expenses (income)
Earnings from continuing operations before
interest and income taxes
Finance costs
Provision for income taxes
Net income from continuing operations
Loss from discontinued operations, net of tax
Net income

1,413.4
393.2
304.5
3.0

85.7
17.9
15.1
52.7
–
52.7

1,117.9
318.9
256.6
0.9

61.4
14.4
8.6
38.4
2.2
36.2

27.8%
21.5%
0.2%

6.1%
1.3%
1.1%
3.7%
–
3.7%

28.5%
22.9%
0.1%

5.5%
1.3%
0.8%
3.4%
0.2%
3.2%

Fourth quarter consolidated revenues from continuing operations of $1,413.4 million continued to be strong, driven by revenue growth of
41.3% from the Company’s Canadian operations. Consolidated revenues increased 26.4% from the fourth quarter of 2005. Earnings from
continuing operations before interest and income taxes (EBIT) increased 39.6% to $85.7 million and consolidated net income from continuing
operations increased by 37.2% to $52.7 million.

Net income was $52.7 million compared with $36.2 million in the same period in 2005.

Basic Earnings Per Share (EPS) from continuing operations for the quarter was $0.59 compared with $0.43 in the same period last year. Including
the loss from discontinued operations, basic EPS was $0.59 in the fourth quarter of 2006 compared with $0.41 in the fourth quarter of 2005.

REVENUE FROM CONTINUING OPERATIONS
($ millions) 3 months ended December 31

REVENUE BY LINE OF BUSINESS FROM CONTINUING OPERATIONS
($ millions) 3 months ended December 31

EBIT FROM CONTINUING OPERATIONS*
($ millions) 3 months ended December 31
*excluding other operations – corporate head office

800

7
3
7

600

2
2
5

400

200

1
0
3

7
4
2

2
0
2

6
0
2

9
6
1

7
4
1

600

500

0
0
5

400

7
7
3

300

200

100

2005
2006

6
2
4

8
3
3

3
2
2 2
0
2

3
3
1

3
9

3
2
6 1
0
1

3 9

2005
2006

6
5

9
2

3
2

8 8

2005
2006

CANADA

SOUTH
AMERICA

HEWDEN

NEW
EQUIPMENT

POWER &
ENERGY

USED
EQUIPMENT

EQUIPMENT
RENTAL

CSS

OTHER

CANADA

SOUTH
AMERICA

HEWDEN

2006 FINNING INTERNATIONAL INC. 31

MANAGEMENT’S DISCUSSION & ANALYSIS

Revenue was higher in the fourth quarter of 2006 in the Company’s Canadian operations as a result of robust activity driven by high commodity
prices and an increase in infrastructure spending. Revenue from the Company’s operations in South America increased 21.9% in Canadian dollars
compared with the fourth quarter of 2005 with a strong revenue mix shift to customer support services (CSS). The Company’s operations in the
U.K. also experienced an increase in revenue in Canadian dollars, year over year.

Finning’s business is geographically diversiﬁ ed and the Company conducts business in multiple currencies, the most signiﬁ cant of which are the
U.S. dollar, the Canadian dollar, and the U.K. pound sterling. The most signiﬁ cant foreign exchange impact on the Company’s net income is the
translation of foreign currency based earnings into Canadian dollars. Excluding the impact of foreign exchange when translating results, revenues
for the fourth quarter of 2006 in local currency increased by 25.4% in South America and by 8.4% in Hewden, and decreased by 4.3% in the
UK Operations when compared to last year’s fourth quarter.

Foreign exchange had a minimal impact on consolidated revenues in the fourth quarter compared to the prior year, with a positive impact
on revenues of $22 million due to a weaker Canadian dollar relative to the U.K. pound sterling (6.4% weakening), offset by the negative impact
on revenues of $32 million due to a stronger Canadian dollar in the quarter relative to the U.S. dollar (2.9% strengthening).

Strong demand continued in the fourth quarter of 2006 for both new equipment and customer support services. On a consolidated basis, all
lines of business increased over the 2005 levels maintaining a similar revenue mix. Canada recorded a 66% increase in new equipment revenues
as demand in both mining and construction continued to be strong. The UK Operations achieved a 30% increase in customer support services
which was offset by lower new equipment deliveries to customers, partially due to product availability constraints. Hewden maintained rental
activity at 2005 levels and beneﬁ ted from a higher level of rental asset disposals in the fourth quarter of 2006. South America posted a strong
quarter in new equipment sales and even stronger customer support services beneﬁ ting from a higher level of long term service contracts with
their customers.

Gross proﬁ t of $393.2 million in the quarter increased 23.3% over the same period last year. As a percentage of revenue, gross proﬁ t for the
quarter decreased slightly from the same period last year due to escalating labour costs in South America and lower rental asset utilization
in Hewden. In markets where we have strong demand, some improvement in price realization has been achieved. In the more competitive
U.K. market, the UK Operations generated higher gross margins with a revenue mix shift towards customer support services.

EBIT from continuing operations of $85.7 million increased 39.6% year over year, primarily due to the strong performance of the Company’s
Canadian and South American operations and a notable improvement in the UK Operations. Hewden’s contribution to overall EBIT was at the
same level compared with the prior year’s quarter. EBIT in the fourth quarter of 2006 included higher variable operating costs to support the
increased level of activity, higher employee costs, and higher long-term incentive plan (LTIP) charges. The LTIP charges in the fourth quarter of
2006 are higher by $23.4 million compared with the same period in 2005, primarily due to the vesting of three tranches of deferred share units
and the mark-to-market impact on the valuation of vested units resulting from the appreciation of the Company’s share price in the quarter.
Performance in the fourth quarter of 2006 beneﬁ ted from cost savings achieved globally through the Company’s cost reduction program whereas
the fourth quarter of 2005 incurred higher costs to support customers amidst the Company’s Canadian operations one month labour stoppage.

Net income from continuing operations improved 37.2% in the fourth quarter of 2006 reﬂ ecting the solid fourth quarter activity noted above.

Cash ﬂ ow after changes in working capital for the quarter was $79.0 million, compared with cash ﬂ ow of $135.2 million generated in the same
period last year. The Company’s Canadian operations experienced a signiﬁ cant increase in its investment in equipment in the fourth quarter
of 2006 to meet strong customer demand and deliveries planned for the ﬁ rst half of 2007. Throughout all operations, management continues
to focus on improving cash cycle times and operating efﬁ ciencies.

The Company’s net investment in rental assets of $64.2 million in the fourth quarter was $34.9 million higher than the same period in 2005
with higher demand for Canada’s rental business and timing of product delivery in Hewden.

As a result of these items, cash ﬂ ow from operating activities was $11.7 million in the fourth quarter of 2006 compared to $98.7 million in the
fourth quarter of 2005.

ANNUAL OVERVIEW

($ MILLIONS)

Revenue
Gross proﬁ t
Selling, general & administrative expenses
Other expenses (income)
Earnings from continuing operations before
interest and taxes (EBIT)
Finance costs
Provision for income taxes
Net income from continuing operations
Loss from discontinued operations, net of tax
Net income

MANAGEMENT’S DISCUSSION & ANALYSIS

2006

5,047.3
1,460.2
1,078.8
(6.4)

387.8
75.7
71.3
240.8
36.7
204.1

2005

4,542.5
1,303.1
1,023.5
2.3

277.3
61.0
46.8
169.5
5.5
164.0

(% OF REVENUE)

2006

28.9%
21.3%
(0.1)%

7.7%
1.5%
1.4%
4.8%
0.8%
4.0%

2005

28.7%
22.5%
0.1%

6.1%
1.4%
1.0%
3.7%
0.1%
3.6%

For the fourth consecutive year, revenues reached record levels. Annual revenues from continuing operations of $5,047.3 million increased
11.1%, year over year, primarily as a result of the strong contribution from the Company’s Canadian operations.

Foreign exchange translation had a negative impact of approximately $250 million on revenues due to the stronger Canadian dollar in 2006
relative to the U.K. pound sterling (5.3% strengthening) and the U.S. dollar (6.4% strengthening), year over year. In local currency, the Company’s
UK and Hewden operations contributed revenues slightly higher to that of 2005, while revenues earned by the South American operations
were 7.0% above the 2005 level.

From a line of business perspective, the strong demand for new equipment was almost equalled by the strong growth in customer support
services in 2006. Customer support services, which generally contribute a higher EBIT as a percentage of revenue, are viewed by management
as a major potential growth area and related revenues are anticipated to comprise a larger percentage of total revenues in the future. Rental
revenue and used equipment revenues are relatively unchanged year over year. Used equipment revenues typically will vary depending on product
availability, customer buying preferences, and exchange rate considerations. As new equipment is currently in high demand and certain models
are in short supply, customers are utilizing their older units longer and as such, availability of used equipment is low.

Finning’s global order book or backlog (the retail value of new equipment units ordered by customers for future deliveries) remained strong
and achieved a record level of approximately $1,547 million at the end of the fourth quarter of 2006. This is up from the previous record level
experienced in the third quarter of 2006 of approximately $1,219 million and the December 2005 level of approximately $968 million.

The Company is dependent on Caterpillar for the timely supply of parts and equipment to fulﬁ ll its deliveries and meet the requirements of the
Company’s service maintenance contracts. Although availability of certain models has improved, Caterpillar continues to have certain medium and
large machine models under managed distribution. Finning continues to work closely with Caterpillar and customers to ensure that demand for
parts and equipment can be met. Where supply constraints occur, the Company has been supplementing its new equipment inventory by utilizing
its rental assets and used equipment to meet demand.

REVENUE FROM CONTINUING OPERATIONS
($ millions) 12 months ended December 31

REVENUE BY LINE OF BUSINESS FROM CONTINUING OPERATIONS
($ millions) 12 months ended December 31

EBIT FROM CONTINUING OPERATIONS*
($ millions) 12 months ended December 31
*excluding other operations – corporate head office

3
1
6

0
5
0

3,000

2,500

2,000

1,500

1,000

500

7
0
0
1

0
1
0
1

0
3
8

6
9
7

5
5
6

9
2
6

9
3
7
1

2
5
5
1

2,000

1,500

1,000

500

0
2
9 4
5
3

3
0
4

8
0
4

9
0
6
1

9
6
3
1

1
5
8

0
5
8

2005
2006

3
82

2005
2006

3
3
2

0
5
1

9
0
1

3
9

250

200

150

100

0
5

4
4

5
3

4
1

2005
2006

CANADA

SOUTH
AMERICA

HEWDEN

NEW
EQUIPMENT

POWER &
ENERGY

USED
EQUIPMENT

EQUIPMENT
RENTAL

CSS

OTHER

CANADA

SOUTH
AMERICA

HEWDEN

2006 FINNING INTERNATIONAL INC. 33

MANAGEMENT’S DISCUSSION & ANALYSIS

Gross proﬁ t of $1,460.2 million in 2006 increased 12.1% over last year and increased slightly as a percentage of revenue. The gross proﬁ t
margin improvement reﬂ ects improved equipment margins due to strong overall demand and higher customer support services margins despite
escalating labour costs, particularly in the South American operations.

EBIT from continuing operations increased 39.8% to $387.8 million in spite of the negative impact of foreign exchange in 2006. Annual 2006 EBIT
was reduced by approximately $33 million compared to 2005 as a result of the stronger Canadian dollar relative to both the U.S. dollar and the
U.K. pound sterling. EBIT in 2006 was also negatively affected by higher LTIP costs compared to 2005. The Company’s LTIP includes stock-based
compensation plans such as deferred share unit plans, share appreciation rights plans, and stock options. The LTIP costs in 2006 are $5.2 million
higher than 2005 primarily due to more stock options outstanding and include the mark-to-market impact on the valuation of LTIP resulting from
the appreciation of the Company’s share price year over year, which hit a high of $47.79 in the fourth quarter of 2006.

Annual 2006 EBIT beneﬁ ted from savings realized from the Company’s various initiatives to reduce costs by $60 million by the end of 2006.
The target savings of $60 million from 2004 was achieved and exceeded at December 31, 2006, with estimated annualized savings going forward
of $64 million.

Consolidated net income from continuing operations in 2006 increased by 42.1% to $240.8 million. Basic EPS from continuing operations for the
year ended December 31, 2006 was $2.69 compared with $1.91 in the same period last year, up 40.8%. Annual 2006 results include non-recurring
gains of approximately $0.17 per share recorded in the ﬁ rst and third quarters of 2006 on the disposal of properties in Canada and the sale of
OEM Remanufacturing’s railroad and non-Caterpillar engine component remanufacturing business to Caterpillar in the ﬁ rst quarter of 2006. The
2006 results also include $0.07 per share in incremental ﬁ nance costs incurred on the early repayment of a portion of the Company’s previously
issued £200 million Eurobond notes.

The increase in 2006 net income from continuing operations, year over year, was primarily due to the continued strong performance of the
Company’s Canadian operations and the gains from the dispositions noted above partially offset by higher ﬁ nance costs as a result of the early
repayment of a portion of the Eurobond notes. Excluding the gains recorded in the ﬁ rst and third quarters of 2006 from the dispositions noted
above and the incremental ﬁ nance costs, basic EPS from continuing operations would have been $2.59, an increase of 35.6% from the prior year.

DISCONTINUED OPERATIONS
Following an extensive strategic review of the Company’s U.K. based businesses, it was determined that the Materials Handling Division in the
U.K. no longer represented a core business for Finning. On September 29, 2006, the Materials Handling Division was sold and is now classiﬁ ed
as discontinued operations within the consolidated ﬁ nancial statements for all periods presented.

The sale of the business resulted in a one-time after-tax loss of approximately $32.7 million (approximately £15.5 million) in the third quarter
of 2006, which included the write-off of the goodwill and intangible assets associated with this business.

Net income after discontinued operations for 2006 was $204.1 million compared with $164.0 million for 2005, reﬂ ecting the loss incurred on
the sale discussed above.

CASH FLOW AFTER CHANGES IN WORKING CAPITAL
Cash ﬂ ow after changes in working capital for year ended December 31, 2006 was $460.2 million, a decrease of 3.9% from $478.8 million
generated last year. Strong cash ﬂ ow from operations was used to fund growth in inventories to meet customer demand in Canada. Throughout
all operations, management continues to focus on improving cash cycle times and operating efﬁ ciencies.

The Company’s net spending on rental assets increased marginally with a net investment of $343.6 million in 2006 (year ended December 31,
2005: $310.7 million). Rental additions were lower in the U.K. due to the sale of the Materials Handling Division in 2006 as well as management
focus on increasing asset utilization at Hewden. Growth in rental assets occurred primarily in Canada to accommodate customer demand.

As a result of the above, cash ﬂ ow from operating activities for the year was $97.2 million compared with $158.3 million for 2005.

RESULTS BY BUSINESS SEGMENT
The Company and its subsidiaries operate primarily in one principal business, that being the selling, servicing, and renting of heavy equipment and
related products in various markets worldwide as noted below.

MANAGEMENT’S DISCUSSION & ANALYSIS

Finning’s operating units are as follows:

(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)

Canadian operations: British Columbia, Alberta, the Yukon Territory, the Northwest Territories, and a portion of Nunavut.
South American operations: Chile, Argentina, Uruguay, and Bolivia.
UK operations: England, Scotland, Wales, Falkland Islands, and the Channel Islands.
Hewden operations: Equipment rental in England, Scotland, Wales, and Jersey.
Other: corporate head ofﬁ ce.

The table below provides details of revenue by operations and lines of business for continuing operations. Comparative periods have been
reclassiﬁ ed to conform to the 2006 presentation.

For year ended December 31, 2006
($ MILLIONS)

Canada

South America

Hewden

Consolidated

New mobile equipment
New power & energy systems
Used equipment
Equipment rental
Customer support services
Other
Total
Revenue percentage by operations

$ 1,033.1
196.8
248.3
240.4
873.4
20.6
$ 2,612.6
51.8%

389.5
69.8
38.7
38.1
471.7
2.1
$ 1,009.9
20.0%

For year ended December 31, 2005
($ MILLIONS)

Canada

South America

New mobile equipment
New power & energy systems
Used equipment
Equipment rental
Customer support services
Other
Total
Revenue percentage by operations

739.5
143.7
253.0
195.4
712.2
5.9
$ 2,049.7
45.1%

454.7
75.4
29.8
45.5
399.7
2.2
$ 1,007.3
22.2%

304.1
153.3
80.8
33.9
224.0
–
796.1
15.8%

12.0
–
39.9
537.2
39.6
–
628.7
12.4%

$ 1,738.7
419.9
407.7
849.6
1,608.7
22.7
$ 5,047.3
100.0%

Hewden

Consolidated

345.7
139.9
91.8
37.8
215.2
–
830.4
18.3%

11.8
–
28.8
572.7
41.8
–
655.1
14.4%

1,551.7
359.0
403.4
851.4
1,368.9
8.1
4,542.5
100.0%

Revenue
percentage

34.4%
8.3%
8.1%
16.9%
31.9%
0.4%
100.0%

Revenue
percentage

34.2%
7.9%
8.9%
18.7%
30.1%
0.2%
100.0%

The table below provides selected income statement information by business segment for continuing operations:

For year ended December 31, 2006
($ MILLIONS)

Revenue from external sources
Operating costs
Depreciation and amortization
Other expenses
Earnings before interest and taxes
Earnings before interest and taxes
– percentage of revenue
– percentage by operations

For year ended December 31, 2005
($ MILLIONS)

Canada

South America

Hewden

Other

Consolidated

$ 2,612.6
2,251.3
145.7
(17.7)
233.3

$ 1,009.9
876.3
24.7
–
108.9

8.9%
60.2%

10.8%
28.1%

796.1
734.5
24.2
2.5
34.9

4.4%
9.0%

628.7
446.6
129.7
8.2
44.2

7.0%
11.4%

–
32.9
–
0.6
(33.5)

–
(8.7)%

$ 5,047.3
4,341.6
324.3
(6.4)
387.8

7.7%
100.0%

Canada

South America

Hewden

Other

Consolidated

$ 2,049.7
1,783.8
115.7
0.3
149.9

$ 1,007.3
886.2
25.6
2.2
93.3

7.3%
54.0%

9.3%
33.6%

830.4
793.6
27.1
(3.8)
13.5

1.6%
4.9%

655.1
463.9
136.0
5.4
49.8

7.6%
18.0%

–
31.0
–
(1.8)
(29.2)

$ 4,542.5
3,958.5
304.4
2.3
277.3

–
(10.5)%

6.1%
100.0%

2006 FINNING INTERNATIONAL INC. 35

MANAGEMENT’S DISCUSSION & ANALYSIS

CANADIAN OPERATIONS
The Canadian operating segment primarily reﬂ ects the results of the Company’s operating division, Finning (Canada). This reporting segment also
includes the Company’s interest in OEM Remanufacturing Company Inc. (OEM), which is separately managed from Finning (Canada). OEM is a
component remanufacturing business located in Edmonton, Alberta and became fully operational late in the second quarter of 2005.

The table below provides details of the results from the Canadian operating segment:

For years ended December 31
($ MILLIONS)

Revenue from external sources
Operating costs
Depreciation and amortization
Other expenses (income)
Earnings before interest and taxes
Earnings before interest and taxes
– as a percentage of revenue
– as a percentage of consolidated earnings before interest and taxes

2006

2,612.6
2,251.3
145.7
(17.7)
233.3

8.9%
60.2%

2005

2,049.7
1,783.8
115.7
0.3
149.9

7.3%
54.0%

Record results were again achieved in the Company’s Canadian operations in 2006. Revenues increased 27.5% over the 2005 levels to $2,612.6 million.
Revenues from all lines of business in Canada, except for used equipment, increased over 2005 levels, most notably in new equipment and
customer support services. This occurred in spite of a 6.4% strengthening of the Canadian dollar relative to the U.S. dollar year over year.

The increase in new equipment revenues was attributable to signiﬁ cant strength in the construction, mining, and petroleum sectors driven
by strong commodity and energy prices as well as higher levels of infrastructure spending.

Higher revenues from customer support services were a result of servicing a growing Caterpillar ﬂ eet in our Canadian dealership territory and
the resulting strong demand for Caterpillar parts. Rental revenues increased over 2005 as a result of a higher investment in rental assets required
to meet increased customer demand including increased investment in the Company’s Cat Rental Stores and its joint venture investment in
PipeLine Machinery International, LLP, both of which continue to generate good return on assets.

In the third quarter of 2006, Finning (Canada) acquired the assets and business operations of Wirtanen Electric Ltd., an electric distribution rental
company based in Alberta, for cash of approximately $10.3 million. This acquisition increased the number of the Company’s Cat Rental Stores in
operation in western Canada to 29 at December 31, 2006, compared with 27 stores at December 31, 2005. A 30th Cat Rental Store was added
in January 2007.

CANADA – REVENUE BY LINE OF BUSINESS
($ millions) 12 months ended December 31

1,500

1,250

1,000

750

500

250

3
3
0
1

0
4
7

3
7
8

2
1
7

3
5
2

8
4
2

0
4
5 2
9
1

7
9
41
4
1

NEW
EQUIPMENT

POWER &
ENERGY

USED
EQUIPMENT

EQUIPMENT
RENTAL

CSS

OTHER

1
62

2005
2006

MANAGEMENT’S DISCUSSION & ANALYSIS

New equipment orders from customers continued to outpace prior year volumes and as a result, the backlog achieved new record levels at the
end of 2006. Backlog reﬂ ects the strong activity in the mining, petroleum, and construction sectors where the Canadian operations operate.

In Canada, higher gross proﬁ ts were achieved in all lines of business. Gross proﬁ t as a percentage of revenue increased slightly from that achieved
in 2005 partially due to a modest shift in the mix of revenues in 2006 towards customer support services, which attract a higher margin than the
equipment sales business. In addition, strong customer demand has led to higher equipment margins.

Selling, general, and administrative (SG&A) costs increased in 2006 largely due to a higher number of employees supporting record activity levels
and meeting customer demands. As a percentage of revenue, SG&A is lower in 2006 compared with last year, reﬂ ecting cost efﬁ ciencies. Key
factors affecting the SG&A increase in 2006 compared with 2005 for the Company’s Canadian operations include:

(cid:129)

(cid:129)
(cid:129)

As a result of increased customer demand and continued strength in resource based businesses and infrastructure spending in western
Canada, headcount for Finning (Canada) increased by approximately 770 or 25% compared to December 2005. As a result, higher salaries,
beneﬁ t, pension, recruitment, relocation, and training costs were incurred in 2006.
Variable selling costs such as warranty, freight, and building occupancy costs have increased in proportion with the increase in revenue.
Higher LTIP costs due to the appreciation of the Company’s share price.

Other income for 2006 includes a $12.9 million total pre-tax gain on the sale of certain properties at Finning (Canada) and a $5.3 million pre-tax
gain recorded on the sale of a portion of OEM’s remanufacturing business.

(cid:129)

Finning (Canada) sold certain properties pursuant to a sale leaseback type transaction in which Finning (Canada) will lease back the properties
involved over lease terms ranging from 2 to 22 years. Net proceeds from this transaction were $12.7 million, resulting in a pre-tax gain in the
third quarter of 2006 of $7.8 million. Finning (Canada) also sold surplus properties during the year for a pre-tax gain of $5.1 million.
OEM sold its railroad and non-Caterpillar engine component remanufacturing business to Caterpillar in the ﬁ rst quarter of 2006, resulting in
a pre-tax gain of $5.3 million. Caterpillar and OEM have signed an initial two-year agreement under which OEM will provide remanufacturing
services to Caterpillar for these lines of business.

Strong revenues due to demand and activity in the Canadian operations and gain on property and business sales, partially offset by demand
related SG&A costs, translated into a signiﬁ cant contribution by the Company’s Canadian operating segment which achieved an EBIT of
$233.3 million in 2006 compared with $149.9 million in 2005. As a result of improved margins and cost efﬁ ciencies, the Canadian operating
segment experienced an improved EBIT margin (EBIT divided by revenues) of 8.9% in 2006, up from 7.3% last year. EBIT margin, excluding
the gains from dispositions described above would be 8.2% compared with 7.3% in 2005.

2006 FINNING INTERNATIONAL INC. 37

MANAGEMENT’S DISCUSSION & ANALYSIS

SOUTH AMERICA
The Company’s South American operations include the results of its Caterpillar dealerships in Chile, Argentina, Uruguay, and Bolivia.

The table below provides details of the results from the South American operations:

For years ended December 31
($ MILLIONS)

2006

1,009.9
876.3
24.7
–
108.9

10.8%
28.1%

2005

1,007.3
886.2
25.6
2.2
93.3

9.3%
33.6%

Annual 2006 revenues of $1,009.9 million achieved record levels in both Canadian and local currency, despite the negative impact of a 6.4%
strengthening of the Canadian dollar relative to the U.S. dollar. In local currency (U.S. dollar), Finning South America revenues increased 7.0%
reﬂ ecting higher revenues from customer support services in 2006. The strong commodity cycle and continued high metal prices, together
with strong economic growth in the countries in which Finning South America operates, continues to fuel the demand for equipment, although
at a slightly lower level in 2006. New equipment order backlog achieved record levels at the end of 2006 with strong new customer orders.

Signiﬁ cant growth experienced in customer support services is primarily the result of servicing the numerous mining maintenance and repair
contracts entered into over the past couple of years. The Company’s South American operations experienced a revenue mix shift from equipment
sales towards higher margined customer support services in 2006.

In both Canadian and local currency, gross proﬁ t increased in 2006 in absolute terms and as a percentage of revenue. This occurred partially due
to the revenue mix shift toward customer support services but was also due to stronger margins earned in new equipment and rentals, partially
through price realization. In South America, high commodity prices have also driven labour costs upward as wages increase to support demand
in a highly competitive market for skilled workers. South America operations were adversely impacted by these higher wage demand settlements
and by some degree of inefﬁ ciencies of newly hired employees to meet customer demand. As a result, margin returns from customer support
services have decreased slightly from 2005 levels.

In order to meet strong customer service demand arising from a higher number of service maintenance contracts, 607 additional revenue-
generating employees and support staff have been hired, representing a 15% increase over December 2005 levels. As a result, higher salaries
and beneﬁ t costs were incurred in 2006. Parts availability constraints also increased costs to expedite delivery of product to customers. Other
operating costs reﬂ ect the upward pressure of inﬂ ationary increases, especially from Argentina which continues to have a high rate of inﬂ ation. In
spite of the increase in SG&A costs to manage growth in demand, SG&A as a percentage of revenue decreased in 2006 as a result of numerous
initiatives to manage costs. Management continues to undertake cost saving initiatives to drive efﬁ ciencies in work ﬂ ow processes and improving
working capital management. These costs were mostly offset by lower variable equipment selling costs and productivity improvements.

SOUTH AMERICA – REVENUE BY LINE OF BUSINESS
($ millions) 12 months ended December 31

5
5
4

0
9
3

2
7
4

0
0
4

5
7

0
7

9
03
3

6
4

8
3

NEW
EQUIPMENT

POWER &
ENERGY

USED
EQUIPMENT

EQUIPMENT
RENTAL

CSS

OTHER

2005
2006

500

400

300

200

100

MANAGEMENT’S DISCUSSION & ANALYSIS

In local currency, EBIT improved 24.7% in 2006 compared to the prior year. When translated into Canadian dollars, EBIT of the Company’s
South American operations of $108.9 million in 2006 was 16.7% higher than 2005. EBIT as a percentage of revenue for Finning South America
at 10.8% was up from 9.3% in 2005 as a result of the revenue mix shift to higher margined customer support services and cost saving initiatives.

UNITED KINGDOM (“UK”) GROUP
In the fourth quarter of 2006, Finning implemented a new organizational structure for its UK Group and appointed a new management team.
Effective November 1, 2006, Finning Group, UK will be organized along four core lines of business; Heavy Construction, General Construction,
Power Systems, and Hewden. These four business units will, over time, be supported by a single back ofﬁ ce operation that will provide centralized
head ofﬁ ce services, allowing further synergies among the business units.

For most of the 2006 year, the Company’s operations in the U.K. operated separately as UK Operations and Hewden Operations as noted below.
The changes implemented in the fourth quarter are expected to improve the performance of the Company’s operations in the U.K.

UK OPERATIONS
The continuing operations of this segment reﬂ ect the results of Finning (UK), the UK Caterpillar dealership operation, and Diperk UK, which
distributes and services Perkins engines in the U.K.

In September 2006, Finning (UK) sold its Materials Handling Division and as a result, the results from the Materials Handling Division are
recorded as discontinued operations with prior period results restated accordingly.

The table below provides details of the results of the continuing operations from the UK Operations:

For years ended December 31
($ MILLIONS)

2006

796.1
734.5
24.2
2.5
34.9

4.4%
9.0%

2005

830.4
793.6
27.1
(3.8)
13.5

1.6%
4.9%

Annual 2006 revenues of $796.1 million were down 4.1% from the prior year. Excluding the impact of foreign currency translation resulting from
the 5.3% strengthening of the Canadian dollar relative to the U.K. pound sterling, revenues in the UK Operations increased marginally by 1% in
local currency compared to the prior year.

UK – REVENUE BY LINE OF BUSINESS
FROM CONTINUING OPERATIONS
($ millions) 12 months ended December 31

400

300

200

100

6
4
3

4
0
3

4
2
5 2
1
2

3
5
01
4
1

2
9

1
8

8
3

4
3

NEW
EQUIPMENT

POWER &
ENERGY

USED
EQUIPMENT

EQUIPMENT
RENTAL

CSS

2005
2006

2006 FINNING INTERNATIONAL INC. 39

MANAGEMENT’S DISCUSSION & ANALYSIS

Revenues, in local currency, from customer support services and power and energy solutions were higher in 2006 compared to the prior year,
partially offset by lower revenues from new and used equipment sales and rentals. Power and energy solutions increased in 2006 supported by
the completion of a number of large power generation projects and higher activity in the offshore petroleum market.

New order backlog at December 2006 achieved record levels.

Gross proﬁ t, in local currency, for 2006 for the UK Operations was 9.9% higher in absolute terms compared with last year. Gross proﬁ t margin
as a percentage of revenue was higher than 2005 due to higher margins achieved across all lines of business.

SG&A costs decreased in 2006 compared with 2005, in both Canadian and local currency, mainly as a result of various initiatives and
management’s focus on realizing cost efﬁ ciencies. The UK Operations incurred lower information system charges as well as lower pension costs
as changes to employee pensionable beneﬁ ts were implemented in the ﬁ rst quarter of 2006.

In 2006, the UK Operations contributed $34.9 million of EBIT, a signiﬁ cant increase compared with the EBIT of $13.5 million recorded in 2005,
primarily due to cost containment initiatives, higher levels of product support, and improved margins in all lines of business.

EBIT as a percentage of revenue for the UK Operations increased to 4.4% in 2006 from 1.6% last year and the UK Operations contributed
9.0% of the Company’s consolidated EBIT, a signiﬁ cant improvement from 4.9% last year.

DISCONTINUED OPERATIONS – MATERIALS HANDLING DIVISION
Following an extensive strategic review of the Company’s U.K. based businesses, the Finning Board of Directors determined that the Materials
Handling Division of Finning (UK) was no longer a core business for Finning. On September 29, 2006, this division was sold and is classiﬁ ed as
discontinued operations within the consolidated income statements for all periods presented.

The sale of this business resulted in an after-tax loss of approximately $32.7 million (approximately £15.5 million) in the third quarter, which
included the write-off of the goodwill and intangible assets associated with this business.

The table below provides details of the discontinued operations of Finning (UK)’s Materials Handling Division excluding the loss on sale:

($ MILLIONS)

Revenue from external sources
Operating costs
Depreciation and amortization
Earnings before interest and taxes

Approximately 1,000 employees were transferred with the sale of the Materials Handling Division.

Nine months
ended
September 30,
2006

183.5
147.6
31.1
4.8

Twelve months
ended
December 31,
2005

292.1
233.3
50.8
8.0

MANAGEMENT’S DISCUSSION & ANALYSIS

HEWDEN OPERATIONS
Hewden is an equipment rental and associated services operation in the United Kingdom.

The table below provides details of the results from Hewden:

For years ended December 31
($ MILLIONS)

2006

628.7
446.6
129.7
8.2
44.2

7.0%
11.4%

2005

655.1
463.9
136.0
5.4
49.8

7.6%
18.0%

Hewden revenues decreased 4.0% to $628.7 million for the year ended 2006 compared with 2005. In local currency, revenues increased
marginally by 1.3%. The increase in local currency revenues was primarily a result of rental asset sales during the year partially offset by a
reduction in rental revenues. This was somewhat attributable to continued competitive pressures in the U.K. rental marketplace with limited
opportunities for price realization and rental revenue growth.

Gross proﬁ t for 2006 decreased in absolute terms and as a percentage of revenue. Positively affecting margins in 2006 was the disposal of retired
rental assets, including several auctions, which partially offset the lower rental margins being achieved due to lower utilization.

In local currency, Hewden’s SG&A costs decreased 2.2% in 2006, largely achieved through cost containment actions, improved credit and
collection efforts, and managed headcount savings. At December 2006, headcount was 116 or 3.2% lower than at December 2005.

Hewden’s rental revenue decreased in 2006 due in part to lower utilization rates and its inability to achieve price realization due to a competitive
market in the U.K. A renewal of Hewden’s strategic focus and structure is expected to improve operational excellence and consequently
operating results. Hewden’s business model is being evolved through an assessment of products, network, and structure to ensure it continues to
meet the needs of its customers. These activities, in conjunction with Hewden’s new information technology system which will be implemented
in 2007, are expected to be key elements in meeting customers’ needs, increasing asset utilization, and reducing operating costs. Project costs
relating to these initiatives are expected to continue throughout 2007. Other expenses incurred in 2006 primarily related to these projects.
Progress on these projects continued throughout the year, albeit slow in some areas, while focus was placed on the implementation of Hewden’s
new information technology system. This system is expected to simplify and standardize business processes and provide improved management
and customer information to improve performance.

HEWDEN – REVENUE FROM LINE OF BUSINESS
($ millions) 12 months ended December 31

600

500

400

300

200

100

3
7
5

7
3
5

0
9 4
2

2
1

2
4

0
4

2005
2006

NEW
EQUIPMENT

USED
EQUIPMENT

EQUIPMENT
RENTAL

CSS

2006 FINNING INTERNATIONAL INC. 41

MANAGEMENT’S DISCUSSION & ANALYSIS

In the fourth quarter of 2006, to better serve its customers and improve returns, Hewden restructured its Cranes business converting from
a widespread rental depot approach to an approach centered in three regions with management focus on each region together with a more
customer aligned product offering. Projects such as this may result in a short-term adverse impact on revenues as resources and management
are deployed in the implementation of these initiatives to generate longer term beneﬁ ts. Anticipated annualized savings from this reorganization
are $3.7 million.

Hewden contributed $44.2 million of EBIT in 2006 compared with $49.8 million in 2005, an 11.2% decrease, reﬂ ecting the impact on revenues,
margins, SG&A, and other items discussed above, and the adverse impact of a stronger Canadian dollar when translating Hewden’s results from
U.K. pound sterling. In local currency, EBIT decreased 6.3% compared to that reported in 2005.

EBIT as a percentage of revenues decreased from 7.6% last year to 7.0% in 2006.

CORPORATE AND OTHER OPERATIONS

For years ended December 31
($ MILLIONS)

Operating costs
Other expenses (income)
Earnings before interest and taxes

2006

32.9
0.6
(33.5)

2005

31.0
(1.8)
(29.2)

For the year ended December 31, 2006, operating costs were $32.9 million, compared with $31.0 million for the same period in 2005. LTIP costs
incurred in 2006 were $5.2 million higher than 2005, partially offset by improved performance from the Company’s investment in Energyst B.V.
In 2005, the Company reported a $1.8 million gain as other income on the sale of its investment in Maxim Power Corp.

EARNINGS BEFORE INTEREST AND TAXES (EBIT)
On a consolidated basis, EBIT from continuing operations in 2006 increased by 39.8% over 2005 to $387.8 million, primarily due to the strong
demand and activity at the Company’s Canadian and South American operations. In addition, improvements were evident in the UK Operations
due to the realization of cost efﬁ ciencies. Gross proﬁ t increased $157.1 million to $1,460.2 million in 2006 compared with 2005. Although SG&A
costs were higher in 2006 compared with 2005 reﬂ ecting higher costs incurred to meet customer demand and also higher LTIP charges, overall
SG&A costs as a percentage of revenue were lower in 2006 as a result of global cost saving initiatives. EBIT was also negatively impacted in
2006 due to the strengthening Canadian dollar relative to the U.S. dollar and U.K. pound sterling. The foreign exchange variance is mainly due to
translating foreign currency based results into Canadian dollars. EBIT as a percentage of revenue increased from 6.1% in 2005 to 7.7% in 2006.
The increase in EBIT was also partially due to the gains realized in the ﬁ rst and third quarters of 2006 on the disposal of surplus properties in
Canada and a portion of OEM Remanufacturing’s business. Excluding these gains, EBIT would have been $369.6 million and EBIT as a percentage
of revenue would have been 7.3%.

EBIT FROM CONTINUING OPERATIONS*
($ millions) 12 months ended December 31
*excluding other operations – corporate head office

3
3
2

0
5
1

9
0
1

3
9

0
5

4
4

5
3

4
1

2005
2006

CANADA

SOUTH
AMERICA

HEWDEN

250

200

150

100

MANAGEMENT’S DISCUSSION & ANALYSIS

Major components of the annual EBIT variance were:

($ MILLIONS)

2005 EBIT
Net growth in operations
Gain on sale of OEM’s railroad and non-Cat remanufacturing business
Gain on sale of properties in Canada
Higher LTIP costs
Foreign exchange impact
Other net expenses (see Note 2 to the Consolidated Financial Statements)
2006 EBIT

277.3
140.2
5.3
12.9
(5.2)
(33.2)
(9.5)
387.8

FINANCE COSTS
Finance costs for the year ended December 31, 2006 of $75.7 million were 24.1% higher than 2005 primarily due to the following:

(cid:129)

(cid:129)
(cid:129)

Following the sale of the Company’s Materials Handling Division in the U.K., the Company used a portion of the proceeds to redeem
£75 million of its £200 million Eurobond Notes. As a result, the Company recorded a charge of approximately $8.9 million, reﬂ ecting costs
associated with the recognition of deferred ﬁ nancing costs and related redemption costs.
Higher short-term interest rates.
Higher average short-term debt levels at the Company’s Canadian operations to support working capital requirements.

These increases were partially offset by the following:

(cid:129)

Favourable foreign exchange impact of translating U.S. and U.K. pound sterling denominated ﬁ nance costs in 2006 with a stronger
Canadian dollar; and
Lower average short-term debt levels at the Company’s U.K. and South America operations.

PROVISION FOR INCOME TAXES
Finning’s 2006 annual income tax expense was $71.3 million (22.9% effective tax rate) compared with $46.8 million (21.6% effective tax rate)
for 2005. The higher effective tax rate in 2006 reﬂ ects the change in the Company’s earnings mix with more income earned in the higher tax
jurisdictions of the Canadian and UK Operations, partially offset by a lower capital tax rate on gains on property sales in Canada in 2006.

Management anticipates that for 2007, the consolidated effective tax rate will approximate 25 - 30%.

NET INCOME
Finning’s net income from continuing operations increased 42.1% to $240.8 million in 2006 compared with $169.5 million in 2005 reﬂ ecting
improved contributions from all operations, particularly from the Company’s operations in Canada and South America. The Company realized
improved margins, controlled spending, and the gains on the sale of surplus properties and business divestitures in Canada in 2006. This was partially
offset by higher costs to meet customer demand, higher LTIP costs and the incremental ﬁ nance costs incurred on the early partial repayment
of the Eurobond notes. Annual 2006 results were tempered by the unfavourable foreign exchange impact of approximately $22 million after-tax,
primarily due to translating foreign currency based earnings with a stronger Canadian dollar. Basic earnings per share from continuing operations
increased 40.8% to $2.69 in 2006 compared with $1.91 last year. Excluding gains on the sale of properties in Canada and a portion of the OEM
remanufacturing business, as well as the incremental ﬁ nance costs, basic earnings per share would have been $2.59, 35.6% higher than 2005.

LIQUIDITY AND CAPITAL RESOURCES
Management of the Company assesses liquidity in terms of its ability to generate sufﬁ cient cash ﬂ ow to fund its operations. Net cash ﬂ ow
is affected by the following items:

(cid:129)

(cid:129)
(cid:129)

operating activities, including the level of accounts receivable, inventories, accounts payable, rental equipment, and ﬁ nancing provided
to customers;
investing activities, including acquisitions of complementary businesses and capital expenditures; and
external ﬁ nancing, including bank credit facilities, commercial paper, and other capital market activities, providing both short and
long-term ﬁ nancing.

2006 FINNING INTERNATIONAL INC. 43

MANAGEMENT’S DISCUSSION & ANALYSIS

CASH FLOW FROM OPERATING ACTIVITIES
For the year ended December 31, 2006, cash ﬂ ow after working capital changes was $460.2 million, a decrease from cash ﬂ ow of $478.8 million
generated last year. While cash ﬂ ow strengthened from the higher operating results in the year, the decrease in cash ﬂ ow after working capital
changes was primarily due to strong demand for product at the Company’s Canadian operations. Investment in inventories was signiﬁ cantly higher
in 2006 compared with 2005 in order to meet customer delivery requirements.

The Company made a net investment in rental assets of $343.6 million during 2006 compared to $310.7 million in 2005. Rental expenditures
increased in Canada as rental ﬂ eets were being replenished in 2006 as a result of rental assets being utilized in 2005 to support customer demand
and help offset product availability issues. Continuing the 2005 trend, expenditures in Hewden’s rental assets were deferred as rental utilization
rates have declined. In 2006, Hewden’s gross expenditures on rental assets were 19.7% lower than in 2005.

Overall, cash ﬂ ow provided by operating activities was $97.2 million in 2006 compared to cash ﬂ ow of $158.3 million in 2005.

CASH USED FOR INVESTING ACTIVITIES
Net cash provided by investing activities in 2006 totalled $107.8 million compared with cash invested of $44.9 million in 2005. The primary source
of cash in 2006 was the proceeds of $170.6 million received on the sale of the Materials Handling division.

Gross capital additions for the year ended December 31, 2006, including capital leases, were $89.4 million which is comparable with $81.1 million
for the year ended December 31, 2005. The capital additions in 2006 reﬂ ect general capital spending to support operations and also included
the capitalization of certain costs related to the development of Hewden’s new information system. The capital additions in 2005 related primarily
to cash invested in OEM’s new component rebuild facility which became fully operational late in the second quarter of 2005.

Other cash ﬂ ow items related to investing activities include:

2006:
(cid:129)
(cid:129)

$10.3 million investment in a new Cat Rental Store by Finning (Canada).
Payment of the $22.4 million (U.S.$ 20.0 million) performance based purchase price adjustment for the Argentina business acquired in 2003.

2005:
(cid:129)
(cid:129)

Additional $9.5 million investment in Energyst B.V.
$16.0 million of proceeds were received on the sale of the Company’s investment in Maxim Power Corp.

The Company’s planned capital expenditures for 2007 are projected to be in the range of $75 million to $125 million and will be funded through
operations’ cash ﬂ ows. Net rental additions for 2007 are projected to be in the $325 million to $375 million range.

The Company believes that internally generated cash ﬂ ow, supplemented by borrowing from existing ﬁ nancing sources, if necessary, will be
sufﬁ cient to meet anticipated capital expenditures and other cash requirements in 2007. At this time, the Company does not reasonably expect
any presently known trend or uncertainty to affect our ability to access our historical sources of cash.

FINANCING ACTIVITIES
To complement the internally generated funds from operating and investing activities, the Company has approximately $1,358 million in
unsecured credit facilities. Included in this amount is a ﬁ ve-year global syndicated bank credit facility entered into in 2005. During the year,
the Company exercised its option, on the ﬁ rst anniversary date of the credit facility, to extend its maturity date an additional year to 2011.
At December 31, 2006, approximately $212.0 million was drawn on the Company’s credit facilities.

Longer-term capital resources are provided by direct access to capital markets. The Company is rated by both Standard & Poor’s (S&P) and
Dominion Bond Rating Service (DBRS). In 2006, the Company’s short-term and long-term debt ratings were both reconﬁ rmed at R-1 (low) and
BBB (high), respectively, by DBRS. In addition, the Company’s long-term debt rating was reconﬁ rmed at BBB+ by S&P. The Company continues to
utilize the Canadian commercial paper market as its principal source of short-term funding in Canada. The Company’s commercial paper program
has a maximum authorized limit of $500 million, and is backstopped by the global syndicated credit facility.

As at December 31, 2006, the Company’s short and long-term borrowings totalled $1,163.6 million, a decrease of $68.2 million or 5.5% since
December 31, 2005 primarily due to the early redemption of £75 million of the outstanding £200 million Eurobond with the proceeds received
from the sale of the UK Materials Handling Division.

MANAGEMENT’S DISCUSSION & ANALYSIS

During 2006, the Company repaid its $75.0 million 6.60% debenture, on maturity, with short-term borrowings from its commercial paper program.

As a result of management’s conﬁ dence in the future earnings for the Company and its ongoing commitment to the return of value to its
shareholders, the Company increased its quarterly dividend in February 2006 by two cents to thirteen cents per common share, and in November
2006 by three cents to sixteen cents per common share. As a result, dividends paid to shareholders increased in 2006 by $10.1 million to
$49.2 million.

CONTRACTUAL OBLIGATIONS
Payments on contractual obligations in each of the next ﬁ ve years and thereafter are as follows:

($ MILLIONS)

2007

2008

2009

2010

2011

Thereafter

Total

Long-term debt
– principal repayment
– interest
Operating leases
Capital leases
Total contractual obligations

2.2
43.6
62.9
6.0
114.7

203.1
35.7
51.8
6.0
296.6

0.1
28.6
42.1
5.6
76.4

–
28.6
32.3
5.3
66.2

247.4
27.2
26.9
5.3
306.8

285.3
16.1
164.4
18.3
484.1

738.1
179.8
380.4
46.5
$ 1,344.8

OFF-BALANCE SHEET ARRANGEMENT
The Company has sold a $45.0 million co-ownership interest in a pool of eligible non-interest bearing trade receivables to a multi-seller
securitization trust (the “Trust”), net of overcollateralization. Under the terms of the 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
ﬂ ows 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, 2006, the Company is carrying a retained interest in the transferred receivables in the amount of $9.5 million (as at
December 31, 2005: $7.1 million), which equals the amount of overcollateralization in the receivables it sold, and is reported on the consolidated
balance sheet in other current assets.

For the year ended December 31, 2006, the Company recognized a pre-tax loss of $2.0 million (2005: $1.4 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 ﬂ ow 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, 2006

Range for year ended 2006

4.32%
31.4
0.043%
7.10%
2.0%
$ 9.4 million

3.64% - 4.62%
28.1 - 34.0
0.000% - 0.327%
5.65% - 8.82%

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 $0.7 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
$0.9 million and $1.6 million, respectively. The sensitivity of the current fair value of the retained interest or residual cash ﬂ ows to an immediate
10 percent and 20 percent adverse change in each of the remaining assumptions is not signiﬁ cant.

Proceeds from revolving reinvestment of collections were $520.6 million in 2006 (2005: $495.5 million).

2006 FINNING INTERNATIONAL INC. 45

MANAGEMENT’S DISCUSSION & ANALYSIS

EMPLOYEE SHARE PURCHASE PLAN
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 the current market price. The Company pays a portion of the purchase price to a
maximum of 2% of employee earnings. At December 31, 2006, 71% of Canadian employees were contributing to this plan. The Company has
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 shares the employee purchases. At December 31, 2006, 27% and 12% of eligible employees in Finning (UK) and Hewden,
respectively, were contributing to this plan. These plans may be cancelled by Finning at any time.

ACCOUNTING ESTIMATES AND CONTINGENCIES
ACCOUNTING, VALUATION AND REPORTING
Changes in the rules or standards governing accounting can impact our ﬁ nancial reporting. We employ numerous professionally qualiﬁ ed
accountants throughout our ﬁ nance group and all of our divisional ﬁ nancial ofﬁ cers have a reporting relationship to our Chief Financial Ofﬁ cer
(CFO). Senior ﬁ nancial representatives are assigned to all signiﬁ cant projects that impact ﬁ nancial accounting and reporting systems. Policies
are in place to ensure completeness and accuracy of reported transactions. Key transaction controls are in place, and there is a segregation of
duties between transaction initiation, processing and cash disbursement, and restricted physical access to the Treasury and cash settlements area.
Accounting, measurement, valuation, and reporting of accounts, which involve estimates and / or valuations, are reviewed quarterly by the CFO
and the Audit Committee. Signiﬁ cant accounting and ﬁ nancial topics and issues are presented to and discussed with the Audit Committee.

Management’s discussion and analysis of the Company’s ﬁ nancial condition and results of operations are based on the Company’s consolidated
ﬁ nancial statements, which have been prepared in accordance with Canadian GAAP. The Company’s signiﬁ cant accounting policies are contained in
note 1 to the consolidated ﬁ nancial statements. Certain of these policies require management to make estimates and assumptions that affect the
reported amounts of assets, liabilities, revenues, expenses, and disclosure of contingent assets and liabilities. These policies may require particularly
subjective and complex judgments to be made as they relate to matters that are inherently uncertain and because the likelihood that materially
different amounts could be reported under different conditions or using different assumptions. We have discussed the development, selection and
application of our key accounting policies, and the critical accounting estimates and assumptions they involve, with the Audit Committee of the
Board of Directors. The more signiﬁ cant estimates include: fair values for goodwill impairment tests, reserves for warranty, provisions for income
tax, employee future beneﬁ ts, and costs associated with maintenance and repair contracts.

A signiﬁ cant portion of goodwill relates to Hewden Stuart plc, acquired in 2001. The Company performs impairment tests on its goodwill
balances on at least an annual basis or as warranted by events or circumstances. During the year, the Company performed an assessment of
goodwill by estimating the fair value of operations to which the goodwill relates using the present value of expected discounted future cash
ﬂ ows, which resulted in no impairment in 2006.

Due to the size, complexity, and nature of the Company’s operations, various legal and tax matters are pending. In the opinion of management,
none of these matters will have a material effect on the Company’s consolidated ﬁ nancial position or results of operations.

TAX COMPLIANCE
In the ordinary course of business, the Company is subject to ongoing audits by tax authorities. While the Company believes that its tax ﬁ ling
positions are appropriate and supportable, the possibility exists that certain matters may be reviewed and challenged by the tax authorities. The
Company regularly reviews the potential for adverse outcomes and the adequacy of its tax provisions and believes it has adequately provided
for these matters. Should the ultimate outcomes materially differ from the provisions, the Company’s effective tax rate and its earnings could be
affected positively or negatively in the period in which the matters are resolved. The Company mitigates this risk through ensuring tax staff are
well trained and supervised and that tax ﬁ ling positions are carefully scrutinized by management and external consultants, as appropriate.

MANAGEMENT’S DISCUSSION & ANALYSIS

FINANCIAL LEVERAGE
The Company’s overall debt to total capital ratio decreased from 47% at the end of 2005 to 42% at the end of 2006. This decrease in the overall
debt to total capital ratio was primarily due to growth in retained earnings and the redemption of £75 million ($156.6 million) of its previously
issued £200 million Eurobond following the sale of the Company’s Materials Handling Division in the U.K. The debt to total capital ratios are
calculated on a fully consolidated basis.

DESCRIPTION OF NON-GAAP MEASURE
EBIT is deﬁ ned herein as earnings from continuing operations before interest expense, interest income, and income taxes and is a measure
of performance utilized by management to measure and evaluate the ﬁ nancial performance of its operating segments. It is also a measure that
is commonly reported and widely used in the industry to assist in understanding and comparing operating results. EBIT does not have any
standardized meaning prescribed by generally accepted accounting principles (GAAP) and is therefore unlikely to be comparable to similar
measures presented by other issuers. Accordingly, this measure should not be considered as a substitute or alternative for net income or cash
ﬂ ow, in each case as determined in accordance with GAAP.

Reconciliation between EBIT and net income from continuing operations:

For years ended December 31
($ THOUSANDS)

Earnings from continuing operations before interest and income taxes (EBIT)
Finance costs
Provision for income taxes
Net income from continuing operations

2006

387,793
75,712
71,343
240,738

2005

277,344
61,023
46,764
169,557

RISK MANAGEMENT
Finning and its subsidiaries are exposed to market, ﬁ nancial, and other risks in the normal course of their business activities. The Company has
adopted an Enterprise Risk Management (ERM) approach in identifying, prioritizing, and evaluating risks. This ERM framework assists the Company
in managing business activities and risks across the organization to assist the Company in achieving its strategic objectives.

The Company is dedicated to a strong risk management culture to protect and enhance shareholder value. The processes within Finning’s risk
management function are designed to ensure that risks are properly identiﬁ ed, managed, and reported. The Company discloses all of its key risks
in its most recent Annual Information Form (AIF) with key ﬁ nancial risks also included herein. On a quarterly basis, the Company assesses all of
its key risks and any changes to key ﬁ nancial or business risks are disclosed in the Company’s quarterly MD&A.

FINANCIAL DERIVATIVES
The Company uses various ﬁ nancial instruments such as interest rate swaps and forward foreign exchange contracts to manage its foreign
exchange and interest rate exposures (see Notes 3 and 4 of Notes to the Consolidated Financial Statements). The Company’s derivative ﬁ nancial
instruments are always associated with a related underlying risk position and are not used for trading or speculative purposes.

The Company continually evaluates and manages risks associated with ﬁ nancial derivatives, which includes counterparty credit exposure. The
Company manages its credit exposure by ensuring there is no signiﬁ cant concentration of credit risk with a single counterparty, and by dealing
only with highly rated ﬁ nancial institutions as counterparties.

FINANCIAL RISKS AND UNCERTAINTIES
INTEREST RATES
The Company’s debt portfolio comprise both ﬁ xed and ﬂ oating rate debt instruments, with terms to maturity ranging up to ten years. In relation
to its debt ﬁ nancing, the Company is exposed to potential changes in interest rates, which may cause the Company’s borrowing costs to ﬂ uctuate.
Floating rate debt exposes the Company to ﬂ uctuations in short-term interest rates, while ﬁ xed rate debt exposes the Company to future
interest rate movements upon reﬁ nancing the debt at maturity. Fluctuations in current or future interest rates could result in a material adverse
impact on the Company’s ﬁ nancial results by causing related ﬁ nance expense to rise. Further, the fair value of the Company’s ﬁ xed rate debt
obligations may be negatively affected by declines in interest rates, thereby exposing the Company to potential losses on early settlements or
reﬁ nancing. The Company minimizes its interest rate risk by balancing its portfolio of ﬁ xed and ﬂ oating rate debt, as well as managing the term to
maturity of its debt portfolio. At certain times the Company utilizes derivative instruments such as interest rate swaps to adjust the balance of
ﬁ xed and ﬂ oating rate debt to appropriately determined levels.

2006 FINNING INTERNATIONAL INC. 47

MANAGEMENT’S DISCUSSION & ANALYSIS

CREDIT RISK
The Company has a large diversiﬁ ed customer base, and is not dependent on any single customer or group of customers. Although there is
usually no signiﬁ cant 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 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, by active credit management and monitoring, and by dealing only with highly rated ﬁ nancial institutions.

FINANCING ARRANGEMENTS
The Company will require capital to ﬁ nance its future growth and to reﬁ nance its outstanding debt obligations as they come due for repayment.
If the cash generated from the Company’s business, together with the credit available under existing bank facilities, is not sufﬁ cient to fund future
capital requirements, the Company will require additional debt or equity ﬁ nancing 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 ﬁ nancial condition.
Further, the Company’s ability to increase its debt ﬁ nancing may be limited by its ﬁ nancial covenants or its credit rating objectives. Although
the Company does not anticipate any difﬁ culties 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 will not be adversely affected. In addition, the Company’s current ﬁ nancing
arrangements contain certain restrictive covenants that may impact the Company’s future operating and ﬁ nancial ﬂ exibility.

COMMODITY PRICES
The Company’s revenues can be affected by ﬂ uctuations in commodity prices; in particular, changes in views on long-term 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, signiﬁ cant ﬂ uctuations in the price of copper and gold can have similar effects, and
customers base their decisions on the long-term outlook for metals. In the U.K., lower prices for thermal coal may reduce equipment demand
in that sector. The Company anticipates continued strong activity in mining and the oil and gas sectors in the upcoming year in the areas in
which we operate.

FOREIGN EXCHANGE EXPOSURE
The Company is geographically diversiﬁ ed, with signiﬁ cant investments in several different countries. The Company transacts business in multiple
currencies, the most signiﬁ cant of which are the U.S. dollar, the Canadian dollar, the U.K. pound sterling, and the Chilean peso. 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 Company’s net investment in the foreign operations.

It is the Company’s objective to minimize its exposure in net foreign investments. The Company has hedged a signiﬁ cant 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 hedging 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 2006
month end rates, assuming the same current level of hedging instruments, would result in an after tax deferred unrealized loss of approximately
$50 million.

TRANSACTION EXPOSURE
Many of the Company’s operations purchase, sell, rent, and lease products as well as incur costs throughout the world using different currencies.
This potential mismatch of currencies creates transactional exposure at the operational level, which may affect the Company’s proﬁ tability as
exchange rates ﬂ uctuate. 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 also enters into forward exchange contracts to manage residual
mismatches in foreign currency cash ﬂ ows. As a result, the foreign exchange impact on earnings with respect to transactional activity is minimal.

MANAGEMENT’S DISCUSSION & ANALYSIS

TRANSLATION EXPOSURE
The most signiﬁ cant 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 U.S. dollar and U.K. pound sterling 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 U.S. dollar based earnings. Some of the Company’s earnings translation exposure is offset by interest on foreign currency
denominated loans and derivative contracts associated with the net investment hedges.

SENSITIVITY TO VARIANCES IN FOREIGN EXCHANGE RATES
The sensitivity of the Company’s net earnings to ﬂ uctuations in average annual foreign exchange rates is summarized in the table below. The table
assumes that the Canadian dollar strengthens 5% against the currency noted, for a full year relative to the December 2006 month end rates,
without any change in local currency volumes or hedging activities.

Currency

USD
GBP
CHP

December 31, 2006
month end rates

1.1653
2.2824
0.0022

Increase (decrease) in
annual net income
$ MILLIONS
(19)
(3)
3

The sensitivities noted above ignore 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.

CONTROLS AND PROCEDURES CERTIFICATION
DISCLOSURE CONTROLS AND PROCEDURES
Management is responsible for establishing and maintaining a system of controls and procedures over the public disclosure of ﬁ nancial and
non-ﬁ nancial information regarding the Company. Such controls and procedures are designed to provide reasonable assurance that all relevant
information is gathered and reported to senior management, including the Chief Executive Ofﬁ cer (CEO) and Chief Financial Ofﬁ cer (CFO), on
a timely basis so that appropriate decisions can be made regarding public disclosure.

The Company has a Disclosure Policy and a Disclosure Committee in place to mitigate risks associated with the disclosure of inaccurate or
incomplete information, or failure to disclose required information.

(cid:129)

The Disclosure Policy sets out accountabilities, authorized spokespersons, and our approach to the determination, preparation, and
dissemination of material information. The policy also deﬁ nes restrictions on insider trading and the handling of conﬁ dential information.
The Disclosure Committee, or its delegates, review all ﬁ nancial information prepared for communication to the public to ensure it meets all
regulatory requirements and is responsible for raising all outstanding issues it believes require the attention of the Audit Committee prior
to recommending disclosure for that Committee’s approval.

As required by Multilateral Instrument 52-109, “Certiﬁ cation of Disclosure in Issuers’ Annual and Interim Filings” issued by the Canadian
Securities regulatory authorities, an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and
procedures was conducted as of December 31, 2006, by and under the supervision of management, including the CEO and CFO. The evaluation
included documentation review, enquiries, and other procedures considered by management to be appropriate in the circumstances.

Based on that evaluation, the CEO and CFO have concluded that the Company’s disclosure controls were effective as of December 31, 2006.

INTERNAL CONTROL OVER FINANCIAL REPORTING
Management is responsible for establishing and maintaining adequate internal control over ﬁ nancial reporting. Internal control over ﬁ nancial
reporting is designed to provide reasonable assurance regarding the reliability of ﬁ nancial reporting and the preparation of ﬁ nancial statements
in accordance with Canadian generally accepted accounting principles.

There have been no changes in internal control over ﬁ nancial reporting during the quarter ended December 31, 2006, that have materially
affected, or are reasonably likely to materially affect, the Company’s internal control over ﬁ nancial reporting.

2006 FINNING INTERNATIONAL INC. 49

MANAGEMENT’S DISCUSSION & ANALYSIS

SELECTED QUARTERLY INFORMATION
($ MILLIONS, EXCEPT FOR SHARE AND OPTION DATA)

2006

2005

$ 737.0
301.0
206.3
169.1
$ 1,413.4

52.7
–
52.7

0.59
–
0.59

0.59
–
$
0.59
$ 4,200.8

2.2
735.9
$ 738.1

Revenue(1)
Canada
South America
UK
Hewden
Total revenue
Net income (loss)
from continuing operations $
from discontinued operations
Total net income
Basic earnings (loss)
per share(2)
from continuing operations $
from discontinued operations
Total basic EPS
Diluted earnings (loss)
per share(2)
from continuing operations $
from discontinued operations
Total diluted EPS
Total assets(1)
Long-term debt
Current
Non-current
Total long-term debt(3)
Cash dividends paid
per common share
Common shares
outstanding (000’s)
Options outstanding (000’s)

$ 594.7
261.0
195.3
165.7
$ 1,216.7

72.8
(34.9)
37.9

0.81
(0.39)
0.42

$ 681.0
216.2
195.1
147.6
$ 1,239.9

57.7
(1.1)
56.6

0.64
(0.01)
0.63

$ 599.9
231.7
199.4
146.3
$ 1,177.3

57.6
(0.7)
56.9

0.65
(0.01)
0.64

$ 521.5
246.9
202.2
147.3
$ 1,117.9

$ 531.1
258.9
200.6
170.8
$ 1,161.4

$ 509.5
274.3
230.1
174.4
$ 1,188.3

$ 487.6
227.2
197.5
162.6
$ 1,074.9

38.4
(2.2)
36.2

0.43
(0.02)
0.41

46.1
(1.3)
44.8

0.52
(0.02)
0.50

45.8
(0.2)
45.6

0.52
–
0.52

39.2
(1.8)
37.4

0.44
(0.02)
0.42

0.81
(0.39)
$
0.42
$ 3,786.4

0.64
(0.01)
$
0.63
$ 3,900.2

0.64
(0.01)
$
0.63
$ 3,868.0

0.42
(0.02)
$
0.40
$ 3,736.4

0.52
(0.02)
$
0.50
$ 3,754.3

0.51
–
$
0.51
$ 3,916.8

0.44
(0.02)
$
0.42
$ 3,905.3

79.3
710.7
$ 790.0

79.1
851.5
$ 930.6

80.3
848.9
$ 929.2

80.3
844.6
$ 924.9

6.3
843.0
$ 849.3

4.1
866.6
$ 870.7

5.1
885.3
$ 890.4

0.16

0.13

0.11

89,545
1,952

89,404
2,151

89,389
2,165

89,371
1,305

89,202
1,474

89,138
1,545

88,906
1,810

88,608
1,812

(1) On September 29, 2006, the Company’s U.K. subsidiary, Finning (UK), sold its Materials Handling Division. Results from the Materials Handling Division qualify as
discontinued operations and have been reclassiﬁ ed to that category for all periods presented. Included in the loss from discontinued operations is the after-tax
loss on the sale of the Materials Handling Division of $32.7 million or $0.37 per share. Revenues from the UK Materials Handling Division have been excluded
from the revenue ﬁ gures above. Assets from the Materials Handling Division have been included in the total assets ﬁ gures for periods prior to its sale – see
Note 14 to the Consolidated Financial Statements.

(2) Earnings per share (EPS) for each quarter has been computed based on the weighted average number of shares issued and outstanding during the respective

quarter; therefore, quarterly amounts may not add to the annual total.

(3) In the third quarter of 2006, the Company utilized funds from the sale of the UK Materials Handling Division to redeem £75 million of its £200 million

Eurobond notes.

MANAGEMENT’S DISCUSSION & ANALYSIS

NEW ACCOUNTING PRONOUNCEMENTS
CHANGE IN ACCOUNTING POLICIES IN 2006
STOCK BASED COMPENSATION
During the year ended December 31, 2006, the Company adopted the Canadian Institute of Chartered Accountants (CICA) new accounting
requirements on stock-based compensation, Emerging Issues Committee 162 Stock-Based Compensation for Employees Eligible to Retire Before the
Vesting Date. The new rules require that stock-based compensation granted to employees eligible to retire be expensed at the time of grant or at
the time that the employee becomes eligible to retire. Previously, these costs were amortized over the vesting period. Comparative periods have
not been restated to reﬂ ect the change in accounting policy as the impact is not signiﬁ cant. The new rules resulted in a decrease in net income of
approximately $1 million in the Consolidated Statement of Income for the year ended December 31, 2006.

FUTURE CHANGES IN ACCOUNTING POLICIES
FINANCIAL INSTRUMENTS AND COMPREHENSIVE INCOME
The CICA has issued new accounting rules on ﬁ nancial instruments (Section 3855 Financial Instruments – Recognition and Measurement), hedges
(Section 3865 Hedges) and comprehensive income (Section 1530 Comprehensive Income) that require all derivatives to be recorded on the
balance sheet at fair value. The new standards, effective for the Company January 1, 2007, also establish new accounting requirements for hedges.
In addition, these standards provide guidance for reporting items in other comprehensive income, which will be included on the Consolidated
Balance Sheets as a separate component of shareholders’ equity.

If the derivative qualiﬁ es as a hedge, depending on the nature of the hedge, the effective portion of changes in the fair value of the derivative
will either be offset against the change in fair value of the hedged assets, liabilities, or ﬁ rm commitments through earnings or recognized in
other comprehensive income until the hedged item is recognized in earnings. Any ineffective portion of designated hedges will be recognized
immediately in income.

The Company is currently evaluating the impact of adopting the new standards. Prior periods will not be restated in accordance with the
prospective application required by the new standards.

MARKET OUTLOOK
The general outlook for Finning’s business continues to be very good.

In western Canada, the region’s resource based industries continue to prosper and drive strong overall economic growth that in turn fuels
construction spending for infrastructure, commercial, and residential projects. Demand for heavy equipment from the resource and construction
industries remains strong and Finning’s operations in this region are producing record results. Notwithstanding some weakness in the natural gas
sector, very strong economic conditions, and good demand for heavy equipment are expected to continue.

Similarly, in South America, attractive commodity prices are driving strong proﬁ tability for the mining industry. This in turn generates considerable
economic expansion for the private sector as well as signiﬁ cant revenue to the governments supporting both public and private sector construction
activity. Finning’s operations in South America are also producing record results and the outlook for continued growth in the region is very good.
Inﬂ ationary pressure on wage rates is occurring in the region, however to date there has been no signiﬁ cant impact on the Company’s results.

Global economic conditions remain good. Demand for energy and the key mineral commodities remains strong and supply increases appear to be
reasonable. While commodity prices are no longer at peak levels, prices remain at levels where commodity producers can earn attractive returns.
As a result, the outlook for Finning’s business in western Canada and South America is expected to continue to be very positive.

The outlook for the UK operations is also good. Demand for heavy equipment in the U.K., both the purchase of equipment as well as equipment
rental, is primarily a function of a healthy construction industry. The outlook for U.K. construction activity is expected to remain healthy as
demand for new housing, upgrading of existing buildings, and renewal and expansion of infrastructure is expected to underpin the construction
industry in the near and medium term. The outlook for the U.K. economy is good.

In addition to new equipment sales, as the size of the Caterpillar ﬂ eet in Finning’s geographic regions grows, a larger proportion of the Company’s
business is being driven by more stable, higher-margin parts and service revenue. This revenue stream is less sensitive to commodity prices and in
some instances is countercyclical as equipment owners will keep their equipment longer in less buoyant economic times and as a result, require
more parts and service on the older equipment.

2006 FINNING INTERNATIONAL INC. 51

MANAGEMENT’S DISCUSSION & ANALYSIS

In order to meet the growth in business that is projected, Finning will require a large number of additional human resources. Recruiting efforts
are ongoing and to date have been successful in attracting sufﬁ cient numbers of appropriate new employees. Finning is conﬁ dent it will continue
to have success in attracting additional human resources as required to meet future growth requirements.

Some challenges are occurring in meeting customer demand as a result of constrained supply of some equipment, engines, components, and
parts from Caterpillar. The Company is working with Caterpillar to manage these supply constraints as effectively as possible. It is anticipated
that supply will improve over the next 12 months.

The Company’s order backlog is at record levels and most of the Company’s key customers are very proﬁ table and growing. The current
economic environment, attractive commodity prices, and launched and pending cost efﬁ ciency initiatives, together, provide a positive outlook
for the Company’s medium to long-term growth opportunities.

February 13, 2007

SELECTED ANNUAL INFORMATION

($ MILLIONS, EXCEPT FOR SHARE DATA)

Total revenue(1)
Net income (loss)(1)
from continuing operations
from discontinued operations
Total net income
Basic earnings (loss) per share(1)
from continuing operations
from discontinued operations
Total basic EPS
Diluted earnings (loss) per share(1)
from continuing operations
from discontinued operations
Total diluted EPS
Total assets(1)
Long-term debt (2)
Current
Non-current

Cash dividends declared per common share

2006

5,047.3

240.8
(36.7)
204.1

2.69
(0.41)
2.28

2.68
(0.41)
2.27
4,200.8

2.2
735.9
738.1
0.55

$
$

2005

4,542.5

169.5
(5.5)
164.0

1.91
(0.06)
1.85

1.89
(0.06)
1.83
3,736.4

80.3
844.6
924.9
0.44

$
$

2004

3,836.2

114.9
–
114.9

1.45
–
1.45

1.43
–
1.43
3,804.0

6.5
889.6
896.1
0.40

$
$

(1) On September 29, 2006, the Company’s U.K. subsidiary, Finning (UK), sold its Materials Handling Division. Results from the Materials Handling Division qualify
as discontinued operations and have been reclassiﬁ ed to that category for the years ended December 31, 2006, 2005 and 2004. Included in the loss from
discontinued operations for the year ended December 31, 2006 is the after-tax loss on the sale of the Materials Handling Division of $32.7 million or $0.37 per
share. Revenues from the UK Materials Handling Division have been excluded from the 2006, 2005 and 2004 revenue ﬁ gures above. Assets from the Materials
Handling Division have been included in the total assets ﬁ gures for periods prior to its sale – see Note 14 to the Consolidated Financial Statements.
(2) In 2006, the Company utilized funds from the sale of the UK Materials Handling Division to redeem £75 million of its £200 million Eurobond notes.

OUTSTANDING SHARE DATA

As at February 9, 2007

Common shares outstanding
Options outstanding

89,596,955
1,837,510

MANAGEMENT’S REPORT TO THE SHAREHOLDERS

The accompanying Consolidated Financial Statements and Management’s Discussion and Analysis (MD&A) are the responsibility of Finning
International Inc.’s management. The Consolidated Financial Statements have been prepared in accordance with accounting principles generally
accepted in Canada which recognize the necessity of relying on some of management’s best estimates and informed judgments.

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 ﬁ nancial records
are reliable for preparation of ﬁ nancial statements.

The Company’s independent auditors, Deloitte & Touche LLP, have audited the Consolidated Financial Statements, as reﬂ ected in their report
for 2006.

The Board of Directors oversees management’s responsibilities for the Consolidated Financial Statements primarily through the activities of its
Audit Committee. The Audit Committee of the Board of Directors is composed solely of directors who are neither ofﬁ cers nor employees of
the Company. The Committee meets regularly during the year with management of the Company and the Company’s independent auditors to
review the Company’s interim and annual ﬁ nancial statements and MD&A. The Audit Committee also reviews internal accounting controls, risk
management, internal and external audit results, and accounting principles and practices. The Audit Committee is responsible for approving the
remuneration and terms of engagement of the Company’s independent auditors. The Audit Committee also meets with the independent auditors,
without management present, to discuss the results of their audit and the quality of ﬁ nancial reporting. On a quarterly basis, the Audit Committee
reports its ﬁ ndings to the Board of Directors, and recommends approval of the interim and annual Consolidated Financial Statements.

The Consolidated 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 the Consolidated Financial Statements.

D. W. G. Whitehead
President and Chief Executive Ofﬁ cer

M. T. Waites
Executive Vice President and Chief Financial Ofﬁ cer

February 13, 2007
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, 2006 and 2005 and
the consolidated statements of income, retained earnings, and cash ﬂ ow for each of the years in the two year period ended December 31, 2006.
These consolidated ﬁ nancial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these
consolidated ﬁ nancial statements based on our audits.

We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we plan and perform
an audit to obtain reasonable assurance whether the consolidated ﬁ nancial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated ﬁ nancial statements. An audit also includes
assessing the accounting principles used and signiﬁ cant estimates made by management, as well as evaluating the overall consolidated ﬁ nancial
statement presentation.

In our opinion, these consolidated ﬁ nancial statements present fairly, in all material respects, the ﬁ nancial position of the Company as at
December 31, 2006 and 2005, and the results of its operations and its cash ﬂ ow for each of the years in the two year period ended December 31,
2006, in accordance with Canadian generally accepted accounting principles.

DELOITTE & TOUCHE LLP, Chartered Accountants
February 13, 2007
Vancouver, BC, Canada

2006 FINNING INTERNATIONAL INC. 53

CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS

For years ended December 31
($ THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

Revenue
New mobile equipment
New power and energy systems
Used equipment
Equipment rental
Customer support services
Other
Total revenue

Cost of sales
Gross proﬁ t

2006

2005

$ 1,738,651
419,954
407,690
849,580
1,608,690
22,765
5,047,330

3,587,179
1,460,151

1,551,743
359,002
403,401
851,427
1,368,857
8,089
4,542,519

3,239,453
1,303,066

Selling, general and administrative expenses

1,078,782

1,023,461

Other expenses (income) (Note 2)
Earnings from continuing operations before interest and income taxes

Finance costs (Notes 3 and 4)
Income from continuing operations before provision for income taxes

Provision for income taxes (Note 5)

Net income from continuing operations
Loss from discontinued operations, net of tax (Note 14)
Net income

Retained earnings, beginning of year
Net income
Dividends on common shares

Earnings (loss) per share – basic
From continuing operations (Note 9)
From discontinued operations

Earnings (loss) per share – diluted
From continuing operations (Note 9)
From discontinued operations

Weighted average number of shares outstanding
Basic
Diluted

(6,424)
387,793

75,712
312,081

71,343

240,738
36,662
204,076

975,254
204,076
(49,159)
$ 1,130,171

2.69
(0.41)
2.28

2.68
(0.41)
2.27

2,261
277,344

61,023
216,321

46,764

169,557
5,527
164,030

850,321
164,030
(39,097)
975,254

1.91
(0.06)
1.85

1.89
(0.06)
1.83

89,370,667
89,899,470

88,851,343
89,524,005

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

December 31
($ THOUSANDS)

ASSETS
Current assets
Cash and cash equivalents
Accounts receivable
Inventories
On-hand equipment
Parts and supplies
Other assets (Note 10)
Total current assets

Finance assets (Note 11)
Rental equipment (Note 12)
Land, buildings and equipment (Note 13)
Intangible assets (Note 13)
Goodwill (Note 15)
Other assets (Note 10)

LIABILITIES
Current liabilities
Short-term debt (Note 3)
Accounts payable and accruals
Income tax payable
Current portion of long-term debt (Note 3)
Total current liabilities

Long-term debt (Note 3)
Long-term obligations (Note 16)
Future income taxes (Note 5)
Total liabilities

Commitments and Contingencies (Notes 23 and 24)

SHAREHOLDERS’ EQUITY
Share capital (Note 6)
Contributed surplus (Note 7)
Cumulative currency translation adjustments (Note 17)
Retained earnings
Total shareholders’ equity

Approved by the Directors:

CONSOLIDATED BALANCE SHEETS

2006

2005

78,485
666,602

27,683
569,098

839,819
450,612
196,509
2,232,027

34,046
1,038,640
365,656
24,931
381,870
123,583
$ 4,200,753

425,423
1,176,531
33,554
2,224
1,637,732

735,926
131,294
71,395
2,576,347

648,853
382,963
186,180
1,814,777

19,826
1,050,490
332,504
16,401
364,827
137,563
3,736,388

306,792
886,179
50,758
80,294
1,324,023

844,638
98,083
56,666
2,323,410

573,482
7,791
(87,038)
1,130,171
1,624,406
$ 4,200,753

568,121
2,739
(133,136)
975,254
1,412,978
3,736,388

D.W.G. Whitehead, Director

C.A. Pinette, Director

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

2006 FINNING INTERNATIONAL INC. 55

CONSOLIDATED STATEMENTS OF CASH FLOW

For years ended December 31
($ THOUSANDS)

OPERATING ACTIVITIES
Net income
Add items not affecting cash
Depreciation and amortization
Future income taxes
Stock-based compensation
Loss (gain) on disposal of capital assets (Note 2)
Loss on disposal of discontinued operations (Note 14)
Other

Changes in working capital items (Note 18)
Cash provided after changes in working capital items
Rental equipment, net of disposals
Equipment leased to customers, net of disposals
Cash ﬂ ow provided by operating activities

INVESTING ACTIVITIES
Additions to capital assets
Payment of contingent consideration (Note 15)
Proceeds from sale of discontinued operations (Note 14)
Net proceeds on sale of equity investment (Note 2)
Acquisition of business (Notes 10 and 15)
Proceeds on sale of business (Note 2)
Proceeds on disposal of capital assets
Proceeds on settlement of foreign currency forwards
Cash provided by (used in) investing activities

FINANCING ACTIVITIES
Increase (decrease) in short-term debt
Increase (repayment) of long-term debt
Repayment of Eurobond and premium paid (Note 3)
Issue of common shares on exercise of stock options (Note 6)
Dividends paid
Cash used in ﬁ nancing activities
Currency translation adjustments
Increase (decrease) in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year

See supplementary cash ﬂ ow information, Note 18

2006

2005

204,076

164,030

358,089
(9,518)
25,783
(21,359)
33,974
8,191
599,236

(139,026)
460,210
(343,564)
(19,490)
97,156

(76,074)
(22,350)
170,595
–
(10,250)
5,331
34,171
6,383
107,806

117,926
(71,570)
(159,413)
5,140
(49,159)
(157,076)
2,916
50,802
27,683
78,485

356,834
(2,627)
20,650
(8,274)
–
(1,826)
528,787

(50,030)
478,757
(310,669)
(9,784)
158,304

(81,111)
–
–
16,000
(9,479)
–
20,976
8,753
(44,861)

(157,902)
89,369
–
10,381
(39,097)
(97,249)
(4,354)
11,840
15,843
27,683

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

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2006, and 2005

1. 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 signiﬁ cant 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 Finning
(Canada) division, Finning’s wholly owned subsidiaries, and investments in joint ventures. Principal operating subsidiaries include Finning (UK) Ltd.,
Finning Chile S.A., Hewden Stuart plc (“Hewden”), Finning Argentina S.A. and Finning Soluciones Mineras S.A. (in Argentina), Finning Uruguay S.A.,
and Finning Bolivia S.A.

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) USE OF ESTIMATES
The preparation of consolidated ﬁ nancial statements in accordance with Canadian generally accepted accounting principles requires the
Company’s management to make estimates and assumptions about future events that affect the reported amounts of assets, liabilities, revenues,
expenses, and disclosure of contingent assets and liabilities. Actual amounts may differ from those estimates.

Signiﬁ cant estimates used in the preparation of these consolidated ﬁ nancial statements include, but are not limited to, fair values for goodwill
impairment tests, reserves for warranty, provisions for income tax, employee future beneﬁ ts, and costs associated with maintenance and
repair contracts.

(C) FOREIGN 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:

(cid:129)

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:

(cid:129)
(cid:129)
(cid:129)

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 the cumulative currency translation adjustments account
on the consolidated balance sheet.

(D) CASH AND CASH EQUIVALENTS
Short-term investments, consisting of highly rated and liquid 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.

2006 FINNING INTERNATIONAL INC. 57

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

1. SIGNIFICANT ACCOUNTING POLICIES (continued)
(E) SECURITIZATION OF TRADE RECEIVABLES
In 2002 and 2004, the Company sold a co-ownership interest in certain present and future accounts receivable in Canada to a securitization
trust (the “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 receivable and receives proceeds from the Trust, other than a beneﬁ cial interest in the assets sold. Losses on
these transactions are recognized in selling, general, and administrative 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 ﬂ ows 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 Company continues to service the receivables and recognizes a servicing liability on the date of the transfer, which is amortized to
income over the expected life of the transferred receivable interest.

(F) INVENTORIES
Inventories are stated at the lower of cost and net realizable value. Cost is determined on a speciﬁ c item basis for on-hand equipment. For
approximately two-thirds of parts and supplies, cost is determined on a ﬁ rst-in, ﬁ rst-out basis. An average cost basis is used for the remaining
inventory of parts and supplies.

(G) OTHER ASSETS
Costs incurred in the development of new businesses which beneﬁ t future periods are deferred and upon commencement of operations are
amortized on a straight-line basis over the expected period of beneﬁ t, or expensed upon abandonment of the project.

Costs related to the issuance of long-term debt are deferred and amortized on a straight-line basis over the term of the respective debt issues.

Investments in which the Company exercises signiﬁ cant inﬂ uence, but not control, are accounted for using the equity method. Other investments
are stated at cost. An investment is considered impaired if its fair value falls below its cost, and the decline is considered other than temporary.

(H) 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.

(I) FINANCE ASSETS
Finance assets comprise instalment notes receivable and equipment leased to customers on long-term ﬁ nancing leases.

Instalment notes receivable represents amounts due from customers relating to ﬁ nancing of equipment sold and are recorded net of unearned
ﬁ nance charges.

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.

(J) RENTAL EQUIPMENT
Rental equipment is available for short and medium term rentals and is recorded at cost, net of accumulated depreciation. Cost is determined
on a speciﬁ c 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.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(K) CAPITAL ASSETS
Land, buildings and equipment are recorded at cost, net of accumulated depreciation. Depreciation is recorded in selling, general, and
administrative expenses in the consolidated statement of income.

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%
10% - 33%
20% - 33%

Intangible assets with indeﬁ nite lives are not amortized. Intangible assets with ﬁ nite lives are amortized on a straight-line basis over their
estimated useful lives to a maximum period of ten years. Amortization is recorded in selling, general, and administrative expenses in the
consolidated statement of income.

(L) GOODWILL
Goodwill represents the excess cost of an investment over the fair value of the net assets acquired and is not amortized.

(M) ASSET IMPAIRMENT
The Company reviews both long-lived assets to be held and used and identiﬁ able intangible assets with ﬁ nite lives whenever events or changes
in circumstances indicate that the carrying amount of such assets may not be fully recoverable. Determination of recoverability is based on an
estimate of undiscounted future cash ﬂ ows resulting from the use of the asset and its eventual disposition. Measurement of an impairment loss
for long-lived assets and certain identiﬁ able intangible assets that management expects to hold and use is based on the fair value of the assets,
whereas assets to be disposed of are reported at the lower of carrying amount or fair value less estimated selling costs. During 2005, the
Company recognized asset impairment charges as described in Note 13. As at December 31, 2006, the Company determined that there were
no other triggering events requiring an impairment analysis.

Goodwill and intangible assets with indeﬁ nite lives are subject to an annual assessment for impairment unless events or changes in circumstances
indicate that the value may not be fully recoverable, in which case the assessment is done at that time. Goodwill and intangible assets with
indeﬁ nite lives are assessed primarily by applying a fair value-based test at the reporting unit level. The fair value is estimated using the present
value of expected discounted future cash ﬂ ows. 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 or intangible asset exceeds
their fair value.

(N) LEASES
Leases entered into by the Company as lessee are classiﬁ ed as either capital or operating leases. Leases where all of the beneﬁ ts and risks of
ownership of property rest with the Company are accounted for as capital leases. Equipment under capital lease is depreciated on the same basis
as capital assets. Gains or losses resulting from sale/leaseback transactions are deferred and amortized in proportion to the amortization of the
leased asset. Rental payments under operating leases are expensed as incurred.

(O) ASSET RETIREMENT OBLIGATIONS
The Company recognizes its obligations to account for the retirement of certain tangible long-lived assets. The fair value of a liability for an
asset retirement obligation is recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated
asset retirement costs are capitalized as part of the carrying amount of the long-lived asset and then amortized over its estimated useful life. In
subsequent periods, the asset retirement obligation is adjusted for the passage of time and any changes in the amount or timing of the underlying
future cash ﬂ ows through charges to earnings. A gain or loss may be incurred upon settlement of the liability.

2006 FINNING INTERNATIONAL INC. 59

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

1. SIGNIFICANT ACCOUNTING POLICIES (continued)
(P) REVENUE RECOGNITION
Revenue recognition, with the exception of cash sales, occurs when there is a written arrangement in the form of a contract or purchase order
with the customer, a ﬁ xed or determinable sales price is established with the customer, performance requirements are achieved, and ultimate
collection of the revenue is reasonably assured. Revenue is recognized as performance requirements are achieved in accordance with the following:

(cid:129)

Revenue from sales of equipment is recognized at the time title to the equipment and signiﬁ cant risks of ownership passes to the customer,
which is generally at the time of shipment of the product to the customer;
Revenue from power and energy solutions 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 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 identiﬁ ed.

(Q) STOCK-BASED COMPENSATION
The Company has stock option plans and other stock-based compensation plans for directors and certain eligible employees which are described
in Note 8. Stock-based awards are measured and recognized using a fair value-based method of accounting.

For stock options granted after January 1, 2003, fair value is determined on the grant date of the stock option and recorded as compensation
expense over the vesting period, with a corresponding increase to contributed surplus. For stock options granted prior to January 1, 2003, the
Company recorded no compensation expense and will continue to use the intrinsic value-based method of accounting for those stock options.
When stock options are exercised, the proceeds received by the Company, together with any related amount recorded in contributed surplus,
are credited to share capital.

Compensation expense which arises from ﬂ uctuations in the market price of the Company’s common shares underlying other stock-based
compensation plans is recorded with a corresponding accrual in long-term obligations or accounts payable and accruals on the consolidated
balance sheet. Compensation expense is reported in selling, general, and administrative expenses and cost of sales in the consolidated statement
of income.

(R) DERIVATIVE FINANCIAL INSTRUMENTS
The Company utilizes derivative ﬁ nancial instruments in the management of its foreign currency and interest rate exposures. The Company
uses ﬁ nancial instruments such as interest rate swaps, cross-currency swaps, and forward foreign exchange contracts as hedges against actual
exposures. These instruments are always associated with a related risk position and are not used for trading or speculative purposes. The
Company’s policy is to utilize derivative ﬁ nancial 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 speciﬁ c assets and liabilities on the
balance sheet or to speciﬁ c ﬁ rm 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 effective in offsetting changes in fair values or cash
ﬂ ows of hedged items. When derivative instruments have been designated as a hedge and are highly effective in offsetting the identiﬁ ed risk
characteristics of the speciﬁ ed hedge exposure, hedge accounting is applied to these derivative instruments. Hedge accounting requires that
gains, losses, revenue, and expenses of a hedging item be recognized in the same period that the associated gains, losses, revenue, and expenses
of the hedged item are recognized. Realized and unrealized gains or losses associated with derivative instruments, which have been terminated
for hedge accounting purposes or cease to be effective prior to maturity, are deferred in current liabilities or current assets 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.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOREIGN EXCHANGE
The Company hedges the foreign currency exposure on its net investment in foreign self-sustaining operations by entering into offsetting
forward exchange contracts and cross-currency swap contracts, when it is deemed appropriate. Foreign exchange translation gains and losses on
derivative ﬁ nancial instruments used to hedge foreign net investments are recorded as assets or liabilities, as appropriate, and recognized in the
cumulative currency translation adjustments account on the balance sheet, offsetting the respective translation losses and gains recognized on the
underlying foreign net investments. The forward premium or discount on forward foreign exchange contracts is amortized as an adjustment of
interest expense over the term of the forward contract.

The Company also enters into foreign exchange contracts to hedge purchase commitments and accounts payable denominated in foreign
currencies. Foreign exchange translation gains and losses on forward contracts used to hedge purchase commitments are recognized as an
adjustment of the purchase cost when the purchase is recorded.

INTEREST RATES
The Company enters into interest rate swaps to manage the ﬁ xed and ﬂ oating interest rate exposures in its debt portfolio. The Company
designates its interest rate swap agreements as hedges of the underlying debt or cash ﬂ ows. Interest expense on the debt is adjusted to include
the payments made or received under the interest rate swaps. As a result, hedge accounting treatment for interest rate swaps results in interest
expense on the related debt being reﬂ ected at hedged rates rather than the original contractual interest rates.

(S) EMPLOYEE FUTURE BENEFITS
The Company and its subsidiaries offer a number of beneﬁ t plans that provide pension and other beneﬁ ts to many of its employees in the
Canadian and the UK operations. These plans include deﬁ ned beneﬁ t and deﬁ ned contribution plans.

The Company’s South American employees do not participate in employer pension plans but are covered by country speciﬁ c legislation with
respect to indemnity plans. The Company accrues its obligations to employees under these indemnity plans based on the actuarial valuation
of anticipated payments to employees.

Deﬁ ned beneﬁ t plans: For the purpose of calculating the expected return on plan assets, those assets are valued at market value. The cost
of pensions and other retirement beneﬁ ts is determined by independent actuaries using the projected beneﬁ t method prorated on service
and management’s best estimates of assumptions including expected plan investment performance and salary escalation rate, along with the
use of a discount rate as prescribed under Canadian Institute of Chartered Accountants Section 3461 Employee Future Beneﬁ ts.

Past service costs from plan amendments are deferred and amortized on a straight-line basis over the expected average remaining service life
of employees active at the date of amendment.

Actuarial gains and losses arise from the difference between the actual and expected long-term rate of return on plan assets for a period,
or from changes in actuarial assumptions used to determine the accrued beneﬁ t obligation. The excess of the net accumulated actuarial gains
or losses over 10% of the greater of the accrued beneﬁ t obligation and the market value of the plan assets is amortized on a straight-line basis
over the expected average remaining service life of the active employees covered by the plans.

The Company is amortizing the transitional obligation on a straight-line basis over 13 years in Canada and Hewden plans and over 14 years
in the Finning (UK) plan, which was the average remaining service period of employees expected to receive beneﬁ ts under the beneﬁ t plan
as of January 1, 2000, the transition date.

Deﬁ ned contribution plans: The cost of pension beneﬁ ts includes the current service cost based on a ﬁ xed percentage of member earnings
for the year.

(T) COMPARATIVE FIGURES
Certain comparative ﬁ gures have been reclassiﬁ ed to conform to the 2006 presentation. The consolidated income statement has been restated
for discontinued operations (see Note 14).

2006 FINNING INTERNATIONAL INC. 61

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

2. OTHER EXPENSES (INCOME)
Other expenses (income) include the following items:

For years ended December 31
($ THOUSANDS)

Gain on sale of properties in Canada (a)
Gain on sale of railroad and non-Cat remanufacturing business in Canada (b)
Restructuring and project costs
Gain on sale of other surplus properties
Gain on sale of equity investment (c)

2006

(12,854)
(5,331)
14,935
(3,174)
–
(6,424)

2005

–
–
12,362
(8,274)
(1,827)
2,261

The tax expense on other expenses for the year ended December 31, 2006, was $0.5 million (2005: tax recovery of $0.8 million on other income).

(a) In March 2006, the Company sold certain surplus properties at Finning (Canada) for cash proceeds of $6.3 million, resulting in a pre-tax gain
of $5.1 million. In September 2006, the Company sold its interest in its Canadian operation’s head ofﬁ ce properties in Edmonton. As part of
this transaction, the Company also terminated lease agreements for land and building in the same area and assigned the repurchase option to
the buyer so as to lease back the entire property over lease terms ranging from 2 to 22 years. Net proceeds from this transaction were
$12.7 million, resulting in a pre-tax gain of $7.8 million and a deferred gain of $2.5 million, which will be amortized to income over the lease terms.

(b) In March 2006, the Company sold its railroad and non-Cat engine component remanufacturing business for cash proceeds of $5.3 million,

resulting in a pre-tax gain of approximately $5.3 million.

(c) In March 2005, the Company sold its 36% interest in Maxim Power Corporation for cash of $16.0 million, resulting in a pre-tax gain of

approximately $1.8 million.

3. SHORT-TERM AND LONG-TERM DEBT

December 31
($ THOUSANDS)

Short-term debt
Long-term debt:
Debenture
6.60% due December 8, 2006
Medium Term Notes
7.40% due June 19, 2008
4.64% due December 14, 2011
5.625% Eurobond due May 30, 2013
Other unsecured term loans (a)

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

2006

2005

425,423

306,792

–

200,000
150,000
285,301
102,849
738,150
2,224
735,926

75,000

200,000
150,000
400,720
99,212
924,932
80,294
844,638

(a) Other unsecured loans include U.S. $83.6 million of borrowings under a ﬁ ve-year committed bank facility that is classiﬁ ed as long-term debt,

and other unsecured term loans primarily from supplier merchandising programs.

SHORT-TERM DEBT
Short-term debt primarily consists of commercial paper borrowings and other short-term bank indebtedness.

The Company maintains a maximum authorized commercial paper program of $500 million which is utilized as its principal source of short-term
funding. This commercial paper program is backstopped by credit available under an $800 million long-term committed credit facility. In addition,
the Company also maintains, as required, certain other unsecured bank credit facilities to support its local operations. As at December 31, 2006,
the Company had approximately $1,358 million of unsecured credit facilities, and including all bank and commercial paper borrowings drawn
against these facilities, approximately $830 million of capacity remained available.

Included in short-term debt is foreign currency denominated debt of U.S. $38.1 million (2005: U.S. $17.9 million), £8.0 million (2005: £nil), and
Chilean peso nil (2005: Chilean peso 23,614.1 million).

The average interest rate applicable to the consolidated short-term debt for 2006 was 4.8% (2005: 3.9%).

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

LONG-TERM DEBT
The Company’s Canadian dollar denominated medium term notes are unsecured, and interest is payable semi-annually with principal due
on maturity. The Company’s £125.0 million (2005: £200.0 million) 5.625% Eurobond is unsecured, and interest is payable annually with principal
due on maturity. Following the September 2006 sale of the Company’s Materials Handling Division in the U.K. (see Note 14), the Company used
a portion of the proceeds to redeem £75 million ($156.6 million) of the £200 million Eurobond.

The Company recorded a pre-tax charge of approximately $8.9 million, reﬂ ecting the early recognition of deferred ﬁ nancing costs and other
costs associated with this redemption.

In December 2006, the Company repaid its $75.0 million 6.60% debenture, on maturity, with short-term borrowings from its commercial
paper program.

During 2005, the Company entered into an $800 million unsecured syndicated revolving credit facility. The facility is available in multiple borrowing
jurisdictions and may be drawn by a number of the Company’s principal operating subsidiaries. Borrowings under this facility are available in
multiple currencies and at various ﬂ oating rates of interest. During the year, the Company exercised its option, on the ﬁ rst anniversary date of
the credit facility, to extend its maturity date an additional year to 2011. At December 31, 2006, $97.4 million (2005: $88.7 million) was drawn
on this facility.

COVENANT
The Company is subject to a maximum debt to capitalization level pursuant to a covenant within its syndicated bank credit facility. As at
December 31, 2006, the Company is in compliance with this covenant.

LONG-TERM DEBT REPAYMENTS
Principal repayments on long-term debt in each of the next ﬁ ve years and thereafter are as follows:

For years ended December 31
($ THOUSANDS)

2007
2008
2009
2010
2011
Thereafter

FINANCE EXPENSE
Finance costs as shown on the consolidated statement of income comprise the following elements:

For years ended December 31
($ THOUSANDS)

Interest on debt securities:
Short-term debt
Long-term debt

Interest on swap contracts
Costs associated with debt redemption
Amortization of deferred debt costs, other ﬁ nance related expenses and sundry interest earned

Interest expense related to discontinued operations
Finance costs from continuing operations

2,224
203,121
78
–
247,426
285,301
738,150

2006

2005

16,618
53,822
70,440
(319)
8,864
7,257
86,242
10,530
75,712

23,317
51,518
74,835
(1,099)
–
3,127
76,863
15,840
61,023

Amortization of deferred debt costs for the year ended December 31, 2006 was $2.7 million (2005: $2.1 million).

2006 FINNING INTERNATIONAL INC. 63

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

4. FINANCIAL INSTRUMENTS
FOREIGN EXCHANGE
The Company has an exposure to foreign currency exchange rates primarily because the net assets and earnings of certain investments are
denominated in foreign currencies. The Company utilizes perpetual cross-currency interest rate swaps and forward contracts to hedge a portion
of the foreign exchange exposure relating to these net investments. The Company also uses forward foreign exchange contracts to hedge foreign
exchange exposure to certain other liabilities, ﬁ rm commitments or forecasted transactions.

INTEREST COSTS
The Company monitors its debt portfolio mix of ﬁ xed and variable rate instruments and at times, will use forward interest rate agreements,
swaps, and collars to manage this balance of ﬁ xed and ﬂ oating rate debt. At December 31, 2005 the Company had a ﬁ xed to ﬂ oating interest rate
swap, with a notional value of $100.0 million outstanding. The Company had no interest rate swaps outstanding as at December 31, 2006.

FAIR VALUES
The following fair value information is provided solely to comply with ﬁ nancial instrument disclosure requirements. The Company cautions
readers in the interpretation of the impact of these estimated fair values. The fair value of ﬁ nancial 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 fair value of accounts receivable, notes receivable, short-term debt, accounts payable and accruals approximates their recorded values due
to the short-term maturities of these instruments.

The fair values of the derivatives below have been estimated using year-end market information as at December 31, 2006 and 2005. These fair
values approximate the amount the Company would receive or pay to terminate the contracts:

($ OR £ THOUSANDS)

2006
Foreign Exchange
Cross Currency Interest Rate Swap
Sell £ (buy CAD $); pay £ ﬁ xed / receive CAD $ ﬁ xed (a)
Forward Buy U.S. $ (sell CAD $)
Forward Buy U.S. $ (sell CLP)
Forward Sell £ (buy CAD $) (b)

2005
Interest rates
Interest rate swaps (CAD $ pay ﬂ oating, receive ﬁ xed)

Foreign Exchange
Cross Currency Interest Rate Swap
Sell £ (buy CAD $); pay £ ﬁ xed / receive CAD $ ﬁ xed (a)
Forward Buy U.S. $ (sell CAD $)
Forward Buy CLP (sell U.S. $)
Forward Sell £ (buy CAD $) (b)

Notional
Value

Term to
Maturity

Fair Value
Receive (Pay)

£
150,000
U.S. $ 215,998
U.S. $ 32,000
155,000
£

perpetual
1-12 months
1-2 months
perpetual

$
$
$
$

(1,094)
9,806
278
(28,612)

100,000

2.5 years

1,041

150,000
£
U.S. $ 237,170
24,000
U.S. $
80,000
£

perpetual
1-12 months
1-12 months
perpetual

$
$
$
$

25,497
(3,362)
1,739
4,147

(a) The perpetual cross currency interest rate swap hedges a portion of the Company’s net investment in Hewden. At December 31, 2006,

$14.2 million of the 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 long-term other obligations and offset to cumulative currency translation adjustments (2005: $27.6 million
gain was recorded in long-term other assets).

(b) The forward foreign exchange contract hedges a portion of the Company’s net investment in Finning’s UK operations. At December 31, 2006,
$27.3 million of the fair value, representing the mark-to-spot rate loss on the contract, has been recognized on the balance sheet in accounts
payable and accruals and offset to cumulative currency translation adjustments (2005: $4.4 million gain was recorded in long-term other assets).

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

LONG-TERM DEBT
The fair value of the Company’s long-term debt is estimated as follows:

December 31
($ THOUSANDS)

Long-term debt

2006

2005

Book Value

Fair Value

Book Value

Fair Value

738,150

745,734

924,932

953,796

CREDIT RISK
The Company operates internationally as a full service provider (selling, servicing, and renting) of heavy equipment and related products. The
Company is not overly dependent on any single customer or group of customers. There is no signiﬁ cant concentration of credit risk related
to the Company’s position in trade accounts or notes receivable. Credit risk is minimized because of the diversiﬁ cation of the Company’s
operations, as well as its large customer base and its geographical dispersion.

The credit risk associated with derivative ﬁ nancial instruments arises from the possibility that the counterparties may default on their obligations.
However, the credit risk is limited to those contracts where the Company would incur a loss in replacing the instrument. In order to minimize
this risk, the Company enters into derivative transactions only with highly rated ﬁ nancial institutions.

5. INCOME TAXES
PROVISION FOR INCOME TAXES
As the Company operates in several tax jurisdictions, its income is subject to various rates of taxation. The components of the Company’s income
tax provision are as follows:

For years ended December 31
($ THOUSANDS)

Provision for income taxes
Current
Canada
International

Future
Canada
International

2006

2005

51,703
29,158
80,861

(10,459)
941
(9,518)
71,343

25,113
24,278
49,391

(3,386)
759
(2,627)
46,764

An income tax recovery of $0.9 million (2005: an income tax provision of $6.4 million) was directly charged to shareholders’ equity resulting
from the tax impact on foreign exchange gains or losses realized on loans and derivatives hedging investments in self-sustaining foreign operations.

The provision for income taxes differs from the amount that would have resulted from applying the Canadian statutory income tax rates to
income from continuing operations before income taxes as follows:

For years ended December 31
($ THOUSANDS)

Combined Canadian federal and provincial income taxes
at the statutory tax rate
Increase / (decrease) resulting from:
Lower statutory rates on the earnings
of foreign subsidiaries
Large corporation tax
Income not subject to tax
Non-taxable capital gain
Other
Provision for income taxes

2006

2005

103,624

33.21%

73,946

34.18%

(33,270)
–
158
(2,817)
3,648
71,343

(10.66)%

–
0.05%
(0.90)%
1.16%
22.86%

(27,627)
1,428
(779)
(1,120)
916
46,764

(12.77)%
0.66%
(0.36)%
(0.52)%
0.43%
21.62%

2006 FINNING INTERNATIONAL INC. 65

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

5. INCOME TAXES (continued)
FUTURE INCOME TAX ASSET AND LIABILITY
Included in other assets on the consolidated balance sheets are a current future income tax asset and long-term future income tax asset of
$47.6 million (2005: $35.0 million) and $5.2 million (2005: $28,000), respectively.

Temporary differences and tax loss carry-forwards that give rise to future income tax assets and liabilities are as follows:

December 31
($ THOUSANDS)

Future income tax assets:
Accounting provisions not currently deductible for tax purposes
Loss carry-forwards
Other stock-based compensation
Goodwill of foreign subsidiaries
Other

Future income tax liabilities:
Capital, rental, and leased assets
Employee beneﬁ ts

Net future income tax liability

2006

2005

47,151
9,885
11,128
965
5,911
75,040

(71,368)
(22,252)
(93,620)
(18,580)

37,420
10,505
8,636
3,452
223
60,236

(65,873)
(16,013)
(81,886)
(21,650)

The Company has recognized the beneﬁ t of the following tax loss carry-forwards available to reduce future taxable income and capital gains
expiring through 2026 for Canada and available indeﬁ nitely for International:

December 31
($ THOUSANDS)

Canada
International

2006

23,652
9,229
32,881

2005

15,521
18,116
33,637

6. SHARE CAPITAL
The Company is authorized to issue an unlimited number of preferred shares without par value, of which 4.4 million are designated as cumulative
redeemable preferred shares. The Company had no preferred shares outstanding for the years ended December 31, 2006 and 2005.

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

For years ended December 31
($ THOUSANDS, EXCEPT SHARE AMOUNTS)

2006

2005

Amount

Balance, beginning of year
Issued – stock options
Balance, end of year

89,201,664
343,705
89,545,369

568,121
5,361
573,482

88,389,881
811,783
89,201,664

Amount

557,740
10,381
568,121

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 signiﬁ cant 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, at
which time the plan rights become exercisable. 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 May 2008.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

The plan will not be triggered if a bid meets certain criteria (a permitted bidder). These criteria include that:

(cid:129)
(cid:129)

(cid:129)

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.

7. CONTRIBUTED SURPLUS

December 31
($ THOUSANDS)

Balance, beginning of year
Stock option expense recognized
Charged to share capital upon exercise of stock options
Balance, end of year

2006

2,739
5,273
(221)
7,791

2005

878
1,861
–
2,739

8. STOCK-BASED COMPENSATION PLANS
The Company has a number of stock-based compensation plans, which are described below.

STOCK OPTIONS
The Company has several stock option plans for certain employees and directors with vesting occurring over a three-year period. The exercise
price of each option is based on the closing price of the common shares of the Company on the date of the grant. Options granted after
January 1, 2004 are exercisable over a seven-year period. Options granted prior to January 1, 2004 are exercisable over a ten-year period.
Under the 2005 Stock Option Plan, the Company may issue up to 2.4 million common shares pursuant to the exercise of stock options.

Details of the stock option plans are as follows:

For years ended December 31

Options outstanding, beginning of year
Issued
Exercised / cancelled
Options outstanding, end of year

Exercisable at year end

2006

Weighted
Average
Exercise Price

$
$
$
$

19.54
39.50
18.16
28.88

17.17

Options

1,474,293
884,700
(407,230)
1,951,763

845,987

2005

Weighted
Average
Exercise Price

$
$
$
$

15.08
32.47
13.26
19.54

14.64

Options

2,016,058
290,800
(832,565)
1,474,293

1,043,383

In May 2006, the Company issued 884,700 common share options to senior executives and management of the Company (May 2005: 290,800
common share options). In 2006, long-term incentives for executives and senior management were all made in the form of stock options. In prior
years, deferred share units were also issued as long-term incentives. It is the Company’s practice to grant and price stock options only when it is
felt that all material information has been disclosed to the market.

The Company determines the cost of all stock options granted since January 1, 2003 using the fair value-based method of accounting for stock
options. This method of accounting uses an option-pricing model to determine the fair value of stock options granted which is amortized over
the vesting period. The fair value of the options granted has been estimated on the date of grant using the Black-Scholes option-pricing model
with the following weighted-average assumptions:

Dividend yield
Expected volatility
Risk-free interest rate
Expected life

2006 Grant

2005 Grant

1.16%
21.32%
4.21%
5.5 years

1.17%
24.15%
3.95%
5.5 years

The weighted average grant-date fair value of options granted during the year was $8.8 million (2005: $2.5 million). Total stock option expense
recognized in 2006 was $5.3 million (2005: $1.9 million).

2006 FINNING INTERNATIONAL INC. 67

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

8. STOCK-BASED COMPENSATION PLANS (continued)
The following table summarizes information about stock options outstanding at December 31, 2006:

Range of exercise prices

$9 - $12
$12.01 - $15
$15.01 - $17
$29 - $33
$33.01 - $40

Options Outstanding
Weighted
Average
Remaining
Life

Weighted
Average
Exercise
Price

Options Exercisable

Number
Outstanding

Weighted
Average
Exercise
Price

2.11 years
3.69 years
0.94 years
4.93 years
6.40 years
4.93 years

$
$
$
$
$
$

9.10
12.96
16.67
31.17
39.50
28.88

94,250
441,501
111,411
198,825
–
845,987

$
$
$
$
$
$

9.10
12.96
16.67
30.64
–
17.17

Number
Outstanding

94,250
441,501
111,411
431,401
873,200
1,951,763

During the year ended December 31, 2006, the Company adopted the Canadian Institute of Chartered Accountants’ new accounting
requirements for stock-based compensation. The new rules require that stock-based compensation granted to employees eligible to retire be
expensed at the time of grant. Previously, these costs were amortized over the vesting period. Comparative periods have not been restated
to reﬂ ect the change in accounting policy as the impact is not signiﬁ cant. The new rules resulted in a decrease in net income of approximately
$1 million in the Consolidated Statement of Income for the year ended December 31, 2006.

OTHER STOCK-BASED COMPENSATION PLANS
The Company has other stock-based compensation plans in the form of deferred share units and stock appreciation rights plans that use notional
common share 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 ﬁ scal quarter. Changes in the value of the units as a result of ﬂ uctuations in the Company’s share
price and new issues as they vest 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 long-term obligations. Details of the plans are as follows:

DIRECTORS
DIRECTORS’ DEFERRED SHARE UNIT PLAN A (DDSU)
The Company offers a Deferred Share Unit Plan (DDSU) for members of the Board of Directors. Under the DDSU Plan, non-employee
Directors of the Company may elect to allocate all or a portion of their annual 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 for cash or shares 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. The value of the deferred share units when converted to
cash will be equivalent to the market value of the Company’s common shares at the time the conversion takes place.

Non-employee Directors of the Company were allocated a total of 11,476 share units in 2006 (2005: 14,886 share units), which were issued
to the Directors and expensed equally over the 2006 calendar year.

EXECUTIVE
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. This plan
utilizes notional units that 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.

No units have been awarded under the DSU-A plan since 2001.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

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 at speciﬁ ed percentages or become vested partially on December 30th of the year
following the year of retirement, death or disability. These speciﬁ ed levels and vesting percentages are based on the Company’s common share
price at those speciﬁ ed levels exceeding, for ten consecutive days, the common share price at the date of grant. Vested deferred share units are
redeemable for a period of 30 days after termination of employment, 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 ﬁ ve years from 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.

Executives of the Company were not awarded any deferred share units in 2006 (2005: 125,400 deferred share units).

The speciﬁ ed levels and respective vesting percentages are as follows:

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

Vesting %

2005 Plan

2004 Plan

2003 Plan

2002 Plan

Common Share Price

0
25
50
75
100

$
$
$
$
$

32.44
35.68
38.93
42.17
45.42

$
$
$
$
$

29.38
32.32
35.26
38.19
41.13

$
$
$
$
$

26.95
29.65
32.34
35.04
37.73

$
$
$
$
$

26.05
28.66
31.26
33.87
36.47

As at December 31, 2006, all outstanding DSU units have vested.

Details of the deferred share unit plans, which reﬂ ect the vestings in the year as well as mark-to-market adjustments, are as follows:

For years ended December 31

2006

2005

UNITS

DSU-A

DSU-B

DDSU

Total

DSU-A

DSU-B

DDSU

Total

Outstanding, beginning
of year
Additions
Exercised/cancelled
Outstanding, end of year
Vested, beginning of year
Vested
Exercised/cancelled
Vested, end of year

LIABILITY

($ THOUSANDS)

51,783
699
–
52,482
51,783
699
–
52,482

755,086
8,340
(86,678)
676,748
668,761
86,415
(78,428)
676,748

158,479
20,661
–
179,140
158,479
20,661
–
179,140

965,348
29,700
(86,678)
908,370
879,023
107,775
(78,428)
908,370

52,716
637
(1,570)
51,783
52,716
637
(1,570)
51,783

723,301
132,400
(100,615)
755,086
388,050
365,190
(84,479)
668,761

163,072
23,511
(28,104)
158,479
163,072
23,511
(28,104)
158,479

939,089
156,548
(130,289)
965,348
603,838
389,338
(114,153)
879,023

Balance, beginning of year $ 1,923
585
Expensed
Exercised/cancelled
–
$ 2,508
Balance, end of year

$ 24,838
10,682
(3,178)
$ 32,342

$ 5,886
2,675
–
$ 8,561

$ 32,647
13,942
(3,178)
$ 43,411

1,844
142
(63)
1,923

$ 13,578
14,402
(3,142)
$ 24,838

5,706
1,195
(1,015)
5,886

$ 21,128
15,739
(4,220)
$ 32,647

MANAGEMENT SHARE APPRECIATION RIGHTS PLAN (SAR)
Beginning in 2002, awards under the SAR were granted to senior managers within Canada and the U.K. The exercise price is determined based
on the Company’s common share price on the Toronto Stock Exchange on the grant date. Under the SAR Plan, awards are expensed over the
vesting period of three years when the market price of the common shares exceeds the exercise price under the plan for vested units. Changes,
either increases or decreases, in the quoted market value of common 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 period. The SAR Plan uses notional units
that are valued based on the Company’s common share price on the Toronto Stock Exchange.

2006 FINNING INTERNATIONAL INC. 69

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

8. STOCK-BASED COMPENSATION PLANS (continued)
In 2006, there were no SAR units issued to management. In 2005, 255,872 SAR units were granted to management in the U.K. and Canada at a
grant price of $32.44. Details of the SAR plans are as follows:

For years ended December 31
UNITS

Outstanding, beginning of year
Additions
Exercised/cancelled
Outstanding, end of year
Vested, beginning of year
Vested
Exercised/cancelled
Vested, end of year

LIABILITY

($ THOUSANDS)

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

Strike price ranges:

2006

2005

715,000
–
(133,934)
581,066
286,700
204,528
(109,867)
381,361

649,367
255,872
(190,239)
715,000
205,073
235,408
(153,781)
286,700

4,655
6,588
(1,278)
9,965

$26.05 - $32.44

3,520
3,050
(1,915)
4,655

SUMMARY – IMPACT OF STOCK BASED COMPENSATION PLANS
Changes in the value of all deferred share units and share appreciation rights as a result of ﬂ uctuations in the Company’s common share price and
the impact of new issues, including stock options, was an expense of $25.8 million in 2006 (2005: $20.6 million).

9. EARNINGS PER SHARE
Basic earnings per share (EPS) is calculated by dividing net income available to common shareholders by the weighted average number of
common shares outstanding during the period. Diluted earnings per share is calculated to reﬂ ect the dilutive effect of exercising outstanding
stock options by applying the treasury stock method.

Earnings used in determining earnings per share from continuing operations are presented below. Earnings used in determining earnings per share
from discontinued operations are the earnings from discontinued operations as reported within the consolidated statements of income and
retained earnings.

For years ended December 31
($ THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

2006
Basic EPS from continuing operations:
Net income from continuing operations
Effect of dilutive securities: stock options
Diluted EPS from continuing operations:
Net income from continuing operations and assumed conversions

2005
Basic EPS from continuing operations:
Net income from continuing operations
Effect of dilutive securities: stock options
Diluted EPS from continuing operations:
Net income from continuing operations and assumed conversions

Income

Per Share

240,738
–

89,370,667
528,803

240,738

89,899,470

169,557
–

88,851,343
672,662

169,557

89,524,005

2.69
–

2.68

1.91
–

1.89

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

10. OTHER ASSETS

December 31
($ THOUSANDS)

Other assets – current:
Future income taxes (Note 5)
Value Added Tax receivable
Prepaid expenses
Current portion of ﬁ nance assets (Note 11)
Supplier claims receivable
Short-term swap contract receivable
Retained interest in transferred receivables (Note 20)
Income taxes recoverable
Other

Other assets – long-term:
Accrued deﬁ ned beneﬁ t pension asset (Note 19)
Long-term swap contracts receivable
Deferred ﬁ nancing costs
Investment in Energyst B.V. (a)
Matreq S.A. receivable (Note 15)
Deferred project costs
Future income taxes (Note 5)
Asset retirement obligation
Other

2006

2005

47,611
14,416
20,980
14,274
42,630
–
9,481
5,337
41,780
196,509

77,285
–
8,937
16,388
–
2,988
5,204
3,876
8,905
123,583

34,988
21,777
19,742
17,255
21,456
13,723
7,133
7,372
42,734
186,180

53,748
31,322
16,085
14,674
4,664
4,315
28
–
12,727
137,563

(a) In April 2005, the Company increased its interest in Energyst B.V. (Energyst) by purchasing 100,000 new shares that were issued from treasury
for cash of $9.5 million (EUR 6.0 million). As a result of this transaction, the Company’s equity interest in Energyst increased to 24.4% from
15.2%. The Company accounts for its investment in Energyst using the equity method of accounting.

11. FINANCE ASSETS

December 31
($ THOUSANDS)

Instalment notes receivable
Equipment leased to customers
Less accumulated depreciation

Total ﬁ nance assets
Less current portion of instalment notes receivable

2006

27,176
38,303
(17,159)
21,144
48,320
14,274
34,046

2005

25,543
17,648
(6,110)
11,538
37,081
17,255
19,826

Depreciation of equipment leased to customers for the year ended December 31, 2006 was $9.9 million (2005: $1.6 million).

2006 FINNING INTERNATIONAL INC. 71

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

12. RENTAL EQUIPMENT

December 31
($ THOUSANDS)

Cost
Less accumulated depreciation

2006

2005

$ 1,918,880
(880,240)
$ 1,038,640

1,948,277
(897,787)
1,050,490

Rental equipment under capital leases of $19.4 million (2005: $20.1 million), net of accumulated amortization of $6.8 million (2005: $2.9 million),
is included above.

Depreciation of rental equipment for the year ended December 31, 2006, was $275.4 million (2005: $266.7 million).

13. CAPITAL ASSETS
LAND, BUILDINGS AND EQUIPMENT

December 31

($ THOUSANDS)

Land
Buildings and equipment

2006

Accumulated
depreciation

Cost

Net book
value

2005
Accumulated
depreciation

Cost

Net book
value

58,805
516,274
$ 575,079

–
209,423
$ 209,423

58,805
306,851
$ 365,656

51,394
468,903
520,297

–
187,793
187,793

51,394
281,110
332,504

Land, buildings and equipment under capital leases of $13.0 million (2005: $1.3 million), net of accumulated amortization of $11.7 million
(2005: $8.8 million), are included above.

Depreciation of buildings and equipment for the year ended December 31, 2006, was $34.9 million (2005: $32.9 million).

INTANGIBLE ASSETS

December 31

($ THOUSANDS)

Subject to amortization
Customer contracts and
related customer relationships
Software

Indeﬁ nite lives
Distribution rights

2006

Accumulated
Cost amortization

Net book
value

2005
Accumulated
amortization

Cost

Net book
value

9,400
28,431
37,831

646
38,477

4,095
9,451
13,546

–
13,546

5,305
18,980
24,285

646
24,931

10,828
15,548
26,376

646
27,022

2,922
7,699
10,621

–
10,621

7,906
7,849
15,755

646
16,401

The Company acquired intangible assets subject to amortization of $15.1 million in 2006 (2005: $4.6 million). Amortization of intangible assets
subject to amortization for the year ended December 31, 2006, was $2.9 million (2005: $2.8 million).

Certain intangible assets are considered to have indeﬁ nite lives because they are expected to generate cash ﬂ ows indeﬁ nitely. As a result of
the assessment of the recoverability of long-lived assets, management determined that the carrying amount of certain distribution rights from
the Canada reporting segment were not recoverable and recorded an impairment charge to selling, general, and administrative expenses of
$2.3 million in 2005.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

14. DISPOSITION OF DISCONTINUED OPERATION

Finning’s Board of Directors approved the sale of the Materials Handling Division of the Company’s UK subsidiary, Finning (UK), following
an extensive strategic review of the Company’s U.K. based businesses and determining that this division no longer represents a core business
for Finning. On September 29, 2006, the Company sold its Materials Handling Division for cash proceeds of approximately $170.6 million
(approximately £81.7 million), net of costs.

The sale of this business resulted in a one-time after-tax loss of approximately $32.7 million (approximately £15.5 million) in 2006, which includes
the write-off of the goodwill and intangible assets associated with this business.

The results of operations of the Materials Handling Division have been included in the consolidated statements of cash ﬂ ow up to the date
of disposition and as discontinued operations in the consolidated statements of income up to the date of disposition. The results of the Materials
Handling Division had previously been reported in the UK segment.

Income (loss) from the Materials Handling Division to the date of disposition is summarized as follows:

($ THOUSANDS)

Revenue
Loss before provision for income taxes
Loss on sale of discontinued operations
Provision for income taxes – recovery
Loss from discontinued operations

Jan 1, 2006 -
Sep 29, 2006

Jan 1, 2005 -
Dec 31, 2005

183,563
(5,690)
(33,974)
3,002
(36,662)

292,059
(7,899)
–
2,372
(5,527)

The assets and liabilities of the Materials Handling Division have been removed from the Consolidated Balance Sheet upon disposition and
are not presented on the December 31, 2006 Consolidated Balance Sheet. The carrying amounts of assets and liabilities related to the Materials
Handling Division as at the date of disposition and for the comparative period presented were as follows:

($ THOUSANDS)

ASSETS
Current assets
Accounts receivable
Inventories
Total current assets
Rental equipment
Capital assets
Goodwill
Intangible assets

LIABILITIES
Current liabilities
Accounts payable and accruals
Total current liabilities

September 29,
2006
(date of
disposition)

December 31,
2005

$
$

33,806
24,740
58,546
131,406
8,554
28,274
5,454
232,234

27,913
27,913

$
$

37,894
26,245
64,139
150,160
8,447
27,139
5,824
255,709

35,770
35,770

The signiﬁ cant net cash ﬂ ows from the Materials Handling Division to the date of disposition are as follows:

For years ended December 31
($ THOUSANDS)

Cash ﬂ ow provided by operating activities

2006

2005

28,052

71,644

2006 FINNING INTERNATIONAL INC. 73

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

15. GOODWILL
The change in the carrying amount of goodwill is as follows:

December 31, 2006
($ thousands)

Goodwill, beginning of year
Acquired (a)
Adjustment to purchase price (b)
Disposed (Note 14)
Foreign exchange translation
adjustment
Goodwill, end of year

December 31, 2005
($ thousands)

Goodwill, beginning of year
Acquired
Adjustment to purchase price (c)
Disposed
Foreign exchange translation
adjustment
Goodwill, end of year

Canada

South America

Hewden

Consolidated

30,304
2,084
–
–

–
32,388

29,862
–
3,402
–

78
33,342

Canada

South America

30,287
17
–
–

–
30,304

5,296
–
24,732
–

(166)
29,862

49,631
–
–
(28,274)

4,265
25,622

57,127
–
–
–

(7,496)
49,631

255,030
–
–
–

35,488
290,518

364,827
2,084
3,402
(28,274)

39,831
381,870

Hewden

Consolidated

293,547
–
–
–

(38,517)
255,030

386,257
17
24,732
–

(46,179)
364,827

(a) In September 2006, the Company acquired the assets and business operations of Wirtanen Electric Ltd., an electric distribution rental

company based in Alberta, Canada, for cash of approximately $10.3 million.

(b) In April 2003, the Company acquired 100% of the voting shares of Matreq S.A. (subsequently renamed Finning Bolivia S.A.), the Caterpillar
dealership in Bolivia. As part of this agreement, additional contingent consideration of U.S. $4.0 million was advanced to the seller in April
2003, and was settled in 2006 for U.S. $3.8 million. The agreed consideration was reclassiﬁ ed from other assets to goodwill and future income
tax asset.

(c) In January 2003, the Company acquired 100% of the voting shares of Macrosa Del Plata S.A. (subsequently renamed Finning Argentina S.A.)
and Servicios Mineros S.A. (subsequently renamed Finning Soluciones Mineras S.A.), the Caterpillar dealerships in Argentina. As part of this
agreement, the sellers were entitled to additional future consideration based on the realization of certain performance criteria over a six-year
period ending December 31, 2008 for the Argentina operations. Any additional consideration would be payable only if certain performance
criteria were achieved and maintained for a stipulated period. The strong performance of the dealership in Argentina since acquisition to the
end of 2005 indicated that the maximum future consideration criteria would likely be met, and was recorded in 2005 in accordance with the
agreement as $24.7 million (U.S. $21.2 million) to goodwill.
In June 2006, a provisional payment of this additional consideration of approximately $14.8 million (U.S. $13.2 million) was paid directly to
the sellers, and an additional $7.6 million (U.S. $6.8 million) was paid in trust as partial security and will be paid upon achievement of the
performance criteria.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

16. LONG-TERM OBLIGATIONS

December 31
($ THOUSANDS)

Stock-based compensation (Note 8)
Leasing obligations (a) (Note 23)
Employee future beneﬁ t obligations
Long-term swap contract payable
Sale leaseback deferred gain
Asset retirement obligations (b)
Argentina additional consideration (Note 15)
Other

2006

53,376
28,453
14,727
14,170
9,230
6,223
1,414
3,701
131,294

2005

37,302
22,555
16,754
–
8,935
–
10,777
1,760
98,083

(a) Capital leases issued at varying rates of interest from 3.5% - 6.8% and maturing on various dates up to 2026.
(b) Asset retirement obligations relate to estimated future costs to remedy dilapidation costs on certain operating leases in the U.K. and Canada
and are based on the Company’s prior experience, including estimates for labour, materials, equipment, and overheads such as surveyor and
legal costs. To determine the recorded liability, the future estimated cash ﬂ ows have been discounted using the Company’s credit-adjusted
risk-free rate of 4% - 6%. Should changes occur in estimated future dilapidation costs, revisions to the liability could be made. The total
undiscounted amount of estimated cash ﬂ ows is $7.3 million, and the expected timing of payment of the cash ﬂ ows is estimated to be
between two and thirty years.

17. CUMULATIVE CURRENCY TRANSLATION ADJUSTMENTS

December 31
($ THOUSANDS)

Balance, beginning of year
Translation adjustments for the year
Balance, end of year

2006

2005

(133,136)
46,098
(87,038)

(82,734)
(50,402)
(133,136)

The Company operates in three functional currencies: Canadian dollars, U.K. pound sterling, and U.S. dollars. Translation gains or losses on
the consolidation of the ﬁ nancial statements of self-sustaining foreign operations are accumulated in the Cumulative Currency Translation
Adjustments account on the consolidated balance sheet. Translation adjustments arise as a result of ﬂ uctuations in foreign currency exchange
rates. The cumulative currency translation adjustment for 2006 mainly resulted from the 14% strengthening of the U.K. pound sterling against
the Canadian dollar.

The exchange rates of the Canadian dollar against the following foreign currencies were as follows:

December 31
Exchange rate

U.S. dollar
U.K. pound sterling

For years ended December 31
Average exchange rates

U.S. dollar
U.K. pound sterling

2006

1.1653
2.2824

1.1341
2.0886

2005

1.1659
2.0036

1.2116
2.2066

2006 FINNING INTERNATIONAL INC. 75

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

18. SUPPLEMENTAL CASH FLOW INFORMATION
CHANGES IN WORKING CAPITAL ITEMS

For years ended December 31
($ THOUSANDS)

Accounts receivable and other
Inventories – on-hand equipment
Inventories – parts and supplies
Accounts payable and accruals
Income taxes

COMPONENTS OF CASH AND CASH EQUIVALENTS

December 31
($ THOUSANDS)

Cash
Short-term investments
Cash and cash equivalents

INTEREST AND TAX PAYMENTS

For years ended December 31
($ THOUSANDS)

Interest paid
Income taxes received (paid)

2006

(127,177)
(186,024)
(66,344)
255,050
(14,531)
(139,026)

2006

13,059
65,426
78,485

2005

(29,491)
(39,177)
(47,646)
14,385
51,899
(50,030)

2005

26,897
786
27,683

2006

2005

$
$

(89,045)
(84,258)

$
$

(81,528)
7,459

19. EMPLOYEE FUTURE BENEFITS
The Company and its subsidiaries in Canada and the U.K. have deﬁ ned beneﬁ t pension plans and deﬁ ned contribution pension plans providing
retirement beneﬁ ts for most of their permanent employees.

The deﬁ ned beneﬁ t pension plans are registered pension plans that provide a pension based on the members’ ﬁ nal average earnings and years
of service while participating in the pension plan.

(cid:129)

In Canada, deﬁ ned beneﬁ t plans exist for eligible employees. Final average earnings are based on the highest 5-year average salary and there is
no standard indexation feature. Effective July 1, 2004, non-executive members of the deﬁ ned beneﬁ t plan were offered a voluntary opportunity
to convert their beneﬁ ts to a deﬁ ned contribution pension plan and this deﬁ ned beneﬁ t plan was subsequently closed to all new non-executive
employees. The deﬁ ned beneﬁ t pension plan continues to be open to new executives. Pension beneﬁ ts that exceed the maximum taxation
limits are provided from a non-registered supplemental pension plan. Beneﬁ ts under this plan are partially funded by a Retirement
Compensation Arrangement.
Finning (UK) provides a deﬁ ned beneﬁ t plan for all employees hired prior to January 2003. Final average earnings are based on the highest
3-year period and beneﬁ ts are indexed annually with inﬂ ation subject to limits. Effective January 2003, this plan was closed to new non-
executive employees and replaced with a deﬁ ned contribution pension plan. The deﬁ ned beneﬁ t plan was temporarily re-opened in June 2003,
on a one-time basis, to allow for the transfer of employees assumed upon the acquisition of the Lex Harvey business. These employees were
allowed to join the Finning (UK) deﬁ ned beneﬁ t pension plan, for future service only. With the sale of the UK Materials Handling business,
certain employees became non-active members of the deﬁ ned beneﬁ t plan.
Hewden has two deﬁ ned beneﬁ t plans that are open to eligible management and executive members by invitation only. Final average earnings
are based on the highest 3-year period and beneﬁ ts are indexed annually with inﬂ ation.

The deﬁ ned contribution pension plans are registered pension plans that offer a base contribution rate for all members. For certain plans, the
Company will partially match employee contributions to a maximum of 1% of employee earnings.

The Company’s South American employees do not participate in employer pension plans but are covered by country speciﬁ c legislation with
respect to indemnity plans. The Company has recorded a liability to employees based on an actuarial valuation of anticipated payments to
employees. An amount of $3.2 million was expensed in 2006 (2005: $3.7 million) for a total obligation of $14.7 million (2005: $12.5 million).

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

The expense for the Company’s beneﬁ t plans, primarily for pension beneﬁ ts, is as follows:

For years ended December 31
($ THOUSANDS)

Canada

2006
UK Hewden

Total

Canada

Hewden

Total

2005

Deﬁ ned contribution plans
Net beneﬁ t plan expense
Deﬁ ned beneﬁ t plans
Current service cost, net
of employee contributions
Interest cost
Actual return on plan assets
Actuarial (gains) losses
Plan curtailment
Employee future beneﬁ t
costs before adjustments
to recognize the long-term
nature of employee future
beneﬁ t costs
Adjustments to recognize
the long-term nature
of employee future
beneﬁ t costs:
Difference between expected
return and actual return
on plan assets for year
Difference between actuarial
loss recognized for year and
actual actuarial loss on
accrued beneﬁ t obligation
for year
Difference between
amortization of past service
costs for year and actual
plan amendments for year
Amortization of transitional
obligation / (asset)
Deﬁ ned beneﬁ t costs
recognized
Total

$ 12,838

948

244

$ 14,030

$ 9,815

920

255

$ 10,990

$ 8,465
15,956
(30,932)
(4,349)
–

$ 9,557
21,137
(43,336)
28,202
3,342

$ 2,673
9,808
(9,639)
(8,776)
–

$ 20,695
46,901
(83,907)
15,077
3,342

$ 6,375
15,636
(21,154)
42,824
–

$ 13,002
21,291
(54,042)
48,907
–

$ 2,663
9,952
(19,672)
18,041
–

$ 22,040
46,879
(94,868)
109,772
–

(10,860)

18,902

(5,934)

2,108

43,681

29,158

10,984

83,823

12,882

19,944

(98)

32,728

3,967

32,408

10,607

46,982

8,348

(21,515)

11,452

(1,715)

(40,967)

(42,120)

(15,373)

(98,460)

298

(3,739)

–

(3,441)

298

–

298

1,047

(1,213)

1,552

1,386

1,047

(1,282)

1,640

1,405

11,715
$ 24,553

12,379
$ 13,327

6,972
$ 7,216

31,066
$ 45,096

8,026
$ 17,841

18,164
$ 19,084

7,858
$ 8,113

34,048
$ 45,038

Total cash payments for employee future beneﬁ ts for 2006, which is made up of cash contributed by the Company to its deﬁ ned beneﬁ t plans
and its deﬁ ned contribution plans was $55.8 million and $14.0 million, respectively (2005: $38.0 million and $11.0 million, respectively).

2006 FINNING INTERNATIONAL INC. 77

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

19. EMPLOYEE FUTURE BENEFITS (continued)
Information about the Company’s deﬁ ned beneﬁ t plans is as follows:

For years ended December 31
($ THOUSANDS)

Accrued beneﬁ t obligation
Balance at beginning of year
Current service cost
Interest cost
Beneﬁ ts paid
Actuarial (gains) losses
Foreign exchange rate changes
Plan curtailment (a)
Plan amendments (b)
Balance at end of year

Canada

UK Hewden

Total

Canada

Hewden

Total

2006

2005

$ 307,646 $ 415,787
13,446
10,190
21,137
15,956
(12,910)
(16,008)
28,202
(4,349)
62,795
3,342
–
$ 313,435 $ 531,799

–
–
–

$ 192,306 $ 915,739
27,675
46,901
(37,701)
17,061
89,209
3,342
(1,984)
$ 215,008 $ 1,060,242

4,039
9,808
(8,783)
(6,792)
26,414
–
(1,984)

$ 256,462
8,026
15,636
(15,302)
42,824
–
–
–
$ 307,646

$ 417,596
17,304
21,291
(15,733)
48,907
(60,162)
–
(13,416)
$ 415,787

$ 193,160
4,065
9,952
(5,086)
18,041
(27,826)
–
–
$ 192,306

$ 867,218
29,395
46,879
(36,121)
109,772
(87,988)
–
(13,416)
$ 915,739

Plan assets
Fair value at beginning of year $ 269,358 $ 312,418
43,336
Actual return on plan assets
26,928
Employer contributions
3,889
Employees’ contributions
(12,910)
Beneﬁ ts paid
Foreign exchange rate changes
51,321
$ 295,019 $ 424,982
Fair value at end of year

30,932
9,012
1,725
(16,008)

–

$ 125,848 $ 707,624
83,907
9,639
49,670
13,730
6,980
1,366
(37,701)
(8,783)
18,992
70,313
$ 160,792 $ 880,793

$ 249,187
21,154
12,668
1,651
(15,302)
–
$ 269,358

$ 295,814
54,042
18,421
4,303
(15,733)
(44,429)
$ 312,418

$ 120,273
19,672
7,533
1,401
(5,086)
(17,945)
$ 125,848

$ 665,274
94,868
38,622
7,355
(36,121)
(62,374)
$ 707,624

Funded status –
plan surplus/(deﬁ cit)
Unamortized net
actuarial loss
Unamortized past service costs
Contributions remitted
after valuation date
Unamortized transitional
obligation/asset
Accrued beneﬁ t asset/
(liability) (c)

$ (18,416) $ (106,817) $ (54,216) $ (179,449)

$ (38,288) $ (103,369) $ (66,458) $ (208,115)

58,732
2,365

149,223
(9,791)

47,661
–

255,616
(7,426)

79,962
2,663

119,208
–

52,588
–

251,758
2,663

505

6,818

1,915

9,238

(121)

(9,194)

8,621

(694)

517

926

1,364

591

2,472

(9,235)

9,056

747

$ 43,065 $ 30,239

$ 3,981 $

77,285

$ 45,780

7,968

$ (4,223) $ 49,525

(a) As a result of the sale of the Materials Handling Division, the Company recognized a curtailment to reﬂ ect the impact of the signiﬁ cant

reduction of the expected years of future services of active employees participating in the Finning (UK) deﬁ ned beneﬁ t plan.

(b) The plan amendment of $2.0 million in 2006 in Hewden and $13.4 million in 2005 in Finning (UK) related to a reduction in the accrued

beneﬁ t obligation of the deﬁ ned beneﬁ t pension plans due to pension beneﬁ t changes that were agreed between the Company and the plans’
trustees and communicated with the employee members of the plans. It was agreed that employee members’ pension beneﬁ ts would cease
to be linked to their ﬁ nal pensionable salary after April 2010. From April 2010, employee members’ pension beneﬁ ts will increase broadly in
line with inﬂ ation, as opposed to future salary increases. This resulted in a reduction in the pension plans’ accrued beneﬁ t obligation because
employee members’ pension beneﬁ ts are now assumed to increase in line with the salary increase assumption until April 2010 and then in
line with the lower inﬂ ation assumption thereafter.

(c) Accrued beneﬁ t asset or liability is classiﬁ ed as either other assets or long-term obligations, respectively, on the consolidated balance sheets.

Included in the above accrued beneﬁ t obligation and fair value of plan assets at the year-end are the following amounts in respect of plans that are
not fully funded:

For years ended December 31
($ THOUSANDS)

Canada

UK Hewden

Total

Canada

Hewden

Total

2006

2005

Accrued beneﬁ t obligation
Fair value of plan assets
Funded status – plan deﬁ cit

$ 256,477
229,213
$ 27,264

$ 531,800
424,983
$ 106,817

$ 215,009 $ 1,003,286
160,793
814,989
$ 54,216 $ 188,297

$ 251,154
207,513
$ 43,641

$ 415,787
312,418
$ 103,369

$ 192,306
125,848
$ 66,458

$ 859,247
645,779
$ 213,468

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Plan assets are principally invested in the following securities at November 30, 2006:

Equity
Fixed-income

Canada

60%
40%

72%
28%

Hewden

67%
33%

For measurement purposes, assets and liabilities of the plans are valued as at November 30. Plan assets no longer include direct investment in
common shares of the Company at December 31, 2006 (2005: $0.8 million).

The signiﬁ cant actuarial assumptions are as follows:

Discount rate – obligation
Discount rate – expense
Expected long-term rate of
return on plan assets
Rate of compensation increase
Estimated remaining service
life (years)

Canada

5.25%
5.15%

7.25%
3.50%

10-15

2006
UK

5.30%
4.95%

7.00%
3.50%

Hewden

Canada

5.30%
4.95%

7.25%
3.50%

5.15%
6.00%

7.50%
3.20%

10-15

2005
UK

4.95%
5.40%

7.50%
3.25%

Hewden

4.95%
5.40%

7.75%
3.50%

Deﬁ ned beneﬁ t pension plans are country and entity speciﬁ c. The major deﬁ ned beneﬁ t plans and their respective valuation dates are:

Deﬁ ned Beneﬁ t Plan

Last Actuarial Valuation Date

Next Actuarial Valuation Date

Canada – BC Regular & Executive Plan
Canada – Executive Supplemental Income Plan
Canada – General Supplemental Income Plan
Canada – Alberta Deﬁ ned Beneﬁ t Plan
Finning UK Deﬁ ned Beneﬁ t Scheme
Hewden Stuart Pension Scheme
Hewden Pension Plan

December 31, 2003
December 31, 2005
December 31, 2003
December 31, 2005
January 1, 2006
December 31, 2005
January 1, 2005

December 31, 2006
December 31, 2006
December 31, 2006
December 31, 2008
January 1, 2009
December 31, 2008
January 1, 2008

20. ACCOUNTS RECEIVABLE SECURITIZATION
The Company sold a $45.0 million co-ownership interest in a pool of eligible non-interest bearing trade receivables to a multi-seller securitization
trust (the “Trust”), net of overcollateralization. Under the terms of the 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 ﬂ ows 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.

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, 2006

Range for year ended 2006

4.32%
31.4
0.043%
7.10%
2.0%
$9.4 million

3.64% - 4.62%
28.1 - 34.0
0.000% - 0.327%
5.65% - 8.82%

2006 FINNING INTERNATIONAL INC. 79

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

20. ACCOUNTS RECEIVABLE SECURITIZATION (continued)
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 $0.7 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
$0.9 million and $1.6 million, respectively. The sensitivity of the current fair value of the retained interest or residual cash ﬂ ows to an immediate
10 percent and 20 percent adverse change in each of the remaining assumptions is not signiﬁ cant.

The table below shows certain cash ﬂ ows received from and paid to the Trust:

For years ended December 31
($ THOUSANDS)

Proceeds from new securitization
Proceeds from revolving reinvestment of collections

2006

2005

$
$

–
520,626

$
$

–
495,456

21. 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 signiﬁ cant 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.

22. SEGMENTED INFORMATION
The Company and its subsidiaries have operated primarily in one industry during the year, that being the selling, servicing, and renting of heavy
equipment and related products.

Operating units are as follows:

(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)

The reportable operating segments are:

Canada

South America

Hewden

Other

Consolidated

$ 2,612,597
2,251,348
145,664
(17,729)

$ 1,009,906
876,286
24,660
–

$ 796,080
734,447
24,269
2,467

$ 628,741
446,641
129,730
8,190

6
32,916
–
648

$ 5,047,330
4,341,638
324,323
(6,424)

$ 233,314

$ 108,960

34,897

$ 44,180

$ (33,558)

$ 1,691,743
$
41,817
$ 295,512

$ 779,817
15,003
$
42,157
$

$ 570,997
6,270
$
68,588
$

$ 1,121,215
$ 26,280
$ 132,068

$ 36,981
–
$
–
$

$ 387,793
75,712
71,343

240,738

36,662
$ 204,076
$ 4,200,753
$ 89,370
$ 538,325

For year ended December 31, 2006
($ THOUSANDS)

Revenue from external sources
Operating costs
Depreciation and amortization
Other expenses (income)
Earnings from continuing operations
before interest and taxes
Finance costs
Provision for income taxes
Net income from continuing
operations
Loss from discontinued operations,
net of tax
Net income
Identiﬁ able assets
Gross capital expenditures
Gross rental asset expenditures

For year ended December 31, 2005
($ THOUSANDS)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Canada

South America

Hewden

Other

Consolidated

$ 2,049,675
1,783,724
115,790
223

$ 1,007,341
886,222
25,573
2,283

$ 830,412
793,659
27,031
(3,756)

$ 655,091
463,819
136,042
5,338

–
31,054
–
(1,827)

$ 149,938

93,263

13,478

49,892

(29,227)

$ 1,304,802
$
45,858
$ 208,490

$ 646,286
13,601
$
44,283
$

$ 748,976
5,756
$
96,762
$

$ 957,023
$
15,607
$ 164,480

$
$
$

79,301
289
–

$ 4,542,519
3,958,478
304,436
2,261

$ 277,344
61,023
46,764

169,557

5,527
$ 164,030
$ 3,736,388
$
81,111
$ 514,015

23. CONTRACTUAL OBLIGATIONS
Future minimum lease payments due under capital lease contracts and payments due under various operating lease contracts are as follows:

For years ended December 31
($ THOUSANDS)

2007
2008
2009
2010
2011
Thereafter

Less imputed interest

Less current portion
Total

Capital
Leases

6,053
5,996
5,593
5,272
5,290
18,295
46,499
13,832
32,667
4,214
28,453

Operating
Leases

62,928
51,764
42,065
32,312
26,885
164,485
380,439
n/a
380,439
n/a
380,439

24. CONTINGENCIES
Due to the size, complexity, and nature of the Company’s operations, various legal and tax matters are pending. In the opinion of management,
these matters will not have a material effect on the Company’s consolidated ﬁ nancial position or results of operations.

25. GUARANTEES AND INDEMNIFICATIONS
The Company enters into contracts with rights of return, in certain circumstances, for the repurchase of equipment sold to customers for an
amount based on an estimate of the future value of the fair market price at that time. As at December 31, 2006, the total estimated value of these
contracts outstanding is $181.2 million coming due at periods ranging from 2007 to 2013. The Company’s experience to date has been that 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 $1.4 million.

As part of the Materials Handling Division Purchase and Sale Agreement, Finning has provided indemniﬁ cations to the third party purchaser,
covering environmental, tax, litigation, and other matters, as well as breaches of representation and warranties set forth in the agreement. Claims
may be made by the third party under this agreement for various periods of time depending on the nature of the claim. The maximum potential
exposure of Finning under these indemniﬁ cations is 75% of the purchase price. As at December 31, 2006, Finning had no material liabilities
recorded for these indemniﬁ cations.

In the normal course of operations, the Company has several long-term maintenance and repair contracts with various customers which contain
cost per hour guarantees.

During the year, the Company entered into various other commercial letters of credit in the normal course of operations.

2006 FINNING INTERNATIONAL INC. 81

TEN YEAR FINANCIAL SUMMARY

For years ended December 31
($ THOUSANDS EXCEPT PER SHARE DATA)

REVENUE(1)
Canadian operations
South American operations
UK operations
Hewden
International operations
TOTAL CONSOLIDATED

Earnings before interest and income taxes (EBIT)(1)
As a percent of revenue
Net income(1)
As a percent of revenue

EARNINGS PER COMMON SHARE(1)
Basic
Diluted(2)

DIVIDENDS
Per common share

Cash ﬂ ow after working capital changes
Cash ﬂ ow per share
Gross capital expenditures

RATIOS
Asset turnover ratio
Debt to total capitalization(3)
Book value per common share
Return on average shareholders’ equity(1)

COMMON SHARE PRICE
High
Low
Year end

Common shares outstanding (THOUSANDS)
Revenue per employee
Net income per employee

NUMBER OF EMPLOYEES
Canada
UK
South America
Hewden
International
TOTAL

2006

2005

2004

2003

$ 2,612,597
$ 1,009,906
796,080
$
628,741
$
$
6
$ 5,047,330

$
$

$
$
$

$
$

387,793
7.7%
240,738
4.8%

2.69
2.68

0.55

460,210
5.14
89,370

1.27
42%
18.14
15.8%

47.79
36.10
47.79

89,545
392,605
18,726

4,106
1,354
3,865
3,487
44
12,856

$
$
$
$
$
$

$
$

$
$
$

$
$

2,049,675
1,007,341
830,412
655,091
–
4,542,519

277,344
6.1%
169,557
3.7%

1.91
1.89

0.44

478,757
5.37
81,111

1.28
47%
15.84
11.8%

41.39
32.25
37.14

89,202
377,554
12,810

3,316
2,471
3,377
3,603
38
12,805

$
$
$
$
$
$

$
$

$
$
$

$
$

1,562,584
869,893
717,877
685,930
15
3,836,299

271,933
7.1%
114,946
3.0%

1.45
1.43

0.40

247,422
2.80
106,202

1.15
51%
15.00
11.0%

35.39
28.85
34.99

88,390
338,918
9,360

2,936
2,373
3,203
3,724
44
12,280

$
$
$
$
$
$

$
$

$
$
$

$
$

1,456,357
561,964
934,193
640,757
24
3,593,295

255,168
7.1%
131,951
3.7%

1.71
1.68

0.36

384,210
4.94
89,657

1.09
44%
12.33
14.3%

33.20
23.00
30.00

77,755
314,953
11,566

2,717
2,387
2,456
3,804
45
11,409

Certain comparative ﬁ gures have been reclassiﬁ ed to conform to the 2006 presentation. In addition, ﬁ nancial data has been restated to
incorporate common share subdivision occurring during the ten year period.

1. On September 29, 2006, the Company’s U.K. subsidiary, Finning (UK) sold its Materials Handling Division. Results from that operation have been reclassiﬁ ed

to discontinued operations for the years ended December 31, 2006, 2005, and 2004 only. Therefore, revenue, EBIT, net income, earnings per common share, and
return on average shareholders’ equity reﬂ ect results from continuing operations for those years. Results from Materials Handling Division prior to 2004 are
considered not signiﬁ cant.

2. In 2000, the diluted earnings per share calculation was changed to reﬂ ect the dilutive effect of exercising outstanding stock options by application of the treasury

stock method. Diluted earnings for the years ended 1999 to 2006 have been stated using this method.

3. Equity ratio for the 2000 year does not include investment in Hewden Stuart; equity ratio for years 2001 to 2003 included non-controlling interests that were

treated as equity.

TEN YEAR FINANCIAL SUMMARY

2002

2001

2000

1999

1998

1997

$
$
$
$
$
$

$
$

$
$
$

$
$

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

277,783
8.7%
132,253
4.1%

1.72
1.68

0.30

472,804
6.09
47,426

1.05
38%
11.99
15.7%

28.85
19.65
25.55

77,580
327,462
13,502

2,548
1,578
1,817
3,813
39
9,795

$
$
$
$
$
$

$
$

$
$
$

$
$

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

241,601
7.4%
103,917
3.2%

1.37
1.34

0.20

445,623
5.88
51,180

1.25
47%
10.23
14.1%

20.35
12.10
20.00

75,816
331,230
10,601

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

$
$
$
$
$
$

$
$

$
$
$

$
$

1,214,516
474,145
682,162
–
89,209
2,460,032

165,263
6.7%
73,391
3.0%

0.95
0.94

0.20

357,780
4.72
15,284

1.18
57%
9.02
10.5%

13.85
9.85
12.70

75,790
477,120
14,234

2,326
1,404
1,390
–
36
5,156

$
$
$
$
$
$

$
$

$
$
$

$
$

1,032,922
377,777
712,941
–
106,221
2,229,861

148,912
6.7%
59,600
2.7%

0.75
0.74

0.20

438,232
5.50
20,864

1.05
56%
8.74
8.7%

15.40
9.00
13.50

79,737
450,113
12,031

2,271
1,364
1,259
–
60
4,954

$
$
$
$
$
$

$
$

$
$
$

$
$

1,136,917
503,505
793,020
–
151,979
2,585,421

82,729
3.2%
3,185
0.1%

0.04
0.04

0.20

253,891
3.20
44,176

1.13
63%
8.52
0.5%

18.50
10.25
10.95

79,426
492,367
607

2,494
1,348
1,354
–
55
5,251

$
$
$
$
$
$

$
$

$
$
$

$
$

1,146,406
514,068
565,376
–
101,214
2,327,064

216,625
9.3%
103,695
4.5%

1.32
1.27

0.20

200,397
2.53
47,148

0.99
62%
8.69
16.2%

20.50
14.43
18.00

79,091
423,565
18,874

2,496
1,720
1,228
–
50
5,494

2006 FINNING INTERNATIONAL INC. 83

BOARD OF DIRECTORS

RICARDO BACARREZA
Santiago, Chile
President, Pro Invest S.A.
Director since 1999
Member of the Audit Committee and
the Environment, Health and Safety Committee

JAMES F. DINNING
Calgary, Alberta, Canada
Chairman of the Board of Western Financial Group
Director of Shaw Communications Inc., Russell Metals Inc.
and the Alberta Energy Research Institute
Director since 1997
Member of the Human Resources Committee and
the Environment, Health and Safety Committee

TIMOTHY S. HOWDEN
Marlow, Buckinghamshire, England
Director of Hyperion Insurance Group Ltd.
Director since 1998
Member of the Audit Committee and
the Environment, Health and Safety Committee

JEFFERSON J. MOONEY
Vancouver, British Columbia, Canada
Chairman of A&W Food Services of Canada Inc.,
Director of A&W Canada Inc., A&W Trade Marks Inc.,
A&W Root Beer Beverages of Canada Inc.,
The Cadillac Fairview Corporation Limited, Ontrea Inc.
and Ontrasia Inc.
Director since 2000
Member of the Human Resources Committee (Chairman)
and the Corporate Governance Committee

KATHLEEN M. O’NEILL
Toronto, Ontario, Canada
Director of TSX Group Inc., MDS Inc. and Canadian Tire Bank
New director as of February 2007
Member and the designated “ﬁ nancial expert” for the Audit
Committee and a member of the Human Resources Committee

DONALD S. O’SULLIVAN
Calgary, Alberta, Canada
President, O’Sullivan Resources Ltd.
Director since 1991
Member of the Corporate Governance Committee
(Chairman) and the Audit Committee

CONRAD A. PINETTE (Chairman of the Board)
Vancouver, British Columbia, Canada
Director of A&W Revenue Royalties Income Fund, TimberWest
Forest Corporation and Northgate Minerals Corporation
Director since 1992
Member of the Corporate Governance Committee

JOHN M. REID
Vancouver, British Columbia, Canada
Director of Methanex Corporation
Director since 2006
Member of the Audit Committee and the Human Resources
Committee

ANDREW H. SIMON, OBE
London, England
Director of SGL Carbon AG, Dalkia Plc, Travis Perkins Plc,
Management Consulting Group Plc and Brake Brothers Ltd.
Chairman of Meretec Ltd.
Director since 1999
Member of the Audit Committee (Chairman) and
the Corporate Governance Committee

BRUCE L. TURNER
Santiago, Chile
President, Turner Minerals S.A.
Director since 2006
Member of the Human Resources Committee and
the Environment, Health and Safety Committee

DOUGLAS W.G. WHITEHEAD
West Vancouver, British Columbia, Canada
President and Chief Executive Ofﬁ cer, Finning International Inc.
Director of Ballard Power Systems Inc., Kinder Morgan Inc., Belkorp
Industries Inc. and The Conference Board of Canada
Director since 1999
Member of the Environment, Health and Safety Committee

JOHN M. WILLSON
Vancouver, British Columbia, Canada
Director of Nexen Inc., Pan American Silver Corporation
and Aber Diamond Corporation
Director since 2000
Member of the Environment, Health and Safety Committee
(Chairman) and the Human Resources Committee

Please refer to the Company’s management proxy circular for complete biographies of Finning directors.

CONRAD A. PINETTE
CHAIRMAN OF THE BOARD
FINNING INTERNATIONAL INC.

DOUGLAS W.G. WHITEHEAD
PRESIDENT AND CHIEF EXECUTIVE OFFICER
FINNING INTERNATIONAL INC.

CORPORATE OFFICERS

NADINE J. BLOCK
SENIOR VICE PRESIDENT,
CORPORATE HUMAN RESOURCES
FINNING INTERNATIONAL INC.

TOM M. MERINSKY
VICE PRESIDENT,
INVESTOR RELATIONS
FINNING INTERNATIONAL INC.

ANDY S. FRASER
MANAGING DIRECTOR
FINNING GROUP, UK

IAN M. REID
PRESIDENT
FINNING (CANADA)

SEBASTIAN T. GURIDI
CORPORATE SECRETARY
FINNING INTERNATIONAL INC.

JUAN CARLOS VILLEGAS
PRESIDENT
FINNING SOUTH AMERICA

NICHOLAS B. LLOYD
VICE CHAIR
FINNING GROUP, UK

STEPHEN MALLETT
PRESIDENT, POWER SYSTEMS
FINNING INTERNATIONAL INC.

ANNA P. MARKS
VICE PRESIDENT,
CORPORATE CONTROLLER
FINNING INTERNATIONAL INC.

MICHAEL T. WAITES
EXECUTIVE VICE PRESIDENT
AND CHIEF FINANCIAL OFFICER
FINNING INTERNATIONAL INC.

SHELLEY C. WILLIAMS
VICE PRESIDENT,
CORPORATE TREASURER
FINNING INTERNATIONAL INC.

2006 FINNING INTERNATIONAL INC. 85

CORPORATE GOVERNANCE

The Corporation’s Board of Directors and management are committed to the highest standards of good corporate governance and understand
that such standards are central to the efﬁ cient and effective operation of the Corporation in a manner that ultimately enhances shareholder
value.

BOARD MANDATE AND COMPOSITION
The Board of Directors has overall responsibility for conduct of the business and affairs of the Corporation. The Board discharges this
responsibility both directly and through delegating certain authority to committees of the Board and to senior management of the Corporation.

The Board of Directors is currently made up of 12 members. All directors, other than Douglas Whitehead (who is the President and Chief
Executive Ofﬁ cer of the Corporation) are independent.

In addition, in order to ensure that the Board can function independently from management, the Corporation has separated the role of
Chairman of the Board (currently Conrad A. Pinette) and Chief Executive Ofﬁ cer (currently Douglas Whitehead).

Finally, each year the Board (with the assistance of the Corporate Governance Committee) formally reviews its own performance, the
performance of each committee of the Board, the performance of the Chairman of the Board, the performance of each individual director
(peer assessment) and the performance of the Chief Executive Ofﬁ cer.

COMMITTEES OF THE BOARD OF DIRECTORS
There are currently 4 committees of the Board of Directors: the Corporate Governance Committee, the Audit Committee, the Human
Resources Committee and the Environment, Health and Safety Committee. Each committee operates in accordance with Board-approved
terms of reference.

The Corporate Governance Committee
The mandate of the Corporate Governance Committee is to enhance 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 Audit Committee
The Audit Committee provides assistance to the Board of Directors in fulﬁ lling its oversight responsibility to the shareholders with respect
to the Corporation’s: (a) ﬁ nancial statements; (b) ﬁ nancial reporting process; (c) systems of internal and disclosure controls; (d) internal audit
function; (e) external audit function; (f) compliance with legal and regulatory requirements; (g) ﬁ nancial arrangements and liquidity; and (h) risk
identiﬁ cation, assessment and management program. It is the responsibility of the Committee to maintain an open avenue of communication
between itself, the external auditors, the internal auditors and the management of the Corporation. In performing its role, the Committee is
empowered to investigate any matter brought to its attention, with full access to all books, records, facilities and personnel of the Corporation.
It is also empowered to retain outside counsel or other experts as required.

The Human Resources Committee
One of the key mandates of the Human Resources Committee is to analyze, in depth, the policies and strategies developed by management in
the areas of human resources, compensation and pension. This includes establishing a market competitive total compensation program for the
executive ofﬁ cers and other key employees. In addition, the Human Resources Committee reviews and approves the succession plan for the
Chief Executive Ofﬁ cer and for the executive leadership team; reviews and approves any signiﬁ cant changes to the organizational structure; and
reviews engagement of the workforce. The Committee also reviews, with the Corporation’s management pension committee: (a) the pension
fund investment strategy; (b) the choice of fund manager(s) for the Corporation’s pension funds; (c) the ongoing performance of the fund
manager(s); (d) the design and beneﬁ ts of the Corporation’s pension plans; and (e) contribution levels and funding status of the Corporation’s
pension plans.

The Environment, Health and Safety Committee
The mandate of the Committee is to encourage, assist and counsel the management of the Corporation in its drive towards attaining and
maintaining a high level of performance in areas relating to the environment, health and safety. In carrying out its purpose, the Committee seeks
to ensure, through the management of the Corporation, that the Corporation’s employees and contractors enjoy a safe and healthy workplace.

The Company’s management proxy circular issued in connection with the 2007 Annual General Meeting and the corporate governance section
of the website provide a full discussion of Finning’s corporate governance policies and practices.

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, British Columbia
Canada V6C 2X8
Telephone: 604-691-6444

ANNUAL GENERAL MEETING
May 9, 2007
11:00 AM PDT

Four Seasons Hotel
Park Ballroom
791 West Georgia Street
Vancouver, British Columbia

SHAREHOLDER INFORMATION

CORPORATE INFORMATION
The Company prepares an Annual Information Form (AIF),
which is ﬁ led 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.ﬁ nning.com

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 ﬁ nancial information
should be directed to Tom Merinsky, Vice President, Investor
Relations. Telephone 604-331-4950, Fax 604-691-6440
Email: investor_relations@ﬁ nning.ca

FORWARD LOOKING STATEMENTS
This report contains forward-looking statements and information,
which reﬂ ect the current view of Finning International Inc.
with respect to future events and ﬁ nancial 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 ﬁ lings 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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www.ﬁ nning.com

REGISTRAR & TRANSFER AGENT
COMPUTERSHARE TRUST COMPANY OF CANADA

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

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

Phone
North America
1-800-564-6253
International
514-982-7555

Website
www.computershare.com

Email
service@computershare.com