sTANdOUT
PERFORMANCE
FINNING INTERNATIONAL INC.
2007 ANNUAL REPORT
sTANdOUT REsULTs
Finning at a Glance
Financial Highlights
Letter to shareholders
Chairman’s Letter
serving Customers for 75 Years
Financial Management
Canada
south America
2
4
6
10
12
14
16
20
United Kingdom
Power systems
Financial Report
Board of directors
Corporate Officers
Corporate Governance
shareholder Information
24
28
30
88
89
90
Inside Back Cover
MONETARY AMOUNTs IN THIs ANNUAL REPORT ARE IN CANAdIAN dOLLARs UNLEss OTHERWIsE NOTEd
2007 was another year of record financial results and excellent
growth in operations. Revenues grew 17% to $5.7 billion and
diluted earnings per share rose 23% to $1.55(1). We advanced
strategic initiatives, added to our labour force and expanded our
service capabilities. strong new equipment sales continued to
build the Caterpillar fleets in our territories, growing the base
for future parts and service revenues. All of which outlines a
future where Finning stands stronger than ever.
(1) diluted EPs from continuing operations and before non-operating items
Finning West Edmonton Branch, Alberta
FINNING AT A GLANCE
Finning International Inc. is the world’s largest Caterpillar equipment
dealer. Finning sells, rents and provides customer support services
for Caterpillar equipment and engines in Western Canada, the United
Kingdom and parts of south America. Headquartered in Vancouver,
British Columbia, Canada, Finning is a widely-held, publicly-traded
corporation, listed on the Toronto stock Exchange (symbol FTT).
CANAdA
Finning (Canada)
OEM
SOUTh AmERICA
Finning south America
TERRITORY
EMPLOYEEs
LOCATIONs
INdUsTRIEs sERVEd
British Columbia, Alberta,
Yukon, the Northwest
Territories, a portion of
Nunavut
4,618
55 branches, 34 Cat Rental
stores and 40 resident
locations
Mining (including oil sands),
construction, pipelines, oil &
gas, forestry
Chile, Argentina, Bolivia,
Uruguay
4,638
73 locations
Mining, construction,
oil & gas, forestry
UNITEd KINGdOm
Finning UK Group
England, scotland, Wales
3,543
22 dealership branches
102 rental depots
POWER SYSTEmS
Caterpillar and
associated brands engine
sales and service
All Finning territories
Employees and locations are recorded
within other Finning divisions
Construction, mining,
quarrying, waste
management, engineering,
petrochemicals,
manufacturing,
telecommunications,
utilities, plant hire
Electric power, industrial,
marine, construction, oil &
gas, on-highway trucks
2
2007 sCORECARd & 2008 OBjECTIVEs
From Continuing Operations
2007 TARGETs
2007 REsULTs
2008 TARGETS
Revenue growth
diluted EPs (long-term goal)
EPs guidance range(1)
dividend payout ratio
Return on Equity (ROE)
Free cash flow (before dividends)
Customer support services business growth
(2005 to 2010)
UK divestitures (2006/2007)
debt to total capital ratio
safety (lost time injuries per 200,000 work hours)
8% - 10%
13.5% - 15%
$1.48 - $1.60
20% - 25%
15% - 20%
$80 - $100 million
15% CAGR(2)
$500 million
40% - 50%
0.80
16.7%
18.3%
$1.57 basic
$1.55 diluted
23%
16.8%
($110.7 million)
7.4%
$480 million(3)
42.1%
0.52
7% - 9%
13.5% - 15%
$1.70 - $1.80
25% - 30%
15% - 20%
$100 - $120 million
15% CAGR
-
40% - 50%
0.60
2007 ACHIEVEMENTs
OPPORTUNITIEs
• Record revenues - $5.7 billion, up 17% from 2006
• Record diluted earnings per share (EPS) from continuing
operations - $1.55 up 23% from 2006(4)
• Strong order backlog of $1.7 billion as at
december 31, 2007
• Attractive growth in higher margin parts and service
• Overall profitability (EBIT margin) improved to 8.0% from
business
7.3% in 2006 after adjusting for non-operating items
• Continued attractive return on equity = 16.8%
• Improved performance in the U.K. following execution
of strategic initiatives
º divested the Tools Hire division
º Implemented IT system at Hewden
• Increased quarterly dividend twice to $0.40 annual
indicated dividend
• Hired over 1,300(5) new employees (net), primarily in
Canada and south America
• Initiated share buy back (repurchased 3.7 million shares
in 2007)
• Achieved excellent safety performance
• Excellent mining fleet expansion (including oil sands)
• Strong general construction markets in all territories
• Growing demand for electric power generation,
particularly in south America and the U.K.
• Continued performance improvement from the
UK operations
• Focus on profitability, return on capital and
long-term growth
(1) Basic EPs from continuing operations (original 2007 guidance range $1.40 - $1.48)
(2) Compound Annual Growth Rate
(3) Gross proceeds (assumes real estate sales for approximately $60 million)
(4) After adjusting for non-operating items
(5) Excludes Hewden employees
2007 FINNING INTERNATIONAL INC. 3
FINANCIAL HIGHLIGHTs
YEAR ENdEd dECEMBER 31
($MILLIONs, ExCEPT PER sHARE AMOUNTs)
OPERATING dATA (from continuing operations)
Revenue
Earnings Before Interest & Income Taxes (EBIT)
Net Income
diluted 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
2007
2006
2005
5,662.2
455.8
280.1
1.55
16.8%
404.4
4,134.2
2,794.8
1,617.8
42%
4,853.2
373.7
236.2
1.31
15.8%
460.2
4,200.8
2,787.9
1,624.4
42%
4,328.3
258.0
161.7
0.90
11.8%
478.8
3,736.4
2,644.7
1,413.0
47%
REVENUE
($ billions)
EBIT
($ millions)
NET INCOME
($ millions)
dILUTEd EPs
($)
6.0
5.0
4.0
3.0
2.0
1.0
0
5.66
4.85
4.33
3.84
3.59
2003 2004 2005 2006 2007
500
400
300
200
100
0
456
374
300
250
200
280
236
2.0
1.5
1.55
1.31
272
258
255
162
150
132
115
1.0
0.84
0.90
0.72
100
50
0
0.5
0.0
2003 2004 2005 2006 2007
2003 2004 2005 2006 2007
2003 2004 2005 2006 2007
Finning West Edmonton Branch, Alberta
Hartlepool, U.K.
The results of operations of the Materials Handling division have been reclassified as discontinued operations for 2006, 2005 and 2004.
The results of operations of the Tools Hire division have been reclassified as discontinued operations for 2007, 2006 and 2005.
4
FINANCIAL PERFORMANCE BY
CONTINUING OPERATIONs
($ MILLIONs)
Canada
south America
UK
REVENUE
EBIT
2007
2,936.2
1,325.6
1,400.4
2006
2,612.6
1,009.9
1,230.7
2007
286.3
127.4
73.0
2006
233.3
108.9
65.0
Power systems
Power systems revenues are reported within other Finning divisions
821.3
694.1
REVENUE BY LINEs OF BUsINEss -
CONTINUING OPERATIONs(1)
($ MILLIONs)
New Mobile Equipment
New Power & Energy systems
Customer support services
Equipment Rental
Used Equipment
(1) Excludes other revenue
2007
2006
2,233.5
503.0
1,701.2
781.2
417.6
39.4%
8.9%
30.0%
13.8%
7.4%
1,732.8
419.9
1,583.5
693.2
401.1
35.7%
8.7%
32.6%
14.3%
8.2%
REVENUE BY OPERATIONs
EBIT BY OPERATIONs(2)
24.7%
23.4%
51.9%
CANADA
FINSA
UK GROUP
28.0%
62.8%
CANADA
FINSA
UK GROUP
16.0%
(2)Excludes other corporate items
Finning Branch, Coquimbo, Chile
Finning West Edmonton Branch, Alberta
2007 FINNING INTERNATIONAL INC. 5
LONG-sTANdING
sUCCEss
Conrad Pinette, Chairman of the Board
doug Whitehead, President & Chief Executive Officer
6
LETTER TO sHAREHOLdERs
As this is my last letter to shareholders as Chief Executive Officer of Finning, it is a special
pleasure to report that 2007 was another very successful year. We posted excellent
operating and financial results, and we made significant advances in our strategic and
people initiatives. As well, we provided shareholders with a total return of 21% including
two dividend increases in the year – a very strong performance considering the downturn
in world stock markets late in 2007.
Our business continued to prosper in
2007 and our financial results once again
reached record levels, with revenues
rising 17%, and diluted earnings per share
from continuing operations up 23% after
adjusting for non-operating items. These
results are particularly gratifying in light
of a much stronger Canadian dollar in
2007 compared to 2006. I am also very
pleased to report that our return on equity
increased to 16.8% in 2007 from 15.8% in
the previous year.
75 YEARS OF CUSTOmER SERvICE
In january 2008, Finning celebrated its 75th
anniversary. Back in 1933, Earl B. Finning
incorporated Finning Tractor & Equipment
Co. Ltd. in British Columbia with six
employees and the philosophy “we service
what we sell”. Today, Finning International
is the world’s largest Caterpillar dealer
with $5.7 billion in revenue and 13,000
employees in six countries, on three
continents.
Our 75th anniversary is a proud occasion
and an important milestone for Finning,
marking our long track record of success
founded on the hard work and unrivalled
customer service provided by thousands
of Finning employees over the decades.
We are proud of our achievements and the
long-standing relationship we have built
with our customers. This commitment to
customer service differentiates Finning
from the others and positions us as a leader
in our industry.
The same dedication to service excellence
will also drive our success for the next 75
years. Our multi-year strategic initiative to
accelerate the growth in parts and service
revenue and earnings continues to gather
momentum as each of our operations
expands resources to support this line of
business. We are on target to meet our
goal of doubling our customer support
services business from 2005 levels by the
end of 2010. We have excellent market
share in providing parts and service
on large mining equipment, and now,
a stronger focus on parts and service
to customers operating medium-sized
equipment lines is beginning to pay off.
STRONG OPERATING
PERFORmANCE
Our Canadian operations had an
exceptional year in 2007. Overall economic
conditions in Western Canada were good,
and the mining, oil sands and construction
markets were extremely strong. However,
our customers in the forestry and
conventional oil and gas markets were
challenged. Notwithstanding the weakness
in these market segments, Finning (Canada)
delivered record results in 2007. The
outlook for 2008 continues to be solid,
and our oil sands operations are expecting
their busiest year ever as they prepare and
deliver a huge amount of new large mining
equipment to our oil sands customers.
The south American operations also
had a very successful year in 2007 and
experienced record results. All market
segments were strong and revenues
from this region rose almost 40% in local
currency. Finning south America (FINsA)
also experienced good growth in parts and
service revenues driven by a considerable
increase in the Caterpillar mining fleet.
increasing service pricing to appropriate
levels. While this market looks solid for
2008, we must remain vigilant to ensure
costs are managed effectively.
The UK dealership made excellent
progress in 2007. Our heavy construction
equipment and power systems divisions
had a strong year in new equipment sales.
The outlook for 2008 remains positive with
construction activity levels projected to be
similar to 2007, and with good prospects
for power systems as well.
We completed the disposition of Hewden’s
Tools Hire division after determining that
this business did not fit our core objectives
in the UK market. We now have a smaller
Hewden operation that focuses primarily
on construction equipment rental. With
better management information from
Hewden’s new information technology
system, which we implemented in 2007,
we expect better asset utilization and
improved results in 2008.
Overall results from our Power systems
business were also very good. We had
very strong performances in the United
Kingdom and south America that more
than offset the impact of a slow natural gas
market in Western Canada. We continue
to strive to meet our goal of $1 billion
revenue from Power systems by the end
of 2008. However, given the strengthening
Canadian dollar we’ll likely need another
year to achieve this goal.
Labour cost inflation is relatively high in
this region, especially in Argentina. As a
result, FINsA’s EBIT margins were lower in
2007. We are actively managing these cost
pressures by reducing overhead costs and
Finning continues to be a leader in safety
and our safety statistics in 2007 are again
at excellent levels with lost time incidents
at record lows. We have one of the best
safety records in our industry and we strive
to do better every year. Unfortunately,
2007 FINNING INTERNATIONAL INC. 7
LETTER TO sHAREHOLdERs continued
senior executive team
Andy Bone
president
finning power systems
dave Primrose
senior vice president
corporate human resources
juan Carlos Villegas
president
finning south america
Mike Waites
executive vice president
& chief financial officer
Ian Reid
president
finning (canada)
Andy Fraser
managing director
finning group, uk
despite our best efforts, a tragedy did
occur in February of 2008. juan Alvarez
lost his life as a result of injuries that he
received while at work in santiago, Chile.
A long-term employee of Finning, juan
Alvarez will be missed by his family, friends
and co-workers. His death is an important
reminder to us all that safety can never be
taken for granted and must be our primary
consideration every day.
ATTRACTIvE ShAREhOLdER
RETURNS
Finning remains focused on creating value
for shareholders. In addition to generating
attractive returns from operations, we
raised our dividend twice in 2007, and
we are moving towards a higher dividend
payout ratio range, from 20-25% to 25-30%
of net income.
We also initiated a share repurchase
program in the third quarter of 2007
and continued to buy stock into the
first quarter of 2008. In total, we have
repurchased approximately 7.3 million
common shares at an average price
of $27.52 since we believe this is a
conservative valuation for Finning shares.
Our balance sheet remains strong with
debt to total capital remaining at about
42% at december 31, 2007, comparable to
2006 levels.
POSITIvE OUTLOOK
Our new equipment order backlog at
december 31, 2007 was approximately
$1.7 billion, a very high level that provides
us with good revenue visibility into 2008
and early 2009. In Western Canada some
sectors are going through slower times,
and in south America we have to manage
our pricing and costs closely, but overall,
we remain optimistic that 2008 will again
produce good results.
As I prepare to leave my role of President
and CEO I would like to thank many people
for their support over the years. At the
top of this list are Finning employees - a
highly motivated and customer focused
team - thank you for your dedication and
hard work. job demands and the pace of
change have been considerable across
our operations, yet Finning employees
repeatedly rise to the challenge and
succeed in exceeding our goals.
I’d like to thank our customers as
well - without them there would be no
Finning. Many have been loyal Finning/
Caterpillar customers for a long
time, through good times and bad. I
appreciate the confidence you have shown
in us and I thank you for your business.
I would also like to thank Caterpillar, our
strategic partner, for their continued
support. As I’ve said many times, the
combination of Caterpillar equipment and
Finning service is the winning combination
at the heart of our success.
As well my appreciation goes to the Board
of directors. Three members of our Board,
jim dinning, Tim Howden and jeff Mooney
retired in 2007. Their contributions are
greatly valued. In 2007, we welcomed jim
Carter and Kathleen O’Neill to our Board
of directors.
8
2007 RETURN TO ShAREhOLdERS
In 2007, Finning’s common shares provided
shareholders with a capital gain of approximately
20% and dividends totaling $0.36 per share.
Total return to shareholders was over 21%.
share value (excluding dividend) has grown at
an annual compound growth rate as follows:
5 years
17%
10 years
12%
20 years
13%
RELATIvE PRICE PERFORmANCE
FINNING INTERNATIONAL INC. Vs. s&P/Tsx COMPOsITE INdEx
dec. 31, 2002 to dec. 31, 2007
Finning International Inc.
S&P/TSX Composite Index
300
250
200
150
100
50
31-Dec-02
31-Dec-03
31-Dec-04
31-Dec-05
31-Dec-06
31-Dec-07
In 2008, Conrad Pinette will step down as Chairman of the Finning Board. He has been a member of our Board since 1992 and Chairman
since 2000. Over the years Conrad has been a driving force behind the scenes and has provided tremendous support in my time as CEO.
Fortunately, Conrad will remain on the Board and we will continue to have the benefit of his counsel.
In March 2008, the Finning Board of directors appointed Mike Waites as the new CEO of Finning, effective at the Annual General Meeting.
Mike has proven to be an exceptional leader at Finning and will draw from his extensive senior executive experience in other industries. He
is a well-rounded senior executive with a strong financial capability and extensive experience in providing senior leadership and strategic
execution. I’m confident he’ll do a great job for all our stakeholders and I wish Mike all the best in his new position.
Once again, the future looks very bright for Finning. We have a proud tradition of great people providing customers with great solutions
and achieving great results. I am confident that Finning will continue to deliver standout performance.
sincerely,
FINNING INTERNATIONAL INC.
douglas W.G. Whitehead
President & Chief Executive Officer
2007 FINNING INTERNATIONAL INC. 9
FINNING BOARd OF dIRECTORs
Conrad A. Pinette
chairman of the board
douglas W.G. Whitehead
president & ceo
james E.C. Carter
Kathleen M. O’Neill
john M. Willson
“2007 was another outstanding year for Finning and our shareholders. On behalf of the
Board of directors, I wish to thank all Finning employees around the globe for their
commitment and contribution to our long-standing success as we celebrate 75 years
of delivering the best equipment and service to our customers.”
10
CHAIRMAN’s LETTER
Andrew H. simon
Bruce L. Turner
john M. Reid
donald s. O’sullivan
Ricardo Bacarreza
The Finning Board of directors believes
that good corporate governance is
fundamental to creating value for our
shareholders. We make every effort
to implement and maintain the best
governance practices to support the Board
in delivering effective performance on
behalf of Finning shareholders.
The Board continuously evaluates and
improves governance processes to ensure
they drive appropriate conduct and reflect
a corporate culture of integrity and respect
for all stakeholders.
To that end, we published a revised Code
of Conduct in 2007 outlining in detail the
Finning values that guide our employees
and Board members around the world in
upholding high standards of ethical conduct
in every aspect of day to day business.
The Finning Board of directors is
an experienced and balanced team
of corporate leaders with diverse
international backgrounds. since our
2006 annual report was published,
the composition of the Finning Board
underwent further changes. jim dinning,
Tim Howden and jeff Mooney retired at
the Annual General Meeting in May 2007
and jim Carter was appointed to the Board
in October 2007.
members and the Finning executive
team for the support they’ve provided
me over the years. I look forward to my
continued association with Finning.
On behalf of the Board of directors,
I would like to thank Mr. dinning,
Mr. Howden and Mr. Mooney for their
valuable contributions and I welcome
Mr. Carter, who brings extensive senior
executive experience and an in-depth
knowledge of the energy business to the
Finning Board. Previously, Mr. Carter
played a prominent role in the growth
of syncrude, as well as the overall
development of Alberta’s oil sands and
the community of Fort McMurray. Also in
2007, as I mentioned in last year’s letter to
shareholders, Kathleen O’Neill joined the
Board of directors.
In February 2008, we announced that I
will be stepping down as Chairman of the
Board and doug Whitehead will be taking
over that role. It has been a pleasure
serving as Chairman of the Finning Board,
and I’d like to thank my fellow Board
Finning has a strong, committed and
progressive Board, and we look forward to
serving the Company to achieve continued
success.
For a more detailed discussion of our
corporate governance policies and
practices, I encourage you to review the
Finning management proxy circular and
visit the corporate governance section of
our website at www.finning.com.
On behalf of your Board of directors,
Conrad A. Pinette
Chairman of the Board
2007 FINNING INTERNATIONAL INC. 11
sERVING CUsTOMERs
FOR 75 YEARs
In 2008 Finning celebrates 75 years of success as a Caterpillar dealer.
In january 1933, Earl B. Finning
incorporated Finning Tractor & Equipment
Co. Ltd. in Vancouver with six employees,
a $50,000 bank loan and a philosophy that
stated: “We service what we sell”. In those
days, our founder, Earl Finning, traveled
around British Columbia introducing
people to the idea of using Caterpillar
heavy equipment when many still preferred
horses. As business slowly developed, he
opened Finning’s own parts and repair
department to provide timely service and
make parts readily available to customers.
Four years later, in response to growing
demand for equipment, parts and service,
Finning opened its first branch in Nelson,
B.C., the beginning of what would become
an extensive service infrastructure
throughout Western Canada, the United
Kingdom and south America.
Finning’s original vision, to meet and
exceed customer service requirements,
has delivered great results. Our long track
record of success is founded on the hard
work and outstanding customer service
provided by thousands of employees
who have worked for Finning over seven
decades. Today, Finning International Inc. is
the world’s largest Caterpillar equipment
dealer, a publicly traded corporation
generating $5.7 billion in revenue and
employing 13,000 people in six countries
on three continents.
For 75 years Finning has provided great
service solutions to customers in many
industries such as mining, construction,
forestry, oil & gas and pipelines. Our
people deliver product support that
lowers the cost of owning and operating
Caterpillar equipment making our
customers’ business more efficient and
successful. Key to our achievements is the
long-standing relationship we have built
with our customers over the years. It is
our dedication to service excellence that
differentiates Finning from others and
positions us as an industry leader. The
quality of our people and our commitment
to always go the extra mile for our
customers will drive our success for the
next 75 years.
The original operating philosophy “We
service what we sell” continues to be the
foundation of our success today. Customer
support remains at the heart of our
strategy as we strive to develop “Great
People” to deliver “Great solutions” to our
customers and achieve “Great Results” for
our shareholders.
12
SIGNIFICANT mILESTONES IN FINNING’S hISTORY
1933
1969
Finning Tractor & Equipment Co. Ltd. incorporated on january 4
in Vancouver, British Columbia, Canada
Becomes a publicly traded company, common shares trade on
the Vancouver and Toronto stock Exchanges
1977
Becomes the Caterpillar dealer for the Yukon
1983
Acquires Bowmaker and Caledonian, the two Caterpillar
dealerships in the U.K.
1989
Acquires R. Angus, the Caterpillar dealership in Alberta and the
Northwest Territories
1993
Acquires Gildemeister, the Caterpillar dealership in Chile
1996
Acquires Leverton, the remaining Caterpillar dealer in the U.K.
2001
Acquires Hewden, the equipment rental business in the U.K.
2003
Acquires the Caterpillar dealerships in Argentina, Bolivia and Uruguay
2003
Invests in Energyst, a Pan-European power rental company jointly owned
by Caterpillar, Finning and 10 European Cat dealers. Finning is currently
the largest shareholder with a 24.85% interest.
2004
Invests in OEM Remanufacturing, a world class component rebuild facility
in Edmonton, Alberta
2005
Awarded a 25% interest in a new global Caterpillar dealership for
pipeline equipment, PipeLine Machinery International
2007
secures distribution rights for new territories for MaK engines in
North & south America
2008
Expands service capacity in Alberta by acquiring Collicutt Energy services
2007 FINNING INTERNATIONAL INC. 13
corporate executive team
Tom Merinsky
vice president
investor relations
Anna Marks
senior vice president
corporate controller
jeff Leigh
vice president
business processes and systems
Andre Beaulieu
general counsel
and corporate secretary
sandeep Kalra
vice president
corporate treasurer
2.
1.
ANOThER YEAR OF RECORd
FINANCIAL RESULTS
Revenue grew by almost 17% to $5.66
billion. Earnings before interest and taxes
(EBIT) improved by 22% to $456 million.
After adjusting 2006 results for non-
operating items, 2007 EBIT was up 28%.
diluted earnings per share from continuing
operations, before non-operating items
was $1.55 compared to $1.26 in 2006, an
increase of 23%.
Non-operating items in 2006 included
proceeds from the sale of real estate,
a gain on the disposition of a non-core
business line and costs related to the early
redemption of a financing. There were no
significant non-operating items in 2007.
CONTINUEd STRONG EBIT
GROWTh
Earnings before interest and taxes (EBIT)
and EBIT margin are Finning's primary
internal earnings performance measures
for each operation. Consolidated EBIT
continued to grow at an impressive
pace in 2007 increasing by 22% to $456
million. since 2005, consolidated EBIT
has grown by almost 33% on average. This
growth has occurred despite a stronger
Canadian dollar compared to 2006
which has impacted profit levels. On a
consolidated basis, the impact of a 5.2%
stronger Canadian dollar relative to the
U.s. dollar was partially offset by a 2.9%
weaker Canadian dollar compared to the
UK pound sterling. In 2007, total revenue
was reduced by approximately $100
million as a result of translating foreign
currency amounts into Canadian dollars on
consolidation.
In Canada, EBIT increased by 23% and EBIT
margin improved primarily as a result of
achieving better pricing in a very strong
market, despite the stronger Canadian
dollar. In south America, EBIT contribution
increased by almost 17% however, EBIT
margins declined modestly from 2006 levels
due to a fairly significant shift in revenue
mix from higher margin parts and service
to lower margin new equipment sales,
compounded by inflationary cost pressures.
FINsA’s 2007 profitability level was
comparable to 2005 and 2004. In the UK,
EBIT contribution increased by over 12%.
EBIT margins in the U.K. were comparable
to 2006 levels and reflected improved
profitability at the dealership, offset by
lower profitability at Hewden.
3.
FOCUS ON ImPROvING
FREE CASh FLOW
In 2007, Finning generated $623 million
cash from operations compared to $599
million in 2006, reflecting continued
strong growth in operations and improved
profitability. Higher business volumes
in 2007 increased working capital
requirements primarily in the form of
inventory and receivables, reducing cash
generation to $404 million compared
to $460 million in 2006. Our continued
focus on working capital management and
shorter supply lead times from Caterpillar
on some models, resulted in improved free
cash flow in the second half of 2007, which
is expected to continue in 2008.
Capital expenditures totaled $74 million
in 2007 compared to $76 million in 2006,
relatively modest in both years. The largest
use of cash was net rental additions, which
totaled $475 million in 2007 compared
to $344 million in 2006. Both years
represented high levels of expenditures on
rental assets in Canada to renew our heavy
equipment rental fleet to meet increased
customer demand and to fund growing
‘rental purchase options’ (RPOs) which
are term rental agreements with customers
that include an option to purchase the
equipment. In addition, Hewden received
deferred delivery of rental assets in 2007
from the prior year. For 2008, net capital
expenditures are projected to total $110
- $120 million and net rental additions are
expected to be in the $300 - $320 million
range.
14
FINANCIAL MANAGEMENT
2007 was another year of record financial results. Overall profitability improved again,
despite a significantly stronger Canadian dollar and a shift in revenue mix to a greater
proportion of lower margin, new equipment sales compared to higher margin parts and
service. Reflecting higher profitability, return on equity improved to 16.8% in 2007
compared to 15.8% in 2006.
4.
5.
dIvIdENd GROWTh
Finning provided shareholders with an
annual dividend of $0.36 per share including
two dividend increases in 2007. dividends
were increased seven times over the last
five years and the current annual indicated
dividend is $0.40 per share.
Going forward, Finning intends to
gradually increase the dividend payout
ratio to 25-30% from 20-25% of net
income. Regular increases in dividends
and the transition to a higher dividend
payout ratio is consistent with the
management and Board’s positive outlook
on Finning’s financial strength and growth
opportunities.
6.
ACTIvE ShARE REPURChASE
PROGRAm
Finning began purchasing shares under
its normal course issuer bid in the third
quarter of 2007 and continued into the
first quarter of 2008. A total of 7.3 million
common shares were purchased at an
average cost of $27.52 for a total cost of
about $200 million.
At these prices we believe Finning shares
are undervalued, and purchasing shares
is immediately beneficial to shareholders.
The purchase was funded by cash from
operations and bank lines and has not
compromised our financial flexibility as our
balance sheet remains strong with sufficient
borrowing capacity.
RE-dEPLOYmENT OF CAPITAL TO
hIGhER RETURN mARKETS
during 2007 we completed the second
major divestiture of a portion of our
UK business and sold the Hewden Tools
division for $245 million. In 2006 we
sold our UK Materials Handling business
for $175 million. Together with some
associated real estate divestitures totaling
about $60 million over the next two years,
we will have generated proceeds of almost
$500 million. These proceeds have been
re-deployed, mainly to our Canadian and
south American operations, where we
believe this capital will earn a higher return.
ANNUAL dIVIdENd PER sHARE
5 YEAR COMPOUNd ANNUAL
GROwTH RATE = 17.3%
$ 40
35
30
25
20
15
10
5
0
* Indicated dividend
0.40*
0.36
0.28
0.22
0.20
0.18
20032004 2005 2006 20072008
2007 FINNING INTERNATIONAL INC. 15
canada
sETTING
sTANdARds
HIGH
988H Loader, Finning West Edmonton Branch, Alberta
16
2007: ANOThER RECORd YEAR
Our Canadian operations once again
posted outstanding performance in
2007 surpassing all previous revenues
and earnings despite a 5.2% stronger
Canadian dollar. Revenues climbed 12% to
$2.9 billion. EBIT reached $286 million,
a 33% increase over 2006(1), reflecting
excellent market conditions and improved
profitability as EBIT margins rose to 9.8%
compared to 8.2% in 2006(1).
strong economic conditions in Western
Canada supported rising demand from
our mining and construction customers,
driving new equipment sales up 18% to
$1.4 billion in 2007. The growing population
of Caterpillar equipment, now standing at
over 40,000 machines in this territory, is
expected to generate increasing demand
for parts, service and rebuilds for the next
several years.
AddING CAPACITY
In the past few years, our business
in Western Canada experienced
unprecedented growth with strong
demand for service from customers
across all industries. Finning’s extensive
service infrastructure and the technical
expertise of our employees remains a
key competitive advantage in meeting
sophisticated customer needs in some of
the most challenging operating conditions.
In 2007, Finning (Canada) announced
a significant expansion to its service
capabilities in Alberta through the
acquisition of Collicutt Energy services
Ltd., complete with extensive additional
facility space and a highly skilled and
experienced workforce. With this
acquisition completed in january 2008,
Finning obtained a total of 315,000 square
feet of operational capacity, of which over
200,000 square feet is in modern, near-
purpose built facilities in Red deer, Alberta.
This expansion is consistent with our
strategic goal of rapidly growing parts
and service revenue as Finning opens a
new “Centre of Excellence” in Red deer.
The Red deer operations will allow us to
centralize our new equipment preparation
work and grow our mining and heavy
equipment overhaul business. Importantly,
(1) excluding 2006 gains on sale of assets
this expansion will also free up capacity in
the existing Finning branches to complete
service work for local customers.
The Canadian operations, including OEM,
continued to recruit and train skilled
people adding more than 500 employees
to our workforce on a net basis, a 12%
increase over 2006. In addition to extensive
recruiting, aggressive retention strategies
and learning and development programs
were introduced to maximize employee
engagement levels throughout the
organization.
RAmPING UP SERvICE
A key part of the Finning/Caterpillar
customer value equation is extended
equipment life through rebuild of individual
components or complete machine
overhauls. With successive rebuilds,
Caterpillar equipment can be durable
enough to have several lives. Caterpillar
Certified Rebuild programs provide
meaningful savings over the purchase of a
new machine, which significantly lowers
the customer’s overall cost of owning
and operating the equipment. Rebuilding
equipment to like-new standards presents
Finning with large growth opportunities,
especially in the mining and heavy
construction sectors. With the newly
added capacity in Red deer, Finning
will now be taking full advantage of this
opportunity.
Customer support services revenue
grew 4% to $906 million in 2007. Finning
(Canada)’s termination of an alliance
agreement with shell Canada, combined
with the strong Canadian dollar, resulted in
a slower growth rate in parts and service
business in 2007. Notwithstanding modest
growth in 2007, Finning (Canada) expects
to meet its 2010 customer support services
business targets.
ExCELLENT OUTLOOK
The new equipment order backlog in our
Canadian operations reached record levels
again in 2007 reflecting robust economic
activity in Western Canada’s resource-
based industries. More than half of the
total machines currently in the backlog
represent mining and heavy construction
equipment that have a high consumption
rate for parts and service.
canada
2008 will be a record year for new
equipment deliveries to the oil sands. It
took over seven years to deliver the first
100 797s to this region. In 2008 alone,
we plan to deliver over 65 new 797s,
dramatically increasing the fleet and the
associated consumption of parts and
service.
strong demand for new mining and heavy
construction equipment is expected to
continue into 2008 along with a growing
need for parts, service and rebuild on the
large number of machines sold over the
past few years. The steady and growing
equipment population provides Finning with
attractive customer support opportunities.
Our continued investment in people and
facilities enables us to keep delivering the
outstanding service our customers expect
from Finning. Our Canadian operations are
planning for a strong 2008 and will continue
contributing outstanding results to Finning
International’s performance.
mINING
The mining industry in Western Canada
experienced exceptional growth over the
last several years, and 2007 continued this
trend as global demand for oil and metals
remained strong. The Caterpillar mining
fleets in our Canadian operations grew
by 13% to over 1,600 units in 2007. This
population of heavy equipment consists
primarily of large haul trucks, wheel
loaders, tractors and graders that often
operate around the clock in some of the
most rugged climate and ground conditions.
Consequently, these units have the highest
consumption rates of parts and service.
Maximizing customer uptime by providing
comprehensive service programs in
challenging equipment applications is what
Finning does best. Our extensive customer
support network including remanufacturing
and rebuild capabilities enables us to
meet the growing demand from mining
customers looking to maintain and expand
their equipment fleets.
Finning has always been successful in
capitalizing on the tremendous growth in
mining equipment demand - 28% of new
equipment deliveries in 2007 were to
mining customers, and our market share in
large mining equipment in Western Canada
stands at over 70%. We continue to invest
2007 FINNING INTERNATIONAL INC. 17
canada continued
Gordon Finlay
vice president,
operations, mining
dave Parker
senior vice president
Miles Hunt
vice president,
human resources
stan Prince
vice president,
operations, forestry
joel Harrod
vice president,
finance
absent from photograph:
Mike Penn
vice president, operations,
construction and petroleum
jason Randhawa
vice president,
marketing and sales
Tim O'Brien
vice president,
power systems
CANAdA REVENUE
($ millions)
CANAdA EBIT
($ millions)
3,000
2,500
2,000
1,563
1,500
1,456
2,613
2,050
1,000
500
0
18
2003 2004 2005 2006
CANAdA CUsTOMER sUPPORT
sERVICE REVENUE
($ millions)
286
215
*
1,000
800
906
873
712
600
564
497
400
200
0
2003 2004 2005 2006 2007
300
250
200
150
100
50
0
150
132
121
2003 2004 2005 2006* 2007
*2006 EBIT excludes gains on sale of assets
in product support capabilities in this
region, including shop facilities, field service
trucks, skilled technicians and training
programs.
The outlook for the mining industry
remains very strong, reflected by our
record order backlog. Capital expenditures
for all oil sands projects from 2006 until
2015 are now estimated around $100
billion (1). The fleet of large machines here
is expected to double by 2013 to almost
1,800 units. All 127 797 trucks currently
operated by our oil sands customers
are covered by Finning parts and service
packages.
In addition to the largest haul trucks that
are delivered to the oil sands producers,
there is also very strong demand for
support equipment such as large graders
and tractors from a growing number of
oil sands contractors. These customers
rely heavily on our service infrastructure
and expertise in the region, presenting
additional opportunities for growing our
customer support services business.
Robust growth in the mining sector also
drives increased volumes at the OEM
Remanufacturing facility which provides
“like new” components supported by
full warranty to our oil sands and other
mining customers. OEM’s volumes climbed
in 2007 supported by rising demand
for component remanufacturing. The
increasing fleets of the largest machines
such as 797 trucks will continue to drive
engine and power train component
remanufacturing at OEM.
The B.C. mining industry also continues
to benefit from sustained demand for
minerals and favourable public policy
supporting mine expansions, increased
exploration and new project development.
2007 mineral exploration expenditures
rose 57% over last year to a record
high of nearly $416 million (2). There are
currently 10 coal, 11 metal and 36 major
industrial mineral quarries and mines
operating in British Columbia(2). With 23
new mine development proposals and 472
exploration projects (2), the resurgence
of the mining industry in B.C. represents
a significant equipment sale and product
support opportunity for Finning. The
introduction of five field test Caterpillar
electric-drive trucks to the coal mining
operations in southeastern B.C. in 2008
will pave the way for Finning to grow
market share in this active mining region.
CONSTRUCTION
Infrastructure spending and non-
residential construction are key drivers of
construction growth in Western Canada.
The value of all major construction
projects, including proposed developments
is estimated at approximately $100 billion(3)
in B.C. and $65 billion(3) in Alberta. Most of
these projects are expansions and upgrades
of transportation networks, ports and
airports as well as construction of 2010
Olympic venues. Finning responded well to
the rising demand for large construction
equipment and associated parts and
services. New construction equipment
sales grew by over 50% in 2007, and our
construction customers now account for
one third of all new equipment deliveries in
Canada.
Non-residential construction markets are
expected to remain very active driven
by healthy economic growth in both
provinces. The growing Caterpillar fleets
of heavy and core construction equipment
such as scrapers, excavators, tractors and
compactors continue to generate further
parts and service opportunities for Finning.
PIPELINES
Finning is a 25% partner in PipeLine
Machinery International, Caterpillar’s global
pipeline equipment dealer. The global
demand for pipeline capacity continues
to grow, doubling PLM’s 2007 revenues
from 2006 levels. PLM was also named
the exclusive supplier for the China
Petroleum Pipeline Bureau, with the first
75 new pipe-layers delivered in 2007. The
oil pipeline system in Western Canada is
running near capacity due to the rise in oil
sands production; and a number of large
pipeline projects in Alberta are under
construction or scheduled to start in the
next few years. In addition to our share in
the global pipeline equipment sales, Finning
will capture all of the parts and service
business generated by the growing fleet of
Caterpillar pipelayers in Western Canada.
CONvENTIONAL OIL ANd GAS
Lower natural gas prices, the stronger
Canadian dollar and high local contractor
costs challenged our customers in the
conventional oil & gas industry in Western
Canada. Exploration activity slowed in
2007, and although the number of well
completions dropped 13% from last year
to just over 19,000 (4), it still remains
at comparatively attractive levels. The
decreased activity in the petroleum
industry is expected to continue into 2008.
Modest demand for mobile equipment
in the natural gas exploration and
development sector is partly offset by the
continued strong demand for engines from
the gas compression packaging industry for
export sales. Conventional oil exploration
and production in Western Canada is also
expected to be modestly weaker in 2008.
FORESTRY
2007 was a very challenging year for the
softwood lumber industry in B.C. and
Alberta as lumber prices declined primarily
due to the slowdown in the U.s. residential
construction market, compounded by
the strong Canadian dollar. Historically,
forestry has been an important market
for Finning. Today forestry accounts for
approximately 6% of new equipment
deliveries in Canada as the mining and
construction sectors have grown.
Finning remains committed to the forestry
sector in partnership with Caterpillar,
which continues to expand the forestry
product line. This industry is expected to
continue to be challenged in 2008, and
Finning (Canada) will work closely with
our forestry customers to provide support
where possible. Finning’s ability to continue
to provide reliable parts and service will
position the Company to deliver new
equipment when this market recovers.
ThE CAT RENTAL STORE
Finning (Canada) added five locations to
The Cat Rental store (TCRs) chain in 2007
for a total of 34 branches. General rental
markets in B.C. and Alberta are expected
to remain very active in 2008.
(1) Alberta Energy and Utilities Board. (2) B.C. Ministry of Energy, Mines and Petroleum Resources.
(3) B.C. and Alberta Governments, Major Projects Inventory. (4) The Canadian Association of Oilwell drilling Contractors
2007 FINNING INTERNATIONAL INC. 19
south america
dELIVERING
REsULTs
Finning service depot, Coquimbo, Chile
2020
south america
vERY STRONG PERFORmANCE
Finning south America (FINsA) achieved
excellent results in 2007 with very strong
revenue growth of 31% to a record $1.3
billion and an increase in EBIT of 17% to
$127 million. In local currency (Usd),
revenues were up 39% while EBIT grew by
23% over 2006.
New equipment sales rose 49% from
2006, overshadowing a strong 17% growth
in customer support services revenue.
The significant rise in new equipment
deliveries reflected very strong demand
from our mining, construction and forestry
customers, and was partly due to 2006
being a light year in comparison for new
mining equipment sales.
The healthy growth in customer support
services revenue, which was up 24%
in local currency, is a result of the
growing Caterpillar fleet in this territory,
particularly large mining equipment with
significant parts and service requirements.
Power systems revenue climbed
substantially driven by growing demand for
energy, particularly in Argentina.
The revenue mix shift towards new
equipment and engine sales in combination
with inflation driven labour cost increases
reduced FINsA’s EBIT margin to 9.6% in
2007 compared to 10.8% in 2006. The
revenue mix in 2008 is expected to shift
back somewhat to customer support
services as new equipment deliveries to
our mining customers are projected to be
lower. Along with cost savings initiatives
and a focus on better productivity, this
is expected to improve profitability as
measured by EBIT margin in 2008.
In 2007, our south American operations
faced inflationary pressure on labour costs
in both Chile and Argentina where labour
costs rose approximately 8% and 20%
respectively. Our large customers in the
region are also operating in the same rapid
growth, high inflation environment, and
most have accepted some form of service
labour price adjustments to reflect the
increased costs.
2007 was also a peak year for investments
in recruitment and training of skilled
technicians to support future demand for
service. Of the net 770 new employees
who joined FINsA’s team in 2007, nearly
60% were mechanics. In 2007 FINsA’s
employees attended on average six days
of training to improve their technical skills
and increase certification levels. FINsA also
implemented differential service pricing
in some areas to reflect higher skill levels
required for certain jobs.
Along with developing great people and
building an excellent safety record, Finning
south America continues to invest in
service infrastructure. Eight new branches
opened in the region in 2007 to meet
growing demand for equipment, parts and
service from our general machinery and
power systems customers, and six more
are expected to open in 2008 to achieve
better territorial coverage and increase
service capacity.
FOCUS ON CUSTOmER SUPPORT
Over the last five years our south
American operations achieved 14%
average annual growth in parts and
service revenues. Our reputation for
delivering the best service solutions to the
mining industry relies on the outstanding
technical expertise of our mechanics, and
a well developed service infrastructure
that includes rebuild capabilities for
large equipment. Our goal is to maintain
our very good market share of heavy
equipment parts and service in the mining
sector.
Given the rapid growth of the non-
mining business in south America such as
construction, forestry and power systems,
our focus is on capturing parts and
service opportunities from the expanding
population of Caterpillar equipment and
building our market share in these non-
mining sectors. Improved service coverage,
particularly in Argentina, and a wider
range of technical competencies acquired
by our service teams are key to delivering
customized equipment solutions to our
general machinery customers.
STRONG GROWTh TO CONTINUE
Attractive metal prices are expected to
continue to support growth in the mining
business in south America. Chile is the
world’s largest and lowest-cost copper
producing region with many long-life mines
in operation. Argentina’s mining industry is
fairly young with only four major mines in
operation but with considerable potential
for future mine development.
demand from our customers in non-mining
sectors, such as general construction,
electric power generation and forestry
is also expected to remain very strong
driven by solid economic growth in both
Chile and Argentina. The buoyant activity
in the region has been accompanied by
inflationary pressure which Finning is
addressing via cost management and price
realization strategies.
FINsA’s customer support revenue
is projected to continue to grow at
attractive rates in 2008. An overall
revenue mix shift to higher margin parts
and service, combined with operating
efficiencies implemented throughout the
organization, is expected to improve EBIT
margin performance in 2008. FINsA’s
main initiative for 2008 is to continue to
The growing mining and
construction equipment fleets
provide a solid base for our
expanding customer support
business in south America.
Our well-developed service
infrastructure positions Finning
as a leader in delivering service
solutions to heavy equipment
customers.
Parts distribution Centre, santiago, Chile
2007 FINNING INTERNATIONAL INC. 21
south america continued
daniel Hernandez
vice president,
construction and
forestry, argentina
and uruguay
absent from photograph:
Chris Thomas
vice president, finance
juan Antonio Winter
vice president,
mining
sebastian Guirdi
vice president,
human resources
and corporate strategy
sergio saavedra
vice president,
power systems
Kevin Wenger
vice president,
product support
Marcello Marchese
vice president, product support and operations
sOUTH AMERICA REVENUE
($ millions)
sOUTH AMERICA EBIT
($ millions)
1,326
1,007 1,010
870
1,400
1,200
1,000
800
600
562
400
200
0
2222
2003 2004 2005 2006 2007
140
120
100
80
60
40
20
0
127
109
93
83
60
2003 2004 2005 2006 2007
sOUTH AMERICA CUsTOMER
sUPPORT sERVICE REVENUE
($ millions)
600
550
472
400
400
382
327
200
0
2003 2004 2005 2006 2007
south america continued
Las Rejas service Centre, santiago, Chile
Articulated Trucks, La Negra, Chile
service Technician, Las Rejas, santiago Chile
many greenfield projects with significant
potential, particularly in Argentina.
Our main focus remains on capturing
the profitable stream of product support
revenues from expanding equipment fleets
in Chilean and Argentinean mines. Our
south American operations continue to
invest in training people and expanding
service capacity. Customer support
revenues from the mining industry grew by
20% in 2007 and strong growth is expected
in 2008.
CONSTRUCTION ANd FORESTRY
The general machinery business in south
America was exceptionally strong in 2007,
posting record revenue growth of 51% over
2006 and accounting for 33% of FINsA’s
total revenue. Remarkably in 2007, our
new equipment sales to the construction
and forestry sectors outpaced those to the
mining industry. Finning’s market share in
these sectors increased and is expected to
gain more ground in 2008. demand from
the construction industry in the region is
projected to remain very robust driven by
continued investments in infrastructure
and general construction.
Forestry revenues climbed 31% over 2006
driven by the growing forestry sectors
in Argentina and Uruguay. The forestry
business in south America is expected to
stay strong into 2008.
With expanded territorial coverage,
additional facilities and trained people,
Finning has improved its position to
capitalize on the growth in the general
machinery sector in south America.
Our focus is on capturing opportunities
in customer support services on the
growing fleets of construction and forestry
equipment, particularly in Argentina.
capitalize on the market opportunities
for growth, expand leadership capabilities
across the entire organization and focus on
cost management and business efficiency
for improved productivity.
mINING
Approximately 54% of FINsA’s 2007
revenues came from mining customers.
Tremendous growth in this well-
established industry in Chile and emerging
mining in Argentina over the past years
have supported Finning’s continued success
as an equipment and service provider.
Our mining related revenues have grown
an average of 17% annually over the last
three years. In 2007, mining product
support revenues continued to constitute
a higher proportion of the total revenue
compared to new equipment sales, a trend
that is expected to continue in 2008. The
mining equipment population in our south
American territory is currently estimated
at over 1,500 units. About 35% of this fleet
is covered by a Finning service contract,
including six full Maintenance and Repair
Contracts (MARCs) and nine Labour Plus
Parts Contracts (LPPs).
The heavy mining equipment, such as off-
highway trucks and track-type tractors,
have high consumption rates for parts
and service and require comprehensive
maintenance programs to keep them
running 24/7 in rough ground conditions
and often high altitudes. Many global
mining companies operating in this region
rely heavily on Caterpillar equipment and
Finning’s service and rebuild capabilities,
and almost all our mining customers have a
product support contract with Finning.
The outlook for the mining industry in
south America remains very favourable
driven by sustained global demand for
metals, primarily copper and gold, and
comparatively low operating costs. A
large number of mining companies in
our territory have expansion plans for
the next two to five years, and there are
789 Haul Truck, Andacollo Copper Mine, Chile
2007 FINNING INTERNATIONAL INC. 23
united kingdom
sTANdING ON
sOLId GROUNd
Finning service depot, desford, UK
24
united kingdom
RESULTS ImPROvE,
STRATEGY AdvANCES
Operating and financial results from the
Finning UK Group improved again in
2007 driven by good performance at the
dealership from strong sales of large and
core equipment and by a very successful
year at the power systems division.
Revenue increased 14% to $1.4 billion and
EBIT improved by over 12% to $73 million
as business conditions in the U.K. remained
healthy. In local currency, revenues were
up by over 11% and EBIT by almost 10%
reflecting a 2.9% weaker Canadian dollar
relative to the pound sterling in 2007
versus 2006. 2007 revenues were more
heavily weighted to new equipment sales
compared to 2006, decreasing EBIT
margins slightly to 5.2% from 5.3% last year.
Hewden’s results were weaker in 2007
as highly competitive market conditions
persisted and a significant amount of
management’s attention was temporarily
focused away from operations on the
divesture of the Hewden Tools Hire
division and also on the implementation
of a new IT system. With these major
initiatives completed, improved results are
expected in 2008 as management focuses
on realizing the benefits of the new IT
solution in a mainly Caterpillar equipment
rental business.
SALE OF hEWdEN TOOLS - UK
STRATEGIC REPOSITIONING
After an extensive strategic review, a
decision was made to further reduce
Finning’s total investment in the U.K. and
focus on the areas most closely associated
with Finning’s Caterpillar equipment related
strengths.
In 2007, the divestiture of the Hewden
Tools Rental division was completed.
The sale generated net proceeds of $243
million. In addition, Tools Hire depots
with an approximate market value of $60
million will be sold over the next two
years. Of this amount, about $28 million
worth of real estate was sold in the first
quarter of 2008. Hewden is now focused
on construction equipment rentals and
remains the largest supplier of rental
construction equipment in the U.K. The
extensive network of 102 locations places
almost all UK customers within a one hour
drive of any Hewden location. Products
include back-hoe loaders, wheel loaders,
excavators, tele-handlers, access platforms
and cranes. Hewden provides primarily
Caterpillar equipment plus complementary
non-Caterpillar brands to support
customer requirements.
With the completion of the divestitures
of the Hewden Tools division in 2007 and
the Finning UK Materials Handling division
in 2006, Finning has reduced its UK assets
to approximately one third of total assets
from 45% in 2005.
NEW INFORmATION
TEChNOLOGY SUPPORTS
hEWdEN FLEET mANAGEmENT
during 2007, Hewden completed the
implementation of its new information
technology system that, among other
features, is designed to provide
management with comprehensive
information about the utilization and
pricing of the rental fleet. Improved fleet
management is expected to lead to better
financial results as equipment is moved to
regions with higher demand and better
pricing. In addition, the fleet size and
composition will be able to be adjusted
more effectively to reflect the most
popular and profitable models.
GOOd dEALERShIP
PERFORmANCE
The UK equipment industry grew by 24% in
unit sales to 37,500 machines in 2007 from
30,200 machines in 2006. “Large and Core”
equipment experienced even stronger
growth – up by about 40% to 5,718 units
from 4,091 in the prior year.
Performance at the Finning (UK) dealership
in 2007 was very good. New equipment
sales rose by almost 31% in Canadian
dollars and the backlog remains at healthy
levels, providing good visibility into new
equipment sales in 2008. This strong
performance was driven mainly by large
and core equipment and power systems
sales. demand from mining, quarrying and
construction customers was strong in 2007.
In 2007 Finning completed the largest single
site sole supplier contract to a coal mining
customer for the Ffos-y-Fran coal mining
and land reclamation project in south
Wales. The project is expected to run for
about 17 years. The contract included the
sale of 46 Caterpillar machines to Miller
Argent and a product support agreement
for a total value of approximately £55
million. The capabilities of Caterpillar
equipment combined with Finning’s focus
on product support play a key role in
securing long-term projects like this.
during 2007, sales of smaller general
construction equipment advanced as well,
as our UK dealership was building up the
sales channel infrastructure for this line of
business. This included the construction of
a new equipment preparation facility for
smaller general construction equipment,
immediately adjacent to the Caterpillar
assembly plant at desford in the U.K.
KEY FOCUS AREAS FOR 2008
Invest in people: In 2007 Finning (UK)
continued to invest in its people through
training and development with an emphasis
on cultivating a performance driven culture
with high employee engagement. Finning
(UK) became the first Caterpillar dealer in
Europe to employ Cat’s Employee Opinion
survey to measure engagement levels.
A key objective is to build
a top tier offering that
positions Finning as number
one in the U.K. for service.
The Caterpillar “360 degree
solutions” program will
support the dealership in
providing customers with full
equipment solutions including
product support.
Finning Branch, Cannock, UK
2007 FINNING INTERNATIONAL INC. 25
united kingdom continued
left to right
Neil dickinson
director,
heavy construction
absent from photograph
Neal Walker
general manager,
general construction
david Oates
director power systems
front sitting
doug sprout
finance director,
finning group, uk
Kevin Parkes
group general manager,
used equipment
Colin Hotchkiss
director,
product support, finning group, uk
Brian sherlock
director,
hewden
jim Gray
head of safety, health,
environment & quality
finning group, uk
Mike davies
hr director,
finning group, uk
UK REVENUE FROM
CONTINUING OPERATIONs (1)
($ millions)
UK CONsTRUCTION
TOTAL OUTPUT (2)
(£ millions at 2000 prices)
1,500
1,250
1,000
750
500
250
0
1,271
1,230
1,180
1,131
2003 2004 2005 2006
80,000
75,000
70,000
65,000
60,000
2003 2004 2005 2006 2007
26
(1) Revenues exclude discontinued operations
(2) U.K. department of Trade & Industry
In addition, training also focused on
advancing technical capabilities. Finning
(UK) was the first dealer in Europe to
begin a joint mechanics training program
with Caterpillar known as the ‘ThinkBIG’
program, which is based on similar
programs employed by Finning in Canada
and south America. 123 apprentices are
currently enrolled in the UK’s ‘ThinkBIG’
training.
Grow product support: A key objective
is to continue to build a top tier offering
that positions Finning as number one in
the U.K. for service. Customer support
revenues represented 18% of total
UK revenues in 2007, and demand for
Caterpillar parts was up 10% as a result of
increased focus on growing the parts and
service business.
The key revision to our customer service
approach in the U.K. was a return to
a regional service model which moved
Finning’s customer service representatives
back into the field and closer to the
customer. The Caterpillar “360 degree
solutions” program introduced in the U.K.
during 2007 is designed to support the
dealership in providing customers with full
equipment solutions including financing and
product support agreements. In addition,
workshop capacity was increased, with
plans for further expansions underway,
particularly in the southeast of England
where a large proportion of the UK’s
infrastructure development is currently
occurring.
Exploit successful heavy
Construction and Power Systems
opportunities:
2007 results showed good performance
from this sector and 2008 is expected to
reflect additional growth. Coal mining is
expected to remain busy. Also, further
efforts will be directed to grow market
share in the heavy construction sector, and
growth opportunities are being targeted
in the waste and recycling sector. The
consolidation of quarrying customers also
presents opportunities.
The power systems group had a very
strong 2007 and another successful year is
expected in 2008. Opportunities include
marine and electric power generation
markets as well as stand-by power
installations where Finning provides
comprehensive solutions including project
management, engineering, design, build and
installation, as well as multi-year support
agreements that offer the customer a
complete integrated solution.
Improve hewden’s performance:
With the completion of the Tools
Hire division divestiture and the new
information technology implementation,
management’s focus at Hewden in 2008 will
be on significant operational improvements.
Hewden now has a clear “Plant Plus”
focus on rental of small to medium sized
construction equipment. The Caterpillar
brand is core to the offering, and Hewden
will be focused on utilization and yield,
with an industry leading commitment to
employee health and safety.
Continue to develop the General
Construction sales channel: General
Construction serves customers that
require smaller Caterpillar equipment.
In 2007, significant progress was made
in establishing a separate lower cost
distribution channel for this equipment.
In 2008, the sales team will be expanded
to full national coverage. The group will
focus on volume sales – large unit deals,
will pilot parts distribution strategies using
co-locations with Hewden, and improve
market offerings with multiple price points
to increase the velocity of operations.
manage costs and drive synergies:
Planning for consolidation of back
office functions occurred in 2007 and
implementation began in early 2008. The
closing of the Tannochside offices near
Glasgow is underway. This consolidation
will deliver back office integration, promote
efficiencies and reduce costs. savings in
excess of £1 million are expected in 2008
and further savings are expected in 2009
and beyond, once the back office is fully
integrated.
OUTLOOK FOR 2008
The outlook for 2008 is positive as market
conditions remain healthy in the U.K.
While GdP growth is expected to slow
from 2007 levels, infrastructure output
is projected to grow following several
years of modest decline. spending on
infrastructure and venues for the 2012
Olympics in London is beginning to emerge
in 2008. The latest estimated costs for
construction for the Olympics is £4.8
billion. discussions are underway with all
major Olympic contractors. Planning work
has also begun on a major east to west
London rail route known as the CrossRail
project, the largest engineering project
ever in London with a budget, including
contingency, of approximately £16 billion.
The project, when completed in 2017, will
allow trains to travel at 60 mph across
central London (21 km of the route will
be underground). The project comprises
track construction, 11 major station
reconstructions, and significant upgrades
to 17 other stations. The project will also
include improved road infrastructure at
key locations. Approvals are anticipated in
2008 with development to start in 2009
and construction to begin in 2010. Finning
expects that these major projects will add
significant demand for equipment supply,
product support and rental opportunities.
Finning service depot, Cannock, UK
Finning Parts Warehouse, Cannock, UK
Finning service depot, desford, UK
2007 FINNING INTERNATIONAL INC. 27
(2) U.K. department of Trade & Industry
power systems
sTRONG
dEMANd
Finning Power systems Branch, Edmonton, Alberta
28
power systems
“POWER” SOLUTIONS ACROSS
FINNING TERRITORIES
Finning Power systems supplies engines as
well as parts and service to a diverse range
of customers.
Power systems delivered a very good
performance in 2007. Revenues grew by
18% over 2006 driven mainly by strong
markets in the United Kingdom and
south America, and by increased demand
for parts and service in all regions. EBIT
rose by 31% from 2006 with higher-
margin customer support revenues up
13% reflecting a company-wide strategic
focus on capturing product support
opportunities.
Market conditions for engine applications
in the United Kingdom, Chile and
Argentina remain very strong, particularly
for electric power generation (EPG). In
Western Canada, with softness in natural
gas drilling, market conditions have been
challenging.
CANAdA
Western Canada provides a diverse
range of growth opportunities for our
power systems business from petroleum
and electric power customers to marine
applications. About 46% of our 2007 global
power systems revenue was generated
in Canada where we experienced only
modest growth due to the slowdown in
natural gas drilling activity. Continued
weakness in the natural gas industry is
expected in 2008.
In 2007, projects related to electric prime
power generation in remote locations and
power rental opportunities continued to
provide growth for this business. Product
support sales grew in all customer groups,
with notable increases in parts and
service volumes associated with the gas
compression business notwithstanding the
slowdown in gas drilling.
Equipment management contracts and
product support continue to represent
significant growth opportunities for Power
systems in Western Canada and Finning
(Canada) continues to focus on providing
customer support solutions to end-users
including gas compression manufacturers,
producers of electric power and the on-
highway truck dealers.
Oil drilling activity in Alberta is expected
to remain at good levels driven by
continued high oil prices. Gas drilling in
northeastern B.C. is also anticipated to
remain active in 2008.
SOUTh AmERICA
2007 was a very successful year for
our power systems division in south
America. These operations contributed
approximately 20% of the total power
systems revenue. Finning has distribution
rights for three product lines in this region:
Caterpillar, Perkins and FG Wilson, and all
are operating at record levels given strong
demand for engines, parts and support
services.
demand for EPG equipment in Chile
and Argentina remains strong from
continued energy shortages caused by
strong economic growth and limited base
electricity supply. The significant electricity
shortage is expected to continue through
2008 and beyond supporting very strong
demand for diesel-fired EPG applications
for stand-by power and peak-shaving during
periods of high energy consumption.
during 2007 Finning supplied one customer
in Chile with 60 FG Wilson generator units
powered by Perkins engines. The generator
packages were linked together, in one
location, to construct a 96 mega-watt peak
power generating facility south of santiago.
Finning supplied the engine and generator
packages and provides maintenance under
a customer service agreement. Other
projects for peak power supply are under
development in Chile and Argentina.
UNITEd KINGdOm
Our Power systems division in the U.K.
continued to deliver very strong results
in 2007, capturing market opportunities
in EPG, industrial equipment, and off-
shore oil & gas platform applications.
2007 was also a good year for supplying
marine engines to the UK’s pleasure and
commercial craft manufacturers.
The UK power systems operations
contributed approximately 34% of total
power systems revenue in 2007. In
the U.K., Finning’s extensive electrical
engineering expertise and technical
capabilities allow us to deliver tailored
customer solutions to large projects and
to secure multi-year customer support
agreements. Finning’s services include
design, procurement, installation and
maintenance of stand-by power systems
for sophisticated applications including
data centres and hospitals. In addition,
government policies in support of clean,
renewable energy encourage development
of additional alternative fuel EPG projects
using methane gas from landfill sites or
former coal mines.
STRONG OUTLOOK
The power systems new equipment
backlog remains at a high level reflecting
continued strong demand for engines for
conventional EPG, natural gas compression,
industrial and marine applications. The
backlog supports an excellent outlook for
our power systems business in all regions.
We continue to focus on developing
engineering capabilities and delivering
innovative solutions that set Finning apart
when it comes to designing, sourcing,
installing and maintaining sophisticated
power projects to demanding customer
specifications.
POWER sYsTEMs REVENUE*
($ millions)
1,000
800
600
400
200
0
821
694
610
479
456
2003 2004 2005 2006 2007
* Power systems results are reported within other Finning divisions
2007 FINNING INTERNATIONAL INC. 29
FINANCIAL REPORT
Management’s discussion & Analysis
Management’s Report to the shareholders
Auditors’ Report
Consolidated Financial statements
Ten Year Financial summary
31
54
54
55
86
3030
ManageMent’s Discussion & analysis
this discussion and analysis of Finning international inc. (Finning or the company) should be read in conjunction with the consolidated financial
statements and accompanying notes. the results reported herein have been prepared in accordance with canadian generally accepted accounting
principles (gaaP) and are presented in canadian dollars unless otherwise stated.
Results oF 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 classified as discontinued. Results from operations that qualify as discontinued operations have
been reclassified 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 2007
Q4 2006
Q4 2007
Q4 2006
(% oF Revenue)
Revenue
gross profit
selling, general & administrative expenses
other income (expenses)
earnings from continuing operations before
interest and income taxes (eBit)(1)
Finance costs
Provision for income taxes
net income from continuing operations
loss from discontinued operations, net of tax
net income
$
$
1,459.5
408.9
(297.5)
0.8
112.2
(18.9)
(22.8)
70.5
–
70.5
$
$
1,365.1
371.4
(285.7)
(1.8)
83.9
(16.4)
(14.4)
53.1
(0.4)
52.7
28.0%
(20.4)%
0.1%
7.7%
(1.3)%
(1.6)%
4.8%
–
4.8%
27.2%
(20.9)%
(0.1)%
6.2%
(1.2)%
(1.1)%
3.9%
–
3.9%
(1) eBit as defined above and referred to throughout this Management’s Discussion and analysis (MD&a) does not have a standardized meaning under generally
accepted accounting principles. For a reconciliation of this amount to net income from continuing operations, see the heading “Description of non-gaaP
Measure” in this MD&a.
Fourth quarter consolidated revenues from continuing operations of $1.5 billion increased 6.9% from the fourth quarter of 2006. in spite of
the continued downward pressure from the significant strength of the canadian dollar relative to the u.s. dollar, Finning achieved record fourth
quarter revenues driven primarily by strong equipment sales. continued growth in resource-based industries and the construction sector led
to sustained equipment demand in the dealership operations in canada, south america, and the u.K.
REVENUE FROM CONTINUING OPERATIONS
($ 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
0
5
7
7
3
7
600
400
200
0
8
4
3
1
6
7 3
2
3
1
0
3
CANADA
SOUTH
AMERICA
UK GROUP
2006
2007
700
600
500
400
300
200
100
0
0
1
6
8
9
4
0
2
4
4
9
3
8
8
1
4
8
1
3
4
1
3
3
1
1
2
1
7
1
1
NEW
EQUIPMENT
POWER &
ENERGY
USED
EQUIPMENT
EQUIPMENT
RENTAL
CSS
OTHER
9 7
2006
2007
9
6
70
60
6
5
50
40
30
20
10
0
9
2
8
2
6
1
6
1
CANADA
SOUTH
AMERICA
UK GROUP
2006
2007
2007 finning international inc. 31
ManageMent’s Discussion & analysis
Revenue was modestly higher in the fourth quarter of 2007 in the company’s canadian operations, reflecting the continued activity driven
by strong market demand and high prices in key commodities. this was partially offset by the impact of the strong canadian dollar on revenues
and approximately $25 million lower revenues from the distribution arrangement with shell canada Products as a result of the termination
of this arrangement in the fourth quarter of 2007. Revenue from the company’s operations in south america increased 15.6% in canadian
dollars compared with the fourth quarter of 2006 with strong new equipment sales combined with an increase in customer support services.
the company’s operations in the u.K. also experienced a 10.4% increase in revenue in canadian dollars compared with the fourth quarter
of 2006 primarily due to a 46.0% increase in new equipment and power system sales. this growth was tempered by lower revenues from the
uK rental business (Hewden), where management’s time continued to be diverted somewhat by the implementation of a new information
technology system.
Finning’s business is geographically diversified and the company conducts business in multiple currencies, the most significant of which are the
canadian dollar, the u.s. dollar, and the u.K. pound sterling. the most significant foreign exchange impact on the company’s revenues and net
income is the translation of foreign currency based results into canadian dollars. compared to the prior year, foreign exchange had a negative
impact on consolidated revenues in the fourth quarter of 2007 of approximately $110 million mainly due to a stronger canadian dollar in the
quarter relative to the u.s. dollar (13.8% stronger than 2006), and the u.K. pound sterling (8.1% stronger than 2006). at the net income level,
the foreign exchange rate movement quarter over quarter had a negative impact of approximately $0.08 per share.
in addition to the above impact as a result of translating foreign currency based operating results, the company experiences foreign currency
translation gains or losses as a result of consolidating the financial statements of self-sustaining foreign operations. these unrealized foreign
currency translation gains or losses are recorded in the accumulated other comprehensive income/loss account on Finning’s consolidated
balance sheets. currency translation adjustments arise as a result of fluctuations in foreign currency exchange rates at the period end. the
unrealized currency translation loss of $28.6 million recorded in the fourth quarter of 2007 mainly resulted from the 3.5% stronger spot
canadian dollar against the u.K. pound sterling, from september 30, 2007 to December 31, 2007. this was partially offset by $5.7 million of
unrealized foreign exchange gains on net investment hedges.
excluding the impact of foreign exchange when translating results, revenues for the fourth quarter of 2007 in local currency increased by
34.1% in the company’s south american operations and increased by 20.0% in the uK group when compared to last year’s fourth quarter.
From a line of business perspective, strong demand continued in the fourth quarter of 2007 for new equipment and power and energy systems.
in the fourth quarter of 2007, the company’s canadian operations completed the termination of its distribution arrangement with shell canada
Products, resulting in approximately $25 million lower revenues from customer support services compared with the prior year’s quarter.
used equipment revenues are slightly down and typically vary depending on product availability, customer buying preferences, and exchange
rate considerations. in addition, with the stronger canadian dollar, many customers in canada are currently opting to buy new rather than
used equipment.
Revenue mix continued to be more heavily weighted to new equipment sales as a result of extremely strong demand for equipment. new equipment
revenues made up 41.8% of total revenues in the fourth quarter of 2007, up from 36.5% of total revenues in the same period last year. Revenues
from the canadian operations continue to grow, most notably in new equipment and equipment rental. the south american and uK operations
recorded a significant increase in new equipment and power systems revenues as demand in the construction sectors continued to be strong.
Finning’s global order book or backlog (the retail value of new equipment units ordered by customers for future deliveries) continues to be
very strong at $1.7 billion at the end of the fourth quarter of 2007, and is up 10% from December 2006 levels, driven primarily by the strong
canadian mining market.
the company is dependent on caterpillar inc. (caterpillar) for the timely supply of parts and equipment to fulfill its deliveries and meet the
requirements of the company’s service maintenance contracts. selected models of large equipment, large engines, and some parts continue to be
under managed distribution. Finning continues to work closely with caterpillar and customers to ensure that demand for parts and equipment
can be met.
gross profit of $408.9 million in the fourth quarter increased 10.1% over the same period last year. gross profit as a percentage of revenue
for the quarter was 28.0%, compared with 27.2% for the fourth quarter in 2006. the canadian operations earned a higher gross profit margin
due to price realization from new equipment and customer support services. the gross profit margins for the south american operations
and the uK group were lower when compared to the prior year’s quarter due to a higher proportion of revenues from new equipment sales,
which typically have lower margins.
32
ManageMent’s Discussion & analysis
earnings from continuing operations before interest and income taxes (eBit) of $112.2 million in the fourth quarter of 2007 increased 33.7%
year over year. eBit in the fourth quarter of 2007 reflected the strong operating performance in canada. the benefit of lower long-term
incentive plan (ltiP) charges offset the negative impact of a stronger canadian dollar in 2007 compared to 2006. the fourth quarter 2007 results
also include higher variable operating costs to support the increased level of sales activity and higher employee related costs. Headcount at
December 2007 increased by over 1,400 employees from the December 2006 level in the company’s canadian and south american operations.
the ltiP charges in the fourth quarter of 2007 were lower by $25.9 million compared with the same period in 2006, primarily due to the lower
mark-to-market impact on the valuation of certain stock-based compensation plans as a result of a decrease in the company’s share price in the
fourth quarter of 2007 as opposed to an increase in 2006. the ltiP charges in the comparable quarter in 2006 were also higher as a result of the
vesting of three tranches of deferred share units as a result of the increase in the company’s share price during the quarter and achievement of
specified share price levels. at the net income level, the movement in ltiP charges quarter over quarter had a positive impact of approximately
$0.10 per share.
the company’s eBit margin (eBit divided by revenues) was 7.7% in the fourth quarter of 2007, up from 6.2% earned in the fourth quarter of
2006. the higher eBit margin in 2007 was due to the significant increased contribution from the company’s canadian operations, partially offset
by higher costs incurred to meet customer demand, cost pressures in south america, and lower returns from Hewden.
consolidated net income from continuing operations of $70.5 million was 32.8% higher in the fourth quarter of 2007 compared to the same
period in 2006, reflecting the solid fourth quarter activity noted above.
Basic earnings Per share (ePs) from continuing operations for the quarter was $0.40 compared with $0.30 in the same period last year, an
increase of 33.3%.
Cash Flow
cash flow after changes in working capital for the fourth quarter was $221.3 million, compared with cash flow of $79.0 million generated in
the same period last year. Working capital demands have stabilized in the fourth quarter of 2007 and, combined with initiatives to improve cash
cycle times, have resulted in a significantly improved cash flow from the third quarter 2007 levels. as disclosed in prior quarters, a significant
improvement in cash flow was anticipated due to the scheduled delivery and sale of inventories in the second half of the year.
the company’s net investment in rental assets of $14.2 million in the fourth quarter of 2007, which was $50.0 million lower than the same
period in 2006, was primarily as a result of a higher level of rental disposals.
as a result of these items, cash flow from operating activities was $207.3 million in the fourth quarter of 2007 compared to $11.7 million in
the fourth quarter of 2006.
During the fourth quarter of 2007, under a share repurchase program, the company repurchased 2,465,200 common shares at an average price
of $27.31 for an aggregate amount of $67.3 million.
2007 finning international inc. 33
ManageMent’s Discussion & analysis
annual overview
($ Millions)
2007
2006
2007
2006
(% oF Revenue)
Revenue
gross profit
selling, general & administrative expenses
other income
eBit
Finance costs
Provision for income taxes
net income from continuing operations
loss from discontinued operations, net of tax
net income
$
$
5,662.2
1,599.2
(1,144.8)
1.4
455.8
(72.8)
(102.9)
280.1
(2.0)
278.1
$
$
4,853.2
1,367.5
(1,003.8)
10.0
373.7
(69.8)
(67.7)
236.2
(32.1)
204.1
28.2%
(20.2)%
–
8.0%
(1.3)%
(1.8)%
4.9%
–
4.9%
28.2%
(20.7)%
0.2%
7.7%
(1.4)%
(1.4)%
4.9%
(0.7)%
4.2%
For the fifth consecutive year, revenues reached record levels and were up in all of the company’s operations. annual revenues from continuing
operations of $5.7 billion increased 16.7%, year over year, as continued strong growth in resource-based industries and the construction
sector continue to drive demand in canada and south america. Revenue from the uK group increased 13.8% over the prior year, reflecting
improvement in most lines of business but primarily in new equipment sales.
on a consolidated basis, all lines of business increased in 2007 over 2006. new equipment sales continued to dominate revenue growth as a
result of extremely strong overall demand for equipment.
Foreign exchange translation had a negative impact of approximately $100 million on revenues due to the 5.2% stronger canadian dollar in 2007
relative to the u.s. dollar, partially offset by a 2.9% weaker canadian dollar relative to the u.K. pound sterling, year over year. in local currency, the
company’s south american operations contributed revenues 39.3% higher than in 2006, while revenues generated by the uK group operations
were 11.2% above the 2006 level.
gross profit of $1,599.2 million in 2007 increased 16.9% over last year and was comparable to the prior year as a percentage of revenue.
the gross profit margin in the canadian operations for 2007 was higher when compared to the prior year with a lower gross profit margin
contributed by south american and uK operations, primarily due to a revenue mix shift from customer support services to lower margin
new equipment sales.
eBit of $455.8 million increased 22.0% year over year, primarily due to the strong performance of the company’s canadian and south american
operations and a continued improvement in the uK group. eBit for the year ended December 31, 2007 included higher variable operating costs
to support the increased level of activity and higher employee costs related to the increased headcount and aggressive competition for a skilled
workforce, as well as cost pressures in south america. annual ltiP charges in 2007 were comparable with 2006.
the 2006 results included non-recurring pre-tax gains of $18.2 million from the disposal of surplus properties in canada and the sale of
oeM Remanufacturing’s railroad and non-caterpillar engine component remanufacturing business to caterpillar. excluding these pre-tax gains
from 2006 results, the 2007 eBit was 28.2% higher than last year and eBit margin of 8.0% in 2007 was above the prior year of 7.3%.
REVENUE FROM CONTINUING OPERATIONS
($ millions) 12 months ended December 31
6
3
9
,
2
3
1
6
,
2
6
2
3
,
1
0
0
4
,
1
0
3
2
1
,
0
1
0
1
,
CANADA
SOUTH
AMERICA
UK GROUP
2006
2007
3,000
2,500
2,000
1,500
1,000
500
0
34
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
2,500
3
3
2
,
2
2,000
3
3
7
1
,
1
0
7
,
1
3
8
5
1
,
1,500
1,000
500
0
1
8
3 7
9
6
3
0
5
0
2
4
1
0
4
8
1
4
NEW
EQUIPMENT
POWER &
ENERGY
USED
EQUIPMENT
EQUIPMENT
RENTAL
CSS
OTHER
3
2
6
2
2006
2007
300
6
8
2
250
3
3
2
200
150
100
50
0
7
2
9 1
0
1
3
5 7
6
CANADA
SOUTH
AMERICA
UK GROUP
2006
2007
ManageMent’s Discussion & analysis
net income from continuing operations in 2007 increased by 18.6% to $280.1 million, reflecting the solid activity noted on the previous page.
Basic ePs from continuing operations for the year ended December 31, 2007 was $1.57 compared with $1.32 in the same period last year,
up 18.9%. the 2006 results included $0.09 per share of non-recurring gains on the sale of surplus properties and a portion of the oeM
remanufacturing business in canada, partially offset by incremental finance costs of approximately $0.04 per share for the early repayment of
Finning’s previously issued eurobond notes in the third quarter of 2006. adjusting the prior year results for the gains on dispositions and the
incremental finance costs noted above, basic ePs would have been $1.27 for the year ended December 31, 2006, compared to $1.57 in 2007,
an improvement of 23.6%.
Discontinued operations
on July 31, 2007, the company sold its u.K. tool Hire Division for cash proceeds of $242.9 million (approximately £112 million), net of costs.
the gross sale price, net of taxes and transaction costs, was approximately equal to the net book value of the net tangible assets and goodwill
associated with the tools rental business, and resulted in an after-tax gain on disposal of $0.1 million.
Restructuring and other costs associated with the disposition of the tool Hire Division of $2.0 million after tax were recorded in the second
and third quarters of 2007.
on september 29, 2006, the u.K. Materials Handling Division was sold for cash proceeds of $170.6 million (£81.7 million), net of costs, which
resulted in an after-tax loss on disposal of $32.7 million (approximately £15.5 million).
these divisions are classified as discontinued operations within the consolidated income statements for all periods presented prior to
each disposition.
net income after discontinued operations for the year ended December 31, 2007 was $278.1 million compared with $204.1 million in 2006.
Basic ePs after discontinued operations was $1.56 in 2007 compared with $1.14 in 2006 ($1.09 after adjusting for non-recurring gains and
incremental finance costs noted previously).
Cash Flow after Changes in working Capital
cash flow after changes in working capital for the year ended December 31, 2007 was $404.4 million, compared with cash flow of $460.2 million
generated in 2006. the company’s operations experienced a significant increase in working capital, particularly in the first half of 2007, as a
result of the timing of equipment and parts deliveries in relation to strong customer demand requirements in 2007. throughout all operations,
management continues to focus on improving cash cycle times and operating efficiencies.
the company made a net investment in rental assets of $474.6 million in 2007, which was $131.0 million higher than 2006, and up in all
operations to support increased demand for all rental lines. Rental additions were also higher in the Finning uK group due to the deferred
delivery of rental assets at Hewden into 2007 from the prior year.
as a result of these items, cash flow used by operating activities was $56.7 million in 2007 compared to cash flow provided by operating activities
of $97.2 million in 2006. cash flow in 2007 reflects the growth in assets to meet customer demand.
For the year ended December 31, 2007, under a share repurchase program, the company repurchased 3,691,400 common shares at an average
price of $27.82 for an aggregate amount of $102.7 million.
2007 finning international inc. 35
ManageMent’s Discussion & analysis
results by Business Segment
the company and its subsidiaries operate primarily in one principal business, that being the selling, servicing, and renting of heavy equipment
and related products in various markets worldwide as noted below.
Finning’s operating units are as follows:
•
•
•
•
Canadian operations: British columbia, alberta, the yukon territory, the northwest territories, and a portion of nunavut.
South American operations: chile, argentina, uruguay, and Bolivia.
UK Group operations: england, scotland, Wales, Falkland islands, and the channel islands.
Other: corporate head office.
the table below provides details of revenue by operations and lines of business for continuing operations. comparative periods have been
reclassified to conform to the 2007 presentation.
For year ended December 31, 2007
($ Millions)
new mobile equipment
new power & energy systems
used equipment
equipment rental
customer support services
other
total
Revenue percentage by operations
For year ended December 31, 2006
($ Millions)
new mobile equipment
new power & energy systems
used equipment
equipment rental
customer support services
other
total
Revenue percentage by operations
canada
south america
uK group
consolidated
$ 1,253.2
194.9
269.3
290.1
905.8
22.9
$ 2,936.2
51.9%
$
574.4
108.7
42.8
46.6
550.3
2.8
$ 1,325.6
23.4%
$
405.9
199.4
105.5
444.5
245.1
–
$ 1,400.4
24.7%
$ 2,233.5
503.0
417.6
781.2
1,701.2
25.7
$ 5,662.2
100.0%
canada
south america
uK group
consolidated
$ 1,033.1
196.8
248.3
240.4
873.4
20.6
$ 2,612.6
53.8%
$
389.5
69.8
38.7
38.1
471.7
2.1
$ 1,009.9
20.8%
$
310.2
153.3
114.1
414.7
238.4
–
$ 1,230.7
25.4%
$
$
1,732.8
419.9
401.1
693.2
1,583.5
22.7
4,853.2
100.0%
Revenue
percentage
39.4%
8.9%
7.4%
13.8%
30.0%
0.5%
100.0%
Revenue
percentage
35.7%
8.7%
8.2%
14.3%
32.6%
0.5%
100.0%
the table below provides selected income statement information by business segment for continuing operations:
For year ended December 31, 2007
($ Millions)
Revenue from external sources
operating costs
Depreciation and amortization
other income (expenses)
earnings before interest and taxes
earnings before interest and taxes
– percentage of revenue
– percentage by operations
For year ended December 31, 2006
($ Millions)
Revenue from external sources
operating costs
Depreciation and amortization
other income (expenses)
earnings before interest and taxes
earnings before interest and taxes
– percentage of revenue
– percentage by operations
36
canada
south america
uK group
other
consolidated
$ 2,936.2
(2,486.0)
(165.5)
1.6
286.3
$
$ 1,325.6
(1,171.7)
(25.9)
(0.6)
127.4
$
$ 1,400.4
(1,191.3)
(136.5)
0.4
73.0
$
$
$
9.8%
62.8%
9.6%
28.0%
5.2%
16.0%
–
(30.9)
–
–
(30.9)
–
(6.8)%
$ 5,662.2
(4,879.9)
(327.9)
1.4
455.8
$
8.0%
100%
canada
south america
uK group
other
consolidated
$ 2,612.6
(2,251.3)
(145.7)
17.7
233.3
$
$ 1,009.9
(876.3)
(24.7)
–
108.9
$
$ 1,230.7
(1,042.5)
(116.1)
(7.1)
65.0
$
$
$
–
(32.9)
–
(0.6)
(33.5)
$ 4,853.2
(4,203.0)
(286.5)
10.0
373.7
$
8.9%
62.4%
10.8%
29.1%
5.3%
17.4%
–
(8.9)%
7.7%
100%
ManageMent’s Discussion & analysis
Canadian OperatiOns
the canadian operating segment primarily reflects 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 rebuild facility based in edmonton, alberta.
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 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
$
$
2007
2,936.2
(2,486.0)
(165.5)
1.6
286.3
9.8%
62.8%
$
$
2006
2,612.6
(2,251.3)
(145.7)
17.7
233.3
8.9%
62.4%
Record results were again achieved in the company’s canadian operations in 2007. Revenues increased 12.4% over the 2006 levels to
$2,936.2 million. Revenues from most lines of business in canada increased over 2006 levels, most notably in new equipment sales. this occurred
in spite of a 5.2% strengthening of the canadian dollar relative to the u.s. dollar year over year.
the increase in new equipment revenues was attributable to strong market demand and continued growth in the mining, construction, and
government sectors, driven by strong commodity and oil prices and infrastructure spending.
new equipment orders from customers continued to outpace prior year volumes and as a result, the backlog in Finning (canada) reached new
record levels at the end of 2007. Backlog reflects the strong activity in the mining, petroleum, and construction sectors, which are all key sectors
for Finning’s canadian operations.
Higher revenues from customer support services were a result of servicing the steadily increasing population of caterpillar units in the
company’s canadian dealership territory and the accompanying demand for caterpillar parts. the strong customer support services revenue
in 2007 was tempered by the termination of the distribution arrangement with shell canada Products in the fourth quarter of 2007. Rental
revenues increased over 2006 as a result of strong customer demand in this sector and a corresponding increased investment in the rental fleet
and in the cat Rental store operations. Finning (canada) increased the number of the company’s cat Rental stores in operation in Western
canada to 34 at December 31, 2007, compared with 29 stores at December 31, 2006. all rental categories continue to generate strong returns.
CANADA – REVENUE BY LINE OF BUSINESS
($ millions) 12 months ended December 31
1,500
1,250
1,000
750
500
250
0
3
5
2
,
1
3
3
0
1
,
6
0
9
4
7
8
9
6
2
8
4
2
0
9
2
0
4
2
7
9
1
5
9
1
NEW
EQUIPMENT
POWER &
ENERGY
USED
EQUIPMENT
EQUIPMENT
RENTAL
CSS
OTHER
1
2
3
2
2006
2007
2007 finning international inc. 37
ManageMent’s Discussion & analysis
the company’s 25% investment in Pipeline Machinery international (PlM) continues to do very well. PlM has almost doubled its revenue over
the prior year. international activity for PlM has included significant penetration into the china market with over 75 new pipelayers sold over the
past 15 months. PlM is also selling to pipeline customers constructing in Russia as well as ongoing focus on sales in south america, europe, africa,
and india as well as australia and Malaysia.
in canada, higher gross profits were achieved in all lines of business. gross profit as a percentage of revenue increased from 2006 primarily due
to higher margins across most lines of business, reflecting good price realization in a robust market.
selling, general, and administrative (sg&a) costs have increased in absolute dollars but have slightly decreased as a percentage of revenue in 2007
compared with 2006. the higher costs in 2007 support the strong revenue growth and customer demand. in order to support the strong demand
in western canada, headcount for Finning (canada) increased by approximately 460 or 12% compared to December 2006. as a result, higher
salaries, benefit, pension, training, and recruitment costs were incurred in 2007. in addition, standard variable selling costs such as warranty and
freight have increased.
strong revenues and good price realization due to robust market activity and demand translated into a significant contribution by the company’s
canadian operating segment in 2007. eBit of $286.3 million in 2007 was 22.7% higher than the $233.3 million earned in 2006. Results from
2007 include a $2.4 million pre-tax gain on the termination of an alliance agreement between Finning (canada) and shell canada relating to
the distribution of shell’s lubricant and light oil products. the annual 2006 results included a $12.9 million pre-tax gain on the sale of surplus
properties at Finning (canada) and a $5.3 million pre-tax gain recorded on the sale of a portion of oeM’s remanufacturing business. oeM sold
its railroad and non-caterpillar engine component remanufacturing business to caterpillar.
excluding the gains on the 2006 property sales and the oeM sale, the 2006 eBit margin (eBit divided by revenues) would have been 8.2%
compared with 9.8% achieved in 2007.
otHeR DeveloPMents
•
Finning, Finning (Canada), and OEM have been involved in legal proceedings for the past three years with the Alberta division of the
international association of Machinists and aerospace Workers – local lodge 99 (iaM) relating to Finning (canada)’s outsourcing of
component repair and rebuilding services to oeM in 2005. on october 17, 2007, the alberta court of appeal overturned previous decisions
in favour of Finning and oeM made by the court of Queens Bench and by a Reconsideration Panel of the alberta labour Relations Board
(alRB), and reinstated a finding of the original alRB panel. the original alRB panel had found that oeM was a successor employer to Finning
(canada) in respect of the component repair and rebuilding activities being carried out by oeM as a service provider to Finning (canada).
the result of the court of appeal finding is that iaM may now have the right to assert that it is the authorized bargaining agent for some
or all of the non-management employees of oeM. these oeM employees are currently represented by another union, the christian labour
association of canada. the court of appeal did not overturn other aspects of the previous decisions in Finning’s and oeM’s favour and the full
operational and legal implications of the court’s decision are still to be determined by the alRB. at this time, Finning and oeM are confident
that they can manage the operational impacts of this recent court decision. Finning, Finning (canada), and oeM filed for leave to appeal this
decision to the supreme court of canada. the timing of the appeal, if allowed, is not yet known.
In a separate matter, in the second quarter of 2007, Finning (Canada) and the IAM, representing Finning (Canada) hourly employees in Alberta
and the northwest territories, agreed to a two year extension of the existing collective agreement with an enhanced wage settlement. this
extends the agreement to april 2010. all other terms and conditions of the existing collective agreement continue in effect.
In January 2008, Finning (Canada) purchased Collicutt Energy Services Ltd., a leading Canadian oilfield service company. The total value of
this transaction is approximately $145 million, comprising $96 million of cash, 14,365 Finning common shares (valued at $0.4 million) issued
in connection with the acquisition, with the difference being the assumption of debt. the acquisition provides Finning (canada) with the
opportunity to expand its capacity of regional branches to enable them to undertake more customer service work, accelerate throughput of
new equipment prepared for delivery to customers, and increase the ability to undertake machine overhaul and rebuild work. Finning (canada)
plans to relocate the edmonton-based new equipment preparation and used parts work to collicutt’s facilities in Red Deer, alberta. this heavy
equipment centre of excellence will free up capacity and give the company the opportunity to develop a mining/heavy equipment overhaul
rebuild capability in Red Deer.
•
•
38
ManageMent’s Discussion & analysis
sOuth ameriCa
the company’s south american operations include the results of its caterpillar dealerships in chile, argentina, uruguay, and Bolivia.
the table below provides details of the results from the south american operations:
For years ended December 31
($ Millions)
Revenue from external sources
operating costs
Depreciation and amortization
other expenses
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
$
$
2007
1,325.6
(1,171.7)
(25.9)
(0.6)
127.4
9.6%
28.0%
$
$
2006
1,009.9
(876.3)
(24.7)
–
108.9
10.8%
29.1%
annual 2007 revenues of $1,325.6 million were at record levels for Finning’s south american operations in both canadian and local currency
(the u.s. dollar), in spite of the negative impact of a 5.2% strengthening of the canadian dollar relative to the u.s. dollar. in local currency,
Finning south america revenues increased 39.3% reflecting higher revenues in all lines of business, most notably in new equipment sales, power
and energy, and customer support services. continued high prices for copper and gold drive good demand for equipment and support services
in the countries in which Finning south america operates. new equipment order backlog in local currency remains strong and is comparable
to the levels achieved at the end of 2006.
although revenues for customer support services were higher in 2007, new equipment sales continued to dominate revenue growth, making up
43.3% of total revenues (38.6% in 2006). the significant growth in new equipment revenues was attributable to the strong demand in the mining,
construction, and forestry sectors. Power and energy system revenues were also up compared with the prior year, primarily in argentina with a
high demand for energy. Revenue growth in customer support services, up 16.7%, was driven by the higher number of caterpillar units operating
in the field and reflects the increasing number of mining maintenance and repair contracts entered into over the past couple of years.
in both canadian and local currency, gross profit increased in 2007 in absolute terms, but decreased as a percentage of revenue. this occurred
partially due to the revenue mix shift toward new equipment sales which typically have lower margins, offset by stronger margins achieved in
most lines of business, reflecting price realization in a robust market. Margins from customer support services remained relatively level compared
with 2006, in spite of higher customer support costs. in order to meet strong customer service demand and the resultant higher number of
service maintenance contracts, over 900 additional revenue-generating employees and support staff have been hired, representing a 20% increase
over December 2006 levels.
SOUTH AMERICA – REVENUE BY LINE OF BUSINESS
($ millions) 12 months ended December 31
600
500
400
300
200
100
0
4
7
5
9
8
3
0
5
5
2
7
4
9
0
1
0
7
3
9 4
3
7
8 4
3
NEW
EQUIPMENT
POWER &
ENERGY
USED
EQUIPMENT
EQUIPMENT
RENTAL
CSS
OTHER
2 3
2006
2007
2007 finning international inc. 39
ManageMent’s Discussion & analysis
as a result of an increased headcount for associated support staff, sg&a expenses included higher salaries and benefit costs in 2007 compared
with 2006 together with higher recruitment and training costs. Parts availability constraints also increased parts delivery costs. other operating
costs reflect the upward pressure of inflationary increases, especially from argentina which continues to have a comparatively high rate of
inflation. Where possible, price increases have been implemented to offset rising costs. in spite of the increase in sg&a costs to manage growth
in demand, sg&a as a percentage of revenue in 2007 remained comparable with 2006 as a result of numerous initiatives to manage costs.
eBit of the company’s south american operations of $127.4 million for the year ended December 31, 2007, was 17.0% higher than 2006 and
in local currency was 22.9% higher when compared to the prior year, reflecting the strong revenue growth. However, as a result of the sales mix
being oriented to a higher proportion of equipment sales (which typically have a lower margin) and the higher costs to meet customer demand,
eBit as a percentage of revenue for Finning south america declined to 9.6%, down from 10.8% in 2006. Management continues to undertake cost
saving initiatives to drive productivity efficiencies in work flow processes wherever possible but continues to be challenged by product availability
constraints for certain large equipment types and the lack of supply of a skilled and experienced workforce to fulfill current demand levels.
united KingdOm (“uK”) grOup
During the fourth quarter of 2006, the uK group was reorganized to combine the operations of Finning (uK) and Hewden into one organization
creating four distinct market units to more effectively service customers, improve alignment with caterpillar, and to generate operating
efficiencies. at the same time a new management team was appointed. these four market units will, over time, be supported by an integrated
back office operation that will provide common head office services, generating additional synergies among the market units. as a result of this
reorganization, the Finning uK group is reported as one operating segment in 2007, with the four market units being: Heavy construction,
general construction, Power systems, and Rental (Hewden).
Prior to 2007, results from the uK group were reported as two separate operating segments: Finning uK operations, reflecting the results of
Finning (uK), the uK caterpillar dealership operation and Diperk uK, which distributes and services Perkins engines in the u.K.; and Hewden
operations, an equipment rental and associated services operation in the u.K.
on July 31, 2007, Hewden sold its tool Hire Division and on september 29, 2006, Finning (uK) sold its Materials Handling Division. the results
from the tool Hire and Materials Handling divisions 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 group:
For years ended December 31
($ Millions)
Revenue from external sources
operating costs
Depreciation and amortization
other income (expenses)
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
$
$
2007
1,400.4
(1,191.3)
(136.5)
0.4
73.0
5.2%
16.0%
$
$
2006
1,230.7
(1,042.5)
(116.1)
(7.1)
65.0
5.3%
17.4%
UK GROUP – REVENUE BY LINE OF BUSINESS
FROM CONTINUING OPERATIONS
($ millions) 12 months ended December 31
4
4
4
5
1
4
5
4
2
8
3
2
6
0
4
0
1
3
9
9
1
3
5
1
4
1
1
6
0
1
NEW
EQUIPMENT
POWER &
ENERGY
USED
EQUIPMENT
EQUIPMENT
RENTAL
CSS
2006
2007
500
400
300
200
100
0
40
ManageMent’s Discussion & analysis
annual 2007 revenues of $1,400.4 million were up 13.8% from the prior year primarily due to increases in new equipment revenue. excluding
the impact of foreign currency translation resulting from the 2.9% weakening of the canadian dollar relative to the u.K. pound sterling, revenues
in the uK group increased by 11.2% in local currency compared to the prior year.
Revenues from most lines of business for the uK group increased over 2006 levels, most notably in new equipment sales. as a result, the
uK group’s revenue mix was more heavily weighted to new equipment sales in 2007 compared with 2006.
the uK group was successful in delivering 19% more new units into the marketplace during the year compared to last year on a continuing
basis, as it benefited from several large deals into the quarrying and mining sectors. Revenue from rental operations was 7.2% higher in 2007
compared with 2006, primarily due to a higher asset base while competitive conditions continue to challenge overall rental utilization levels
and price realization. in addition, during 2007 management focused on the disposition of Hewden’s tool Hire Division and implementation of a
new information technology system for Hewden’s continuing operations, thereby reducing focus on market facing activities. as this new system
improves processes, and Hewden’s revised product line becomes fully embedded in rental operations, management believes that utilization, price
realization, and operating results will improve.
new order backlog in local currency at December 2007 remained strong and was comparable to the levels achieved at December 2006.
gross profit for the year ended December 31, 2007 was higher compared with the same period last year in absolute terms, but decreased as a
percentage of revenue partially due to a revenue mix shift towards a higher proportion of new equipment sales which typically generate lower
margins compared to customer support services. in addition, the rental business experienced lower margins in 2007 compared to the prior year
for the reasons noted above.
sg&a costs were higher in 2007 compared with 2006 in absolute terms reflecting higher revenues and increased information technology costs,
partially offset by lower pension costs. sg&a costs as a percentage of revenue were lower compared with 2006, mainly as a result of various
initiatives and management’s focus on realizing cost efficiencies.
in 2007, the uK group contributed $73.0 million of eBit, a 12.3% increase compared with that achieved in 2006. other expenses incurred
in 2006 were primarily project costs at Hewden and related to various initiatives to assess products, the distribution network, organizational
structure, and process efficiency to meet customers’ needs. Management continues to examine and assess the business model in the u.K. with
Finning’s goal of building market share, growing the customer service business, generating higher returns on invested capital, and improving
financial results.
eBit as a percentage of revenue for the uK group of 5.2% in 2007 was slightly lower than 5.3% in 2006.
subsequent to the end of 2007, in January and early February 2008, Hewden sold certain properties for cash proceeds of approximately
$28 million, resulting in a pre-tax gain of approximately $14 million. also in January 2008, Hewden sold its Hoists business. these sales are in line
with Hewden’s strategy of increasing focus on core business areas where it has already built, or intends to build, a market leadership position.
2007 finning international inc. 41
ManageMent’s Discussion & analysis
Discontinued operations – tool hire and Materials handling Divisions
on september 29, 2006, the Materials Handling Division was sold for cash proceeds of $170.6 million (£81.7 million), net of costs, which resulted
in a one-time after-tax loss of $32.7 million (approximately £15.5 million).
on July 31, 2007, the company sold its tool Hire Division for cash proceeds of approximately $242.9 million (approximately £112 million),
net of costs. the gross sale price, net of taxes and transaction costs, was approximately equal to the net book value of the net tangible assets
and goodwill associated with the tools rental business, and resulted in a one-time after-tax gain of $0.1 million. Restructuring and other costs
associated with the disposition of this business of $2.0 million after tax were recorded in the second and third quarters of 2007.
these divisions are classified as discontinued operations within the consolidated income statements for all periods presented prior to the
disposition. the table below provides details of the discontinued operations of the tool Hire and Materials Handling divisions, excluding the gain
and loss on sale, respectively:
For years ended December 31
($ tHousanDs)
Revenue from external sources
operating costs
Depreciation and amortization
other expenses
earnings before interest and taxes
tool Hire Division
Materials Handling Division
2007
113.3
(82.2)
(23.4)
(8.0)
(0.3)
2006
194.1
(138.6)
(37.8)
(3.6)
14.1
$
$
$
$
$
$ –
2007
–
–
–
–
2006
183.6
(147.7)
(31.1)
–
4.8
$
$
approximately 1,200 and 1,000 employees were transferred with the sale of the tool Hire and Materials Handling divisions, respectively.
COrpOrate and Other OperatiOns
For years ended December 31
($ Millions)
operating costs
other expenses
earnings before interest and taxes
2007
(30.9)
–
(30.9)
$
$
2006
(32.9)
(0.6)
(33.5)
$
$
For the year ended December 31, 2007, operating costs of $30.9 million were lower than the $32.9 million in 2006. ltiP and pension costs
incurred in 2007 were slightly lower than the costs recorded in 2006.
EBIT FROM CONTINUING OPERATIONS*
($ millions) 12 months ended December 31
*excluding other operations – corporate head office
300
6
8
2
250
3
3
2
7
2
9 1
0
1
3
5 7
6
CANADA
SOUTH
AMERICA
UK GROUP
2006
2007
200
150
100
50
0
42
ManageMent’s Discussion & analysis
earnings BefOre interest and taxes (eBit)
on a consolidated basis, eBit in 2007 increased by 22.0% over 2006 to $455.8 million. eBit in the prior year included gains realized on the
disposal of surplus properties in canada and a portion of oeM’s business. adjusting prior year results for these gains, eBit in 2007 was up
28.2%. gross profit increased 16.9% to $1,599.2 million in 2007 compared with 2006, up in all business segments. the increase in gross profit
was partially offset by an increase in sg&a costs. sg&a costs were higher in 2007 compared with 2006, reflecting higher costs incurred to
meet customer demand and inflationary cost increases in south america. eBit continued to be negatively impacted in 2007 due to the stronger
canadian dollar relative to the u.s. dollar. eBit as a percentage of revenue increased from 7.7% in 2006 to 8.0% in 2007. excluding the prior year
gains on dispositions noted above, eBit margin in 2006 would have been 7.3% compared with 8.0% in 2007.
Major components of the annual eBit variance were:
($ Millions)
2006 eBit
net growth in operations
gain on sale of oeM’s railroad and non-cat remanufacturing business in 2006
gain on sale of properties in canada in 2006
lower pension expense
Foreign exchange impact
other net expenses (see note 2 to the consolidated Financial statements)
2007 eBit
$
$
373.7
101.6
(5.3)
(12.9)
8.1
(19.0)
9.6
455.8
finanCe COsts
Finance costs for the year ended December 31, 2007 of $72.8 million were 4.3% higher than 2006. Finance costs in 2006 included a charge of
approximately $8.9 million, reflecting costs associated with the recognition of deferred financing costs and related redemption costs. these costs
arose following the sale of the company’s Materials Handling Division in the u.K., as the company used a portion of the proceeds to redeem
£75 million of its £200 million eurobond notes. adjusting for the costs associated with the redemption of the eurobond notes in 2006, finance
costs from continuing operations increased 19.5% in 2007 due to:
•
•
Higher average debt levels at each of the Company’s operations to support working capital requirements and investment in rental assets.
Higher short-term interest rates.
prOvisiOn fOr inCOme taxes
Finning’s 2007 annual income tax expense was $102.9 million (26.9% effective tax rate) compared with $67.7 million (22.3% effective tax rate) for
2006. the higher effective tax rate in 2007 reflects a reduced benefit realized from tax planning strategies and a change in the company’s earnings
mix with proportionately more income earned in the higher tax jurisdictions of canada and the u.K. the income tax provision in 2006 was also
lower due to a lower capital tax rate on gains on property sales in canada.
Management anticipates that for 2008, the consolidated effective tax rate will approximate 25 - 30%.
net inCOme
Finning’s net income from continuing operations increased 18.6% to $280.1 million in 2007 compared with $236.2 million in 2006, reflecting
the strength in the company’s canadian and south american operations as well as improved results from the uK group. annual 2007 results
were impacted by higher costs to meet customer demand, inflationary operating cost pressures in certain markets, and the unfavourable impact
of foreign exchange translation. Finning’s 2006 earnings included after-tax gains on the sale of certain properties in canada and a portion of the
oeM business, partially offset by incremental finance costs incurred on the early partial repayment of the eurobond notes.
Basic ePs from continuing operations increased 18.9% to $1.57 in 2007 compared with $1.32 in 2006. excluding the gains and incremental finance
costs incurred in 2006 noted above, basic ePs would have been $1.27 in 2006, 23.6% lower than 2007.
liQuiDity anD caPital ResouRces
Management of the company assesses liquidity in terms of Finning’s ability to generate sufficient cash flow to fund its operations. net cash flow
is affected by the following items:
•
•
•
operating activities, including the level of accounts receivable, inventories, accounts payable, rental equipment, and financing provided to customers;
investing activities, including acquisitions of complementary businesses, divestitures of non-core businesses, and capital expenditures; and
external financing, including bank credit facilities, commercial paper, and other capital market activities, providing both short and
long-term financing.
2007 finning international inc. 43
ManageMent’s Discussion & analysis
Cash flOw frOm Operating aCtivities
For the year ended December 31, 2007, cash flow after working capital changes was $404.4 million, a decrease from cash flow of $460.2 million
generated last year. cash flow before working capital changes from operations increased in 2007 compared to 2006. this was offset by a
significant increase in working capital in the first half of 2007 as a result of the timing of equipment and parts deliveries in relation to strong
customer demand requirements in 2007, and increased funding of pension plans. throughout all operations, management continues to focus
on improving cash cycle times and operating efficiencies, which was evident in the last half of 2007.
the company made a net investment in rental assets of $474.6 million during 2007 compared to $343.6 million in 2006, above its annual target
of $325 million to $375 million. Rental expenditures increased as the company experienced higher demand for these assets in all rental lines of
business. Rental assets continued to be replenished where they have been utilized to help meet customer demand and offset product availability
issues. Rental additions were also higher in the Finning uK group due to the deferred delivery of rental assets at Hewden into 2007 from
the prior year.
overall, cash flow used by operating activities was $56.7 million in 2007 compared to cash flow provided by operations of $97.2 million in 2006.
cash flow used by operating activities in 2007 was below the company’s target due to strong growth in the company’s business and customer
demands required an increase in working capital and rental assets.
Cash used fOr investing aCtivities
net cash provided by investing activities in 2007 totalled $181.3 million compared with $107.8 million in 2006. the primary source of cash in
2007 was the net proceeds of $242.9 million received on the sale of the tool Hire division, and in 2006 was the net proceeds of $170.6 million
received on the sale of the Materials Handling Division.
cash used for capital additions for the year ended December 31, 2007 was $74.2 million compared with $76.1 million for the year ended
December 31, 2006. the capital additions in 2007 and 2006 reflect general capital spending to support operations and also included the
capitalization of certain costs related to the development of Hewden’s new information system.
in 2007, the company’s canadian operations acquired a cat Rental store for $2.7 million and in the third quarter of 2006, the company made
a $10.3 million investment in a new cat Rental store.
Proceeds of approximately $4.1 million were paid in 2007 and $6.4 million were received in 2006 on the settlement of foreign currency
forwards that hedged foreign subsidiary investments. in 2006, proceeds of $5.3 million were received on the divestiture of a portion of the oeM
Remanufacturing business. investing activities in 2006 also reflected the payment of a $22.4 million (u.s. $20 million) purchase price adjustment
as a result of achieving performance criteria by the argentina caterpillar dealership acquired by Finning in 2003.
the company’s planned net capital expenditures for 2008 are projected to be in the range of $110 million to $120 million and will be funded
through cash flows from operations. this excludes any capital acquired as a result of an acquisition. net rental additions for 2008 are projected
to be in the $300 million to $320 million range.
the company believes that internally generated cash flow, supplemented by borrowing from existing financing sources, if necessary, will be
sufficient to meet anticipated capital expenditures and other cash requirements in 2008. 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 $1,380 million in
unsecured credit facilities. included in this amount is a committed five-year global syndicated bank credit facility entered into in 2005 and
maturing in 2011. at December 31, 2007, approximately $560 million was drawn on or backed by 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 2007, the company’s short-term and long-term debt ratings were both reconfirmed at R-1 (low) and
BBB (high), respectively, by DBRs. in addition, the company’s long-term debt rating was reconfirmed 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
is backstopped by the global syndicated credit facility. in February 2008, the maximum authorized limit of the company’s commercial paper
program was increased from $500 million to $600 million.
as at December 31, 2007, the company’s short and long-term borrowings totalled $1,177.0 million, an increase of $13.4 million or 1.2% since
December 31, 2006.
44
ManageMent’s Discussion & analysis
in 2006, 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 ($156.6 million) of the original £200 million eurobond. in addition, the company repaid its $75.0 million 6.60% debenture, on maturity,
with short-term borrowings from its commercial paper program.
in 2007, an additional pension payment of $17.1 million was made to fund the uK pension plans as agreed at the time of the sale of the Materials
Handling Division. in addition, the company repurchased previously securitized receivables for cash of $45 million.
on May 9, 2007, the company’s shareholders approved a split of the company’s outstanding common shares on a two-for-one basis. each
shareholder of record at the close of business on May 30, 2007, received one additional share for every outstanding share held on the record
date. all stock-based compensation plans, share, and per-share data have been adjusted to reflect the stock split.
as a result of the Board’s confidence 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 May 2007 by one cent to nine cents per common share, and in november 2007 by
a further one cent to ten cents per common share. as a result, dividends paid to shareholders increased in 2007 by $15.3 million to $64.5 million.
the company has an active share repurchase program in effect until March 29, 2008. During 2007, the company repurchased 3,691,400 common
shares at an average price of $27.82 for an aggregate amount of $102.7 million.
the company’s overall debt to total capital ratio was 42% at the end of 2007 and 2006. the total debt to capital ratio is comparable, year over
year, with overall debt levels remaining fairly constant.
COntraCtual OBligatiOns
Payments on contractual obligations in each of the next five years and thereafter are as follows:
($ Millions)
2008
2009
2010
2011
2012
thereafter
total
long-term debt
– principal repayment
– interest
operating leases
capital leases
total contractual obligations
$
$
215.7
37.6
70.5
2.3
326.1
$
$
4.0
29.9
59.8
1.8
95.5
$
$
4.0
29.6
52.0
1.4
87.0
$
$
339.5
28.9
38.9
1.2
408.5
$
$
–
13.8
28.1
1.0
42.9
$
$
242.9
5.6
164.1
15.8
428.4
$
806.1
145.4
413.4
23.5
$ 1,388.4
Off-BalanCe sheet arrangement
in 2002, the company entered into an arrangement and 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 expired
on november 29, 2007, the company could sell co-ownership interests of up to $120.0 million on a revolving basis. the company retained
a subordinated interest in the cash flows arising from the eligible receivables underlying the trust’s co-ownership interest. the trust and its
investors did not have recourse to the company’s other assets in the event that obligors failed to pay the underlying receivables when due.
Pursuant to the agreement, the company serviced the pool of underlying receivables.
on the expiry date, the company terminated the co-ownership interests, ceased all securitization of its accounts receivable, and repurchased
previously securitized receivables for cash of $45.0 million. at December 31, 2006, the company carried a retained interest in the transferred
receivables in the amount of $9.5 million, which equalled the amount of overcollateralization in the receivables it sold, which was reported
on the consolidated balance sheets in other current assets.
For the 2007 period up to the repurchase of the receivables held by the trust, the company recognized a pre-tax loss of $1.8 million
(2006: $2.0 million) relating to these transfers.
Proceeds from revolving reinvestment of collections were $451.9 million in 2007 (2006: $520.6 million).
2007 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, 2007, 72% 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, 2007, 26% and 14% 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 financial reporting. the company employs professionally qualified
accountants throughout its finance group and all of the operating unit financial officers have a reporting relationship to the chief Financial officer
(cFo). senior financial representatives are assigned to all significant projects that impact financial 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 receipt or disbursement, and there is 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 of the Board of Directors. significant accounting and financial topics and issues are presented
to and discussed with the audit committee.
in 2006, canada’s accounting standards Board ratified a strategic plan that will result in canadian gaaP, as used by public companies, being evolved
and converged with international Financial Reporting standards (iFRs) over a transitional period to be complete by 2011. the official changeover
date from canadian gaaP to iFRs is for interim and annual financial statements relating to fiscal years beginning on or after January 1, 2011. as
the international accounting standards Board currently has projects underway that should result in new pronouncements and since this canadian
convergence initiative is very much in its infancy as of the date of these statements, the company has not yet assessed the impact of the ultimate
adoption of iFRs on the company. the company seeks to have a global plan in place for 2008, and believes it has the adequate human and
financial resources and project oversight in order to be able to meet the implementation timelines currently contemplated by the regulators.
Management’s discussion and analysis of the company’s financial condition and results of operations are based on the company’s consolidated
financial statements, which have been prepared in accordance with canadian gaaP. the company’s significant accounting policies are contained
in note 1 to the consolidated financial 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. the company has discussed the
development, selection, and application of its key accounting policies, and the critical accounting estimates and assumptions they involve, with
the audit committee. the more significant estimates include: fair values for goodwill impairment tests, allowance for doubtful accounts, reserves
for warranty, provisions for income tax, employee future benefits, and costs associated with maintenance and repair contracts.
a significant portion of goodwill recorded on the consolidated balance sheets relates to the company’s investment in 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 its assessment of goodwill by estimating the fair value of operations to which the
goodwill relates using the present value of expected discounted future cash flows, which resulted in no impairment in 2007.
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 financial position or results of operations.
46
ManageMent’s Discussion & analysis
inCOme taxes
the company exercises judgment in estimating the provision for income taxes. Provisions for federal, provincial, and foreign taxes are based on
the respective laws and regulations in each jurisdiction within which the company operates. these complex laws and regulations are potentially
subject to different interpretation between the company and the respective tax authority. Due to the number of variables associated with
the differing tax laws and regulations across the multiple jurisdictions, the precision and reliability of the resulting estimates are subject to
uncertainties and may change as additional information becomes known.
Future income tax assets and liabilities are comprised of the tax effect of temporary differences between the carrying amount and tax basis of
assets and liabilities as well as the tax effect of undeducted tax losses, and are measured according to the income tax law that is expected to apply
when the asset is realized or liability settled. assumptions underlying the composition of future income tax assets and liabilities include estimates
of future results of operations and the timing of reversal of temporary differences as well as the tax rates and laws in each respective jurisdiction
at the time of the expected reversal. the composition of future income tax assets and liabilities is reasonably likely to change from period to
period due to the uncertainties surrounding these assumptions.
DeSCription oF non-Gaap MeaSure
eBit is defined 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 financial 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 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 flow, in each case as determined
in accordance with gaaP.
Reconciliation between eBit and net income from continuing operations:
For years ended December 31
($ Millions)
earnings from continuing operations before interest and income taxes (eBit)
Finance costs
Provision for income taxes
net income from continuing operations
2007
455.8
(72.8)
(102.9)
280.1
$
$
$
$
2006
373.7
(69.8)
(67.7)
236.2
riSk ManaGeMent
Finning and its subsidiaries are exposed to market, financial, 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 in order to achieve the company’s 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 identified, managed, and reported. the company discloses all of its key risks
in its most recent annual information Form (aiF) with key financial risks also included herein. on a quarterly basis, the company assesses all of
its key risks and any changes to key financial or business risks are disclosed in the company’s quarterly MD&a.
FinanCial DerivativeS
the company uses various financial instruments such as interest rate swaps and forward foreign exchange contracts as well as foreign currency
debt to manage its foreign exchange exposures, interest rate exposures, and expenses which fluctuate with share price movements (see notes 3
and 4 of notes to the consolidated Financial statements). the company uses derivative financial instruments only in connection with managing
related risk positions and does not use them for trading or speculative purposes.
the company continually evaluates and manages risks associated with financial derivatives, which includes counterparty credit exposure. the
company manages its credit exposure by ensuring there is no significant concentration of credit risk with a single counterparty, and by dealing
only with highly rated financial institutions as counterparties.
2007 finning international inc. 47
ManageMent’s Discussion & analysis
FinanCial riSkS anD unCertaintieS
inteRest Rates
the company’s debt portfolio is comprised of both fixed and floating rate debt instruments, with terms to maturity ranging up to six years. in
relation to its debt financing, the company is exposed to potential changes in interest rates, which may cause the company’s borrowing costs to
fluctuate. Floating rate debt exposes the company to fluctuations in short-term interest rates, while fixed rate debt exposes the company to
future interest rate movements upon refinancing the debt at maturity. Fluctuations in current or future interest rates could result in a material
adverse impact on the company’s financial results by causing related finance expense to rise. Further, the fair value of the company’s fixed rate
debt obligations may be negatively affected by declines in interest rates, thereby exposing the company to potential losses on early settlements
or refinancing. the company minimizes its interest rate risk by balancing its portfolio of fixed and floating rate debt, as well as managing the term
to maturity of its debt portfolio. at certain times the company utilizes derivative instruments such as interest rate swaps to adjust the balance
of fixed and floating rate debt to appropriately determined levels.
cReDit RisK
the company has a large diversified customer base, and is not dependent on any single customer or group of customers. credit risk is minimized
because of the diversification of the company’s operations as well as its large customer base and its geographical dispersion. although there is
usually no significant concentration of credit risk related to the company’s position in trade accounts or notes receivable, the company does
have a certain degree of credit exposure arising from its foreign exchange 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 financial institutions.
Financing aRRangeMents
the company will require capital to finance its future growth and to refinance 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 available bank facilities, is not sufficient to fund future
capital requirements, the company will require additional debt or equity financing in the capital markets. the company’s ability to access capital
markets on terms that are acceptable will be dependent upon prevailing market conditions, as well as the company’s future financial condition.
Further, the company’s ability to increase its debt financing may be limited by its financial covenants or its credit rating objectives. although
the company does not anticipate any difficulties in raising necessary 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
financing arrangements contain certain restrictive covenants that may impact the company’s future operating and financial flexibility.
coMMoDity PRices
the company’s revenues can be affected by fluctuations in commodity prices; in particular, changes in views on long-term commodity prices.
in canada, commodity price movements in the metals, coal, forestry, and petroleum sectors can have an impact on customers’ demands for
equipment and customer service. in chile and argentina, significant fluctuations in the price of copper and gold can have similar effects, and
customers base their capital expenditure decisions on the long-term outlook for metals. in the u.K., changes to prices for thermal coal may
impact equipment demand in that sector. While commodity prices continue to be strong, significant fluctuations in future commodity prices
could result in a material adverse impact on the company’s financial results.
FoReign excHange exPosuRe
the company is geographically diversified, with significant investments in several different countries. the company transacts business in multiple
currencies, the most significant of which are the 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 recorded as an item of
comprehensive income and accumulated other comprehensive income. cumulative currency translation adjustments are recognized in net
income when there is a reduction in the company’s net investment in the self-sustaining foreign operations.
it is the company’s objective to manage its exposure in net foreign investments. the company has hedged a portion of its foreign investments
through foreign currency denominated loans and other derivative contracts. any exchange gains or losses arising from the translation of the
hedging instruments are recorded as an item of comprehensive income and accumulated other comprehensive income. a 5% hypothetical
strengthening of the canadian dollar relative to all other currencies from the December 2007 month end rates, assuming the same current
level of hedging instruments, would result in an after tax deferred unrealized loss of approximately $50 million.
48
ManageMent’s Discussion & analysis
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
profitability as exchange rates fluctuate. it may also impact the company’s competitive position as relative currency movements affect the
business practices and/or pricing strategies of the company’s competitors.
it is the company’s objective to manage 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 flows. as a result, the foreign exchange impact on earnings with respect to transactional activity
is not significant.
translatIon exposure
the most significant foreign exchange impact on the company’s net income is the translation of foreign currency based earnings into
canadian dollars each reporting period. all of the company’s foreign subsidiaries report their operating results in currencies other than the
canadian dollar. therefore, exchange rate movements in the u.s. dollar and u.K. pound sterling relative to the canadian dollar will impact
the consolidated results of the south american and u.K. 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 fluctuations 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 2007 month
end rates, without any change in local currency volumes or hedging activities.
currency
usD
gBP
cHP
December 31, 2007
month end rates
0.9881
1.9600
0.0020
increase (decrease) in
annual net income
$ Millions
(16)
(1)
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 financial and
non-financial 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 officer (ceo) and chief Financial officer (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.
•
•
The Disclosure Policy sets out accountabilities, authorized spokespersons, and Finning’s approach to the determination, preparation, and
dissemination of material information. the policy also defines restrictions on insider trading and the handling of confidential information.
A Disclosure Committee, consisting of senior management and external legal counsel, review all financial 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, “certification 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, 2007, 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, 2007.
2007 finning international inc. 49
ManageMent’s Discussion & analysis
inteRnal contRol oveR Financial RePoRting
Management is responsible for establishing and maintaining adequate internal control over financial reporting. internal control over financial
reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in
accordance with canadian generally accepted accounting principles.
there have been no changes in internal control over financial reporting during the year ended December 31, 2007 that have materially affected,
or are reasonably likely to materially affect, the company’s internal control over financial reporting.
SeleCteD Quarterly inForMation
($ Millions, excePt FoR sHaRe anD oPtion Data)
Q4
Q3
Q2
Q1
Q4
Q3
Q2
Q1
2007
2006
$
Revenue(1)
canada
south america
uK group
total revenue
net income (loss)(1)
from continuing operations $
from discontinued operations
total net income
Basic earnings (loss)
per share(1)(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(2)
common shares
outstanding (000’s)(2)
options outstanding (000’s)(2)
$
$
$ 750.3
348.0
361.2
$ 1,459.5
$ 639.9
317.4
371.8
$ 1,329.1
$ 846.4
321.6
329.6
$ 1,497.6
$ 699.6
338.6
337.8
$ 1,376.0
$ 737.0
301.0
327.1
$ 1,365.1
$ 594.7
261.0
312.0
$ 1,167.7
$ 681.0
216.2
294.5
$ 1,191.7
$ 599.9
231.7
297.1
$ 1,128.7
70.5
–
70.5
0.40
–
0.40
$
$
$
$
63.6
–
63.6
0.35
–
0.35
$
$
$
$
75.3
(1.2)
74.1
0.42
(0.01)
0.41
$
$
$
$
70.7
(0.8)
69.9
0.39
–
0.39
$
$
$
$
53.1
(0.4)
52.7
0.30
–
0.30
$
$
$
$
71.8
(33.9)
37.9
0.40
(0.19)
0.21
$
$
$
$
56.0
0.6
56.6
0.31
–
0.31
0.39
–
0.39
$
$ 4,134.2
$ 215.7
590.4
$ 806.1
$
0.35
–
0.35
$
$ 4,079.7
$
0.42
(0.01)
0.41
$
$ 4,434.4
$
0.39
–
0.39
$
$ 4,386.2
$
0.29
–
0.29
$
$ 4,200.8
$
0.40
(0.19)
0.21
$
$ 3,786.4
$
0.31
–
0.31
$
$ 3,900.2
$ 204.2
554.5
$ 758.7
$ 204.1
600.6
$ 804.7
$
2.2
753.8
$ 756.0
$
2.2
735.9
$ 738.1
$
79.3
710.7
$ 790.0
$
79.1
851.5
$ 930.6
0.10
$
0.09
$
0.09
$
0.08
$
0.08
$ 0.065
$ 0.065
$ 0.065
176,132
4,656
178,521
4,737
179,601
4,934
179,272
3,606
179,090
3,904
178,808
4,302
178,778
4,330
178,742
2,610
$
$
$
$
55.3
1.6
56.9
0.31
0.01
0.32
$
0.31
0.01
0.32
$
$ 3,868.0
$
80.3
848.9
$ 929.2
(1) on July 31, 2007, the company’s u.K. subsidiary, Hewden stuart Plc, sold its tool Hire Division. on september 29, 2006, the company’s u.K. subsidiary, Finning
(uK), sold its Materials Handling Division.
Results from the tool Hire and Materials Handling divisions qualify as discontinued operations and have been reclassified to that category for all periods presented.
included in the loss from discontinued operations in the third quarter of 2007 is the after-tax gain on the sale of the tool Hire Division of $0.1 million.
Restructuring and other costs associated with the disposition of $2.0 million after tax were recorded in the second and third quarters of 2007. included in the
loss from discontinued operations in the third quarter of 2006 is the after-tax loss on the sale of the Materials Handling Division of $32.7 million or $0.18 per
share. Revenues from the uK tool Hire and Materials Handling divisions have been excluded from the revenue figures above. assets from the tool Hire and
Materials Handling divisions have been included in the total assets figures for periods prior to their sale – see note 13 to the consolidated Financial statements.
(2) on May 9, 2007, the company’s shareholders approved a split of the company’s outstanding common shares on a two-for-one basis. each shareholder of record
at the close of business on May 30, 2007, received one additional share for every outstanding share held on the record date. all share and per-share data have
been adjusted to reflect the stock split. During 2007, the company repurchased 3,691,400 common shares at an average price of $27.82 as part of a normal
course issuer bid.
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.
50
ManageMent’s Discussion & analysis
new aCCountinG pronounCeMentS
cHanges aDoPteD in 2007
(a) FInancIal Instruments and comprehensIve Income
effective January 1, 2007, the company adopted the following new accounting standards issued by the canadian institute of chartered
accountants (cica): Handbook section 1530, Comprehensive Income; section 3855, Financial Instruments – Recognition and Measurement; section
3865, Hedges; section 3251, Equity; and section 3861, Financial Instruments – Disclosure and Presentation. these new standards require all derivatives
to be recorded on the balance sheet at fair value and establish new accounting requirements for hedges. in addition, these standards provide
guidance for reporting items in other comprehensive income, which is included on the consolidated balance sheets as accumulated other
comprehensive income or loss, a separate component of shareholders’ equity.
if a derivative qualifies 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 firm 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 new standards have been applied prospectively; accordingly comparative periods have not been restated. However, prior period financial
statements retroactively reflect the classification of currency translation adjustments on the company’s net investment in self-sustaining
operations and related hedging gains and losses as components of other comprehensive income. as at January 1, 2007, the impact on the
consolidated balance sheet as a result of the adoption of these standards was a decrease in other long-term assets of $8.4 million; an increase
in future income tax assets of $5.9 million; a decrease in accounts payable of $4.5 million; a decrease in long-term obligations of $13.1 million;
a decrease of $0.8 million in long-term debt; an increase of $5.7 million in accumulated other comprehensive income; and an increase in
retained earnings of $10.2 million.
the effect on net income for the year ended December 31, 2007 as a result of adopting the new standards is not material.
Details of the specific impact of these standards on the company are disclosed in note 1 to the company’s consolidated Financial statements.
(b) capItal dIsclosures
effective December 31, 2007, the company early adopted the new recommendations of the cica for disclosure of the company’s objectives,
policies, and processes for managing capital, in accordance with section 1535 Capital Disclosures (see note 25 to the company’s consolidated
Financial statements).
Recent accounting PRonounceMents
(a) FInancIal Instrument dIsclosures
in March 2007, the cica issued section 3862, Financial Instruments – Disclosures and section 3863, Financial Instruments – Presentation, which
together comprise a complete set of disclosure and presentation requirements that revise and enhance current disclosure requirements for
financial instruments. section 3862 requires disclosure of additional detail by financial asset and liability categories. section 3863 establishes
standards for presentation of financial instruments and non-financial derivatives. it deals with the classification of financial instruments, from the
perspective of the issuer, between liabilities and equity, the classification of related interest, dividends, losses and gains, and the circumstances
in which financial assets and financial liabilities are offset.
the company will implement these disclosures in the first quarter of 2008.
(b) InventorIes
in June 2007, the cica issued section 3031, Inventories which provides more guidance on the measurement and disclosure requirements for
inventories. specifically the new pronouncement requires inventories to be measured at the lower of cost and net realizable value, and provides
guidance on the determination of cost and its subsequent recognition as an expense, including any write-down to net realizable value. the
new pronouncement is effective in the first quarter of 2008, and the new standard is not expected to have a material impact on the company’s
net income.
(c) goodwIll and IntangIble assets
in February 2008, the cica issued section 3064, Goodwill and Intangible Assets, replacing section 3062, Goodwill and Other Intangible Assets and
section 3450, Research and Development Costs. the new pronouncement establishes standards for the recognition, measurement, presentation, and
disclosure of goodwill subsequent to its initial recognition and of intangible assets by profit-oriented enterprises. standards concerning goodwill
are unchanged from the standards included in the previous section 3062. this section is effective in the first quarter of 2009, and the company is
currently evaluating the impact of the adoption of this new section on its consolidated financial statements.
2007 finning international inc. 51
ManageMent’s Discussion & analysis
(d) convergence wIth InternatIonal FInancIal reportIng standards
in 2006, canada’s accounting standards Board ratified a strategic plan that will result in canadian gaaP, as used by public companies, being
evolved and converged with international Financial Reporting standards (iFRs) over a transitional period to be complete by 2011. the official
changeover date from canadian gaaP to iFRs is for interim and annual financial statements relating to fiscal years beginning on or after
January 1, 2011. as the international accounting standards Board currently has projects underway that should result in new pronouncements and
since this canadian convergence initiative is very much in its infancy as of the date of this MD&a, the company has not yet assessed the impact
of the ultimate adoption of iFRs on the company.
Market outlook
the outlook for Finning’s businesses remains solid. the company’s order backlog remains at robust levels and the near term outlook for certain
key commodities remains positive. as well, attendant infrastructure in the company’s market areas supports the demand for both equipment
and parts and service.
the outlook for Finning’s business in western canada continues, on balance, to be sound. the mining industry (including the oil sands) continues
to expand and capital expenditure plans for equipment remain robust for mining customers. general construction activity also continues at high
levels and spending on infrastructure remains very strong. the forestry and conventional oil and gas industries in western canada are presently
undergoing challenging business conditions and equipment purchases are lower as a result. this situation is expected to continue through 2008.
Weak housing markets and soft economic conditions in the united states are not having a noticeable impact on business conditions for the
company in western canada at this time. However, the economic challenges in the united states are a source of some uncertainty for future
economic activity in western canada.
the heavy equipment markets in the company’s south american operations also remain healthy and demand for the company’s products and
services remains strong. the construction and power markets in argentina and chile are strong and demand for equipment support services
continues to grow. copper and gold prices are expected to remain at attractive levels supporting ongoing good business conditions in mining.
the outlook for strong growth in sales of new mining equipment is beginning to moderate, as expected, as the number of new projects and
expansions to existing mining operations slows. However, revenues from support services for mining customers will continue to grow at
attractive rates over the next several years reflecting the impact of the large volume of new equipment sales to the industry in the recent past.
Business at the caterpillar dealership in the uK has improved and is expected to continue as construction activity remains healthy. Demand for
power systems products and services also remain strong. Market conditions in the uK plant hire (equipment rental) industry are reasonable,
although the business remains highly competitive. at Hewden, the company continues to manage the effects of the recent disposition of the
tool hire division and the start-up of a new information system. Both items have been disruptive to normal operations. While execution of both
projects has gone reasonably well to this point, ongoing management of these changes continues to challenge Hewden employees. the improved
management information that will be available from the new system will take several quarters of operations to gather and analyze and the
operational and pricing changes which may be driven by this information will take a further period of time to implement and become visible
in operating results.
additional human resources are required to meet the projected growth in business in western canada and south america. to date, Finning
has been successful in attracting significant numbers of new employees and anticipates it will attract the requisite human resources to meet
future growth.
Finning’s financial results are negatively impacted by a stronger canadian dollar compared to the u.s. dollar and the u.K. pound sterling in the
translation of its foreign currency earnings. the company’s 2008 results will be negatively impacted as a result of translating foreign currency
based earnings should the strengthening of the canadian dollar continue against the u.s. dollar and the u.K. pound sterling.
the company’s outlook remains positive for the medium term.
February 19, 2008
52
ManageMent’s Discussion & analysis
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(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(3)
current
non-current
cash dividends declared per common share(2)
2007
5,662.2
280.1
(2.0)
278.1
1.57
(0.01)
1.56
1.55
(0.01)
1.54
4,134.2
215.7
590.4
806.1
0.36
$
$
$
$
$
$
$
$
$
$
$
2006
4,853.2
236.2
(32.1)
204.1
1.32
(0.18)
1.14
1.31
(0.18)
1.13
4,200.8
2.2
735.9
738.1
0.275
$
$
$
$
$
$
$
$
$
$
$
2005
4,328.3
161.7
2.3
164.0
0.91
0.01
0.92
0.90
0.01
0.91
3,736.4
80.3
844.6
924.9
0.22
$
$
$
$
$
$
$
$
$
$
$
(1) on July 31, 2007, the company’s u.K. subsidiary, Hewden stuart Plc, sold its tool Hire Division. on september 29, 2006, the company’s u.K. subsidiary,
Finning (uK), sold its Materials Handling Division.
Results from the tool Hire and Materials Handling divisions qualify as discontinued operations and have been reclassified to that category for all periods
presented. included in the loss from discontinued operations in 2007 is the after-tax gain on the sale of the tool Hire Division of $0.1 million. Restructuring
and other costs associated with the disposition of $2.0 million after tax were recorded in 2007. included in the loss from discontinued operations in 2006 is
the after-tax loss on the sale of the Materials Handling Division of $32.7 million or $0.18 per share. Revenues from the uK tool Hire and Materials Handling
divisions have been excluded from the revenue figures above. assets from the tool Hire and Materials Handling divisions have been included in the total assets
figures for periods prior to their sale – see note 13 to the consolidated Financial statements.
(2) on May 9, 2007, the company’s shareholders approved a split of the company’s outstanding common shares on a two-for-one basis. each shareholder of record
at the close of business on May 30, 2007, received one additional share for every outstanding share held on the record date. all share and per-share data have
been adjusted to reflect the stock split. During 2007, the company repurchased 3,691,400 common shares at an average price of $27.82 as part of a normal
course issuer bid.
earnings per share (ePs) for each year has been computed based on the weighted average number of shares issued and outstanding during the respective year.
(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.
outStanDinG Share Data
as at February 15, 2008
common shares outstanding
options outstanding
172,912,976
4,595,604
2007 finning international inc. 53
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 judgements.
the company maintains an accounting system and related controls to provide management with reasonable assurance that transactions are
executed and recorded in accordance with its authorizations, that assets are properly safeguarded and accounted for, and that financial records
are reliable for preparation of financial statements.
the company’s independent auditors, Deloitte & touche llP, have audited the consolidated Financial statements, as reflected in their report
for 2007.
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 officers 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 financial 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 financial reporting. on a quarterly basis, the audit committee
reports its findings 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 officer
M. t. Waites
executive vice President and chief Financial officer
February 19, 2008
vancouver, Bc, canada
auDitoRs’ RePoRt
to the ShareholDerS oF FinninG international inC.:
We have audited the consolidated balance sheets of Finning international inc. as at December 31, 2007 and 2006 and the consolidated statements
of income, comprehensive income, shareholders’ equity and cash flows for each of the years in the two year period ended December 31, 2007.
these financial statements are the responsibility of the company’s management. our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with canadian generally accepted auditing standards. those standards require that we plan and perform
an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. an audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial statements. an audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall financial statement presentation.
in our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the company as at
December 31, 2007 and 2006, and the results of its operations and its cash flows for each of the years in the two year period ended December 31,
2007, in accordance with canadian generally accepted accounting principles.
Deloitte & toucHe llP, chartered accountants
February 19, 2008
vancouver, Bc, canada
54
consoliDateD stateMents oF incoMe
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 profit
2007
2006
$ 2,233,512
503,012
417,613
781,194
1,701,253
25,660
5,662,244
4,063,079
1,599,165
$
1,732,766
419,954
401,056
693,183
1,583,515
22,765
4,853,239
3,485,710
1,367,529
selling, general, and administrative expenses
1,144,753
1,003,797
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 13)
net income
earnings (loss) per share – basic
From continuing operations (note 8)
From discontinued operations
earnings (loss) per share – diluted
From continuing operations (note 8)
From discontinued operations
Weighted average number of shares outstanding
Basic
Diluted
(1,435)
455,847
72,842
383,005
102,898
280,107
(2,050)
278,057
1.57
(0.01)
1.56
1.55
(0.01)
1.54
$
$
$
$
$
(9,976)
373,708
69,842
303,866
67,679
236,187
(32,111)
204,076
1.32
(0.18)
1.14
1.31
(0.18)
1.13
$
$
$
$
$
178,844,411
180,459,955
178,741,334
179,798,940
the accompanying notes to the consolidated Financial statements are an integral part of these statements.
2007 finning international inc. 55
2007
2006
$
61,860
713,677
$
78,485
666,602
844,699
446,845
181,861
2,248,942
26,714
1,028,301
348,923
24,548
251,099
205,636
$ 4,134,163
$
370,942
1,106,392
32,440
215,663
1,725,437
590,382
101,699
98,848
2,516,366
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
$
$
571,402
15,356
(232,223)
1,263,262
1,617,797
$ 4,134,163
573,482
7,791
(87,038)
1,130,171
1,624,406
4,200,753
$
consoliDateD Balance sHeets
December 31
($ tHousanDs)
aSSetS
current assets
cash and cash equivalents (note 17)
accounts receivable
inventories
on-hand equipment
Parts and supplies
other assets (note 9)
total current assets
Finance assets (note 10)
Rental equipment (note 11)
land, buildings, and equipment (note 12)
intangible assets (note 12)
goodwill (note 14)
other assets (note 9)
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 15)
Future income taxes (note 5)
total liabilities
commitments and contingencies (notes 22 and 23)
ShareholDerS’ eQuity
share capital (note 6)
contributed surplus
accumulated other comprehensive loss
Retained earnings
total shareholders’ equity
approved by the Directors:
D.W.g. Whitehead, Director
c.a. Pinette, Director
the accompanying notes to the consolidated Financial statements are an integral part of these statements.
56
consoliDateD stateMents oF coMPReHensive incoMe
For years ended December 31
($ tHousanDs)
net income
other comprehensive income (loss), net of income tax
currency translation adjustments, net of hedges
currency translation adjustments
unrealized gains on net investment hedges, net of tax of $20.6 million
Realized translation adjustment, net of investment hedges, reclassified to
earnings on disposition of investment, net of tax of $0.2 million
unrealized losses on cash flow hedges, net of tax of $1.5 million
Realized gains on cash flow hedges, reclassified to earnings, net of tax of $0.8 million
comprehensive income
2007
2006
$
278,057
$
204,076
–
(194,452)
47,394
443
(3,512)
(747)
127,183
$
46,098
–
–
–
–
–
250,174
$
consoliDateD stateMents oF sHaReHolDeRs’ eQuity
accumulated other
comprehensive income (loss)
($ tHousanDs, excePt sHaRe aMounts)
shares
amount
share capital
contributed
surplus
Foreign
currency
translation and
gains/(losses)
on net
investment
Hedges
gains/
(losses) on
cash Flow
Hedges
Retained
earnings
Balance, December 31, 2005
comprehensive income
issued on exercise of stock options
stock option expense
Dividends on common shares
Balance, December 31, 2006
178,403,328
–
687,410
–
–
179,090,738
$ 568,121
–
5,361
–
–
$ 573,482
$
$
2,739
–
(221)
5,273
–
7,791
$ (133,136) $
46,098
–
–
–
(87,038) $
$
–
–
–
–
–
–
$ 975,254
204,076
–
–
(49,159)
$ 1,130,171
transition adjustment (note 1)
Balance, January 1, 2007
comprehensive income (loss)
issued on exercise of stock options
Repurchase of common shares
stock option expense
Dividends on common shares
Balance, December 31, 2007
–
179,090,738
–
732,541
(3,691,400)
–
–
176,131,879
–
573,482
–
9,848
(11,928)
–
–
$ 571,402
–
7,791
–
(1,695)
–
9,260
–
$ 15,356
9,992
(77,046)
(146,615)
–
–
–
–
$ (223,661) $
(4,303)
(4,303)
(4,259)
–
–
–
–
10,244
1,140,415
278,057
–
(90,764)
–
(64,446)
(8,562) $ 1,263,262
total
$ 1,412,978
250,174
5,140
5,273
(49,159)
$ 1,624,406
15,933
1,640,339
127,183
8,153
(102,692)
9,260
(64,446)
$ 1,617,797
the accompanying notes to the consolidated Financial statements are an integral part of these statements.
2007 finning international inc. 57
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
gain on disposal of capital assets (note 2)
loss (gain) on disposal of discontinued operations (note 13)
other
changes in working capital items (note 17)
cash provided after changes in working capital items
Rental equipment, net of disposals
equipment leased to customers, net of disposals
cash flow provided by (used in) operating activities
inveStinG aCtivitieS
additions to capital assets
Proceeds on disposal of capital assets
Proceeds from sale of discontinued operations (note 13)
acquisition of business (note 14)
Proceeds on sale of business (note 2)
Payment of contingent consideration (note 14)
Proceeds (payments) on settlement of foreign currency forwards
cash provided by investing activities
FinanCinG aCtivitieS
increase (decrease) in short-term debt
increase (repayment) of long-term debt
Repurchase of securitized accounts receivable (note 19)
Repayment of eurobond and premium paid (note 3)
Defined benefit pension plan special funding (note 18)
issue of common shares on exercise of stock options
Repurchase of common shares (note 6)
Dividends paid
cash used in financing activities
effect of currency translation on cash balances
increase (decrease) in cash and cash equivalents
cash and cash equivalents, beginning of year
cash and cash equivalents, end of year
see supplemental cash flow information, note 17
2007
2006
$
278,057
$
204,076
351,289
18,393
25,540
(6,552)
(38,590)
(5,122)
623,015
(218,588)
404,427
(474,566)
13,449
(56,690)
(74,226)
20,212
242,851
(2,670)
–
(767)
(4,065)
181,335
(43,608)
135,642
(45,000)
–
(17,066)
8,153
(102,692)
(64,446)
(129,017)
(12,253)
(16,625)
78,485
61,860
$
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)
34,171
170,595
(10,250)
5,331
(22,350)
6,383
107,806
117,926
(71,570)
–
(159,413)
–
5,140
–
(49,159)
(157,076)
2,916
50,802
27,683
78,485
$
the accompanying notes to the consolidated Financial statements are an integral part of these statements.
58
notes to tHe consoliDateD Financial stateMents
December 31, 2007 and 2006
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 significant accounting policies used in these consolidated Financial statements are as follows:
(A) PRInCIPlES OF COnSOlIDAtIOn
the consolidated Financial statements include the accounts of Finning international inc. (“Finning” or “company”), which includes the Finning
(canada) division, Finning’s wholly owned subsidiaries, and its proportionate share of joint venture investments. 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 financial 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.
significant estimates used in the preparation of these consolidated financial statements include, but are not limited to, fair values for goodwill
impairment tests, allowance for doubtful accounts, reserves for warranty, provisions for income tax, employee future benefits, the useful lives
of the rental fleet and related residual values, 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:
•
•
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 items
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 from the functional currency into canadian dollars as follows:
•
•
•
Assets and liabilities are translated using the exchange rates in effect at the balance sheet dates.
Revenue and expense items are translated at average exchange rates prevailing during the period that the transactions occurred.
Unrealized translation gains and losses are recorded as an item of other comprehensive income and accumulated other comprehensive
income. cumulative currency translation adjustments are recognized in net 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 as items of other comprehensive income and presented in
the accumulated other comprehensive loss 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 fair value, which approximates cost.
2007 finning international inc. 59
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 accounts receivable in canada to a securitization trust (the “trust”).
these transactions were accounted for as sales to the extent that the company was considered to have surrendered control over the interest
in the accounts receivable and received proceeds from the trust, other than a beneficial interest in the assets sold. losses on these transactions
were recognized in selling, general, and administrative expenses and were dependent in part on the previous carrying amount of the receivable
interest transferred, which was 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 determined fair value based on the present value of future expected cash flows using management’s
best estimates of key assumptions such as discount rates, weighted average life of accounts receivable, dilution rates, and credit loss ratios.
the company serviced the receivables and recognized a servicing liability on the date of the transfer, which was amortized to income over
the expected life of the transferred receivable interest. in november 2007, the co-ownership interest was repurchased from the trust and the
securitization program was terminated.
(F) InvEntORIES
inventories are stated at the lower of cost and net realizable value. cost is determined on a specific item basis for on-hand equipment. For
approximately two-thirds of parts and supplies, cost is determined on a first-in, first-out basis. an average cost basis is used for the remaining
inventory of parts and supplies.
(G) OtHER ASSEtS
investments in which the company exercises significant influence, but not control, are accounted for using the equity method. a long-term
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 becomes substantively enacted.
(I) FInAnCE ASSEtS
Finance assets comprises instalment notes receivables and equipment leased to customers on long-term financing leases.
instalment notes receivable represents amounts due from customers relating to financing of equipment sold and parts and service sales. these
receivables are recorded net of unearned finance 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 specific item basis. Rental equipment is depreciated to its estimated residual value over its estimated useful life on a straight-line or on an actual
usage basis.
(K) CAPItAl ASSEtS
land, buildings, and equipment are recorded at cost, net of accumulated depreciation. Depreciation of these capital assets 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 indefinite lives are not amortized. intangible assets with finite 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.
60
notes to tHe consoliDateD Financial stateMents
(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 identifiable intangible assets with finite 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 flows resulting from the use of the asset and its eventual disposition. Measurement of an impairment loss
for long-lived assets and certain identifiable 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. as at December 31, 2007
and 2006, the company determined that there were no triggering events requiring an impairment analysis.
goodwill and intangible assets with indefinite 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
indefinite 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 future cash flows. the company also considers projected future operating results, trends and other circumstances in making
such evaluations. an impairment loss would be recognized to the extent the carrying amount of goodwill or intangible assets exceeds their
fair value.
(n) lEASES
leases entered into by the company as lessee are classified as either capital or operating leases. leases where all of the benefits 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 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 the 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 flows through charges to earnings. a gain or loss may be incurred upon settlement of the liability.
(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 fixed 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:
•
•
•
•
Revenue from sales of equipment is recognized at the time title to the equipment and significant risks of ownership passes to the customer,
which is generally at the time of shipment of the product to the customer;
Revenue from sales of power and energy systems includes construction contracts with customers that involve the design, installation, and
assembly of power and energy equipment systems. Revenue is recognized on a percentage of completion basis proportionate to the work
that has been completed which is based on associated costs incurred;
Revenue from equipment rentals and operating leases is recognized in accordance with the terms of the relevant agreement with the
customer, either evenly over the term of that agreement or on a usage basis such as the number of hours that the equipment is used; and
Revenue from customer support services includes sales of parts and servicing of equipment. For sales of parts, revenue is recognized when the
part is shipped to the customer or when the part is installed in the customer’s equipment. For servicing of equipment, revenue is recognized
as the service work is performed. customer support services are also offered to customers in the form of long-term maintenance and repair
contracts. For these contracts, revenue is recognized on a 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 or near the completion of the contract, any remaining deferred revenue on the contract is recognized as revenue.
any losses estimated during the term of the contract are recognized when identified.
2007 finning international inc. 61
notes to tHe consoliDateD Financial stateMents
1. signifiCant aCCOunting pOliCies (continued)
(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 7. 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 fluctuations in the market price of the company’s common shares underlying other stock-based
compensation plans (net of hedging instruments) 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) EMPlOyEE FUtURE bEnEFItS
the company and its subsidiaries offer a number of benefit plans that provide pension and other benefits to many of its employees in canada
and the u.K. these plans include defined benefit and defined contribution plans.
the company’s south american employees do not participate in employer pension plans but are covered by country specific 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.
Defined benefit plans: the cost of pensions and other retirement benefits is determined by independent actuaries using the projected benefit
method prorated on service and management’s best estimates of assumptions including the expected return on plan assets and salary escalation
rate, along with the use of a discount rate as prescribed under canadian institute of chartered accountants (cica) section 3461, Employee
Future benefits. For the purpose of calculating the expected return on plan assets, those assets are valued at market value.
Past service costs from plan amendments are amortized on a straight-line basis over the expected average remaining service life of employees
active at the date of amendment.
actuarial gains and losses arise from differences between actual experience and that expected as a result of economic, demographic, and other
assumptions made. these include the difference between the actual and expected rate of return on plan assets for a period, and differences from
changes in actuarial assumptions used to determine the accrued benefit obligation. the excess of the net accumulated actuarial gains or losses
over 10% of the greater of the accrued benefit 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.
upon adoption of cica 3461 on January 1, 2000, a transitional asset or obligation was determined for each plan as a result of the new standard.
the company is amortizing these transitional amounts on a straight-line basis over 13 years for the Finning (canada) and Hewden plans and
over 14 years for the Finning (uK) plan, representing the average remaining service period of employees expected to receive benefits under the
benefit plans as of January 1, 2000, the transition date.
Defined contribution plans: the cost of pension benefits includes the current service cost, which comprise the actual contributions made by the
company during the year. these contributions are based on a fixed percentage of member earnings for the year.
(S) COMPREHEnSIvE InCOME, FInAnCIAl InStRUMEntS, AnD HEDGES
comprehensIve Income
comprehensive income comprises the company’s net income and other comprehensive income. comprehensive income represents changes
in shareholders’ equity during a period arising from non-owner sources and, for the company, other comprehensive income includes currency
translation adjustments on its net investment in self-sustaining foreign operations and related hedging gains and losses, unrealized gains and losses
on available-for-sale securities, and hedging gains and losses on cash flow hedges. the company’s comprehensive income, components of other
comprehensive income, and accumulated other comprehensive income are presented in the statements of comprehensive income and the
statements of shareholders’ equity.
62
notes to tHe consoliDateD Financial stateMents
FInancIal assets and FInancIal lIabIlItIes
classification
the company has implemented the following classification of its financial assets and financial liabilities:
•
•
Accounts and notes receivable are classified as “Loans and Receivables”. They are measured at amortized cost using the effective interest rate
method. at December 31, 2007, the recorded amount approximates fair value.
Short-term and long-term debt and accounts payable and accruals are classified as “Other Financial Liabilities”. They are measured at
amortized cost using the effective interest rate method. at December 31, 2007, the measured amount approximates cost, with the exception
of long-term debt. the estimated fair value of the company’s long-term debt as at December 31, 2007 and 2006 is disclosed in note 4.
transaction costs directly attributable to the acquisition or issue of a financial asset or financial liability are included in the carrying amount of
the financial asset or financial liability, and are amortized to income using the effective interest rate method.
derivatives
all derivative instruments are recorded on the balance sheet at fair value.
embedded derivatives
Derivatives may be embedded in other financial instruments (host instruments). embedded derivatives are treated as separate derivatives
when their economic characteristics and risks are not closely related to those of the host instrument, the terms of the embedded derivative are
the same as those of a stand-alone derivative, and the combined contract is not classified as held for trading. these embedded derivatives are
measured at fair value on the balance sheet with subsequent changes in fair value recognized in income. the company selected January 1, 2003
as its transition date for embedded derivatives. the company has not identified any embedded derivatives that are required to be accounted for
separately from the host contract.
hedges
the company utilizes derivative financial instruments and foreign currency debt in order to manage its foreign currency, interest rate exposures,
and expenses which fluctuate with share price movements. the company uses derivative financial instruments only in connection with managing
related risk positions and does not use them for trading or speculative purposes.
the company determines whether or not to formally designate, for accounting purposes, eligible hedging relationships between hedging
instruments and hedged items. this process includes linking derivatives to specific risks from assets or liabilities on the balance sheet or specific
firm commitments or forecasted transactions. For hedges designated as such for accounting purposes, the company formally assesses, both at
inception and on an ongoing basis, whether the hedging item is highly effective in offsetting changes in fair value or cash flows associated with the
identified hedged items. When derivative instruments have been designated as a hedge and are highly effective in offsetting the identified hedged
risk, hedge accounting is applied to the derivative instruments. the ineffective portion of hedging gains and losses of highly effective hedges is
reported in income. the accounting treatment for the types of hedges used by the company is described below.
cash Flow hedges
the company uses foreign exchange forward contracts to hedge the currency risk associated with certain foreign currency purchase
commitments, payroll, and associated accounts payable and accounts receivable. the effective portion of hedging gains and losses associated with
these cash flow hedges is recorded in other comprehensive income and is released from accumulated other comprehensive income and recorded
in income when the hedged item affects income.
When a hedging instrument expires or is sold, or when a hedge is discontinued or no longer meets the criteria for hedge accounting, any
accumulated gain or loss recorded in other comprehensive income at that time remains in other comprehensive income until the originally
hedged transaction is recorded. When a forecasted transaction is no longer expected to occur, the accumulated gain or loss that was reported
in other comprehensive income is immediately recorded in the income statement.
gains and losses relating to forward foreign exchange contracts that are not designated as hedges for accounting purposes are recorded in selling,
general, and administrative expenses.
From time to time, the company uses derivative financial instruments to hedge interest rate risk associated with future proceeds of debt.
as at December 31, 2007, approximately $0.4 million of deferred net losses (net of tax) included in accumulated other comprehensive income
are expected to be reclassified to current earnings over the next twelve months when earnings are affected by the hedged transactions.
2007 finning international inc. 63
notes to tHe consoliDateD Financial stateMents
1. signifiCant aCCOunting pOliCies (continued)
Fair value hedges
changes in the fair value of derivatives designated and qualifying as fair value hedging instruments are recorded in income along with changes
in the fair value of the hedged item attributable to the hedged risk.
generally, if a hedging relationship no longer meets the criteria for hedge accounting, the cumulative adjustment to the carrying amount of the
hedged item is amortized to income based on a recalculated effective interest rate over the remaining expected life of the hedged item, unless
the hedged item has been derecognized in which case the cumulative adjustment is recorded immediately in the income statement.
net Investment hedges
the company uses forward contracts, cross-currency interest rate swaps, and foreign currency debt to hedge foreign currency gains and losses
on its long-term net investments in self-sustaining foreign operations. the effective portion of the gain or loss of such instruments associated with
the hedged risk is recorded in other comprehensive income each period. these gains or losses will be recorded in income in the same period
during which corresponding exchange gains or losses arising from the translation of the financial statements of self-sustaining foreign operations
are recognized in net income.
the company uses the forward rate method for net investment hedges where derivative financial instruments are used. the company uses the
spot method, as required, when the company uses debt to hedge foreign currency net investments.
(t) CHAnGE In ACCOUntInG POlICIES
effective January 1, 2007, the company adopted the following new accounting standards issued by the cica: Handbook section 1530,
Comprehensive Income; section 3855, Financial Instruments – Recognition and Measurement; section 3865, Hedges; section 3251, Equity; and section
3861, Financial Instruments – Disclosure and Presentation (the new standards). the new standards require all derivatives to be recorded on the
balance sheet at fair value and establish new accounting requirements for hedges. in addition, these standards provide guidance for reporting
items in other comprehensive income, which is included on the consolidated Balance sheets as accumulated other comprehensive income or
loss, a separate component of shareholders’ equity.
if a derivative qualifies 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 firm 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 new standards have been applied prospectively; accordingly comparative periods have not been restated. However, prior period financial
statements retroactively reflect the classification of currency translation adjustments on the company’s net investment in self-sustaining
operations and related hedging gains and losses as components of other comprehensive income. the adoption of the new standards resulted
in the following adjustments as of January 1, 2007 in accordance with the transition provisions:
(i) Deferred Debt costs
Previously deferred debt issue costs and discounts of $3.5 million were reclassified from other long-term assets, resulting in a reduction
of long-term debt of $3.5 million.
(ii) cash Flow Hedges
the company discontinued hedge accounting for hedges of foreign currency purchase commitments that existed at the time of adoption
of the new standards. as such, upon adoption, the carrying value of the forward foreign exchange contracts was adjusted to fair value and
the previously unrecognized after-tax gain of $2.5 million was recorded as an increase to accumulated other comprehensive income, with a
corresponding decrease in accounts payable of $3.3 million, an increase in future income tax liability of $1.0 million and a decrease in retained
earnings of $0.2 million. these gains are being recognized in cost of sales at the time the hedged inventory is sold.
in accordance with the company’s policy, deferred losses of $6.8 million associated with prior cash flow hedges of debt proceeds recorded
in other long-term assets were reclassified as a reduction to accumulated other comprehensive income at the time of adoption of the
new standards.
(iii) Fair value Hedges
upon transition to the new standards, the company had no interest rate swaps. a $2.7 million deferred gain from a previous fair value
hedge recorded in other long-term assets was reclassified as an adjustment to the carrying value of the hedged debt.
64
notes to tHe consoliDateD Financial stateMents
(iv) net investment Hedges
Prior to adoption of the new standards, the company valued its derivative instruments hedging net investments in self-sustaining foreign
operations using spot exchange rates. upon transition, the carrying value of the hedging derivative instruments was adjusted to their fair
value and the effective portion of the gains and losses, net of associated income taxes, including amounts previously reported in cumulative
currency translation adjustments, were recorded in accumulated other comprehensive income based on the previously designated hedged
risk. as a result, accounts payable decreased by $1.2 million, long-term other assets decreased by $0.8 million, long-term obligations
decreased by $13.1 million, future income tax assets increased by $6.9 million, accumulated other comprehensive income increased by
$10.0 million, and retained earnings increased by $10.4 million on January 1, 2007.
the effect on net income for the year ended December 31, 2007 as a result of adopting the new standards is not material.
(U) COMPARAtIvE FIGURES
certain comparative figures have been reclassified to conform to the 2007 presentation. the consolidated income statement has been restated
for discontinued operations (see note 13).
(v) RECEnt ACCOUntInG PROnOUnCEMEntS
(i) Financial instrument Disclosures
in March 2007, the cica issued section 3862 Financial Instruments – Disclosures and section 3863 Financial Instruments – Presentation, which
together comprise a complete set of disclosure and presentation requirements that revise and enhance current disclosure requirements for
financial instruments. section 3862 requires disclosure of additional detail by financial asset and liability categories. section 3863 establishes
standards for presentation of financial instruments and non-financial derivatives. it deals with the classification of financial instruments,
from the perspective of the issuer, between liabilities and equity, the classification of related interest, dividends, losses and gains, and the
circumstances in which financial assets and financial liabilities are offset.
the company will implement these disclosures in the first quarter of 2008.
(ii) capital Disclosures
effective December 31, 2007, the company early adopted the new recommendations of the cica for disclosure of the company’s objectives,
policies, and processes for managing capital, in accordance with section 1535 Capital Disclosures (note 25).
(iii) inventories
in June 2007, the cica issued section 3031 Inventories which provides more guidance on the measurement and disclosure requirements
for inventories. specifically the new pronouncement requires inventories to be measured at the lower of cost and net realizable value, and
provides guidance on the determination of cost and its subsequent recognition as an expense, including any write-down to net realizable
value. the new pronouncement is effective in the first quarter of 2008, and the new standard is not expected to have a material impact on
the company’s net income.
(iv) goodwill and intangible assets
in February 2008, the cica issued section 3064, Goodwill and Intangible Assets, replacing section 3062, Goodwill and Other Intangible Assets and
section 3450, Research and Development Costs. the new pronouncement establishes standards for the recognition, measurement, presentation,
and disclosure of goodwill subsequent to its initial recognition and of intangible assets by profit-oriented enterprises. standards concerning
goodwill are unchanged from the standards included in the previous section 3062. this section is effective in the first quarter of 2009, and the
company is currently evaluating the impact of the adoption of this new section on its consolidated financial statements.
(v) convergence with international Financial Reporting standards
in 2006, canada’s accounting standards Board ratified a strategic plan that will result in canadian generally accepted accounting principles
(gaaP), as used by public companies, being evolved and converged with international Financial Reporting standards (iFRs) over a transitional
period to be complete by 2011. the official changeover date from canadian gaaP to iFRs is for interim and annual financial statements
relating to fiscal years beginning on or after January 1, 2011. as the international accounting standards Board currently has projects underway
that should result in new pronouncements and since this canadian convergence initiative is very much in its infancy as of the date of these
statements, the company has not yet assessed the impact of the ultimate adoption of iFRs on the company.
2007 finning international inc. 65
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 disposition of distribution arrangement in canada (a)
gain on sale of properties in canada (b)
gain on sale of railroad and non-cat remanufacturing business in canada (c)
Project costs and other
gain on sale of other surplus properties
2007
(2,408)
–
–
5,117
(4,144)
(1,435)
$
$
2006
–
(12,854)
(5,331)
11,383
(3,174)
(9,976)
$
$
the tax expense on other income for the year ended December 31, 2007 was $0.1 million (2006: $0.6 million).
(a) in 2007, Finning (canada) terminated its distribution arrangement with shell canada Products for net cash proceeds of approximately
$7 million, resulting in a pre-tax gain of $2.4 million.
(b) in the first quarter of 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 the third quarter of 2006, the company sold its interest in its canadian operation’s head office properties
in edmonton. as part of this transaction, the company also terminated lease agreements for land and buildings 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 is being amortized to
income over the lease terms.
(c) in the first quarter of 2006, the company sold its railroad and non-caterpillar engine component remanufacturing business for cash proceeds
of $5.3 million, resulting in a pre-tax gain of approximately $5.3 million.
3. shOrt-term and lOng-term deBt
December 31
($ tHousanDs)
short-term debt
long-term debt:
Medium term notes
7.40%, $200 million, due June 19, 2008
4.64%, $150 million, due December 14, 2011
5.625%, £125 million eurobond, due May 30, 2013
other term loans (a)
less current portion of long-term debt
total long-term debt
2007
2006
$
370,942
$
425,423
200,812
149,622
242,881
212,730
806,045
(215,663)
590,382
$
200,000
150,000
285,301
102,849
738,150
(2,224)
735,926
$
(a) other loans include u.s. $130.6 million and £30.0 million (2006: u.s. $83.6 million) of unsecured borrowings under a five-year committed
bank facility that is classified as long-term debt, and other unsecured term loans primarily from supplier merchandising programs. other loans
also include £11.2 million of rental equipment financing secured by the related equipment, with varying rates of interest from 5.5% - 10.3%
and maturing on various dates up to 2011.
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 subsidiary operations. as at December
31, 2007, the company had approximately $1,380 million of unsecured credit facilities, and including all bank and commercial paper borrowings
drawn against these facilities, approximately $800 million of capacity remained available.
included in short-term debt is foreign currency denominated debt of u.s. $14.3 million (2006: u.s. $38.1 million) and £27.2 million (2006: £8.0 million).
the average interest rate applicable to the consolidated short-term debt for 2007 was 5.3% (2006: 4.8%).
66
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 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 13), the company used a portion of the proceeds
to redeem £75 million ($156.6 million) of the original £200 million eurobond. the company recorded a pre-tax charge of approximately
$8.9 million in 2006, reflecting the early recognition of deferred financing 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.
the company has an $800 million unsecured syndicated revolving credit facility, maturing in 2011. 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 floating rates of interest. at December 31, 2007, $187.8 million (2006: $97.4 million) was drawn on this facility.
covenant
the company is subject to a maximum debt to capitalization level pursuant to a covenant within its syndicated bank credit facility. as at
December 31, 2007 and 2006, the company is in compliance with this covenant.
long-teRM DeBt RePayMents
Principal repayments on long-term debt in each of the next five years and thereafter are as follows:
($ tHousanDs)
2008
2009
2010
2011
2012
thereafter
Finance costs
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
other finance related expenses, net of sundry interest earned
less: interest expense related to discontinued operations
Finance costs from continuing operations
$
$
215,663
4,024
3,971
339,504
–
242,883
806,045
2007
2006
$
$
25,600
46,444
72,044
(823)
–
5,381
76,602
(3,760)
72,842
$
$
16,618
53,822
70,440
(319)
8,864
7,257
86,242
(16,400)
69,842
2007 finning international inc. 67
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, firm commitments, or forecasted transactions.
Finance costs
the company monitors its debt portfolio mix of fixed and variable rate instruments and at times, will use forward interest rate agreements,
swaps and collars to manage this balance of fixed and floating rate debt.
in contemplation of the planned refinancing of the $200 million Medium term note maturing June 19, 2008, the company has entered into a bond
forward to hedge a portion of the interest rate risk associated with the replacement debt. Hedge accounting has been applied to this bond forward.
long-teRM incentive Plans
the company’s earnings are affected by its long-term incentive plans (ltiP) as a result of movements in the company’s share price. During 2007,
the company entered into a variable Rate share Forward (vRsF) with a financial institution to hedge a portion of its ltiP which is marked-to-
market on a quarterly basis. the vRsF is cash-settled at the end of a five-year term, or at any time prior to that at the option of the company,
based on the difference between the company’s common share price at that time and the execution price plus accrued interest. the average
execution price per share is $28.71 on 2.0 million common shares, which approximates the number of outstanding deferred share units and
vested share appreciation units as at December 31, 2007. as the company’s share price changes, the mark-to-market impact related to the stock-
based compensation liability is effectively offset by the mark-to-market impact related to the vRsF.
FaiR values
the following fair value information is provided solely to comply with financial instrument disclosure requirements. the company cautions
readers in the interpretation of the impact of these estimated fair values. the fair value of financial instruments is determined by reference to
quoted market prices for actual or similar instruments, where available, or by estimates derived using present value or other valuation techniques.
the fair value of accounts receivable, notes receivable, short-term debt, and accounts payable and accruals approximates their recorded values
due to the short-term maturities of these instruments.
the fair values of the derivatives below have been estimated using market information as at December 31, 2007 and 2006. these fair values
approximate the amount the company would receive or pay to terminate the contracts:
notional
value
term to
Maturity
Fair value
Receive (Pay)
($ oR £ tHousanDs)
Balance sheet classification
2007
Foreign exchange
cross currency interest Rate swaps
other assets – long-term
Pay £ fixed / receive caD $ fixed
Forwards buy us$ (sell caD $)
accounts payable and accruals
Forwards buy us$ (sell chilean peso) accounts payable and accruals
Forward buy us$ (sell caD $)
other assets – current
£
150,000
uS$ 166,921
uS$ 48,000
3,875
uS$
perpetual
1-12 months
1-2 months
3 months
interest rates
Bond Forward
interest Rate swaps
long-term incentive plans
variable Rate share Forward
accounts payable and accruals
accounts payable and accruals
$
200,000
uS$ 11,250
September 2008
1-4 years
long-term obligations
$
57,422
november 2012
2006
Foreign exchange
cross currency interest Rate swaps
Pay £ fixed / receive caD $ fixed (a) long-term obligations
accounts payable and accruals
Forwards sell £ (buy caD $) (b)
Forwards buy us$ (sell caD $)
accounts payable and accruals
Forwards buy us$ (sell chilean peso) accounts payable and accruals
£
£
us$
us$
150,000
155,000
215,998
32,000
perpetual
perpetual
1-12 months
1-2 months
68
$
$
$
$
$
$
$
$
$
$
$
41,637
(3,283)
(48)
71
(5,028)
(325)
(193)
(1,094)
(28,612)
9,806
278
notes to tHe consoliDateD Financial stateMents
the amounts above are recorded at fair value on the balance sheet as indicated above, except for the following:
(a) at December 31, 2006, the mark-to-market loss of $14.2 million was recorded in long-term obligations.
(b) at December 31, 2006, the mark-to-market loss of $29.8 million was recorded in accounts payable and accruals. these forwards were
unwound during 2007.
long-teRM DeBt
the fair value of the company’s long-term debt is estimated as follows:
December 31
($ tHousanDs)
long-term debt
2007
2006
Book value
Fair value
Book value
Fair value
$
806,045
$
788,459
$
738,150
$
745,734
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 significant concentration of credit risk related
to the company’s position in trade accounts or notes receivables. credit risk is minimized because of the diversification of the company’s
operations, as well as its large customer base and its geographical dispersion.
the credit risk associated with derivative financial 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 financial 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
2007
2006
$
$
70,954
19,352
90,306
230
12,362
12,592
102,898
$
$
51,703
24,470
76,173
(10,459)
1,965
(8,494)
67,679
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
change in statutory tax rates in u.K. and canada
non-deductible stock-based compensation
and other expenses
income not subject to tax
non-taxable capital gain
other
Provision for income taxes
2007
2006
$
125,971
32.89%
$
100,914
33.21%
(24,183)
(4,536)
6,012
(410)
(277)
321
102,898
$
(6.31)%
(1.18)%
1.57%
(0.11)%
(0.07)%
0.08%
26.87%
(33,007)
664
3,014
1,548
(2,210)
(3,244)
67,679
$
(10.86)%
0.22%
0.99%
0.51%
(0.73)%
(1.07)%
22.27%
2007 finning international inc. 69
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
$51.8 million (2006: $47.6 million) and $2.6 million (2006: $5.2 million), respectively.
temporary differences and tax loss carry-forwards that give rise to future income tax assets and liabilities are as follows:
December 31
($ 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:
Derivative financial instruments
capital, rental and leased assets
employee benefits
net future income tax liability
2007
2006
$
$
51,096
5,416
10,938
849
1,800
70,099
(12,968)
(63,392)
(38,214)
(114,574)
(44,475)
$
$
47,151
9,885
11,128
965
5,911
75,040
–
(71,368)
(22,252)
(93,620)
(18,580)
the company has recognized the benefit of the following tax loss carry-forwards available to reduce future taxable income and capital gains
expiring through 2026 for canada and available indefinitely for international:
December 31
($ tHousanDs)
canada
international
2007
14,464
5,821
20,285
$
$
2006
23,652
9,229
32,881
$
$
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, 2007 and 2006.
the company is authorized to issue an unlimited number of common shares.
on May 9, 2007, the company’s shareholders approved a split of the company’s outstanding common shares on a two-for-one basis. each
shareholder of record at the close of business on May 30, 2007, received one additional share for every outstanding share held on the record
date. all stock-based compensation plans, share, and per-share data have been adjusted to reflect the stock split.
the company repurchased 3,691,400 common shares during 2007 as part of a normal course issuer bid. these shares were repurchased at an
average price of $27.82, which has been allocated to reduce share capital by $11.9 million and retained earnings by $90.8 million.
a shareholders’ rights plan is in place which is intended to provide all holders of common shares with the opportunity to receive full and
fair value for all of their shares in the event a third party attempts to acquire a significant interest in the company. the company’s dealership
agreements with subsidiaries of caterpillar inc. are fundamental to its business and any change in control must be approved by caterpillar inc.
the plan provides that one share purchase right has been issued for each common share and will trade with the common shares until such
time as any person or group, other than a “permitted bidder”, bids to acquire or acquires 20% or more of the company’s common shares, 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.
70
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:
•
•
•
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. 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 7.5 million common shares pursuant to the exercise of stock options.
at December 31, 2007, 3.7 million common shares remain eligible to be issued in connection with future grants under this stock option Plan.
Details of the stock option plans, adjusted for the May 2007 stock split, 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
2007
weighted
average
exercise price
$
$
$
$
$
14.44
31.59
13.42
20.99
11.92
options
3,903,526
1,721,000
(968,124)
4,656,402
1,745,280
2006
Weighted
average
exercise Price
$
$
$
$
$
9.77
19.75
9.08
14.44
8.59
options
2,948,586
1,769,400
(814,460)
3,903,526
1,691,974
in the second quarter of 2007, the company issued 1,721,000 common share options to senior executives and management of the company
(2006: 1,769,400 common share options). in 2007 and 2006, long term incentives for executives and senior management were all made in the
form of stock options. 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
2007 Grant
2006 grant
1.21%
21.57%
4.09%
5.5 years
1.16%
21.32%
4.21%
5.5 years
at the grant date, the weighted average fair value of options granted during the year was $7.89 (2006: $4.96). total stock option expense
recognized in 2007 was $9.3 million (2006: $5.3 million).
2007 finning international inc. 71
notes to tHe consoliDateD Financial stateMents
7. stOCK-Based COmpensatiOn plans (continued)
the following table summarizes information about stock options outstanding at December 31, 2007:
Range of exercise prices
$4.52 - $8.50
$14.69 - $16.27
$19.75 - $19.82
$25.85 - $31.67
options outstanding
weighted
average
remaining
life
weighted
average
exercise
price
options exercisable
number
outstanding
weighted
average
exercise
price
2.3 years
4.0 years
5.3 years
6.3 years
5.0 years
$
$
$
$
$
6.26
15.79
19.75
31.59
20.99
914,734
320,542
510,004
–
1,745,280
$
$
$
$
$
6.26
15.60
19.75
–
11.92
number
outstanding
914,734
468,668
1,585,600
1,687,400
4,656,402
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 fiscal quarter. changes in the value of the units as a result of fluctuations 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.
in December 2007, the company entered into a variable Rate share Forward (vRsF) with a financial institution to hedge a portion of its
outstanding deferred share units and vested share appreciation units, reducing the exposure to movements in the company’s share price due to
the impact on these stock-based compensation plans – see note 4. the vRsF had a minimal impact on the stock-based compensation expense
for the year ended December 31, 2007. 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 14,301 share units in 2007 (2006: 22,952 share units), which were issued to
the Directors and expensed equally over the calendar year as the units are issued.
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.
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 specified percentages or become vested partially on December 30th of the year
following the year of retirement, death or disability. these specified levels and vesting percentages are based on the company’s common share
price at those specified 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 five 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. no units have
been awarded under the Dsu-B plan since 2005.
72
notes to tHe consoliDateD Financial stateMents
as at December 31, 2007 and 2006, all outstanding Dsu units have vested.
Details of the deferred share unit plans, which reflect the vestings in the year as well as mark-to-market adjustments, are as follows:
For years ended December 31
2007
2006
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)
104,964
789
(48,574)
57,179
104,964
789
(48,574)
57,179
1,353,496
14,525
(228,321)
1,139,700
1,353,496
14,525
(228,321)
1,139,700
358,280
25,402
(89,649)
294,033
358,280
25,402
(89,649)
294,033
1,816,740
40,716
(366,544)
1,490,912
1,816,740
40,716
(366,544)
1,490,912
103,566
1,398
–
104,964
103,566
1,398
–
104,964
1,510,172
16,680
(173,356)
1,353,496
1,337,522
172,830
(156,856)
1,353,496
316,958
41,322
–
358,280
316,958
41,322
–
358,280
1,930,696
59,400
(173,356)
1,816,740
1,758,046
215,550
(156,856)
1,816,740
Balance, beginning of year $ 2,508
406
expensed
(1,275)
exercised/cancelled
$ 1,639
Balance, end of year
$ 32,342
6,632
(6,310)
$ 32,664
$ 8,561
2,636
(2,770)
$ 8,427
$ 43,411
9,674
(10,355)
$ 42,730
$
$
1,923
585
–
2,508
$ 24,838
10,682
(3,178)
$ 32,342
$
$
5,886
2,675
–
8,561
$ 32,647
13,942
(3,178)
$ 43,411
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.
in 2007 and 2006, there were no saR units issued to management. Details of the saR plans are as follows:
For years ended December 31
units
outstanding, beginning of year
exercised/cancelled
outstanding, end of year
vested, beginning of year
vested
exercised
vested, end of year
liaBility
($ tHousanDs)
Balance, beginning of year
expensed
exercised
Balance, end of year
strike price ranges:
2007
2006
1,162,132
(325,257)
836,875
762,722
265,937
(317,557)
711,102
1,430,000
(267,868)
1,162,132
573,400
409,056
(219,734)
762,722
$
$
9,965
6,413
(4,935)
11,443
$13.03 - $16.22
$
$
4,655
6,588
(1,278)
9,965
SUMMARy – IMPACt OF StOCK-bASED COMPEnSAtIOn PlAnS
changes in the value of all deferred share units and share appreciation rights as a result of fluctuations in the company’s common share price and
the impact of new issues, including stock options, was an expense of $25.5 million in 2007 (2006: $25.8 million).
2007 finning international inc. 73
notes to tHe consoliDateD Financial stateMents
8. earnings per share
Basic earnings per share (ePs) is calculated by dividing net income available to common shareholders by the weighted average number of
common shares outstanding during the period. Diluted earnings per share is calculated to reflect the dilutive effect of exercising outstanding
stock options by applying the treasury stock method.
earnings used in determining earnings per share from continuing operations are presented below. earnings used in determining earnings per share
from discontinued operations are the earnings from discontinued operations as reported within the consolidated statements of income and
retained earnings.
For years ended December 31
($ tHousanDs, excePt sHaRe anD PeR sHaRe aMounts)
2007
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
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
9. Other assets
December 31
($ tHousanDs)
other assets – current:
Future income taxes (note 5)
value added tax receivable
Prepaid expenses
current portion of finance assets (note 10)
supplier claims receivable
Retained interest in transferred receivables (note 19)
income taxes recoverable
other
other assets – long-term:
accrued defined benefit pension asset (note 18)
long-term swap contracts receivable (note 4)
Deferred financing costs
investment in energyst B.v. (a)
Deferred project costs
Future income taxes (note 5)
other
income
shares
Per share
$
280,107
–
178,844,411
1,615,544
$
280,107
180,459,955
$
236,187
–
178,741,334
1,057,606
$
236,187
179,798,940
$
$
$
$
1.57
–
1.55
1.32
–
1.31
2007
2006
$
$
$
$
51,806
6,519
13,817
11,789
45,780
–
582
51,568
181,861
126,747
41,637
–
17,105
746
2,567
16,834
205,636
$
$
$
$
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
12,781
123,583
(a) the company accounts for its 24.4% investment in energyst using the equity method of accounting. in January 2008, the company increased
its interest in energyst by purchasing 14,582 new shares that were issued from treasury for cash of $4.6 million (euR 3.0 million). as a result
of this transaction, the company’s equity interest in energyst increased to 24.85% from 24.4%.
74
notes to tHe consoliDateD Financial stateMents
10. finanCe assets
December 31
($ tHousanDs)
instalment notes receivable
equipment leased to customers
less accumulated depreciation
total finance assets
less current portion of instalment notes receivable
2007
36,590
2,636
(723)
1,913
38,503
(11,789)
26,714
$
$
2006
27,176
38,303
(17,159)
21,144
48,320
(14,274)
34,046
$
$
Depreciation of equipment leased to customers for the year ended December 31, 2007 was $5.7 million (2006: $9.9 million).
11. rental eQuipment
December 31
($ tHousanDs)
cost
less accumulated depreciation
2007
2006
$ 1,707,545
(679,244)
$ 1,028,301
$
$
1,918,880
(880,240)
1,038,640
Depreciation of rental equipment for the year ended December 31, 2007 was $278.7 million (2006: $241.9 million).
12. Capital assets
lanD, BuilDings anD eQuiPMent
December 31
($ tHousanDs)
land
Buildings and equipment
2007
accumulated
depreciation
Cost
net book
value
2006
accumulated
depreciation
cost
net book
value
$
55,217
488,848
$ 544,065
$
–
195,142
$ 195,142
$
55,217
293,706
$ 348,923
$
$
58,805
516,274
575,079
$
$
–
209,423
209,423
$
$
58,805
306,851
365,656
land, buildings, and equipment under capital leases of $13.5 million (2006: $13.0 million), net of accumulated amortization of $2.2 million (2006:
$11.7 million), are included above.
Depreciation of buildings and equipment for the year ended December 31, 2007 was $38.1 million (2006: $34.9 million).
intangiBle assets
December 31
($ tHousanDs)
subject to amortization
customer contracts and
related customer relationships
software
indefinite lives
Distribution rights
2007
accumulated
Cost amortization
net book
value
2006
accumulated
amortization
cost
net book
value
$
$
3,132
34,994
38,126
646
38,772
$
$
1,549
12,675
14,224
–
14,224
$
$
1,583
22,319
23,902
646
24,548
$
$
$
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
the company acquired intangible assets subject to amortization of $10.8 million in 2007 (2006: $15.1 million). Depreciation of intangible assets
subject to amortization for the year ended December 31, 2007 was $4.1 million (2006: $2.9 million).
certain intangible assets are considered to have indefinite lives because they are expected to generate cash flows indefinitely.
2007 finning international inc. 75
notes to tHe consoliDateD Financial stateMents
13. dispOsitiOn Of disCOntinued OperatiOn
FInnInG UK GROUP – tOOlS HIRE DIvISIOn
on July 31, 2007, the company sold the business and assets of the tool Hire Division of the company’s u.K. subsidiary, Hewden stuart Plc,
excluding real estate, for cash proceeds of $242.9 million (approximately £112 million), net of costs.
the gross sale price, net of taxes and transaction costs, was approximately equal to the net book value of the net tangible assets and goodwill
associated with the tools rental business, and resulted in an after-tax gain on disposal of $0.1 million.
Restructuring and other costs associated with the disposition of this business of $2.0 million after tax were recorded in 2007.
FInnInG UK GROUP – MAtERIAlS HAnDlInG DIvISIOn
on september 29, 2006, the company sold its Materials Handling Division for cash proceeds of $170.6 million (£81.7 million), net of costs.
the sale of this business resulted in an after-tax loss on disposal of $32.7 million (£15.5 million) in the third quarter of 2006, which included the
write-off of the goodwill and intangible assets associated with this business.
the results of operations of the tool Hire and the Materials Handling divisions have been included in the consolidated statements of cash flow
up to the date of disposition and as discontinued operations in the consolidated statements of income up to the date of disposition. the results
of the tool Hire and the Materials Handling divisions had previously been reported in the Finning uK group segment.
income (loss) from the tool Hire and Materials Handling divisions to the date of disposition is summarized as follows:
For years ended December 31
($ tHousanDs)
tool Hire Division
Materials Handling Division
2007
2006
2007
Revenue
income (loss) before provision for income taxes
gain (loss) on sale of discontinued operations
Provision for income taxes (expense) recovery
income (loss) from discontinued operations
$
$
113,272
(4,108)
38,590
(36,532)
(2,050)
$
$
194,090
8,214
–
(3,663)
4,551
$
$
–
–
–
–
–
$
$
2006
183,563
(5,690)
(33,974)
3,002
(36,662)
the assets and liabilities of the Materials Handling Division were removed from the consolidated Balance sheet upon disposition in 2006 and
are not presented on the consolidated Balance sheet at December 31, 2007 or 2006. the carrying amounts of assets and liabilities related to the
tool Hire Division as at the date of disposition, and for the comparative period presented, are as follows:
($ tHousanDs)
aSSetS
current assets
accounts receivable
inventories
other assets
total current assets
Rental equipment
land, building and equipment
goodwill
other assets
liaBilitieS
current liabilities
accounts payable and accruals
income tax payable
total current liabilities
long-term obligations
76
July 31, 2007
(date of
disposition)
December 31,
2006
$
$
$
$
35,270
3,893
1,277
40,440
77,334
13,841
91,136
–
222,751
19,071
–
19,071
–
19,071
$
$
$
$
38,284
5,169
3,130
46,583
81,775
16,526
95,861
7,529
248,274
32,726
1,011
33,737
2,915
36,652
notes to tHe consoliDateD Financial stateMents
the significant net cash flows from discontinued operations up to the date of disposition included in the consolidated statements of cash Flow
are as follows:
For years ended December 31
($ tHousanDs)
cash provided by (used in) operating activities
cash provided by (used in) investing activities
$
$
(3,795)
(561)
$
$
14. gOOdwill
the change in the carrying amount of goodwill is as follows:
tool Hire Division
Materials Handling Division
2007
2006
31,528
860
2007
$
$
–
–
$
$
2006
28,052
–
December 31, 2007
($ tHousanDs)
goodwill, beginning of year
acquired (a)
adjustment to purchase price (c)
Disposed (note 13)
Foreign exchange translation adjustment
goodwill, end of year
December 31, 2006
($ tHousanDs)
goodwill, beginning of year
acquired (a)
adjustment to purchase price (b)
Disposed (note 13)
Foreign exchange translation adjustment
goodwill, end of year
Canada
South america
uk Group
Consolidated
$
$
$
$
32,388
1,043
–
–
–
33,431
$
$
33,342
–
253
–
(5,091)
28,504
canada
south america
30,304
2,084
–
–
–
32,388
$
$
29,862
–
3,402
–
78
33,342
$
$
$
$
316,140
–
–
(91,136)
(35,840)
189,164
$
$
381,870
1,043
253
(91,136)
(40,931)
251,099
uK group
consolidated
304,661
–
–
(28,274)
39,753
316,140
$
$
364,827
2,084
3,402
(28,274)
39,831
381,870
(a) in 2007, the company acquired the assets and business operations of Mainline Rent-all (1986) ltd., an equipment rental company based
in alberta, canada, for cash of approximately $2.7 million. in 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 reclassified 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 Mineras 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. $6.8 million) was paid in trust as partial security, which has now been paid upon achievement
of the performance criteria.
2007 finning international inc. 77
notes to tHe consoliDateD Financial stateMents
15. lOng-term OBligatiOns
December 31
($ tHousanDs)
stock-based compensation (note 7)
leasing obligations (a) (note 22)
employee future benefit obligations
long-term swap contract payable (note 4)
sale leaseback deferred gain
asset retirement obligations (b)
argentina additional consideration (note 14)
other
2007
54,173
12,618
17,498
–
8,470
1,423
–
7,517
101,699
$
$
2006
53,376
28,453
14,727
14,170
9,230
6,223
1,414
3,701
131,294
$
$
(a) capital leases issued at varying rates of interest from 0.9% - 10.6% 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 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 flows have been discounted using the company’s credit-adjusted risk-free rate
of 4%. should changes occur in estimated future dilapidation costs, revisions to the liability could be made. Due to the disposition of the tool
Hire Division in the u.K., the liability has been reduced by approximately $2.8 million. the total undiscounted amount of estimated cash flows
is $2.2 million, and the expected timing of payment of the cash flows is estimated to be over the next thirty years.
16. Cumulative CurrenCy translatiOn adJustments
the company’s subsidiaries operate in three functional currencies: canadian dollars, u.s. dollars, and the u.K. pound sterling. the company
experiences foreign currency translation gains or losses as a result of consolidating the financial statements of self-sustaining foreign operations.
these unrealized foreign currency translation gains or losses are recorded in the accumulated other comprehensive income/loss account
on the consolidated Balance sheet. currency translation adjustments arise as a result of fluctuations in foreign currency exchange rates at the
period end. the cumulative currency translation adjustment for 2007 mainly resulted from the stronger canadian dollar relative to the u.s. dollar
(15.2% stronger), and the u.K. pound sterling (14.1% stronger), from December 31, 2006 to December 31, 2007.
the exchange rates of the canadian dollar against the following foreign currencies were as follows:
2007
0.9881
1.9600
1.0748
2.1487
2006
1.1653
2.2824
1.1341
2.0886
December 31
exchange rate
u.s. dollar
u.K. pound sterling
For years ended December 31
average exchange rates
u.s. dollar
u.K. pound sterling
78
notes to tHe consoliDateD Financial stateMents
17. supplemental Cash flOw infOrmatiOn
non casH WoRKing caPital cHanges
For years ended December 31
($ tHousanDs)
accounts receivable and other
inventories – on-hand equipment
inventories – parts and supplies
accounts payable and accruals
income taxes
changes in working capital items
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 paid
2007
2006
$
$
$
(158,857)
(65,548)
(31,897)
31,215
6,499
(218,588)
2007
16,533
45,327
61,860
$
$
$
(127,177)
(186,024)
(66,344)
255,050
(14,531)
(139,026)
2006
13,059
65,426
78,485
2007
2006
$
$
(74,668)
(105,091)
$
$
(89,045)
(84,258)
18. emplOyee future Benefits
the company and its subsidiaries in canada and the u.K. have defined benefit pension plans and defined contribution pension plans providing
retirement benefits for most of their permanent employees.
the defined benefit pension plans include both registered and non-registered pension plans that provide a pension based on the members’ final
average earnings and years of service while participating in the pension plan.
•
•
•
In Canada, defined benefit plans exist for eligible employees. Final average earnings are based on the highest 3-5 year average salary and
there is no standard indexation feature. effective July 1, 2004, non-executive members of the defined benefit plan were offered a voluntary
opportunity to convert their benefits to a defined contribution pension plan. the registered defined benefit plan was subsequently closed
to all new non-executive employees, who are eligible to enter one of the company’s defined contribution plans. the defined benefit pension
plan continues to be open to new executives. Pension benefits under the registered plans’ formula that exceed the maximum taxation
limits are provided from a non-registered supplemental pension plan. Benefits under this plan are partially funded by a Retirement
compensation arrangement.
Finning (UK) provides a defined benefit plan for all employees hired prior to January 2003. Final average earnings are based on the highest
3-year period and benefits are indexed annually with inflation subject to limits. effective January 2003, this plan was closed to new non-
executive employees and replaced with a defined contribution pension plan. the defined benefit 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) defined benefit pension plan, for future service only. With the sale of the uK Materials Handling business,
certain employees became non-active members of the defined benefit plan.
Hewden has two defined benefit 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 benefits are indexed annually with inflation subject to limits. With the sale of the Hewden tool
Hire business, certain employees became non-active members of the defined benefit plan.
the defined contribution pension plans in canada 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 defined contribution pension plan
in the uK offers a match of employee contributions, within a required range, plus 1%.
2007 finning international inc. 79
notes to tHe consoliDateD Financial stateMents
18. emplOyee future Benefits (continued)
the company’s south american employees do not participate in employer pension plans but are covered by country specific 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 $4.8 million was expensed in 2007 (2006: $3.2 million) for a total obligation of $17.5 million (2006: $14.7 million).
the expense for the company’s benefit plans, primarily for pension benefits, is as follows:
For years ended December 31
($ tHousanDs)
Canada
2007
uk hewden
total
canada
uK
Hewden
total
2006
Defined contribution plans
net benefit plan expense
Defined benefit plans
current service cost, net
of employee contributions
interest cost
actual return on plan assets
actuarial (gains) losses
Plan curtailment (a)
employee future benefit
costs before adjustments
to recognize the long-term
nature of employee future
benefit costs
adjustments to recognize
the long-term nature
of employee future
benefit 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 benefit obligation
for year
Difference between
amortization of past service
costs for year and actual
plan amendments for year
amortization of transitional
obligation / (asset)
Defined benefit costs
recognized
total
$ 16,193
$
823
$
241
$ 17,257
$ 12,838
$
948
$
244
$ 14,030
$ 8,343
16,563
(8,120)
(3,559)
–
$ 5,328
26,238
(17,619)
(75,643)
–
$ 2,039
10,582
(7,321)
(21,148)
958
$ 15,710
53,383
(33,060)
(100,350)
958
$ 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
13,227
(61,696)
(14,890)
(63,359)
(10,860)
18,902
(5,934)
2,108
(11,707)
(11,498)
(4,280)
(27,485)
12,882
19,944
(98)
32,728
5,769
82,102
22,894
110,765
8,348
(21,515)
11,452
(1,715)
298
(709)
–
(411)
298
(3,739)
–
(3,441)
(19)
(1,248)
1,523
256
1,047
(1,213)
1,552
1,386
7,568
$ 23,761
6,951
$ 7,774
5,247
$ 5,488
19,766
$ 37,023
11,715
$ 24,553
12,379
$ 13,327
6,972
$ 7,216
31,066
$ 45,096
(a) as a result of the sales of the tool Hire and Materials Handling divisions, the company recognized a curtailment to reflect the impact of the
significant reduction of the expected years of future services of active employees participating in the Hewden and Finning (uK) defined benefit
plans, respectively.
total cash payments for employee future benefits for 2007, which is made up of cash contributed by the company to its defined benefit plans and
its defined contribution plans was $78.5 million and $17.2 million, respectively (2006: $55.8 million and $14.0 million, respectively).
80
notes to tHe consoliDateD Financial stateMents
information about the company’s defined benefit plans is as follows:
For years ended December 31
($ tHousanDs)
Canada
uk hewden
total
canada
uK
Hewden
total
2007
2006
accrued benefit obligation
Balance at beginning of year
current service cost
interest cost
Benefits paid
actuarial (gains) losses
Foreign exchange rate changes
Plan curtailment
Plan amendments (a)
Balance at end of year
$ 313,435
10,068
16,563
(18,355)
(3,559)
–
–
–
$ 318,152
$ 531,799
8,126
26,238
(19,959)
(75,643)
(69,741)
–
–
$ 400,820
(8,820)
3,298
10,582
$ 215,008 $ 1,060,242
21,492
53,383
(47,134)
(21,148) (100,350)
(98,697)
(28,956)
–
–
$ 169,964 $ 888,936
–
–
$ 307,646
10,190
15,956
(16,008)
(4,349)
–
–
–
$ 313,435
$ 415,787
13,446
21,137
(12,910)
28,202
62,795
3,342
–
$ 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)
plan assets
Fair value at beginning of year $ 295,019
8,120
actual return on plan assets
12,485
employer contributions (b)
1,725
employees’ contributions
(18,355)
Benefits paid
–
Foreign exchange rate changes
$ 298,994
Fair value at end of year
$ 424,982
17,619
46,169
2,798
(19,959)
(64,123)
$ 407,486
$ 160,792 $ 880,793
33,060
7,321
81,922
23,268
5,782
1,259
(47,134)
(8,820)
(88,857)
(24,734)
$ 159,086 $ 865,566
$ 269,358
30,932
9,012
1,725
(16,008)
–
$ 295,019
$ 312,418
43,336
26,928
3,889
(12,910)
51,321
$ 424,982
$ 125,848 $ 707,624
83,907
49,670
6,980
(37,701)
70,313
$ 160,792 $ 880,793
9,639
13,730
1,366
(8,783)
18,992
Funded status –
plan surplus/(deficit)
unamortized net
actuarial loss
unamortized past service costs
contributions remitted
after valuation date
unamortized transitional
obligation/asset
accrued benefit asset/
(liability) (c)
$ (19,158) $ 6,666
$ (10,878) $ (23,370)
$ (18,416) $ (106,817) $ (54,216) $ (179,449)
64,670
2,067
63,740
(7,762)
22,306
–
150,716
(5,695)
58,732
2,365
149,223
(9,791)
47,661
–
255,616
(7,426)
3,984
1,833
998
6,815
505
6,818
1,915
9,238
(102)
(6,756)
5,139
(1,719)
(121)
(9,194)
8,621
(694)
$ 51,461
$ 57,721
$ 17,565 $ 126,747
$ 43,065
$ 30,239
$ 3,981 $ 77,285
(a) the plan amendment of $2.0 million in 2006 in Hewden related to a reduction in the accrued benefit obligation of the defined benefit pension
plan due to pension benefit changes that were agreed between the company and the plan’s trustees and communicated with the employee
members of the plan. it was agreed that employee members’ pension benefits would cease to be linked to their final pensionable salary after
april 2010. From april 2010, employee members’ pension benefits will increase broadly in line with inflation, as opposed to future salary
increases. this resulted in a reduction in the pension plan’s accrued benefit obligation because employee members’ pension benefits are now
assumed to increase in line with the salary increase assumption until april 2010 and then in line with the lower inflation assumption thereafter.
(b) in 2007, an additional pension payment of $17.1 million was made to fund the uK pension plans as agreed at the time of the sale of the
Materials Handling Division.
(c) the accrued benefit asset or liability is classified in either other assets or long-term obligations, respectively, on the consolidated balance sheets.
included in the above accrued benefit obligation and fair value of plan assets at the year-end are the following amounts in respect of plans that are
not fully funded:
For years ended December 31
($ tHousanDs)
Canada
uk hewden
total
canada
uK
Hewden
total
2007
2006
accrued benefit obligation
Fair value of plan assets
Funded status – plan deficit
$ 262,895
236,336
$ 26,559
$
$
–
–
–
$ 154,093
143,011
$ 11,082
$ 416,988
379,347
$ 37,641
$ 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
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, 2007 and 2006.
2007 finning international inc. 81
notes to tHe consoliDateD Financial stateMents
18. emplOyee future Benefits (continued)
Plan assets are principally invested in the following securities at november 30, 2007:
equity
Fixed-income
Real estate
Canada
54%
39%
7%
the significant 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
5.80%
5.25%
7.25%
3.50%
10-15
2007
uk
6.20%
5.30%
7.00%
4.00%
14
hewden
canada
6.20%
5.30%
7.25%
4.00%
13
5.25%
5.15%
7.25%
3.50%
10-15
uk
67%
33%
–
2006
uK
5.30%
4.95%
7.00%
3.50%
14
hewden
69%
31%
–
Hewden
5.30%
4.95%
7.25%
3.50%
13
Defined benefit pension plans are country and entity specific. the major defined benefit plans and their respective valuation dates are:
Defined Benefit 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 Defined Benefit Plan
Finning uK Defined Benefit scheme
Hewden stuart Pension scheme
Hewden Pension Plan
December 31, 2006
December 31, 2006
December 31, 2006
December 31, 2005
December 31, 2005
December 31, 2005
January 1, 2005
December 31, 2009
December 31, 2009
December 31, 2009
December 31, 2008
December 31, 2008
December 31, 2008
January 1, 2008
19. aCCOunts reCeivaBle seCuritiZatiOn
in 2002, the company entered into an arrangement and 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 expired
on november 29, 2007, the company could sell co-ownership interests of up to $120.0 million on a revolving basis. the company retained
a subordinated interest in the cash flows arising from the eligible receivables underlying the trust’s co-ownership interest. the trust and its
investors did not have recourse to the company’s other assets in the event that obligors failed to pay the underlying receivables when due.
Pursuant to the agreement, the company serviced the pool of underlying receivables.
on the expiry date, the company terminated the co-ownership interests, ceased all securitization of its accounts receivable, and repurchased
previously securitized receivables for cash of $45.0 million. at December 31, 2006, the company carried a retained interest in the transferred
receivables in the amount of $9.5 million, which equalled the amount of overcollateralization in the receivables it sold, which was reported on
the consolidated balance sheet in other current assets (note 9).
For the 2007 period up to the repurchase of the receivables held by the trust, the company recognized a pre-tax loss of $1.8 million (2006:
$2.0 million) relating to these transfers.
Proceeds from revolving reinvestment of collections were $451.9 million in 2007 (2006: $520.6 million).
82
notes to tHe consoliDateD Financial stateMents
20. eCOnOmiC relatiOnships
the company distributes and services heavy equipment and related products. the company has dealership agreements with numerous equipment
manufacturers, of which the most significant are with subsidiaries of caterpillar inc. Distribution and servicing of caterpillar products account for
the major portion of the company’s operations. Finning has a strong relationship with caterpillar inc. that has been ongoing since 1933.
21. 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.
During the fourth quarter of 2006, the uK group business model was reorganized to combine the operations of Finning (uK) and Hewden into
one organization creating four distinct market units to more effectively service customers, improve alignment with caterpillar, and to generate
operating efficiencies. at the same time a new management team was appointed. these four market units will, over time, be supported by an
integrated back office operation that will provide common head office services, generating additional synergies among the market units. as a
result of this reorganization, the Finning uK group is reported as one operating segment beginning in 2007, with the four market units being:
Heavy construction, general construction, Power systems, and Rental (Hewden).
Prior to 2007, results from the uK group were reported as two separate operating segments: Finning uK operations, reflecting the results
of Finning (uK), the uK caterpillar dealership operation and Diperk uK, which distributes and services Perkins engines in the u.K.; and Hewden
operations, an equipment rental and associated services operation in the u.K.
operating units are as follows:
•
•
•
•
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 Group operations: England, Scotland, Wales, Falkland Islands, and the Channel Islands.
Other: corporate head office.
the reportable operating segments are:
For year ended December 31, 2007
($ tHousanDs)
Revenue from external sources
operating costs
Depreciation and amortization
other income (expenses)
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
identifiable assets
capital assets
gross capital expenditures(1)
gross rental asset expenditures
(1) includes capital leases
canada
south america
uK group
other
consolidated
$ 2,936,229
(2,486,030)
(165,488)
1,602
$ 1,325,582
(1,171,761)
(25,922)
(551)
$ 1,400,427
(1,191,290)
(136,474)
384
$
6
(30,867)
–
–
$ 286,313
$ 127,348
$
73,047
$ (30,861)
$ 1,820,394
$ 158,301
23,604
$
$ 449,894
$ 810,465
58,339
$
21,856
$
76,481
$
$ 1,434,608
$ 156,014
32,359
$
$ 231,110
$ 68,696
817
$
–
$
–
$
$ 5,662,244
(4,879,948)
(327,884)
1,435
$ 455,847
(72,842)
(102,898)
280,107
(2,050)
$ 278,057
$ 4,134,163
$ 373,471
$ 77,819
$ 757,485
2007 finning international inc. 83
notes to tHe consoliDateD Financial stateMents
21. segmented infOrmatiOn (continued)
For year ended December 31, 2006
($ tHousanDs)
Revenue from external sources
operating costs
Depreciation and amortization
other income (expenses)
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
identifiable assets
capital assets
gross capital expenditures(1)
gross rental asset expenditures
(1) includes capital leases
canada
south america
uK group
other
consolidated
$ 2,612,597
(2,251,348)
(145,664)
17,729
$ 1,009,906
(876,286)
(24,660)
–
$ 1,230,730
(1,042,438)
(116,195)
(7,105)
$
6
(32,916)
–
(648)
$ 233,314
$ 108,960
$
64,992
$
(33,558)
$ 1,691,743
$ 158,485
41,817
$
$ 295,512
$ 779,817
55,224
$
15,003
$
42,157
$
$ 1,692,212
$ 176,450
32,550
$
$ 200,656
$
$
$
$
36,981
428
–
–
$ 4,853,239
(4,202,988)
(286,519)
9,976
$ 373,708
(69,842)
(67,679)
236,187
(32,111)
$ 204,076
$ 4,200,753
$ 390,587
89,370
$
$ 538,325
22. 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)
2008
2009
2010
2011
2012
thereafter
less imputed interest
less current portion of capital lease obligation
total long-term capital lease obligation
capital
leases
2,311
1,766
1,396
1,208
1,064
15,798
23,543
(9,442)
14,101
(1,483)
12,618
$
$
operating
leases
70,472
59,771
52,037
38,924
28,064
164,125
413,393
n/a
413,393
n/a
413,393
$
$
23. COmmitments and COntingenCies
(a) 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 financial position or results of operations.
(b) the company has committed to pay approximately $26.3 million over the next two years for the software licenses and implementation
support for a new information technology system solution for its global operations.
24. 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, 2007, the total estimated value of these
contracts outstanding is $161.2 million coming due at periods ranging from 2008 to 2014. the company’s experience to date has been that the
equipment at the exercise date of the contract is worth more than the repurchase amount. the total amount recognized as a provision against
these contracts is $0.7 million.
as part of the tool Hire and Materials Handling divisions Purchase and sale agreements, Finning has provided indemnifications to the respective
third party purchaser, covering breaches of representation and warranties as well as litigation and other matters set forth in the agreement.
claims may be made by the third party purchaser under these agreements for various periods of time depending on the nature of the claim. the
maximum potential exposure of Finning under these indemnifications is 100% of the purchase price with respect to the tool Hire Division, and
75% of the purchase price with respect to the Materials Handling Division. as at December 31, 2007, Finning had no material liabilities recorded
for these indemnifications.
84
notes to tHe consoliDateD Financial stateMents
in connection with the sale of the Materials Handling Division in 2006, the company provided a guarantee to a third party with respect to a
property lease. if the lessee were to default, the company would be required to make the annual lease payments of approximately $1.2 million
to the end of the lease term in 2020. as at December 31, 2007, the company had no liability recorded for this guarantee.
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.
25. management Of Capital
the company’s objectives when managing capital are:
(i) to maintain a flexible capital structure which optimizes the cost of capital at acceptable risk; and
(ii) to manage capital in a manner which balances the interests of equity and debt holders.
in the management of capital, the company includes shareholders’ equity, short-term and long-term debt in the definition of capital.
the company manages its capital structure and makes adjustments to it in the light of changes in economic conditions and the risk characteristics
of the underlying assets. in order to maintain or adjust the capital structure, the company may adjust the amount of dividends paid to shareholders,
purchase shares for cancellation pursuant to normal course issuer bids, issue new shares, issue new debt, and/or issue new debt to replace
existing debt with different characteristics.
the company monitors the following ratios in this respect: debt to total capitalization; and dividend payout ratio. Debt to total capitalization
and dividend payout ratio are non-gaaP measures which do not have a standardized meaning prescribed by gaaP and therefore may not be
comparable to similar measures presented by other issuers.
Debt to total capitalization is calculated as short-term and long-term debt (total debt) divided by total capitalization. total capitalization is defined
as the sum of total debt and all components of equity (share capital, contributed surplus, accumulated other comprehensive loss, and retained earnings).
Dividend payout ratio is calculated as the annual dividend declared per share divided by basic earnings per share from continuing operations for
the past twelve month period.
During 2007, the company’s strategy, which was unchanged from 2006, was to maintain the targets set out in the following table. the company
believes that these ratios are currently in the optimal range and provide access to capital at a reasonable cost.
as at and for years ended December 31
($ Millions, excePt as noteD)
Components of Debt and Coverage ratios
short-term debt
current portion of long-term debt
long-term debt
total debt
shareholders’ equity
total debt to capital
Dividend payout ratio
2007
2006
$
$
$
370.9
215.7
590.4
1,177.0
1,617.8
$
$
$
425.5
2.2
735.9
1,163.6
1,624.4
company targets
40 - 50%
25 - 30%
42%
23%
42%
21%
the total debt to capital ratio is comparable, year over year, and is within the company’s target.
in 2007, the company increased its dividend payout ratio target from 20-25% to 25-30%. the dividend payout ratio has increased over the 2006
level with the dividend rate per common share increasing twice during 2007, as the company moves towards its stated target.
26. suBseQuent events
(a) in January 2008, the company’s canadian operations, Finning (canada), acquired all of the issued and outstanding common shares of collicutt
energy services ltd. the total value of this transaction is approximately $145 million, comprising $96 million of cash, 14,365 Finning common
shares (valued at $0.4 million) issued in connection with the acquisition, with the difference being the assumption of debt. the purchase price
allocation has not been finalized.
(b) in January and early February 2008, the company’s uK subsidiary, Hewden, sold certain properties for cash proceeds of approximately
$28 million, resulting in a pre-tax gain of approximately $14 million.
2007 finning international inc. 85
ten yeaR Financial suMMaRy
For years ended December 31
($ tHousanDs excePt PeR sHaRe Data)
Revenue(1)
canadian operations
south american operations
uK group
international operations
total consoliDateD
earnings before interest and tax (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 flow after working capital changes
cash flow 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
south america
uK group
international
total
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
$ 2,936,229
$ 1,325,582
$ 1,400,427
$
6
$ 5,662,244
$
$
$
$
$
$
$
$
$
$
$
$
$
$
455,847
8.0%
280,107
4.9%
1.57
1.55
0.36
404,427
2.30
77,819
1.36
42%
9.19
16.8%
33.50
23.10
28.66
176,132
440,642
21,798
4,618
4,638
3,543
51
12,850
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
2,612,597
1,009,906
1,230,730
6
4,853,239
373,708
7.7%
236,187
4.9%
1.32
1.31
0.275
460,210
2.57
89,370
1.22
42%
9.07
15.8%
23.90
18.05
23.90
179,090
392,605
18,726
4,106
3,865
4,841
44
12,856
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
2,049,675
1,007,341
1,271,264
–
4,328,280
257,955
6.0%
161,672
3.7%
0.91
0.90
0.22
478,757
2.68
81,111
1.15
47%
7.92
11.8%
20.70
16.13
18.57
178,404
377,554
12,810
3,316
3,377
6,074
38
12,805
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
1,562,584
869,893
1,403,807
15
3,836,299
271,933
7.1%
114,946
3.0%
0.73
0.72
0.20
247,422
1.40
106,202
1.15
51%
7.50
11.0%
17.70
14.43
17.50
176,780
338,918
9,360
2,936
3,203
6,097
44
12,280
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
1,456,357
561,964
1,574,950
24
3,593,295
255,168
7.1%
131,951
3.7%
0.86
0.84
0.18
384,210
2.47
89,657
1.09
44%
6.17
14.3%
16.60
11.50
15.00
155,510
314,953
11,566
2,717
2,456
6,191
45
11,409
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
1,269,275
444,644
1,493,512
55
3,207,486
277,783
8.7%
132,253
4.1%
0.86
0.84
0.15
472,804
3.05
47,426
1.05
38%
6.00
15.7%
14.43
9.83
12.78
155,160
327,462
13,502
2,548
1,817
5,391
39
9,795
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
1,398,623
448,005
1,391,566
8,849
3,247,043
241,601
7.4%
103,917
3.2%
0.69
0.67
0.10
445,623
2.94
51,180
1.25
47%
5.12
14.1%
10.18
6.05
10.00
151,632
331,230
10,601
2,629
1,516
5,619
39
9,803
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
1,214,516
474,145
682,162
89,209
2,460,032
165,263
6.7%
73,391
3.0%
0.48
0.47
0.10
357,780
2.36
15,284
1.18
57%
4.51
10.5%
6.93
4.93
6.35
151,580
477,120
14,234
2,326
1,390
1,404
36
5,156
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
1,032,922
377,777
712,941
106,221
2,229,861
148,912
6.7%
59,600
2.7%
0.38
0.37
0.10
438,232
2.75
20,864
1.05
56%
4.37
8.7%
7.70
4.50
6.75
159,474
450,113
12,031
2,271
1,259
1,364
60
4,954
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
1,136,917
503,505
793,020
151,979
2,585,421
82,729
3.2%
3,185
0.1%
0.02
0.02
0.10
253,891
1.60
44,176
1.13
63%
4.26
0.5%
9.25
5.13
5.48
158,852
492,367
607
2,494
1,354
1,348
55
5,251
certain comparative figures have been reclassified to conform to the 2007 presentation. in addition, financial data has been restated to
incorporate common share subdivision occurring during the ten year period.
1.
on July 31, 2007, the company’s u.K. subsidiary, Hewden stuart Plc. sold its tools Hire Division. Results from that operation have been reclassified to
discontinued operations for the years ended December 31, 2007, 2006, and 2005. on september 29, 2006, the company’s u.K. subsidiary, Finning (uK) sold
its Materials Handling Division. Results from that operation have been reclassified to discontinued operations for the years ended December 31, 2006, 2005,
and 2004. therefore, revenue, eBit, net income, earnings per common share, and return on average shareholders’ equity reflect results from continuing
operations for those years.
2. in 2000, the diluted earnings per share calculation was changed to reflect the dilutive effect of exercising outstanding stock options by application of the
treasury stock method. Diluted earnings for the years ended 1999 to 2005 have been stated using this method.
3. equity ratios for the 2000 year does not include investment in Hewden stuart; equity ratio for years 2001 to 2003 included non-controlling interest that
was treated as equity.
86
For years ended December 31
($ tHousanDs excePt PeR sHaRe Data)
Revenue(1)
canadian operations
south american operations
uK group
international operations
total consoliDateD
earnings before interest and tax (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 flow after working capital changes
cash flow 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 shares outstanding (thousands)
coMMon sHaRe PRice
High
low
year end
Revenue per employee
net income per employee
nuMBeR oF eMPloyees
canada
south america
uK group
international
total
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
ten yeaR Financial suMMaRy
$ 2,936,229
$ 1,325,582
$ 1,400,427
6
$ 5,662,244
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
455,847
8.0%
280,107
4.9%
1.57
1.55
0.36
404,427
2.30
77,819
1.36
42%
9.19
16.8%
33.50
23.10
28.66
176,132
440,642
21,798
4,618
4,638
3,543
51
12,850
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
2,612,597
1,009,906
1,230,730
6
4,853,239
373,708
7.7%
236,187
4.9%
1.32
1.31
0.275
460,210
2.57
89,370
1.22
42%
9.07
15.8%
23.90
18.05
23.90
179,090
392,605
18,726
4,106
3,865
4,841
44
12,856
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
2,049,675
1,007,341
1,271,264
–
4,328,280
257,955
6.0%
161,672
3.7%
0.91
0.90
0.22
478,757
2.68
81,111
1.15
47%
7.92
11.8%
20.70
16.13
18.57
178,404
377,554
12,810
3,316
3,377
6,074
38
12,805
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
1,562,584
869,893
1,403,807
15
3,836,299
271,933
7.1%
114,946
3.0%
0.73
0.72
0.20
247,422
1.40
106,202
1.15
51%
7.50
11.0%
17.70
14.43
17.50
176,780
338,918
9,360
2,936
3,203
6,097
44
12,280
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
1,456,357
561,964
1,574,950
24
3,593,295
255,168
7.1%
131,951
3.7%
0.86
0.84
0.18
384,210
2.47
89,657
1.09
44%
6.17
14.3%
16.60
11.50
15.00
155,510
314,953
11,566
2,717
2,456
6,191
45
11,409
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
1,269,275
444,644
1,493,512
55
3,207,486
277,783
8.7%
132,253
4.1%
0.86
0.84
0.15
472,804
3.05
47,426
1.05
38%
6.00
15.7%
14.43
9.83
12.78
155,160
327,462
13,502
2,548
1,817
5,391
39
9,795
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
1,398,623
448,005
1,391,566
8,849
3,247,043
241,601
7.4%
103,917
3.2%
0.69
0.67
0.10
445,623
2.94
51,180
1.25
47%
5.12
14.1%
10.18
6.05
10.00
151,632
331,230
10,601
2,629
1,516
5,619
39
9,803
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
1,214,516
474,145
682,162
89,209
2,460,032
165,263
6.7%
73,391
3.0%
0.48
0.47
0.10
357,780
2.36
15,284
1.18
57%
4.51
10.5%
6.93
4.93
6.35
151,580
477,120
14,234
2,326
1,390
1,404
36
5,156
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
1,032,922
377,777
712,941
106,221
2,229,861
148,912
6.7%
59,600
2.7%
0.38
0.37
0.10
438,232
2.75
20,864
1.05
56%
4.37
8.7%
7.70
4.50
6.75
159,474
450,113
12,031
2,271
1,259
1,364
60
4,954
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
1,136,917
503,505
793,020
151,979
2,585,421
82,729
3.2%
3,185
0.1%
0.02
0.02
0.10
253,891
1.60
44,176
1.13
63%
4.26
0.5%
9.25
5.13
5.48
158,852
492,367
607
2,494
1,354
1,348
55
5,251
certain comparative figures have been reclassified to conform to the 2007 presentation. in addition, financial data has been restated to
incorporate common share subdivision occurring during the ten year period.
1.
on July 31, 2007, the company’s u.K. subsidiary, Hewden stuart Plc. sold its tools Hire Division. Results from that operation have been reclassified to
discontinued operations for the years ended December 31, 2007, 2006, and 2005. on september 29, 2006, the company’s u.K. subsidiary, Finning (uK) sold
its Materials Handling Division. Results from that operation have been reclassified to discontinued operations for the years ended December 31, 2006, 2005,
and 2004. therefore, revenue, eBit, net income, earnings per common share, and return on average shareholders’ equity reflect results from continuing
2. in 2000, the diluted earnings per share calculation was changed to reflect the dilutive effect of exercising outstanding stock options by application of the
treasury stock method. Diluted earnings for the years ended 1999 to 2005 have been stated using this method.
3. equity ratios for the 2000 year does not include investment in Hewden stuart; equity ratio for years 2001 to 2003 included non-controlling interest that
operations for those years.
was treated as equity.
2007 finning international inc. 87
BoaRD oF DiRectoRs
riCarDo BaCarreza
santiago, chile
President, Proinvest s.a.
Director since 1999
Member of the audit committee and
environment, Health and safety committee
John M. reiD
vancouver, British columbia, canada
Director of Methanex corporation
Director since 2006
Member of the audit committee and
environment, Health and safety committee
JaMeS e.C. Carter
edmonton, alberta, canada
Director of ePcoR utilities inc., the alberta Research council
and caReeRs: the next generation
Director since 2007
Member of the audit committee and
environment, Health and safety committee
anDrew h. SiMon, oBe
london, england
Director of sgl supervisory Board, Dalkia Plc,
travis Perkins Plc and Management consulting group Plc
Director since 1999
Member of the audit committee (chair) and corporate
governance committee
kathleen M. o’neill
toronto, ontario, canada
Director of tsx group inc., MDs inc., and canadian tire Bank
Director since 2007
Member of, and the designated ‘financial expert’ for, the audit
committee and a member of the Human Resources committee
BruCe l.turner
santiago, chile
turner Minerals s.a.
Director since 2006
Member of the Human Resources committee and environment,
Health and safety committee (chair)
DonalD S. o’Sullivan
calgary, alberta, canada
President, o’sullivan Resources ltd.
Director since 1991
Member of the Human Resources committee and
corporate governance committee (chair)
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
DouGlaS w.G. whiteheaD
north vancouver, British columbia, canada
President and chief executive officer, Finning international inc.
Director of Ballard Power systems inc., inmet Mining corporation,
international Forest Products ltd., Belkorp industries and
the conference Board of canada
Director since 1999
Member of the environmental, Health and safety committee
John M. willSon
vancouver, British columbia, canada
Director of nexen inc., Pan american silver corporation
and Harry Winston Diamond corporation
Director since 2000
Member of the Human Resources committee (chair)
and corporate governance committee
Please refer to the company’s management proxy circular for complete biographies of Finning directors.
88
ConraD a. pinette
cHaiRMan oF tHe BoaRD
Finning inteRnational inc.
DouGlaS w.G. whiteheaD
PResiDent anD cHieF executive oFFiceR
Finning inteRnational inc.
coRPoRate oFFiceRs
anDre J. Beaulieu
geneRal counsel anD
coRPoRate secRetaRy
Finning inteRnational inc.
anDrew w. Bone
PResiDent, PoWeR systeMs
Finning inteRnational inc.
anDrew S. FraSer
Managing DiRectoR
Finning gRouP, uK
SanDeep S. kalra
vice PResiDent,
coRPoRate tReasuReR
Finning inteRnational inc.
anna p. MarkS
senioR vice PResiDent,
coRPoRate contRolleR
Finning inteRnational inc.
thoMaS M. MerinSky
vice PResiDent,
investoR Relations
Finning inteRnational inc.
DaviD F.n. priMroSe
senioR vice PResiDent,
coRPoRate HuMan ResouRces
Finning inteRnational inc.
ian M. reiD
PResiDent
Finning (canaDa)
Juan CarloS villeGaS
PResiDent
Finning soutH aMeRica
MiChael t. waiteS
executive vice PResiDent
anD cHieF Financial oFFiceR
Finning inteRnational inc.
2007 finning international inc. 89
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 efficient 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 10 members. all directors, other than Douglas W. g. Whitehead (who is the President and
chief executive officer 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 officer (currently Douglas Whitehead). the Board further ensures
its independent function by convening an independent directors-only in camera session at every Board Meeting.
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 officer.
Committees of the Board of Directors
there are currently four standing 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 fulfilling its oversight responsibility to the shareholders with respect
to the corporation’s: (a) financial statements; (b) financial reporting process; (c) systems of internal and disclosure controls; (d) internal audit
function; (e) external audit function; (f) financial arrangements and liquidity and (g) risk identification, 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 establish a market competitive total compensation program for the
executive officers and other key employees. in all its deliberations the committee takes into account the cost of the corporation’s executive
compensation program, the interests of shareholders and good governance guidelines on executive compensation. in addition, the committee
reviews and approves the succession plan for the chief executive officer and for the executive leadership team; reviews and approves any
significant changes to the organizational structure; and ensures at a strategic level that there are appropriate and effective Human Resources
policies in place for the employment and engagement of the corporation’s employees. 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 benefits 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 environment, Health and safety 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. the committee also 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 2008 Annual Meeting of Shareholders and the corporate governance section
of the website provide a full discussion of Finning’s corporate governance policies and practices.
90
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 6, 2008
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 filed with the securities commission or similar bodies
in all of the provinces of Canada. Copies of the AIF and Annual
and Quarterly Reports are available to shareholders and other
interested parties on request or can be accessed directly from
Finning’s website at www.finning.com
INVEsTOR INQUIRIEs
Inquiries relating to shares or dividends should be directed to
the Company’s Registrar and Transfer Agent. Inquiries relating
to the Company’s operating activities and financial information
should be directed to Tom Merinsky, Vice President, Investor
Relations. Telephone 604-331-4950, Fax 604-691-6440
Email: investor_relations@finning.ca
FORWARd LOOKING sTATEMENTs
This report contains forward-looking statements and information,
which reflect the current view of Finning International Inc.
with respect to future events and financial performance. Any
such forward-looking statements are subject to risks and
uncertainties and Finning’s actual results of operations could
differ materially from historical results or current expectations.
Finning assumes no obligation to publicly update or revise its
forward-looking statements even if experience or future
changes make it clear that any projected results expressed or
implied therein do not materialize.
Refer to Finning’s annual report, management information circular,
annual information form and other filings with the Ontario
securities Commission and Toronto stock Exchange, which can
be found at www.sedar.com, for further information on risks and
uncertainties that could cause actual results to differ materially
from forward-looking statements contained in this report.
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
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www.finning.com
By selecting the papers used for this report 13 trees,
10.776 gallons of water and 7,330 lbs of wood were
saved. In addition, 2,217 lbs of greenhouse emissions,
1,143 lbs of landfill and 14,588 BTU (000)
of energy were reduced.